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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 001-16201
GLOBAL CROSSING LTD.
BERMUDA 98-0189783
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
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: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [_] No [X]
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. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act.). Yes [_] No [X]
The aggregate market value of the common stock of the Registrant held by
non-affiliates of the Registrant as of June 30, 2002, based on the average bid
and asked prices of such stock on the over-the-counter market on June 28, 2002
of $0.05 per share, was approximately $45.4 million.
The number of shares of the Registrant's common stock, par value $0.01 per
share, outstanding as of September 30, 2003, was 931,497,689, including
22,033,758 treasury shares.
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GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In Provisional Liquidation in the Supreme Court of Bermuda)
For The Year Ended December 31, 2002
INDEX
Page
----
Part I.
Item 1. Business............................................................................. 1
Item 2. Properties........................................................................... 37
Item 3. Legal Proceedings.................................................................... 37
Item 4. Submission of Matters to a Vote of Security Holders.................................. 41
Part II.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters............. 42
Item 6. Selected Financial Data.............................................................. 47
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 51
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................... 88
Item 8. Financial Statements and Supplementary Data.......................................... 89
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 89
Part III.
Item 10. Directors and Executive Officers of the Registrant................................... 91
Item 11. Executive Compensation............................................................... 98
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 102
Item 13. Certain Relationships and Related Transactions....................................... 102
Item 14. Controls and Procedures.............................................................. 105
Part IV.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 107
Consolidated Financial Statements and Schedule................................................ F-1
Signatures.................................................................................... S-1
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PART I
ITEM 1. BUSINESS
Introduction
Global Crossing Ltd. (in provisional liquidation in the Supreme Court of
Bermuda), or "GCL," was formed under the laws of Bermuda in 1997. Unless the
context indicates otherwise, references in this annual report on Form 10-K to
"Global Crossing," "the Company," "we," "our" and "us" mean GCL and its
subsidiaries.
As discussed below in this Item 1 under "Our Chapter 11 Reorganization," GCL
and a number of its subsidiaries are currently debtors under chapter 11 of
title 11 of the United States Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the Southern District of New York (the "Bankruptcy
Court"). GCL and its Bermuda subsidiaries have also commenced coordinated
insolvency proceedings in the Supreme Court of Bermuda. Upon consummation of
our plan of reorganization, which is expected to occur shortly after the date
of filing of this annual report on Form 10-K, GCL will transfer substantially
all of its assets to a newly formed Bermuda company named "Global Crossing
Limited" ("New GCL"). New GCL will thereby become the parent company of the
Global Crossing consolidated group of companies and will succeed to GCL's
reporting obligations under the Securities Exchange Act of 1934, as amended.
References in this annual report on Form 10-K to Global Crossing at any time
after our plan of reorganization goes effective mean New GCL and its
subsidiaries.
We provide telecommunications services in most major business centers in the
world. We serve many of the world's largest corporations, providing a full
range of managed data and voice products and services.
Our overall strategy is to be a premier provider of broadband communications
services in commercial centers worldwide. We seek to attain market leadership
in global data and Internet Protocol ("IP") services by taking advantage of our
extensive broadband network and technological capabilities. Through our Global
Marine Systems Limited subsidiary ("Global Marine"), we also provide
installation and maintenance services for subsea telecommunications systems.
Our principal executive offices are located at Wessex House, 45 Reid Street,
Hamilton, Bermuda. Our principal administrative offices are located at 200 Park
Place, Suite 300, Florham Park, New Jersey 07932. Our Internet address is
www.globalcrossing.com, where you can find copies of this annual report on Form
10-K and GCL's quarterly reports on Form 10-Q and current reports on Form 8-K,
all of which we will make available free of charge as soon as reasonably
practicable after such reports are filed or furnished with the Securities and
Exchange Commission (the "SEC").
As of December 31, 2002, we employed approximately 5,644 people and as of
September 30, 2003, we employed approximately 5,245 people, including full-time
and part-time employees. We consider our employee relations to be good. None of
our employees are currently covered by a collective bargaining agreement, other
than approximately 60 employees in our telecommunications services business in
the United Kingdom.
We report our results in two business segments: telecommunications services
and installation and maintenance services. Although we manage our global
operations on a centralized basis, we operate in four geographic segments:
North America, Europe, Asia/Pacific and Latin America. See Note 29, "Segment
Reporting," to our consolidated financial statements included in this annual
report on Form 10-K.
Restatements
We identified certain accounting matters relating to our financial
statements for the year ended December 31, 2000 and for the quarters ended
March 31, 2001, June 30, 2001 and September 30, 2001, that required
restatement. The matters subject to adjustment and the restatement adjustments
that we have made to these financial statements are discussed in detail below
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Restatements of Previously Issued Financial Statements," and in
Note 4, "Restatement of Previously Issued Financial Statements," to our
consolidated financial statements included in this annual report on Form 10-K.
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In addition, the operating results of our former subsidiaries Asia Global
Crossing Ltd. and IPC Trading Systems, Inc. have been retroactively
reclassified as discontinued operations in the consolidated financial
statements for all periods presented in this annual report on Form 10-K in
accordance with Statement of Financial Accounting Standards No. 144 and
Accounting Principles Board Opinion No. 30.
Historical Development of Business
Since our inception in 1997, we have completed a major network construction
program and have entered into several strategic transactions. The major
strategic transactions we have entered into are as follows:
Global Marine
On July 2, 1999, we acquired Cable & Wireless Marine, the world's largest
submarine cable maintenance and installation company, for approximately $908
million in cash. The acquisition of this business, which we renamed Global
Marine Systems Limited, increased our ability to provide installation and
maintenance services for our undersea global network.
Frontier Corporation
On September 28, 1999, we acquired Frontier Corporation ("Frontier") in a
stock-for-stock merger transaction valued at over $10 billion based on stock
prices at the time of the acquisition. 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. Frontier's businesses included a long distance business, an
incumbent local exchange carrier, or ILEC, business, and GlobalCenter, a
web-hosting business. Acquiring Frontier increased our network and service
capabilities and the geographic reach of our systems. The acquisition also
provided operating systems and personnel with the expertise needed to help
us 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 (now known as "Global Crossing UK") owns one of the most
extensive fiber telecommunications networks in the United Kingdom,
consisting of approximately 5,600 route miles of fiber and reaching more
than 2,000 cities and towns. Similar to our Frontier acquisition, Racal
Telecom provided a broad fiber optic network as well as personnel and
systems which were used to launch our network and services in the United
Kingdom.
Asia Global Crossing
Asia Global Crossing Ltd. (together with its consolidated subsidiaries,
"Asia Global Crossing"), which is now undergoing a liquidation under chapter
7 of the Bankruptcy Code, was originally established as a joint venture 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 intended to link several countries in eastern Asia, and our then
majority interest in Pacific Crossing-1 ("PC-1"), an undersea system
connecting the United States and Japan. Softbank Corporation ("Softbank")
and Microsoft Corporation ("Microsoft") 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 also agreed to use Asia Global Crossing's network in the
region, subject to specified conditions. The current status of these
commitments is described below in Item 3 "Legal Proceedings." On October 12,
2000, Asia Global Crossing completed an initial public offering of shares of
common stock, and we contributed to Asia Global Crossing certain joint
venture interests we had in networks in Japan and Hong Kong. After giving
effect to the initial public offering and related transactions, our equity
interest in Asia Global Crossing was reduced to 56.9%. Our equity interest
in Asia Global Crossing has been effectively
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cancelled in connection with its bankruptcy case and the subsequent sale of
its assets to a third party, as described below in this Item 1 under the
caption "Overview of Our Business--Asian Operations."
IXnet/IPC
On June 14, 2000, we acquired IXnet, Inc. ("IXnet") and its parent
company, IPC Communications, Inc. ("IPC"), in a stock-for-stock merger
valued at $3.2 billion based on stock prices at the time of acquisition.
IXnet developed and deployed a specialized set of voice and data solutions
aimed at trading floor operations in the financial industry. These services
were based on a common, state-of-the-art switched data platform that
provided economic and performance advantages over other then-available
service offerings. IPC's Trading Systems business provided sophisticated
desktop trading systems to the global financial community. The IXnet/IPC
acquisition provided us with services, expertise, personnel, and access to a
desirable customer base. We have since disposed of IPC's Trading Systems
business and IXnet's Asian operations, as described below in this Item 1
under "Historical Development of Business--Asian operations of IXnet and
IPC" and "--IPC Trading Systems."
GlobalCenter
In January 2001, we sold our GlobalCenter web hosting business, which we
had acquired in the Frontier merger, to Exodus Communications, Inc.
("Exodus") for 108.15 million Exodus common shares, representing
approximately 19.6% of its outstanding shares at the effective time of the
merger. The value of the transaction was approximately $1.918 billion, based
on the closing sales price of Exodus common stock prior to the closing of
the transaction. At the time of the transaction, Exodus also committed to a
10-year network services agreement under which it committed to 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 agreed to offer Exodus' web hosting
services to our customers. Exodus subsequently filed for bankruptcy
protection on September 26, 2001, and our equity interest in Exodus was
written off in its entirety and the 10-year network services agreement and
the marketing services agreement have been or are being terminated.
Incumbent Local Exchange Carrier
In June 2001, we completed the sale of the ILEC business that we had
acquired in the Frontier acquisition to Citizens Communications ("Citizens")
for $3.369 billion in cash. At the time of the transaction, Citizens agreed
to purchase long distance services from us for resale to the ILEC's
customers, and we provided Citizens with a $100 million credit toward future
services over a five-year period. The transaction involved the sale of
approximately 1.1 million telephone access lines. In connection with the
settlement of certain post-closing disputes between the parties, the credit
referenced above was reduced to $65 million.
Asian operations of IXnet and IPC
In July 2001, we sold to Asia Global Crossing the Asian operations of
IXnet and IPC as well as our territorial rights to Australia and New Zealand
in exchange for 26.8 million shares of Asia Global Crossing common stock,
thereby increasing our ownership interest in Asia Global Crossing by 2% to
58.9%. The transaction was undertaken to delineate the geographic
responsibilities of Global Crossing and Asia Global Crossing. As described
below in "Overview of Our Business--Asian Operations," the delineation of
geographic responsibilities between Global Crossing and Asia Global Crossing
is no longer in effect.
IPC Trading Systems
In December 2001, we completed the sale of our IPC Trading Systems
business to an investment group led by Goldman Sachs Capital Partners 2000
for gross proceeds of $360 million in cash. Of the total proceeds, $22.5
million was paid to Asia Global Crossing for IPC Trading Systems'
Asia-Pacific assets, which Asia Global Crossing had acquired from us in July
2001.
3
Business Strategy
Our strategy has evolved since our inception. In 1997, we began constructing
the world's first independent fiber optic network and initially operated as a
"carriers' carrier" to providers of international telecommunications services.
With the completion of our core network and various strategic acquisitions, by
mid-2001, we were able to offer an extensive line of IP services, Internet
access, and data and voice services to telecommunications carriers and business
customers on a cost-effective basis. This broadened focus reflected our
transformation from a construction-based wholesaler of network capacity to a
value-added telecommunications services provider to global enterprises and
carriers. This strategy required significant capital expenditures for continued
incremental expansion of the network and for value-added service offerings to
new and existing customers.
However, the downturn in the economy and the telecommunications industry in
2001 restricted the amount of capital available to us to invest in our existing
business plan. As a result, we focused our resources on selling a standard
suite of products and services. We changed our strategy from a growth model
requiring significant cash expenditures to a retention model, with a focus on
conserving cash and improving services to existing customers. As part of this
effort, we integrated global functions such as network operations, customer
care, information systems, finance and sales to align those functional units
more appropriately with various regional operating needs. These efforts also
resulted in additional reductions of capital expenditures and personnel and the
consolidation of real estate facilities, thereby reducing overall operating
expenses and streamlining operations.
We believe that these restructuring efforts have allowed us to operate more
effectively and efficiently. As conditions improve in the telecommunications
market, we expect that our restructuring will leave us well positioned to
implement our strategy to be a premier provider of broadband communications
services in commercial centers worldwide. We seek to attain market leadership
in global data and IP services by taking advantage of our extensive broadband
network and technological capabilities.
We expect continued growth in the demand for global bandwidth due to a
variety of trends. End-user traffic should continue to grow due to increased
adoption of broadband access to the Internet by businesses and consumers. We
expect the demand for data communications to be driven by the introduction of
more powerful computers and software applications, facilitating higher download
rates, increased usage of e-mail, streaming video, wireless local area
networks, teleconferencing and other innovations. In addition, we expect global
enterprises to continue to outsource their networking needs as companies
require the use of networks to interact internally as well as with partners,
customers and vendors, driving the demand for IP-virtual private networks
("VPNs") and managed services. We also expect mobile traffic growth to remain
strong due to increased adoption of mobile communications, increased usage per
mobile connection and increased usage of mobile data applications.
Overview of Our Business
We provide telecommunications services over a global network that reaches
more than 200 major cities throughout the world. The markets in these cities
represent approximately 85% of the world market for telecommunications
services. We serve many of the world's largest corporations, providing a full
range of managed data and voice products and services.
Our Telecommunications Services
The telecommunications services we provide include voice services, data
services and conferencing services. These services are built around a
streamlined global service delivery model intended to provide outstanding
customer service, including prompt and accurate procurement and billing. Our
uCommand(R) Web-based network management tool allows customers to securely
monitor their voice services, create utilization reports, reroute traffic,
order new services, create and track trouble tickets and perform online bill
payment.
The following is a brief description of our key telecommunications service
offerings.
4
Voice Services
Our voice services include switched and dedicated outbound and inbound
voice services for domestic and international long-distance traffic,
toll-free enhanced routing services, calling cards and, in the United
Kingdom, commercial managed voice services. Voice services accounted for
approximately 65% of our total telecommunications services revenues in 2002.
We carry more than five billion minutes per month over our global voice
network. Voice traffic is routed over our network using a voice-over-IP
("VoIP") packet-based and time division multiplexing ("TDM") platform. For
carriers who use VoIP for their own voice customers, which is a technology
we expect to grow rapidly, we recently introduced a VoIP termination service
providing wholesale IP interconnection, transport and call completion of
packet-based voice traffic using IP and VoIP and TDM switch technologies.
Our commercial voice services feature end-to-end service level agreements
("SLAs") that apply to our dedicated commercial voice services globally and
guarantee service availability along our network as well as local access
circuits. The SLAs support three key areas: end-to-end network availability,
guaranteed time of installation and mean time to restore.
Data Services
In addition to our voice and conferencing services, we offer a broad
range of telecommunications services that we refer to generally as "data
services." These services include services that provide network
interconnectivity to wholesale and retail customers; capacity services; and
access services. In the aggregate, data services accounted for approximately
31% of our total telecommunications services revenues in 2002.
. ATM Service: Our Asynchronous Transfer Mode ("ATM") service supports
multiple data applications with diverse requirements for network
transport, prioritization and performance, such as full motion video,
one-way video feeds, toll-quality voice, IP and
latency/security-sensitive file transfers.
. Frame Relay Service: Our frame relay service provides a reliable data
transport network ideal for partial mesh and hub-and-spoke network
applications and traffic that is subject to significant spikes in volume,
while providing significant manageability and scalability.
. IP VPN Service: Global Crossing IP VPN Service(TM) is a feature-rich IP
virtual private network solution that offers enterprises and carriers
three classes of service and multiple access options using a highly
secure platform. This service, which allows for the convergence of
site-to-site voice, video and data traffic into a single connection, is
available today in more than 300 cities in 52 countries through extended
reach relationships and is backed by SLAs that can cover latency, packet
loss, jitter and availability. Our Remote Access Service is a key
enhancement to our IP VPN service that allows enterprises to extend the
reach of their wide area networks by supporting simultaneous secure
connections for multiple users to their private corporate network from
common Internet access methods worldwide.
. Managed Services: Our managed services support transport for dedicated
Internet access, frame relay and ATM services, and are expected to
support transport for our IP VPN service in the near future. Our managed
services include pre-sales engineering and customer premises equipment
("CPE") design, equipment procurement, provisioning and installation, and
network monitoring and management backed by global SLAs. We can also
provide ongoing end-to-end CPE and network management and maintenance
support for corporate locations around the globe.
. Private Line Service: Our international private line service provides
secure point-to-point digital connectivity. The service is available
between any two points of presence on our network, enabling customers to
build private networks that carry business-critical applications at a
wide range of speeds.
. Wavelength Services: Our wavelength services provide customers with an
unprotected, bi-directional, point-to-point circuit at speeds of 2.5
gigabits per second ("Gbps") or 10 Gbps. Wavelength service is a
Synchronous Optical Network ("SONET")/Synchronous Digital Hierarchy
("SDH") framed signal and is fully compliant with standards set by the
Telecommunication Standardization Sector of the International
Telecommunication Union.
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. Dedicated Internet Access Service: Our dedicated Internet access service
provides always-on, direct high-speed connectivity to the Internet at a
wide range of speeds on a global basis.
. IP Transit Service: Our IP transit service offers carriers and ISPs
Internet connectivity to all worldwide domains connected in Europe, U.S.
and Latin America.
. Internet Dial Service: Our Internet dial service provides remote network
users the ability to access the Internet or communicate remotely with a
corporate network from different international locations. Traveling users
can connect to over 20,000 local numbers in 150 countries worldwide.
. Colocation Service: Our colocation service allows for the housing of
customer equipment within a Global Crossing point of presence or repeater
site in order to interconnect with our fiber-optic backbone. Colocation
delivers improved speed, stability and security for critical network
requirements.
. Metro Access: Our metropolitan access network service brings our
worldwide network capabilities to the customer's premise in twenty-five
major metropolitan markets. Our metro networks are deployed as
multi-fiber, self-healing SONET or SDH rings designed to support applied
services including broadband, data and voice at a wide range of speeds.
Conferencing Services
We offer a full range of conferencing services, including those described
below. Conferencing services accounted for approximately 4% of our total
telecommunications services revenues in 2002.
. Videoconferencing: Our videoconferencing services provide video over IP
and ISDN platforms, using multipoint bridging to connect multiple sites.
Our newest offering, iVideoconferencing(TM), sends ISDN calls onto our
advanced IP network, minimizing dependence on international ISDN lines
for superior quality, reliability and cost savings. Enhanced options
available with our videoconferencing services include scheduling,
recording and hybrid meetings that combine our audio and video services.
. Ready-Access(R): Ready-Access is a market leading audio
on-demand/reservationless audio conferencing service. The service
provides permanent access for telephonic meetings, connecting up to 96
lines at a time. Toll-free access is provided in North America and,
through our Ready Access Global 800 product enhancement, in key business
markets worldwide. Other product enhancements include Ready-Access Web
Meeting and Emeeting, which allow conference participants to share
documents, presentations, data and feedback over the Internet.
Additionally, users can manage their calls and change account options
on-line.
. Event Call: Event call provides highly reliable, operator assisted,
full-service conference calls. Participants can access this service by
dialing in on either a toll or a toll-free number, or by being dialed out
to by an operator. Although the average number of participants on an
Event Call ranges from 50-100, this service is suitable for as few as
three or up to thousands of participants. Enhanced service options
include PostView(R) conference playback, taping/transcription service,
translation services and on-line participant lists.
Telecommunications Sales and Principal Customers
We focus our sales and marketing efforts towards enterprise and carrier
customers requiring significant telecommunications services. We make use of the
following sales channels in this regard.
Carrier Sales Channel
We offer telecommunications carriers access to our fiber optic network
providing a robust combination of global reach and bandwidth. As an owner
and operator of an international network, we can offer carriers a broad
range of voice, data and infrastructure services at competitive price and
service levels. We focus on local, national and global cable and wireless
telecommunications carriers and on facilities and non-facilities
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based resellers, systems integrators and application service providers. We
provide services in North America, Latin America, Western Europe and the
Asia/ Pacific region. There are approximately 1,000 carriers in these
markets. We currently employ approximately 275 sales professionals and sales
support personnel focused on the carrier sales channel.
Enterprise Sales Channel
Through the enterprise sales channel, we target mid-sized businesses,
large multi-national enterprises, systems integrators, higher educational
institutions and governmental entities. We target these customers in North
America, Western Europe, Latin America and the Asia/Pacific region. We
currently employ a worldwide direct sales force of approximately 480 and
also use non-employee agents as an indirect sales channel.
Conferencing Sales Channel
This channel is used to offer audio, video and Web-based conferencing
services to commercial enterprises and both governmental and
non-governmental organizations. We currently employ approximately 100 sales
professionals and sales support personnel focused on this market.
Our Network
Our network comprises a series of network assets that operate in most major
business centers in the world. Most of these assets are owned by us, but many
are held under either long-term or short-term leases. At the core of our owned
network are interconnecting subsea and terrestrial fiber-optic cables that
connect North America, South America and Western Europe. The network was
engineered 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. The network has approximately 800 points of presence
("POPs") in over 200 major cities throughout the world. As described below, 468
of these POPs are located on fiber facilities that we own or hold under
long-term indefeasible rights of use ("IRUs") and house transmission add/drop
multiplex equipment (devices similar to routers that can add or drop signals)
that we own. The remaining 332 POPs, although located on fiber facilities that
we lease on a non-IRU basis, house service platform and transmission equipment
that we own.
Our North American network comprises approximately 19,000 route miles of
fiber in the U.S. and Canada, most of which consists of IRUs in fibers
purchased from other carriers. It has 170 POPs, 22 integrated service platform
sites, three subsea cable landing stations and three international voice
gateway sites. The North American network carries voice, data and private line
services over our SONET, IP and ATM backbones, all traversing 2.5 and 10 Gbps
dense wavelength division multiplexing ("DWDM") transmission systems. IP and
ATM are methods of sending audio, video and computer data at the same time over
one high-speed digital line. DWDM technology makes it possible simultaneously
to transmit data at more than one wavelength, thereby allowing the transmission
of multiple signals through the same fiber at different wavelengths.
The Western European network comprises approximately 14,000 route miles of
fiber, most of which is contained in cable that we own. This network has 59
POPs, six cable landing stations, and two international voice and three
international data gateway sites. The Western European network carries voice,
data and private line services over our SDH, IP and ATM backbones, all
traversing 2.5 and 10 Gbps DWDM transmission systems.
The Global Crossing UK network comprises approximately 5,600 route miles of
fiber, most of which is leased. This network has 222 POPs, 49 of which are core
nodes and 173 of which are in customer locations.
Our subsea network comprises five rings of fiber optic cable owned by us:
Atlantic Crossing-1 ("AC-1"), Atlantic Crossing-2 ("AC-2"), Mid-Atlantic
Crossing ("MAC"), South American Crossing ("SAC") and Pan American Crossing
("PAC"). SAC is integrated with a 1,600 route mile terrestrial route connecting
Argentina and Chile, and PAC is integrated with a 2,300 route mile terrestrial
route in Mexico. In the aggregate, these systems span approximately 39,000
route miles and have 27 landing points on three continents, North America,
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South America and Europe. These are all two or four fiber strand 10 Gbps DWDM
transmission systems. AC-2 consists of two fiber strand pairs in a cable
containing four fiber strand pairs that was co-built with Level 3
Communications, Inc. These systems include 17 POPs in the Latin America and
Caribbean regions. In addition, as described below under "Overview of our
Business--Asian Operations," we have rights in capacity on trans-Pacific
("PC-1") and Asia/Pacific ("EAC") fiber optic cable systems owned by former
subsidiaries of ours or their successors.
Our IP network utilizes a single global Autonomous System Number ("ASN") in
over 70 locations. The single ASN implies a greater degree of integration than
that which exists in a multiple ASN system. Having a global ASN allows us to
deploy certain technologies, such as MultiProtocol Label Switching ("MPLS"),
sooner and on a global basis. It also provides our international customers with
a more global appearance in the global Internet routing table.
Our IP network utilizes a MPLS Cisco core with a mixture of Cisco and
Juniper devices at the edge of the network. The network carries in excess of
6.5 Gbps of voice traffic and over 59 Gbps of data traffic. The network is
considered a Tier 1 backbone and is quality-of-service ("QOS") enabled, which
allows different types of data to be assigned different priorities, such that,
for example, voice can always have priority over IP-VPN and Internet traffic.
We operate our network from three primary network operations centers. The
Global Network Operations Center ("GNOC") in London manages our subsea cable
systems and our Western European and Global Crossing UK networks. The North
America Network Operations Center, located in Southfield, Michigan, manages the
global voice network and the North American network. The Global Data Services
Network Operating Center, located in Phoenix, Arizona, manages the global IP
and Frame Relay/ATM networks. In addition, we have a small network operating
center in New York City that provides redundant IP and ATM network management
capability.
Our London GNOC monitored and managed Asia/Pacific transmission facilities
for our former Asia Global Crossing subsidiary until April 2003, when that
responsibility was assumed by Asia Netcom, the purchaser of the EAC subsea
system. Our London GNOC currently continues to manage the PC-1 subsea cable
system for our former Pacific Crossing Limited subsidiary. See "Overview of Our
Business--Asian Operations" below.
Asian Operations
Prior to November 17, 2002, Asia Global Crossing had been a majority owned
subsidiary of Global Crossing. We provided services in most of the major
markets of East and Southeast Asia using a fiber optic cable system owned by
Asia Global Crossing and through local partners. On November 17, 2002, Asia
Global Crossing and one of its wholly owned subsidiaries, Asia Global Crossing
Development Company, filed voluntary petitions for relief under the Bankruptcy
Code. On the same date, Asia Global Crossing commenced joint provisional
liquidation proceedings in the Bermuda Supreme Court. Similarly, on July 19,
2002, Pacific Crossing Ltd., a majority owned subsidiary of Asia Global
Crossing, and certain of its subsidiaries (together, "PCL") filed voluntary
petitions for relief under the Bankruptcy Code. The services we provide between
the United States and Asia are provided on the trans-Pacific fiber optic cable
system known as Pacific Crossing-1 or "PC-1," which is owned by PCL. Asia
Global Crossing's and PCL's bankruptcy cases are being administered separately
and are not consolidated with our chapter 11 cases or with each other.
On March 10, 2003, Asia Netcom Corporation Limited ("Asia Netcom"), an
investment vehicle that is wholly-owned by a consortium consisting of China
Netcom International Limited, Newbridge Capital LLC and SB Asia Infrastructure
Fund L.P., purchased substantially all of the assets of Asia Global Crossing in
a sale pursuant to Section 363 of the Bankruptcy Code. On June 11, 2003, Asia
Global Crossing's bankruptcy cases were converted into chapter 7 liquidation
proceedings, one result of which will be that our equity stake in Asia Global
Crossing will be canceled for no consideration.
On April 15, 2003, PCL entered into an asset purchase agreement pursuant to
which it agreed to sell substantially all of its assets, including PC-1, to
Pivotal Telecom, LLC ("Pivotal"). We will receive no recovery in PCL's
bankruptcy case in our capacity as an indirect equity holder in PCL.
8
We entered into an agreement with PCL under which PCL has agreed that the
trans-Pacific capacity that we currently utilize will continue to be made
available to us until the earlier of the closing date of the sale of PC-1 to
Pivotal or January 31, 2004. We expect to extend such short term arrangements
and are also seeking to secure trans-Pacific capacity on a long-term basis. We
and PCL each have outstanding disputed claims against the other. PCL claims
that monies are owed to it by us principally as a result of the prior provision
of capacity and maintenance services to us on PC-1. Our claims relate to
network operation and subsea maintenance services provided by us to PCL and
ancillary matters.
On March 5, 2003, we entered into a settlement agreement with Asia Global
Crossing (the "AX Settlement Agreement") pursuant to which, among other things:
. we and Asia Global Crossing agreed to continue to provide certain
telecommunications services to one another through December 31, 2003;
. any and all exclusivity and non-compete restrictions between the two
companies were eliminated, including restrictions on our ability to
compete in the Asian market;
. Asia Global Crossing remitted $2.5 million and, upon the meeting of
certain milestones, will remit an additional $2.0 million to us, while we
agreed to provide certain interim management services to Asia Global
Crossing;
. Asia Global Crossing agreed to continue to purchase maintenance services
from Global Marine pursuant to an existing agreement for a one-year term
effective March 1, 2003; and
. Asia Global Crossing agreed to provide us, upon the meeting of certain
milestones, with a $3 million credit and a 30% discount (not to exceed
$10 million) on market-based prices for services on Asia Global
Crossing's East Asia Crossing network, which connects Japan, Hong Kong,
Taiwan, Korea, Malaysia, the Philippines and Singapore.
The rights and obligations of Asia Global Crossing under the AX Settlement
Agreement have been assigned to and assumed by Asia Netcom. The above summary
is qualified by reference to the AX Settlement Agreement, which is filed as an
exhibit to this annual report on Form 10-K.
We ceased consolidating Asia Global Crossing's results effective as of
November 17, 2002, the date of Asia Global Crossing's bankruptcy petition.
Accordingly, the financial position and results of operations of Asia Global
Crossing are presented as discontinued operations for the periods presented in
this annual report on Form 10-K. See Note 8 to our consolidated financial
statements included in this annual report on Form 10-K.
Our Installation and Maintenance Services
In addition to our telecommunications services business, we own an
installation and maintenance services business called Global Marine Systems
Limited, which installs and maintains subsea fiber optic cable systems for
carrier customers worldwide with a fleet of cable-laying and -maintenance
vessels. Global Marine is the world's largest submarine cable maintenance and
installation company. None of the Global Marine operating entities filed for
bankruptcy protection.
Global Marine operates an advanced fleet of cable ships and subsea vehicles
consisting of 15 cable ships, one installation barge, 24 remotely operated
vehicles and ten cable ploughs.
Global Marine employs approximately 1,000 people worldwide, with most of
them based at sea. Its head office is in Chelmsford in the UK, with a regional
office in Singapore, covering South East Asia and the Pacific Rim. Global
Marine also has depots in Batangas, Philippines; Batam, Indonesia; Bermuda;
Kobe, Japan; Portland, UK; Suva, Fiji; and Victoria, British Columbia, Canada.
9
Global Marine's range of services includes:
. Installation of subsea fiber optic cable;
. Zone-based, private dedicated or private shared subsea cable maintenance
contracts;
. Single or multiple repair cable ships on continuous standby, anywhere in
the world;
. Leading edge cable recovery and burial tools;
. Expertise in cable jointing and fiber optic transmission technology;
. Logistics management of spare subsea cable and joints/repeaters;
. Post repair charting services;
. Post repair burial services; and
. Periodic inspection and cable protection improvement services.
Since the mid-1980s, there has been over 880,000 kilometers of fiber optic
cable installed worldwide; Global Marine has installed approximately 32% of
this and has performed approximately 40% of reported worldwide repairs. Due to
adverse conditions in the telecommunications industry, during 2002 subsea
installation of fiber optic cable accounted for only $68 million, or
approximately 32%, of Global Marine's aggregate revenues in that year, as
compared to $364 million or approximately 68% of aggregate revenues in 2001.
These adverse conditions in the subsea installation business are expected to
continue for the foreseeable future in light of the current worldwide surplus
of fiber optic capacity, and have had a material adverse impact on Global
Marine's results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Financial Condition and State of
Liquidity."
In addition to subsea telecommunication cable installation and maintenance,
Global Marine provides a comprehensive range of associated services, including
route engineering, charting services, fishery liaison, shallow water services
and specialized training for cable jointers at its UK and Singapore training
schools.
Network Security Agreement
Consummation of the purchase agreement described below under the caption
"Our Chapter 11 Reorganization" was conditioned on the receipt of all required
regulatory approvals, including the approval of the U.S. Government under
Section 721 of the Defense Production Act, of the investment in New GCL by
Singapore Technologies Telemedia Pte Ltd ("ST Telemedia"). In order to obtain
this approval, which was received on September 19, 2003, we entered into an
agreement (the "Network Security Agreement") with the U.S. Government to
address the U.S. Government's national security and law enforcement concerns.
The Network Security Agreement is intended to ensure that New GCL's operations
do not impair the U.S. Government's ability (1) to carry out
lawfully-authorized electronic surveillance of communications that originate
and/or terminate in the United States; (2) to prevent and detect foreign-based
espionage and electronic surveillance of U.S. communications; and (3) to
satisfy U.S. critical infrastructure protection requirements. Failure to comply
with our obligations under the Network Security Agreement could result in the
revocation of our telecommunications licenses by the Federal Communications
Commission ("FCC").
While our operations were already generally consistent with the requirements
of the Network Security Agreement, we have initiated a number of operational
improvements in order to ensure full compliance with the Network Security
Agreement. These improvements relate to information storage and management,
traffic routing and management, physical, logical, and network security
arrangements, personnel screening and training, and other matters.
Implementation of and compliance with the Network Security Agreement will
require significant upfront and ongoing capital and operating expenditures that
are incremental to the Company's historical levels of such expenditures. We
estimate that these incremental expenditures will be approximately $6.5 million
in 2004 and approximately $2.5 million in subsequent years; however, the actual
costs could significantly exceed these estimates. While implementation of the
Network Security Agreement may increase our ability to compete for contracts to
provide telecommunications services to the U.S. Government, there can be no
assurance that any such contracts will be awarded.
10
The Network Security Agreement requires changes in New GCL's corporate
governance as well. The New GCL Board of Directors must establish a Security
Committee comprised solely of directors who are U.S. citizens and who already
possess or are eligible to possess a U.S. security clearance. These "Security
Directors" must satisfy the independent director requirements of the New York
Stock Exchange, regardless of whether any of New GCL's securities are listed on
such exchange. At least half of the members of the New GCL board nominated by
ST Telemedia must be Security Directors. See "Directors and Executive Officers
of the Registrant--Directors of New GCL" in Item 10 below. A Security Director
must be present at every meeting of the board of directors of New GCL and of
any of our U.S. subsidiaries unless such meeting in no way addresses or affects
our obligations under the Network Security Agreement.
Competition
The telecommunications industry is intensely competitive and has undergone
significant change in recent years. Beginning in the late 1990s, a number of
new competitors entered the market and commenced network construction
activities, resulting in a significant expansion of worldwide network capacity.
In 2001, it became clear that, at least in the short-term, actual demand failed
to keep pace with available supply, resulting in intense price pressure and, in
many cases, an unsustainably low ratio of revenues to fixed costs. Market
valuations of debt and equity securities of telecommunications companies,
particularly new providers, decreased precipitously as the financial condition
of many carriers deteriorated. In the last two years, a number of these
competitors have attempted to reorganize, or have completed reorganizations,
under chapter 11 of the Bankruptcy Code. Several competitors have emerged from
bankruptcy with significant improvements to their financial condition or as
newly formed entities that have acquired the assets of others at substantial
discounts relative to their original cost.
At the same time, the regulatory environment has changed and continues to
change rapidly. Although the Telecommunications Act of 1996 and actions by the
FCC and state regulatory authorities have had the general effect of promoting
competition in the provision of communications services, they also have allowed
the incumbent carriers to begin to provide long distance services in many
states. These effects, together with new technologies, such as voice-over-IP,
and the importance of data services, have blurred the distinctions among
traditional communications markets. As a result, a competitor in any of our
business areas is potentially a competitor in our other business areas.
Many of our existing and potential competitors have significant competitive
advantages, including greater market presence, name recognition and financial,
technological and personnel resources, superior engineering and marketing
capabilities, and significantly larger installed customer bases. The following
summarizes the competition we face by type of competitor.
Incumbent Carriers
In each market that we serve, we face, and expect to continue to face,
significant competition from the incumbent carriers, which currently dominate
the local telecommunications markets. In the United States, these are primarily
the domestic regional Bell operating companies, or RBOCs, which include
BellSouth, Verizon, Qwest Communications and SBC Communications. Outside the
United States, in many markets we face competition from the foreign incumbents,
including companies such as British Telecom, France Telecom, Telecom Italia and
Duetsche Telekom. We compete with the incumbent carriers in our markets for
local exchange and other services on the basis of product offerings, price,
quality, capacity and reliability of network facilities, state-of-the-art
technology, route diversity, ease of ordering and customer service. Because our
fiber optic systems have been recently installed, compared to some of the
networks of the incumbent carriers, our networks' architectures and technology
may provide us with cost, capacity, and service quality advantages over some
existing incumbent carrier networks. However, the incumbent carriers have
long-standing relationships with their customers and provide those customers
with various transmission and switching services that we, in many cases, do not
currently offer. Competition, however, is not based on any proprietary
technology. Domestic incumbent carriers also have received regulatory approval
to provide and have begun to provide long distance voice service in a number of
regions. In their own domestic markets, the foreign incumbents have the
advantages of network concentration, significant existing customer bases and,
in many cases, regulatory protection from competition.
11
Other Voice Service Competitors
We face, and expect to continue to face, competition for local and long
distance voice telecommunications services from competitors and potential
competitors in addition to the incumbent carriers, primarily AT&T, MCI and
Sprint Corporation in the United States and the foreign incumbents outside the
United States. With respect to U.S. long distance telecommunications services,
although the market is dominated by these incumbents, hundreds of other
companies, such as Qwest Communications, also compete in the long distance
marketplace. In addition, as the RBOCs continue to receive FCC authorization to
provide long distance telecommunications services, we would expect them to
become increasingly significant competitors for those services.
Data Service Competitors
We face, and expect to continue to face, competition for Internet access and
other data services from telecommunications companies, including AT&T, MCI,
Sprint Corporation, Colt Telecom Group plc, Equant N.V., Telefonica, Telstra,
the foreign incumbents, online service providers, DSL service providers and
Internet service providers and web hosting providers.
Conferencing Competitors
In addition to competitors that provide voice and data services generally,
our conferencing business competes with companies that specialize in conference
communications, such as InterCall, a division of West Corporation.
Other Business Competitors
In addition to the above providers, we have other competitors including
Level 3, IDT Corporation and WilTel Communications, which are companies that
deliver bandwidth-enabled services internationally on newly built or
undeveloped terrestrial and subsea fiber optic networks.
Installation and Maintenance Competition
Although Global Marine is the world's leading independent marine services
company to the telecommunications industry based on revenue, it faces
competition from both existing market participants and potential new entrants.
There are currently two other major system supply and maintenance companies in
the subsea cable industry, Tyco and Alcatel Submarine Networks.
Our Chapter 11 Reorganization
Events Leading Up to the Chapter 11 Reorganization
Our business plan until late 2001 called for significant capital
expenditures (i) to continue the incremental expansion of our network,
particularly in metropolitan areas, and (ii) to develop broad managed service
offerings to new enterprise customers. These capital requirements were to have
been funded by the sale of capacity on the completed network or through asset
sales. However, due to a variety of factors, we became unable to fund our
business plan. First, the downturn in the economy in 2001, particularly in the
telecommunications sector, limited our ability to build our revenue base to a
cash flow break-even level. Second, the well-publicized failure of a number of
telecommunications companies, compounded by the recessionary state of the
national and global economy, unnerved investors and significantly restricted
the capital markets as a source of additional funds for us. Third, increased
fiber system builds by new entrants, as well as announced plans for major
subsea systems, affected supply and demand in the telecommunications market,
depressed prices for telecommunications services and lowered profitability.
In the years prior to our bankruptcy filing, competition increased
significantly in all areas of the telecommunications services market. In
addition, increased consolidation and strategic alliances in the industry
12
resulting from the Telecommunications Act of 1996 have allowed significant new
competitors to enter the long distance industry. This increased participation
in the telecommunications market prompted a wave of new construction as all
service providers attempted quickly to meet the forecasted growth of demand for
telecommunications services. The result was a significant increase in capacity
to provide telecommunications services and a significant decrease in the price
of telecommunications services across the board.
Advances in fiber optic technology contributed to significant per circuit
price declines in the fiber optic transmission industry. Other changes in
technology also caused prices for telecommunications capacity and services to
decrease. In 2001, prices continued to fall and demand for telecommunications,
though strong, grew less than had been projected, adversely affecting operating
margins for us and the entire telecommunications industry. The financial
difficulties experienced by industry participants severely impacted available
capital for the telecommunications sector. As capital tightened up, many
companies were forced to seek bankruptcy protection.
After the downturn in the telecommunications industry and the deterioration
of our operating performance and prospects, our ability to fund our business
plan depended on an infusion of capital to reach cash flow break-even. As the
capital markets closed to us, we experienced constrained liquidity to fund our
continued efforts to grow our business and build our network. We were able to
complete three significant asset sales in 2001 (the ILEC, GlobalCenter and IPC
Trading Systems dispositions), but the proceeds were not sufficient to fund our
original business plan. Accordingly, we undertook efforts to recast our
business plan in light of capital constraints, significant operating losses and
the overall state of the telecom industry.
Commencement of the Chapter 11 and Bermuda Cases
On January 28, 2002 (the "Commencement Date"), GCL and fifty-four of its
subsidiaries filed voluntary petitions for relief under chapter 11 of the
Bankruptcy Code in the Bankruptcy Court.
On the same date, GCL and certain of its Bermuda subsidiaries commenced
insolvency proceedings in the Supreme Court of Bermuda (the "Bermuda Court").
On such date, the Bermuda Court granted an order appointing Malcolm
Butterfield, Jane Moriarty and Philip Wallace, partners of KPMG, as Joint
Provisional Liquidators ("JPLs") in respect of GCL and those Bermuda
subsidiaries. The Bermuda Court granted the JPLs the power to oversee the
continuation and reorganization of these companies' businesses under the
control of their boards of directors and under the supervision of the
Bankruptcy Court and the Bermuda Court. Twenty-five additional subsidiaries of
GCL subsequently commenced chapter 11 cases and, where applicable, Bermuda
insolvency proceedings under the supervision of the JPLs to coordinate the
restructuring of those companies with the restructuring of GCL.
The Purchase Agreement
On March 25, 2002, the Bankruptcy Court approved bidding and auction
procedures for the potential sale of the Company's businesses, either in whole
or in part. Numerous parties were contacted and performed diligence on the
Company's assets. As the auction process came to an end in late July of 2002,
Hutchison Telecommunications Limited ("Hutchison") and ST Telemedia were
invited by us and representatives of our creditors to negotiate the definitive
terms of a proposed investment in the Company. After extensive negotiations, an
agreement in principle was reached leading to the execution of a definitive
Purchase Agreement, dated as of August 9, 2002, among the Company, Global
Crossing Holdings Ltd., the JPLs, Hutchison, and ST Telemedia (the "Purchase
Agreement") for the purchase of substantially all of GCL's assets. The
Bankruptcy Court approved the Purchase Agreement on August 9, 2002.
Under the Purchase Agreement, Hutchison and ST Telemedia agreed to invest a
total of $250 million for a 61.5 percent equity interest in New GCL, a newly
formed Bermuda company, upon our emergence from bankruptcy. At emergence, GCL
will transfer substantially all of its assets (including stock in subsidiaries)
to
13
New GCL. New GCL will thereby become the parent company of the Global Crossing
group and will, among other things, succeed to GCL's reporting obligations
under the Exchange Act. However, New GCL and its subsidiaries will not assume
any liabilities of GCL or its subsidiaries that commenced bankruptcy cases (the
"GC Debtors") other than the "Assumed Liabilities," which are generally defined
in the Plan of Reorganization to include the following: (i) ordinary course
administrative expense claims, (ii) priority tax claims, (iii) certain secured
claims, (iv) obligations under agreements assumed by the GC Debtors in our
chapter 11 cases and (v) obligations under the Purchase Agreement.
The Purchase Agreement also sets forth the basic terms of a restructuring
with our banks and unsecured creditors. In summary, those parties were to
receive common shares representing 38.5 percent of the equity in New GCL,
approximately $323 million in cash, and $200 million of new debt in the form of
senior secured notes (the "New Senior Secured Notes"). Based on subsequent
agreement among the parties, our banks and unsecured creditors will receive an
additional $200 million in cash rather than the New Senior Secured Notes.
Consummation of the Purchase Agreement was subject to various conditions,
including the receipt of regulatory approvals. In particular, each of the
parties had the right to terminate their obligations under the Purchase
Agreement in the event that such regulatory approvals had not been obtained by
April 30, 2003 (the "Voluntary Termination Date").
The Chapter 11 Plan of Reorganization and Bermuda Schemes of Arrangement
On September 16, 2002, we filed a chapter 11 plan of reorganization (as
amended, the "Plan of Reorganization") and accompanying disclosure statement
(as amended, the "Disclosure Statement") with the Bankruptcy Court. On October
17, 2002, we filed an amended Plan of Reorganization and amended Disclosure
Statement. The Plan of Reorganization implements the terms of the Purchase
Agreement with respect to the chapter 11 cases. The terms of the Plan of
Reorganization are described in more detail below. On October 21, 2002, the
Bankruptcy Court approved the Disclosure Statement and related voting
procedures. On October 28, 2002, we commenced solicitation of acceptances and
rejections of the Plan of Reorganization.
On October 24, 2002, GCL and each of the other GC Debtors incorporated in
Bermuda were granted approval by the Bermuda Court to hold meetings of their
creditors for the purpose of considering and voting on schemes of arrangement
(the "Schemes"). The Schemes implement the terms of the Purchase Agreement with
respect to the Bermuda cases, essentially by incorporating the terms of the
Plan of Reorganization. The meetings of creditors to consider and vote on the
Schemes were held in Bermuda on November 25 and 28, 2002.
On December 17, 2002, the Bankruptcy Court confirmed the Plan of
Reorganization, subject to the entry of a formal confirmation order and
documentation of the resolution of any outstanding objections. On December 26,
2002, the conditions specified by the Bankruptcy Court on December 17, 2002
were met and as a result the Bankruptcy Court entered the order confirming the
Plan of Reorganization. Similarly, on January 3, 2003, the Bermuda Court
sanctioned the Schemes (the Bermuda equivalent to confirmation).
ST Telemedia's Assumption of Hutchison's Rights Under the Purchase Agreement
and Regulatory Approval
On the Voluntary Termination Date, we had not obtained all the regulatory
approvals necessary to complete the transaction and it became apparent that the
Committee on Foreign Investment in the United States ("CFIUS") would not
approve the transaction with Hutchison participating in it. On that date,
Hutchison withdrew from the Purchase Agreement and ST Telemedia exercised its
option under the Purchase Agreement to assume all of Hutchison's rights and
obligations thereunder. As a result, ST Telemedia agreed to increase its
original $125 million investment to a total of $250 million for a 61.5 percent
equity interest in New GCL upon our emergence from bankruptcy. The withdrawal
by Hutchison and related assumption by ST Telemedia required us to file amended
applications for regulatory approvals with CFIUS, the FCC and other regulatory
authorities.
14
In May 2003, we filed a motion with the Bankruptcy Court to approve an
amendment to the Purchase Agreement which, among other things, extended the
Voluntary Termination Date to October 14, 2003. The Bankruptcy Court approved
the amendment on July 1, 2003 after a contested hearing on the matter and over
the objection of one of our creditor groups. The decision of the Bankruptcy
Court is currently on appeal to the United States District Court for the
Southern District of New York.
On September 19, 2003, President Bush stated, in a letter to congressional
leaders, that he would "take no action to suspend or prohibit the proposed 61.5
percent investment by Singapore Technologies Telemedia Pte. Ltd., a company
indirectly owned by the Government of Singapore, in Global Crossing Ltd.," thus
clearing the Company to proceed with the sale to ST Telemedia in connection
with the CFIUS process. On October 8, 2003, the Company received approval from
the Federal Communications Commission for the transfer of licenses required
under the Purchase Agreement. With this action, all regulatory approvals
required by the Purchase Agreement had been obtained.
By amendments dated October 13, 2003, November 14, 2003 and December 3,
2003, the Company and ST Telemedia further extended the Voluntary Termination
Date until, most recently, December 19, 2003, in order to provide additional
time for completion of the transactions required by the Purchase Agreement.
None of those amendments was opposed. The Company believes that the appeal from
the July 1, 2003 decision of the Bankruptcy Court described above is now moot
and is likely to be dismissed, with prejudice.
On November 28, 2003, we decided to amend the Plan of Reorganization to
provide an additional $200 million of cash to our banks and unsecured creditors
in lieu of the New Senior Secured Notes. ST Telemedia advised us that it would
purchase the New Senior Secured Notes to provide the funding to effectuate that
amendment. On December 4, 2003, the Bankruptcy Court entered an order approving
the amendment. The amendment similarly was approved by the Supreme Court of
Bermuda on December 5, 2003.
Effect of the Plan of Reorganization and Schemes of Arrangement and
Distributions Thereunder
The Plan of Reorganization governs the treatment of claims against and
interests in each of the GC Debtors. Upon consummation of the Plan of
Reorganization, all pre-petition claims against and interests in each of the GC
Debtors (other than interests and certain claims held by us) will be discharged
and terminated. Creditors of the GC Debtors will receive the following
distributions under the plan:
. Holders of administrative expense claims (post-petition claims relating
to actual and necessary costs of administering the bankruptcy estates and
operating the businesses of the GC Debtors) and priority claims
(principally taxes and claims for pre-petition wages and employee benefit
plan contributions) will generally be paid in full in cash.
. Holders of certain secured claims will be paid in full in cash or have
their debt reinstated or collateral returned.
. The remaining pre-petition creditors will receive in the aggregate a
combination of 38.5% of the equity in New GCL, approximately $523 million
in cash and the entire beneficial interest in the liquidating trust
described in the next paragraph. (For a description of New GCL's equity
securities, see Item 5 herein.)
. Holders of GCL common and preferred shares will not receive any
distribution under the plan.
. Holders of preferred shares of Global Crossing Holdings Ltd. ("GCHL"), a
direct subsidiary of GCL whose assets are being transferred to New GCL
and its subsidiaries pursuant to the plan, will not receive any
distribution under the plan.
15
The GC Debtors' bankruptcy proceedings in general, and the Plan of
Reorganization in particular, have had and will have many other important
consequences for us. For example, many of the executory contracts and leases of
the GC Debtors have been or will be rejected in the bankruptcy process,
significantly decreasing our contractual obligations going forward. In
addition, upon consummation of the plan, the GC Debtors will transfer to a
liquidating trust established for the benefit of the creditors approximately $7
million in cash and certain of the GC Debtors' rights, credits, claims and
causes of action for preferences, fraudulent transfers and other causes of
action and rights to setoff. Reference is made to the Plan of Reorganization
attached to the Disclosure Statement, which is filed as an exhibit to this
annual report on Form 10-K, for a complete description of the GC Debtors' plan
of reorganization and the consequences of its consummation.
Accounting for Consummation of the Plan
We expect that the Plan of Reorganization will become effective and that we
will emerge from our chapter 11 reorganization cases shortly after the filing
of this annual report on Form 10-K. Upon effectiveness of the Plan of
Reorganization, we will have a significantly restructured balance sheet. We
have determined that we are required to implement the "fresh start" accounting
provisions of AICPA Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code," which we refer to as SOP
90-7. The fresh start accounting provisions require that we establish a "fair
value" basis for the carrying value of the assets and liabilities for
reorganized Global Crossing. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Accounting Impact of
Reorganization" for a summary of the impact of the implementation of "fresh
start" accounting.
Cost Reduction Initiatives
We initiated significant cost reduction and related restructuring efforts in
August 2001. These efforts have continued throughout our chapter 11
reorganization. The following summarizes the results of these efforts:
. We reduced our workforce related to continuing operations from
approximately 9,754 in December 2001 to approximately 5,245 in September
2003 as a result of both organized restructuring efforts and natural
attrition.
. We reduced the aggregate number of our real estate facilities from more
than 1,100 locations and approximately 7.2 million square feet on
December 31, 2001 to fewer than 900 locations and approximately 3.2
million square feet on September 30, 2003.
. We rejected or renegotiated numerous vendor contracts and related payment
terms and restructured our business relationships with critical vendors.
These efforts resulted in a year-over-year reduction in "other operating
expenses" from approximately $2.1 billion in 2001 to approximately $1.2 billion
in 2002.
In addition to the above cost reduction and related restructuring efforts,
we also completed the construction of our core network of interconnecting
subsea and terrestrial fiber-optic cables in 2001 and we substantially reduced
non-critical capital spending, resulting in a decrease in cash paid for
purchases of property and equipment from approximately $2.643 billion in 2001
to approximately $281 million in 2002.
Regulatory Overview
Overview
The construction and operation of our facilities and our provision of
telecommunications services subjects us to regulation in many countries
throughout the world.
In the United States, the Telecommunications Act of 1996, or the Telecom
Act, which substantially revised the Communications Act of 1934, has
established the regulatory framework for the introduction of competition
16
for local telecommunications services by new competitive entrants such as us.
Prior to the passage of the Telecom Act, states typically granted an exclusive
franchise in each local service area to a single dominant carrier - often a
former subsidiary of AT&T, known as a regional Bell operating company, or RBOC
- - which owned the entire local exchange network and operated a virtual monopoly
in the provision of most local exchange services in most locations in the
United States. The RBOCs, following some recent consolidation, now consist of
the following companies: BellSouth, Verizon, Qwest Communications and SBC
Communications.
Among other things, the Telecom Act prohibits state and local governments
from barring any entity from providing telecommunications service, which has
the effect of eliminating prohibitions on entry that existed in almost half of
the states at the time the Telecom Act was enacted. At the same time, the
Telecom Act preserved state and local jurisdiction over many aspects of local
telephone service, and, as a result, we are subject to varying degrees of
federal, state and local regulation. Consequently, federal, state and local
regulation, and other legislative and judicial initiatives relating to the
telecommunications industry could significantly affect our business in the
United States.
We believe that the Telecom Act provided the opportunity to accelerate the
development of competition at the local level by, among other things, requiring
the incumbent carriers to cooperate with competitors' entry into the local
exchange market. We have developed our business and designed and constructed
our networks in part to take advantage of the features of the Telecom Act that
require cooperation from the incumbent carriers, and believe that the continued
viability of the provisions relating to these matters is critical to the
success of the competitive regime contemplated by the Telecom Act.
Federal Regulation
The FCC exercises jurisdiction over our communication facilities and
services in the United States. We have authority from the FCC for the
installation, acquisition or operation of our domestic network facilities and
to provide facilities-based international services.
The following is a summary of the interconnection and other rights granted
by the Telecom Act that are most important for full local competition and our
belief as to the effect of the requirements on our business, if properly
implemented:
. Interconnection with the networks of incumbents and other carriers, which
permits customers of ours to exchange traffic with customers connected to
other networks;
. Local loop unbundling, which allows us to selectively gain access to
incumbent carriers' facilities and wires that connect the incumbent
carriers' central offices with customer premises, thereby enabling us to
serve customers on a facilities basis even though they are not directly
connected to our networks;
. Reciprocal compensation, which mandates arrangements for local traffic
exchange between us and both incumbent and competitive carriers and
compensation for terminating local traffic originating on other carriers'
networks, thereby improving our margins for local service;
. Number portability, which allows customers to change local carriers
without changing telephone numbers, thereby removing a significant
barrier for a potential customer to switch to our local voice services;
. Access to phone numbers, which mandates assignment of new telephone
numbers to our customers, thereby enabling us to provide telephone
numbers to new customers on the same basis as the incumbent carrier; and
. Colocation of telecommunications equipment in incumbent central offices,
which enables us to have direct access to unbundled loops and other
network elements and facilitates their efficient integration with our
switching and other network facilities.
As part of its statutorily required periodic review of its list of unbundled
elements, the FCC initiated its "Triennial Review" proceeding and, on August
21, 2003, the FCC released its Triennial Review Order, which is
17
in excess of eight hundred pages. Numerous parties, including both incumbent
and competitive carriers, filed petitions for review of the Triennial Review
Order in various of the federal courts of appeals throughout the country. These
petitions have been consolidated and transferred to the United States Court of
Appeals for the District of Columbia Circuit. We cannot predict the outcome of
these consolidated proceedings.
In the Triennial Review Order, the FCC altered the framework of its prior
decisions implementing the Telecom Act. The Order preserves the basic structure
of the Telecom Act, although it contains provisions that may make it more
difficult for competitive carriers such as us to compete with the RBOCs.
However, given the breadth and complexity of the Order and because it is
subject to judicial review, it is difficult for us to evaluate its overall
effect on our operations. We summarize those portions of the FCC's Triennial
Review Order with the most direct relevance to our operations below.
"Network Element": The FCC reaffirmed its previous interpretation of the
definition of "network element," as requiring ILECs to make available to
competing (or requesting) carriers discrete network elements that are capable
of being used in the provision of a telecommunications service, including
features, functions, and capabilities of a physical facility or equipment. The
FCC also revised its definition of the statutory "impair" standard (which
determines when an ILEC must make unbundled network elements ("UNEs") available
to its competitors) and added a definition of "qualifying service" (which
determines for what purposes an ILEC must make unbundled network elements so
available).
Unbundled Switching Network Element Platform (UNE/P) for High Capacity
Enterprise Customers: The FCC found that, in most areas, competitive local
exchange carriers can overcome barriers to serving enterprise customers, i.e.
those served by DS1 and higher capacity loops (transmission facilities from
telephone company switching offices to customer premises), using their own
switching facilities in combination with unbundled loops (or loop facilities).
The FCC found on a national level (subject to the outcomes of state-commission
proceedings) that requesting carriers are not impaired without access to
unbundled local circuit switching to serve enterprise customers.
In addition, current rules provide that ILECs are not obligated to provide
unbundled local circuit switching to requesting carriers for serving customers
with four or more voice grade (DS0) loops in density zone one of the top fifty
metropolitan areas ("MSAs"). While this rule will remain in effect on an
interim basis, the states are to consider the extent to which this rule should
remain in effect.
Dedicated Transport: The FCC revised the definition of the dedicated
transport network element to include only those transmission facilities within
an ILEC's network that connect ILEC switches and wire centers within a LATA.
In addition, the FCC found on a national level that requesting carriers are
not impaired without access to unbundled certain high capacity (OCn) transport
facilities. On the other hand, the FCC found on a national level that
requesting carriers are impaired without access to dark fiber transport, DS3
transport, and DS1 transport, subject to analysis of specific routes by the
state commissions.
Shared Transport: The FCC defined shared transport as the transmission
facilities shared by more than one carrier, including the ILEC, between end
office switches, between end office switches and tandem switches, and between
tandem switches in the ILEC's network. The FCC concluded that, because
switching and shared transport are inextricably linked, requesting
telecommunications carriers are impaired without access to shared transport
only to the extent that they are impaired without access to unbundled
switching. Accordingly, the FCC directed state commissions to include in their
analyses of impairment for unbundled circuit switching the economic
characteristics of shared transport and other backhaul.
Combinations of Unbundled Network Elements: The FCC affirmed the right of
competitive local exchange carriers ("CLECs") to obtain both new combinations
of unbundled network elements, including the loop-dedicated transport
combination (enhanced extended link, or EEL), and to convert special access to
UNEs.
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The FCC also determined that a competitive carrier may obtain network
element combinations and combine them with special access circuits. However,
the FCC did establish certain service eligibility criteria for permitting
competitive carriers to obtain network element combinations, primarily to
ensure that such competitors were actually in the business of providing local
telephone service.
Clarifications of the FCC's Pricing Standards: The FCC clarified that the
risk-adjusted cost of capital used in calculating UNE prices should reflect the
risks associated with a market in which there exists facilities-based
competition. The FCC explained that in this type of competitive market, all
facilities-based carriers would face the risk of losing customers to other
facilities-based carriers, and that risk should be reflected in TELRIC prices
(as defined immediately below). The FCC also clarified that the cost of capital
may be different for different UNEs in order to reflect any unique risks (above
and beyond the competitive risks) associated with new services that might be
provided over certain facilities.
Pricing Standards Rulemaking: The FCC also initiated a rulemaking process to
consider whether and to what extent it should modify its rules governing the
pricing standard used to determine the prices for UNEs and for resale of ILEC
services (i.e., total element long run incremental cost or "TELRIC").
"Pick and Choose" Rulemaking: The FCC initiated a rulemaking process to
determine whether it should reinterpret the requirements of Section 252(i) of
the Act to facilitate commercial negotiations between ILECs and CLECs. Under
the FCC's current interpretation, that Section permits CLECs to adopt
individual and related provisions of interconnection agreements. The FCC
tentatively concluded that once an ILEC obtains state approval of a statement
of generally available terms and conditions ("SGAT") pursuant to Section 252(f)
of the Telecom Act, which would essentially function as a standardized
interconnection agreement, ILECs and CLECs would be permitted to negotiate an
alternative agreement based upon the SGAT that third parties could opt into
only in its entirety or not at all. The FCC proposed that if an ILEC does not
obtain approval of an SGAT, the current pick-and-choose rule would continue to
apply to all of the ILEC's approved interconnection agreements.
Regulation of the RBOCs' Ability to Provide Long Distance Service
The FCC has primary jurisdiction over the implementation of Section 271 of
the Telecom Act, which provides that the RBOCs cannot offer in-region long
distance services until they have demonstrated that:
. they have entered into an approved interconnection agreement with a
facilities-based competitive telephone company or that no such
competitive telephone company has requested interconnection as of a
statutorily determined deadline;
. they have satisfied a 14-element checklist designed to ensure that the
RBOC is offering access and interconnection to all local exchange
carriers on competitive terms; and
. the FCC has determined that allowing the RBOC to offer in-region, long
distance services is consistent with the public interest, convenience and
necessity.
The FCC has granted each of the RBOCs the authority to provide long distance
service in a number of states. We expect that the RBOCs will have received such
authority with respect to most of the remaining states in the near term.
Although we cannot predict when such approvals will be granted, RBOC entry into
the long distance market could have an adverse affect on our ability to compete
if not accompanied by safeguards to ensure that the RBOCs continue to comply
with the market-opening requirements of Section 271 or if approvals are granted
prematurely, before the RBOCs have completely satisfied the local
market-opening requirements.
In its Triennial Review Order, the FCC reasserted that Section 271
establishes an independent obligation for RBOCs to provide access to loops,
switching, transport, and signaling, regardless of their obligations under
Section 251. The pricing standard, however, may vary for UNEs depending on
whether they also must be unbundled under Section 251. For the UNEs that must
be unbundled, the pricing standard under Section 271 is TELRIC, the same as for
Section 251. For UNEs that must be provided under Section 271, but are not
required to
19
be provided under Section 251, the pricing standard is found in Sections 201
and 202, that is, whether they are priced on a just, reasonable, and not
unreasonably discriminatory basis. Prices that comply with this requirement
could be either prices that the RBOC provides to other carriers from its
wholesale tariffs, or prices found in arms-length agreements with other
similarly situated carriers.
In 1997, the FCC established a significantly expanded federal
telecommunications subsidy regime known as "universal service". The FCC
established new subsidies for services provided to qualifying schools and
libraries and rural health care providers, and expanded existing subsidies to
low income consumers. Most telecommunications companies, including us, must pay
for these programs based on their projected interstate and international
telecommunications end user revenues. The contribution factor for the fourth
quarter of 2003 stands at 9.2%.
Intercarrier Compensation Reform
Currently, communications carriers are required to pay other carriers for
interstate access charges and local reciprocal compensation charges, both of
which are being considered for reform.
Interstate Access Charges
Long distance carriers pay local facilities-based carriers interstate access
charges for both originating and terminating the interstate calls of long
distance customers on the local carriers' networks. Historically, the RBOCs set
access charges higher than cost and justified this pricing to regulators as a
subsidy to the cost of providing local telephone service to higher cost
customers. With the establishment of an explicit and competitively neutral
universal service subsidy mechanism, however, the FCC has taken steps to lower
the access charges assessed by both incumbent and competitive carriers. For
example, the FCC issued a decision in 2001 setting the rates that competitive
local carriers charge to long distance carriers at a level that will gradually
decrease over three years from a maximum of $0.025 per minute to the rates
charged by incumbent carriers. So long as a local exchange carrier is in
compliance with the FCC's rate schedule, the FCC's order forbids long distance
carriers from challenging its interstate access rates. The FCC also issued a
declaratory ruling in the summer of 2002 that had the effect of precluding
wireless carriers from assessing interstate access charges on long-distance
carriers pursuant to tariff. The FCC is also considering, in a declaratory
ruling proceeding commenced in November 2002, the question of whether voice
over the Internet services or services utilizing an Internet protocol should be
made subject to interstate access charges in the same manner as traditional
telephony. The Chairman of the FCC also has announced that it will initiate a
more comprehensive review of the regulatory treatment of voice over IP
services. Like a growing number of carriers and some of our customers, we
utilize Internet protocol for a portion of our traffic. Until the FCC issues
its ruling in the current proceeding, it is unclear how such traffic will be
treated for intercarrier compensation purposes.
Local Reciprocal Compensation Charges
Local telephone companies that originate traffic that is terminated on the
network of other carriers typically compensate the other local carriers for
terminating that traffic. These payments flow in both directions between any
two carriers. Some competitors, however, have a customer base that generates
many more minutes of terminating traffic from other carriers than originating
traffic destined for other carriers. For example, a competitor that has a
customer base that has many information service providers typically will have a
large amount of compensation being paid to it by other carriers, while it will
owe very little reciprocal compensation to other carriers. The FCC revamped the
local reciprocal compensation structure in 2001 on an interim basis for three
years to eliminate or reduce the opportunity for carriers to take advantage of
an imbalance of originating and terminating traffic flows due to traffic
terminated to information service providers. The FCC also initiated a
rulemaking process to examine inter-carrier compensation more comprehensively.
Under the decision, at the election of the incumbent carrier, terminating
traffic that is out-of-balance by a ratio of more than 3 to 1 can be
compensated at a lower rate, or in some cases, at no charge.
20
Regulation of Business Combinations
The FCC, along with the U.S. Department of Justice and state commissions,
has jurisdiction over business combinations involving telecommunications
companies. For example, the FCC's approval was required to implement certain
aspects of our chapter 11 reorganization. The FCC has reviewed a number of
recent and proposed combinations to determine whether the combination would
undermine the market-opening incentives of the Telecom Act by permitting the
combined company to expand its operations without opening its local markets to
competition or have other anti-competitive effects on the telecommunications
and Internet access markets. In some cases, the FCC has set conditions for its
approval of the proposed business combination. We cannot predict whether any
conditions imposed will be effective, nor can we predict whether the FCC will
impose similar conditions should it approve future business combinations.
State Regulation
State regulatory commissions retain jurisdiction over our facilities and
services to the extent they are used to provide intrastate communications. We
expect that we will be subject to direct state regulation in most, if not all,
states in which we operate in the future. Many states require certification
before a company can provide intrastate communications services. We are
certified in all states where we have operations and certification is required.
We cannot be sure that we will retain such certifications or that we will
receive authorization for markets in which we expect to operate or to require
certification in the future.
Most states require us to file tariffs or price lists setting forth the
terms, conditions and prices for services that are classified as intrastate. In
some states, our tariff can list a range of prices for particular services. In
other states, prices can be set on an individual customer basis. Several states
where we do business, however, do not require us to file tariffs. We are not
subject to price cap or to rate of return regulation in any state in which we
currently provide service.
Under the regulatory arrangements contemplated by the Telecom Act, state
authorities continue to regulate matters related to universal service, public
safety and welfare, quality of service and consumer rights. All of these
regulations, however, must be competitively neutral and consistent with the
Telecom Act, which generally prohibits state regulation that has the effect of
prohibiting us from providing telecommunications services in any particular
state. State commissions also enforce some of the Telecom Act's local
competition provisions, including those governing the arbitration of
interconnection disputes between the incumbent carriers and competitive
telephone companies and the setting of rates for unbundled network elements.
Finally, the Triennial Review Order delegated to the states important authority
to decide what unbundled elements must be made available to competitive
carriers in each of the states' local markets over a period three to nine
months following the effectiveness of the decision. Consequently, this
authority gives the states a key role regarding our continuing access to
unbundled elements, such as loops and transport in particular, that are
necessary in many cases to connect our customers to our metro networks.
Local Government Regulation
In certain locations, we must obtain local franchises, licenses or other
operating rights and street opening and construction permits to install, expand
and operate our fiber-optic networks in the public right-of-way. In some of the
areas where we provide network services, our subsidiaries pay license or
franchise fees based on a percentage of gross revenues or on a per linear foot
basis. Cities that do not currently impose fees might seek to impose them in
the future, and after the expiration of existing franchises, fees could
increase. Under the Telecom Act, state and local governments retain the right
to manage the public rights-of-way and to require fair and reasonable
compensation from telecommunications providers, on a competitively neutral and
nondiscriminatory basis, for use of public rights-of-way. As noted above, these
activities must be consistent with the Telecom Act, and may not have the effect
of prohibiting us from providing telecommunications services in any particular
local jurisdiction.
If an existing franchise or license agreement were to be terminated prior to
its expiration date and we were forced to remove our fiber from the streets or
abandon our network in place, our operations in that area would
21
cease, which could have a material adverse effect on our business as a whole.
We believe that the provisions of the Telecom Act barring state and local
requirements that prohibit or have the effect of prohibiting any entity from
providing telecommunications service should be construed to limit any such
action. Although none of our existing franchise or license agreements has been
terminated, and we have received no threat of such a termination, there can be
no assurance that one or more local authorities will not attempt to take such
action. Nor is it clear that we would prevail in any judicial or regulatory
proceeding to resolve such a dispute.
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, as well as rights of
way (or their equivalent in foreign jurisdictions) necessary for our fiber
optic cable lines to pass through property owned by others. 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.
Western Europe
In connection with the construction and operation of our Western European
network, we have obtained telecommunications licenses in all nations where
authorization is required for us to construct and operate facilities or provide
network services, including voice telephony. While construction of our Western
European network is substantially complete, we expect to obtain additional
telecommunications authorizations in Europe in the ordinary course of business,
should they be required as a consequence of further network growth.
Our activities in Europe are subject to regulation by the European Union
("EU") and national regulatory authorities. The level of regulation and the
regulatory obligations and rights that attach to us as a licensee or authorised
operator in each country vary. In all Member States of the EU, we, as a
competitive entrant, are currently considered to lack significant market power
("SMP") in the provision of bandwidth and call origination services, and
consequently we are generally subjected to less regulation than providers that
are deemed to possess SMP, who are generally incumbents in the countries
concerned.
In April 2002, the 15 EU Member States agreed to introduce a harmonized set
of telecommunications regulations by July 25, 2003, in accordance with a
framework as set out in Directive 2002/21/EC and a package of related
Directives.
Under the Framework Directive (2002/21/EC), the EU has adopted a revised
policy for dealing with the definition and regulation of significant market
power. Regulatory remedies will be introduced in due course following a series
of reviews of telecommunications markets defined in accordance with EC
Recommendation 2003/311/EC. At this time, it is not possible to accurately
predict what those remedies may entail, and their potential impact on our
business.
Also included in the package of Directives are measures under Directive
2002/20/EC to remove the necessity for telecommunications network operators and
service providers to obtain individual licenses and/or authorizations, save for
use of scarce resources such as numbering addresses and radio spectrum.
However, as at July 25, 2003, only the UK, Ireland, Finland, Sweden and
Denmark are believed to have adopted the changes to their national laws to
implement the EU's telecommunications-related Directives. While there is no
certainty and hence it is impossible for us to accurately predict when the
national laws will be amended in the remaining EU Member States, it is
generally anticipated that certain Member States, including Italy, Austria and
Spain, are relatively close to full transposition of the new regulations,
whereas others, including France and Germany, may be further behind and so
could face enforcement action by the European Commission.
22
It should be noted that the membership of the EU is scheduled to increase
beginning in May 2004 when, subject to ratification by national referenda, up
to nine additional countries are scheduled to accede to the EU. Upon a
country's accession, the harmonized package of EU telecommunications-related
Directives will take effect and hence subsequent market entry is expected to be
possible without the requirement for additional licenses.
Asia
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. Similarly, some countries in Asia maintain
foreign ownership restrictions which limit the amount of foreign direct
investment and require companies to seek joint venture partners.
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
Basic Telecommunications Services, which came into force in February 1998.
Additionally, the adoption of the Free Trade Agreement between the United
States and Singapore establishes a new standard of liberalization based on
bilateral negotiations with the United States. We cannot predict what effect,
if any, this agreement will have on other countries in the region or whether
the United States will pursue similar agreements with those countries. We also
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 intend to operate will slow or halt the
liberalization of its telecommunications markets. The effect on us of such an
action cannot be accurately predicted.
The telecommunications regulatory regimes of many Asian countries are in the
process of development. Many issues, such as regulation of incumbent providers,
interconnection, unbundling of local loops, resale of telecommunications
services, offering of voice 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 Asia.
Latin America
Our MAC, PAC and SAC fiber optic cable systems connect to Latin America. In
connection with the construction of these systems, we have obtained cable
landing licenses and/or telecommunications licenses in Argentina, Brazil,
Chile, Colombia, Mexico, Panama, Peru, Uruguay, Venezuela and the United
States. While construction of our Latin American network is substantially
complete, we expect to obtain additional telecommunications authorizations in
Latin America in the ordinary course of business, should they be required as a
consequence of further network growth and expansion of the regional service
portfolio.
As in Asia, the status of liberalization of the telecommunications markets
of Latin America varies. All of the countries in which we currently operate are
members of the WTO and most have agreed to the Agreement on Basic
Telecommunications Services, thereby committing 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
currently impose limits on foreign ownership of telecommunications carriers.
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.
23
Cautionary Factors That May Affect Future Results
(Cautionary Statements Under Section 21E of the Securities Exchange Act of 1934)
Forward-Looking Statements
Our disclosure and analysis in this annual report on Form 10-K contain
certain "forward-looking statements," as such term is defined in Section 21E of
the Securities Exchange Act of 1934. These statements set forth anticipated
results based on management's plans and assumptions. From time to time, we also
provide forward-looking statements in other materials we release to the public
as well as oral forward-looking statements. Such statements give our current
expectations or forecasts of future events; they do not relate strictly to
historical or current facts. We have tried, wherever possible, to identify such
statements by using words such as "anticipate," "estimate," "expect,"
"project," "intend," "plan," "believe," "will" and similar expressions in
connection with any discussion of future operating or financial performance or
strategies. Such forward-looking statements include, but are not limited to,
statements regarding:
. our services, including the development and deployment of data products
and services based on IP and other technologies and strategies to expand
our targeted customer base and broaden our sales channels;
. the operation of our network, including with respect to the development
of IP protocols;
. our liquidity and financial resources, including anticipated capital
expenditures, funding of capital expenditures and anticipated levels of
indebtedness;
. trends related to and management's expectations regarding results of
operations, including but not limited to those statements set forth below
in "Management's Discussion and Analysis of Financial Condition and
Results of Operations;" and
. sales efforts, expenses, interest rates, foreign exchange rates, and the
outcome of contingencies, such as legal proceedings.
We cannot guarantee that any forward-looking statement will be realized.
Achievement of future results is subject to risks, uncertainties and
potentially inaccurate assumptions. Should known or unknown risks or
uncertainties materialize, or should underlying assumptions prove inaccurate,
actual results could vary materially from past results and those anticipated,
estimated or projected. Investors should bear this in mind as they consider
forward-looking statements.
We undertake no obligation to update publicly forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related
subjects in our quarterly reports on Form 10-Q and current reports on Form 8-K.
Also note that we provide the following cautionary discussion of risks and
uncertainties related to our businesses. These are factors that we believe,
individually or in the aggregate, could cause our actual results to differ
materially from expected and historical results. We note these factors for
investors as permitted by the Section 21E of the Securities Exchange Act of
1934. You should understand that it is not possible to predict or identify all
such factors. Consequently, you should not consider the following to be a
complete discussion of all potential risks or uncertainties.
You are further cautioned that we have not filed certain of our recent
periodic reports with the SEC, and we have restated information disclosed in
certain other reports previously filed with the SEC. We have restated our
consolidated financial statements for the year ended December 31, 2000. In
addition, we have restated our financial data for the quarterly periods ended
March 31, 2001, June 30, 2001 and September 30, 2001. As a result, information
previously disclosed in our annual report on Form 10-K for the year ended
December 31, 2000 and in our quarterly reports on Form 10-Q for the quarters
ended March 31, 2001, June 30, 2001 and September 30, 2001 that has been
previously disclosed should not be relied upon. The information to be contained
in our quarterly reports for our quarters ended on March 31, 2003, June 30,
2003 and September 30, 2003 is unavailable at this time. We anticipate filing
the quarterly reports on Form 10-Q for the first three quarters of 2003 after
we emerge from bankruptcy.
24
Risk Factors
Our forward-looking statements are subject to a variety of factors that
could cause actual results to differ significantly from current beliefs and
expectations. In addition to the risk factors identified under the captions
below, the operation and results of our business are subject to risks and
uncertainties identified elsewhere in this annual report on Form 10-K as well
as the following general risks and uncertainties:
. general economic conditions in the geographic areas that we are targeting
for communications services;
. the ability to achieve and maintain market penetration and average per
customer revenue levels sufficient to provide financial viability to our
business; and
. fluctuations in the actual and forecast demand for national, regional or
global telecommunications services.
Risks Related to Our Operations
Our rights to the use of the dark fiber that make up our network may be
affected by the financial health of our fiber providers.
The majority of our North American network and some of the other
transmission facilities comprising our global network are held by us through
long-term leases or IRU agreements with various companies that provide us
access to fiber owned by them. A bankruptcy or financial collapse of one of
these fiber providers could result in a loss of our rights under such leases
and agreements with the provider, which in turn could have a negative impact on
the integrity of our network and ultimately on our results of operations.
Beginning in 2001, there has been increasing financial pressure on some of our
fiber providers as part of the overall weakening of the telecommunications
market. Several such providers have sought bankruptcy protection. To our
knowledge, the rights of the holder of such rights in strands of fiber in the
event of bankruptcy have not been squarely addressed by the judiciary at the
state or federal level in the United States or in the foreign jurisdictions in
which we operate and, therefore, our rights with respect to dark fiber
agreements under such circumstances are unclear.
We may not be able to continue to connect our network to incumbent carriers'
networks or maintain Internet peering arrangements on favorable terms.
We must be party to interconnection agreements with incumbent carriers and
certain independent carriers in order to connect our customers to the public
telephone network. If we are unable to renegotiate or maintain interconnection
agreements in all of our markets on favorable terms, it could adversely affect
our ability to provide services in the affected markets.
Peering agreements with Internet service providers allow us to access the
Internet and exchange transit for free with these providers. Depending on the
relative size of the carriers involved, these exchanges may be made without
settlement charge. Recently, many Internet service providers that previously
offered peering have reduced or eliminated peering relationships or are
establishing new, more restrictive criteria for peering and an increasing
number of these service providers are seeking to impose charges for transit.
Increases in costs associated with Internet and exchange transit could have a
material adverse effect on our margins for our products that require Internet
access. We may not be able to renegotiate or maintain peering arrangements on
favorable terms, which would impair our growth and performance.
The loss of our majority interest in Asia Global Crossing and our resultant
dependence on third party carriers to provide services to and throughout the
Asia/Pacific region could adversely affect our operations and operating results.
We currently have no definitive long-term agreements with providers of the
trans-Pacific and intra-Pacific capacity required by us to provide services
within the Asia/Pacific region and between the United States and the
Asia/Pacific region. We cannot provide any assurance that we will be able to
enter into any such agreements on
25
acceptable pricing and other terms. In the absence of capacity to and within
the region, we will be unable to conduct that part of our business which
involves providing services to and within the Asia/Pacific region. In addition,
to the extent that we are unable to secure such long-term capacity, we may be
in breach of certain agreements with our existing customers to provide them
with long-term IRUs in trans-Pacific capacity. Any of these developments could
result in significant liability or adversely affect our operating results.
The Network Security Agreement requires significant operating and capital
expenditures. The inadvertent violation of the agreement could have severe
consequences.
Implementation of and compliance with the Network Security Agreement will
require significant upfront and ongoing capital and operating expenditures that
are incremental to the Company's historical levels of such expenditures. We
estimate that these incremental expenditures will be approximately $6.5 million
in 2004, and approximately $2.5 million in subsequent years; however, the
actual costs could significantly exceed these estimates. While implementation
of the Network Security Agreement may increase our ability to compete for
contracts to provide telecommunications services to the U.S. Government, there
can be no assurances that any such contracts will be awarded.
In addition, the Network Security Agreement imposes significant requirements
on us related to information storage and management; traffic routing and
management; physical, logical, and network security arrangements; personnel
screening and training; corporate governance practices; and other matters.
While we expect fully to comply with our obligations under the Network Security
Agreement, it is impossible to eliminate completely the risk of an inadvertent
violation of the agreement. The consequences of a violation of the Network
Security Agreement could be severe, potentially including the revocation of our
FCC licenses in the U.S., which would result in the cessation of our U.S.
operations and would have a material adverse effect on our operations and
financial condition.
The bankruptcies of potential customers in the Internet and
communications-related industries have diminished our sales prospects and may
have an adverse effect on our results of operations.
We historically have provided services to, and generated significant
revenues from, customers that conduct business in the Internet and
communications-related sectors. Many businesses that operated in those
segments, particularly start-ups in the Internet service provider segment, have
liquidated, otherwise gone out of business, or modified their business plans in
ways that have significantly reduced their need for communications services.
These developments have decreased significantly the size of the potential
market for many of our wholesale and carrier-related services, particularly
data transport services. Those of our Internet and communications-related
customers that remain in business and have not sought bankruptcy protection
nevertheless have been adversely affected by recent business trends in the
Internet and "dot com" industries. To the extent the credit quality of these
customers deteriorates or these customers seek bankruptcy protection, we may
not be able to collect all amounts due from them and our ability to generate
revenue in future periods from them could be adversely affected.
It is expensive and difficult to switch new customers to our network, and lack
of cooperation of incumbent carriers can slow the new customer connection
process.
It is expensive and difficult for us to switch a new customer to our network
because:
. we charge the potential customer certain one-time installation fees, and,
although the fees are generally less than the cost to install a new
customer, they may act as a deterrent to becoming our customer, and
. we require cooperation from the incumbent carrier in instances where
there is no direct connection between the customer and our network, which
can complicate and add to the time that it takes to provision a new
customer's service.
Many of our principal competitors, the domestic and international incumbent
carriers, are already established providers of local telephone services to all
or virtually all telephone subscribers within their respective service areas.
Their physical connections from their premises to those of their customers are
expensive
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and difficult to duplicate. To complete the new customer provisioning process,
we rely on the incumbent carrier to process certain information. The incumbent
carriers have a financial interest in retaining their customers, which could
reduce their willingness to cooperate with our new customer provisioning
requests, thereby adversely impacting our ability to compete and grow revenues.
We depend on our key personnel and qualified technical staff and, if we lose
their services, our ability to manage the day-to-day aspects of our business
and complex network will be weakened. We may not be able to hire and retain
qualified personnel, which could adversely affect our operating results.
We are highly dependent on the services of our management and other key
personnel. The loss of the services of members of our senior executive
management team or other key personnel could cause us to make less successful
strategic decisions, which could hinder the introduction of new services or
make us less prepared for technological or marketing problems, which could
reduce our ability to serve our customers or lower the quality of our services.
We believe that a critical component for our success will be the attraction
and retention of qualified, professional technical and sales personnel. We have
experienced intense competition for qualified personnel in our business with
the sales, technical and other skill sets that we seek and, as a result of the
bankruptcy, we have lost qualified personnel. We may not be able to attract,
develop, motivate and retain experienced and innovative personnel. If we fail
to do so, there will be an adverse effect on our ability to generate revenue
and operate our business.
As a result of our bankruptcy, we have not been able to use stock-based
compensation as a means to attract and retain employees. Although New GCL will
implement a new stock incentive plan upon our emergence from bankruptcy,
constraints due to our capital structure and our Plan of Reorganization will
limit the availability of stock incentives relative to pre-bankruptcy levels.
The operation, administration, maintenance and repair of our systems are
subject to risks that could lead to disruptions in our services and the failure
of our systems to operate as intended for their full design life.
Each of our systems is and will be subject to the risks inherent in
large-scale, complex fiber optic telecommunications systems. The operation,
administration, maintenance and repair of our systems require the coordination
and integration of sophisticated and highly specialized hardware and software
technologies and equipment located throughout the world. Our systems may not
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.
Each of our subsea 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 provide any assurances as to 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.
Interruptions in service or performance problems, for whatever reason, could
undermine confidence in our services and cause us to lose customers or make it
more difficult to attract new ones. In addition, because many of our services
are critical to our customers' businesses, a significant interruption in
service could result in lost profits or other loss to customers. Although we
attempt to disclaim liability for these losses in our service agreements, a
court might not enforce a limitation on liability, which could expose us to
financial loss. In addition, we often provide customers with guaranteed service
level commitments. If we are unable to meet these guaranteed service level
commitments for whatever reason, we may be obligated to provide our customers
with credits, generally in the form of free service for a short period of time,
which could negatively effect our operating results.
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As part of our reorganization efforts, we entered into settlement agreements
with a number of our significant suppliers. Certain of these settlement
agreements have resulted in reductions of up to approximately two years in
warranty coverage related to our SAC, PAC and MAC subsea systems and to
telecommunications equipment we use throughout our worldwide network. As a
result, commencing in 2004, repair costs related to these systems and equipment
will likely increase relative to prior years. This increase, and the adverse
impact of such increase on operating results, could be material if the rate of
failure of such systems and equipment were to increase relative to prior years.
The failure of our operations support systems to perform as we expect could
impair our ability to retain customers and obtain new customers, or provision
their services, or result in increased capital expenditures, which would
adversely affect our revenues or capital resources.
Our operations support systems are an important factor in our success.
Critical information systems used in daily operations perform sales and order
entry, provisioning, billing and accounts receivable functions, and cost of
service verification and payment functions, particularly with respect to
facilities leased from incumbent carriers. If any of these systems fail or do
not perform as expected, it would adversely affect our ability to process
orders and provision sales, and to bill for services efficiently and
accurately, all of which could cause us to suffer customer dissatisfaction,
loss of business, loss of revenue or the inability to add customers on a timely
basis, any of which would adversely affect our revenues. In addition, system
failure or performance issues could have an adverse impact on our ability to
effectively audit and dispute invoicing and provisioning data provided by
service providers from whom we lease facilities. Furthermore, processing higher
volumes of data or additionally automating system features could result in
system breakdowns and delays and additional unanticipated expense to remedy the
defect or to replace the defective system with an alternative system.
Intellectual property and proprietary rights of others could prevent us from
using necessary technology.
While we do not believe that there exists any technology patented by others,
or other intellectual property owned by others, that is necessary for us to
provide our services, there can be no assurances in this regard. If such
intellectual property is owned by others, we would have to negotiate a license
for the use of that property. We may not be able to negotiate such a license at
a price that is acceptable. This could force us to cease offering products and
services incorporating such property, thereby adversely affecting operating
results.
Physical space limitations in office buildings and landlord demands for fees or
revenue sharing could limit our ability to connect customers to our networks
and increase our costs.
In some circumstances, connecting a customer who is a tenant in an office
building to our network requires installation of in-building cabling through
the building's risers from the customer's office to our fiber in the street or
building equipment room, or our antenna on the roof. In some office buildings,
particularly the premier buildings in the largest markets, the risers are
already close to their maximum physical capacity due to the entry of other
competitive carriers into the market. Direct connections require us to obtain
access to rooftops from building owners. Moreover, the owners of these
buildings are increasingly requiring competitive telecommunications service
providers like us to pay fees or otherwise share revenue as a condition of
access to risers and rooftops. Although we generally do not agree to revenue
sharing arrangements, we may continue to be required to pay fees to access
buildings, particularly for buildings located in larger markets, which would
reduce our operating margins.
We have substantial international operations and face political, legal and
other risks from our operations in foreign jurisdictions.
We derive a substantial portion of our revenue from international operations
and have substantial physical assets in several jurisdictions along our routes,
including countries in Latin America and Western Europe. In addition, we lease
capacity and obtain services from carriers in those and other regions. 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, vandalism affecting cable
assets, terrorism or armed conflict;
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. 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.
In addition, managing operations in multiple jurisdictions may place further
strain on our ability to manage growth.
We are exposed to contingent liabilities that could result in material losses
that we have not reserved against.
Included in "Legal Proceedings" in Item 3 and Note 27, "Commitments,
Contingencies and Other" to our consolidated financial statements included in
this annual report on Form 10-K are descriptions of our important contingent
liabilities. If one or more of these contingent liabilities were to be resolved
in a manner adverse to us, we could suffer losses that are material to our
financial condition. We have not established reserves for many of these
contingent liabilities. Moreover, as described in "Legal Proceedings" and in
Note 27 to the consolidated financial statements, certain of these contingent
liabilities could have a material adverse effect on our operations in addition
to the effect of any potential monetary judgment or sanction against us.
Many of our customers deal predominantly in foreign currencies, so we may be
exposed to exchange rate risks and our net loss may suffer due to currency
translations.
Many of our current and prospective customers that derive their revenue in
currencies other than U.S. dollars are invoiced by us in 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 depreciate in value 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 either 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 loss may suffer due to currency translations in the event that such
currencies depreciate 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.
Risks Related to Competition and Our Industry
The prices that we charge for our services have been decreasing, and we expect
that such decreases will continue over time.
We expect price decreases in our industry to continue as we and our
competitors increase transmission capacity on existing and new networks.
Accordingly, our historical revenues are not indicative of future revenues
based on comparable traffic volumes. If the prices for our services decrease
for whatever reason and we are unable to increase volumes through additional
services or otherwise, our operating results would be adversely affected.
Technological advances and regulatory changes are eroding traditional barriers
between formerly distinct telecommunications markets, which could increase the
competition we face and put downward pressure on prices.
New technologies, such as voice-over-IP, and regulatory changes,
particularly those permitting incumbent local telephone companies to provide
long distance services, are blurring the distinctions between traditional and
emerging telecommunications markets. In addition, the increasing importance of
data services has focused the attention of most telecommunications companies on
this growing sector. As a result, a competitor in any of our business areas is
potentially a competitor in our other business areas, which could impair our
prospects, put downward pressure on prices and adversely affect our operating
results.
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We face competition in each of our markets from the incumbent carrier in
that market and from recent market entrants, including long distance carriers
seeking to enter, reenter or expand entry into the local exchange marketplace
and incumbent carriers seeking to enter into the long distance market as they
are granted the regulatory authority to do so. This competition places downward
pressure on prices for local and long distance telephone service and data
services, which can adversely affect our operating results. In addition, we
could face competition from other companies, such as other competitive
carriers, cable television companies, microwave carriers, wireless telephone
system operators and private networks built by large end-users. If we are not
able to compete effectively with these industry participants, our operating
results would be adversely affected.
Many of our competitors have superior resources, which could place us at a cost
and price disadvantage.
Many of our existing and potential competitors have significant competitive
advantages, including greater market presence, name recognition and financial,
technological and personnel resources, superior engineering and marketing
capabilities, and significantly larger installed customer bases. As a result,
some of our competitors can raise capital at a lower cost than we can, and they
may be able to adapt more swiftly to new or emerging technologies and changes
in customer requirements, take advantage of acquisition and other opportunities
more readily, and devote greater resources to the development, marketing and
sale of products and services than we can. Also, our competitors' greater brand
name recognition may require us to price our services at lower levels in order
to win business. Our competitors' financial advantages may give them the
ability to reduce their prices for an extended period of time if they so choose.
Our selection of technology could prove to be incorrect, ineffective or
unacceptably costly, which would limit our ability to compete effectively.
The telecommunications industry is subject to rapid and significant changes
in technology. Most technologies and equipment that we use or will use,
including wireline and wireless transmission technologies, circuit and packet
switching technologies, multiplexing technologies, data transmission
technologies, including the DSL, ATM and IP technologies, and server and
storage technologies may become obsolete. If we do not replace or upgrade
technology and equipment that becomes obsolete, we will be unable to compete
effectively because we will not be able to meet the expectations of our
customers, which could cause our results to suffer.
The introduction of new technologies may reduce the cost of services similar
to those that we plan to provide. As a result, our most significant competitors
in the future may be new entrants to the telecommunications industry or
existing providers that upgrade equipment with new technologies. These
providers may not be burdened by an installed base of outdated equipment and,
therefore, may be able to more quickly respond to customer demands.
Additionally, the markets for data and Internet-related services are
characterized by rapidly changing technology, evolving industry standards,
changing customer needs, emerging competition and frequent new product and
service introductions. The future success of our data services business will
depend, in part, on our ability to accomplish the following in a timely and
cost-effective manner:
. effectively use leading technologies and update or convert from existing
technologies and equipment;
. continue to develop technical expertise;
. develop new services that meet changing customer needs; and
. influence and respond to emerging industry standards and other
technological changes.
Our pursuit of necessary technological advances may require substantial time
and expense. Moreover, in the course of our business we must make choices
regarding technology based on our understanding of technological trends. If the
technology choices we make prove to be incorrect, ineffective or unacceptably
costly, our ability to meet our customers' demands for existing and future
telecommunications services could be impaired, which would adversely affect our
growth and operating results.
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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. Moreover, those regulatory requirements could change in a manner that
significantly increases our costs or otherwise adversely affects our operations.
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 Western Europe, Latin America, and the Asia/Pacific
region. Our operations in those countries are subject to regulation at the
regional level (e.g., European Union), 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, or inadequate
judicial, regulatory or other fora are available to address these
inadequacies or disputes. 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 regulatory or other 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.
. The regulatory requirements to which we are subject could change in a
manner that significantly increases our costs or otherwise adversely
affects our operations.
Attempts to limit the basic competitive framework of the Telecom Act could
interfere with the successful implementation of our business plan.
Successful implementation of our business plan is predicated on the
assumption that the basic framework for competition in the local exchange
services market established by the Telecom Act will remain in place. We expect
that there will be attempts to modify, limit or eliminate this basic framework
through a combination of federal legislation, new rulemaking proceedings by the
FCC and challenges to existing and proposed regulations
31
by the RBOCs. It is not possible to predict the nature of any such action or
its impact on our business and operation, though the effect of certain changes
could be material.
Potential regulation of Internet service providers could adversely affect our
operations.
The FCC has to date treated Internet service providers as enhanced service
providers. Enhanced service providers are currently exempt from federal and
state regulations governing common carriers, including the obligation to pay
access charges and contribute to the universal service funds. The FCC is
currently examining the status of Internet service providers and the services
they provide. If the FCC were to determine that Internet service providers, or
the services they provide, are subject to FCC regulation, including the payment
of access charges and contribution to the universal service funds, it could
significantly increase our cost structure and have a material adverse effect on
our business.
The requirement that we obtain and maintain permits and rights-of-way for our
network increases our cost of doing business and could adversely affect our
performance and results.
In order for us to acquire and develop our fiber optic networks, we must
obtain and maintain local franchises and other permits, as well as
rights-of-way and fiber capacity from entities such as incumbent carriers and
other utilities, railroads, long distance companies, state highway authorities,
private persons and companies, local governments and transit authorities. The
process of obtaining these permits and rights-of-way is time-consuming and
burdensome and increases our cost of doing business.
We may not be able to maintain our existing franchises, permits and
rights-of-way that we need for our business. We may also be unable to obtain
and maintain the other franchises, permits and rights-of-way that we require.
In particular, we are a defendant in several lawsuits that, among other things,
challenge certain of our rights-of-way (and amounts payable by us therefor),
and additional such suits could be instituted. This litigation may increase our
costs and adversely affect our profitability. Moreover, a sustained and
material failure to obtain or maintain required rights could materially
adversely affect our performance in the affected area and our operating results.
We depend on third parties for many functions. If the services of those third
parties become unavailable to us, we may not be able to conduct our business.
We depend and will continue to depend upon third parties to:
. construct and/or upgrade 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/or upgrade and operate landing stations in a number of
those jurisdictions;
. acquire rights-of-way; and
. provide terrestrial and subsea capacity and services to our customers
through contractual arrangements.
We cannot provide any assurances 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,
or if any of these relationships are terminated and we are unable to reach
suitable alternative arrangements on a timely basis, we may not be able to
conduct our business.
Terrorist attacks and other acts of violence or war may adversely affect the
financial markets and our business and operations.
As a result of the September 11, 2001 terrorist attacks and subsequent
events, there has been considerable uncertainty in world financial markets.
These events and concerns about future terrorist attacks could lead to
volatility or illiquidity in world financial markets. They could cause consumer
confidence and spending to
32
decrease or otherwise adversely affect the economy. These events could
adversely affect our business and our ability to obtain financing on favorable
terms.
Future terrorist attacks against the United States or other countries in
which we operate are possible. Since telecommunications networks and equipment
may be considered critical infrastructure, it is possible that our physical
facilities or network control systems could be the target of such attacks, or
that such attacks could impact other telecommunications companies in a manner
that disrupts our operations. Any of these occurrences could materially
adversely affect our business.
Risks Related to Liquidity and Financial Resources
We incurred substantial operating losses in 2002 which have continued in 2003,
and, in the near term, we will not generate funds from operations sufficient to
meet all of our cash requirements.
For each period since inception, we have incurred substantial operating
losses. For 2002, we posted an operating loss of approximately $434 million. In
the near term, our existing and projected operations are not expected to
generate cash flows sufficient to pay our expected operating expenses, fund our
expected capital expenditure requirements, meet our debt service obligations
and meet our restructuring cost requirements. We expect our available liquidity
to decline in 2004 due in part to exit cost requirements under our Plan of
Reorganization (with payment terms of up to 24 months) that will consume over
$100 million of cash in 2004 and interest payments on the New Senior Secured
Notes. We currently anticipate that we will need to obtain up to $100 million
in financing to fund our anticipated liquidity requirements through the end of
2004.
If we cannot arrange a working capital facility or raise other financing by
December 31, 2003, ST Telemedia has indicated its intention to provide us with
up to $100 million of additional financial support to fund our operating needs
on such terms and conditions as we and ST Telemedia may agree. ST Telemedia's
intention is based on our commitment to adhere to an operating plan requiring
no more than $100 million in additional funds in 2004. However, ST Telemedia
does not have any contractual obligation to provide financial support to us,
and we can provide no assurance that ST Telemedia will provide any such
financial support. Moreover, we can provide no assurance that we will be able
to arrange a working capital facility on terms acceptable to us or that
provides borrowing availability sufficient to meet our liquidity needs,
particularly if our operating cash flows do not improve as we anticipate.
Without such financing, we would be unable to fund operations through 2004.
Even with such financing, we expect that we will need additional funding in
2005 to pay our expected operating expenses, fund our expected capital
expenditures, meet our debt service obligations and meet our restructuring cost
requirements.
The covenants in our debt instruments restrict our financial and operational
flexibility.
The indenture for the New Senior Secured Notes to be issued by our
subsidiary, Global Crossing North American Holdings, Inc., and guaranteed by
New GCL in connection with our Plan of Reorganization contains covenants that
restrict, among other things, our ability to borrow money, grant additional
liens on our assets, make particular types of investments or other restricted
payments, engage in transactions with affiliates, sell assets or merge or
consolidate. However, the covenants in the indenture contain exceptions
permitting the incurrence of debt under one or more senior working capital
facilities secured by a first priority lien on substantially all of our assets
(other than the assets of Global Marine and Global Crossing UK) in an aggregate
principal amount of up to $150 million (individually, a "Working Capital
Facility" and collectively, the "Working Capital Facilities"). Under the terms
of the indenture, ST Telemedia may not be the lender under a Working Capital
Facility, although the indenture does not prohibit ST Telemedia from
guaranteeing our obligations under a Working Capital Facility. The indenture
allows ST Telemedia to make loans to us only on a subordinated basis and
subject to other significant restrictions. Except for the indication of
interest described immediately above, ST Telemedia has not indicated any
willingness or commitment to extend credit to us or to guarantee credit
extended to us by third parties.
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In addition, the indenture contains cross-default provisions which could
result in the acceleration of our repayment obligations in the event that the
issuer of the New Senior Secured Notes or one or more of our other subsidiaries
were to default on certain other indebtedness exceeding $2.5 million or were to
become the subject of bankruptcy or insolvency proceedings. We expect that any
Working Capital Facility would contain similar restrictions, as well as
financial covenants that would require us to meet certain financial tests.
The security for the New Senior Secured Notes and any future Working Capital
Facility will consist of substantially all of our assets. A default under these
financing agreements would allow ST Telemedia (or transferee noteholders) or
the Working Capital Facility lenders to accelerate our repayment obligations,
foreclose on our assets and adversely affect our rights under other commercial
agreements.
These financing agreements also could affect our financial and operational
flexibility as follows:
. they may impair our ability to obtain additional financing in the future;
. they may limit our flexibility in planning for or reacting to changes in
market conditions; and
. they may cause us to be more vulnerable in the event of a downturn in our
business.
Our international corporate structure limits the availability of our
consolidated cash resources for intercompany funding purposes and reduces our
financial restructuring flexibility.
As a holding company, all of our revenues are generated by our subsidiaries
and substantially all of our assets are owned by our subsidiaries. As a result,
we are dependent upon dividends and inter-company transfer of funds from our
subsidiaries to meet our debt service and other payment obligations. Our
subsidiaries are incorporated and are operating in various jurisdictions
throughout the world. A number of our subsidiaries have cash on hand that
exceeds their immediate requirements but that cannot be distributed or loaned
to us or our other subsidiaries to fund our or their operations due to
contractual restrictions or legal constraints related to the solvency of such
entities. These restrictions could cause us or certain of our other
subsidiaries to become and remain illiquid while other subsidiaries have
sufficient liquidity to meet their liquidity needs. A number of the non-GC
Debtors have significant capital lease obligations that will not be discharged
in our bankruptcy proceedings. These subsidiaries were generally not included
in our U.S. chapter 11 bankruptcy proceedings since such inclusion may have
triggered the commencement of liquidation proceedings against such entities in
jurisdictions that do not recognize an equivalent of a chapter 11
reorganization. Some of these subsidiaries could be forced into local
insolvency proceedings if their operating results and financial condition do
not improve.
A default by any of our subsidiaries under any capital lease obligation or
debt obligation totaling more than $2.5 million, as well as the bankruptcy or
insolvency of any of our subsidiaries, could trigger cross-default provisions
under the indenture for the New Senior Secured Notes and may trigger
cross-default provisions under any working capital facility or other financing
that we may arrange. This could lead ST Telemedia (or transferee noteholders)
or other lenders to accelerate the maturity of their relevant debt instruments,
which would have a material adverse effect on our financial condition.
Our Global Marine subsidiary faces significant financial challenges and must
successfully restructure its operations to ensure its continued viability.
Due to adverse industry conditions and significant decreased demand for
subsea cable installation services, Global Marine's revenues decreased from
$537 million in 2001 to $213 million in 2002. Global Marine has experienced
continued revenue declines in 2003. In addition, as a result of the non-renewal
of a customer contract, commencing in April 2004, Global Marine will lose an
approximately $50 million in revenue per annum contract to provide subsea
maintenance services. Global Marine has implemented restructuring initiatives
that have partially offset the impact of declining revenues, but Global Marine
nevertheless expects to experience negative cash flows during the next year. If
Global Marine is unable to increase its revenues through new business and
improve its cash flow performance or is unable to raise additional funding, it
may default on its
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capital lease and other obligations. Additional funding may not be available on
acceptable terms or at all, particularly since Global Marine does not own
significant unencumbered assets that it could use as collateral.
A significant portion of Global Marine's current cash outflows consists of
payments under ship charters and capital lease obligations. Certain of these
charters and capital leases contain covenants that reduce Global Marine's
financial flexibility and restrict, among other things, its ability to grant
liens on assets. Global Marine expects to be in default under a financial ratio
covenant contained in two of these agreements by the end of 2003. Global Marine
is in discussions with the counterparties to these agreements to address the
expected breach of such financial covenant, and is discussing with its
principal ship charter creditors a possible restructuring of the payment
schedules under its agreements with such creditors. If Global Marine is
unsuccessful in these efforts, these parties could terminate these agreements
and accelerate Global Marine's required payments thereunder. Such an action
would trigger cross-default provisions in Global Marine's other ship charters
and capital lease obligations.
Our access to capital is likely to be limited.
Many telecommunications companies, including us, have defaulted on debt
securities and bank loans in recent years and had their equity positions
eliminated in bankruptcy reorganizations. This history has led to limited
access to the capital markets by companies in our industry. Our access to the
capital markets is likely to be particularly limited for the foreseeable future
in light of our recent financial troubles and the uncertainties associated with
a company that is first emerging from bankruptcy protection. Restrictions on
our ability to access capital will diminish our financial and operational
flexibility, and could adversely affect our ability to take advantage of
opportunities for expansion of our network and capabilities and for growth
through business acquisitions.
We cannot predict our future tax liabilities. If we become subject to increased
levels of taxation, our results of operations could be adversely affected.
Global Crossing consists of a group of legal entities incorporated and
operating in jurisdictions throughout the world, thereby subjecting us to
multiple sets of complex and varying tax laws and rules. We cannot predict the
amount of future tax liabilities to which we may become subject. Any increase
in the amount of taxation incurred as a result of our operations or due to
legislative or regulatory changes could result in a material adverse effect on
our net loss and, accordingly, our financial condition and results of
operations. Certain unsettled tax liabilities may survive our bankruptcy
proceedings. We cannot assure you that we have made adequate provision for all
potential tax liabilities that may arise.
Risks Related to Our New Common Stock
ST Telemedia will be our majority stockholder.
After emergence from bankruptcy, a subsidiary of ST Telemedia will
beneficially own 61.5% of New GCL's outstanding equity securities. As a result,
ST Telemedia will have the power to elect the majority of New GCL's directors,
as described in Item 10 below under the caption "Directors and Executive
Officers of the Registrant--Directors of New GCL." Under applicable law and New
GCL's articles of association and bye-laws and the certificate of designations
for New GCL's preferred stock, certain actions cannot be taken without the
approval of holders of a majority of our voting stock including, without
limitation, mergers and amendments to our articles of association and bye-laws.
New GCL's bye-laws include significant additional corporate governance rights
of ST Telemedia. These rights effectively dilute the rights of other
shareholders. In addition, after consummation of our Plan of Reorganization, ST
Telemedia will hold the New Senior Secured Notes and enjoy significant rights
as a creditor under the indenture for the New Senior Secured Notes.
Limited liquidity of New GCL's common stock may result in delays in your
ability to sell your common stock or lower your returns; you should be prepared
to hold your investment indefinitely.
We expect that upon our emergence from bankruptcy, there will be a limited
trading market for New GCL's common stock on the over-the-counter market.
Unlike the New York Stock Exchange or the Nasdaq National
35
Market, an active and orderly trading market on the over-the-counter market
depends on the existence, and individual decisions, of willing buyers and
sellers at any given time. We will not have any control over the willingness of
any such parties to create a trading market.
New GCL has applied for quotation of its common stock on the Nasdaq National
Market. However, there can be no assurance that the common stock will be
accepted for quotation by such market. In addition, if accepted for quotation,
there can be no assurance that New GCL will continue to meet the Nasdaq
National Market's listing criteria over time, or that an active trading market
in New GCL's common stock will develop even if it trades on the Nasdaq National
Market. If Nasdaq National Market trading does not continue or if an active
trading market otherwise fails to exist, the market value of New GCL's common
stock could be adversely affected, making it difficult to buy or sell New GCL's
shares. Consequently, you should be prepared to hold your New GCL common stock
indefinitely.
Future sales of New GCL's common stock could adversely affect its price and/or
our ability to raise capital.
Future sales of substantial amounts of New GCL's common stock, or the
perception that such sales could occur, could adversely affect the market price
of such stock and our ability to raise capital.
As of our emergence from bankruptcy, there will be 22,000,000 shares of New
GCL's common stock outstanding. 6,600,000 of these shares will be restricted
shares held by a subsidiary of ST Telemedia. In addition, ST Telemedia's
subsidiary will hold 18,000,000 shares of restricted preferred stock in New
GCL, which is convertible into shares of New GCL's common stock on a
one-for-one basis. These common shares will be restricted unless certain
criteria are met. All such restricted shares may be sold only under a
registration statement or an exemption from Securities Act registration
requirements. However, ST Telemedia may cause us to register sales of such
restricted stock at any time.
In addition to the shares outstanding upon our emergence from bankruptcy, an
additional 18,000,000 shares of common stock will be reserved for issuance upon
the conversion of the preferred shares held by ST Telemedia and its affiliates,
and an additional 3,478,261 shares will be reserved for issuance upon the
exercise of stock options under New GCL's 2003 Stock Incentive Plan.
The shares of New GCL common stock available for sale on the open market
could increase materially as a result of a decision by ST Telemedia to reduce
or eliminate its equity stake in New GCL, or as a result of the conversion of
ST Telemedia's preferred shares into common shares or the exercise of options
under the 2003 Stock Incentive Plan. These actions could significantly depress
the market price of New GCL's common stock.
Other Risks
Our adoption of "fresh start" accounting and changes due to acquisitions and
dispositions make comparisons of our financial position and results of
operations with those of prior periods more difficult.
In connection with our emergence from bankruptcy, we will implement "fresh
start" accounting for periods following the reorganization. Fresh start
accounting requires us to restate all our assets and liabilities to reflect
their respective fair values. As a result, the consolidated financial
statements for periods after our emergence from bankruptcy will not be
comparable to our consolidated financial statements for the periods prior to
our emergence from bankruptcy, which were prepared on an historical cost basis.
The application of "fresh start" accounting may make it more difficult to
compare our post-emergence operations and results to those in pre-emergence
periods and could therefore adversely affect trading in and the liquidity of
New GCL's common stock. Comparability difficulties also may arise due to
changes in our business due to acquisitions and dispositions of business units
and significant assets over time, as described in the notes to the consolidated
financial statements included in this annual report on Form 10-K.
36
We and certain of our current and former officers and directors are involved in
various governmental investigations and lawsuits.
As described below in Item 3 "Legal Proceedings," we are the subject of
investigations by the SEC and certain other governmental agencies. In addition,
certain of our current and former officers and directors may also be the
subject of such investigations and are defendants in related class action and
other pending and future lawsuits. If a monetary sanction were to be imposed on
us by the SEC, any civil monetary penalty would be discharged upon consummation
of our Plan of Reorganization. Nevertheless, the SEC and the other governmental
agencies that are investigating us could impose non-monetary penalties on us
that could affect our capital-raising or other activities. Moreover, the
ongoing involvement in these governmental investigations and civil lawsuits by
certain of our current officers and directors could distract such individuals
and reduce their productivity on our behalf. Finally, our involvement and the
involvement of our current and former officers and directors in these
investigations and lawsuits could adversely affect our perception by investors,
customers, suppliers, employees and others, which in turn could adversely
affect our operating results and hamper our ability to raise capital.
ITEM 2. PROPERTIES
We lease our principal offices in Hamilton, Bermuda. We also lease corporate
office space in Basingstoke and Chelmsford, England; Billings, Montana; Crewe,
England; Dublin, Ireland; Florham Park, New Jersey; London, England; Miami,
Florida; Montreal, Canada; New York, New York; Phoenix, Arizona; Rochester, New
York; Southfield, Michigan; and Westminster, Colorado. We also own or lease
sales, administrative and other support offices worldwide.
In our telecommunications services segment, we own or lease numerous cable
landing stations throughout the world related to undersea and terrestrial cable
systems. Furthermore, we own or lease properties to house and operate our fiber
optic backbone and distribution network facilities, our point-to-point
distribution capacity, our switching equipment and connecting lines between
other carriers' equipment and facilities and our customers' equipment and
facilities.
In our installation and maintenance services segment, we own, lease and
operate a fleet of vessels used in the planning, installation, and maintenance
of undersea fiber optic cable systems.
Our existing properties are in good condition and are suitable for the
conduct of our business.
ITEM 3. LEGAL PROCEEDINGS
Special Committee Investigation
In August 2001, a former employee of ours made public certain accusations,
among other things, regarding the propriety, business purpose and accounting
treatment of certain concurrent transactions for the purchase and sale of
telecommunications capacity and services between us and our carrier customers.
In response, the Company formed a special committee of its board of directors
to investigate those allegations. In April, 2002, the board of directors
appointed three independent members to fill vacancies on the board and the
special committee that occurred shortly after the commencement of the
bankruptcy cases. Since that time, these three directors have constituted the
special committee. In its investigation, the special committee reviewed 16 of
36 concurrent transactions entered into by us between the fourth quarter of
2000 and the third quarter of 2001 (the "Core Transactions"). The Core
Transactions represented the majority of the value of the concurrent
transactions entered into by us during that time frame.
In addition to addressing the substance of the allegations by the former
employee, the committee also reviewed the circumstances surrounding our
retention of our outside counsel, Simpson Thacher & Bartlett LLP, for the
purpose of inquiring into the allegations and Simpson Thacher's performance
pursuant to our retention.
37
The special committee completed its investigation after a year-long inquiry
and filed its report with the Bankruptcy Court on March 10, 2003, pursuant to
an order of the Court. The special committee's complete report is available
through the Bankruptcy Court. The special committee summarized its findings and
conclusions, in part, as follows: (1) each of the Core Transactions had a
legitimate business purpose at the time it was entered into and each was
subjected to a process of internal corporate review and approval (albeit one
not always rigorously applied); (2) our sharply increased reliance on
concurrent transactions in the first and second quarters of 2001, when reviewed
in retrospect, was not a prudent or financially sound business decision; (3)
neither we nor Simpson Thacher intended to conceal or suppress the former
employee's allegations, although Simpson Thacher did not adequately investigate
or respond to the allegations and did not adequately discharge its professional
obligations to us; (4) we relied in good faith on advice received from Arthur
Andersen LLP, our independent public accountants at the time ("Arthur
Andersen") in accounting for the concurrent transactions; and (5) we relied in
good faith on advice received from Simpson Thacher and Arthur Andersen in our
public disclosures regarding the concurrent transactions.
Securities and Exchange Commission Investigation
On February 5, 2002, the SEC commenced a formal investigation into our
concurrent transactions and related accounting and disclosure issues. We have
been cooperating with the SEC by providing documents and other information to
the SEC staff, which has taken testimony from our current and former directors,
officers, and employees. To resolve the SEC's investigation, we and certain
former officials have entered into negotiations with the SEC staff with a view
to settlement, although to date settlement has not been reached. As part of the
chapter 11 process, the SEC filed a proof of claim asserting contingent and
unliquidated amounts against us. However, on November 14, 2003, the Bankruptcy
Court approved a stipulation among us, the SEC and our unsecured creditors
committee in which the SEC withdrew its proof of claim, with prejudice.
We have restated certain previously issued financial statements to record
the concurrent transactions at historical carrying value rather than at fair
value. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Restatements of Previously Issued Financial Statements."
Department of Justice Inquiry
In early 2002, the U.S. Attorney's Office for the Central District of
California, in conjunction with the Federal Bureau of Investigation (the
"FBI"), began conducting an investigation into our concurrent transactions and
related accounting and disclosure issues. We have provided documents to the
U.S. Attorney's office and the FBI, and FBI representatives have interviewed a
number of our current and former officers and employees. We do not know whether
the investigation is ongoing or has concluded.
Department of Labor Investigation
The Department of Labor ("DOL") is conducting an investigation related to
the administration of our benefit plans, including the acquisition and
maintenance of investments in GCL's common stock in our 401(k) employee savings
plans. We have been cooperating with the DOL by providing documents and other
information to the DOL staff, and the DOL has interviewed a number of our
current and former officers and employees. We and certain of our current and
former officers and directors have been negotiating with the DOL staff over the
terms of a potential settlement, but no agreement has been reached. If the DOL
were to impose a civil monetary penalty on us, such a penalty would be
discharged upon consummation of our Plan of Reorganization.
Shareholder Class Actions and Other Actions
Following our filing for bankruptcy on January 28, 2002, approximately 50
purported shareholder class action lawsuits were filed against certain of our
current and former officers and directors. The plaintiffs allege that the
defendants committed fraud under the federal securities laws in connection with
our financial statements and disclosures and certain other public statements
made by our representatives and seek compensatory damages, costs and expenses,
and equitable and other relief. The class actions have been consolidated in the
United States
38
District Court for the Southern District of New York under the caption In re
Global Crossing Ltd. Securities Litigation. In addition, a number of individual
securities cases or other actions based on federal or state law claims and
arising out of similar underlying facts have been filed (and in the future,
additional cases may be filed) against certain of our current and former
officers, directors, and employees, seeking damages for alleged violations of
federal and state securities laws, breach of fiduciary duties, violations of
state whistle-blower statutes, and allegations that certain former employees
were improperly restricted from selling GCL common stock before the price
collapsed. We are involved only indirectly in these cases and are not a named
defendant.
We deny any liability for the claims asserted in these actions and
understand that our former and present officers and directors have been
negotiating the terms of a settlement with the plaintiffs in the consolidated
securities action, but that no agreement has been reached. Any monetary
liability that we may have in respect of these cases would be discharged upon
consummation of our Plan of Reorganization.
ERISA Class Actions
Following our filing for bankruptcy on January 28, 2002, plaintiffs filed
over 15 purported class actions against our current and former officers,
directors, and employees pursuant to the Employee Retirement Income Security
Act of 1974 ("ERISA") in connection with the administration of our 401(k)
retirement savings plans. The plaintiffs allege, among other things, that the
ERISA fiduciaries breached their duties to the 401(k) plan participants by
directing or otherwise being responsible for the plans' acquiring and
continuing to maintain investments in our common stock. The United States
District Court for the Southern District of New York has consolidated most of
these actions under the caption In re Global Crossing Ltd. ERISA Litigation.
The consolidated complaint seeks, among other things, a declaration that the
defendants breached their fiduciary duties to the plaintiff class, an order
compelling defendants to make good on the losses sustained by the plans, the
imposition of a constructive trust on any amounts by which the defendants were
unjustly enriched by their actions, and an order of equitable restitution.
Although we are named as a defendant in the consolidated ERISA case, plaintiffs
assert in their consolidated complaint that they will not prosecute their
action against us unless or until the Bankruptcy Court lifts or grants relief
from the automatic stay of litigation imposed by the Bankruptcy Code. We deny
any liability for the claims asserted in these matters and understand that our
past and present officers and directors have been negotiating the terms of a
settlement with the plaintiffs in these actions, but that no agreement has been
reached. Any monetary liability that we may have in respect of these cases
would be discharged upon consummation of our Plan of Reorganization.
On April 30, 2002, an additional case, Pusloskie v. Winnick et al, was
commenced in the United States District Court for the Southern District Court
against certain of our current and former directors, officers and employees.
This case is brought on behalf of a putative class of our former employees and
asserts claims for breach of fiduciary duties in connection with the
administration of one of our 401(k) retirement plans. This additional case does
not name us as a defendant and was not consolidated with the other ERISA cases.
Change-of-Control Severance Plan Class Action
Plaintiffs have filed a purported class action against our current and
former officers, directors, and employees and against the Frontier
Corporation/Global Crossing Change of Control Severance Plan (the "Severance
Plan") under ERISA in connection with the administration of the Severance Plan.
The plaintiffs allege, among other things, that the purported ERISA fiduciaries
and the Severance Plan breached their duties to the plan's participants in
suspending payments of severance benefits in connection with our bankruptcy
filing. The case has been coordinated (but not consolidated) with the
securities and the other ERISA class actions in the Southern District of New
York, where it is pending under the caption Simonetti v. Perrone. We are not
named as a defendant in the Simonetti case. We deny any liability for the
claims asserted and understand that the defendants have been negotiating the
terms of a settlement with the plaintiffs but that no agreement has been
reached. Any monetary liability that we might have in respect of this case will
be discharged upon consummation of the Plan of Reorganization.
39
Initial Public Offering Litigation
On June 12, 2002, certain plaintiffs filed a consolidated complaint
captioned In re Global Crossing Ltd. Initial Public Offering Securities
Litigation in the United States District Court for the Southern District of New
York alleging that certain of our current and former officers and directors
violated the federal securities laws through agreements with underwriters in
connection with our initial public offering and other offerings of our shares.
The complaint seeks damages in an unstated amount, pre-judgment and
post-judgment interest, and attorneys' and expert witness fees. This
consolidated action involving us is further consolidated in the United States
District Court for the Southern District of New York with cases against
approximately 309 other public issuers and their underwriters under the caption
In re Initial Public Offering Securities Litigation. Pursuant to the automatic
stay of litigation imposed by the Bankruptcy Code, we are not a defendant in
this action. We believe that any liability we may have in respect of this
action is subject to indemnification by the firms that acted as underwriters in
the applicable securities offerings. Any monetary liability would, in any
event, be discharged upon consummation of our Plan of Reorganization.
Qwest Rights-of-Way Litigation
In May 2001, a purported class action was commenced against three of our
subsidiaries in the United States District Court for the Southern District of
Illinois. The complaint alleges that we had no right to install a fiber optic
cable in rights-of-way granted by the plaintiffs to certain railroads. Pursuant
to an agreement with Qwest Communications Corporation, we have an indefeasible
right to use certain fiber optical cables in a fiber optic communications
system constructed by Qwest within the rights-of- way. The complaint alleges
that the railroads had only limited rights-of-way granted to them that did not
include permission to install fiber optic cable for use by Qwest or any other
entities. The action has been brought on behalf of a national class of
landowners whose property underlies or is adjacent to a railroad right-of-way
within which the fiber optic cables have been installed. The action seeks
actual damages in an unstated amount and alleges that the wrongs done by us
involve fraud, malice, intentional wrongdoing, willful or wanton conduct and/or
reckless disregard for the rights of the plaintiff landowners. As a result,
plaintiffs also request an award of punitive damages. We have made a demand of
Qwest to defend and indemnify us in the lawsuit. In response, Qwest has
appointed defense counsel to protect our interests.
Our North American network includes capacity purchased from Qwest on an IRU
basis. Although the amount of the claim is unstated, an adverse outcome could
have an adverse impact on our ability to utilize large portions of its North
American network. This litigation is stayed against us pending our emergence
from bankruptcy, and the plaintiffs' pre-petition claims against us will be
discharged at that time in accordance with our Plan of Reorganization. By
agreement between the parties, the Plan of Reorganization preserves plaintiffs'
rights to pursue any post-confirmation claims of trespass or ejectment. If the
plaintiffs were to prevail, we could lose our ability to operate our North
American network, although we believe that we would be entitled to
indemnification from Qwest for any losses under the terms of the IRU agreement
under which we originally purchased this capacity.
In September 2002, Qwest and certain of the other telecommunication carrier
defendants filed a proposed settlement agreement in the United States District
Court for the Northern District of Illinois. On July 25, 2003, the court
granted preliminary approval of the settlement and entered an order enjoining
competing class action claims, except for certain claims in Louisiana. The
settlement and the court's injunction are opposed by some, but not all, of the
plaintiffs' counsel and are on appeal before the U.S. Court of Appeals for the
Seventh Circuit.
Softbank Arbitration and Microsoft Settlement
At the time of the formation of the Asia Global Crossing joint venture,
Microsoft and Softbank each committed to purchases of at least $100 million in
capacity on our network over a three-year period. Softbank failed to satisfy
that commitment, and its remaining unsatisfied commitment of $85.5 million,
which it was required to utilize by December 31, 2002, had been the subject of
a recently concluded arbitration proceeding. The arbitration, commenced by us
in September 2002, alleged that Softbank breached its contractual obligations
40
to us and sought $85.5 million in damages. Softbank's defense was that its
commitment was extinguished as a result of our loss of control of Asia Global
Crossing and Pacific Crossing Limited, and that in any event it was entitled to
offset any monies owed by various credits and abatements due from us. In a
final award issued on October 30, 2003, the arbitration panel found that
Softbank is liable to Global Crossing for breach of the underlying commercial
commitment agreement in the net amount of approximately $20 million, after
abatements and offsets, together with an additional award of interest in the
amount of approximately $0.2 million.
On April 1, 2003 we entered into a settlement agreement with Microsoft to
resolve a number of contractual disputes regarding its remaining capacity
commitment obligations, including allegations by Microsoft that were similar to
those made by Softbank in the above-referenced arbitration proceedings. The
settlement resulted in a reduction in Microsoft's remaining unsatisfied
commitment from approximately $76 million to approximately $61 million. Most of
the restructured commitment is subject to our emergence from bankruptcy and a
smaller portion is also contingent on the satisfactory completion of a
performance test of our Western European network. The restructured commitment
requires Microsoft to purchase capacity on our owned network, except that 15%
of Microsoft's commitment can be used by it for the purchase of off-network
access services.
Resolution of Pre-petition Claims
As discussed above, the GC Debtors filed for protection under the Bankruptcy
Code. As is typical in a large chapter 11 case, the resolution of claims of
certain creditors will take place over a number of months after we emerge from
bankruptcy. The Plan of Reorganization turns this administrative process over
to an "Estate Representative," appointed by representatives of our largest
pre-petition creditor groups. The resolution of disputes in connection with
these pre-petition claims will not have an adverse affect on New GCL or change
the distributions under our Plan of Reorganization to any of the classes of
holders of claims and interests summarized above under "Business--Our Chapter
11 Reorganization--Effect of the Plan of Reorganization and Schemes of
Arrangement and Distributions Thereunder."
For a discussion of certain other legal proceedings involving us, see Note
27 "Commitments, Contingencies and Other" to our consolidated financial
statements included in this annual report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the year
ended December 31, 2002, other than matters voted on by holders of our debt
securities in the ordinary course of our bankruptcy proceedings.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market Information
GCL's common stock traded on the New York Stock Exchange ("NYSE") under the
symbol "GX" until January 28, 2002, at which time the NYSE suspended trading of
GCL's common stock due to our chapter 11 bankruptcy filing. As a result of the
suspension and subsequent de-listing of GCL's our common stock from the NYSE,
the shares began quotation on the over-the-counter ("OTC") market under the
symbol "GBLXQ" on January 29, 2002. The table below sets forth, on a per share
basis for the periods indicated, the intra-day high and low sales prices for
our common stock as reported by the NYSE and the closing high and low bid
prices as reported on the OTC market; provided that the first quarter 2002 high
price reflects the NYSE high sales price prior to GCL's delisting on January
28, 2002, and the first quarter 2002 low price reflects the OTC market low bid
price during the balance of the quarter. The OTC bid prices represent prices
between dealers and do not include retail markup, markdown or commission. They
do not represent actual transactions.
Price Range
-------------------------
2002 2001
----------- -------------
High Low High Low
----- ----- ------ ------
First Quarter. $0.88 $0.05 $25.88 $11.15
Second Quarter $0.16 $0.05 $16.00 $ 6.70
Third Quarter. $0.06 $0.02 $ 9.85 $ 1.61
Fourth Quarter $0.04 $0.01 $ 2.30 $ 0.38
As of September 30, 2003, there were approximately 31,350 stockholders of
record of GCL's common stock. Pursuant to our Plan of Reorganization, all
interests in GCL's common stock will be canceled effective on the date we
emerge from bankruptcy. Our pre-petition common stock has continued to trade in
the OTC market throughout our bankruptcy proceedings.
We have applied for New GCL's common stock to be quoted on the Nasdaq
National Market. However, there can be no assurance that such application will
be accepted. It is expected that, after giving effect to the distributions to
be made under our Plan of Reorganization, there will be four stockholders of
record of New GCL's common stock: a subsidiary of ST Telemedia; the estate
representative appointed by our creditors to resolve disputed claims, among
other things; Wells Fargo Bank Minnesota, NA, as indenture trustee for certain
pre-petition bondholders; and Cede & Co., a depository that will hold the
shares of New GCL on behalf of the beneficial holders, who will initially be
certain of our pre-petition creditors.
Dividends
GCL has never declared or paid a cash dividend on its common stock. We do
not expect that New GCL will declare or pay dividends on its common stock for
the foreseeable future. The payment of future dividends, if any, will be at the
discretion of New GCL's 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 our board of
directors may deem relevant. In addition, covenants in our financing agreements
will significantly restrict New GCL's ability to pay cash dividends on its
capital stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" for a discussion of
the terms of these agreements.
Description of New Global Crossing Equity Securities
New GCL will be authorized to issue 55,000,000 shares of common stock and
45,000,000 shares of preferred stock. Pursuant to our Plan of Reorganization,
upon our emergence from bankruptcy, New GCL will issue 15,400,000 shares of
common stock to our pre-petition creditors and will issue 6,600,000 shares of
42
common stock and 18,000,000 shares of preferred stock to a subsidiary of ST
Telemedia. 18,000,000 shares of common stock will be reserved for the
conversion of ST Telemedia's preferred shares, while an additional 3,478,261
shares of common stock will be reserved for issuance under New GCL's 2003 Stock
Incentive Plan, which is described below under "- Equity Compensation Plan
Information." The following is a brief description of New GCL's common and
preferred shares.
New Global Crossing Common Stock
Each share of New GCL common stock ("New GCL Common Stock") has a par value
of $.01 and entitles the holder thereof to one vote on all matters to be
approved by stockholders. The amended and restated bye-laws of New GCL contain
special protections for minority shareholders, including limitations on
transactions with ST Telemedia or its affiliates, certain pre-emptive rights,
certain rights to receive financial information, and certain obligations of ST
Telemedia, or certain other third parties, to offer to purchase shares of New
GCL Common Stock under certain circumstances. Certain of these rights expire
when the New GCL Common Stock is listed on the Nasdaq National Market or a
securities exchange. The amended and restated bye-laws of New GCL are filed as
an exhibit to this annual report on Form 10-K.
New Global Crossing Preferred Stock
The 18,000,000 shares of preferred stock to be issued to a subsidiary of ST
Telemedia at the time of our emergence from bankruptcy (the "New GCL Preferred
Stock") will accumulate dividends at the rate of 2% per annum. Those dividends
will be payable in cash after New GCL and its subsidiaries (other than Global
Marine and its subsidiaries) achieve specified financial targets. The New GCL
Preferred Stock will have a par value of $.10 per share and a liquidation
preference of $10 per share (for an aggregate liquidation preference of $180
million). The New GCL Preferred Stock will rank senior to all other capital
stock of New GCL, provided that any distribution to shareholders following a
disposition of all or any portion of the assets of New GCL will be shared pro
rata by the holders of New GCL Common Stock and New GCL Preferred Stock on an
as-converted basis. Each share of New GCL Preferred Stock is convertible into
one share of New GCL Common Stock at the option of the holder.
The New GCL Preferred Stock will vote on an as-converted basis with the New
GCL Common Stock, but will have class voting rights with respect to any
amendments to the terms of the New GCL Preferred Stock. As long as ST Telemedia
beneficially owns a certain minimum percentage of the outstanding New GCL
Common Stock, its approval will be required for certain major corporate actions
of New GCL and/or its subsidiaries. Those corporate actions include (i) the
appointment or replacement of the chief executive officer, (ii) material
acquisitions or dispositions, (iii) mergers, consolidations or reorganizations,
(iv) issuance of additional equity securities (other than enumerated
exceptions), (v) incurrence of indebtedness above specified amounts, (vi)
capital expenditures in excess of specified amounts, (vii) the commencement of
bankruptcy or other insolvency proceedings, and (viii) certain affiliate
transactions. New GCL's amended and restated bye-laws and the certificate of
designations for the New GCL Preferred Stock are filed as exhibits to this
annual report on Form 10-K.
Securities Law Matters Relating to New Global Crossing Equity Securities
Section 1145(a) of the Bankruptcy Code generally exempts from registration
under the Securities Act of 1933, as amended (the "Securities Act"), the offer
or sale of a debtor's securities under a chapter 11 plan if such securities are
offered or sold in exchange for a claim against, or an equity interest in, such
debtor. In reliance upon this exemption, the New GCL Common Stock issued to
creditors under the Plan of Reorganization generally will be exempt from the
registration requirements of the Securities Act. Accordingly, such securities
may be resold without registration under the Securities Act or other federal
securities laws pursuant to an exemption provided by section 4(1) of the
Securities Act, unless the holder is an "underwriter" with respect to such
securities, as that term is defined in the Bankruptcy Code. In addition, such
securities generally may be resold without registration under state securities
laws pursuant to various exemptions provided by the respective laws of the
several states. However, recipients of securities issued under our Plan of
Reorganization are advised to consult with their own legal advisors as to the
availability of any such exemption from registration under state law in any
given instance and as to any applicable requirements or conditions to such
availability.
43
Section 1145(b) of the Bankruptcy Code defines "underwriter" for purposes of
the Securities Act as one who (i) purchases a claim with a view to distribution
of any security to be received in exchange for the claim other than in ordinary
trading transactions, (ii) offers to sell securities issued under a plan for
the holders of such securities, (iii) offers to buy securities issued under a
plan from persons receiving such securities, if the offer to buy is made with a
view to distribution of such securities, or (iv) is a control person of the
issuer of the securities or other issuer of the securities within the meaning
of Section 2(11) of the Securities Act. The legislative history of section 1145
of the Bankruptcy Code suggests that a creditor who owns at least ten percent
(10%) of the securities of a reorganized debtor may be presumed to be a
"control person."
Notwithstanding the foregoing, statutory underwriters may be able to sell
their securities pursuant to the resale limitations of Rule 144 promulgated
under the Securities Act. Rule 144 would, in effect, permit the resale of
securities received by statutory underwriters pursuant to a chapter 11 plan,
subject to applicable volume limitations, notice and manner of sale
requirements, and certain other conditions. Parties who believe they may be
statutory underwriters as defined in section 1145 of the Bankruptcy Code are
advised to consult with their own legal advisors as to the availability of the
exemption provided by Rule 144. Whether any particular person would be deemed
to be an "underwriter" with respect to any security issued under our Plan of
Reorganization would depend upon the facts and circumstances applicable to that
person. Accordingly, we express no view as to whether any particular person
receiving distributions under our Plan of Reorganization would be an
"underwriter" with respect to any security issued under the plan.
In view of the complex, subjective nature of the question of whether a
particular person may be an underwriter or an affiliate of ours, we make no
representations concerning the right of any person to trade in the New GCL
Common Stock to be distributed pursuant to the Plan of Reorganization.
Accordingly, we recommend that potential recipients of New GCL Common Stock
consult their own counsel concerning whether they may freely trade such
securities.
The shares of New GCL's preferred and common stock being sold to a
subsidiary of ST Telemedia under the Purchase Agreement are being issued in a
private placement transaction pursuant to Section 4(2) of the Securities Act.
New GCL is entering into a registration rights agreement with such subsidiary
of ST Telemedia with respect to shares of New GCL Common Stock owned by it and
its affiliates, including shares that may be acquired by them upon conversion
of shares of New GCL Preferred Stock. Under this registration rights agreement,
such subsidiary of ST Telemedia and certain of its transferees will have demand
and piggyback registration rights and will receive indemnification and, in some
circumstances, expense reimbursement, from New GCL in connection with the
registration of ST Telemedia's New GCL Common Shares under the Securities Act.
The registration rights agreement is filed as an exhibit to this annual report
on Form 10-K.
Equity Compensation Plan Information
Table of Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth the indicated information regarding our
equity compensation plans and arrangements as of December 31, 2002. Upon
consummation of our Plan of Reorganization, all outstanding options in respect
of GCL's common stock will be canceled.
Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining for future
exercise of outstanding issuance under
outstanding options, options, warrants equity compensation
Plan category warrants and rights and rights plans
------------- -------------------- ----------------- --------------------
Equity compensation plans approved by security
holders......................................... 72,412,117 $17.31 --
Equity compensation plans not approved by security
holders......................................... -- -- --
---------- ------ --
Total............................................. 72,412,117 $17.31 --
========== ====== ==
44
Description of Equity Compensation Plans
The 1998 Global Crossing Ltd. Stock Incentive Plan (as amended and restated
as of May 1, 2000) is our only compensation plan or arrangement under which
equity securities are still authorized for issuance, although no such issuance
is contemplated. That plan was previously approved by shareholders. Upon
consummation of our Plan of Reorganization, all awards granted under the 1998
Global Crossing Ltd. Stock Incentive Plan will be canceled, and the plan will
be of no further force or effect.
In connection with the confirmation of our Plan of Reorganization, the
Bankruptcy Court approved the adoption of the 2003 Global Crossing Ltd. Stock
Incentive Plan (the "2003 Stock Incentive Plan"), which will become effective
as of the date that we consummate our Plan of Reorganization. Under the 2003
Stock Incentive Plan, New GCL is authorized to issue, in the aggregate, stock
awards with respect of up to 3,478,261 shares of New GCL Common Stock. Of those
shares, non-qualified options to purchase approximately 2.2 million shares of
New GCL Common Stock are expected to be granted upon our emergence from
bankruptcy (the "Emergence Options").
The following is a summary of certain important features of the 2003 Stock
Incentive Plan. This summary is qualified in its entirety by reference to the
full text of the plan, which is filed as an exhibit to this annual report on
Form 10-K.
Purpose. The purpose of the 2003 Stock Incentive Plan is to help recruit and
retain key individuals of outstanding ability and to motivate such individuals
to exert their best efforts on our behalf. We expect to benefit from the added
interest which such key individuals will have in our welfare as a result of
their proprietary interest in New GCL's success.
Administration and Participation. The 2003 Stock Incentive Plan will be
administered by the compensation committee of the board of directors. The plan
allows the compensation committee to make awards of stock options, stock
appreciation rights, and other stock-based awards to any employee, director or
consultant who is selected by the compensation committee to participate in the
plan. The compensation committee has the authority to interpret the plan, to
establish rules relating to the plan and to make any other determinations that
the committee deems necessary or desirable for the administration of the plan.
Limitations. The maximum number of shares for which stock options and stock
appreciation rights may be granted to any one participant during any calendar
year is 1,000,000; and the maximum amount of other stock-based awards that are
intended to be deductible by us under Section 162(m) of the Internal Revenue
Code ("performance-based awards") that may be granted to any one participant
during any calendar year is 500,000 shares (or $10,000,000 if not expressed in
shares). Prior to the date on which New GCL's common stock is listed on a
national stock exchange or admitted for quotation on the Nasdaq National Market
or Nasdaq Small Cap Market, no award may be issued under the 2003 Stock
Incentive Plan with an exercise or purchase price of less than $10.16 per share.
Stock options. Stock options granted under the 2003 Stock Incentive Plan may
be non-qualified or incentive stock options for federal income tax purposes.
The compensation committee will set option exercise prices and terms and
determine the time at which stock options will be exercisable. However, the
term of a stock option may not exceed 10 years and its exercise price may not
be less than the fair market value of the shares on the date of grant; provided
that the exercise price of the Emergence Options may not in any event be less
than $10.16 per share.
Stock appreciation rights. Stock appreciation rights may be granted by the
compensation committee to participants as a right in conjunction with the
number of shares underlying stock options granted to participants under the
2003 Stock Incentive Plan or on a stand-alone basis with respect to a number of
shares for which a stock option has not been granted. Stock appreciation rights
constitute the right to receive payment for each share of the stock
appreciation rights exercised in stock or in cash equal to the excess of that
share's fair market value on the date of exercise over the exercise price per
share. The compensation committee will determine the exercise price per share
of stock appreciation rights. However, that price may not be less than the fair
market value of a share of common stock on the grant date. The compensation
committee may impose, in its discretion, conditions on the exercisability or
transferability of stock appreciation rights.
45
Other stock-based awards. The compensation committee has the authority to
grant other stock-based awards, which may consist of awards of common stock,
restricted stock, or awards that are based on the fair market value of shares
of New GCL Common Stock. The compensation committee will determine the form of
other stock-based awards and the conditions on which they may be dependent,
such as the right to receive one or more shares of common stock or the
equivalent value in cash upon the completion of a specified period of service
or the occurrence of an event or the attainment of performance objectives.
Adjustments. In the event of any changes in the outstanding New GCL Common
Stock or in the capital structure of New GCL by reason of stock or
extraordinary cash dividends, stock splits, reverse stock splits,
recapitalizations, reorganizations, mergers, consolidations, combinations,
exchanges, or other relevant changes in capitalization or in the event of any
change in applicable laws or any change in circumstances which would result in
any substantial dilution or enlargement of the rights granted to, or available
for, plan participants, or which otherwise warrants equitable adjustment
because it interferes with the intended operation of the plan, the compensation
committee may, in its sole discretion, make adjustments or substitutions, as
determined by the committee in its sole discretion, as to the number, price or
kind of a share or other consideration subject to such awards or as otherwise
determined by the committee to be equitable.
Change in Control. In the event of a change in control of New GCL, the
compensation committee in its sole discretion may take such actions, if any, as
it deems necessary or desirable with respect to any award (including, without
limitation, the acceleration of an award, and/or the issuance of substitute
awards that will substantially preserve the value, rights and benefits of any
affected awards) as of the date of the consummation of the change in control.
46
ITEM 6. SELECTED FINANCIAL DATA
The table below presents selected consolidated financial data of Global
Crossing as of and for the five years ended December 31, 2002. The historical
financial data as of December 31, 2002 and 2001 and for the years ended
December 31, 2002, 2001, and 2000 have been derived from the historical
consolidated financial statements of Global Crossing presented elsewhere in
this annual report on Form 10-K and should be read in conjunction with such
consolidated financial statements and accompanying notes. We restated our
consolidated financial statements as of and for the year ended December 31,
2000 and restated our quarterly consolidated financial statements for the
quarters ended March 31, 2001, June 30, 2001 and September 30, 2001. The data
presented in the table below reflect these restatements. See Note 4,
"Restatement of Previously Issued Financial Statements," to the consolidated
financial statements included in this annual report on Form 10-K and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Restatements of Previously Issued Financial Statements" for a
discussion of these restatements.
Year Ended December 31,
--------------------------------------------------------------------
2000
2002 2001 (restated) 1999 1998
------------ ------------ ------------ ------------ ------------
(in millions, except share and per share information )
Statements of Operations data:
Revenues............................................... $ 3,116 $ 3,659 $ 3,505 $ 1,491 $ 424
Cost of access and maintenance......................... 2,205 2,152 1,791 396 13
Other operating expenses............................... 1,208 2,080 1,752 647 150
Asset impairment charges............................... -- 17,181 -- -- --
Depreciation and amortization.......................... 137 1,548 1,280 451 141
Restructuring charges.................................. -- 410 -- -- --
Operating loss......................................... (434) (19,712) (1,318) (3) (20)
Gain from sale of subsidiary's common stock and related
subsidiary stock sale transactions.................... -- -- 303 -- --
Loss from write-down and sale of investments, net...... -- (2,041) -- -- --
Termination of advisory services agreement............. -- -- -- -- 140
Income (loss) from continuing operations............... (296) (20,478) (1,785) (53) (91)
Income (loss) from discontinued operations, net........ 950 (1,916) (1,008) (44) 3
Income (loss) applicable to common shareholders........ 635 (22,632) (3,115) (178) (135)
Income (loss) per common share:
Income (loss) from continuing operations applicable to
common shareholders, basic and diluted................ $ (0.35) $ (23.37) $ (2.49) $ (0.24) $ (0.38)
============ ============ ============ ============ ============
Income (loss) applicable to common shareholders, basic
and diluted........................................... $ 0.70 $ (25.53) $ (3.69) $ (0.35) $ (0.38)
============ ============ ============ ============ ============
Shares used in computing basic and diluted loss per
share................................................. 903,217,277 886,471,473 844,153,231 502,400,851 358,735,340
============ ============ ============ ============ ============
Balance Sheet data:
Property and equipment, net............................ $ 1,059 $ 1,000 $ 8,124 $ 4,896 $ 434
Goodwill and intangibles, net.......................... -- -- 9,176 6,444 --
Total assets........................................... 2,635 4,214 28,940 19,666 2,639
Short-term borrowings and long-term debt in default.... -- 6,589 1,000 -- --
Long-term debt......................................... -- -- 5,113 4,900 1,066
Liabilities subject to compromise...................... 8,136 -- -- -- --
Mandatorily redeemable and cumulative convertible
preferred stock....................................... 2,444 3,161 3,158 2,085 483
Total shareholders' (deficit) equity................... (10,935) (12,195) 10,564 9,179 774
Other data:
Working capital not including long-term debt in
default............................................... $ 138 $ (794) $ (202) $ 1,025 $ 715
Net cash provided by (used in) operating activities.... 330 (1,087) 549 710 344
Net cash provided by (used in) investing activities.... (235) 750 (3,398) (3,952) (760)
Net cash provided by (used in) financing activities.... 2 151 2,989 4,133 1,216
47
In reading the above selected historical financial data, please note the
following:
. The consolidated 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. The
consolidated statement of operations data for the year ended December 31,
2000 includes the results of IXnet (excluding Asian operations) for the
period from June 14, 2000, date of acquisition, through December 31,
2000. The consolidated balance sheet as of December 31, 2000 includes
amounts related to IXnet (excluding Asian operations). See further
discussion under "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
. The consolidated statement of operations data for all periods presented
reflects the results of the ILEC and GlobalCenter (both acquired in the
Frontier transaction), IPC and Asia Global Crossing (including PCL and
Asian Operations of IXnet) as discontinued operations. The ILEC business
was sold on June 29, 2001 to Citizens Communications, Inc. for cash
proceeds of $3.369 billion, resulting in an after-tax loss of
approximately $206 million; GlobalCenter was sold to Exodus
Communications, Inc. for 108.15 million shares valued at $1.918 billion
on January 11, 2001, resulting in a deferred gain of $126 million
amortizable over the 10 year life of a network services agreement between
the Company and Exodus; IPC was sold to Goldman Sachs Capital Partners,
Inc. for cash proceeds of $300.5 million, representing a loss of $120
million; and Asia Global Crossing, a 58.9% owned subsidiary, was
abandoned on November 17, 2003 upon its filing for bankruptcy and our
effective loss of control with no corresponding proceeds or outflow,
representing a gain of $1.184 billion. The 2001 discontinued operating
results of Asia Global Crossing includes impairment charges of $2.399
billion and $450 million in accordance with the provisions of SFAS No.
121 and APB No. 18, respectively. See further discussion in Item 7
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
. On May 16, 1999, we entered into a definitive agreement to merge with US
West, Inc. On July 18, 1999, we agreed to terminate our merger agreement
and US West agreed to merge with Qwest Communications International, Inc.
As a result, US West paid a termination fee of $140 million in cash and
returned shares of our common stock purchased in a tender offer, and
Qwest committed to purchase capacity over a four-year period. For the
year ended December 31, 1999, we recognized $210 million, net of merger
related expenses, of "other income" in connection with the termination of
the US West merger agreement.
. As of December 31, 2001, as a result of our subsequent bankruptcy filing
on January 28, 2002, our outstanding indebtedness of $6.589 billion was
classified as a current liability in the consolidated balance sheet. As
of December 31, 2002, our debt and all other liabilities of the GC
Debtors predating our bankruptcy filing are presented as liabilities
subject to compromise in accordance with SOP 90-7. See further discussion
under "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Critical Accounting Policies--Fresh Start
Accounting."
. In 2001, the results from operations include non-cash long-lived asset
impairment charges of $17.181 billion in accordance with the provisions
of SFAS No. 121. This includes a write-off of all goodwill and other
identifiable intangibles of $8.573 billion and tangible long-lived assets
of $8.608 billion. See further discussion in "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Restatements."
. We raised significant capital (both equity and debt) during the years
ending December 31, 2001, 2000, 1999, and 1998. All outstanding common
and preferred stock will be canceled upon our emergence from bankruptcy.
In addition, all outstanding indebtedness of the GC Debtors, including
debt under our $2.25 billion senior secured corporate credit facility
(the "Corporate Credit Facility") will be canceled. Our wholly-owned
subsidiary, Global Crossing North American Holdings, Inc., will issue
$200 million
48
principal amount of the New Senior Secured Notes upon emergence from
bankruptcy which will be guaranteed by New GCL and its subsidiaries. See
further discussion under "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
. Restructuring efforts commenced in August of 2001 resulting in more than
5,300 employee terminations and the closing of 247 sites. Restructuring
charges of $95 million and $410 million are reflected in the results from
operations above in 2002 and 2001, respectively. The 2002 charges are
recorded as a reorganization item as required under SOP 90-7. See further
discussion under "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The following tables set forth the effect of the restatements on our
consolidated balance sheets, statements of operations and statements of cash
flows for the restated periods. The tables do not reflect the retroactive
reclassification of Asia Global Crossing and IPC into discontinued operations
or the reclassification of Global Marine from discontinued operations to
continuing operations for the nine months ended September 30, 2001 as described
in Note 8, "Discontinued Operations and Dispositions," to the consolidated
financial statements included in this annual report on Form 10-K. See Notes 4,
8 and 33 to the accompanying consolidated financial statements.
Nine months ended Year ended
September 30, 2001 December 31, 2000
-------------------------- -----------------------------
(in millions, except share and per share information)
As previously As previously
reported As Restated Reported As restated/(1)/
------------- ------------ ------------- ---------------
Consolidated balance sheet data:
Other assets, current and long term....... $ 1,508 $ 1,353 $ 1,568 $ 1,568
Property and equipment, net............... 12,058 11,102 10,030 10,030
Goodwill and intangibles, net............. 8,291 8,291 11,481 9,631
Deferred revenue, current and long-term... 3,256 2,158 1,983 1,983
Stockholder's equity...................... 6,884 6,798 11,700 10,565
Consolidated statement of operations data:
Revenue................................... 2,437 2,327 3,789 3,726
Operating expenses........................ (4,409) (4,298) (5,185) (5,122)
Tax benefit (provision)................... 331 866 145 (390)
Income (loss) from discontinued operations (591) (73) (308) (908)
Loss applicable to shareholders........... (4,772) (3,722) (1,980) (3,115)
Loss per share applicable to shareholders. (5.39) (4.20) (2.35) (3.69)
Shares used in computing basic and diluted
loss per share.......................... 885,981,278 885,981,278 844,153,231 844,153,231
Consolidated cash flow data:
Net cash provided by (used in) operating
activities.............................. 418 (362) 911 734
Net cash provided by (used in) investing
activities.............................. $ 110 $ 890 $ (4,427) $ (4,250)
49
Six months ended Three months ended
June 30, 2001 March 31, 2001
-------------------------- --------------------------
(in millions, except share and per share information)
As previously As previously
reported As Restated Reported As restated
------------- ------------ ------------- ------------
Consolidated balance sheet data:
Other assets, current and long term............ $ 2,033 $ 1,894 $ 3,098 $ 3,060
Property and equipment, net.................... 11,823 11,001 10,915 10,419
Goodwill and intangibles, net.................. 10,085 9,235 11,224 9,374
Deferred revenue, current and long term........ 3,027 2,070 2,528 1,997
Stockholder's equity........................... 8,815 8,200 10,327 9,110
Consolidated statement of operations data:
Revenue........................................ 2,151 2,090 1,082 1,034
Operating expenses............................. (3,203) (3,137) (1,595) (1,545)
Tax benefit (provision)........................ 123 123 46 46
Income (loss) from discontinued operations..... (125) 393 (54) (136)
Loss applicable to shareholders................ (1,364) (843) (675) (756)
Loss per share applicable to shareholders...... (1.54) (0.95) (0.76) (0.85)
Shares used in computing basic and diluted loss
per share.................................... 885,409,765 885,409,765 884,702,182 884,702,182
Consolidated cash flow data:
Net cash provided by (used in) operating
activities................................... 677 32 21 (296)
Net cash provided by (used in) investing
activities................................... $ 1,087 $ 442 $ (1,273) $ (956)
(1)Recording the concurrent transactions at historical carryover basis rather
than at fair value did not have a material impact on our consolidated
financial position (less than 1% of total assets) or statement of operations
(less than 0.1% of net loss) as of and for the year ended December 31, 2000
and as a result the consolidated balance sheet and statement of operations
as of and for the year ended December 31, 2000 have not been restated in
respect of the concurrent transactions.
50
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 in this annual
report on Form 10-K.
Some of the statements contained in the following discussion of our
financial condition and results of operations refer to future expectations and
business strategies or include other "forward-looking" information. Those
statements are subject to known and unknown risks, uncertainties and other
factors that could cause the actual results to differ materially from those
contemplated by the statements. The forward-looking information is based on
various factors and was derived from numerous assumptions. See Item 1,
"Business--Cautionary Factors That May Affect Future Results," for risk factors
that should be considered when evaluating forward-looking information detailed
below. These factors could cause our actual results to differ materially from
the forward-looking data.
Plan of Reorganization
On December 26, 2002, the Bankruptcy Court confirmed the Plan of
Reorganization. The consummation of the Plan of Reorganization will result in
the following:
. Payment of $489 million in cash to the holders of claims under our
pre-petition bank financing agreements (the "Bank Lenders");
. Payment of $31 million in cash to the holders of our pre-petition
publicly issued notes and certain other general unsecured creditors (the
"Unsecured Creditors");
. Payment of $3 million in cash to the holders of small pre-petition
unsecured claims;
. Payment of $180 million in cash (certain amounts within this total to be
paid over 24 months) to certain of our pre-petition vendors in accordance
with settlements approved by the Bankruptcy Court;
. Payment of cash settlements ($8 million paid on consummation and an
estimated balance of $48 million to be settled over a period of up to six
years) to the holders of secured and priority tax claims;
. Payment of $7 million in cash to estate representatives to fund the
post-emergence administration expenses for winding up the bankruptcy
estates, resolving disputed claims, and pursuing causes of action against
third parties;
. Payment of all administrative claims in the GC Debtors' chapter 11 cases,
including payments to retained professionals;
. Reimbursement of indenture trustees' fees and the reasonable fees and
expenses of their professionals;
. Issuance of 2.4 million shares of New GCL Common Stock to the Bank
Lenders (representing a 6% equity ownership interest);
. Issuance of 13 million shares of New GCL Common Stock to the Unsecured
Creditors (representing a 32.5% equity ownership interest);
. Issuance of 18 million shares of New GCL Preferred Stock (convertible
into 18 million shares of New GCL Common Stock) and 6.6 million shares of
New GCL Common Stock to ST Telemedia in consideration for a cash equity
investment of $250 million (the New GCL Preferred Stock and New Common
Stock issued to ST Telemedia will represent a 61.5% equity ownership
interest);
. Reservation of approximately 3.5 million shares of New GCL Common Stock
for issuance under the 2003 Stock Incentive Plan;
51
. Issuance of $200 million in aggregate principal amount of New Senior
Secured Notes to ST Telemedia for gross proceeds of $200 million, which
gross proceeds will be distributed to our banks and unsecured creditors
(which amounts are included in the cash payments noted above); and
. Discharge of all pre-petition claims against the GC Debtors and the
cancellation of all pre-petition equity interests in GCL (whether in the
form of preferred stock, common stock, or options) and all pre-petition
preferred equity interests in GCHL.
See "Our Chapter 11 Reorganization" in Item 1 of this annual report on Form
10-K for a discussion of our bankruptcy filings and the Plan of Reorganization.
We refer to the Plan of Reorganization, which is attached to the Disclosure
Statement which is included as an exhibit to this annual report on Form 10-K,
for a complete description of the allocations among all creditor classes.
Accounting Impact of Reorganization
As a result of our chapter 11 filing in the Bankruptcy Court, our
consolidated financial statements have been prepared in accordance with SOP
90-7. SOP 90-7 requires an entity to distinguish pre-petition liabilities as
subject to compromise from post-petition liabilities on its consolidated
balance sheet. The liabilities subject to compromise reflect our estimate of
the amount of pre-petition claims that will be restructured in the GC Debtors'
chapter 11 cases. In addition, our consolidated statement of operations
reflects ongoing operations separately from any revenues, expenses, realized
gains and losses, and provisions resulting from the reorganization, otherwise
known as reorganization items, except those required to be reported as
discontinued operations and extraordinary items in conformity with Accounting
Principles Board Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions", as
amended by SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections", and SFAS No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets."
We will be required to implement the "fresh start" accounting provisions of
SOP 90-7 to the financial statements of New GCL and its subsidiaries upon
emergence. Under fresh start accounting, we are required to adjust the
historical cost of our assets and liabilities to their fair value. The fair
value of the assets and liabilities of New GCL, its reorganization value, of
approximately $2 billion constitutes $200 million in New Senior Secured Notes,
$407 million in New GCL Common Stock and New GCL Preferred Stock and
approximately $1.4 billion of other liabilities, including obligations under
various capital leases, that were not eliminated or discharged under the terms
of the Plan of Reorganization. As described above, the Plan of Reorganization
will result in the cancellation of all outstanding common and preferred stock
of Global Crossing, all outstanding preferred stock of GCHL and all
pre-petition indebtedness of the GC Debtors, including approximately $2.2
billion under the Corporate Credit Facility, $4.4 billion in unsecured notes,
approximately $1.6 billion of deferred revenue and $1.4 billion of other
liabilities. As a result of these changes to the capital structure, New GCL's
interest expense and preferred dividend obligations will be significantly less
than we incurred in periods prior to the Commencement Date. Due to the
cancellation of pre-emergence debts and liabilities and the change of control
anticipated under the Purchase Agreement, a substantial portion of our net
operating loss carryforwards and capital loss carryforwards will be eliminated.
In addition, other tax attributes, including asset bases, could also be
reduced. We are still reviewing the overall tax impact of the Plan of
Reorganization.
Restructuring
In August 2001, we announced restructuring efforts centered around the
realignment and integration of our then current regional organizational
structure into integrated global functions such as network operations, customer
care, information systems, finance, and sales and marketing. The realignment
and integration was expected to result in the elimination of more than 2,000
positions, primarily in the United States, across a majority of our business
functions and job classes. In addition, as part of the plan, we planned a
significant
52
consolidation of offices and other real estate facilities. These initial
restructuring efforts were primarily in response to revenue and margin
shortfalls compared to planned levels that commenced in 2001. We anticipated
that this initial restructuring, which resulted in about 1,300 employee
terminations and 110 site closings, would reduce costs and bring the Company
back in line with its planned levels of profitability.
Following the events of September 11, 2001, the macroeconomic environment,
especially in relation to the telecommunications industry, worsened
considerably from the declining environment that had prevailed since the
economic highs of early 2000. These worsening conditions further interfered
with the Company's ability to build its revenue base to a break-even level.
Additionally, the failure of a number of telecommunications companies,
compounded by the recessionary state of the national and global economy,
unnerved investors and significantly limited capital markets as a source of
additional liquidity for us. Furthermore, increased fiber system builds by new
entrants, as well as announced plans for major subsea systems increased supply
in the telecommunications market, which depressed forward-looking bandwidth
prices. As a result of these circumstances, we determined that a deeper
restructuring of the business was required. Additional efforts were adopted in
the fourth quarter of 2001, which led to an additional 1,500 employee
terminations and 20 site closings.
As a result of the cumulative impact of these initiatives, we recorded a
restructuring charge of $410 million during the year ended December 31, 2001.
The components of this charge consisted of $71 million related to employee
terminations, $270 million related to facility closures, and $69 million
related to various other restructuring items.
In January 2002, we filed voluntary petitions for relief under chapter 11 of
the Bankruptcy Code and subsequently filed the Plan of Reorganization.
Throughout 2002, we continued our efforts to reduce costs under an aggressive
financial plan. As a result of these continued initiatives and adjustments to
our plans resulting from the chapter 11 filings, we recorded a net
restructuring charge of $95 million as a reorganization item during the year
ended December 31, 2002. The components of this charge consist of $51 million
related to employee terminations, $51 million related to facility closures, and
a release of charges of $7 million related to various other restructuring items.
The employee-related costs included in the restructuring charges for the
years ended December 31, 2002 and 2001 were $51 million and $71 million,
respectively. These were comprised primarily of severance-related payments and
outplacement costs for all employees involuntarily terminated. Upon our chapter
11 filings on January 28, 2002, severance payments for U.S. employees
previously terminated were stayed and those employees filed claims with the
Bankruptcy Court. As a result, we classified $24 million of the
employee-related restructuring liability as subject to compromise. In July of
2002, the Bankruptcy Court approved $3 million of priority payments to 680
employees terminated within 90 days of the filing, reducing our
employee-related subject to compromise liability to $21 million at December 31,
2002. Upon consummation of the Plan of Reorganization, we intend to make
additional non-priority payments totaling $2 million to 556 former employees
terminated more than ninety days prior to our bankruptcy filing but prior to
receipt of their full severance benefit payout. These payments were approved by
the Bankruptcy Court, subject to meeting certain conditions. In addition, in
March 2002, we launched a voluntary severance program with payouts similar to
our severance plan, except that lump sum payments were made on the voluntary
termination date, March 8, 2002, rather than payments over time. Through a
combination of the sale of businesses (see "Dispositions" below) and the
restructuring plans discussed above, we reduced our number of employees from
9,754 at December 31, 2001 to 5,644 at December 31, 2002.
The costs related to facility closures included in the restructuring charges
for the years ended December 31, 2002 and 2001 were $51 million and $270
million, respectively. In 2001, the $270 million of costs are composed of
continuing building lease obligations and estimated decommissioning costs and
broker commissions for 130 sites, offset by anticipated third-party sub-lease
payments. It also includes $63 million of impairments to the facility-related
assets such as leasehold improvements and abandoned office equipment related to
these facility closures. In 2002, the net costs related to facility closures
are composed of continuing building lease obligations
53
and estimated decommissioning costs and broker commissions for an additional
133 sites, offset by anticipated third-party sub-lease payments. The initial
charge recorded was further reduced by the release of the related reserve for
U.S. facilities rejected through the chapter 11 bankruptcy process and other
sites terminated with the landlords. In 2002, we filed petitions in the court
to reject the operating leases for 131 sites in the United States, resulting in
a rejection claim liability of $66 million as of December 31, 2002, included in
our liabilities subject to compromise.
As of December 31, 2002, 247 sites, constituting approximately 4 million
square feet, have been vacated and approximately 5,300 employees have been
terminated as a result of these restructuring plans. These adopted plans and
the related liabilities include an additional 16 sites, consisting of
approximately 118,000 square feet, identified for closure during 2003.
On January 1, 2003 we adopted SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"), for any exit or disposal
activities initiated after December 31, 2002.
Delays in Reporting
On April 2, 2002, we announced that the filing with the SEC of our annual
report on Form 10-K for the year ended December 31, 2001 would be delayed.
Arthur Andersen had previously informed us that it would not be able to deliver
an audit report with respect to our financial statements for the year ended
December 31, 2001 to be contained in our annual report on Form 10-K until the
completion of an investigation by a special committee of our board of directors
into allegations regarding our accounting and financial reporting practices
made by a former employee. See Item 3 above under the caption "Special
Committee Investigation."
During June 2002, Arthur Andersen informed us and our audit committee that
Arthur Andersen's conviction for obstruction of justice would effectively end
Arthur Andersen's audit practice and, as a result, Arthur Andersen ceased
practicing before the SEC on August 31, 2002. As a result, Arthur Andersen was
unable to perform the audit and provide an audit report with respect to our
financial statements for the year ended December 31, 2001. Due to the
investigation by the special committee, the cessation of Arthur Andersen's
audit practice, the demands of the bankruptcy process, and the time required to
hire a new independent public accountant and complete the 2001 audit, we had to
delay the preparation of our audited financial statements for 2001 and 2002. We
fulfilled our Bankruptcy Court financial reporting requirements by filing
Monthly Operating Reports ("MORs"). We completed filings of MORs through June
2003. We will file MORs for July 2003 through the emergence date subsequent to
our emergence from bankruptcy.
Appointment of Examiner and Independent Public Accountant
By order dated November 20, 2002, the Bankruptcy Court directed the
appointment of an examiner in the GC Debtors' chapter 11 cases. On November 25,
2002, the United States Trustee appointed a partner of Grant Thornton LLP
("Grant Thornton") as the Examiner. The Examiner and the audit committee of our
board of directors retained Grant Thornton to assist the Examiner. In general,
the Examiner's role was limited to reviewing our financial and accounting
records for the years ended December 31, 2002 and 2001, and earlier periods if
any restatement of those periods was necessary. As part of his role, the
Examiner, with the assistance of Grant Thornton, will, among other things,
cause an audit report to be issued with respect to our consolidated financial
statements as of and for the years ended December 31, 2002 and 2001.
Separately, on November 27, 2002, the Examiner and the audit committee of the
board of directors filed an application with the Bankruptcy Court to retain
Grant Thornton as our independent auditors effective as of November 25, 2002.
The Bankruptcy Court approved this application on December 11, 2002, and an
engagement letter formalizing Grant Thornton's appointment was executed on
January 8, 2003. The Examiner's first interim report to the Bankruptcy Court
was filed on February 24, 2003. On June 30, 2003, the Examiner filed his second
interim report with the Bankruptcy Court. It is anticipated that the Examiner's
final report will be filed with the Bankruptcy Court in December 2003.
54
Restatements of Previously Issued Financial Statements
We identified certain accounting matters relating to our consolidated
financial statements for the year ended December 31, 2000 and for the quarters
ended March 31, 2001, June 30, 2001 and September 30, 2001, that require
restatement. These matters are discussed in the following paragraphs and
summarized in the tables that follow.
Arthur Andersen audited the Company's consolidated financial statements and
issued an unqualified audit opinion as of and for the year ended December 31,
2000. Grant Thornton audited our consolidated financial statements as of and
for the years ended December 31, 2002 and 2001. With respect to our
consolidated financial statements as of and for the year ended December 31,
2000, Grant Thornton was also engaged to audit only the restatement adjustments
outlined below in addition to the retroactive reclassifications required as a
result of operations discontinued subsequent to December 31, 2000 and the
Company's adoption of SFAS No. 145 in the fourth quarter of 2002. Grant
Thornton was not engaged to audit, review or apply any procedures to the
Company's consolidated financial statements as of and for the year ended
December 31, 2000 other than with respect to such adjustments. Arthur
Andersen's report for 2000 is included in this annual report on Form 10-K in
accordance with procedures under Rule 2-02(e) of the SEC's Regulation S-X.
Concurrent Transactions
During the years ended December 31, 2001 and 2000, we entered into a number
of transactions in which we provided capacity, services and/or facilities to
other telecommunications carriers and concurrently purchased or leased
capacity, services, and/or facilities from these same carriers. We accounted
for these transactions based on guidance provided by Arthur Andersen and on an
industry white paper provided by Arthur Andersen that set forth accounting
principles relating to sales and exchanges of telecommunications capacity and
services. Following its review of these transactions, Arthur Andersen concurred
with our accounting for the transactions in accordance with the interpretation
of APB No. 29 contained in the white paper. We recorded the concurrent
transactions at the fair value of the assets or services surrendered to the
counterparty in the transaction. As a result, the fair value was recorded as
deferred revenue and amortized into revenue on a straight-line basis over the
term of the related contract. The capacity, services and/or facilities acquired
were recorded at the fair value of the assets or services surrendered by the
Company in the exchange based upon the type of asset or services acquired and
the terms of the applicable purchase agreement. The "other assets" acquired in
the exchanges were expensed over the term of the related contract. Property and
equipment acquired in the transaction were depreciated over the terms of the
applicable purchase agreements.
On August 2, 2002, SEC staff from the Office of the Chief Accountant
communicated to the SEC Regulations Committee of the American Institute of
Certified Public Accountants ("AICPA"), its position on exchanges of
indefeasible rights of use, or IRUs, for telecommunications capacity. The SEC
staff concluded that transactions involving the concurrent sales and purchases
of IRU capacity swaps consisting of the exchange of leases should be evaluated
within paragraph 21 of APB No. 29. Under paragraph 21 of APB No. 29, accounting
for an exchange is based on the historical carrying value rather than the fair
value of the asset or services relinquished, resulting in no recognition of
revenue or of asset additions in connection with the exchange.
In October 2002, we announced we would restate our consolidated financial
statements for the year ended December 31, 2000 and the quarters ended March
31, 2001, June 30, 2001 and September 30, 2001 to record concurrent
transactions between carriers of assets and/or services constituting
telecommunications capacity at historical carryover basis, pursuant to
paragraph 21 of APB No. 29, resulting in no recognition of revenue or of asset
additions for such transactions. We have also determined that, under APB No.
29, we will continue to record at fair values those transactions that involve
service contracts rather than leases, amortizing the revenue over the lives of
the relevant contracts.
Based upon a review of the relevant transactions, we determined that
recording the concurrent transactions at historical carryover basis rather than
fair value does not have a material impact on our consolidated financial
position
55
(less than 1% of total assets) or consolidated statements of operations (less
than 0.1% of net loss) for financial statements filed in respect of relevant
periods in 2000. Accordingly, our consolidated balance sheets and statements of
operations for these periods have not been restated. However, we determined
that recording the concurrent transactions at historical carryover basis rather
than fair value does have a material impact on the consolidated statement of
cash flows for the year ended December 31, 2000 and on our consolidated
financial position, statements of operations and cash flows for the financial
statements filed in respect of relevant periods in 2001.
The cumulative impact of the restatements for the concurrent transactions is
a reduction of total assets and liabilities and shareholders equity of $1.111
billion as of September 30, 2001 and a reduction of revenues and operating
expenses of $13 million and $5 million, respectively, for the nine months ended
September 30, 2001. As a result of the restatements, cash provided by operating
activities decreased $780 million and $177 million for the nine months ended
September 30, 2001 and the year ended December 31, 2000, respectively. We
recognized an offsetting decrease in cash used in investing activities for each
period, resulting in no change in net cash flow for such periods.
Gain Recognition--Sale of GlobalCenter
In September 1999, we acquired Frontier Corporation, a telecommunications
company that had several businesses, including a long distance business, an
incumbent local exchange carrier, or ILEC, business and GlobalCenter, a
web-hosting business. In September 2000, we entered into an agreement to sell
GlobalCenter to Exodus Communications, Inc. The sale of GlobalCenter to Exodus
closed in January 2001. Commencing with the quarterly period ended December 31,
2000, we classified GlobalCenter in our consolidated financial statements as a
discontinued operation, retroactive to the date of the Frontier acquisition. In
the sale, we received 108.15 million shares of Exodus common stock which were
valued at $1.918 billion based on the closing sale price of the Exodus common
stock prior to the closing of the transaction. The value of such Exodus shares
exceeded the aggregate value of the GlobalCenter net assets sold by $126
million, or $82 million on an after-tax basis. We recognized the $82 million
after-tax gain in results from discontinued operations in the first quarter of
2001. We recorded the investment in the Exodus shares as a marketable security
classified as available for sale pursuant to SFAS No. 115.
Concurrent with the agreement to sell GlobalCenter, we and Exodus entered
into a network services agreement (the "NSA") whereby Exodus committed to
purchase 50% of its network capacity requirements outside of Asia from us over
a 10-year period. As an incentive to Exodus to migrate its network traffic to
us, the NSA included a $100 million pricing discount, or credit, for Exodus
over the first two years of the NSA. We planned to record the $100 million
pricing discount as a reduction of revenues, which, as services were provided
over the life of the contract, would be treated as a sales discount in the
recognition of revenue under the NSA. We believed that this discount was
consistent with terms that would have been offered to any other third party
customer with the same product profile and commitment size and therefore that
recording the $100 million as a sales discount was reasonable and appropriate.
In addition, Exodus paid us $200 million in nonrefundable deposits for
capacity, $100 million in September 2000 and $100 million in December 2000,
which we recognized as deferred revenue. We discussed the accounting for the
gain and sales discount with Arthur Andersen, who concurred with the accounting
treatment.
We reassessed these matters and have determined to restate our consolidated
financial statements with respect to the accounting for the gain on the sale of
GlobalCenter. As restated, the value of the Exodus shares received in excess of
the GlobalCenter net assets sold of $126 million is treated as a deferred gain
to be recognized as a reduction of operating expenses on a straight-line basis
over the 10-year term of the NSA or upon judicial release from our obligations
under the NSA, if this were to occur earlier in accordance with the guidance
provided in Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements--Frequently Asked Questions No. 4". This results in a
reversal of the $82 million after-tax gain that had been recognized in the
first quarter of 2001 and in the recognition of $12 million of gain per year
over the 10-year term of the NSA commencing in 2001 (which results in
recognition of $3 million of such gain in each of the first three quarters of
2001).
56
In September 2001, Exodus filed for bankruptcy. As a result, the commitments
under the NSA were never realized as service was substantially halted upon the
bankruptcy filing by Exodus. We are not assuming the Exodus contract in our
bankruptcy proceeding. Accordingly, upon emergence from bankruptcy, the
balances of the deferred revenue (approximately $167 million) and the deferred
gain on the sale (approximately $89 million) will both be eliminated in
accordance with fresh start accounting guidelines under SOP 90-7.
Deferred Taxes
Sale of ILEC business
In July 2000, we entered into a stock purchase agreement to sell the ILEC
business to Citizens Communications, Inc. for $3.65 billion in cash. During the
quarterly period ending September 30, 2000, we classified the ILEC business in
our consolidated financial statements as a discontinued operation, retroactive
to the date of the Frontier acquisition. In connection with this change to
reflect the ILEC business as a discontinued operation, we evaluated our
accounting for the ILEC sale and reevaluated our original purchase price
allocation for the Frontier acquisition. As a result, at such time, we (1)
reallocated $1.5 billion in goodwill of the Frontier purchase price to the ILEC
business (which had previously been allocated no goodwill) and (2) recorded a
$1.0 billion deferred tax liability pursuant to SFAS No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"), in connection with the sale of the ILEC
business as our financial reporting basis exceeded our tax basis in our
investment in the ILEC business. We recorded the $1.0 billion deferred tax
liability as an adjustment to goodwill in the Frontier acquisition purchase
price allocation, effective as of the date of the Frontier acquisition. This
re-allocation was deemed necessary as we concluded that it would be
inappropriate for a gain to be recognized on the sale of this business so
shortly after the acquisition of the ILEC since we invested little into the
ILEC segment since it was acquired, market valuations of ILECs had not changed
significantly in that period (September 28, 1999, date of acquisition, through
July 2000), and the financial performance of the business had changed very
little since its acquisition. Our original purchase price allocation, based in
part upon an appraisal performed by a third party dated February 2000, resulted
in no goodwill allocation to the ILEC business and was consistent with our view
and the market's view at the time that the value of the Frontier acquisition
was primarily related to the long distance business. However, we believed the
third party transaction with Citizens was a better indicator of fair value of
the ILEC business acquired in September 1999 than the February 2000 valuation
report and should have been reflected in the purchase price allocation. We also
believed that, since the purchase price allocation was being revisited and this
temporary difference arose during this re-allocation period, recording the
deferred tax liability as a purchase price adjustment was reasonable and
appropriate. We discussed this accounting for deferred taxes with Arthur
Andersen, who concurred with this accounting treatment.
We have since reassessed this matter and determined that under SFAS No. 109
it is appropriate to restate our consolidated financial statements for the
treatment of the deferred tax as follows:
The original calculation of the deferred tax liability was incorrect and
therefore has been reduced from $1.0 billion to $600 million. The corrected
$600 million deferred tax liability has been recorded as a deferred tax expense
to discontinued operations in the third quarter of 2000 rather than as an
adjustment to the Frontier acquisition purchase price (i.e., goodwill).
This deferred tax expense and related liability restated in the third
quarter of 2000 are completely reversed in the second quarter of 2001 to
deferred tax benefit from discontinued operations. The corresponding current
tax liability was offset by losses and other tax attributes of continuing
operations in the fourth quarter of 2001.
Sale of GlobalCenter
In connection with the sale of GlobalCenter to Exodus discussed above, we
recorded an $850 million deferred tax liability pursuant to SFAS No. 109 as our
financial reporting basis exceeded our tax basis in our
57
investment in GlobalCenter. We recorded the deferred tax liability as an
adjustment to goodwill in the Frontier acquisition purchase price allocation,
effective as of the date of the Frontier acquisition. We believed that, since
we sold the business within one year of its acquisition, this temporary
difference arose during the re-allocation period and the final allocation of
purchase price in connection with the Frontier acquisition had yet to be
recorded, recording the deferred tax liability as a purchase price adjustment
to the Frontier acquisition was reasonable and appropriate. We also discussed
this accounting for deferred taxes with Arthur Andersen, who concurred with
this accounting treatment.
We have since reassessed this matter and determined that under SFAS No. 109
it is appropriate to restate our consolidated financial statements for the
treatment of the deferred tax as follows:
The original calculation of the deferred tax liability was incorrect and
therefore has been reduced from $850 million to $535 million. The corrected
$535 million deferred tax liability has been recorded as a deferred tax expense
in the third quarter of 2000 rather than as an adjustment to the Frontier
acquisition purchase price (i.e., goodwill).
Due to the bankruptcy filing of Exodus in September 2001, we recorded a
non-temporary write-down of the entire value of our investment in the common
stock of Exodus (equal to $1.918 billion) in the third quarter of 2001. As a
result, the deferred tax expense and related liability restated in the third
quarter of 2000 are completely reversed in the third quarter of 2001 to
deferred tax benefit.
Global Marine Installation Revenue
During the year ended December 31, 2000 and the nine months ended September
30, 2001, certain contractors that were responsible for constructing our
undersea systems subcontracted certain subsea cable laying and subsea cable
burial work to Global Marine, our wholly-owned subsidiary. These subcontracting
arrangements were entered into at arm's length between the contractors and
Global Marine and were not bargained for in the course of our negotiations with
the contractors. Therefore, we believed that recognizing revenue at the
consolidated level for these subcontracting services provided by Global Marine
was reasonable and appropriate. We discussed this accounting for subcontract
revenue with Arthur Andersen, who concurred with this accounting treatment.
We have since reassessed the accounting for these services provided by
Global Marine, and determined that revenue should not have been recognized
separately at the consolidated level for these subcontracting services.
However, management has concluded that the impact to our net loss was
immaterial. Accordingly, we restated our consolidated financial statements to
eliminate the recognition of this revenue. The decreases in revenue were offset
primarily by decreases in related operating expenses and, to a lesser extent,
by the impact of other unrelated adjustments. The result of this restatement is
a decrease in both revenue and other operating expenses of approximately $97
million for the nine months ended September 30, 2001 and approximately $63
million for the year ended December 31, 2000.
The following tables set forth the effect of the restatements on our
consolidated balance sheets, statements of operations and statements of cash
flows for the restated periods. The following tables do not reflect the
subsequent retroactive reclassification of Asia Global Crossing and IPC into
discontinued operations or the reclassification of the extraordinary loss on
the extinguishment of debt to "other income" and the related taxes to "income
tax expense" in accordance with SFAS No. 145, or the reclassification of Global
Marine from discontinued operations to continuing operations for the nine
months ended September 30, 2001 as described in Note 8, "Discontinued
Operations and Dispositions," to the consolidated financial statements included
in this annual report on Form 10-K. See Notes 4, 8 and 33 to the accompanying
consolidated financial statements.
58
Nine months ended Year ended
September 30, 2001 December 31, 2000
-------------------------- ----------------------------
(in millions, except share and per share information)
As previously As previously
reported As restated reported As restated/(1)/
------------- ------------ ------------- ---------------
Consolidated balance sheet data:
Other assets, current and long term............ $ 1,508 $ 1,353 $ 1,568 $ 1,568
Property and equipment, net.................... 12,058 11,102 10,030 10,030
Goodwill and intangibles, net.................. 8,291 8,291 11,481 9,631
Deferred revenue, current and long term........ 3,256 2,158 1,983 1,983
Stockholder's equity........................... 6,884 6,798 11,700 10,565
Consolidated statement of operations data:
Revenue........................................ 2,437 2,327 3,789 3,726
Operating expenses............................. (4,409) (4,298) (5,185) (5,122)
Tax benefit (provision)........................ 331 866 145 (390)
Income (loss) from discontinued operations..... (591) (73) (308) (908)
Loss applicable to shareholders................ (4,772) (3,722) (1,980) (3,115)
Loss per share applicable to shareholders...... (5.39) (4.20) (2.35) (3.69)
Shares used in computing basic and diluted loss
per share.................................... 885,981,278 885,981,278 844,153,231 844,153,231
Consolidated cash flow data:
Net cash provided by (used in) operating
activities................................... 418 (362) 911 734
Net cash provided by (used in) investing
activities................................... $ 110 $ 890 $ (4,427) $ (4,250)
Six months ended Three months ended
June 30, 2001 March 31, 2001
---------------------------- ----------------------------
(in millions, except share and share per share information)
As previously As previously
reported As restated reported As restated
------------- ------------ ------------- ------------
Consolidated balance sheet data:
Other assets, current and long term............ $ 2,033 $ 1,894 $ 3,098 $ 3,060
Property and equipment, net.................... 11,823 11,001 10,915 10,419
Goodwill and intangibles, net.................. 10,085 9,235 11,224 9,374
Deferred revenue, current and long term........ 3,027 2,070 2,528 1,997
Stockholder's equity........................... 8,815 8,200 10,327 9,110
Consolidated statement of operations data:
Revenue........................................ 2,151 2,090 1,082 1,034
Operating expenses............................. (3,203) (3,137) (1,595) (1,545)
Tax benefit (provision)........................ 123 123 46 46
Income (loss) from discontinued operations..... (125) 393 (54) (136)
Loss applicable to shareholders................ (1,364) (843) (675) (756)
Loss per share applicable to shareholders...... (1.54) (0.95) (0.76) (0.85)
Shares used in computing basic and diluted loss
per share.................................... 885,409,765 885,409,765 884,702,182 884,702,182
Consolidated cash flow data:
Net cash provided by (used in) operating
activities................................... 677 32 21 (296)
Net cash provided by (used in) investing
activities................................... 1,087 442 (1,273) (956)
(1)Recording the concurrent transactions at historical carryover basis rather
than at fair value did not have a material impact on our consolidated
financial position (less than 1% of total assets) or statement of operations
(less than 0.1% of net loss) as of and for the year ended December 31, 2000
and as a result the consolidated balance sheet and statement of operations
as of and for the year ended December 31, 2000 have not been restated in
respect of the concurrent transactions.
59
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States ("U.S. GAAP").
The preparation of financial statements in conformity with U.S. GAAP requires
management to make judgments, 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.
Management continually evaluates its judgments, estimates and assumptions,
including those related to the critical accounting policies described below.
Management uses historical experience and available information to make these
judgments, estimates and assumptions and actual amounts and results could
differ from the estimates and assumptions that are used to prepare the
financial statements included in this annual report of Form 10-K. For a full
description of our significant accounting policies, see Note 3, "Basis of
Presentation and Significant Accounting Policies," to the accompanying
consolidated financial statements. The policies described below are considered
"critical" because they have the potential to have a material impact on our
consolidated financial statements and because they require significant
judgments and estimates.
Fresh Start Accounting
As discussed earlier in "--Accounting Impact of Reorganization," we will
implement "fresh start" accounting in accordance with SOP 90-7 upon our
emergence from bankruptcy in November 2003. SOP 90-7 also requires that changes
in accounting principles that will be required in the financial statements of
New GCL and its subsidiaries within twelve months following the adoption of
fresh start accounting be adopted at the time fresh start accounting is
implemented.
Adopting fresh start accounting will likely result in material adjustments
to the historical carrying amount of our assets and liabilities. Fresh start
accounting requires us to allocate the reorganization value to our assets and
liabilities based upon their estimated fair values. The fair values of the
assets as determined for fresh start reporting will be based on estimates of
anticipated future cash flow. Liabilities existing at the date our Plan of
Reorganization becomes effective are stated at the present values of amounts to
be paid discounted at appropriate rates. The determination of fair values of
assets and liabilities is subject to significant estimation and assumptions.
Revenue Recognition and Related Reserves
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.
Operating Leases
We offer customers flexible bandwidth products to multiple destinations and
many of our contracts for subsea circuits are entered into as part of a service
offering. Consequently, we defer revenue related to those circuits and amortize
the revenue over the appropriate term of the contract. Accordingly, we treat
cash received prior to the completion of the earnings process as deferred
revenue.
Percentage-of-Completion
Revenue and estimated profits under long-term contracts for undersea
telecommunication installation by Global Marine 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.
60
Non-Monetary Transactions
We may exchange capacity with other capacity or service providers. These
transactions were accounted for in accordance with Accounting Principles Board
Opinion No. 29. "Accounting for Nonmonetary Transactions", where an exchange
for similar capacity is recorded at historical carryover basis and dissimilar
capacity is accounted for at fair market value with recognition of any gain or
loss. On August 2, 2002, the SEC staff communicated its position on
indefeasible rights of use ("IRU") capacity swaps to the American Institute of
Certified Public Accountants SEC Regulations Committee. The SEC staff has
concluded that all IRU capacity swaps consisting of the exchange of leases
should be evaluated within paragraph 21 of APB 29. That is, if a swap involves
leases that transfer the right to use similar productive assets, the exchange
should be treated as the exchange of similar productive assets irrespective of
whether the "outbound" lease is classified as a sale-type lease, direct
financing lease or operating lease and irrespective of whether the "inbound"
lease is classified as a capital lease or an operating lease. The SEC staff
directed that in accounting for such transactions the carrying value rather
than the fair market value should be used. The SEC staff further directed
registrants to apply this guidance historically and prospectively, and to
restate prior financial statements if appropriate. All adjustments that we
consider necessary to comply with the SEC's guidance have been reflected in the
accompanying consolidated financial statements and the related notes (see Note
4, "Restatements of Previously Issued Financial Statements," to the
consolidated financial statements included in this annual report on Form 10-K
for further discussion of our related restatements). See "--Restatements of
Previously Issued Financial Statements" for further discussion regarding the
exchange of capacity with other capacity or service providers.
Allowance for Doubtful Accounts and Sales Credits
We provide for allowances for doubtful accounts and sales credits.
Allowances for doubtful accounts are charged to other operating expenses, while
allowances for sales credits are charged to revenue. We evaluate the adequacy
of the reserves monthly utilizing several factors, including the length of time
the receivables are past due, changes in the customer's creditworthiness, the
customer's payment history, the length of the customer's relationship with us,
the current economic climate, current industry trends and other relevant
factors. A specific reserve requirement review is performed on customer
accounts with larger balances. A general reserve requirement is performed on
most accounts utilizing the factors previously mentioned. Service level
requirements are assessed to determine sales credit requirements where
necessary. We have historically experienced significant changes month to month
in reserve level requirements, primarily due to unanticipated large customer
bankruptcy filings or other insolvency proceedings. Changes in the financial
viability of significant customers, worsening of economic conditions and
changes in our ability to meet service level requirements may require changes
to our estimate of the recoverability of the receivables. Appropriate
adjustments will be recorded to the period in which these changes become known.
We believe that the accounting estimates related to the recognition of
revenue and establishment of reserves for uncollectible amounts and customer
credits in the results of operations are "critical accounting estimates"
because (1) they require management to make assumptions about future
collections and billing adjustments, and (2) the impact of changes in actual
performance versus these estimates on the accounts receivable balance reported
in our consolidated balance sheets and the results reported in our consolidated
statement of operations could be material. In making these assumptions, we use
historical trending of write-offs and current market indicators about general
economic conditions that might impact the collectibility of accounts.
Impairment of Long-Lived Assets
As required under the provisions of SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" ("SFAS
No. 121"), we periodically review long-lived assets composed of property and
equipment, goodwill, other intangibles and other assets held for a period
longer than a year, whenever events or changes in circumstances indicate that
the carrying amount of the asset(s) may be impaired. Recoverability of assets
to be held and used is measured by comparison of the carrying amount of an
asset to the future net cash flows expected to be generated by the asset. If
such assets are considered to be
61
impaired, the impairment to be recognized is measured by the amount by which
the carrying amounts of the assets exceed their fair value. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
cost to sell.
Effective January 1, 2002, we adopted the provisions of SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"), which supercedes SFAS No. 121 and addresses financial accounting and
reporting for the impairment of long-lived assets, while retaining the
fundamental recognition and measurement for determining impairment for
long-lived assets to be held and used. SFAS No. 144 requires that a long-lived
asset to be abandoned, exchanged for a similar productive asset or distributed
to owners in a spin-off is to be considered held and used until it is disposed
of. However, SFAS No. 144 requires that management consider revising the
depreciable life of such long-lived asset. With respect to long-lived assets to
be disposed of by sale, SFAS No. 144 retains the provisions of SFAS No. 121
and, therefore, requires that discontinued operations no longer be measured on
a net realizable value basis and that future operating losses associated with
such discontinued operations no longer be recognized before they occur. The
adoption of SFAS No. 144 did not have any impact on our consolidated financial
statements.
Calculating the future net cash flows expected to be generated by assets
held for sale to determine if an impairment exists and to calculate an
impairment involves significant judgments and a variety of assumptions. The
judgments and assumptions include, but are not limited to, estimating long term
revenues, revenue growth, operating expenses, and capital expenditures.
During the year ended December 31, 2001, long-lived tangible and intangible
asset impairments of $17.181 billion were recorded to continuing operations in
the accompanying consolidated statement of operations. Additional long-lived
asset impairments of $2.399 billion were recorded to discontinued operations
during the year ended December 31, 2001. These impairment charges were recorded
in accordance with SFAS No.121. See Note 6, "Impairment of Long-Lived Assets,"
to the accompanying consolidated financial statements included in this annual
report on Form 10-K for a further description of the impairment charges.
We continue to conduct a comprehensive review of our telecommunications
assets. It is possible that additional telecommunications equipment may be
identified as obsolete or excess and additional impairment charges recorded to
reflect the realizable value of these assets in future periods. As discussed in
Note 3, "Basis of Presentation and Significant Accounting Policies," to the
accompanying consolidated financial statements included in this annual report
on Form 10-K, we will adopt fresh start accounting upon our emergence from
bankruptcy, which will result in a change in the value of New GCL's long-lived
assets.
Restructuring
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Restructuring" and Note 5, "Restructuring Costs and Related
Impairments," to the accompanying consolidated financial statements included in
this annual report on From 10-K, for information on restructuring activities
for the years ended December 31, 2002 and 2001. Restructuring charges represent
direct costs of exiting lease commitments for certain real estate facility
locations and employee termination costs, along with certain other costs
associated with approved restructuring plans. Charges were recorded in
accordance with EITF 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)" and represent our best estimate of
undiscounted liabilities at the date the charges were taken. Adjustments for
changes in assumptions are recorded in the period such changes become known.
Changes in assumptions, especially as they relate to contractual lease
commitments and related anticipated third party sub-lease payments, could have
a material effect on the restructuring liabilities and consolidated results of
operations. See "Basis of Presentation and Significant Accounting Policies--New
Accounting Standards" in Note 3 to the accompanying consolidated financial
statements included in this annual report on Form 10-K for a discussion
regarding SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", which supercedes EITF 94-3 effective January 1, 2003.
62
The various assumptions in determining restructuring charges include, but
are not limited to, future severance costs, sublease income or disposal costs,
length of time on market for abandoned rented facilities, and contractual
termination costs. Such estimates are inherently judgmental and may change
based upon actual experience.
Acquisitions
Since our inception in 1997, a major network construction program was
completed and several strategic acquisitions were executed in order to enhance
our network, service offerings and position in the marketplace. Strategic
transactions during the years ended December 31, 2000 and 1999 were as follows:
Global Marine
On July 2, 1999, we acquired Cable & Wireless Marine, a submarine cable
maintenance and installation company, for approximately $908 million in cash.
The acquisition of this business, which we renamed Global Marine Systems
Limited, increased our ability to provide the installation and maintenance of
our undersea global network on a cost-effective basis.
Frontier Corporation
On September 28, 1999, we acquired Frontier Corporation in a stock-for-stock
merger valued at over $10 billion based on stock prices at the time of the
acquisition. 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. Frontier's
businesses included a long distance business, an ILEC business and
GlobalCenter, a web-hosting business. Acquiring Frontier 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, now known as "Global Crossing UK", owned one of the most
extensive fiber telecommunications networks in the United Kingdom, consisting
of approximately 5,600 route miles of fiber and reaching more than 2,000 cities
and towns. Similar to our Frontier acquisition, Global Crossing UK provided a
broad fiber optic network as well as personnel and systems which were used to
launch our network and services in the United Kingdom.
IXnet/IPC
On June 14, 2000, we acquired IXnet, Inc. and its parent company, IPC
Communications, Inc., in a stock-for-stock merger valued at $3.2 billion based
on stock prices at the time of the acquisition. IXnet developed and deployed a
specialized set of voice and data services aimed at trading floor operations in
the financial industry. These services were based on a common state-of-the-art
switched data platform that provided economic advantages and performance
advantages over other then-available service offerings. IPC's Trading Systems
business provided sophisticated desktop trading systems to the global financial
community. The IXnet/IPC acquisition provided us with services, expertise,
personnel, and access to a desirable customer base. We have since disposed of
IPC's Trading Systems business and IXNet's Asian operations as described below
under "--Dispositions."
Dispositions
GlobalCenter
During September 2000, we entered into a definitive merger agreement under
which Exodus Communications, Inc. would acquire our GlobalCenter web hosting
services division. The sale was completed in
63
January 2001 and we received approximately 108.15 million shares of Exodus
common stock. The value of the shares was $1.918 billion, based on the closing
sales price of Exodus common stock prior to the closing of the transaction. We
monitored the impairment of this marketable security in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
During the quarter ended September 30, 2001, we reduced the carrying value of
our investment in Exodus to $0 following Exodus' bankruptcy filing on September
26, 2001. As a result, we recorded a nonrecurring charge of $1.918 billion
related to our investment in Exodus, which comprises most of the $2.041 billion
in losses on the write-down and sale of strategic investments, net reflected in
the accompanying consolidated statements of operations. As a result of this
transaction, we are no longer in the web-hosting business and our financial
statements 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.
ILEC
On July 11, 2000, we entered into an agreement to sell our ILEC business,
acquired in the acquisition of Frontier, to Citizens Communications for $3.65
billion in cash, subject to adjustments concerning closing date liabilities and
working capital balances. The disposition of the ILEC was 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 our network.
In April 2001, we and Citizens amended this agreement to provide for, among
other things, (i) an acceleration of the anticipated closing date for the
transaction and (ii) an adjustment to the purchase price, reflecting a
reduction in the amount of cash received by us at closing in connection with
the transaction from $3.65 billion to $3.5 billion, subject to adjustments
concerning closing date liabilities and working capital balances, and a $100
million credit, subsequently reduced in July 2002 to $65 million, which will be
applied against future services to be rendered to Citizens over a five year
period. Pursuant to the transaction, the parties also entered into an agreement
under which Citizens would purchase long distance services from us for resale
to the ILEC's customers. In connection with this sale, the associated pension
assets and related liabilities were to be transferred to Citizens. As a result
of our bankruptcy filing, the transfer of the pension assets and related
liability was delayed pending approval of the Bankruptcy Court. While the
transfer of the pension assets and related liabilities was delayed, we
segregated the assets related to the ILEC employees during 2001. In December,
2002, the Bankruptcy Court approved the transfer of the pension assets and
related liabilities to Citizens, with the actual transfer of the assets
occurring in February 2003.
The sale of the ILEC to Citizens closed on June 29, 2001. As a result of
customary adjustments based on closing date liabilities and working capital
balances, we received cash proceeds of $3.369 billion at closing and recorded
an after-tax loss from the sale of approximately $206 million. As previously
discussed, the deferred taxes incurred as a result of this sale have been
restated from being recorded as a purchase price adjustment of the Frontier
transaction to being recorded as a deferred tax expense to discontinued
operations in our consolidated statement of operations for the year ended
December 31, 2000.
IXnet/IPC Asia
On July 10, 2001, we sold to Asia Global Crossing the Asian operations of
IXnet and IPC, as well as our territorial rights to Australia and New Zealand,
in exchange for 26.8 million shares of Asia Global Crossing common stock. This
increased our ownership in Asia Global Crossing by 2% to 58.9% at the time of
the transaction closing. The transaction had no impact on our consolidated
results of operations as the transaction was accounted for in accordance with
AICPA Interpretation No. 39 of APB No. 16 "Transfers and Exchanges Between
Companies Under Common Control".
IPC
We acquired IPC and its wholly owned subsidiary IXnet in a merger
transaction on June 14, 2000. IPC designs, manufactures, installs and services
turret systems, which provide desktop access to time-sensitive voice
communications and data for the financial services community.
64
On November 16, 2001, we entered into an agreement to sell IPC to Goldman
Sachs Partners 2000 for an aggregate purchase price of $360 million in cash
less certain holdback requirements and working capital and purchase price
adjustments, as stipulated in the agreement. On December 20, 2001, the
transaction closed, resulting in cash proceeds to us of $300.5 million, net of
$22.5 million paid directly to Asia Global Crossing, deal costs of $8 million,
working capital adjustments paid at closing of $9 million and holdback
requirements of $20 million. The $300.5 million in net proceeds was placed
directly into a restricted cash account for the benefit of the administrative
agent to the Corporate Credit Facility in accordance with the terms of the bank
waiver we negotiated with the Bank Lenders at such time. We recorded an
after-tax loss on the sale of IPC of approximately $120 million, which is
reflected in the results from discontinued operations during the year ended
December 31, 2001 in our consolidated statement of operations included in this
annual report on Form 10-K. IXnet was not included in the plan of disposal.
Cancellation of Plans to Sell Global Marine
In accordance with board authorization on October 4, 2001, we commenced
negotiations to sell substantially all of our Global Marine installation and
maintenance segment and permanently exit the installation and maintenance
segment. Based on these events, the segment was classified as a discontinued
operation commencing in the third quarter of 2001. However, both our Plan of
Reorganization and the Purchase Agreement with ST Telemedia contemplate that we
will retain our non-core businesses previously being evaluated for disposal,
including Global Marine. Therefore, we officially terminated our plans to
permanently exit this segment. Accordingly, this segment is no longer
classified as a discontinued operation and our consolidated financial
statements have been reclassified to reflect Global Marine as part of
continuing operations for all periods presented. The accounting for
discontinued operations changed on January 1, 2002 as a result of SFAS No. 144;
however, the transition rules for SFAS No. 144 provide that the accounting for
discontinued operations that arose prior to January 1, 2002 would not have to
conform with SFAS No. 144 until December 31, 2003. Therefore, as the decision
to retain the segment occurred during 2002 all amounts have been reclassified
into continuing operations in accordance with EITF Issue No. 90-16 "Accounting
for Discontinued Operations Subsequently Retained."
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, an approximately 11,000 mile undersea network that would link several
countries in eastern Asia, and our then 58% interest in Pacific Crossing, an
undersea system connecting the United States and Japan. Softbank Corporation
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.
On January 12, 2000, we established a joint venture, called Hutchison Global
Crossing ("HGC"), with Hutchison Whampoa Limited ("Hutchison Whampoa") to
pursue fixed-line telecommunications and Internet opportunities in Hong Kong.
For its 50% share, Hutchison Whampoa 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 Whampoa agreed that
any fixed-line telecommunications activities it pursues in China would be
carried out by the joint venture. For our 50% share, we provided to Hutchison
Whampoa $400 million in our 6 3/8% convertible preferred stock (convertible
into shares of our 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 certain media distribution center capabilities, which
together were valued at $350 million, as well as $50 million in cash.
On October 12, 2000, Asia Global Crossing completed its initial public
offering of shares of common stock and we contributed to Asia Global Crossing
certain joint venture interests we had in networks in Japan and Hong Kong.
After giving effect to the initial public offering and related transactions,
the Company's economic interest in Asia Global Crossing was reduced to 56.9%.
65
On April 25, 2002, Asia Global Crossing and Vectant, a wholly owned
subsidiary of Marubeni, announced a restructuring of their two joint ventures,
Pacific Crossing Ltd. ("PCL") and Global Access Limited ("GAL"). Upon
completion of the restructuring (including the exercise of the option described
below), Asia Global Crossing indirectly owned 100 percent of PCL, the owner of
the Pacific Crossing transpacific cable system, and Vectant owned 100% of GAL,
a terrestrial network provider in Japan. Under the terms of the restructuring
agreement, Asia Global Crossing transferred its 49 percent interest in GAL to
Vectant and Vectant transferred a 20 percent stake in PCL to Asia Global
Crossing. In addition, Vectant granted Asia Global Crossing a call option to
purchase Vectant's remaining 15.5 percent interest in PCL, exercisable when
certain conditions are satisfied. No gain or loss was recognized on such
transactions as the value of both investments was minimal.
On April 30, 2002, Asia Global Crossing agreed to sell its interest in three
joint ventures for $120 million in cash to Hutchison Whampoa. The sale includes
its 50 percent interest in each of Hutchison Global Crossing, the Hong Kong
fixed-line telecommunications company, and Hutchison GlobalCenter, an internet
data center company, as well as its 42.5 percent interest in ESD Services, an
e-commerce operator. As Asia Global Crossing had recorded an impairment of such
interests in 2001, there was no gain or loss recognized on such transactions in
2002.
On November 17, 2002, Asia Global Crossing and one of its wholly owned
subsidiaries, Asia Global Crossing Development Company ("AGCDC"), filed
voluntary petitions for relief under the Bankruptcy Code. On the same date,
Asia Global Crossing commenced joint provisional liquidation cases in the
Supreme Court of Bermuda. Similarly, on July 19, 2002, Pacific Crossing, Ltd.
("PCL"), a majority owned subsidiary of Asia Global Crossing and operator of
PC-1, and certain of its subsidiaries filed voluntary petitions for relief
under the Bankruptcy Code. On the same date, PCL commenced joint provisional
liquidation cases in the Supreme Court of Bermuda. Asia Global Crossing's and
PCL's bankruptcy cases are being administered separately and are not
consolidated with the GC Debtors' chapter 11 cases.
As a result of the chapter 11 petitions of Asia Global Crossing and PCL, our
ability to exert control and exercise influence over Asia Global Crossing's and
PCL's management decisions through our equity interest was substantially
eliminated; further the nature of the reorganization plans of Asia Global
Crossing and PCL were such that we would no longer have access to or a
continuing involvement in the businesses of Asia Global Crossing and PCL. Due
to our loss of control and lack of continuing involvement in Asia Global
Crossing's and PCL's operations, we effectively disposed of our rights and
obligations by abandoning our equity ownership effective on the date of Asia
Global Crossing's and PCL's chapter 11 petitions. Asia Global Crossing and PCL
have been accounted for as discontinued operations for all periods presented in
accordance with SFAS No. 144. As a result of the abandonment, we recognized a
gain of approximately $1.184 billion.
On March 11, 2003, Asia Netcom, a company organized by China Netcom
Corporation (Hong Kong) on behalf of a consortium of investors, acquired
substantially all of Asia Global Crossing's operating subsidiaries (except PCL)
in a sale pursuant to the Bankruptcy Code. On June 11, 2003, Asia Global
Crossing's and AGCDC's bankruptcy cases were converted from reorganizations
under chapter 11 of the Bankruptcy Code into chapter 7 liquidation proceedings.
We no longer had control of or effective ownership in any of the assets
formerly operated by Asia Global Crossing effective as of the date of Asia
Global Crossing's bankruptcy petition. No recovery is expected for Asia Global
Crossing's shareholders, including us.
On April 15, 2003, PCL entered into an asset purchase agreement pursuant to
which it agreed to sell substantially all of its assets, including PC-1, to
Pivotal Telecom LLC for $63 million. In June 2003, the United States Bankruptcy
Court of Delaware approved the sale pursuant to sections 363 and 365 of the
Bankruptcy Code. We will receive no recovery in PCL's bankruptcy case in our
capacity as an indirect equity holder in PCL.
66
Comparison of Financial Results
In light of events and circumstances that occurred during the years ended
December 31, 2002, 2001 and 2000, the results between periods are not
necessarily comparable due to the following factors:
. We filed for bankruptcy protection on January 28, 2002, which had a
profound effect on our results, including the cessation of interest
accruing on all of our outstanding indebtedness and dividends on
outstanding preferred stock; significant reduction of operating expenses
through lease and contract rejections resulting from the exercise of our
rights under the Bankruptcy Code; and erosion of revenues in 2002 from
levels experienced in 2001 following the bankruptcy filing.
. Material impairment charges to continuing operations aggregating
approximately $17.181 billion during the year ended December 31, 2001
were recorded to long-lived assets which substantially reduced
depreciation and amortization expense in the year ended December 31, 2002
compared to prior periods.
. We restructured our cost structure commencing August 2001, when we made
our initial announcement of employee reductions, asset abandonments and
real estate portfolio rationalization. The cost restructuring and the
January 2002 bankruptcy filing resulted in an overall reduction to cost
levels in 2002 versus the levels incurred in 2001 and 2000.
. We disposed of our web-hosting business, GlobalCenter, on January 10,
2001; ILEC business on June 29, 2001; and IPC Trading Systems business on
December 20, 2001. These asset sales had a significant impact on the tax
provision and tax benefit reflected in the consolidated statement of
operations. The decline in the value of the Exodus stock received in
connection with the sale of GlobalCenter also contributed significantly
to the greater than $2 billion in realized losses recorded by us in 2001
in our investments portfolio. In addition, Asia Global Crossing was
abandoned effective November 17, 2002, the date Asia Global Crossing
filed for bankruptcy protection. The ILEC business, GlobalCenter, IPC and
Asia Global Crossing are all reflected in results from discontinued
operations for all periods presented although the dates of disposal
occurred at various points throughout the period being discussed below.
. We acquired IXnet/IPC on June 14, 2000 and thus the results of the
non-IPC and non-IXnet Asian portion of this acquisition are included in
continuing operations from the date of acquisition only.
. The performance of the telecommunications industry declined as a whole,
including as a result of an actual and anticipated excess of supply over
demand, which resulted in significant price deflation throughout the
period being discussed below.
Results of Operations for the Years Ended December 31, 2002 and December 31,
2001
Revenues. Total revenues decreased $543 million, or 15%, in 2002 versus
2001. Our bankruptcy filing in January 2002, the continued worsening of the
macroeconomic environment throughout 2002, bankruptcy filings by several of our
carrier customers, the overcapacity in the telecommunications sector, related
price competition throughout the industry in both voice and data products in
the United States and Europe and the uncertainties about our ability to emerge
from bankruptcy all contributed to declines in telecommunications services
segment revenue levels year over year. In addition, in 2002 the installation
and maintenance segment was significantly impacted by the overbuild of subsea
cable capacity in recent years, resulting in substantial declines in its
installation revenue. Due primarily to the delay in our emergence from
bankruptcy and continued price declines, revenue in 2003 is expected to reflect
further declines in comparison to 2002. We expect continued attrition of
customers and revenue in the commercial sales channel, and declines in sales of
data services in the carrier sales channel offset by increases in carrier voice
services. Further declines in installation revenues are expected by Global
Marine in 2003. Maintenance revenue is expected to experience modest declines
as well.
67
Actual reported revenues for the years ended December 31, 2002 and 2001
reflect the following changes:
December 31, December 31, Increase/
2002 2001 (Decrease)
------------ ------------ ----------
(in millions)
Commercial................................................ $1,252 $1,395 $(143)
Consumer.................................................. 44 110 (66)
Carrier:
Service revenue........................................... 1,533 1,519 14
Sales type lease revenue.................................. -- 18 (18)
Amortization of prior period IRU's........................ 74 80 (6)
------ ------ -----
Total carrier............................................. 1,607 1,617 (10)
------ ------ -----
Total telecommunications services segment revenue......... 2,903 3,122 (219)
Total installation and maintenance segment revenue, net of
eliminations............................................ 213 537 (324)
------ ------ -----
Total revenues......................................... $3,116 $3,659 $(543)
====== ====== =====
Our bankruptcy filing and pricing declines had an adverse effect on customer
attrition in the commercial sales channel resulting in a $143 million, or 10%,
decline in commercial sales revenue to $1.252 billion in 2002 from $1.395
billion in 2001. This was primarily due to a $192 million or 22% decrease, to
$676 million revenue generated from voice services in 2002 compared with $868
million in 2001. This included a $54 million, or 31%, decline in 2002
conferencing revenue from the prior period total of $173 million. Customers in
this sales channel sought alternative network solutions due to concerns
regarding the financial viability of the Company. While a portion of this
reduction was due to disconnects, or customers altogether moving off our
network, the majority was due to customers directing their traffic to other
carriers for the sake of redundancy. In addition, some of the revenue reduction
was a result of repricing existing customer contracts as they came up for
renewal during our bankruptcy. While revenue levels were declining, volume
levels were declining to a lesser extent or increasing, depending on the
product offering. The decline in the conferencing product offering was more
severe as we were the primary provider of conferencing services to many
conferencing customers including several large multinational corporations. We
believe these customers became hesitant to rely on us as a primary provider of
this critical service to their businesses while there was uncertainty as a
result of our bankruptcy and strategy for emerging from bankruptcy. The
declines in voice services were offset by increases of $50 million, or 10%, to
$576 million in 2002 in the sale of data services. Our data services were not
as severely impacted by our bankruptcy due to the logistics of the relationship
with the existing customers as we have deployed equipment at customers'
premises to provide Frame Relay, ATM, IP Access and Managed Services products.
The attrition experienced in commercial voice services was much greater as
customers perceived that migrating this service to another provider would be
less risky and that it would be less costly to switch to an alternative
provider.
We did not invest in supporting our consumer business during 2002 as we
determined that this business was not core to our strategy and plans for the
period. There are no plans to grow this business as the costs to maintain and
acquire customers are expected to exceed the benefits to our future
profitability. In addition, price levels for consumer services continue to
decline, as a result of new competitive entry and substantial increases in
network capacity.
Our bankruptcy had a significant impact on the mix of carrier revenue in
2002 compared with 2001. Carriers often use several suppliers to meet their
traffic demands and the risk of relying on one carrier supplier is not as
prevalent as in the case of commercial businesses previously discussed. Service
revenue from the Carrier channel experienced a modest $14 million, or 1%,
increase in 2002 from 2001. This overall flatness in growth was a result of an
increase in voice services of $178 million, or 16%, to $1.288 billion in 2002
from $1.110 billion in 2001, offset by a decrease in data services of $164
million, or 40%, to $245 million in 2002 from $409 million in 2001. The 16%
increase in revenue generated from voice services includes an increase in
international voice
68
services of $140 million, or 52%, to $408 million in 2002 from $268 million in
2001. The international voice market is highly competitive, experiencing a 20%
annualized price decline in 2002 compared with 2001. Revenue from data services
experienced even larger declines in pricing period over period, including from
contract repricing, and volume growth could not be attained by the carrier
sales force to compensate for these declines. Additional data revenues were
lost as several carrier customers filed for bankruptcy protection resulting in
the cancellation of longer term data contracts.
We had no sales of capacity under sales-type lease arrangements in 2002,
compared with one contract for $18 million in 2001. The revenue recognized in
2002 relating to the amortization of IRUs signed in prior periods decreased $6
million, or 8%, to $74 million from $80 million in 2001. The declines in this
revenue were a result of a few factors, including significantly fewer IRUs
signed in 2002 than in 2001 and therefore very limited incremental amortization
revenue. In addition, certain agreements for services were terminated either
through customer settlements or through bankruptcy proceedings of the customers
that had purchased services from us. We recognized $97 million of the deferred
revenue related to these obligations into "other income," as a result of our no
longer having an obligation to provide services; however, the suspension of
these agreements resulted in a reduced revenue stream.
Installation revenue decreased $296 million, or 81%, in 2002 to $68 million
from $364 million in 2001. This was primarily due to the rapid decline in
subsea installation projects as a result of the oversupply of subsea capacity
in the global telecommunications market. Maintenance revenue also decreased $28
million or 16% in 2002 to $145 million, from $173 million in 2001. This is
primarily due to the loss of the North Sea cable maintenance contract and a
reduction in spare part purchasing by customers for their subsea systems due to
tighter system capital spending.
Operating Expenses. Components of operating expenses for the years ended
December 31, 2002 and 2001 were as follows:
December 31, December 31, Increase/
2002 2001 (Decrease)
------------ ------------ ----------
(in millions)
Cost of access and maintenance $2,205 $ 2,152 $ 53
Other operating expenses...... 1,208 2,080 (872)
Depreciation and amortization. 137 1,548 (1,411)
Asset impairment charges...... -- 17,181 (17,181)
Restructuring charges......... -- 410 (410)
------ ------- --------
Total operating expenses... $3,550 $23,371 $(19,821)
====== ======= ========
Cost of access and maintenance. Cost of access and maintenance ("COA&M")
increased $53 million, or 2%, in 2002 from 2001. COA&M primarily includes the
following: (i) usage based voice charges paid to local exchange carriers
("LECs") and interexchange carriers ("IXCs") to originate and/or terminate
switched voice traffic; (ii) charges for leased lines for dedicated facilities
and local loop ("last mile") charges from both domestic and international
carriers; (iii) internet exit charges incurred in transporting IP traffic and
other enhanced services usage based charges; and (iv) third party maintenance
costs incurred in connection with maintaining the terrestrial network, subsea
fiber optic network ("wet maintenance") and cable landing stations.
Cost of access increased $86 million, or 4%, to $2.047 billion in 2002 from
$1.961 billion in 2001, primarily due to increases in usage based voice charges
of $187 million, or 17%, necessary to meet the increased level of voice
services revenue, which resulted in increased minute volumes with other
carriers to originate and/or terminate traffic. This was offset by decreases in
dedicated leased facility charges as a result of our rejection of certain
contracts in accordance with our rights under bankruptcy. As discussed above,
the higher margin products in the commercial sales channel and sales of higher
margin data services in the carrier channel both declined as a percentage of
total revenue in 2002 when compared to 2001. Although certain cost of access
rate reductions were
69
achieved within broad categories of COA&M expenses, aggregate costs of access
increased due to having a higher percentage of lower margin carrier voice
services. We expect these trends to continue throughout 2003 as we have not
been able to improve our voice and data product mix through the first ten
months of 2003.
Third party maintenance expenses decreased $33 million, or 17%, in 2002 to
$158 million from $191 million in 2001 primarily as a result of our ability to
eliminate certain terrestrial, cable station and equipment maintenance
contracts, transition certain third party managed costs into employee managed
maintenance at lower costs (which is included within "other operating expenses"
below) and the re-negotiation of terms and conditions, including pricing
reductions, of existing contracts for maintenance during the bankruptcy. Third
party maintenance initiatives have continued in 2003 with additional modest
declines expected when compared with 2002 maintenance expense levels.
Other operating expenses. Other operating expenses decreased $872 million,
or 42%, to $1.208 billion in 2002 from $2.080 billion in 2001. Other operating
expenses primarily consist of (i) real estate and non-income tax related costs;
(ii) selling and general and administrative expenses ("SG&A"), including all
employee-related expenses and professional fees; (iii) bad debt expense; and
(iv) cost of goods sold for the cable installation and maintenance segment and
for the managed services products sold within the telecommunications services
segment.
SG&A expenses decreased substantially primarily as a result of our cost
reduction and restructuring efforts beginning in August 2001 and continuing
throughout 2002. SG&A decreased $482 million, or 39% to $744 million in 2002
from $1.226 billion in 2001. The restructuring efforts have resulted in
significant declines in employee-related costs including salaries, employee
benefits, temporary labor, commissions and travel. Approximately 5,300
employees have been terminated from employment since the restructuring plan
commenced in August 2001. Cost of sales decreased $238 million, or 51%, to $233
million in 2002 as a result of a reduction of installation projects in 2002 and
cost reduction efforts by the installation and maintenance segment, including
the reduction of manning costs and other fleet-related expenses. Cost of sales
related to installation revenue declined $214 million, or 69% to $97 million in
2002 from $311 million in 2001 as a result of these events. However, since a
significant portion of cost of sales related to installation revenue represents
fixed vessel-related costs, we were unable to reduce such costs enough to
offset the rapid decline in subsea installation projects and, as a result,
margins on installation projects were negative in 2002. Real estate and other
tax related costs declined 35% to $154 million in 2002, which reflects the
impacts of our anticipated exit of certain leased facilities as defined in our
restructuring plans. As of December 31, 2002, 247 sites, consisting of
approximately 4 million square feet, have been vacated under the real estate
restructuring plan. Non-income taxes, specifically taxes on owned real estate
and personal property, declined significantly in 2002 as a result of the
substantial impairment of our long-lived asset values. Bad debt expense also
declined from $124 million in 2001 to $77 million in 2002 as a result of
improvements in the aging of our account receivables, due to focused collection
efforts, enhanced evaluations of customers' creditworthiness and limits, and
recovery of significantly aged amounts through settlements. Cost reduction
efforts have continued in 2003 resulting in improved monthly recurring expense
levels versus those incurred at the end of 2002 primarily due to more headcount
reductions, site closings, information system maintenance cost reductions and
discretionary spending curtailments in areas such as consulting, travel and
other administrative costs.
Depreciation and amortization. Depreciation and amortization consists of
depreciation expense of our property and equipment, non-cash costs of capacity
sold, amortization of customer installation costs and goodwill and other
identifiable intangibles amortization. The $1.411 billion, or 91%, decrease in
depreciation and amortization expense in 2002 from 2001 was directly related to
the $17.181 billion impairment charges we recorded during the year ended
December 31, 2001, which are more fully described in the next paragraph.
Asset Impairment Charges. We evaluated our long-lived assets for impairment
under the provisions of SFAS No. 121 in the fourth quarter of 2001 due to the
continuing economic slowdown, the significant cost reduction and restructuring
efforts across our business, the sale of three businesses by us between January
2001 and December 2001 (GlobalCenter, ILEC and IPC), the change in our business
outlook due primarily to the overcapacity in the telecommunications market, and
difficulty in obtaining new revenue to fill our recently completed global IP
network.
70
Our bankruptcy filing on January 28, 2002 and the capital structure
contemplated for our planned reorganization further demonstrated impairments in
our long-lived asset carrying values. As a result of the cumulative impact of
these factors, we recorded a long-lived asset impairment charge of $16.636
billion for continuing operations in the fourth quarter of 2001 in accordance
with the guidelines set forth under SFAS No. 121, which resulted in a full
write-off of $8.028 billion of goodwill and other identifiable intangibles and
a remaining net carrying value of property and equipment for continuing
operations of $1.000 billion, following a tangible asset impairment charge of
$8.608 billion. In addition, when we were actively seeking to sell our Global
Marine business, we recorded an impairment charge in the third quarter of 2001
relating to the entire net carrying value of remaining goodwill and other
identifiable intangibles of $545 million in our installation and maintenance
segment as we believed these assets would not be realized through the sale of
the business, based upon available information.
Restructuring Charges. Restructuring charges were $95 million in 2002
(reflected in reorganization items, net, in accordance with SOP 90-7) compared
to $410 million in 2001. In August 2001, we announced our original
restructuring efforts centered around the realignment and integration of our
then regional organization structure into integrated global functions such as
network operations, customer care, information systems, finance and sales and
marketing. This effort continued throughout 2002 following our bankruptcy
filing on January 28, 2002 and increased cost reduction efforts.
The employee-related costs included in the restructuring charges for the
years ended December 31, 2002 and 2001 were $51 million and $71 million,
respectively. This is composed primarily of severance-related payments and
outplacement costs for all employees involuntarily terminated. The costs
related to facility closures included in the restructuring charges for the
years ended December 31, 2002 and 2001 were $51 million and $270 million,
respectively. In 2001, the $270 million of costs included continuing building
lease obligations and estimated decommissioning costs and broker commissions
for 130 sites, offset by anticipated third-party sublease payments. It also
includes $63 million of impairments to the facility-related assets such as
leasehold improvements and abandoned office equipment related to these facility
closures. In 2002, the net costs related to facility closures included
continuing building lease obligations and estimated decommissioning costs and
broker commissions for an additional 133 sites, offset by anticipated
third-party sublease payments. The charge initially recorded was further
reduced by the release of the related reserve for United States facilities
rejected through the chapter 11 bankruptcy process and other sites terminated
with the landlords. In 2002, we filed petitions in the Bankruptcy Court to
reject the operating leases for 131 sites in the United States, resulting in a
rejection claim liability of $66 million as of December 31, 2002, included in
our liabilities subject to compromise.
As of December 31, 2002, 247 sites, consisting of approximately 4 million
square feet, have been vacated and approximately 5,300 employees have been
terminated as a result of these restructuring plans. These adopted plans and
the related liabilities include an additional 16 sites, consisting of
approximately 118,000 square feet, identified for closure during 2003.
Other components of our consolidated statements of operations for the years
ended December 31, 2002 and 2001 include the following:
December 31, December 31, Increase/
2002 2001 (Decrease)
------------ ------------ ----------
(in millions)
Equity in income (loss) of affiliates, net....... $ 6 $ (94) $ 100
Interest income.................................. 2 21 (19)
Interest expense................................. (75) (506) (431)
Loss from write-down and sale of investments, net -- (2,041) 2,041
Other income, net................................ 198 7 191
Reorganizations items, net....................... (95) -- 95
Benefit for income taxes......................... 102 1,847 (1,745)
Income (loss) from discontinued operations....... 950 (1,916) 2,866
Preferred stock dividends........................ (19) (238) (219)
71
Equity in income (loss) of affiliates, net. Equity in income (loss) of
affiliates, net increased $100 million in 2002 from 2001. This change is
primarily a result of the $114 million impairment charge recognized in the
fourth quarter of 2001 related to an equity investment held in Latin America.
The remaining activity is primarily related to three joint ventures in the
installation and maintenance segment.
Interest income. Interest income declined $19 million, to $2 million in 2002
from $21 million in 2001. The interest income in 2002 reflects interest for the
month of January 2002 only for the GC Debtors. Interest income earned following
the commencement of our bankruptcy proceedings is reflected in reorganization
items, net, in accordance with the provisions of bankruptcy reporting pursuant
to SOP 90-7.
Interest expense. Interest expense declined $431 million, or 85% to $75
million in 2002 from $506 million in 2001. The decrease in interest expense is
directly attributable to our bankruptcy filing on January 28, 2002. We ceased
accruing for all interest on our outstanding debt following the date of the
commencement of our bankruptcy proceedings in accordance with the provisions of
bankruptcy reporting contained within SOP 90-7. The balance of the 2002 amount
represents interest expense relating to capitalized lease obligations. Interest
expense will remain substantially lower than 2001 levels in 2003 as we will
cancel indebtedness of more than $6.6 billion in connection with the Plan of
Reorganization.
Loss from write-down and sale of investments. As of December 31, 2001,
substantially all of the carrying value of our strategic investment portfolio
was permanently impaired in accordance with the provisions of SFAS No. 115. As
discussed more fully below, the $2.041 billion in losses incurred in 2001
relate to the permanent impairment charges of $2.097 billion and realized gains
of $67 million, offset by realized losses of $11 million in our marketable
securities portfolio. The permanent impairment charges includes $1.918 billion
relating to the full impairment of our investment in the common stock of Exodus
as no recovery was expected as a result of its bankruptcy filing in September
2001.
Other income, net. Other income increased $191 million to $198 million in
2002, from $7 million in 2001. This increase is primarily attributable to the
extinguishment of obligations under certain long-term and prepaid lease
agreements for services on our network either through customer settlement
agreements or through the bankruptcy proceedings of the customers that had
purchased such services from us. As a result, we have no further requirement to
provide services and, therefore, the remaining deferred revenue relating to
these agreements of $97 million was realized into "other income". The
derecognition of these liabilities is in accordance with the guidelines
described within SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities" and did not result in any
revenue recognition. The balance of the increase in other income is primarily
attributable to foreign currency transaction gains (losses).
Reorganization Items. Reorganization items represent expenses and income
that are incurred or realized as a direct result of the reorganization under
bankruptcy that commenced on January 28, 2002. Reorganization items are
reported separately in the consolidated statements of operations in accordance
with the provisions of SOP 90-7. The reorganization items in 2002 were
comprised of (i) costs related to the employee retention programs, (ii)
non-cash charges relating to the write-off of deferred financing fees, (iii)
retained professional fee costs associated with the reorganization, (iv)
interest income attributable to increased GC Debtors' cash balances as a result
of the bankruptcy, (v) adjustments to liabilities subject to compromise to the
settlement claim amounts allowed by the Bankruptcy Court, and (vi) costs
incurred in connection with our continued restructuring efforts (see
"Restructuring Charges" above for further discussion).
Benefit for income taxes. Benefits from income taxes decreased $1.745
billion to $102 million in 2002. The 2002 income tax benefit is primarily
attributable to the United States income tax refunds received in the fourth
quarter of 2002 and in the third quarter of 2003 as a result of loss carrybacks
from 2001 and 2002 to prior tax years. The income tax benefit in 2001 is
primarily attributable to the reversal of $535 million of deferred tax expense
recorded in 2000 (see "Restatements of Previously Issued Financial Statements"
above) and the use of losses and other tax attributes of continuing operations
to offset the taxes provided for on the sales and results of operations of the
ILEC and IPC of $1.096 billion reflected in the results of discontinued
operations.
72
Income (loss) from discontinued operations. Income from discontinued
operations in 2002 increased $2.886 billion to $950 million when compared with
2001. This increase was primarily attributable to the $1.184 billion gain on
abandonment of Asia Global Crossing. We have classified the financial position
and results of operations of Asia Global Crossing as discontinued operations
for all periods presented in the accompanying consolidated financial statements
in accordance with SFAS No. 144. The net loss of Asia Global Crossing's
operations decreased $1.982 billion to $236 million in 2002 from $2.218 billion
in 2001. The loss from Asia Global Crossing's operations in 2002 was primarily
due to interest costs of $100 million, and operating expenses of $205 million,
offset by revenue of $93 million. The 2001 loss from Asia Global Crossing's
operations was primarily a result of long-lived asset impairment charges of
$2.399 billion, equity investment impairment of $450 million and operating
losses of $300 million offset by $949 million in losses to minority interests
of Asia Global Crossing. The Asia Global Crossing impairment charges were
recorded in accordance with the provisions of SFAS No. 121 and APB No. 18 in
the fourth quarter of 2001. These impairment charges represented the shortfall
between Asia Global Crossing's long-lived asset net carrying values from the
discounted future cash flow stream and the estimated long-lived asset fair
value in the sales of Asia Global Crossing, its PCL subsidiary and its 50%
interest in the HGC joint venture to Asia Netcom, Pivotal, and Hutchison,
respectively. The aggregate impairment charges of $2.399 billion and $450
million in the year ended December 31, 2001, which are included as
"discontinued operations" in the accompanying consolidated statements of
operations, include the full impairment of $100 million in goodwill and other
identifiable intangibles, the write-off of $450 million in connection with Asia
Global Crossing's 50% investment in the HGC joint venture and tangible asset
impairment charges of $2.299 billion, including PCL.
In 2001, we sold our GlobalCenter, ILEC and IPC businesses. The ILEC and IPC
businesses were sold for losses of $206 million and $120 million, respectively.
The gain on sale of GlobalCenter was deferred as discussed above in
"Restatements of Previously Issued Financial Statements." In addition, a
deferred tax expense of $600 million was recorded in the third quarter of 2000
in connection with the sale of the ILEC. This deferred tax expense and related
liability restated in the third quarter of 2000 are completely reversed in the
second quarter of 2001 to deferred tax benefit from discontinued operations.
The corresponding current tax liability was offset by losses and other tax
attributes of continuing operations in the fourth quarter of 2001
Preferred stock dividends. Preferred stock dividends decreased $219 million
to $19 million in 2002. We ceased accruing all preferred stock dividends on
January 28, 2002 upon our filing for bankruptcy protection in accordance with
SOP 90-7.
Results of Operations for the Years Ended December 31, 2001 and December 31,
2000
Revenues. Total revenue in 2001 increased to $3.618 billion from $3.505
billion in 2000. The increase was primarily due to an increase in the traffic
on our network in the telecommunications services segment and an increase in
the number of installation projects of subsea networks. The growth in network
traffic was a direct result of the expansion of our sales force and our service
offerings.
73
Actual reported revenues for the years ended December 31, 2001 and 2000
reflect the following changes by segment:
December 31, December 31, Increase/
2001 2000 (Decrease)
------------ ------------ ----------
Restated
(in millions)
Commercial....................................................... $1,395 1,242 153
Consumer......................................................... 110 169 (59)
Carrier:
Service revenue.................................................. 1,519 1,360 159
Sales-type lease revenue......................................... 18 312 (294)
Amortization of prior period IRU's............................... 80 25 55
------ ------ -----
Total carrier.................................................... 1,617 1,697 (80)
------ ------ -----
Telecommunications services segment revenue...................... 3,122 3,108 14
Installation and maintenance segment revenue, net of eliminations 537 397 140
------ ------ -----
Total revenues................................................... $3,659 $3,505 $ 154
====== ====== =====
Commercial revenue increased $153 million, or 12%, in 2001 as a result of
our investments in our sales force, support functions and service platforms in
the second half of 2000 and into the early part of 2001. In addition, the sales
in 2000 include the commercial revenue from IXnet (specifically customers in
the financial markets sector) for only 7.5 months. In addition, our
conferencing unit experienced almost 20% revenue growth in 2001 over 2000 with
our voice product sales exceeding $173 million during the period. Following the
September 11, 2001 terrorist attacks, significant volume growth in conferencing
occurred due to the sudden and rapid decline in business travel. Long distance
voice services experienced declines primarily due to significant price declines
occurring in the industry throughout the period. We also experienced customer
attrition at a rate of 3- 4% per month, primarily at the low end of the
commercial market.
We were not investing in our Consumer business during the year ended
December 31, 2001 as we determined that this business was not core to our
strategy and plans for the period. There are no plans to grow this business as
the costs to maintain and acquire customers are expected to exceed the benefits
to our future profitability. In addition, price levels continue to decline as a
result of new competitive entry and substantial increases in capacity.
Carrier service revenue increased $159 million, or 12%, in 2001 from 2000
primarily driven by sales to new carrier and reseller customers in North
America and significant growth in the international voice markets in Europe.
This was partially offset by decreases in revenue generated by data products,
driven primarily by the continued migration of Level 3 off of our network onto
its own network. Revenue, excluding sales-type leases, with Level 3 decreased
$122 million, or 90% in 2001 from 2000 levels. Excluding the impact of the
Level 3 migration, there was considerable growth in IP transit service and
private line service revenue with carriers. The competitive landscape increased
in intensity during the year ended December 31, 2001 as a result of the
increased available capacity in the telecommunications sector as a whole
resulting in substantial price decreases on an annualized basis of up to 50% in
such data capacity products as private line service, international private line
service and IP transit service. Pricing competition was also intense in both
domestic and international long distance voice where volumes were significantly
higher in 2001 but prices decreased approximately 30% on an annualized basis.
Sales-type lease revenue decreased $294 million, or 94% in 2001 primarily
due to the changes in our service contract arrangements with our customers in
the IRU market for capacity. Historically, many of our service contracts for
IRU capacity contained a bargain purchase option, therefore qualifying the
revenue for sales-type lease treatment. During 2000, trends in the market and
changes to our standard service contracts disqualified almost all
74
IRU contracts from treatment as sales-type leases. In 2000, $242 million, or
78% of the $312 million of sales-type lease revenue, was contracted for with
only four customers. In 2001, only one contract, amounting to $18 million,
qualified for sales-type lease accounting.
Revenue recognized related to the amortization of IRU contracts over their
respective lives increased $55 million, or 220%, in 2001 from 2000 levels. This
is reflective of the significant volume of IRU contracts signed in 2000 and
early 2001. This change is also related to changes in accounting guidance that
became effective in the third quarter of 1999. Prior to that period, revenue
from capacity sales was recognized upon activation of the circuits, resulting
in up-front revenue recognition. Therefore, in 2000 there was less IRU
amortization revenue recognized in the period as compared with 2001 given that
there were fewer IRU contracts with carry forward amortizing revenue at January
1, 2000 than at January 1, 2001.
Installation revenue increased $106 million, or 41%, in 2001 to $364 million
from $258 million in 2000. This was primarily due to the unprecedented growth
in subsea construction builds across the globe. This included several new
system builds in the Atlantic, Latin America and Asia/Pacific regions.
Maintenance revenue also increased $34 million, or 24%, in 2001 to $173 million
from $139 million in 2000. This was primarily due to more systems providing
subsea capacity worldwide that required continuous maintenance once they were
ready for service.
Operating Expenses. Components of operating expenses for the years ended
December 31, 2001 and 2000 were as follows:
December 31, December 31, Increase/
2001 2000 (Decrease)
------------ ------------ ----------
Restated
------------
(in millions)
Cost of access and maintenance $ 2,152 $1,791 $ 361
Other operating expenses...... 2,080 1,752 328
Depreciation and amortization. 1,548 1,280 268
Goodwill impairment charges... 8,573 -- 8,573
Asset impairment charges...... 8,608 -- 8,608
Restructuring charges......... 410 -- 410
------- ------ -------
Total operating expenses... $23,371 $4,823 $18,548
======= ====== =======
Cost of access and maintenance. COA&M increased $361 million, or 20%, in
2001 over 2000. Cost of access increased $325 million, or 20%, to $1.961
billion in 2001 from $1.636 billion in 2000, primarily due to increases in
usage based voice charges with other carriers to originate and/or terminate
traffic necessary to meet the increased level of voice revenue. Third party
maintenance expenses increased $36 million, or 23%, in 2001 from 2000 primarily
as a result of increased maintenance costs relating to SAC and PEC which were
not operational for the entire year in 2000 as they were in 2001.
Other operating expenses. Other operating expenses increased $328 million,
or 19%, to $2.080 billion in 2001 from $1.752 billion in 2000. Other operating
expenses primarily consist of (i) real estate and tax related costs; (ii) SG&A;
(iii) bad debt expense; (iv) marketing and promotional costs including
advertising and (v) cost of goods sold for the cable installation and
maintenance segment and for the managed services products sold within the
telecommunications services segment. SG&A costs increased over the prior year
primarily due to increased employee related expenses as a result of a full year
impact for IXnet compared with approximately half a year in 2000 and headcount
growth, primarily in the sales force and sales support functions. Real estate
costs were higher in 2001 than in 2000 for the following reasons: (i)
additional sales force locations; (ii) full year impact of completed networks
in Europe and Latin America that were not operational for the full year in
2000; and (iii) expansion of leased real estate and related costs for
administrative and technical real estate in the United States. Cost of sales
increased $126 million, or 37%, primarily due to the costs necessary to fulfill
the 41% increase in installation revenue in 2001 from 2000. Bad debt expense
increased $55 million, or 80%, to $124 million in 2001 from $69 million in 2000
as a result of several bankruptcies of significant carrier customers and an
overall deterioration in the aging of accounts receivables in the U.K. and the
U.S.
75
Depreciation and amortization. Depreciation and amortization consists of
depreciation expense of our property and equipment, non-cash costs of capacity
sold, amortization of customer installation costs and goodwill and other
identifiable intangibles amortization. The $268 million, or 21%, increase in
depreciation and amortization in 2001 from 2000 is primarily related to
increases in goodwill amortization and depreciation on property and equipment,
offset by a reduction in non-cash cost of capacity sold in the period.
Depreciation expense increased $353 million, or 59%, to $952 million in 2001
from $599 million in 2000 and is a result of the completion of several segments
of our network that were not depreciated for a full year in 2000 in addition to
significant additions to the North American network to meet the capacity
demands of our traffic. Goodwill and other identifiable intangibles
amortization increased $118 million, or 26%, in 2001 to $580 million from $462
million primarily due to a full year of amortization relating to the IXnet
acquisition completed on June 14, 2000, offset by only nine months of
amortization of goodwill and other intangibles relating to Global Marine, prior
to the write-off of $545 million in Global Marine goodwill and intangibles in
the third quarter of 2001. Non-cash cost of capacity sold resulting from
capacity sales under sales-type lease arrangements decreased $203 million in
2001 to $16 million from $219 million in 2000 as a direct result of the $294
million decline in sales-type lease revenue.
Asset Impairment Charges. We evaluated our long-lived assets for impairment
under the provisions of SFAS No. 121 in the fourth quarter of 2001 due to the
continuing economic slowdown, significant cost reduction and restructuring
efforts across the entire business, the sale of three businesses by us between
January 2001 and December 2001 (GlobalCenter, ILEC and IPC), the change in the
business outlook due primarily to the overcapacity in the telecommunications
market, and difficulty in obtaining new revenue to fill our recently completed
global IP network. In addition, the bankruptcy filing on January 28, 2002 and
the capital structure within our planned reorganization demonstrated
impairments in our long-lived asset carrying values. As a result of the
cumulative impact of these factors, we recorded a long-lived asset impairment
charge of $16.636 billion for continuing operations in the fourth quarter of
2001 in accordance with the guidelines set forth under SFAS No. 121, which
resulted in a full write-off of $8.028 billion of goodwill and other
identifiable intangibles and a remaining net carrying value of property and
equipment for continuing operations of $1.0 billion, following a tangible asset
impairment charge of $8.608 billion. In addition, when we were actively seeking
to sell our installation and maintenance business, we recorded an impairment
charge in the third quarter of 2001 relating to the entire net carrying value
of remaining goodwill and other identifiable intangibles ($545 million) in our
installation and maintenance segment as it was believed these assets would not
be realized through the sale of the business, based upon available information.
Restructuring Charges. We commenced significant restructuring efforts in
August 2001 resulting in charges totaling $410 million during the year ended
December 31, 2001. These costs related to our initial efforts to overhaul our
cost structure. No such efforts occurred during 2000. As of December 31, 2001,
restructuring plans included the termination of approximately 2,800 employees
and the vacating or restructuring of approximately 130 site locations. The
components of this charge consisted of $71 million related to employee
terminations, $270 million related to facility closures, and $69 million
related to various other restructuring items, including a $53 million write-off
of information systems costs which we would no longer be utilizing as a result
of changes in system integration efforts.
76
Other significant components of our consolidated statements of operations
for the years ended December 31, 2001 and 2000 include the following:
December 31, December 31, Increase/
2001 2000 (Decrease)
------------ ------------ ----------
Restated
------------
(in millions)
Equity in income (loss) of affiliates, net.............................. $ (94) $ (45) $ (49)
Interest income......................................................... 21 103 (82)
Interest expense........................................................ (506) (383) 123
Loss from write-down and sale of investments............................ (2,041) -- (2,041)
Gain from sale of subsidiary's common stock and related subsidiary stock
sale transactions..................................................... -- 303 (303)
Other (expense) income, net............................................. 7 (69) 76
Benefit (provision) for income taxes.................................... 1,847 (376) 2,223
Loss from discontinued operations....................................... (1,916) (1,008) 908
Cumulative effect of change in accounting principle..................... -- (9) 9
Preferred stock dividends............................................... (238) (221) 17
Charge for conversion and redemption of preferred stock................. -- (92) 92
Equity in income (loss) of affiliates, net. Equity in income (loss) of
affiliates, net, decreased $49 million in 2001 from 2000. This decrease is
primarily a result of the $114 million impairment charge recognized in the
fourth quarter of 2001 related to an equity investment in Latin America. The
remaining activity is primarily related to equity in the income of three joint
ventures in the installation and maintenance segment.
Interest Income. Interest income decreased to $21 million from $103 million
in 2000. The decrease in interest income correlates with the reduction in our
average cash and cash equivalents' balances and reduction in interest rates.
Interest Expense. Interest expense increased $123 million, or 32%, in 2001
from levels in 2000. The increase in interest expense was primarily
attributable to an increase in our average outstanding indebtedness in 2001
compared to 2000. In January 2001, we issued $1.0 billion in 8.7% senior
unsecured notes and average borrowings under the Corporate Credit Facility
exceeded levels on an annualized basis from 2000. Interest under the Corporate
Credit Facility amounted to $109 million in 2001 versus $94 million in 2000.
The newly issued 8.7% notes resulted in $80 million in new interest expense in
2001.
Loss from write-down and sale of investments. The loss from write-down and
sale of investments available for sale increased in 2001 primarily due to the
100% write-off of our 19.6% investment in the common stock of Exodus
Communications upon Exodus' chapter 11 bankruptcy filing in September 2001. The
Exodus stock, which we received in January 2001 in connection with the sale of
our subsidiary, GlobalCenter, was valued at $1.918 billion at the time of its
receipt. The additional loss represents write-downs of $179 million recorded
against the balance of the available for sale securities held by us in 2001.
The write downs were offset by gains realized on the sales of securities of $67
million, partly reduced by $11 million of realized losses from sales. In 2000,
we realized gains of $19 million and losses of $19 million for a net impact of
$0 million from the sale of marketable securities.
Gain from sale of subsidiary's common stock and related subsidiary stock
sale transactions. The $303 million gain from sale of subsidiary's common stock
resulted from our subsidiary, Asia Global Crossing, completing its initial
public offering on October 12, 2000, as well as related subsidiary stock sale
transactions.
Other income (expense), net. Other income (expense), net increased $76
million to $7 million in 2001 from $(69) million in 2000. This increase is
primarily due to changes in gains and losses resulting from foreign currency
impacts on transactions in 2001 compared with 2000 and the classification of a
$24 million charge in
77
connection with the early extinguishment of debt in 2000, previously recorded
as a extraordinary loss to other income (expense), net, in accordance with SFAS
No. 145. See Note 3, "Basis of Presentation and Significant Accounting
Policies," to the consolidated financial statements included in this annual
report on Form 10-K for discussion of the retroactive reclassification relating
to this item.
Benefit (provision) for income taxes. We realized a net benefit from taxes
in 2001 of $1.847 billion compared with a $376 million provision for taxes in
2000. The tax benefit in 2001 includes the reversal of $535 million of deferred
taxes recorded in 2000 (see "Restatements of Previously Issued Financial
Statements" above) as a result of the sale of Global Center. In the third
quarter of 2001, the $535 million was reversed as a result of the bankruptcy
filing of Exodus in September 2001, which resulted in the write-off of our
$1.918 billion investment in the common stock of Exodus, received in connection
with the sale of Global Center in January 2001. The remaining tax benefit from
continuing operations is primarily attributable to the use of losses and other
tax attributes to offset the taxes provided for the sales and results of
operations of the ILEC and IPC of $1.096 billion reflected in the results of
discontinued operations.
Income (loss) from discontinued operations. The loss from discontinued
operations increased $908 million in 2001 to $1.916 billion, compared to $1.008
billion in 2000. In 2001, we sold our GlobalCenter, ILEC and IPC businesses. As
previously discussed, the ILEC and IPC were sold for losses of $206 million and
$120 million, respectively, and the $126 million gain on the sale of
GlobalCenter was deferred and amortized as a reduction of other operating
expenses from continuing operations over a ten year period (see "Restatements
of Previously Issued Financial Statements" above).
The net loss from Asia Global Crossing increased $2.101 billion to $2.218
billion in 2001 from $117 million in 2000. The 2001 loss from Asia Global
Crossing's operations was primarily a result of long-lived asset impairment
charges of $2.399 billion, equity investment impairment of $450 million and
operating losses of $300 million offset by $949 million in losses attributable
to minority interests of Asia Global Crossing. The losses were less in 2000
primarily as a result of interest costs on the Asia Global Crossing senior
notes, which were issued in connection with its initial public offering in
October 2000. The Asia Global Crossing impairment charges were recorded in
accordance with the provisions of SFAS No. 121 and APB No. 18 in the fourth
quarter of 2001. These impairment charges represented the shortfall between the
Asia Global Crossing long-lived asset net carrying values from the discounted
future cash flow stream and the estimated long-lived asset fair value in the
sales of Asia Global Crossing, its PCL subsidiary and its 50% interest in the
HGC joint venture to Asia Netcom, Pivotal, and Hutchison, respectively. The
aggregate impairment charges of $2.399 billion, and $450 million, which are
included as "discontinued operations" in the accompanying consolidated
statements of operations, include the full impairment of $100 million in
goodwill and other identifiable intangibles, the write-off of $450 million in
connection with Asia Global Crossing's 50% investment in the HGC joint venture
and tangible asset impairment charges of $2.299 billion, including PCL.
Offsetting the impact of Asia Global Crossing's results period to period is
the impact of GlobalCenter's operating losses in 2000 of $399 million due
primarily to significant expansion of its media distribution centers and their
related expenses. GlobalCenter was sold on January 11, 2001 and as a result had
minimal impact to the loss from discontinued operations for the year ended
December 31, 2001.
The ILEC was sold on June 30, 2001 and therefore only six months of results
are reflected in 2001, resulting in a $10 million loss, excluding the $600
million deferred tax expense reversal and $206 million loss on sale, compared
with a full year of results in 2000, resulting in $91 million in income
excluding the $600 million deferred tax expense. IPC's operating results, which
exclude the $120 million loss on sale, increased $24 million to $22 million
income in 2001 from a $2 million loss in 2000, primarily due to the writeoff of
deferred finance costs of $18 million in 2000.
As discussed above, a deferred tax expense of $600 million was recorded in
the third quarter of 2000 in connection with the sale of ILEC (see
"Restatements of Previously Issued Financial Statements" above for further
discussion). This deferred tax expense and related liability restated in the
third quarter of 2000 were
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completely reversed in the second quarter of 2001 to deferred tax benefit from
discontinued operations. The corresponding current tax liability was offset by
losses and other tax attributes of continuing operations in the fourth quarter
of 2001.
Cumulative effect of change in accounting principle. As of 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 million, and increased
amortization expense by approximately $11 million. The cumulative impact on the
results of prior years was reflected as a $9 million cumulative effect of a
change in accounting principle in accordance with the adoption provisions of
this bulletin.
Preferred stock dividends. Preferred stock dividends recognized in 2001
increased $17 million over 2000 as all of the related issues were outstanding
for the entire year. A preferred stock issuance occurred in January and April
of 2000 and therefore did not result in a full 12 month dividend accrual in
2000.
Liquidity and Capital Resources
Financial Condition and State of Liquidity
At December 31, 2002, our available liquidity consisted of $423 million of
unrestricted cash and cash equivalents. In addition, we held $332 million ($5
million of which is included in long-term other assets) in restricted cash.
This amount is composed of (i) $305 million, representing the $301 million in
net proceeds from the sale of IPC in December 2001 plus interest, the entire
amount of which will be distributed to the Bank Lenders upon emergence in
accordance with the Plan of Reorganization, (ii) $13 million restricted cash
held in a Global Crossing account in Bermuda under the control of the Joint
Provisional Liquidators ("JPLs"), such funds being a contingency fund for the
provisional liquidators, with any remainder to be distributed to the creditors
upon emergence in accordance with the Plan of Reorganization and (iii) $14
million, primarily attributable to collateral relating to certain guarantees,
performance bonds and deposits.
Our working capital improved $7.521 billion to $138 million at December 31,
2002 compared to December 31, 2001. This improvement was principally due to the
impact of our January 28, 2002 bankruptcy filing, which resulted in $6.589
billion in indebtedness (classified as current in the December 31, 2001
consolidated balance sheet as a result of bankruptcy default events) along with
approximately $1.4 billion in additional current liabilities changing
classification to liabilities subject to compromise in the December 31, 2002
consolidated balance sheet in accordance with the provisions of SOP 90-7. The
liabilities subject to compromise are being restructured in accordance with the
Plan of Reorganization.
Since the fourth quarter of 2001, we have reduced the amount of cash
required to fund our operations. Nonetheless, our unrestricted cash balances
have continued to decline due primarily to ongoing operating losses, severance
payments, settlement payments to vendors and significant costs incurred in
connection with the bankruptcy proceedings. At October 31, 2003, we had $213
million in unrestricted cash and cash equivalents. Management is currently
evaluating our financial forecast in light of anticipated sources of capital.
We currently expect that we will need to obtain up to $100 million in
financing to fund our anticipated liquidity requirements through the end of
2004. We are currently seeking to arrange a working capital facility or other
financing to provide us with this necessary liquidity. The indenture for the
New Senior Secured Notes permits us to incur up to $150 million in additional
debt under one or more working capital facilities secured by first priority
liens on our assets. If we cannot arrange a working capital facility or raise
other financing by December 31, 2003, ST Telemedia has indicated its intention
to provide us with up to $100 million of financial support to fund our
operating needs on such terms and conditions as we and ST Telemedia may agree.
(ST Telemedia's intention is based on our commitment to adhere to an operating
plan requiring no more than $100
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million in additional funds in 2004.) If provided, this financial support could
be in the form of (1) a guarantee or other support by ST Telemedia in respect
of borrowings by us under a working capital facility or other financing or (2)
a subordinated loan from ST Telemedia. The indenture for the New Senior Secured
Notes does not permit ST Telemedia to lend to us directly on a secured or
senior basis.
While ST Telemedia has indicated its intention to provide financial support
to us (in addition to its $250 million equity investment and its $200 million
investment in the New Senior Secured Notes) and management expects ST Telemedia
to make such financial support available, ST Telemedia does not have any
contractual obligation to provide financial support to us, and we can provide
no assurance that ST Telemedia will provide any such financial support.
Moreover, we can provide no assurance that we will be able to arrange a working
capital facility on terms acceptable to us or that provides borrowing
availability sufficient to meet our liquidity needs.
In addition to the $150 million in debt that we may incur under secured
working capital facilities, the indenture for the New Senior Secured Notes
permits us to incur up to an aggregate of $50 million in purchase money debt
and capital lease obligations and up to $10 million in debt for general
corporate purposes. We are also permitted to incur additional subordinated debt
if we satisfy the leverage ratio specified in the indenture, although we do not
expect to satisfy such ratio for the foreseeable future.
As a holding company, all of our revenues are generated by our subsidiaries
and substantially all of our assets are owned by our subsidiaries. As a result,
we are dependent upon dividends and inter-company transfer of funds from our
subsidiaries to meet our debt service and other payment obligations. Our
subsidiaries are incorporated and are operating in various jurisdictions
throughout the world. A number of our subsidiaries have cash on hand that
exceeds their immediate requirements but that cannot be distributed or loaned
to us or our other subsidiaries to fund our or their operations due to
contractual restrictions or legal constraints related to the solvency of such
entities. These restrictions could cause us or certain of our other
subsidiaries to become and remain illiquid while other subsidiaries have
sufficient liquidity to meet their liquidity needs.
A number of our subsidiaries that are not debtors in our bankruptcy
proceedings have significant capital lease obligations that will not be
discharged in our bankruptcy proceedings. As of December 31, 2002, the
aggregate amount of capital lease obligations of these subsidiaries was $278
million. These subsidiaries were generally not included in our U.S. chapter 11
bankruptcy proceedings since such inclusion may have triggered the commencement
of liquidation proceedings against such entities in jurisdictions that do not
recognize an equivalent of a chapter 11 reorganization. Some of these
subsidiaries could be forced into local insolvency proceedings if their
operating results and financial condition do not improve.
A default by any of our subsidiaries under any capital lease obligation or
debt obligation totaling more than $2.5 million, as well as the bankruptcy or
insolvency of any of our subsidiaries, could trigger cross-default provisions
under the indenture for the New Senior Secured Notes and may trigger
cross-default provisions under any working capital facility or other financing
that we may arrange. This could lead ST Telemedia (or transferee noteholders)
or other lenders to accelerate the maturity of their relevant debt instruments.
Global Marine has experienced significant declines in revenues since 2001
and is expected to experience negative cash flows during the next year. If
Global Marine is unable to increase its revenues through new business and
improve its cash flow performance or is unable to raise additional funding, it
may default on its capital lease and other obligations. Additional funding may
not be available to Global Marine on acceptable terms or at all, particularly
since Global Marine does not own significant unencumbered assets that it could
use as collateral.
A significant portion of Global Marine's current cash outflows represent
payments under ship charters and capital lease obligations. Global Marine
expects to be in default under a financial ratio covenant contained in two of
these agreements by the end of 2003. Global Marine is in discussions with the
counterparties to these agreements to address the expected breach of such
financial covenant, and is discussing with its principal ship
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charter creditors a possible restructuring of the payment schedules under its
agreements with such creditors. If Global Marine is unsuccessful in these
efforts, these parties could terminate such agreements and accelerate Global
Marine's required payments thereunder. Such an action would trigger
cross-default provisions in Global Marine's other ship charters and capital
lease obligations, as well as the cross-default provisions under the indenture
for the New Senior Secured Notes and other financing agreements of ours.
We expect our available liquidity to decline in 2004 due in part to exit
cost requirements under our Plan of Reorganization (with payment terms of up to
24 months) that will consume over $100 million of cash in 2004 and interest
payments on the New Senior Secured Notes. We believe the $250 million equity
infusion that we will receive from ST Telemedia upon our emergence from
bankruptcy under the Purchase Agreement, unrestricted cash and anticipated
operating cash flows, together with a working capital facility or other
financing providing for up to $100 million in available funds (which has not
yet been arranged), will provide adequate funding for us to pay our expected
operating expenses, fund our expected capital expenditures, meet our debt
service obligations and meet our restructuring cost requirements through at
least January 1, 2005. However, there can be no assurance that our operating
cash flows will improve as we anticipate, or that our operating cash flows and
any working capital facility or other financing that we may arrange will be
adequate to meet our anticipated liquidity requirements. As currently
projected, we will need to raise additional financing to offset our anticipated
liquidity needs for 2005 and thereafter. The market environment and our
financial condition will make it difficult for us to access the capital markets
for the foreseeable future. If we are unable to raise additional financing or
improve our operating results to achieve positive operating cash flows in the
future, we would be unable to meet our anticipated liquidity requirements.
Cash Management Impacts
Our unrestricted cash balances decreased $184 million to $423 million at
December 31, 2002 from $607 million at December 31, 2001. This decrease
primarily resulted from funding operating losses, cash capital expenditures and
bankruptcy-related costs (including professional fees for us, the JPLs and the
creditors, retention plan costs and severance and real estate exit costs
resulting from our restructuring efforts). We remain focused on managing our
cash with an objective of reducing the rate at which cash is used. These
efforts have been successful in decreasing the rate of depletion of our cash
resources and liquidity. The following are significant items and events that
have assisted in these efforts, in addition to our restructuring initiatives
described above:
. Commencing in the fourth quarter of 2001, we created an office of cash
management to approve all expenditures over one hundred thousand dollars;
this committee also established significant cash reporting tools for us.
. We minimized capital requirements by utilizing existing inventory on the
network to meet new customer capacity requirements.
. Vendor management efforts for non-GC Debtor companies in Europe and Latin
America were directed towards settlements resulting in cash savings.
. Dividend and interest payments on preferred stock and outstanding
indebtedness ceased upon our bankruptcy filing on January 28, 2002.
. Tax refunds were received relating to 2001 and 2002 U.S. income tax
returns and international value-added taxes.
. We improved operational processes and increased focus relating to the
collection of accounts receivable.
. We collected cash relating to pre-bankruptcy IRU contract commitments
with significant carrier customers.
Cash provided by operating activities was $49 million, which includes cash
paid for reorganization items of $292 million, for the year ended December 31,
2002 as compared to cash used in operating activities of
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$1.224 billion for the year ended December 31, 2001. This $1.565 billion
improvement, excluding reorganization items, in year-over-year operating cash
performance is primarily attributable to the working capital benefit from the
bankruptcy filing (i.e., payables due at filing were stayed), elimination of
interest costs under outstanding indebtedness, operating expense reductions
through restructuring efforts, collections under IRU contracts signed prior to
2002 and improved collections/working capital performance.
Cash used in investing activities was $235 million for the year ended
December 31, 2002 as compared to cash provided by investing activities of $914
million for the year ended December 31, 2001. The cash used in 2002 is
primarily attributable to capital expenditures and increases in restricted cash
as required by the bankruptcy. In 2001, we received $3.369 billion in proceeds
from the sale of our ILEC business, which was offset by $2.643 billion in
capital expenditures.
Cash provided by financing activities was $2 million for the year ended
December 31, 2002 and cash provided by financing activities was $151 million
for the year ended December 31, 2001. The financing activities in 2002 were
limited to $17 million in proceeds from short term borrowings offset by $15
million in principal payments under capital lease obligations. In 2001,
proceeds from borrowings under the Corporate Credit Facility and from the
issuance of the 8.7% senior notes were offset by repayment of the ILEC bridge
loan (described below under "--Financing History--Pre-Bankruptcy Filing") and
preferred stock dividend payments.
New Global Crossing Capital Structure
New Global Crossing Common and Preferred Stock
New GCL is authorized to issue 55,000,000 shares of common stock and
45,000,000 shares of preferred stock. Pursuant to our Plan of Reorganization,
upon our emergence from bankruptcy, New GCL will issue 15,400,000 shares of
common stock to our pre-petition creditors and will issue 6,600,000 shares of
New GCL Common Stock and 18,000,000 shares of New GCL Preferred Stock to ST
Telemedia. 18,000,000 shares of New GCL Common Stock will be reserved for the
conversion of shares of New GCL Preferred Stock to be held by ST Telemedia,
while an additional 3,478,261 shares of New GCL Common Stock will be reserved
for issuance under New GCL's 2003 Stock Incentive Plan, which is described
above in Item 5 under the caption "Equity Compensation Plan Information." A
description of New GCL's common and preferred stock is also contained in Item 5.
New Senior Secured Notes
Global Crossing North American Holdings, Inc. ("GC North American
Holdings"), one of our domestic subsidiaries, will issue $200 million aggregate
principal amount of the New Senior Secured Notes upon our emergence from
bankruptcy. On December 4, 2003, the Bankruptcy Court approved an amendment to
the Plan of Reorganization pursuant to which the New Senior Secured Notes will
be issued to ST Telemedia rather than to our banks and unsecured creditors,
with the gross proceeds of such issuance being distributed to such banks and
unsecured creditors in lieu of any interest in the New Senior Secured Notes.
The notes will mature on the third anniversary of their issuance. Interest will
accrue at 11% per annum and will be paid semi-annually.
The New Senior Secured Notes will be guaranteed by New GCL and all of its
material subsidiaries. The New Senior Secured Notes will be senior in right of
payment to all other indebtedness of New GCL and its material subsidiaries,
except that they will be equal in right of payment with (i) one or more working
capital facilities in an aggregate principal amount of up to $150 million (the
"Working Capital Facilities") and (ii) a limited amount of certain other senior
indebtedness. The New Senior Secured Notes will be secured by a first priority
lien on the stock and assets of Global Marine and Global Crossing (UK)
Telecommunications Limited and their material subsidiaries. In addition, any
sale of those entities will trigger mandatory prepayment of the New Senior
Secured Notes to the extent of the proceeds of any such sale. To the extent
proceeds of any such sales are other than cash, such proceeds shall be
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substituted for the collateral. Payment of the New Senior Secured Notes will
also be secured by a lien on substantially all the other assets of New GCL and
its material subsidiaries, such lien to be second in priority to the lien on
the Working Capital Facilities.
GC North American Holdings may redeem the New Senior Secured Notes, plus
accrued and unpaid interest, at any time without penalty or premium. In the
event of a change of control, GC North American Holdings will be obligated to
offer to redeem the notes at 101% of the outstanding principal amount plus
accrued and unpaid interest.
The New Senior Secured Notes will be issued under an indenture which
includes covenants and events of default that are customary for high-yield
senior note issuances. These provisions include (i) limitations on the
indebtedness of New GCL, payments to equity holders (including ST Telemedia),
investments, and sale and leaseback transactions, (ii) restrictions on asset
sales, consolidations, and mergers, (iii) limitations on granting additional
liens and (iv) cross-default provisions which could result in the acceleration
of our repayment obligations in the event that one or more of our subsidiary
companies were to default on certain other indebtedness. The covenants will
permit New GCL to enter into the Working Capital Facilities and will have
customary exceptions, baskets, and carve-outs. The form of the indenture is
filed as an exhibit to this annual report on Form 10-K.
The New Senior Secured Notes are being issued to ST Telemedia in a private
placement transaction pursuant to Section 4(2) of the Securities Act. The New
Senior Secured Notes will therefore be "restricted securities" for purposes of
the rules and regulations promulgated by the SEC under the Securities Act. In
addition, the initial holder of the New Senior Secured Notes (i.e., ST
Telemedia) will be a control person of the issuer of the securities within the
meaning of Section 2(11) of the Securities Act. ST Telemedia may sell or
otherwise transfer the New Senior Secured Notes only pursuant to a registration
statement declared effective by the SEC or an exemption from Securities Act
registration requirements. We have agreed to grant customary registration
rights to ST Telemedia in respect of the New Senior Secured Notes.
Financing History - Pre-Bankruptcy Filing
The following is a summary of debt and equity financing transactions that we
entered into in 2000 and 2001. Except as specified below, the debt and equity
described below remained outstanding on the date of our filing for relief under
chapter 11 of the Bankruptcy Code. Any such remaining debt and equity will be
extinguished upon consummation of our Plan of Reorganization.
Senior Secured Corporate Credit Facility
On July 2, 1999, our subsidiaries Global Crossing Holdings Ltd. ("GCHL") and
Global Crossing North America, Inc. ("GCNA") entered into a $3 billion senior
secured corporate credit facility (as amended, the "Corporate Credit Facility")
with several lenders. The proceeds from the Corporate Credit Facility were used
to repay existing indebtedness and fund capital expenditures. The Corporate
Credit Facility consisted of two term loans and a revolving credit facility,
which had an original maturity date of July 2, 2004. The term loans, totaling
$2 billion, were repaid in full in 1999. In August 2000, we amended and
restated the terms of the Corporate Credit Facility increasing the total
remaining amount of the Corporate Credit Facility from $1 billion to $2.25
billion, consisting of a $1 billion revolving credit facility due July 2004, a
$700 million revolving term facility that was to convert to a term loan in
August 2002 and mature in July 2004 and a $550 million term loan which was to
mature in June 2006. GCHL and GCNA were permitted to borrow under the Corporate
Credit Facility and utilize the borrowings for working capital and general
corporate purposes. Borrowings under this facility were secured by a pledge of
shares of many of our subsidiaries and were guaranteed by us and many of our
subsidiaries. In September 2001, we reached maximum borrowing capacity under
the Corporate Credit Facility with $2.205 billion in outstanding indebtedness
and $45 million in outstanding standby letters of credit. This position
remained unchanged as of December 31, 2001 except for the two principal
repayments of $1 million in September and December 2001 under the terms of the
term loan due 2006.
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On December 28, 2001, the Corporate Credit Facility lending group agreed to
waive potential violations of certain financial covenants under the facility
through February 13, 2002. The waiver resolved concerns that we would be out of
compliance with these covenants at the end of 2001. The waiver required us to
maintain certain weekly cash balances in order to keep the waiver in force. It
also applied additional restrictions on our ability to sell assets, incur
additional debt, pay certain bank fees and related expenses and pay dividends.
Short-Term Borrowings--Bridge Loan
On October 13, 2000, a direct subsidiary of GCNA entered into a $1 billion
unsecured credit facility ("Bridge Loan") due April 10, 2002 or upon closing or
abandonment of the sale of our ILEC business. The Bridge Loan was funded
through a commercial paper conduit. Interest was payable at a rate of LIBOR
plus 1%. Proceeds from the Bridge Loan were used to repay approximately $768
million of borrowings under the credit facilities incurred in connection with
our purchase of Racal Telecom in November 1999. As a result of the transaction,
we wrote-off approximately $24 million of deferred financing costs. We provided
a full valuation allowance related to this loss due to the uncertainty of
realizing any tax benefit. Proceeds from the Bridge Loan were also used for
general corporate purposes. On June 29, 2001, upon consummation of the sale of
the ILEC business, the Bridge Loan plus accrued interest was repaid in full
with the proceeds from the ILEC sale.
Short-Term Borrowings--Accounts Receivable Securitization
On June 15, 2001, certain of our indirect, wholly-owned subsidiaries (the
"AR Subsidiaries") entered into a receivables sale agreement (the "AR Sale
Agreement"), under which the AR Subsidiaries agreed to sell a defined,
revolving pool of trade accounts receivable to GC Mart LLC ("GCM"), our
wholly-owned, special purpose subsidiary. GCM was formed for the sole purpose
of buying and selling receivables generated by the AR Subsidiaries. Under the
Sale Agreement, the AR Subsidiaries agreed irrevocably and without recourse to
sell their accounts receivable to GCM. Under a separate receivables purchase
agreement, dated the same date, GCM agreed to sell, in turn, an undivided
percentage ownership interest in these receivables to an independent issuer of
receivables-backed commercial paper. Under this purchase agreement, the
receivables continued to be serviced by GCNA. Certain of the AR Subsidiaries
and GCNA's obligations under the $250 million receivables facility were
guaranteed by GCHL.
This two-step transaction was accounted for as a sale of receivables under
the provisions of SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities", which we adopted in June
2001. The provisions of SFAS No. 140 establishes the conditions for a
securitization to be accounted for as a sale of receivables, which include
requirements for an entity to be a qualifying special purpose entity, and for
the conditions under which a transferor will be deemed to have retained
effective control over transferred assets. On October 19, 2001 this arrangement
was terminated due to the reduction of our credit ratings by various rating
agencies. All prospective cash collections related to this facility, up to the
amount of cash received by us from the financing vehicle, were remitted solely
to the facility provider to satisfy the termination of this arrangement.
Consequently, none of our accounts receivable were securitized at December 31,
2002 and 2001.
Common and Preferred Stock Issuances
In January 2000, in connection with the formation of Hutchison Global
Crossing, we issued 400,000 shares of 6 3/8% cumulative convertible preferred
stock Series B at a liquidation preference of $1,000 per share, for proceeds of
$400 million, to Hutchison Whampoa Limited, the joint venture partner. Each
share of preferred stock was convertible into 22.2222 shares of our common
stock based on a conversion price of $45 per share. For further discussion of
this joint venture, see Item 7 under the caption "Dispositions--Asia Global
Crossing."
In April 2000, we issued 21,673,706 shares of our common stock in an
underwritten public offering for net proceeds of approximately $688 million. In
connection with this transaction, certain of our shareholders sold an aggregate
of 21,326,294 shares of common stock, for which we received no proceeds.
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In April 2000, we issued 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, we issued an additional
600,000 shares of 6 3/4% cumulative convertible preferred stock for net
proceeds of approximately $143 million. Each share of preferred stock was
convertible into 6.3131 shares of common stock, based on a conversion price of
$39.60. Dividends on the preferred stock were cumulative from the date of
original issuance and were payable on January 15, April 15, July 15 and October
15 of each year at an annual rate of 6 3/4%. The proceeds of these offerings
were used for general corporate purposes, principally capital for the expansion
of the business.
Unsecured Note Offering
In January 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 were used to refinance existing indebtedness consisting of term loans
and revolving loans under the Corporate Credit Facility.
Contractual Cash Commitments
The following table summarizes our contractual cash commitments at December
31, 2002:
Less than 1 - 3 3 - 5 More than
1 year years years 5 years
Total (2003) (2004-2005) (2006-2007) (2008-2045)
In millions ------- --------- ----------- ----------- -----------
Long-term debt obligations/(1)/. $ 6,641 $ 14 $2,255 $2,172 $2,200
Capital lease obligations....... 519 43 91 66 319
Operating lease obligations/(2)/ 1,428 166 298 225 739
Purchase obligations............ 2,090 681 899 253 257
------- ---- ------ ------ ------
Total........................... $10,678 $904 $3,543 $2,716 $3,515
======= ==== ====== ====== ======
- --------
/(1)/Under the Bankruptcy Code, actions to collect pre-petition indebtedness,
as well as most other pending litigation, are stayed and other contractual
obligations against the GC Debtors may not be enforced. Therefore, the
long-term debt obligations cash commitments shown above reflect cash
commitments which will not occur in future periods. See "Plan of
Reorganization" and "Accounting Impact of Reorganization" above in this
Item 7 for further details in addition to the commitments table below
which reflects the impact of our Plan of Reorganization.
/(2)/Under the Bankruptcy Code, we may assume or reject executory contracts,
including lease obligations. The operating lease commitments shown do not
reflect cash commitments for future periods relating to leases that we
rejected in 2002. The 2002 lease rejections eliminated $398 million in
future undiscounted operating lease cash commitments. In connection with
our rejection of these operating leases during 2002, we recorded a subject
to compromise liability totaling $66 million. The liability represents the
maximum allowable damage recoverable by the affected landlords under the
Bankruptcy Code. See "Plan of Reorganization" and "Accounting Impact of
Reorganization" above in this Item 7 for further details, in addition to
the commitments table below which reflects the impact of our Plan of
Reorganization.
The table below summarizes our contractual cash commitments at December 31,
2002, reflecting the impact of the Plan of Reorganization and our related
bankruptcy proceedings:
Less than 1 - 3 3 - 5 More than
1 year years years 5 years
Total (2003) (2004-2005) (2006-2007) (2008-2045)
In millions ------ --------- ----------- ----------- -----------
Long-term debt obligations /(1)/. $ 200 $ -- $ -- $200 $ --
Capital lease obligations /(2)/.. 473 38 81 55 299
Operating lease obligations /(2)/ 1,428 166 298 225 739
Purchase obligations............. 2,090 681 899 253 257
------ ---- ------ ---- ------
Total............................ $4,191 $885 $1,278 $733 $1,295
====== ==== ====== ==== ======
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- --------
/(1)/The $6.641 billion of debt obligations included in "liabilities subject to
compromise" in the accompanying December 31, 2002 consolidated balance
sheet will be canceled in connection with our Plan of Reorganization. Upon
emergence from bankruptcy, our wholly-owned subsidiary, GC North American
Holdings, will issue $200 million in aggregate principal amount of 11% New
Senior Secured Notes due 2006.
/(2)/We continued to reject executory contracts, including lease obligations,
during 2003 within our rights under the Bankruptcy Code. The operating
lease commitments shown do not reflect cash commitments for future periods
relating to leases that we rejected in 2002 and 2003. The lease rejections
in 2002 and 2003, in the aggregate, eliminated $411 million in future
undiscounted operating lease cash commitments. In addition, we rejected a
capital lease obligation that resulted in the elimination of $46 million in
future undiscounted capital lease cash commitments. In connection with our
rejection of both operating and capital leases during 2002 and 2003, we
recorded a subject to compromise liability totaling $75 million of which $7
million is related to the rejected capital lease. This liability represents
the maximum allowable damage recoverable by the affected landlords under
the Bankruptcy Code. See the discussion under the captions "Plan of
Reorganization" and "Accounting Impact of Reorganization" above in this
Item 7 for further details.
Credit Risk
We are subject to concentrations of credit risk in our trade receivables.
Although our receivables are geographically dispersed and include customers
both large and small and in numerous industries, our revenue in our carrier
sales channel is generated from services to other carriers in the
telecommunications industry. In 2002, our revenues from the carrier sales
channel represented approximately 52% of our consolidated revenues.
Off-balance sheet arrangements
GCHL and GCNA remained guarantors with respect to certain real estate lease
agreements of GlobalCenter following the sale of GlobalCenter to Exodus in
January 2001. The lease agreements related to administrative and technical
facilities located throughout the United States, Europe, and the Asia/Pacific
region. On an aggregated basis, the annual lease payments averaged
approximately $70 million per year over the life of the leases. The remaining
lease terms expired between 2002 and 2025. On September 26, 2001, Exodus filed
for bankruptcy protection. In October 2001, Exodus executed an agreement with
us that provided us with certain rights to direct the disposition of the
applicable leasehold interests in Exodus' bankruptcy proceedings. This
agreement, which was subject to the approval of the bankruptcy court overseeing
Exodus' bankruptcy proceedings, would likely have substantially eliminated the
risk of acceleration of payments due under these leases as long as obligations
under the leases were satisfied by Exodus or us as they became due. In the
fourth quarter of 2001 and continuing in January of 2002, prior to our
bankruptcy filing, we remitted $6 million to various landlords relating to
these leases and pursuant to the agreements. As part of our first day orders in
bankruptcy on January 28, 2002, all of the guarantees of Exodus leases were
rejected. The lease rejection claims of the applicable landlords (approximately
$180 million) are unsecured claims in the Company's bankruptcy proceeding,
which will be eliminated upon emergence from bankruptcy.
We have certain letter of credit requirements of approximately $5 million as
of December 31, 2002 relating to our workmen's compensation and employee
liability insurance policies. In addition, certain real estate lease
obligations require cash collateral to be converted to letters of credit upon
the availability of financing. We intend to utilize a working capital facility
to fulfill these requirements or to continue to collateralize these obligations
with cash.
From time to time, New GCL and certain of its wholly owned subsidiaries may
enter into guarantees on behalf of other wholly owned subsidiaries.
Recently Issued Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002" ("SFAS No. 145"), which
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eliminates the requirement to report material gains or losses from debt
extinguishments as an extraordinary item, net of any applicable income tax
effect, in an entity's statement of operations. SFAS No. 145 instead requires
that a gain or loss recognized from a debt extinguishment be classified as an
extraordinary item only when the extinguishment meets the criteria of both
"unusual in nature" and "infrequent in occurrence" as prescribed under APB No.
30, "Reporting the Results of Operations--Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." The provisions of SFAS No. 145 are effective for
fiscal years beginning after May 15, 2002 with respect to the rescission of
SFAS No. 4 and for transactions occurring after May 15, 2002, with respect to
provisions related to SFAS No. 13. We adopted this standard in the fourth
quarter of 2002 and it did not have a material effect on our results of
operations or our financial position. The statement of operations and cash
flows for the year ended December 31, 2000 have been reclassified to reflect
our adoption of SFAS No. 145 and, accordingly, the extraordinary loss on the
extinguishment of debt has been reclassified to "other income" and the related
taxes to "income tax expense".
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"), which requires that costs,
including severance costs, associated with exit or disposal activities be
recorded at their fair value when a liability has been incurred. Under previous
guidance, certain exit costs, including severance costs, were accrued upon
management's commitment to an exit plan, which is generally before an actual
liability has been incurred. We will apply the provisions of SFAS No. 146 to
any exit or disposal activities initiated after December 31, 2002.
In November 2002, the EITF addressed the accounting for revenue arrangements
with multiple deliverables in Issue 00-21: "Accounting for Revenue Arrangements
with Multiple Deliverables" ("EITF 00-21"). EITF 00-21 provides guidance on how
the arrangement consideration should be measured, whether the arrangement
should be divided into separate units of accounting, and how the arrangement
consideration should be allocated among the separate units of accounting. EITF
00-21 shall be effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. We do not expect EITF 00-21 to have a
material effect on our results of operations or financial position.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". FASB Interpretation No. 45 elaborates on
the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of the interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim or annual
periods ending after December 15, 2002. We have not entered into arrangements
or guarantees that meet the criteria of this interpretation and do not expect
the adoption of this interpretation to have a material effect on our results of
operations or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure" ("SFAS No. 148"), which amends SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the
fair-value-based method of accounting for stock-based employee compensation.
SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and APB No.
28, "Interim Financial Reporting," to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting policy
with respect to stock-based employee compensation on reported net income (loss)
per share in annual and interim financial statements. While SFAS No. 148 does
not amend SFAS No. 123 to require companies to account for employee stock
options using the fair value method, the disclosure provisions of SFAS No. 148
are applicable to all companies with stock-based employee compensation,
regardless of whether they account for that compensation using the fair value
method of SFAS No. 123 or the intrinsic value method of APB No. 25. The
provisions of SFAS No. 148 are effective for fiscal years beginning after
December 15, 2002 with respect to the amendments of SFAS No. 123 and effective
for financial reports containing condensed financial statements for interim
periods beginning after December 15, 2002 with
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respect to the amendments of APB No. 28. We will implement SFAS No. 148
effective January 1, 2003 regarding disclosure requirements for condensed
financial statements for interim periods.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities and Interpretation of ARB No. 51" ("FIN 46"). FIN
46 addresses consolidation by business enterprises of variable interest
entities. A variable interest entity is defined as an entity in which the total
equity investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support from other
parties, or as a group the holders of the equity investment at risk lack any
one of the following three characteristics of a controlling financial interest:
(1) the direct or indirect ability to make decisions about an entity's
activities through voting rights or similar rights, (2) the obligation to
absorb the expected losses of the entity if they occur and (3) the right to
receive the expected residual returns of the entity if they occur. FIN 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003 to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
We do not currently expect the adoption of FIN 46 to have a material impact on
our financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In general, SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. We do not currently
expect the adoption of SFAS No. 149 to have a material impact on our financial
statements.
In May 2003, the FASB issued SFAS No. 150 ("SFAS No. 150"), "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 clarifies the accounting for certain financial
instruments with characteristics of both liabilities and equity and requires
that those instruments be classified as liabilities in statements of financial
position. Previously, many of those financial instruments were classified as
equity. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. We do not expect the
adoption of SFAS No. 150 to have a material impact on our financial statements.
Inflation
We do not believe that our business is impacted by inflation to a
significantly different extent than the general economy.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our cash flows and earnings are subject to fluctuations resulting from
changes in interest rates and changes in foreign currency exchange rates and we
selectively use financial instruments to manage these risks. As the payment of
principal and interest on the GC Debtors' pre-petition indebtedness is stayed
under the Bankruptcy Code, there is no interest rate risk for our indebtedness
at December 31, 2002, continuing through our emergence from bankruptcy. For
post-emergence debt, our policy will be 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. Our objective in managing exposure to changes in interest rates is
to reduce volatility on earnings and cash flow associated with such changes.
Foreign Currency Risk
We use foreign currency forward transactions to hedge exposure to foreign
currency exchange rate fluctuations. The Euro and pound sterling were the
principal currencies hedged by us in 2001 and 2000. Changes
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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.
For our subsidiaries using the U.S. dollar as their functional currency,
translation adjustments are recorded in the accompanying consolidated
statements of operations. Our foreign exchange transaction gains (losses) for
the years ended December 31, 2002, 2001 and 2000 were $26 million, $21 million
and $(46) million, respectively.
For our 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. For the years ended December 31,
2002, 2001 and 2000, we incurred foreign currency translation losses of $65
million, $77 million and $138 million, respectively.
We have not entered into, and do not intend to enter into, financial
instruments for speculation or trading purposes. Additional information
regarding financial instruments is contained in Notes 25, "Derivative
Instruments and Hedging Activities," and 26, "Financial Instruments," to the
consolidated financial statements included in this annual report on Form 10-K.
We measure the market risk related to our holding of financial instruments
based on changes in interest rates and foreign currency rates using a
sensitivity analysis. The sensitivity analysis measures the potential loss in
fair values, cash flows and earnings based on a hypothetical 10 percent change
in interest and currency exchange rates. We used current market rates on debt
and derivative portfolios to perform the sensitivity analysis. Such analysis
indicates that a hypothetical 10 percent change in interest rates or foreign
currency exchange rates would not have a material impact on our fair values,
cash flows or earnings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index included on page F-1 of this annual report on Form 10-K,
"Index to Consolidated Financial Statements and Schedule."
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In June 2002, our former independent auditor, Arthur Andersen, informed us
and the audit committee of our board of directors that Arthur Andersen's
conviction for obstruction of justice would effectively end the firm's audit
practice and, as a result, Arthur Andersen expected that it would cease
practicing before the SEC by August 31, 2002. Arthur Andersen ceased such
practice and, as a result, became unable to perform the audit and provide an
audit report with respect to our financial statements for the year ended
December 31, 2001.
Arthur Andersen's audit report on our financial statements for the 2000
fiscal year did not contain an adverse opinion or disclaimer of opinion nor
were such financial statements qualified or modified as to uncertainty, audit
scope or accounting principles. Except as set forth below, during our 2000 and
2001 fiscal years and the subsequent interim period through June 30, 2002,
there was no disagreement between us and Arthur Andersen on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreement, if not resolved to the satisfaction of
Arthur Andersen, would have caused it to make reference to the subject matter
of the disagreement in connection with its report.
In August 2001, we received a letter from Roy Olofson, who was at that time
a vice president-finance of Global Crossing. Mr. Olofson's letter raised
concerns about certain accounting and financial reporting matters. We first
disclosed to Arthur Andersen the existence of Mr. Olofson's letter on January
28, 2002 and provided a copy of the letter to Arthur Andersen on January 29,
2002. Shortly thereafter, Arthur Andersen informed the
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audit committee that Mr. Olofson's letter contained allegations that, in its
view, indicated that an illegal act may have occurred. At the request of the
Audit Committee and Arthur Andersen, we formed a special committee of
independent directors to investigate the matter. Arthur Andersen informed us
that they would not issue an audit report for the year ended December 31, 2001
pending the completion of the investigation of the special committee. In April,
2002, the board of directors appointed three independent members to fill
vacancies on the board and the special committee that occurred shortly after
the commencement of the bankruptcy cases. Since that time, these three
directors have constituted the special committee. In its investigation, the
special committee reviewed 16 of 36 concurrent transactions entered into by us
between the fourth quarter of 2000 and the third quarter of 2001 (the "Core
Transactions"). The Core Transactions represented the majority of the value of
the concurrent transactions entered into by us during that time frame.
In addition to addressing the substance of Mr. Olofson's allegations, the
committee also reviewed the circumstances surrounding our retention of our
outside counsel, Simpson Thacher & Bartlett LLP, for the purpose of inquiring
into the allegations and Simpson Thacher's performance pursuant to our
retention.
The special committee completed its investigation after a year-long inquiry
and filed its report with the Bankruptcy Court on March 10, 2003 pursuant to an
order of the court. The special committee's complete report is available
through the Bankruptcy Court. The special committee summarized its findings and
conclusions, in part, as follows: (1) each of the Core Transactions had a
legitimate business purpose at the time it was entered into and each was
subjected to a process of internal corporate review and approval (albeit one
not always rigorously applied); (2) our sharply increased reliance on
concurrent transactions in the first and second quarters of 2001, when reviewed
in retrospect, was not a prudent or financially sound business decision; (3)
neither we nor Simpson Thacher intended to conceal or suppress the former
employee's allegations, although Simpson Thacher did not adequately investigate
or respond to the allegations and did not adequately discharge its professional
obligations to us; (4) we relied in good faith on advice received from Arthur
Andersen in accounting for the concurrent transactions; and (5) we relied in
good faith on advice received from Simpson Thacher and Arthur Andersen in our
public disclosures regarding the concurrent transactions. Investigations into
Mr. Olofson's allegations and related matters by the Los Angeles office of the
SEC and other governmental authorities are ongoing. See "Legal Proceedings" in
Item 3 above.
On October 21, 2002, we announced that we would restate certain financial
statements contained in filings previously made with the SEC. Our restated
financial statements record our concurrent transactions with our carrier
customers involving leases of telecommunications capacity at historical
carryover basis, based on guidance provided by an exception contained in
Accounting Principles Board Opinion No. 29 ("APB No. 29") for exchanges of
similar productive assets, resulting in no recognition of revenue for such
exchanges. Relying in part on guidance provided by Arthur Andersen during the
periods subject to restatement, we had previously recorded the exchanges at
fair value following the general principle in APB No. 29, with the asset
acquired being amortized over its estimated useful life and the revenue being
deferred and amortized over the life of the contractual agreement to provide
services. The SEC staff, however, has advised us that our previous accounting
for the concurrent transactions did not comply with U.S. GAAP. We have
concluded that our previously issued financial statements that are materially
affected by the accounting for the concurrent transactions must be restated.
The impact of this restatement is discussed below in Note 4 to our consolidated
financial statements. Arthur Andersen has notified us that it does not agree
with the SEC staff's interpretation of APB No. 29.
On November 27, 2002, our court-appointed Examiner and our audit committee
filed an application with the Bankruptcy Court to retain Grant Thornton as our
independent auditors effective as of November 25, 2002. The Bankruptcy Court
approved this application on December 11, 2002 and an engagement letter
formalizing Grant Thornton's appointment was executed on January 8, 2003. The
engagement of Grant Thornton was recommended and approved by our audit
committee.
Our audit committee has previously discussed with Arthur Andersen our delay
in disclosing to Arthur Andersen the existence of Mr. Olofson's letter and the
accounting issues associated with concurrent transactions involving
telecommunications capacity and services. We have authorized Arthur Andersen to
respond fully to the inquiries of Grant Thornton concerning these subjects.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of our
directors and executive officers as of September 30, 2003. Additional
biographical information concerning these individuals is provided in the text
following the table.
Name Age Position
- ---- --- --------
Jeremiah D. Lambert 69 Co-Chairman of the Board and Director
Myron E. Ullman III 56 Co-Chairman of the Board and Director
Lodwrick Cook 75 Deputy Chairman of the Board and Director
Alice T. Kane 55 Director
John J. Legere 45 Chief Executive Officer and Director
David Carey 50 Executive Vice President, Enterprise Sales
Anthony Christie 42 Senior Vice President, Offer and Product Management
Dan Enright 43 Executive Vice President, Operations
Edward T. Higase 37 Executive Vice President, Carrier Sales and Marketing
John B. McShane 41 Executive Vice President and General Counsel
Daniel P. O'Brien 49 Executive Vice President and Chief Financial Officer
Jose Antonio Rios 58 Chief Administrative Officer and President, International
Jerry Santos 60 Senior Vice President, Corporate Communications
Dan Wagner 38 Chief Information Officer
Gary Breauninger 36 Senior Vice President, Business Finance and Strategic Planning
Kirk Rossi 32 Senior Vice President, Financial and Treasury Operations
Directors of the Company
Jeremiah D. Lambert--Mr. Lambert, co-chairman of the Board, chairs our audit
committee and special committee on accounting matters, and also serves as a
member of the compensation committee. A Global Crossing director since April
2002, Mr. Lambert served as chairman of the board of directors of Asia Global
Crossing, from September 2002 through March 2003. Mr. Lambert is a nationally
known lawyer whose practice has focused on corporate clients in regulated
industries, including those in the electricity, natural gas and telecom
sectors. Mr. Lambert served as a senior partner in Shook, Hardy & Bacon L.L.P.,
from December 1997 until April 2002, when he withdrew to join our board of
directors. Prior to that date, Mr. Lambert was the co-founder and chair of
Peabody, Lambert & Meyers, P.C., a law firm in Washington, D.C. Mr. Lambert
began his legal practice at Cravath, Swaine & Moore in New York City and is a
frequent lecturer and author on legal topics.
Myron E. Ullman, III--Mr. Ullman, co-chairman of our board of directors,
serves as a member of our compensation and audit committees, as well as the
special committee on accounting matters. A Global Crossing director since April
2002, Mr. Ullman served on the board of directors of Asia Global Crossing from
September 2002 through March 2003. Mr. Ullman, who has retired from full-time
corporate activity, has extensive experience, both domestically and
internationally, in corporations, government and academia. Mr. Ullman was
directeur general, group managing director of Paris-based LVMH Moet Hennessy
Louis Vuitton, a global company producing luxury products, from July 1999 until
he retired in September 2001. Prior to this, Mr. Ullman held various senior
executive positions with LVMH, including president of LVMH Selective Retail
Group from 1998 until June 1999, and chairman and chief executive officer of
DFS Group Limited from 1995 to 1998. From 1992 through 1994, Mr. Ullman was
chairman and chief executive officer of R.H. Macy & Co., Inc., one of the
largest retailers in the United States, after having served as executive vice
president from 1989 through 1991. From 1986 to 1988, Mr. Ullman served as
managing director and chief operating officer of Wharf (Holdings) Ltd., one of
the largest diversified groups in Hong Kong. Mr. Ullman is currently a director
of Starbucks Coffee Company, Taubman Centers (a real estate investment trust),
DFS Group Limited (a retailer for international travelers) and Kendall Jackson
Wineries. He also serves on numerous business, community and not-for-profit
boards.
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Lodwrick Cook--Mr. Cook was the co-chairman of Global Crossing from January
1998 through January 2003, and continues to serve on our board of directors as
deputy chairman. Mr. Cook also serves as vice chairman and managing director of
Pacific Capital Group, which he joined in such capacity in September 1997.
Pacific Capital played a principal role in the founding of Global Crossing and
continues to invest in the real estate, financial services, media, health care,
and telecommunication industries. Mr. Cook has served as a member of the Board
of Directors of Litex, Inc., which is developing technologies to reduce vehicle
exhaust emissions, since April 1997, becoming chairman in July 1998. He is also
a director of Sabeus Photonics, Inc., a California privately-held company that
engineers and manufactures fiber optic components. Prior to joining Global
Crossing, Mr. Cook had a 39-year career at Atlantic Richfield Company (ARCO),
the seventh largest U.S. oil company, culminating in his appointment as
president and chief executive officer in October 1985 and chairman and chief
executive officer in 1986. Upon his retirement from ARCO in June 1995, he
became chairman emeritus. Mr. Cook's philanthropy has had a particular focus on
education, youth and minority programs.
Alice T. Kane--Ms. Kane, a Global Crossing director since April 2002, chairs
our compensation committee and serves as a member of our audit committee and
special committee on accounting matters. Ms. Kane became the chairperson of
Blaylock Asset Management in September 2002 and had been providing consulting
services for Blaylock & Partners, L.P., an investment banking firm providing
underwriting, mergers and acquisitions, and research and trading services,
since December 2001. Prior to that, Ms. Kane was the president of American
General Fund Group and was chairperson of VALIC Group Annuity Funds with over
$18 billion in assets under management. In June 1998, Ms. Kane joined American
General Corporation as executive vice president of their investments advisory
subsidiary, American General Investment Management L.P. Prior thereto, Ms. Kane
served her entire financial services industry career at New York Life Insurance
Company, which she joined in 1972. She served in several different roles at New
York Life, including executive vice president in charge of asset management and
executive vice president & general counsel. Ms. Kane is currently a director of
Guess Inc., an apparel manufacturer, and Unified Financial Services, Inc., a
financial services holding company.
John J. Legere--Mr. Legere has been chief executive officer and a director
of Global Crossing since October 2001. He served as president and chief
executive officer of Asia Global Crossing from February 2000 until January
2002. Mr. Legere has two decades of experience in the telecommunications
industry. Prior to joining Asia Global Crossing, he was senior vice president
of Dell Computer Corporation and president for Dell's operations in Europe, the
Middle East and Africa from July 1999 until February 2000, and president,
Asia-Pacific for Dell from June 1998 until June 1999. From April 1994 to
November 1997, Mr. Legere was president and chief executive officer of AT&T
Asia/Pacific and spent time also as head of AT&T Global Strategy and Business
Development. From 1997 to 1998, he was president of worldwide outsourcing of
AT&T Solutions.
Other Executive Officers of the Company
David R. Carey--Mr. Carey was named executive vice president, strategy and
corporate development of Global Crossing in November 2003. From March 2002
through November 2003, Mr. Carey served as executive vice president, enterprise
sales, where he was responsible for overseeing all sales and marketing
activities relating to our enterprise customers. From September 1999 through
March 2002, Mr. Carey served in numerous capacities at Global Crossing,
including senior vice president-operations planning from January 2002 through
March 2002; senior vice president-network planning and development, from
December 2000 through January 2002; senior vice president-business and network
development from January 2000 through December 2000; and senior vice
president-business development from September 1999 through January 2000. Before
joining Global Crossing, Mr. Carey served as senior vice president, marketing
and chief marketing officer for Frontier Corporation's business lines from
October 1997 through September 1999. Prior to that, Mr. Carey spent seven years
in the energy industry, serving as president & chief executive officer of LG&E
Natural Inc., a subsidiary of LG&E Energy Corp. based in Louisville, Kentucky.
Mr. Carey began his career with AT&T. During his 15 years there, he held a wide
range of executive positions in marketing, sales, operations and personnel.
92
Anthony Christie--Mr. Christie was named executive vice president and chief
marketing officer of Global Crossing in November 2003. From February 2002
through November 2003, Mr. Christie served as senior vice president, global
product management, having previously served as senior vice president, business
integration and strategic planning from November 2001. Mr. Christie is
accountable for global product strategy development, deployment, marketing,
profit and loss for all wholesale and retail products for the Company. Prior to
joining Global Crossing, Mr. Christie was vice president, business development
and strategic planning for Asia Global Crossing from March 2000 through October
2001. In this position, Mr. Christie was accountable for all business and
corporate development, joint venture and M&A activities, as well as overall
strategic planning for the company. Prior to joining Asia Global Crossing, Mr.
Christie was general manager and network vice president at AT&T Solutions in
New York City from November 1999 through March 2000, having also held the
position of Global Sales and Operations vice president in AT&T's outsourcing
division from June 1998 through November 1999. From June 1997 through June
1998, Mr. Christie was a Sloan Fellow at MIT. Prior thereto, Mr. Christie held
positions in AT&T's International Operations Division that included an
assignment as the regional managing director for the Consumer Markets Division
in Asia.
Dan Enright--Mr. Enright was named executive vice president, operations in
June 2003. In this role, Mr. Enright is responsible for our network
architecture, planning and engineering, customer operations, network operations
and field operations. Mr. Enright is also responsible for managing our network
capital, operating expenses and third party maintenance expenses. Mr. Enright
has held other positions at Global Crossing, including senior vice
president--global network engineering and operations from March 2002 through
June 2003; vice president--global service operations from June 2001 through
March 2002; vice president North America engineering and field operations from
July 2000 through June 2001; and vice president--North America network and
field operations from April 1999 through July 2000. Mr. Enright joined Global
Crossing in 1999 from Frontier Communications Services, where he had served
since October 1996 as vice president for network operations and service
provisioning. In that role, he led the network operations and service
provisioning team during the construction of Frontier's nationwide fiber-optic
network. Prior to Frontier, Mr. Enright held various engineering and operations
positions at Highland Telephone and Rochester Telephone.
Edward T. Higase--Mr. Higase has been executive vice president, carrier
sales and marketing of Global Crossing since January 2002. Mr. Higase is
responsible for overseeing all sales activities related to our carrier, ISP,
and ASP customers worldwide. Mr. Higase previously served as president, carrier
services for Asia Global Crossing, from August 2000 to December 2001. Prior to
Asia Global Crossing, Mr. Higase was corporate director and general manager
from November 1999 to August 2000 of the medium-size business Corporate
Accounts Division for Dell Computer Corporation in Japan. Prior to this
assignment, he served as corporate director, Dell Online for Asia Pacific from
August 1998 to November 1999, where he led the growth of Internet-based
transactions in the Asia Pacific Region. Mr. Higase began his career with AT&T
in Japan. During his nine years with the company, he held a wide range of
senior and executive positions in marketing, sales, and business management
across AT&T's business markets division, consumer markets division, outsourcing
unit, and the international business unit.
John B. McShane--Mr. McShane was named executive vice president and general
counsel of Global Crossing in March 2002. Mr. McShane oversees and manages all
of our legal matters. Prior to his appointment as general counsel, Mr. McShane
joined Global Crossing in February 1999 as our European assistant general
counsel where he led the negotiations of network infrastructure agreements for
the build-out of the PEC network. As assistant general counsel he also had
responsibility for the oversight of worldwide sales and telecommunications
network outsourcing transactions for Global Crossing's Solutions business unit
and of major vendor supply agreements. Prior to joining Global Crossing, Mr.
McShane spent twelve years at several international law firms, including
positions as an associate at Simpson Thacher & Bartlett from 1987 through 1996
and as senior counsel at Shearman and Sterling, Cadwalader, Wickersham & Taft,
and Brown & Wood, where his main focus was on representing major commercial
banks, financial institutions and corporations in connection with a broad range
of their corporate, commercial and financing activities.
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Daniel P. O'Brien--Mr. O'Brien joined Global Crossing in May 2003 as
executive vice president and chief financial officer. Mr. O'Brien previously
served as the chief financial officer of Genuity Corporation from June 2000
through February 2003, where he facilitated the company's sale to Level 3
Communications. Prior to his tenure at Genuity, he spent 17 years in various
roles at GTE Corporation. From May 1998 to June 2000 Mr. O'Brien was GTE's
executive vice president and chief financial officer. In that capacity, Mr.
O'Brien was centrally involved in the strategic evaluations and the integration
and structuring activities leading to the merger of GTE and Bell Atlantic,
which formed Verizon. Before joining GTE in a corporate capacity, Mr. O'Brien
held several positions with the Electrical Products Group of GTE, including
vice president and controller of GTE European Lighting in Geneva, Switzerland.
He also served in various financial and management capacities within the
manufacturing and chemical industries.
Jose Antonio Rios--Mr. Rios was named chief administrative officer of Global
Crossing in November 2002. Mr. Rios has also served as president of Global
Crossing International since May 2001 and as chairman of the board of Global
Marine since September 2002 Mr. Rios has more than 20 years of experience
managing a wide range of companies in the technology and media sectors. Prior
to joining Global Crossing in February 2001 as president Latin America and
corporate senior vice president, Mr. Rios served as president and CEO of
Telefonica Media from June 1999 through August 2000 and president of Atento
Worldwide from July 2000 through June 2002. Earlier in his career, Mr. Rios was
the founding president and chief executive officer of Galaxy Latin America
(subsequently named DIRECTV(TM) Latin America), where he was responsible for
the planning, development, and launch of DIRECTV(TM), a division of Hughes
Electronics. During his four-year tenure, he was a vice president of Hughes
Electronics and a member of its management committee. Mr. Rios previously
served as the first chief operating officer and corporate vice president of the
Cisneros Group of Companies. He was also a founding member of its worldwide
executive committee. During his 13-year tenure with the Cisneros Group, Mr.
Rios held a succession of increasingly responsible positions, including tenure
as a board member or president in over 60 Cisneros companies worldwide. From
2000 to 2002, Mr. Rios served as chairman of the supervisory board of Endemol
Entertainment, Europe's premier independent TV production company based in
Holland and with operations in 28 countries around the world. He also serves on
the board of directors of Claxson Interactive Group Inc. and is an active
national board member of Operation Smile, a philanthropic organization that
provides global medical assistance to children born with facial deformities. In
addition, Mr. Rios serves as a board member of the Inter-American Dialogue's
Latin America Advisor.
Jerry Santos--Mr.Santos was named senior vice president, corporate
communications of Global Crossing, in October 2001. He manages all aspects of
external and internal communications efforts including public relations,
marketing communications, employee communications, advertising and branding.
Prior to joining Global Crossing, Mr. Santos was vice president of worldwide
public relations and communications with Concert Communications from July 1999
through June 2001. Prior to his role at Concert, Mr. Santos held several senior
leadership positions in the communications organization within AT&T, most
recently as vice president, global communications for AT&T Asia/Pacific from
September 1996 through July 1999.
Dan Wagner--Mr. Wagner was named chief information officer and senior vice
president--business information of Global Crossing in March 2002. Mr. Wagner
oversees our global information technology function, including operations,
telecommunications, development, security, and technology integration. In
addition to his corporate responsibilities, Mr. Wagner has served on the board
of directors of Global Marine since February 2002. Mr. Wagner has also served
as president of Global Crossing Europe from October 2001 through March 2002 and
managing director of Global Crossing UK from January 2001 through October 2001.
Mr. Wagner served Global Crossing as vice president of business integration for
North America following its acquisition of Frontier Communications. While at
Frontier, between June 1999 and July 2000, he held several other key management
positions, including senior director of finance and integration, and vice
president of service delivery. Before joining Frontier in 1994, Mr. Wagner was
a management consultant for Andersen Consulting and his own independent firm
for several years.
94
Gary Breauninger--Mr. Breauninger was named senior vice president, business
finance and strategic planning of Global Crossing in October of 2002. He
manages our business finance, decision support, pricing, and business planning.
From March 2002 through October 2002, Mr. Breauninger served as vice president
financial planning, having previously served as vice president offer and
product management finance since March 2000. Before joining Global Crossing,
Mr. Breauninger was a senior director in finance at AT&T. He served in many
senior roles at AT&T for more than 9 years including sales, sales support,
finance and product management.
Kirk Rossi--Mr. Rossi was named senior vice president, financial and
treasury operations of Global Crossing in October of 2002. Mr. Rossi is
responsible for overseeing all worldwide accounting, consolidation, financial
reporting, treasury, payroll and accounts payable operations. Most recently,
Mr. Rossi served as vice president financial operations from April 2001 through
October 2002 and prior to that served as director financial operations since
joining Global Crossing in July 2000. Before joining Global Crossing, Mr. Rossi
was a senior manager in the audit and business advisory services practice at
Arthur Andersen LLP. He served many clients while at Arthur Andersen for almost
nine years in the telecommunications, sports, gaming, manufacturing and biotech
industries.
Directors of New GCL
Upon our emergence from bankruptcy, the current members of our board of
directors will resign, and new directors will be appointed to the New GCL board
of directors in accordance with New GCL's amended and restated bye-laws and the
Plan of Reorganization. If New GCL's common stock is accepted for quotation on
the Nasdaq National Market, the composition of its board of directors will need
to satisfy Nasdaq requirements, subject to any applicable exemptions, including
exemptions applicable to companies in respect of which more than 50% of the
voting power is held by another entity. We believe that the initial board of
New GCL will satisfy applicable Nasdaq requirements.
New GCL's board will consist of ten members. Eight members will be nominated
by ST Telemedia, including the chairman of the board and the chairman of all
significant board committees. The remaining two members will be nominated by
the Creditors Committee in our bankruptcy proceedings. The directors designated
by ST Telemedia will have terms of three years (which can be renewed) unless
earlier removed by ST Telemedia. The directors nominated by the Creditors
Committee will serve as directors until the second anniversary of our emergence
from bankruptcy and will thereafter have one-year terms. ST Telemedia will
agree to vote for the designees of the Creditors Committee who satisfy the
"independent" director requirements of the New York Stock Exchange. If ST
Telemedia acquires 50% or more of the New GCL Common Stock outstanding at the
time of our emergence from bankruptcy that is owned by persons other than ST
Telemedia, through purchases in the open market, the Creditors Committee will
be entitled to nominate only one member to the board. At 75% or more of such
ownership (through purchases in the open market) by ST Telemedia, the Creditors
Committee will not be entitled to nominate any board members.
The New GCL Board of Directors is expected to designate the following board
committees: an Audit Committee, a Government Security Committee, a Compensation
Committee, a Nominating and Corporate Governance Committee, and an Executive
Committee. The initial members of the Government Security Committee will be
E.C. "Pete" Aldridge, Jr., Donald L. Cromer, Archie Clemins and Richard R.
Erkeneff. The members of the other Board committees will be determined by the
New GCL Board.
We have been informed by ST Telemedia and the Creditors Committee that the
following individuals are expected to be appointed to the New GCL board at the
time of or shortly after our emergence from bankruptcy:
E.C. "Pete" Aldridge, Jr.--Mr. Aldridge, age 65, currently serves on the
boards of Lockheed Martin Corporation and Alion Science and Technology
Corporation. From May 2001 until May 2003, Mr. Aldridge served as Under
Secretary of Defense for Acquisition, Technology, and Logistics. In this
position, he was responsible for all matters relating to U.S. Department of
Defense acquisition, research and development,
95
advanced technology, international programs, and the industrial base. Prior to
this appointment, Mr. Aldridge served as chief executive officer of the
Aerospace Corporation from March 1992 through May 2001; president of McDonnell
Douglas Electronic Systems from December 1988 through March 1992; and Secretary
of the Air Force from June 1986 through December 1998. Mr. Aldridge has also
held numerous other senior positions within the Department of Defense.
Donald L. Cromer--Mr. Cromer, age 67, currently acts as a consultant to the
U.S. Department of Defense, the United States Air Force and the following
companies: The Boeing Company, Booz Allen Hamilton Inc. (a strategy and
technology consulting firm) and the Institute for Defense Analysis. He is a
trustee of the Aerospace Corporation and a board member of Draper Laboratory,
Inc. (a not-for-profit laboratory for applied research, engineering
development, education, and technology transfer). He also serves on the boards
of the following private companies: Universal Space Network, Vadium, Inc., and
Innovative Intelcom Industries. He is also affiliated with the California Space
Authority and serves as a member of Aeronautics and Space Engineering Board of
the National Research Council. General Cromer's military career in the Air
Force spanned 32 years. He retired in 1991 as the Commander of Space Division,
Los Angeles, CA (the satellite, missile and launch vehicle acquisition center
for the Air Force). Subsequent to his retirement, he joined Hughes Space and
Communications Company and served as president from 1993 to 1998.
Archie Clemins--Mr. Clemins, age 59, has been, since January 2003, the owner
and president of Caribou Technologies, Inc., and, since November 2001, co-owner
of TableRock International LLC, both international consulting firms, and
concentrates on the transition of commercial technology to the government
sectors, both in the United States and Asia. In addition to serving on the
boards of other technology corporations, including Extended Systems, Mr.
Clemins is the vice chairman of Advanced Electron Beams, Inc., which focuses on
low energy electron beam technology, and vice chairman of Positron Systems,
Inc., a company whose intellectual property determines the fatigue levels of
metals. As an officer of the United States Navy from 1966 through December
1999, Mr. Clemins' active duty service included tours on several attack
submarines and command of the USS Pogy. Promoted to Flag (General Officer) rank
in 1991, he had five follow-on assignments, including Commander, Pacific Fleet
Training Command in San Diego, California and Commander, Seventh Fleet,
headquartered in Yokosuka, Japan, which he assumed in November, 1996. Mr.
Clemins concluded his military career in Hawaii as an Admiral and the 28th
Commander of the U. S. Pacific Fleet.
Richard R. Erkeneff--Mr. Erkeneff, age 68, was, from October 1995 until
August 2003, president and chief executive officer of United Industrial
Corporation ("UIC"), a company focused on the design and production of defense,
training, transportation and energy systems. Mr. Erkeneff has also served as a
director of UIC since October 1995. In addition, Mr. Erkeneff was chief
executive officer of AAI Corporation ("AAI"), a wholly-owned subsidiary of
United Industrial Corporation responsible for the design, manufacture, testing
and support of advanced Tactical Unmanned Aerial Vehicles, from November 1993
until August 2003, and president of AAI from November 1993 to January 2003.
Prior to joining AAI, Mr. Erkeneff held positions as senior vice president of
the Aerospace Group at McDonnell Douglas Corporation, and president and
executive vice president of McDonnell Douglas Electronics Systems Company. Mr.
Erkeneff is currently a director of United Industrial Corp., a defense and
energy company.
Peter Seah Lim Huat--Mr. Seah, age 57, is president and chief executive
officer of Singapore Technologies Pte Ltd ("ST") and also a member of its board
of directors. Before joining ST in December 2001, he was a banker for the prior
33 years, retiring as vice chairman & chief executive officer of Overseas Union
Bank in September 2001. Mr. Seah is chairman of SembCorp Industries and
Singapore Technologies Engineering. Presently, he also sits on the boards of
CapitaLand Limited, Chartered Semiconductor Manufacturing Ltd, StarHub Pte Ltd
and ST Assembly Test Services in the ST Group. Mr. Seah also serves on the
boards of the Government of Singapore Investment Corporation, EDB Investments
Pte Ltd, PT Indonesian Satellite Corporation Tbk and Siam Commercial Bank
Public Company Limited and is chairman of EDB Ventures. His other appointments
include being a member of the Economic Review Committee's Sub-committee on
Policies Related to Taxation, the CPF System, Wages and Land. He is also the
vice president of the Singapore Chinese Chamber of Commerce & Industry and the
honorary treasurer of Singapore Business Federation Council.
96
Charles Macaluso--Mr. Macaluso, age 59, is a founding principal and the
chief executive officer of Dorchester Capital Advisors (formerly East Ridge
Consulting, Inc.), a management consulting and corporate advisory firm founded
in 1996. From March 1996 to June 1998, Mr. Macaluso was a partner at Miller
Associates, Inc., a company principally involved in corporate workouts. From
1989 to 1996, Mr. Macaluso was a partner at The Airlie Group, LLP, a fund
specializing in leveraged buyout, mezzanine and equity investments. Mr.
Macaluso currently serves as chairman of the board for Crescent Public
Telephone, Inc. and Prime Succession, Inc. He also serves on the boards of
directors of Lazy Days Recreational Vehicles, Inc. and Darling International.
Michael Rescoe--Mr. Rescoe, age 51, is executive vice president and chief
financial officer of the Tennessee Valley Authority (the "TVA"), a federal
corporation that is the nation's largest public power provider. Before joining
the TVA in July 2003, Mr. Rescoe was chief financial officer of 3Com
Corporation, a global technology manufacturing company specializing in Internet
connection technology for both voice and data applications, from April 2000
through June 2002. During 1999 and 2000, Mr. Rescoe was associated with
Forstman Little, an investment banking firm. Prior thereto, Mr. Rescoe was
chief financial officer of PG&E Corporation, a power and natural gas energy
holding company, since September 1997. For over a decade prior to that Mr.
Rescoe was a senior investment banker with Kidder, Peabody and Bear Stearns
specializing in strategy and structured financing.
Robert J. Sachs--Mr. Sachs, age 52, is president and chief executive officer
of the National Cable & Telecommunications Association (NCTA), the principal
trade association of the Cable Industry in the United States, representing
cable television operators, program services, and equipment and service
providers. From January 1998 until taking the helm of the NCTA in August 1999,
Mr. Sachs had been a principal of Continental Consulting Group, LLC, a
consulting firm serving the cable television industry. Prior to co-founding
Continental Consulting Group, Mr. Sachs served as senior vice president of
corporate and legal affairs for Continental Cablevision, Inc. and its
successor, MediaOne.
Lee Theng Kiat--Mr. Lee, age 50, has been president and chief executive
officer of ST Telemedia since 1994. He joined Singapore Technologies Pte. Ltd.
("ST") in 1985 and has held various senior ST positions including directorships
in Legal and Strategic Business Development. In 1993, following ST's decision
to enter the telecommunications sector, Mr. Lee spearheaded the creation of ST
Telemedia as a new business area for ST. Mr. Lee, a lawyer by training, began
his career as an officer of the Singapore Legal Service, remaining with that
entity for more than eight years. Mr. Lee also serves on the boards of the PT
Indonesian Satellite Corporation Tbk and Equinix, Inc.
Lodewijk Christiaan van Wachem--Mr. Van Wachem, age 72, is currently
chairman of the supervisory board of Royal Philips Electronics N.V., chairman
of the board of directors of Zurich Financial Services, and a member of the
board of directors of ATCO (Canada) Ltd. and of the executive board of Rand
Europe. He became a director of Royal Dutch Shell Group in 1977, president in
1982 and chairman of the committee of managing directors in 1985. He served in
that capacity until 1992, when he was appointed chairman of the supervisory
board of the Royal Dutch Petroleum Company, a position he held through July
2002. Until 2002 he also served on the supervisory boards of Akzo Nobel, BMW
and Bayer as well as on the board of directors of International Business
Machines Corp.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors,
executive officers and any person who owns more than 10% of our common stock,
whom we refer to collectively as the "Reporting Persons," to file with the
Securities and Exchange Commission reports of ownership and reports of changes
in ownership of our common stock. Under Securities and Exchange Commission
rules, we receive copies of all Section 16(a) forms that these Reporting
Persons file. We have reviewed copies of these reports and written
representations from the Reporting Persons. We believe all Reporting Persons
complied with their Section 16(a) reporting obligations during 2002.
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ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The table below sets forth information concerning compensation paid to
certain executive officers during the last three fiscal years.
Annual Compensation Long-Term Compensation
------------------------------------- -----------------------------------------------
Awards Payouts
--------------------- -------
Securities
Restricted underlying
Name and principal Other annual stock options/ LTIP All other
position Year Salary Bonus /(1)/ compensation /(2)/ award/(s)/ SARs payouts compensation /(3)/
------------------ ---- -------- ---------- ----------------- ---------- ---------- ------- -----------------
John J. Legere,*....... 2002 $850,208 $3,940,000 $14,834,381 -- -- -- --
Chief Executive 2001 704,545 6,910,168 6,572,670 -- 5,000,000 -- --
Officer 2000 439,423 1,000,000 915,228 -- -- -- --
Jose Antonio Rios,**... 2002 500,000 1,070,000 1,111,903 -- -- -- --
Chief Administrative 2001 416,667 -- 121,908 -- 1,900,000 -- --
Officer 2000 -- -- -- -- -- -- --
Carl Grivner,**........ 2002 502,046 1,271,000 288,898 -- -- -- $ 7,083
Chief Operating 2001 500,000 -- 158,990 -- 1,050,000 -- 12,350
Officer 2000 231,818 500,000 37,214 -- 500,000 -- 3,645
Dan Cohrs,**........... 2002 500,000 1,070,000 3,229 -- -- -- 8,000
Chief Financial 2001 483,333 -- 521,269 -- 900,000 -- 10,500
Officer 2000 392,917 412,000 14,632 -- 310,000 -- --
Joe Perrone,**......... 2002 450,000 963,000 2,507 -- -- -- 3,188
Executive Vice 2001 441,667 -- 3,399 -- 800,000 -- --
President, Business 2000 251,538 2,900,000 646 -- 630,000 -- --
Performance
- --------
* Mr. Legere was chief executive officer of Asia Global Crossing from February
2000 through January 2002, and has been Global Crossing's chief executive
officer since October 2001. Compensation listed for Mr. Legere includes
compensation with respect to his employment at both companies.
** Messrs. Rios, Grivner and Perrone commenced employment in March 2001, June
2000 and May 2000, respectively. Messrs. Cohrs, Grivner and Perrone were
officers of Global Crossing as of December 31, 2002 but are no longer
employees as of the date of this filing.
(1)The amounts in this column generally represent corporate annual, quarterly
and retention bonuses for executives. Mr. Legere's 2002 bonus includes three
retention bonus payments of $800,000 each, as required by his "Bankruptcy
Period Employment Agreement" (as defined below under "Employment Agreements
and Other Arrangements"). Mr. Legere's 2001 bonus amount represents a
signing bonus of $6,910,168 ($3,500,000 net of taxes). Mr. Perrone's 2000
bonus amount includes a $2,500,000 signing bonus. As described below under
"Certain Relationships and Related Transactions--Transactions with
Withit.com," $325,000 of Mr. Perrone's 2002 bonuses was withheld by the
Company.
(2)The amounts in this column include loan forgiveness for Mr. Legere of
$5,000,000 in 2001 and $10,000,000 in 2002 as required by his "October 3,
2001 Employment Agreement" (as defined below under "Employment Agreements
and Other Arrangements"); for Mr. Rios of $1,000,000 in 2002; and for Mr.
Cohrs of $250,000 in 2001. This column also includes tax payments and
related tax gross up payments for Mr. Legere of $934,101 in 2001 and
$4,786,293 in 2002 as required by his October 3, 2001 Employment Agreement;
for Mr. Grivner of $22 in 2000, $221 in 2001 and $184,785 in 2002; for Mr.
Cohrs of $254,306 in 2001; and for Mr. Perrone of $828 in 2002. Also
included is the value of certain perquisites, including imputed interest in
the amount of $802,307 in 2000, $587,934 in 2001 and $10,789 in 2002 for Mr.
Legere; $121,083 in 2001 and $111,380 in 2002 for Mr. Rios; and $14,000 in
2000 and $13,565 in 2001 for Mr. Cohrs. Also included for Mr. Grivner is an
expatriate living allowance of $156,554 in 2001 and temporary personal
living expenses of $100,884 in 2002.
(3)The amounts in this column include matching contributions under defined
contribution plans in the amount of $3,645, $12,350, and $7,083 for Mr.
Grivner in 2000, 2001 and 2002, respectively; $10,500 and $8,000 for Mr.
Cohrs in 2001 and 2002, respectively; and $3,188 for Mr. Perrone in 2002.
98
Fiscal Year-End Option Values
The table below sets forth information concerning the December 31, 2002
amounts of certain executive officers' unexercised GCL stock options. In light
of our January 28, 2002 bankruptcy filing, we did not issue stock options
during 2002 and none of the named executive officers exercised
previously-granted stock options during 2002. All options in respect of GCL
common stock will be canceled automatically upon consummation of our Plan of
Reorganization.
Number of Securities Value of Unexercised In-
Underlying Unexercised The-Money Options at
Options at Fiscal Year End Fiscal Year End
------------------------- -------------------------
Number of Number of Number of Number of
Exercisable Unexercisable Exercisable Unexercisable
Name and Title Options Options Options Options
-------------- ----------- ------------- ----------- -------------
John J. Legere,................................ 3,333,333 1,666,667 -- --
Chief Executive Officer
Jose Antonio Rios,............................. 816,666 1,083,334 -- --
Chief Administrative Officer
Carl Grivner, *................................ 683,332 866,668 -- --
Chief Operating Officer
Dan J. Cohrs, *................................ 1,494,176 703,334 -- --
Chief Financial Officer
Joseph P. Perrone,*............................ 728,332 701,668 -- --
Executive Vice President, Business Performance
- --------
* Messrs. Grivner, Cohrs and Perrone were officers of Global Crossing as of
December 31, 2002 but are no longer employees as of the date of this filing.
Employment Agreements and Other Arrangements
On February 12, 2000, John J. Legere was named chief executive officer of
Asia Global Crossing. At that time, Mr. Legere and Asia Global Crossing entered
into a three-year employment agreement pursuant to which Mr. Legere was
entitled to receive a base salary of $500,000 and a guaranteed annual bonus of
$500,000 in each of 2000 and 2001. Mr. Legere also received options to acquire
17.5 million shares of Asia Global Crossing common stock. In addition, Mr.
Legere received a $15 million interest-free loan from Asia Global Crossing,
repayable in full on January 31, 2004 or 30 days after a termination of his
employment for cause, whichever was to occur first. However, $5 million of the
loan was to be forgiven on each of the first three anniversaries of Mr.
Legere's employment, so long as Mr Legere remained an employee of Asia Global
Crossing on the applicable anniversary. Under the employment agreement, if Mr.
Legere's employment were to be actually or constructively terminated by Asia
Global Crossing for any reason other than for cause, the then outstanding
balance of the loan was to be forgiven.
On October 3, 2001, we hired Mr. Legere as our chief executive officer.
Until Mr. Legere's employment with Asia Global Crossing terminated on January
11, 2002, Mr Legere also continued at the same time to serve as chief executive
officer of Asia Global Crossing, then still our subsidiary. On the date of his
hiring, Mr. Legere's employment agreement with Asia Global Crossing was
effectively amended and restated in a new employment agreement among us, Asia
Global Crossing and Mr. Legere (the "October 3, 2001 Employment Agreement");
provided that Asia Global Crossing's obligations under Mr. Legere's February
12, 2000 employment agreement technically continued, with any compensation paid
under that agreement being offset against the employers' obligations under the
October 3, 2001 Employment Agreement.
The October 3, 2001 Employment Agreement provided for a three-year term and
a base salary of $1.1 million, a target annual bonus of $1.375 million, a
signing bonus in the net after-tax amount of $3.5 million, and
99
5 million options to purchase GCL common stock. The agreement also changed the
terms applicable to the $10 million balance then outstanding on Mr. Legere's
promissory note to Asia Global Crossing. Specifically, Global Crossing agreed
to pay after-tax amounts sufficient to cover all taxes attributable to the
forgiveness of Mr. Legere's loan. These tax-related payments in respect of the
three $5 million installments were payable on January 1, 2002, October 1, 2002
and February 1, 2003, respectively. The tax-related payment in respect of the
forgiveness of the first $5 million installment was made by the Company on or
about January 1, 2002. This payment, in the amount of approximately $4.8
million, also included a tax gross-up in respect of interest imputed on Mr.
Legere's loan in 2001. The $10 million loan balance was forgiven in full in
connection with the termination of Mr. Legere's employment by Asia Global
Crossing on January 11, 2002. No tax-related payment was ever made in respect
of the forgiveness of the $10 million balance of Mr. Legere's loan.
After the GC Debtors' January 28, 2002 bankruptcy filing, on April 8, 2002,
the GC Debtors filed a motion to assume the October 31, 2001 Employment
Agreement, subject to certain modifications, including a temporary voluntary
30% reduction in Mr. Legere's base salary. Mr. Legere's employment agreement
was the subject of extensive negotiation and review by the creditors committee
and the agent for the Bank Lenders. Numerous additional concessions were made
by Mr. Legere in order to attain the approval of the creditors committee,
including the tying of Mr. Legere's annual bonus opportunity to the attainment
of specified corporate and individual performance goals subject to the approval
of the creditors committee and the Bank Lenders, and the waiver of certain
relocation expenses and certain additional severance, retention and other
benefits, including the tax-related payments referenced above that would have
totaled approximately $8.8 million in respect of the $10 million of Mr.
Legere's loan forgiven on January 11, 2002. In light of these concessions, the
agreement provided Mr. Legere with (1) a $3.2 million retention bonus payable
in four equal installments on June 4, 2002, July 31, 2002, October 31, 2002 and
January 31, 2003 and (2) the opportunity to earn a performance fee of up to $4
million based on the value to be received by the creditors of the Company in
its chapter 11 reorganization (the "Contingent Performance Fee"). The
Bankruptcy Court approved the assumption of the modified employment agreement
(the "Bankruptcy Period Employment Agreement") on May 31, 2002. The $3.2
million retention bonus payments were made by the Company to Mr. Legere on the
dates specified above; however, no Contingent Performance Fee will be paid to
Mr. Legere if his proposed new employment agreement (described in the
immediately succeeding paragraph) goes into effect upon consummation of the
Plan of Reorganization.
Upon our emergence from bankruptcy, we expect to enter into a new employment
agreement with Mr. Legere (the "Emergence Employment Agreement"), the form of
which has been approved by ST Telemedia. This agreement will supersede the
Bankruptcy Period Employment Agreement, except with respect to certain rights
Mr. Legere had under the latter agreement relating to indemnification,
liability insurance and the resolution of disputes thereunder.
The Emergence Employment Agreement: (1) provides Mr. Legere with an annual
base salary of $1.1 million and a target annual bonus of $1.1 million; (2)
entitles Mr. Legere to attend all meetings of New GCL's Board of Directors and
to receive all materials provided to the members of the Board, subject to
certain limited exceptions; (3) extends the term of the agreement through the
fourth anniversary of the date on which the agreement becomes effective (the
"Agreement Effective Date"); (4) entitles Mr. Legere to a $2.7 million bonus
payable on the Agreement Effective Date but supersedes any rights he would
otherwise have in respect of the Contingent Performance Fee; (5) entitles Mr.
Legere to an initial grant of options to purchase not less than 0.69 percent of
the fully diluted shares of New GCL Common Stock (including dilution due to
conversion of preferred shares, with the aggregate number of fully diluted
shares not to exceed 43,478,261), such options to vest in full upon termination
of Mr. Legere's employment by the Company without "cause" or upon Mr. Legere's
death, "disability" or resignation for "good reason" (as such quoted terms are
defined in the agreement; such terms being collectively referred to as
"Designated Terminations"); (6) provides for the payment of severance to Mr.
Legere in the event of a Designated Termination in an amount ranging from one
to three times the sum of Mr. Legere's base salary and target annual bonus,
depending on the date of such termination, plus certain other benefits and
payments; and (7) entitles Mr. Legere to reimbursement (on an after-tax basis)
for certain excise taxes should they apply to payments made to Mr. Legere by
the Company. The form of the Emergence Employment Agreement is filed as an
exhibit to this annual report on Form 10-K.
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In connection with our emergence from bankruptcy, New GCL is expected to
adopt the Global Crossing Limited Key Management Protection Plan. This plan
will provide enhanced severance benefits for executive officers and certain
other key employees of New GCL. With respect to each of John J. Legere and Jose
Antonio Rios, who are the only executive officers named in the Summary
Compensation Table above who are still employed by the Company, if his
employment is terminated by us (other than for cause or by reason of death or
disability), or he terminates employment for "good reason" (generally, an
unfavorable change in employment status or compensation), the plan entitles him
to receive (i) a lump sum payment equal to two times (three times in the case
of Mr. Legere) the sum of his annual base salary plus guideline bonus
opportunity (reduced by any cash severance benefit otherwise paid to the
executive under any applicable severance plan or other severance arrangement),
(ii) a prorated annual target bonus for the year in which the termination
occurs, (iii) continuation of his life and health insurance coverages for up to
two years (three years in the case of Mr. Legere) and (iv) payment for
outplacement services in an amount not to exceed 30% of his base salary.
Director Compensation
Each of our directors who is not an employee of Global Crossing receives
cash compensation of $5,000 for each in-person meeting of the board of
directors attended and $2,500 for each telephonic meeting of the board of
directors attended. Each such director also receives $2,500 for each in-person
meeting of a board committee attended and $1,500 for each telephonic meeting of
a board of directors committee attended. Each non-employee chairman or
co-chairman of the board receives an annual retainer of $10,000, payable
quarterly in advance. Each non-employee chairman of a board committee receives
an annual retainer of $5,000, payable annually in advance. In addition, during
the pendency of the investigation into certain accounting and related
allegations by the special committee on accounting matters of our board of
directors (see Item 3, "Legal Proceedings," above), the members of that
committee received an hourly fee of $500 for certain activities relating to the
committee's investigation that occurred outside of formal committee meetings,
including time spent in interviews of current and former employees and
directors and meetings with regulatory authorities.
The New GCL Board will adopt its own compensation arrangements upon New
GCL's emergence from bankruptcy.
Compensation Committee Interlocks and Insider Participation
During the first quarter of 2002, the members of the compensation committee
of our board of directors were Geoffrey Kent, Mark Attanasio and William Cohen.
After these individuals resigned from our board of directors in connection with
our bankruptcy filing, Alice Kane, Jeremiah D. Lambert and Myron E. Ullman, III
were appointed as the members of our compensation committee in April 2002 and
continue to serve in that capacity as of the date of filing of this annual
report on Form 10-K. None of the individuals who served on our compensation
committee at any time during 2002 had any relationship with us that requires
disclosure in accordance with SEC rules.
101
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 30, 2003, certain
information regarding the beneficial ownership of GCL's common stock by (1)
each person or entity who is known by us to beneficially own 5% or more of our
voting common stock, (2) each of our directors, (3) each of our executive
officers named in the Summary Compensation table above and (4) all of our
directors and executive officers as a group. To our knowledge, each such
shareholder has sole voting and investment power with respect to the shares
shown, unless otherwise noted. For purposes of this table, an individual is
deemed to have sole beneficial ownership of securities owned jointly with such
individual's spouse. Amounts appearing in the table below include (1) all
shares of common stock outstanding as of September 30, 2003 and (2) all shares
of common stock issuable upon the exercise of options or warrants within 60
days of September 30, 2003. All shares of GCL common stock and all warrants and
options in respect of such common stock will be canceled at the time our Plan
of Reorganization becomes effective.
Beneficial Ownership of Common Stock
Shares Shares
Number of Subject to Subject to Percentage
Shares/(1)/ Options/(2)/ Warrants/(3)/ of Class
---------- ----------- ------------ ----------
Gary Winnick/(4)/.............................. 68,929,867 -- 8,565,792 7.35%
GKW Unified Holdings, LLC/(4)/................. 63,408,375 -- 2,515,788 6.77%
Lodwrick Cook.................................. 2,500,264/(5)/ 1,692,480 950,002 *
Alice Kane..................................... -- -- -- *
Jeremiah Lambert............................... -- -- -- *
John Legere.................................... -- 5,000,000 -- *
Myron Ullman III............................... -- -- -- *
Dan Cohrs...................................... 60,647 1,747,550 -- *
Carl Grivner................................... 945 749,999 -- *
Joseph Perrone................................. -- 1,163,333 -- *
Jose Antonio Rios.............................. 364,000 1,358,333 -- *
All directors and executive officers as a group
(17 persons)**............................... 2,875,733 9,310,056 950,002 1.39%
- --------
* Percentage of shares beneficially owned does not exceed one percent.
** Excludes the shareholdings of Messrs. Cohrs, Grivner and Perrone, who are no
longer executive officers of the Company.
1. As of September 30, 2003, 932,714,416 shares of common stock were issued and
outstanding.
2. Represents stock options granted under our stock incentive plans.
3. Represents warrants providing for the immediate right to purchase shares of
common stock at an exercise price of $9.50 per share.
4. Based on information provided by Form 13G/A-4, filed by such shareholders on
February 14, 2003. Mr. Winnick's amounts include all shares and warrants
owned by both Pacific Capital Group, Inc., a company wholly owned and
controlled by Mr. Winnick, and GKW Unified Holdings, LLC ("GKW"), a limited
liability company of which Mr. Winnick is a trustee of a trust that is a
member-manager. Mr. Winnick has shared voting and dispositive power with
respect to the shares and warrants held by GKW.
5. Includes 1,235,312 shares of common stock owned by the Cook Family Trust
dated September 16, 1991, a trust formed for the benefit of Lodwrick Cook
and members of his family. Mr. Cook is a trustee of the Trust and in such
capacity shares investment and voting power over such shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since the beginning of 2001, we entered into the transactions described
below with certain of our directors, executive officers and affiliates.
102
Transactions with Pacific Capital Group and its Affiliates
Pacific Capital Group, Inc. ("PCG") is a merchant bank specializing in
telecommunications, media and technology and has a substantial equity
investment in GCL's common stock, before giving effect to the cancellation of
GCL's equity securities upon our emergence from bankruptcy. PCG is controlled
by Gary Winnick, former chairman of our board of directors from our inception
through December 2002. In addition, Lodwrick Cook and some of our former
officers and directors are or at one time were affiliated with PCG.
In 1999, we entered into a lease with North Crescent Realty V, LLC ("North
Crescent Realty"), which is managed by and affiliated with PCG, with respect to
our then executive offices in Beverly Hills, California. We engaged an
independent real estate consultant to review the terms of our occupancy of the
building, and the consultant found the terms to be consistent with market terms
and conditions and the product of an arm's length negotiation. During 2001, we
made payments under this lease in the amount of approximately $333,000 per
month. PCG subleased a portion of this space from us during 2001 at a cost of
approximately $3.50 per square foot, which approximated our costs under the
lease. The amount of space subleased from us started the year at approximately
2,700 square feet but decreased during the year until PCG vacated the premises
by the end of the year. We relocated out of the Beverly Hills facility in March
2002. In connection with our bankruptcy proceedings, we rejected the Beverly
Hills lease at that time, thereby terminating our obligations under the lease.
PCG has fractional ownership interests in certain aircraft previously used
by us. In 2002 PCG paid us $232,000 in reimbursement of an amount contractually
due us after our use of such aircraft terminated. Prior to such termination, we
reimbursed PCG for PCG's cost of maintaining these ownership interests such
that PCG realized no profit from the relationship.
Financial Accommodations for Executive Officers
In July 1998, one of our subsidiaries provided a $250,000 interest-free
relocation loan to Dan J. Cohrs, an executive officer of Global Crossing until
the time of his termination of employment in May 2003. We forgave this loan in
full in December 2001.
In November 2000, one of our subsidiaries loaned $8 million to Thomas J.
Casey, then our chief executive officer and a director. The loan bore interest
at the rate of 6.01% per annum and was secured by a second deed of trust on Mr.
Casey's residence. The principal of and accrued interest on the loan were to be
due in full in October 2005 or upon the earlier termination of Mr. Casey's
employment for cause or due to his voluntary resignation. The loan was forgiven
in full in connection with the replacement of Mr. Casey with John Legere as
chief executive officer in October 2001.
In February 2001, one of our subsidiaries made a $3 million interest-free
loan to Jose Antonio Rios, one of our executive officers. The loan was
forgivable in three equal installments on the first, second and third
anniversaries of the date of grant, subject to Mr. Rios' continued employment
with the Company. $1 million of this loan was forgiven by its terms in each of
February 2002 and February 2003. A balance of $1 million remains outstanding on
the date of this annual report on Form 10-K.
In March 2001, one of our subsidiaries loaned $1.8 million to David Walsh,
then one of our executive officers. The loan bore interest at the rate of 4.75%
per annum and was secured by a second mortgage on his residence. The principal
of and accrued interest on the loan were to be due in full in March 2002 or
upon the earlier termination of Mr. Walsh's employment. Mr. Walsh repaid this
loan in full after his employment was terminated in October 2001.
In September 2001, one of our subsidiaries loaned $500,000 to a life
insurance trust created by S. Wallace Dawson, Jr., then an executive officer of
Global Crossing. The loan is repayable in full in September 2061 or, if
earlier, upon the death of the last to survive of Mr. Dawson and his wife. This
loan was used to purchase a joint variable life insurance policy with initial
face value amount of approximately $7.9 million. The outstanding balance of the
loan accrues interest at the rate of 5.49% per annum, payable upon maturity of
the loan. The full $500,000 original principal amount plus accrued interest
remains outstanding on the date of this annual report on Form 10-K.
103
In April 2001, our compensation committee and board of directors approved a
program (the "Program") under which financial accommodations could be made to
our executive officers who were in danger of suffering forced sales of their
GCL common stock at a time when the stock was trading at what appeared to be
depressed levels. David Walsh and Lodwrick Cook are the only executives who
participated in the Program.
Pursuant to the Program, in August 2001 one of our subsidiaries provided
approximately $1.4 million of cash collateral to secure an approximately $1.4
million margin loan balance in Mr. Walsh's commercial brokerage account, which
loan was secured by 746,973 shares of GCL common stock owned by Mr. Walsh. Mr.
Walsh agreed to cause our cash collateral to be returned by December 31, 2001,
together with interest at the average rate of interest applicable to loans
under our revolving credit facility. Mr. Walsh repaid the cash collateral to
us, together with accrued interest, after his employment was terminated in
October 2001.
In April 2001, a $7.5 million guarantee was approved for Mr. Cook under the
Program. Certain interim arrangements were put in place in which one of our
subsidiaries effectively guaranteed up to $7.5 million of the obligations of
Mr. Cook, his wife and a trust for the benefit of Mr. Cook and members of his
family under an existing margin loan, with such guarantee being secured by
certain cash and securities of the Company. In July 2001, these interim
arrangements were replaced by a $7.5 million letter of credit issued under our
then-existing revolving credit facility. This letter of credit supported a $7.5
million commercial bank loan that the Cooks used to refinance their margin loan
in full. This bank loan was also secured by 2.5 million shares of GCL common
stock pledged by the Cooks. At the time the letter of credit was issued, the
Cooks entered into a reimbursement agreement providing for the reimbursement to
us of any amounts drawn under the letter of credit, together with interest at
the rate applicable to the Cooks' commercial bank loan or, if higher, the rate
of interest applicable to letter of credit reimbursement obligations under our
revolving credit facility. In July 2002, the bank loan matured and the Cooks
failed to repay the loan. The lender then drew under the letter of credit. As
of the date of this annual report on Form 10-K, no reimbursement payments have
been made to us under the aforementioned reimbursement agreement. Pursuant to
the Plan of Reorganization, our reimbursement claim will be transferred to the
agent for the creditors under our revolving credit facility and any recoveries
against the Cooks will be distributed to such creditors.
Transactions with Withit.com
In June 2001, the Company entered into an agreement with Withit.com
("Withit"), a company owned and controlled by Joseph Perrone Jr., the son of
Joseph P. Perrone, a former executive officer of Global Crossing. Pursuant to
that agreement, we engaged Withit to perform certain integration,
implementation and co-marketing services relating to a one-way IP-based voice
extension product that we intended to market to the financial services
industry. We paid Withit an initial installment of $250,000 and undertook to
pay an equal amount upon its acceptance of the product in accordance with the
terms of the agreement. We paid Withit a second $250,000 installment in
December 2001 and also paid Withit $125,000 for out-of-pocket expenses incurred
in purchasing certain equipment to be used in implementation of the new product
and $115,000 for support and consulting services performed during the latter
half of 2001. In total we paid Withit $740,000.
Because of budgetary constraints and a change in product development
strategy, among other factors, we did not implement or market the voice
extension product that was the subject of the Withit agreement. The extent to
which Withit in fact provided the deliverables that were contractual
prerequisites for our second $250,000 payment in December 2001 is also an open
question.
Commencing in April 2002, an independent committee of our board of directors
reviewed these matters with the support of outside counsel. The committee found
that Mr. Perrone had influenced our decision to enter into the agreement with
Withit in a manner the committee deemed inappropriate. At the independent
committee's recommendation, the board of directors imposed a $325,000 monetary
penalty on Mr. Perrone and reassigned him to other duties within Global
Crossing. Although Mr. Perrone disagreed with the committee's findings, before
he left our employ for other reasons he paid this amount in full by consenting
to our withholding a portion of quarterly and annual cash bonus payments
otherwise due him.
104
Prior to the above-described relationship, Withit also subleased
approximately 4,125 square feet of office space in Chicago from us from August
2000 through July 2002 at a monthly rent of approximately $4,500. In late 2001,
Withit had fallen approximately $32,000 in arrears in its rental obligations
under the sublease, although it paid all arrearages in full upon termination of
the sublease in July 2002.
Relationships with Brownstein Hyatt & Farber, P.C.
Norman Brownstein, a director of Global Crossing from May 2000 through
November 2001, is chairman of the law firm of Brownstein Hyatt & Farber, P.C.
During 2001, we paid approximately $1,445,000 to Brownstein Hyatt & Farber for
legal and lobbying services. In addition, in his capacity as a consultant, in
March 2001 Mr. Brownstein was issued options to purchase 100,000 shares of GCL
common stock at an exercise price of $17.15 per share, such options vesting
ratably on each of the first three anniversaries of the date of grant. In 2001,
we also paid Brownstein Hyatt & Farber $156,000 for rent and shared office
expenses in respect of approximately 2,300 square feet of office space in
Washington, D.C. that we lease from that firm.
Relationship with Simpson Thacher & Bartlett LLP
Simpson Thacher & Bartlett LLP ("Simpson Thacher") was our principal
corporate counsel from our inception in 1997 through our bankruptcy filing in
January 2002. D. Rhett Brandon, a Simpson Thacher partner, served as our acting
vice president and general counsel from mid-September 2001 through February
2002, while remaining a partner of and receiving compensation from Simpson
Thacher, which billed us fees that included Mr. Brandon's time charges,
incurred at his usual hourly rate. We made aggregate payments of approximately
$3.8 million and $17.1 million to Simpson Thacher for fees and disbursements in
2002 and 2001, respectively, including significant payments made within 90 days
of the date on which the Company first filed for protection under the
Bankruptcy Code. It is possible that a portion of those payments may be
recoverable by the Company in an avoidance action under the Bankruptcy Code or
otherwise. Pursuant to our Plan of Reorganization, our rights to pursue any
such action will be transferred to a liquidating trust established for the
benefit of our creditors, to whom any recovery will be distributed.
ITEM 14. CONTROLS AND PROCEDURES
In connection with the completion of its audit of our consolidated financial
statements as of December 31, 2002 and 2001 and for the years then ended, Grant
Thornton identified to our Audit Committee and management certain internal
control deficiencies, including in the following areas: authorization,
accounting for and disclosure of certain related party transactions;
maintenance of documentation and recordkeeping for certain non-recurring,
significant transactions; delays in filing reports with the SEC and staffing of
personnel related to SEC reporting; deficiencies with respect to information
system security; misapplication of U.S. GAAP, resulting in the restatements
described in this annual report on Form 10-K; and manual invoicing inaccuracies
in the billing departments of certain subsidiaries. Grant Thornton has advised
the Audit Committee that they consider these internal control deficiencies to
be "significant deficiencies" that, in the aggregate, constitute "material
weaknesses" under standards established by the American Institute of Certified
Public Accountants. Grant Thornton has further advised the Audit Committee that
these internal control deficiencies do not affect Grant Thornton's unqualified
report on our consolidated financial statements as of December 31, 2002 and
2001 and for the years then ended.
Management has carried out an evaluation, with the participation of our
chief executive officer and chief financial officer, of the effectiveness of
our disclosure controls and procedures pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934 (the "Exchange Act"). In connection with such
evaluation, management has considered the internal control issues identified by
Grant Thornton. Based upon management's evaluation, our chief executive officer
and chief financial officer have concluded that disclosure controls and
procedures were effective as of December 31, 2002 to provide reasonable
assurance that information required to be disclosed by us in reports required
to be filed or submitted under the Exchange Act is properly identified,
recorded, processed, summarized and reported.
105
Nonetheless, to address the continued effectiveness of our internal controls
and disclosure controls and procedures on a go-forward basis, we:
. consolidated all security functions under a central organization that
reports directly to the Company's chief information officer and has
responsibility for security architecture and operations, audit and
compliance, and physical security;
. implemented a series of billing improvements to substantially reduce the
level of manual invoices;
. will include in the charter of the Audit Committee of New GCL a
requirement that the committee pre-approve any related party transactions
over a specified dollar amount; and
. will centralize recordkeeping for significant, non-recurring transactions.
In preparation for our emergence from bankruptcy, we have had discussions
with the SEC with respect to reporting under the Exchange Act and the
preparation of our consolidated financial statements. Within 15 days after
emergence, we intend to file with the SEC quarterly reports on Form 10-Q for
each of the first three quarters of 2003, as well as a current report on Form
8-K that will include a "fresh start" balance sheet establishing a fair value
basis for the carrying value of the assets and liabilities of the reorganized
company.
We will continue to ensure the adequacy and professional training of our
financial reporting staff. Upon emergence, we will continue to evaluate and
implement procedures to improve the effectiveness of our internal control over
financial reporting and disclosure controls and procedures.
There was no change in our internal control over financial reporting that
occurred during the fourth quarter of 2002 that has materially affected, or
that is likely to materially affect, our internal control over financial
reporting.
106
PART IV
ITEM 15. 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, 2002 and 2001.
Consolidated Statements of Operations for the years ended December 31,
2002, 2001 and 2000.
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended December 31, 2002, 2001 and 2000.
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000.
Consolidated Statements of Comprehensive Income (Loss) for the years
ended December 31, 2002, 2001 and 2000.
Notes to Consolidated Financial Statements
2. Financial Statement Schedules--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 Global Crossing Ltd., Frontier Corporation and GCF Acquisition Corp.
(incorporated by reference to Exhibit 2 to Global Crossing Ltd.'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 Global Crossing Ltd., GCF Acquisition Corp. and Frontier Corporation (incorporated
by reference to Exhibit 2 to Global Crossing Ltd.'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
Global Crossing Ltd., GCF Acquisition Corp. and Frontier Corporation (incorporated by
reference to Exhibit 2 to Global Crossing Ltd.'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
Global Crossing Ltd. (incorporated by reference to Exhibit 2.1 to Global Crossing Ltd.'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 Global Crossing Ltd. (incorporated by reference to Exhibit 2.2 to the July 16,
1999 8-K).+
2.6 Sale Agreement, made on October 10, 1999, between Controls and Communications Limited,
The Racal Corporation, Racal Electronics Plc and Global Crossing Ltd. (incorporated by
reference to Exhibit 2.1 to Global Crossing Ltd.'s Current Report on Form 8-K filed on
October 21, 1999 (the "October 21, 1999 8-K")).+
2.7 Agreement and Plan of Merger, dated as of February 22, 2000, among Global Crossing Ltd.,
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
Global Crossing Ltd.'s Current Report on Form 8-K filed on March 2, 2000 (the "March 2,
2000 8-K")).+
107
Exhibit Number Exhibit
- -------------- -------
2.8 Stock Purchase Agreement, dated as of July 11, 2000, by and among Global Crossing Ltd.,
Global Crossing North America, Inc. and Citizens Communications Company (incorporated
by reference to Exhibit 2 to Global Crossing Ltd.'s Current Report on Form 8-K filed on July
19, 2000).+
2.9 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 Global Crossing Ltd.'s Current Report on Form 8-K dated September 28,
2000, filed on October 17, 2000).+
2.10 Stock Purchase Agreement among Global Crossing Ltd., IXnet, Inc., International Exchange
Networks, Ltd., and Asia Global Crossing Ltd. dated as of July 10, 2000 (incorporated by
reference Exhibit 6 of Global Crossing Ltd.'s Schedule 13D, filed on July 19, 2001).+
2.11 Stock Purchase Agreement among Global Crossing Ltd., Asia Global Crossing, Ltd., Global
Crossing North America Holdings, Inc., Saturn Global Network Services Holdings Limited,
IXnet Hong Kong Ltd., Asia Global Crossing (Singapore) PTE Ltd., GS Capital Partners
2000, L.P., GS Capital Partners 2000 Offshore, L.P., GS Capital Partners 2000 GMBH & Co.
Beteiligungs KG, Bridge Street Special Opportunities Fund 2000, L.P., GS Capital Partners
2000 Employee Fund, L.P., Stone Street Fund 2000, L.P. and GS IPC Acquisition Corp., dated
November 16, 2001 (filed herewith).+
2.12 Purchase Agreement among Global Crossing Ltd., Global Crossing Holdings Ltd., Joint
Provisional Liquidators of Global Crossing Ltd. and Global Crossing Holdings Ltd. (the
"JPLs"), Singapore Technologies Telemedia Pte Ltd, and Hutchison Telecommunications
Ltd., dated as of August 9, 2002 (filed herewith).
2.13 Amendment No. 1 to Purchase Agreement to Purchase Agreement among Global Crossing
Ltd., Global Crossing Holdings Ltd., the JPLs, Singapore Technologies Telemedia Pte Ltd,
and Hutchison Telecommunications Ltd. dated as of December 20, 2002 (filed herewith).
2.14 Amendment No. 2 to Purchase Agreement among Global Crossing Ltd., Global Crossing
Holdings Ltd., the JPLs and Singapore Technologies Telemedia Pte Ltd, dated as of May 13,
2003 (filed herewith).
2.15 Amendment No. 3 to Purchase Agreement among Global Crossing Ltd., Global Crossing
Holdings, Ltd. and Singapore Technologies Telemedia Pte Ltd dated as of October 13, 2003
(filed herewith).
2.16 Amendment No. 4 to Purchase Agreement among Global Crossing Ltd., Global Crossing
Holdings Ltd., the JPLs and Singapore Technologies Telemedia Pte Ltd dated as of November
14, 2003 (filed herewith).
2.17 Amendment No. 5 to Purchase Agreement among Global Crossing Ltd., Global Crossing
Holdings Ltd., the JPLs and Singapore Technologies Telemedia Pte Ltd dated as of December 3,
2003 (filed herewith).
2.18 Disclosure Statement, including Proposed Plan of Reorganization of Global Crossing Ltd.
(incorporated by reference to Global Crossing Ltd.'s Current Report on Form 8-K dated
October 21, 2002, filed on October 28, 2002).
2.19 Confirmation Order, dated December 26, 2002, confirming Global Crossing Ltd.'s Joint Plan
of Reorganization (incorporated by reference to Exhibit 99.2 to Global Crossing Ltd.'s
Current Report on Form 8-K, filed on January 10, 2003).
3.1 Memorandum of Association of Global Crossing Ltd. (incorporated by reference to Exhibit
3.1 to Global Crossing Ltd.'s Registration Statement on Form S-1/A filed on July 2, 1998).+
3.2 Certificate of Incorporation of Change of Name of Global Crossing Ltd. dated April 30, 1998
(incorporated by reference to Exhibit 3.3 to Global Crossing Ltd's Registration Statement on
Form S-1/A filed on July 23, 1998).+
108
Exhibit Number Exhibit
- -------------- -------
3.3 Memorandum of Increase of Share Capital of Global Crossing Ltd. dated July 9, 1998
(incorporated by reference to Exhibit 3.4 to Global Crossing Ltd. Registration Statement on
Form S-1/A filed on July 23, 1998).+
3.4 Memorandum of Increase of Share Capital of Global Crossing Ltd. dated September 27, 1999
(incorporated by reference to Exhibit 3.1 to Global Crossing Ltd.'s Quarterly Report on Form
10-Q filed on November 15, 1999).+
3.5 Bye-laws of Global Crossing Ltd. as in effect on October 14, 1999 (incorporated by reference
to Exhibit 3.2 to Global Crossing Ltd.'s Quarterly Report on Form 10-Q filed on November
15, 1999).+
3.6 Amended and Restated Constitutional Documents of Global Crossing Limited (formerly GC
Acquisition Ltd.) (filed herewith).
3.7 Form of Amended and Restated Bye-Laws of Global Crossing Limited (formerly GC
Acquisition Ltd.) (filed herewith).
4.1 Form of stock certificate for common stock of Global Crossing Limited (formerly GC
Acquisition Ltd.) (filed herewith).
4.2 Form of Certificate of Designations of 2.0% Cumulative Senior Preferred Shares of Global
Crossing Limited (formerly GC Acquisition Ltd.) (filed herewith).
4.3 Form of Indenture among Global Crossing Limited, Global Crossing North American
Holdings, Inc. ("GCNAH"), Certain Guarantors and Wells Fargo Bank relating to $200
million original principal amount of 11% Senior Secured Notes of GCNAH (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 1998 Global Crossing Ltd. Stock Incentive Plan as amended and restated as of May 1, 2000
(incorporated by reference to Annex A to Global Crossing Ltd.'s definitive proxy statement on
Schedule 14A filed on May 8, 2000).+*
10.2 Form of Non-Qualified Stock Option Agreement of Global Crossing Ltd. as in effect on
September 30, 1999 (incorporated by reference to Exhibit 10.2 to Global Crossings Ltd.'s
Quarterly Report on Form 10-Q filed on November 15, 1999).+*
10.3 Reimbursement Agreement dated July 26, 2001, between Global Crossing Holdings Ltd.,
Lodwrick Cook, Carole Cook and the Cook Family Trust (filed herewith).+*
10.4 Promissory note dated February 27, 2001 between Jose Antonio Rios and Global Crossing
Development Co. (filed herewith).*
10.5 Employment Agreement dated as of June 3, 2002 between John J. Legere and Global Crossing
Ltd. (filed herewith).+*
10.6 Form of Employment Agreement between John J. Legere and Global Crossing Limited
(formerly GC Acquisition Ltd.) to be entered into in connection with the consummation of the
Plan of Reorganization (filed herewith).*
10.7 Form of Global Crossing Limited (formerly GC Acquisition Ltd.) Key Management
Protection Plan to be adopted in connection with the consummation of the Plan of
Reorganization (filed herewith).*
109
Exhibit Number Exhibit
- -------------- -------
10.8 Form of 2003 Global Crossing Limited (formerly GC Acquisition Ltd.) Stock Incentive Plan
to be used after consummation of the Plan of Reorganization (filed herewith).*
10.9 Form of Non-Qualified Stock Option Agreement applicable to executive officers of Global
Crossing Limited (formerly GC Acquisition Ltd.) to be used after consummation of the Plan
of Reorganization (filed herewith).*
10.10 Form of Cooperation Agreement between Global Crossing Limited (formerly GC Acquisition
Ltd.) and the individuals signatory thereto in their capacities as Estate Representative under
the Plan of Reorganization and as, or on the behalf of, the Liquidating Trustee under a
liquidating trust agreement (filed herewith).
10.11 Form of Liquidating Trust Agreement among Global Crossing Ltd. and its debtor subsidiaries
signatory thereto and the individuals signatory thereto in their capacity as the liquidating
trustee (filed herewith).
10.12 Form of Registration Rights Agreement between Global Crossing Limited (formerly GC
Acquisition Ltd.) and Singapore Technologies Telemedia Pte Ltd (filed herewith).
10.13 Network Security Agreement dated as of September 24, 2003, between Global Crossing Ltd.,
Global Crossing Limited (formerly GC Acquisition Ltd.), Singapore Technologies Telemedia
Pte Ltd, the Federal Bureau of Investigation, the U.S. Department of Justice, the Department
of Defense and the Department of Homeland Security (filed herewith).
10.14 Settlement Agreement dated March 5, 2003 between Global Crossing Ltd. and Asia Global
Crossing Ltd. (filed herewith).
21.1 Subsidiaries of Global Crossing Limited (filed herewith).
31.1 Certification by John J. Legere, Chief Executive Officer of Registrant pursuant to Rule 13a-
14(a) of the Securities Exchange Act of 1934 (filed herewith).
31.2 Certification by Daniel P. O'Brien, Chief Financial Officer of Registrant pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934 (filed herewith).
32.1 Certification by John J. Legere, Chief Executive Officer of Registrant, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
32.2 Certification by Daniel P. O'Brien, Chief Financial Officer of Registrant, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith).
- --------
+ Denotes constituent document, plan or agreement of Global Crossing Ltd. that
is not being assumed by Global Crossing Limited (formerly GC Acquisition
Ltd.) in connection with the consummation of the Plan of Reorganization.
* Denotes management contract or compensatory plan, contract or arrangement.
(b) Reports on Form 8-K.
During the year ended December 31, 2002, the following reports on Form
8-K were filed by the Registrant:
1. Current Report on Form 8-K dated January 28, 2002 (date of earliest
event reported), filed on February 7, 2002, for the purpose of reporting,
under Item 3, the Chapter 11 bankruptcy proceedings of Registrant.
2. Current Report on Form 8-K dated April 12, 2002 (date of earliest
event reported), filed on April 12, 2002, for the purpose of providing,
under Items 7 and 9, the Monthly Operating Report of Registrant.
110
3. Current Report on Form 8-K dated May 9, 2002 (date of earliest event
reported), filed on May 9, 2002, for the purpose of providing, under Items 7
and 9, the Monthly Operating Report of Registrant.
4. Current Report on Form 8-K dated June 7, 2002 (date of earliest event
reported), filed on June 10, 2002, for the purpose of providing, under Items
7 and 9, the Monthly Operating Report of Registrant.
5. Current Report on Form 8-K dated June 17, 2002 (date of earliest event
reported), filed on June 21, 2002, for the purpose of providing, under Item
5, the bidding procedures for investment in the Registrant as proscribed by
the Bankruptcy Court.
6. Current Report on Form 8-K dated July 8, 2002 (date of earliest event
reported), filed on July 18, 2002, for the purpose of providing, under Items
7 and 9, the Monthly Operating Report of Registrant.
7. Current Report on Form 8-K dated August 9, 2002 (date of earliest
event reported), filed on August 16, 2002, for the purpose of announcing,
under Item 5, the signing of a definitive agreement under which Hutchison
Telecommunications Limited, a wholly owned subsidiary of Hutchison Whampoa
Limited, and Singapore Technologies Telemedia Pte. Ltd. would invest a total
of $250 million for a 61.5 percent majority interest in Registrant on its
emergence from bankruptcy.
8. Current Report on Form 8-K dated October 21, 2002 (date of earliest
event reported), filed on October 28, 2002, for the purpose of providing,
under Item 3, the Registrant's Plan of Reorganization and Disclosure
Statement.
(c) See Item 15(a)(3) above.
(d) See Item 15(a)(2) above.
111
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
-----
Report of Independent Certified Public Accountants: Grant Thornton LLP............................ F-2
Report of Independent Public Accountants: Arthur Andersen LLP..................................... F-4
Consolidated Financial Statements as of December 31, 2002 and 2001 and for each of the three years
ended December 31, 2002:
Consolidated Balance Sheets....................................................................... F-5
Consolidated Statements of Operations............................................................. F-6
Consolidated Statements of Shareholders' Equity (Deficit)......................................... F-7
Consolidated Statements of Cash Flows............................................................. F-8
Consolidated Statements of Comprehensive Income (Loss)............................................ F-9
Notes to Consolidated Financial Statements........................................................ F-10
Schedule:
Schedule II--Valuation and Qualifying Accounts................................................... F-101
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
GLOBAL CROSSING LTD.
(in provisional liquidation in the Supreme Court of Bermuda)
We have audited the accompanying consolidated balance sheets of Global
Crossing Ltd. (in provisional liquidation in the Supreme Court of Bermuda) and
its subsidiaries (the "Company") as of December 31, 2002 and 2001, and the
related consolidated statements of operations, shareholders' equity (deficit),
cash flows and comprehensive loss for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial
statements based on our audits. The consolidated financial statements of the
Company as of and for the year ended December 31, 2000 were audited by other
auditors who have ceased operations. The other auditors expressed an
unqualified opinion on those consolidated financial statements in their report
dated February 14, 2001, prior to the restatements discussed in Note 4,
"Restatement of Previously Issued Financial Statements," and Note 8,
"Discontinued Operations and Dispositions".
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Global
Crossing Ltd. (in provisional liquidation in the Supreme Court of Bermuda) and
its subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed above, the consolidated financial statements of the Company as
of and for the year ended December 31, 2000 were audited by other auditors who
have ceased operations. As described in Notes 4 and 8, these financial
statements have been restated. We audited the adjustments described in Notes 4
and 8 that were applied to restate the Company's consolidated financial
statements as of and for the year ended December 31, 2000. In our opinion, such
adjustments have been properly applied. However, we were not engaged to audit,
review, or apply any procedures to the Company's consolidated financial
statements as of and for the year ended December 31, 2000 other than with
respect to such adjustments and, accordingly, we do not express an opinion or
any other form of assurance on the 2000 consolidated financial statements taken
as a whole.
We have also audited the financial statement schedule listed in the Index at
Item 15(a)(2) as of and for the years ended December 31, 2002 and 2001. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
As discussed in Note 2, "Reorganization and Delays in Reporting," Global
Crossing Ltd. and certain of its subsidiaries have filed for reorganization
under Chapter 11 of the Federal Bankruptcy Code. Similarly, Global Crossing
Ltd. and certain of its Bermuda subsidiaries commenced insolvency proceedings
in the Supreme Court of Bermuda (the "Bermuda Court"). The accompanying
consolidated financial statements do not purport to reflect or provide for the
consequences of the bankruptcy proceedings. In particular, such financial
statements do not purport to show (a) as to assets, their net realizable value
on a liquidation basis or their availability to satisfy liabilities; (b) as to
pre-petition liabilities, the amounts that may be allowed for claims or
contingencies, or the status or priority thereof; (c) as to shareholder
accounts, the effect of any changes that may be made in the capitalization of
the Company; or (d) as to operations, the effect of any changes that may be
made in its
F-2
business. On December 26, 2002, the Bankruptcy Court entered an order
confirming the Plan of Reorganization. Similarly, on January 3, 2003, the
Bermuda Court sanctioned the Schemes (the Bermuda equivalent to confirmation).
Under the Plan of Reorganization, the Company is required to comply with
certain terms and conditions as more fully described in Note 2.
/s/ GRANT THORNTON LLP
New York, New York
September 10, 2003 (except as it relates to Notes 1, 2, 13--New Senior Secured
Notes, 27 and 32, as to which the date is December 4, 2003)
F-3
THIS IS A COPY OF AN ACCOUNTANT'S REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP NOR HAS ARTHUR
ANDERSEN LLP PROVIDED A CONSENT TO THE INCLUSION OF ITS REPORT IN THIS ANNUAL
REPORT ON FORM 10-K. THE 2000 FINANCIAL STATEMENTS REFERRED
TO IN THIS REPORT HAVE BEEN RESTATED SUBSEQUENT TO THE DATE OF THE REPORT (SEE
NOTES 4 AND 8). THE RESTATEMENT ADJUSTMENTS HAVE BEEN REPORTED ON BY GRANT
THORNTON LLP.
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 year 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-4
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share information)
December 31,
------------------
2002 2001
-------- --------
ASSETS:
Current assets:
Cash and cash equivalents................................................................. $ 423 $ 607
Restricted cash and cash equivalents...................................................... 327 306
Accounts receivable, net of allowances of $134 in 2002 and $128 in 2001................... 482 818
Other current assets and prepaid costs.................................................... 218 298
Current assets of discontinued operations................................................. -- 616
-------- --------
Total current assets................................................................... 1,450 2,645
Property and equipment, net.................................................................. 1,059 1,000
Investments in and advances to/from affiliates, net.......................................... 53 70
Other assets................................................................................. 73 254
Non current assets of discontinued operations................................................ -- 245
-------- --------
Total assets........................................................................... $ 2,635 $ 4,214
======== ========
LIABILITIES:
Current liabilities not subject to compromise
Accounts payable....................................................................... $ 141 $ 247
Accrued construction costs............................................................. 38 476
Accrued cost of access................................................................. 235 300
Long-term debt in default.............................................................. -- 6,589
Other current liabilities.............................................................. 898 1,842
Current liabilities of discontinued operations......................................... -- 574
-------- --------
Total current liabilities........................................................... 1,312 10,028
Deferred revenue............................................................................. 1,438 1,475
Other deferred liabilities................................................................... 240 428
Non current liabilities of discontinued operations........................................... -- 1,317
-------- --------
Total liabilities not subject to compromise.................................................. 2,990 13,248
-------- --------
Liabilities subject to compromise............................................................ 8,136 --
-------- --------
11,126 13,248
-------- --------
MANDATORILY REDEEMABLE PREFERRED STOCK:
10 1/2% Mandatorily Redeemable Preferred Stock, 5,262,500 shares issued and outstanding as of
December 31, 2002 and 2001, $100 liquidation preference per share plus accumulated and unpaid
dividends..................................................................................... 526 517
-------- --------
CUMULATIVE CONVERTIBLE PREFERRED STOCK........................................................... 1,918 2,644
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Common stock, 3,000,000,000 shares authorized, par value $.01 per share, 909,052,691 and
890,417,743 shares issued and outstanding as of December 31, 2002 and 2001, respectively.... 9 9
Treasury stock, 22,033,758 shares............................................................ (209) (209)
Additional paid-in capital................................................................... 14,350 13,637
Accumulated other comprehensive loss......................................................... (344) (237)
Accumulated deficit.......................................................................... (24,741) (25,395)
-------- --------
(10,935) (12,195)
-------- --------
Total liabilities and shareholders' deficit............................................ $ 2,635 $ 4,214
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except share and per share information)
Years Ended December 31,
----------------------------------------
2002 2001 2000 Restated
------------ ------------ -------------
REVENUES...................................................................... $ 3,116 $ 3,659 $ 3,505
OPERATING EXPENSES:
Cost of access and maintenance............................................ 2,205 2,152 1,791
Other operating expenses.................................................. 1,208 2,080 1,752
Depreciation and amortization............................................. 137 1,548 1,280
Asset impairment charges.................................................. -- 17,181 --
Restructuring charges..................................................... -- 410 --
------------ ------------ ------------
3,550 23,371 4,823
------------ ------------ ------------
OPERATING LOSS................................................................ (434) (19,712) (1,318)
OTHER INCOME (EXPENSE):
Equity in income (loss) of affiliates, net................................ 6 (94) (45)
Interest income........................................................... 2 21 103
Interest expense.......................................................... (75) (506) (383)
Loss from write-down and sale of investments, net......................... -- (2,041) --
Gain from sale of subsidiary's common stock and related subsidiary
stock sale transactions.................................................. -- -- 303
Other income (expense), net............................................... 198 7 (69)
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE
REORGANIZATION ITEMS AND INCOME TAXES........................................ (303) (22,325) (1,409)
REORGANIZATION ITEMS, NET..................................................... (95) -- --
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE BENEFIT
(PROVISION) FOR INCOME TAXES................................................. (398) (22,325) (1,409)
Benefit (provision) for income taxes...................................... 102 1,847 (376)
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS............................................... (296) (20,478) (1,785)
Income (loss) from discontinued operations, (net of provision for
income taxes of $0, $496 and $669, respectively)......................... 950 (1,916) (1,008)
------------ ------------ ------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES........................................................ 654 (22,394) (2,793)
Cumulative effect of change in accounting principle, net of benefit for
income taxes of $0, $0 and $5, respectively.............................. -- -- (9)
------------ ------------ ------------
NET INCOME (LOSS)............................................................. 654 (22,394) (2,802)
Preferred stock dividends................................................. (19) (238) (221)
Charge for conversion and redemption of preferred stock................... -- -- (92)
------------ ------------ ------------
INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS............................... $ 635 $ (22,632) $ (3,115)
============ ============ ============
INCOME (LOSS) PER COMMON SHARE, basic and diluted:
Loss from continuing operations applicable to common shareholders......... $ (0.35) $ (23.37) $ (2.49)
============ ============ ============
Income (loss) from discontinued operations, net........................... $ 1.05 $ (2.16) $ (1.19)
============ ============ ============
Cumulative effect of changes in accounting principles, net................ $ -- $ -- $ (0.01)
============ ============ ============
Income (loss) applicable to common shareholders........................... $ 0.70 $ (25.53) $ (3.69)
============ ============ ============
Shares used in computing basic and diluted income (loss) per share........ 903,217,277 886,471,473 844,153,231
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in millions, except share information)
Other
Shareholders'
Common Stock Treasury Stock Equity (Deficit)
------------------ ---------------- -----------------------
Accumulated
Additional Other
Paid-in Comprehensive Accumulated
Shares Amount Shares Amount Capital (Loss) Deficit
----------- ------ ---------- ------ ---------- ------------- -----------
Balance at December 31, 1999...................... 799,137,142 $ 8 22,033,758 $(209) $ 9,599 $ (20) $ (199)
Issuance of common stock from exercise of
stock options................................. 14,936,578 -- -- -- 102 -- --
Income tax benefit from exercise of stock
options....................................... -- -- -- -- 4 -- --
Issuance of common stock to convert
preferred stock............................... 12,363,489 -- -- -- 445 -- --
Issuance of common stock for cash.............. 21,673,706 -- -- -- 688 -- --
Preferred stock dividends...................... -- -- -- -- (221) -- --
Shares issued in connection with IXnet/IPC
acquisition................................... 58,228,358 1 -- -- 3,189 -- --
Amortization of compensation expense........... -- -- -- -- 44 -- --
Unrealized gain on securities, net............. -- -- -- -- -- 76 --
Foreign currency translation adjustment........ -- -- -- -- -- (138) --
Other.......................................... -- -- -- -- (2) -- --
Net loss (Restated)............................ -- -- -- -- -- -- (2,802)
----------- --- ---------- ----- ------- ----- --------
Balance at December 31, 2000...................... 906,339,273 $ 9 22,033,758 $(209) $13,848 $ (82) $ (3,001)
Issuance of common stock from exercise of
stock options................................. 5,401,476 -- -- -- 20 -- --
Reduction of tax benefit on future stock
option exercises.............................. -- -- -- -- (33) -- --
Issuance of common stock to convert
preferred stock............................... 710,752 -- -- -- 27 -- --
Preferred stock dividends...................... -- -- -- -- (238) -- --
Write-off unused share accrual................. -- -- -- -- 3 -- --
Amortization of compensation expense........... -- -- -- -- 24 -- --
Unrealized loss on securities, net............. -- -- -- -- -- (78) --
Foreign currency translation adjustment........ -- -- -- -- -- (77) --
Other.......................................... -- -- -- -- (14) -- --
Net loss....................................... -- -- -- -- -- -- (22,394)
----------- --- ---------- ----- ------- ----- --------
Balance at December 31, 2001...................... 912,451,501 $ 9 22,033,758 $(209) $13,637 $(237) $(25,395)
Issuance of common stock to convert
preferred stock............................... 18,634,948 -- -- -- 797 -- --
Preferred stock dividends...................... -- -- -- -- (19) -- --
Write-off preferred stock cost to liquidation
value......................................... -- -- -- -- (72) -- --
Write-off preferred stock issuance costs....... -- -- -- -- (9) -- --
Foreign currency translation adjustment........ -- -- -- -- -- (65) --
Additional minimum pension liability........... -- -- -- -- -- (42) --
Other.......................................... -- -- -- -- 16 -- --
Net income..................................... -- -- -- -- -- -- 654
----------- --- ---------- ----- ------- ----- --------
Balance at December 31, 2002...................... 931,086,449 $ 9 22,033,758 $(209) $14,350 $(344) $(24,741)
=========== === ========== ===== ======= ===== ========
Total
Shareholders'
Equity
(Deficit)
-------------
Balance at December 31, 1999...................... $ 9,179
Issuance of common stock from exercise of
stock options................................. 102
Income tax benefit from exercise of stock
options....................................... 4
Issuance of common stock to convert
preferred stock............................... 445
Issuance of common stock for cash.............. 688
Preferred stock dividends...................... (221)
Shares issued in connection with IXnet/IPC
acquisition................................... 3,190
Amortization of compensation expense........... 44
Unrealized gain on securities, net............. 76
Foreign currency translation adjustment........ (138)
Other.......................................... (2)
Net loss (Restated)............................ (2,802)
--------
Balance at December 31, 2000...................... $ 10,565
Issuance of common stock from exercise of
stock options................................. 20
Reduction of tax benefit on future stock
option exercises.............................. (33)
Issuance of common stock to convert
preferred stock............................... 27
Preferred stock dividends...................... (238)
Write-off unused share accrual................. 3
Amortization of compensation expense........... 24
Unrealized loss on securities, net............. (78)
Foreign currency translation adjustment........ (77)
Other.......................................... (14)
Net loss....................................... (22,394)
--------
Balance at December 31, 2001...................... $(12,195)
Issuance of common stock to convert
preferred stock............................... 797
Preferred stock dividends...................... (19)
Write-off preferred stock cost to liquidation
value......................................... (72)
Write-off preferred stock issuance costs....... (9)
Foreign currency translation adjustment........ (65)
Additional minimum pension liability........... (42)
Other.......................................... 16
Net income..................................... 654
--------
Balance at December 31, 2002...................... $(10,935)
========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Years Ended December 31,
-------------------------------
2002 2001 2000 Restated
------- -------- -------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss)......................................... $ 654 $(22,394) $(2,802)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) continuing operations:
Loss from discontinued operations......................... 234 1,590 1,008
Loss on sales of discontinued operations.................. -- 326 --
Gain on abandonment of Asia Global Crossing............... (1,184) -- --
Gain on sale of fixed assets.............................. (57) -- --
Restructuring charge...................................... -- 115 --
Loss from write-down and sale of investments, net......... -- 2,041 --
Impairment of long-lived assets........................... -- 17,181 --
Cumulative effect of change in accounting principle, net.. -- -- 9
Depreciation and amortization............................. 137 1,548 1,280
Gain from sale of subsidiary's common stock and related
subsidiary stock sale transactions....................... -- -- (303)
Reorganization items, net................................. 95 -- --
Stock related expenses.................................... -- 21 48
Equity in loss (income) of affiliates..................... (6) 94 45
Provision for doubtful accounts........................... 77 124 69
Deferred income taxes..................................... -- (970) 573
Other..................................................... (70) (82) 38
Changes in operating assets and liabilities............... 527 (500) 584
------- -------- -------
Net cash provided by (used in) continuing operations...... 407 (906) 549
Net cash used in discontinued operations.................. (66) (318) (986)
Net cash used in reorganization items..................... (292) -- --
------- -------- -------
Net cash provided by (used in) operating activities..... 49 (1,224) (437)
------- -------- -------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of property and equipment....................... (281) (2,643) (3,366)
Proceeds from sale of ILEC................................ -- 3,369 --
Proceeds from sale of fixed assets........................ 62 -- --
Investments in and advances to/from affiliates, net....... -- (75) (32)
Purchases of marketable securities........................ -- (12) (186)
Proceeds from sale of marketable securities............... 4 124 9
Proceeds from sale of unconsolidated affiliates........... -- 164 164
Change in restricted cash and cash equivalents............ (20) (12) 13
Other..................................................... -- (1) --
------- -------- -------
Net cash provided by (used in) investing activities..... (235) 914 (3,398)
------- -------- -------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net............... -- -- 785
Proceeds from issuance of preferred stock, net............ -- -- 1,112
Proceeds from short-term borrowings....................... -- 61 1,000
Proceeds from long-term debt.............................. 17 4,016 1,641
Repayment of long-term debt............................... -- (2,630) (1,303)
Repayment of short-term debt.............................. -- (1,061) --
Preferred dividends....................................... -- (211) (193)
Other..................................................... (15) (24) (53)
------- -------- -------
Net cash provided by financing activities............... 2 151 2,989
------- -------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................... (184) (159) (846)
CASH AND CASH EQUIVALENTS, beginning of year................. 607 766 1,612
------- -------- -------
CASH AND CASH EQUIVALENTS, end of year....................... $ 423 $ 607 $ 766
======= ======== =======
The accompanying notes are an integral part of these consolidated
financial statements.
F-8
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
Years Ended December 31,
----------------------------
2002 2001 2000 Restated
---- -------- -------------
Net income (loss).............................................................. $654 $(22,394) $(2,802)
Foreign currency translation adjustment..................................... (65) (77) (138)
Unrealized (loss) gain on securities, net of provision (benefit) for income
taxes of $0 in 2002, $(49) in 2001 and $49 in 2000........................ -- (78) 76
Additional minimum pension liability........................................ (42) -- --
---- -------- -------
Comprehensive income (loss).................................................... $547 $(22,549) $(2,864)
==== ======== =======
Foreign currency translation adjustments are not adjusted for income taxes
since they relate to investments that are permanent in nature.
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except number of sites, square footage, share and per share
information)
1. BACKGROUND AND ORGANIZATION
Global Crossing Ltd., a Bermuda company in provisional liquidation in the
Supreme Court of Bermuda ("GCL" and, together with its consolidated
subsidiaries, the "Company"), was incorporated in Bermuda on March 19, 1997.
The Company's common stock traded on the New York Stock Exchange ("NYSE") under
the name Global Crossing Ltd. and the ticker symbol "GX" until January 28,
2002, at which time the NYSE suspended trading of the Company's common stock
due to its chapter 11 filing. As a result of the suspension and subsequent
de-listing of the Company's common stock from the NYSE, the shares began
quotation on the over the counter market under the symbol "GBLXQ" on January
29, 2002.
As discussed below in Note 2, GCL and a number of its subsidiaries are
currently debtors under chapter 11 of title 11 of the United States Code (the
"Bankruptcy Code"), and GCL and certain of its Bermuda subsidiaries have also
commenced coordinated insolvency proceedings in the Supreme Court of Bermuda.
Upon consummation of the Company's plan of reorganization, which is expected to
occur shortly after the date of filing of this annual report on Form 10-K, GCL
will transfer substantially all of its assets to a newly formed Bermuda company
named "Global Crossing Limited" ("New GCL"). New GCL will thereby become the
parent company of the Global Crossing consolidated group of companies and will
succeed to GCL's reporting obligations under the Securities Exchange Act of
1934, as amended. References in these Notes to the Company at any time after
such plan of reorganization goes effective mean New GCL and its subsidiaries.
The Company provides telecommunication services over a global network that
reaches more than 200 major cities throughout the world. The markets in these
cities represent 85% of the world market for telecommunications services. The
Company serves many of the world's largest corporations, providing a full range
of managed data and voice products and services. The Company operates
throughout the Americas and Europe. The Company provides services throughout
the Asia/Pacific region through commercial arrangements with other carriers.
The Company's strategy is to be a premier provider of broadband
communications services in commercial centers worldwide. The Company seeks to
attain market leadership in global data and Internet Protocol ("IP") services
by taking advantage of its extensive broadband network and technological
capabilities. Through its Global Marine Systems Limited ("GMS") subsidiary, the
Company also provides installation and maintenance services for subsea
telecommunications systems.
Since the fourth quarter of 2001, the Company has reduced the amount of cash
required to fund its operations. Nonetheless, the Company's unrestricted cash
balances have continued to decline due primarily to ongoing operating losses,
severance payments, settlement payments to vendors and significant costs
incurred in connection with the bankruptcy proceedings. As of October 31, 2003,
the Company had $213 in unrestricted cash. Management currently expects that
the Company will need to obtain up to $100 in financing to fund the Company's
anticipated liquidity requirements through the end of 2004. The Company is
currently seeking to arrange a working capital facility or other financing to
provide the Company with this necessary liquidity. The indenture for the $200
of new debt in the form of senior secured notes (the "New Senior Secured
Notes") to be issued upon the Company's emergence from bankruptcy (see Notes 2
and 13) permits the Company to incur up to $150 in additional debt under one or
more working capital facilities secured by first priority liens on the
Company's assets. If the Company cannot arrange a working capital facility or
raise other financing by December 31, 2003, Singapore Technologies Telemedia
Pte Ltd ("ST Telemedia") has indicated its intention to provide the Company
with up to $100 of financial support to fund the Company's operating needs on
such terms and conditions as the Company and ST Telemedia may agree. ST
Telemedia's intention is based on the Company's commitment to adhere to an
operating plan requiring no more than $100 in additional funds in 2004.
F-10
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
If provided, this financial support could be in the form of (1) a guarantee or
other support by ST Telemedia in respect of borrowings by the Company under a
working capital facility or other financing or (2) a subordinated loan from ST
Telemedia. The indenture for the New Senior Secured Notes does not permit ST
Telemedia to lend to the Company directly on a secured or senior basis. While
ST Telemedia has indicated its intention to provide financial support to the
Company (in addition to its $250 equity investment) and management expects ST
Telemedia to make such financial support available, ST Telemedia does not have
any contractual obligation to provide financial support to the Company, and the
Company can provide no assurance that ST Telemedia will provide any such
financial support.
The Company expects its available liquidity to decline in 2004 due in part
to exit cost requirements under the Plan of Reorganization (with payment terms
of up to 24 months) that will consume over $100 of cash in 2004 and interest
payments on the New Senior Secured Notes. The Company believes the $250 equity
infusion the Company will receive from ST Telemedia upon emergence from
bankruptcy under the Purchase Agreement, and the Company's unrestricted cash
and anticipated operating cash flows, together with a working capital facility
or other financing providing for up to $100 in available funds (which has not
yet been arranged), will provide adequate funding for the Company to pay its
expected operating expenses, fund its expected capital expenditures, meets its
debt service obligations and meet its restructuring cost requirements through
at least January 1, 2005. However, there can be no assurance that the Company's
operating cash flows will improve as the Company anticipates, or that the
Company's operating cash flows and any working capital facility or other
financing that the Company may arrange will be adequate to meet its anticipated
liquidity requirements. As currently projected, the Company will need to raise
additional financing to fund the Company's anticipated liquidity needs for 2005
and thereafter. The market environment and the Company's financial condition
will make it difficult for the Company to access the capital markets for the
foreseeable future. If the Company is unable to raise additional financing or
improve the Company's operating results to achieve positive operating cash
flows in the future, the Company would be unable to meet its anticipated
liquidity requirements.
2. REORGANIZATION AND DELAYS IN REPORTING
Commencement of the Chapter 11 and Bermuda Cases
On January 28, 2002 (the "Commencement Date"), GCL and fifty-four of its
subsidiaries filed voluntary petitions for relief under chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of New York (the "Bankruptcy Court").
On the same date, GCL and certain of its Bermuda subsidiaries commenced
insolvency proceedings in the Supreme Court of Bermuda (the "Bermuda Court").
On such date, the Bermuda Court granted an order appointing Malcolm
Butterfield, Jane Moriarty and Philip Wallace, partners of KPMG, as Joint
Provisional Liquidators ("JPLs") in respect of GCL and those Bermuda
subsidiaries. The Bermuda Court granted the JPLs the power to oversee the
continuation and reorganization of these companies' businesses under the
control of their boards of directors and under the supervision of the
Bankruptcy Court and the Bermuda Court. Twenty-five additional subsidiaries of
GCL subsequently commenced chapter 11 cases and, where applicable, Bermuda
insolvency proceedings under the supervision of the JPLs to coordinate the
restructuring of those companies with the restructuring of GCL.
F-11
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
The Purchase Agreement
On March 25, 2002, the Bankruptcy Court approved bidding and auction
procedures for the potential sale of the Company's businesses, either in whole
or in part. Numerous parties were contacted and performed diligence on the
Company's assets. As the auction process came to an end in late July of 2002,
Hutchison Telecommunications Limited ("Hutchison") and ST Telemedia were
invited by the Company and representatives of its creditors to negotiate the
definitive terms of a proposed investment in the Company. After extensive
negotiations, an agreement in principle was reached leading to the execution of
a definitive Purchase Agreement, dated as of August 9, 2002, among the Company,
Global Crossing Holdings Ltd., the JPLs, Hutchison, and ST Telemedia (the
"Purchase Agreement") for the purchase of substantially all of GCL's assets.
The Bankruptcy Court approved the Purchase Agreement on August 9, 2002.
Under the Purchase Agreement, Hutchison and ST Telemedia agreed to invest a
total of $250 for a 61.5 percent equity interest in New GCL, a newly formed
Bermuda company, upon the Company's emergence from bankruptcy. At emergence,
GCL will transfer substantially all of its assets (including stock in
subsidiaries) to New GCL. New GCL will thereby become the parent company of the
Global Crossing group and will succeed to GCL's reporting obligations under the
Exchange Act. However, New GCL and its subsidiaries will not assume any
liabilities of GCL or its subsidiaries that commenced bankruptcy cases (the "GC
Debtors") other than the "Assumed Liabilities," which are generally defined in
the Plan of Reorganization to include the following: (i) ordinary course
administrative expense claims, (ii) priority tax claims, (iii) certain secured
claims, (iv) obligations under agreements assumed by the GC Debtors in their
chapter 11 cases and (v) obligations under the Purchase Agreement.
The Purchase Agreement also sets forth the basic terms of a restructuring
with the Company's banks and unsecured creditors. In summary, those parties
were to receive common shares representing 38.5 percent of the equity in New
GCL, approximately $323 in cash, and $200 of New Senior Secured Notes. However,
pursuant to an amendment to the plan of reorganization approved by the
Bankruptcy Court on December 4, 2003, the New Senior Secured Notes will be
issued to ST Telemedia for gross proceeds of $200 in cash, all of which gross
proceeds will be distributed to the Company's banks and unsecured creditors,
increasing their total cash recovery to approximately $523 but eliminating
their previously contemplated interest in the New Senior Secured Notes.
Consummation of the Purchase Agreement is subject to various conditions,
including the receipt of regulatory approvals. In particular, each of the
parties had the right to terminate their obligations under the Purchase
Agreement in the event that such regulatory approvals had not been obtained by
April 30, 2003 (the "Voluntary Termination Date").
The Chapter 11 Plan of Reorganization and Bermuda Schemes of Arrangement
On September 16, 2002, GCL filed a chapter 11 plan of reorganization (as
amended, the "Plan of Reorganization") and accompanying disclosure statement
(as amended, the "Disclosure Statement") with the Bankruptcy Court. On October
17, 2002, GCL filed an amended Plan of Reorganization and amended Disclosure
Statement. The Plan of Reorganization implements the terms of the Purchase
Agreement with respect to the chapter 11 cases. The terms of the Plan of
Reorganization are described in more detail below. On October 21, 2002, the
Bankruptcy Court approved the Disclosure Statement and related voting
procedures. On October 28, 2002, GCL commenced solicitation of acceptances and
rejections of the Plan of Reorganization.
On October 24, 2002, GCL and each of the other GC Debtors incorporated in
Bermuda were granted approval by the Bermuda Court to hold meetings of their
creditors for the purpose of considering and voting on schemes of arrangement
(the "Schemes"). The Schemes implement the terms of the Purchase Agreement with
F-12
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
respect to the Bermuda cases, essentially by incorporating the terms of the
Plan of Reorganization. The meetings of creditors to consider and vote on the
Schemes were held in Bermuda on November 25 and 28, 2002.
On December 17, 2002, the Bankruptcy Court confirmed the Plan of
Reorganization, subject to the entry of a formal confirmation order and
documentation of the resolution of any outstanding objections. On December 26,
2002, the conditions specified by the Bankruptcy Court on December 17, 2002
were met and as a result the Bankruptcy Court entered the order confirming the
Plan of Reorganization. Similarly, on January 3, 2003, the Bermuda Court
sanctioned the Schemes (the Bermuda equivalent to confirmation).
ST Telemedia's Assumption of Hutchison's Rights Under the Purchase Agreement
and Regulatory Approval
On the Voluntary Termination Date, GCL had not obtained all the regulatory
approvals necessary to complete the transaction and it became apparent that the
Committee on Foreign Investment in the United States ("CFIUS") would not
approve the transaction with Hutchison participating in it. On that date,
Hutchison withdrew from the Purchase Agreement and ST Telemedia exercised its
option under the Purchase Agreement to assume all of Hutchison's rights and
obligations thereunder. As a result, ST Telemedia agreed to increase its
original $125 investment to a total of $250 for a 61.5 percent equity interest
in New GCL upon its emergence from bankruptcy. The withdrawal by Hutchison and
related assumption by ST Telemedia required GCL to file amended applications
for regulatory approvals with CFIUS, the FCC and other regulatory authorities.
In May 2003, GCL filed a motion with the Bankruptcy Court to approve an
amendment to the Purchase Agreement which, among other things, extended the
Voluntary Termination Date to October 14, 2003. The Bankruptcy Court approved
the amendment on July 1, 2003 after a contested hearing on the matter and over
the objection of one of the Company's creditor groups. The decision of the
Bankruptcy Court is currently on appeal to the United States District Court for
the Southern District of New York.
On September 19, 2003, President Bush stated, in a letter to congressional
leaders, that he would "take no action to suspend or prohibit the proposed 61.5
percent investment by Singapore Technologies Telemedia Pte. Ltd., a company
indirectly owned by the Government of Singapore, in Global Crossing Ltd.," thus
clearing the Company to proceed with the sale to ST Telemedia in connection
with the CFIUS process. On October 8, 2003, the Company received approval from
the Federal Communications Commission for the transfer of licenses required
under the Purchase Agreement. With this action, all regulatory approvals
required by the Purchase Agreement had been obtained.
By amendment dated October 13, 2003, November 14, 2003 and December 3, 2003,
the Company and ST Telemedia further extended the Voluntary Termination Date
until, most recently, December 19, 2003, in order to provide additional time
for completion of the transactions required by the Purchase Agreement. None of
these amendments was opposed. The Company believes that the appeal from the
July 1, 2003 decision of the Bankruptcy Court described above is now moot and
is likely to be dismissed, with prejudice.
On November 28, 2003, the Company decided to amend the Plan of
Reorganization to provide an additional $200 million of cash to its banks and
unsecured creditors in lieu of the New Senior Secured Notes. ST Telemedia
advised the Company that it would purchase the New Senior Secured Notes to
provide the funding to effectuate that amendment. On December 4, 2003, the
Bankruptcy Court entered an order approving the amendment. The amendment
similarly was approved by the Supreme Court of Bermuda on December 5, 2003.
F-13
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
Effect of the Plan of Reorganization and Schemes of Arrangement and
Distributions Thereunder
The Plan of Reorganization governs the treatment of claims against and
interests in each of the GC Debtors. Upon consummation of the Plan of
Reorganization, all pre-petition claims against and interests in each of the GC
Debtors (other than interests and certain claims held by the Company) will be
discharged and terminated. Creditors of the GC Debtors will receive the
following distributions under the plan:
. Holders of administrative expense claims (post-petition claims relating
to actual and necessary costs of administering the bankruptcy estates and
operating the businesses of the GC Debtors) and priority claims
(principally taxes and claims for pre-petition wages and employee benefit
plan contributions) will generally be paid in full in cash.
. Holders of certain secured claims will be paid in full in cash or have
their debt reinstated or collateral returned.
. The remaining pre-petition creditors will receive in the aggregate a
combination of 38.5% of the equity in New GCL, approximately $523 in cash
and the entire beneficial interest in the liquidating trust described in
the next paragraph.
. Holders of GCL common and preferred shares will not receive any
distribution under the plan.
. Holders of preferred shares of Global Crossing Holdings Ltd. ("GCHL"), a
direct subsidiary of GCL whose assets are being transferred to New GCL
and its subsidiaries pursuant to the plan, will not receive any
distribution under the plan.
The GC Debtors' bankruptcy proceedings in general, and the Plan of
Reorganization in particular, have had and will have many other important
consequences for the Company. For example, many of the executory contracts and
leases of the GC Debtors have been or will be rejected in the bankruptcy
process, significantly decreasing the Company's contractual obligations going
forward. In addition, upon consummation of the plan, the GC Debtors will
transfer to a liquidating trust established for the benefit of the creditors
approximately $7 in cash and certain of the GC Debtors' rights, credits, claims
and causes of action for preferences, fraudulent transfers and other causes of
action and rights to setoff.
Delays in Reporting
On April 2, 2002, the Company announced that the filing with the SEC of its
annual report on Form 10-K for the fiscal year ended December 31, 2001 would be
delayed. Arthur Andersen LLP ("Arthur Andersen"), the Company's independent
public accountants at the time, had previously informed the Company that
Andersen would not be able to deliver an audit report with respect to the
Company's financial statements for the year ended December 31, 2001 to be
contained in the annual report on Form 10-K until the completion of an
investigation by a special committee of the Company's board of directors into
allegations regarding the Company's accounting and financial reporting
practices made by a former employee of the Company.
During June 2002, Arthur Andersen informed the Company and the Audit
Committee of its Board of Directors that Arthur Andersen's conviction for
obstruction of justice would effectively end the firm's audit practice. Arthur
Andersen ceased practicing before the SEC by August 31, 2002. As a result,
Arthur Andersen was unable to perform the audit and provide an audit report
with respect to the Company's financial statements for the year ended December
31, 2001. Due to the investigation by the special committee, the cessation of
Arthur Andersen's audit practice, the demands of the bankruptcy process and the
time required to hire a new independent public accountant and complete the 2001
audit, the Company had to delay the preparation of its
F-14
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
audited financial statements for 2001 and 2002. The Company fulfilled its
Bankruptcy Court financial reporting requirements by filing Monthly Operating
Reports ("MOR"). The Company completed MOR filings through June 2003. The
Company will file MORs for July 2003 through to the emergence date subsequent
to its emergence from bankruptcy.
By order dated November 20, 2002, the Bankruptcy Court directed the
appointment of an examiner in the GC Debtors' chapter 11 cases. On November 25,
2002, the United States Trustee appointed a partner of Grant Thornton LLP
("Grant Thornton") as the Examiner. The Examiner and the Audit Committee of the
Board of Directors of the Company retained Grant Thornton to assist the
Examiner. In general, the Examiner's role was limited to reviewing the
financial and accounting records of the Company for the years ended December
31, 2002 and 2001, and earlier periods if any restatement of those period was
necessary. As part of his role, the Examiner, with the assistance of Grant
Thornton, will, among other things, cause an audit report to be issued with
respect to the Company's financial statements as of and for the years ended
December 31, 2002 and 2001. Separately, on November 27, 2002, the Examiner and
the Audit Committee of the Board of Directors filed an application with the
Bankruptcy Court to retain Grant Thornton as the independent public accountants
of the Company effective as of November 25, 2002. The Bankruptcy Court approved
this application on December 11, 2002, and an engagement letter formalizing
GT's appointment was executed on January 8, 2003. The Examiner's first interim
report to the Bankruptcy Court was filed on February 24, 2003. On June 30,
2003, the Examiner filed his second interim report with the Bankruptcy Court.
It is anticipated that the Examiner's final report will be filed with the
Bankruptcy Court in December 2003.
3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
A summary of the basis of presentation and the significant accounting
policies followed in the preparation of these consolidated financial statements
is as follows:
Basis of Presentation and Use of Estimates
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States ("U.S.
GAAP"). The preparation of consolidated financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities in the consolidated financial statements and the accompanying
notes, as well as the reported amounts of revenue and expenses during the
reporting period. Actual amounts and results could differ from those estimates.
The estimates the Company makes are based on historical factors, current
circumstances and the experience and judgment of the Company's management. The
Company evaluates its assumptions and estimates on an ongoing basis and may
employ outside experts to assist in the Company's evaluations.
As discussed in Note 2, GCL and certain subsidiaries filed voluntary
petitions for relief under chapter 11 of the Bankruptcy Code and accordingly
the accompanying consolidated financial statements have also been prepared in
accordance with Statement of Position ("SOP") No. 90-7, "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code". SOP 90-7 requires an
entity to distinguish pre-petition liabilities subject to compromise from post
petition liabilities on its balance sheet. In the accompanying consolidated
balance sheet, the caption "liabilities subject to compromise" reflects the
Company's best current estimate of the amount of pre-petition claims that will
be restructured in the GC Debtors' chapter 11 cases. In addition, SOP 90-7
requires an entity's statement of operations to portray the results of
operations of the entity during chapter 11 proceedings. As a result, any
revenues, expenses, realized gains and losses, and provisions resulting from
the reorganization and restructuring of the organization should be reported
separately as reorganization items, except
F-15
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
those required to be reported as discontinued operations and extraordinary
items in conformity with Accounting Principles Board Opinion No. 30 ("APB No.
30"), "Reporting the Results of Operations--Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", as amended by Statement of Financial
Accounting Standards No. 145 ("SFAS No. 145") "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections", and SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets".
Principles of Consolidation
The consolidated financial statements include the accounts of GCL and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Under U.S. GAAP, consolidation is generally required for investments of more
than 50% of the outstanding voting stock of an investee, except when control is
not held by the majority owner. Under these same rules, legal reorganization or
bankruptcy represent conditions which can preclude consolidation in instances
where control rests with the bankruptcy court, rather than with the majority
owner. As discussed in Note 8, during the year ended December 31, 2002 Asia
Global Crossing Ltd. (together with its consolidated subsidiaries, "AGC") and
Pacific Crossing Limited ("PCL") filed for voluntary petitions for relief under
the Bankruptcy Code. As a result of the chapter 11 petitions, the Company's
ability to exert control and exercise influence over AGC's and PCL's management
decisions through its equity interest was substantially eliminated; furthermore
the nature of the reorganization plans of AGC and PCL were such that the
Company would no longer have access to or a continuing involvement in the
businesses of AGC and PCL. As a result, AGC's and PCL's financial results are
included as discontinued operations for all periods presented.
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.
Operating Leases
The Company offers customers flexible bandwidth products to multiple
destinations and many of the Company's contracts for subsea circuits are
entered into as 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 a right to use the capacity that 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
F-16
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
purchased is available for service. Revenue attributable to leases of capacity
pursuant to indefeasible rights-of-use agreements ("IRUs") that qualify for
sales-type lease accounting, and were entered into prior to June 30, 1999, were
recognized at the time of delivery and acceptance of the capacity by the
customer. Certain sale and long-term IRU agreements of capacity entered into
after June 30, 1999 are required to be accounted for in the same manner as
sales of real estate with property improvements or integral equipment which
results in the deferral of revenue recognition over the term of the agreement
(currently up to 25 years). 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. For the
years ended December 31, 2002, 2001 and 2000, $0, $18 and $312 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 GMS 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. For the
years ended December 31, 2002, 2001, and 2000, $68, $364 and $258 in revenue,
respectively, was recognized using the percentage of completion method. Costs
related to the percentage of completion revenues for the years ended December
31, 2002, 2001 and 2000 were $97, $311, and $243 respectively.
Telecom Installation Revenue
Effective January 1, 2000, the Company 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 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 and increased amortization expense by approximately $11. The cumulative
impact on the results for the year ended December 31, 2000 was reflected as a
$9 (net of income tax benefit) cumulative effect of a change in accounting
principle in accordance with the adoption provisions of SAB 101.
Non-Monetary Transactions
The Company may exchange capacity with other capacity or service providers.
These transactions are accounted for in accordance with APB 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. On August 2,
2002, the SEC staff communicated its position on indefeasible rights of use
("IRU") capacity swaps to the American Institute of Certified Public
Accountants ("AICPA") SEC Regulations Committee. The SEC staff has concluded
that all IRU capacity swaps consisting of the exchange of leases should be
evaluated within paragraph 21 of APB No. 29. That is, if a swap involves leases
that transfer the right to use similar productive assets, the exchange should
be treated as the exchange of similar productive assets irrespective of whether
the "outbound" lease is classified as a sale-type lease, direct financing lease
or operating lease and irrespective of whether the "inbound" lease is
classified as a capital lease or an operating lease. The SEC staff directed
that in accounting for such transactions the carrying value rather than the
fair market value should be used. The SEC staff further directed registrants to
apply this guidance historically and prospectively, and to restate prior
financial statements if appropriate. All adjustments that the Company considers
are necessary to comply with the SEC's guidance have been reflected in the
accompanying
F-17
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
consolidated financial statements and the related notes (see Note 4 for further
discussion of related restatements recorded by the Company). There were no
material gains or losses from non-monetary transactions for the years ended
December 31, 2002, 2001, or 2000, respectively.
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
The Company utilizes service contract accounting and therefore depreciates
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 aggregate amount
to be 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 net 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 (see Note 10).
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 and 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, 2002 and 2001 were $332 and $312, respectively. The restricted
cash balance at the respective dates mainly reflect an escrow account with the
proceeds from the Company's sale of IPC Information Systems ("IPC") on December
20, 2001. The December 31, 2002 balance also includes funds in a Global
Crossing account under the control of the JPLs in Bermuda, such funds being a
contingency fund for the JPLs, with any remainder to be distributed to the
creditors upon emergence in accordance with the Plan of Reorganization. The
balance of the restricted cash at the respective dates includes but is not
limited to various rental guarantees, performance bonds, or amounts arising
from vendor or customer disputes. Included in long term "other assets" as of
December 31, 2002 and 2001 is approximately $5 and $6, respectively, of
restricted cash which serves as collateral on letters of credit and bank
guarantees.
Allowance for Doubtful Accounts and Sales Credits
The Company provides for allowances for doubtful accounts and sales credits.
Allowances for doubtful accounts are charged to other operating expenses, while
allowances for sales credits are charged to revenue. The adequacy of the
reserves is evaluated monthly by the Company utilizing several factors
including the length of time the receivables are past due, changes in the
customer's credit worthiness, the customer's payment history, the length of the
customer's relationship with the Company, current economic climate, current
industry trends and other relevant factors. A specific reserve requirement
review is performed on customer accounts with larger balances. A general
reserve requirement is performed on most accounts utilizing the factors
previously mentioned. Service level requirements are assessed to determine
sales credit requirements where necessary. The Company has historically
experienced significant changes month to month in reserve level requirements,
F-18
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
primarily due to unanticipated large customer bankruptcy filings or other
insolvency proceedings. Allowances are $134 and $128 as of December 31, 2002
and 2001, respectively. Changes in the financial viability of significant
customers, worsening of economic conditions and changes in the Company's
ability to meet service level requirements may require changes to its estimate
of the recoverability of the receivables. Appropriate adjustments will be
recorded to the period in which these changes become known.
Property and Equipment, net
Property and equipment, net, 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 as construction in progress, which is reclassified to
property and equipment at the date each segment of the applicable system
becomes operational.
The construction of the Company's network was substantially completed in
2001. 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;
direct internal costs 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.
The Company capitalizes third party line installation costs incurred by the
Company for new facilities and connections from the Global Crossing network to
networks of other carriers in order to provision customer orders. The costs are
capitalized to prepaid costs (current portion) and other assets (long-term
portion) and amortized using the straight-line method into depreciation and
amortization over the average useful life of customer contracts (2 years) in
accordance with the provisions of SAB 101. Internal costs, including labor,
incurred in the provisioning of customer orders are expensed as incurred and
recorded to other operating expenses.
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
(determined based on historical trends and usage, which could be impacted by
new technological advances in the industry that could result in partial or
complete obsolescence of components of the network) are as follows:
Buildings 10-40 years
Leasehold improvements 2-25 years
Furniture, fixtures and equipment 2-30 years
Transmission equipment 7-25 years
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 (loss).
F-19
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
The Company periodically evaluates the recoverability of its long-lived
assets and evaluates such assets for impairment whenever events or
circumstances indicate that the carrying amount of such assets (or group of
assets) may not be recoverable. Impairment is determined to exist if the
estimated future undiscounted cash flows are less than the carrying value of
such asset. The amount of any impairment then recognized would be calculated as
the difference between the fair value and the carrying value of the asset (see
"Impairment of Long Lived Assets", below and Notes 6 and 10).
Computer Software Costs
The Company capitalizes the cost of internal-use software which has a useful
life in excess of one year in accordance with Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent additions, modifications or upgrades to internal-use
software are capitalized only to the extent that they allow the software to
perform a task it previously did not perform. Software maintenance and training
costs are expensed in the period in which they are incurred. In addition, the
Company capitalizes interest associated with the development of internal-use
software. Capitalized computer software costs are amortized using the
straight-line method over a period of between 3 to 5 years.
Goodwill
Goodwill represents the remaining excess purchase price over the fair value
of the net assets of acquired companies, after allocation to other identifiable
intangibles. Prior to January 1, 2002, amortization expense was recorded on the
straight-line method over the applicable useful lives of goodwill, estimated by
the Company to be 10 to 25 years. Goodwill is reviewed for impairment whenever
events or circumstances indicate that carrying amounts may not be recoverable.
If it is determined that goodwill may be impaired and the estimated
undiscounted future cash flows, excluding interest, of the underlying business
are less than the carrying amount of the goodwill, then an impairment loss is
recognized. The impairment loss is based on the difference between the fair
value of the underlying business and the carrying amount (see Note 6).
Effective January 1, 2002, the Company also adopted SFAS No. 142 "Goodwill
and Other Intangible Assets" ("SFAS No. 142"), which provides, among other
things, that goodwill and intangibles with indefinite lives are no longer
amortized but are reviewed for impairment at least annually (beginning with the
first anniversary of the acquisition date). The adoption of SFAS No. 142 had no
impact on the Company's consolidated financial statements.
Other Intangibles
Other intangibles consist primarily of customer lists, trademarks, deeds of
grant (a right, granted to the Company in the acquisition of Racal Telecom in
November 1999, to install and maintain cable along the railways in the United
Kingdom) and assembled workforce. These values were based on a number of
significant assumptions and are amortized on the straight-line method over the
applicable estimated useful lives of the other intangibles, estimated by the
Company to be between 3 to 40 years.
Impairment of Long-Lived Assets
As required under the provisions of SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" ("SFAS
No. 121"), the Company periodically reviews long-lived
F-20
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
assets composed of property and equipment, goodwill, other intangibles and
other assets held for a period longer than a year, whenever events or changes
in circumstances indicate that the carrying amount of the asset(s) may be
impaired. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to the future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amounts of the assets exceed their fair value. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
cost to sell.
Effective January 1, 2002, the Company adopted the provisions of SFAS No.
144, which supercedes SFAS No. 121 and addresses financial accounting and
reporting for the impairment of long-lived assets, while retaining the
fundamental recognition and measurement for determining impairment for
long-lived assets to be held and used. SFAS No. 144 requires that a long-lived
asset to be abandoned, exchanged for a similar productive asset or distributed
to owners in a spin-off is to be considered held and used until it is disposed
of. However, SFAS No. 144 requires that management consider revising the
depreciable life of such long-lived asset. With respect to long-lived assets to
be disposed of by sale, SFAS No. 144 retains the provisions of SFAS No. 121
and, therefore, requires that discontinued operations no longer be measured on
a net realizable value basis and that future operating losses associated with
such discontinued operations no longer be recognized before they occur. The
adoption of SFAS No. 144 did not have any impact on the Company's consolidated
financial statements.
During the year ended December 31, 2001, long-lived tangible and intangible
asset impairments of $17,181 were recorded to continuing operations in the
accompanying consolidated statement of operations. Additional long-lived asset
impairments of $2,399 were recorded to discontinued operations during the year
ended December 31, 2001. These impairment charges were recorded in accordance
with SFAS No. 121 (see Note 6 for a further description of the impairment
charges). Amortization expense of goodwill and other intangibles, prior to the
write-off during the year ended December 31, 2001, amounted to $580 and $462
for the years ended December 31, 2001 and 2000, respectively.
The Company will adopt fresh start accounting, in accordance with SOP 90-7,
upon its anticipated emergence from bankruptcy in the fourth quarter of 2003,
which will result in a change in the value of long-lived assets in New GCL.
Investments
Marketable Securities
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 SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", are classified as "available for sale" and are reported at
estimated fair value with any unrealized gains or losses, net of tax, recorded
as a separate component of "other comprehensive income (loss)" 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 generally 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. If the Company concludes that the market
value of an investment is other-than-temporary, the Company records a charge to
the consolidated statement of operations to reduce the carrying value of the
security to its estimated fair value. The table below
F-21
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
discloses the realized gains and losses on the sale of marketable securities
and losses from the write down of marketable securities included in the
statements of operations for the years ended December 31, 2002, 2001 and 2000,
respectively.
Years Ended December 31,
---------------------
2000
--------
2002 2001 Restated
---- ------- --------
Realized gains on the sale of marketable securities........... $-- $ 67 $ 19
Realized losses on the sale of marketable securities.......... -- (11) --
Losses on the write down of marketable securities (see Note 8) -- (2,097) (19)
--- ------- ----
Total loss from write down and sale of investments, net.... $-- $(2,041) $ --
=== ======= ====
For the years ended December 31, 2002 and 2001 the gross unrealized holding
loss, net included in accumulated other comprehensive loss was $1 and $1,
respectively.
Equity Method Investments
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 (see Note 11).
Impairment of equity investments
The Company has invested in the equity instruments of certain unconsolidated
entities. The Company periodically reviews its investments under the provisions
of Accounting Principles Board ("APB") Opinions No. 18 "The Equity Method of
Accounting for Investments in Common Stock" whenever there is an indication
that fair value is less than cost and the decline in value is determined to be
other than temporary. Evidence of an other than temporary decline in value
might include, but would not necessarily be limited to, absence of an ability
to recover the carrying amount of the investment or inability of the investee
to sustain an earnings capacity that would justify the carrying amount of the
investment. When the decline in value is judged to be other than temporary, the
basis of the security is written down to fair value and the resulting loss is
charged to equity in income (loss) of affiliates, net in the statement of
operations. In the fourth quarter of 2001, the Company recorded a $114
write-down of an equity investment held in a Latin America, which is included
in equity in income (loss) of affiliates, net in the accompanying statement of
operations for the year ended December 31, 2001. In addition, an impairment of
$450 was recorded to discontinued operations in the year ended December 31,
2001 relating to AGC's investment in Hutchison Global Crossing ("HGC"; see Note
8 for further background on HGC and the sale of AGC's ownership in HGC in April
2002).
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, certain long-term debt was
extinguished, at which time the remaining balance of unamortized discount and
offering costs was written off and included in "other income (expense)" in
accordance with SFAS No. 145 (see "New Accounting Standards" below and Note 8).
F-22
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
On January 28, 2002, the remaining balance of deferred finance costs of $102
was written-off and a loss was recorded as a reorganization item in the
accompanying consolidated statement of operations as required by SOP 90-7.
Restructuring
The Company initiated a restructuring program commencing in August 2001,
that has resulted in restructuring charges of $95 (recorded to reorganization
items, net in accordance with SOP 90-7) and $410 for the years ended December
31, 2002 and 2001, respectively. The restructuring charges represent direct
costs of exiting lease commitments for certain real estate facility locations
and employee termination costs, along with certain other costs associated with
approved restructuring plans. These charges were recorded in accordance with
EITF 94-3 "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)" and represent the Company's best estimate of undiscounted
liabilities at the date the charges were taken. Adjustments for changes in
assumptions are recorded in the period such changes become known. Changes in
assumptions, especially as they relate to contractual lease commitments and
related anticipated third party sub-lease payments, could have a material
effect on the restructuring liabilities and consolidated results of operations.
See "New Accounting Standards" for a discussion regarding SFAS No.146 that
supercedes EITF 94-3 effective January 1, 2003.
Derivative Instruments
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133
requires that all derivatives be measured at fair value and recognized as
either assets or liabilities in the Company's consolidated balance sheets.
Changes in fair value of derivative instruments that do not qualify as hedges
and/or any ineffective portion of hedges are recognized as a gain or loss in
the Company's consolidated statement of operations in the current period.
Changes in the fair values of the derivative instruments used effectively as
fair value hedges are recognized in income (losses), along with the change in
the value of the hedged item. Changes in the fair value of the effective
portions of cash flow hedges are reported in other comprehensive income (loss)
and recognized in income (losses) when the hedged item is recognized in income
(losses). See Note 25.
The Company has entered into forward currency contracts, hedging the
exchange risk on committed foreign currency transactions. During 2001 and 2000,
the gains and losses on these contracts were recognized at the time the
underlying transactions were completed. The Company did not enter into any
forward currency contracts in 2002.
The Company's interest rate hedges were terminated during 2002 (see Note 25).
Fair Value of Financial Instruments
The Company does not enter into financial instruments for trading or
speculative purposes. Accordingly, financial instruments are presented on the
accompanying consolidated balance sheets at their carrying values. Fair values
are based on market quotes, current interest rates or management estimates, as
appropriate (see Note 26).
Income Taxes
The provision for income taxes, income taxes payable and deferred income
taxes are determined using the liability method. Deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax basis of assets and liabilities and are measured by applying enacted
tax rates and laws to
F-23
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
taxable years in which such differences are expected to reverse. A valuation
allowance is provided when the Company determines that it is more likely than
not that a portion of the deferred tax asset balance will not be realized.
Provision for income taxes on unremitted earnings of foreign subsidiaries is
made only on those amounts in excess of the funds considered to be permanently
reinvested.
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 transactions
are translated at average exchange rates during the period. Resulting
translation adjustments are recorded directly to a separate component of
shareholders' deficit and are reflected in the accompanying consolidated
statements of comprehensive loss. Translation differences resulting from the
effect of exchange rate changes on cash and cash equivalents were immaterial
and are not reflected separately in the Company's consolidated statements of
cash flows for each of the periods presented.
The Company's foreign exchange transaction gains (losses) included in "other
income (expense), net" in the consolidated statements of operations for the
years ended December 31, 2002, 2001 and 2000 were $26, $21 and $(46),
respectively.
Income (Loss) Per Common Share
Basic earnings (loss) per common share ("EPS") is computed as net income
(loss) available to common stockholders divided by the weighted-average number
of common shares outstanding for the period. Net income (loss) applicable to
common stockholders includes preferred stock dividends for the years ended
December 31, 2002, 2001, and 2000, respectively, and the conversion cost
related to the redemption of preferred stock for the year ended December 31,
2000. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. However, since the Company had a net loss from continuing
operations for the years ended December 31, 2002, 2001, and 2000, respectively,
diluted earnings (loss) per common share is the same as basic earnings (loss)
per common share, as any potentially dilutive securities would reduce the loss
per common share from continuing operations (see Note 22).
Stock-Based Compensation
The Company has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), and elected to
continue to account for stock options granted to employees and directors based
on the accounting set forth in Accounting Principles Board No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25").
On January 1, 2003, the Company adopted SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure" ("SFAS No. 148"). SFAS No.
148 amends SFAS No. 123 to provide alternative methods of transition to SFAS
No. 123's fair value method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No.
123 and APB No. 28, "Interim Financial Reporting," to require disclosure in the
summary of significant accounting policies on reported net income and earnings
per share in annual and interim financial statements. While SFAS No. 148 does
not amend
F-24
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
SFAS No. 123 to require companies to account for employee stock options using
the fair value method, the disclosure provisions of SFAS No. 148 are applicable
to all companies with stock-based employee compensation, regardless of whether
they account for that compensation using the fair value method of SFAS No. 123
or the intrinsic value method of APB No. 25.
Had compensation expense been determined and recorded based upon the
fair-value recognition provisions of SFAS No. 123, net income (loss) and income
(loss) per share would have been the following pro forma amounts:
Years Ended December 31,
------------------------
2000
--------
2002 2001 Restated
----- -------- --------
Income (loss) applicable to common shareholders, as reported............... $ 635 $(22,632) $(3,115)
Stock-based employee compensation expense determined under fair-value-based
method................................................................... (401) (421) (340)
----- -------- -------
Pro forma income (loss) applicable to common shareholders.................. $ 234 $(23,053) $(3,455)
===== ======== =======
Income (loss) per common share, basic and diluted..........................
As reported............................................................. $0.70 $ (25.53) $ (3.69)
===== ======== =======
Pro forma............................................................... $0.26 $ (26.00) $ (4.09)
===== ======== =======
Upon consummation of the Company's Plan of Reorganization all outstanding
options with respect of the Company's common stock will be canceled.
The weighted-average fair values of options granted for the years ended
December 31, 2001 and 2000 were $7.28 and $21.14, respectively. There were no
stock options granted in 2002. The fair value of each option grant is estimated
at the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
Years Ended December 31,
-----------------------
2002 2001 2000
---- ------ -----
Dividend yield......... -- 0% 0%
Expected volatility.... -- 101.68% 84.77%
Risk-free interest rate -- 4.32% 5.92%
Expected life (years).. -- 4 4
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. The Company establishes an allowance for uncollectible
accounts based on the credit risk applicable to particular customers,
historical trends and other relevant information. As of December 31, 2002 and
2001 no one customer accounted for more than 5% and 4% of the Company's
accounts receivable, net, respectively. For the years ended December 31, 2002,
2001, and 2000, no one customer accounted for more than 3%, 6% and 5% of the
Company's revenue, respectively.
F-25
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
Accounting for Accounts Receivable Securitizations
On June 15, 2001, certain of the Company's indirect, wholly-owned
subsidiaries (the "Subsidiaries") entered into a receivables sale agreement
(the "Sale Agreement"), under which the Subsidiaries agreed to sell a defined,
revolving pool of trade accounts receivable to GC Mart LLC ("GCM"), a
wholly-owned, special purpose subsidiary of the Company. GCM was formed for the
sole purpose of buying and selling receivables generated by the Subsidiaries.
Under the Sale Agreement, the Subsidiaries agreed to irrevocably and without
recourse sell their accounts receivable to GCM. Under a separate receivables
purchase agreement, dated the same date, GCM agreed to sell, in turn, an
undivided percentage ownership interest in these receivables to an independent
issuer of receivables-backed commercial paper. Under this purchase agreement,
the receivables continued to be serviced by Global Crossing North America, Inc.
("GCNA"), an indirect, wholly owned subsidiary of the Company. Certain of the
Subsidiaries' and GCNA's obligations under the $250 receivables facility were
guaranteed by Global Crossing Holdings Ltd. ("GCHL"), a direct wholly owned
subsidiary of the Company.
This two-step transaction was accounted for as a sale of receivables under
the provisions of SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities" ("SFAS No. 140"), which the
Company adopted in June 2001. The provisions of SFAS No. 140 establish the
conditions for a securitization to be accounted for as a sale of receivables,
which include requirements for an entity to be a qualifying special purpose
entity, and for the conditions under which a transferor will be deemed to have
retained effective control over transferred assets. On October 19, 2001 this
arrangement was terminated due to the reduction of the Company's credit ratings
by various rating agencies. All prospective cash collections related to this
facility, up to the amount of cash received by the Company from the financing
vehicle, were remitted solely to the facility provider to satisfy the
termination of this arrangement. Consequently, none of the Company's
outstanding accounts receivable were securitized as of December 31, 2002 and
2001.
Extinguishment of Deferred Revenue Obligations
The Company enters into agreements with its customers that may result in the
receipt of non-refundable cash before the relevant criteria for revenue
recognition have been satisfied and as a result a liability is recorded as
deferred revenue.
During the year ended December 31, 2002, certain long-term and prepaid lease
agreements for services on the Company's network were terminated either through
customer settlement agreements or through the bankruptcy proceedings of the
customers that had purchased such services from the Company. As a result, the
Company has no further requirement to provide services and, therefore, the
remaining deferred revenue of $97 was realized into "other income" in the
accompanying consolidated statement of operations as a result of the
extinguishment of the liability to provide future services to the applicable
customer. The derecognition of these liabilities is in accordance with the
guidelines described within SFAS No. 140 and did not result in any revenue
recognition by the Company.
Gain on Sale of Subsidiary Common Stock and Related Subsidiary Stock Sale
Transactions
The Company elected to adopt 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 to be reflected as
either a gain or loss in the consolidated financial statements or
F-26
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
reflected as a capital transaction. During 2000, one of the Company's
subsidiaries, AGC, completed an initial public offering that resulted in a gain
on the sale of the subsidiary's stock. No deferred taxes were required as GCL
is a Bermudian corporation and Bermuda does not impose a corporate income tax.
As a result, the Company elected to record the gain and any future gains or
losses resulting from the sale of a subsidiary's stock in its consolidated
statement of operations (See Note 8).
Advertising Costs
The Company expenses the cost of advertising as incurred. Advertising
expense is included as a component of other operating expenses in the
accompanying consolidated statements of operations and aggregated $1, $32, and
$50 during the years ended December 31, 2002, 2001, and 2000, respectively.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss) and other non-owner
related changes in equity not included in net income (loss), such as unrealized
gains and losses on marketable securities classified as available for sale,
foreign currency translation adjustments related to foreign subsidiaries and
other adjustments.
Fresh Start Accounting
The Company will implement "fresh start" accounting in accordance with SOP
90-7 upon its emergence from bankruptcy. SOP 90-7 also requires that changes in
accounting principles that will be required in the financial statements of New
GCL and its subsidiaries within twelve months following the adoption of fresh
start accounting be adopted at the time fresh start accounting is implemented.
Adopting fresh start accounting will likely result in material adjustments to
the historical carrying amount of the Company's assets and liabilities. Fresh
start accounting requires the Company to allocate the reorganization value to
its assets and liabilities based upon their estimated fair values. The fair
values of the assets as determined for fresh start reporting will be based on
estimates of anticipated future cash flow. Liabilities existing at the date the
Company's Plan of Reorganization becomes effective are stated at the present
values of amounts to be paid discounted at appropriate rates. The determination
of fair values of assets and liabilities is subject to significant estimation
and assumptions.
New Accounting Standards
In April 2002, the FASB issued SFAS No. 145, which eliminates the
requirement to report material gains or losses from debt extinguishments as an
extraordinary item, net of any applicable income tax effect, in an entity's
statement of operations. SFAS No. 145 instead requires that a gain or loss
recognized from a debt extinguishment be classified as an extraordinary item
only when the extinguishment meets the criteria of both "unusual in nature" and
"infrequent in occurrence" as prescribed under APB No. 30. The provisions of
SFAS No.145 are effective for fiscal years beginning after May 15, 2002 with
respect to the rescission of SFAS No. 4 and for transactions occurring after
May 15, 2002, with respect to provisions related to SFAS No. 13. The Company
adopted this standard in the fourth quarter of 2002 and it did not have a
material effect on the Company's results of operations or its financial
position. The statement of operations and cash flows for the year ended
December 31, 2000 have been reclassified to reflect its adoption of SFAS No.
145 and, accordingly, the extraordinary loss on the extinguishment of debt has
been reclassified to "other income" and the related taxes to "income tax
expense".
F-27
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"), which requires that costs,
including severance costs, associated with exit or disposal activities be
recorded at their fair value when a liability has been incurred. Under previous
guidance, certain exit costs, including severance costs, were accrued upon
management's commitment to an exit plan, which is generally before an actual
liability has been incurred. The Company will apply the provisions of SFAS
No. 146 to any exit or disposal activities initiated after December 31, 2002.
In November 2002, the EITF addressed the accounting for revenue arrangements
with multiple deliverables in Issue 00-21: "Accounting for Revenue Arrangements
with Multiple Deliverables" ("EITF 00-21"). EITF 00-21 provides guidance on how
the arrangement consideration should be measured, whether the arrangement
should be divided into separate units of accounting, and how the arrangement
consideration should be allocated among the separate units of accounting. EITF
00-21 shall be effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. The Company does not expect EITF 00-21
to have a material effect on the Company's results of operations or financial
position.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". FASB Interpretation No. 45 elaborates on
the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of the interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company has not entered into
arrangements or guarantees that meet the criteria of this interpretation and
does not expect the adoption of this interpretation to have a material effect
on its results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148 which amends SFAS No. 123.
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair-value-based method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No.
123 and APB No. 28, "Interim Financial Reporting," to require disclosure in the
summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income (loss) per share in annual and interim financial statements. While
SFAS No. 148 does not amend SFAS No. 123 to require companies to account for
employee stock options using the fair value method, the disclosure provisions
of SFAS No. 148 are applicable to all companies with stock-based employee
compensation, regardless of whether they account for that compensation using
the fair value method of SFAS No. 123 or the intrinsic value method of APB No.
25. The provisions of SFAS No. 148 are effective for fiscal years beginning
after December 15, 2002 with respect to the amendments of SFAS No. 123 and
effective for financial reports containing condensed financial statements for
interim periods beginning after December 15, 2002 with respect to the
amendments of APB No. 28. The Company will implement SFAS No. 148 effective
January 1, 2003 regarding disclosure requirements for condensed financial
statements for interim periods.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities and Interpretation of ARB No. 51" ("FIN 46"). FIN
46 addresses consolidation by business enterprises of variable interest
entities. A variable interest entity is defined as an entity in which the total
equity investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support from other
parties, or as a group the holders of the equity investment at risk lack any
one of the following three characteristics of a controlling financial interest:
(1) the direct or indirect ability to make decisions about an
F-28
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
entity's activities through voting rights or similar rights, (2) the obligation
to absorb the expected losses of the entity if they occur and (3) the right to
receive the expected residual returns of the entity if they occur. FIN 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003 to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The Company does not currently expect the adoption of FIN 46 to have a material
effect on the Company's consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133. In general, SFAS No.
149 is effective for contracts entered into or modified after June 30, 2003 and
for hedging relationships designated after June 30, 2003. The Company does not
currently expect the adoption of SFAS No. 149 to have a material effect on its
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150 ("SFAS No. 150"), "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 clarifies the accounting for certain financial
instruments with characteristics of both liabilities and equity and requires
that those instruments be classified as liabilities in statements of financial
position. Previously, many of those financial instruments were classified as
equity. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company does not expect
the adoption of SFAS No. 150 to have a material effect on its consolidated
financial statements.
Reclassifications
Certain prior year amounts have been reclassified in the consolidated
financial statements to conform to the current year presentation.
4. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The Company identified certain accounting matters relating to its
consolidated financial statements for the year ended December 31, 2000 and for
the quarters ended March 31, 2001, June 30, 2001 and September 30, 2001, that
require restatement. These matters are discussed in the following paragraphs
and summarized in the tables that follow.
Arthur Andersen, the Company's independent accountant during the periods
subject to restatement, audited the Company's consolidated financial statements
and issued an unqualified audit opinion dated February 14, 2001 as of and for
the year ended December 31, 2000. In November 2002, the Company retained Grant
Thornton to serve as its independent public accountant in respect of the
Company's consolidated financial statements for the years ended December 31,
2002 and 2001. Grant Thornton was also engaged to audit the adjustments applied
to restate the Company's 2000 consolidated financial statements including those
adjustments outlined below and those outlined in Note 8 in connection with the
retroactive reclassifications required as a result of operations discontinued
subsequent to December 31, 2000 and the Company's adoption of SFAS No. 145 in
the fourth quarter of 2002. However, Grant Thornton was not engaged to audit,
review or apply any procedures to the Company's consolidated financial
statements as of and for the year ended December 31, 2000 other than with
F-29
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
respect to such adjustments and, accordingly, does not express an opinion or
any other form of assurance on the 2000 consolidated financial statements taken
as a whole. A copy of Arthur Andersen's report for 2000 is included herein in
accordance with procedures under Rule 2-02 (e) of Regulation S-X. Quarterly
amounts are unaudited.
Concurrent Transactions
During the years ended December 31, 2001 and 2000, the Company entered into
a number of transactions in which the Company provided capacity, services
and/or facilities to other telecommunications carriers and concurrently
purchased or leased capacity, services, and/or facilities from these same
carriers. The Company accounted for these transactions based on guidance
provided by Arthur Andersen and on an industry white paper provided by Arthur
Andersen that set forth accounting principles relating to sales and exchanges
of telecommunications capacity and services. Following its review of these
transactions, Andersen concurred with the Company's accounting for the
transactions in accordance with the interpretation of APB No. 29 contained in
the white paper. The Company recorded the concurrent transactions at the fair
value of the assets or services surrendered to the counterparty in the
transaction. As a result, the fair value was recorded as deferred revenue and
amortized into revenue on a straight-line basis over the term of the related
contract. The capacity, services and/or facilities acquired were recorded at
the fair value of the assets or services surrendered by the Company in the
exchange based upon the type of asset or services acquired and the terms of the
applicable purchase agreement. The "other assets" acquired in the exchanges
were expensed over the term of the related contract. Property and equipment
acquired in the transaction were depreciated over the terms of the applicable
purchase agreements.
On August 2, 2002, SEC staff from the Office of the Chief Accountant
communicated to the SEC Regulations Committee of the American Institute of
Certified Public Accountants ("AICPA"), its position on exchanges of
indefeasible rights of use, or IRUs, for telecommunications capacity. The SEC
staff concluded that transactions involving concurrent sales and purchases of
IRU capacity swaps consisting of the exchange of leases should be evaluated
within paragraph 21 of APB No. 29. Under paragraph 21 of APB No. 29, accounting
for an exchange is based on the historical carrying value rather than the fair
value of the asset or services relinquished, resulting in no recognition of
revenue or of asset additions in connection with the exchange.
In October 2002, the Company announced it would restate the Company's
consolidated financial statements for the year ended December 31, 2000 and the
quarters ended March 31, 2001, June 30, 2001 and September 30, 2001 to record
concurrent transactions between carriers of assets and/or services constituting
telecommunications capacity at historical carryover basis, pursuant to
paragraph 21 of APB No. 29, resulting in no recognition of revenue or of asset
additions for such transactions. The Company has also determined that, under
APB No. 29, it will continue to record at fair values those transactions that
involve service contracts rather than leases, amortizing the revenue over the
lives of the relevant contracts.
Based upon a review of the relevant transactions, the Company has determined
that recording the concurrent transactions at historical carryover basis rather
than fair value does not have a material impact on the Company's consolidated
financial position (less than 1% of total assets) or consolidated statements of
operations (less than 0.1% of net loss) for financial statements filed in
respect of relevant periods in 2000. Accordingly, the Company's balance sheets
and statements of operations for these periods have not been restated. However,
the Company has determined that recording the concurrent transactions at
historical carryover basis rather than fair value does have a material impact
on the statement of cash flows for the year ended 2000 and on the Company's
financial position, statements of operations and cash flows for the financial
statements filed in respect of relevant periods in 2001.
F-30
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
The cumulative impact of the restatements for the concurrent transactions is
a reduction of total assets and liabilities and shareholders equity of $1,111
as of September 30, 2001 and a reduction of revenues and operating expenses of
$13 and $5, respectively, for the nine months ended September 20, 2001. As a
result of the restatements, cash provided by operating activities decreased
$780 and $177 for the nine months ended September 30, 2001 and the year ended
December 31, 2000, respectively. The Company recognized an offsetting decrease
in cash used in investing activities for each period, resulting in no change in
net cash flow for such periods.
Gain Recognition--Sale of GlobalCenter
In September 1999, the Company acquired Frontier Corporation ("Frontier"), a
telecommunications company that had several businesses, including a long
distance business, an incumbent local exchange carrier, or ILEC, business and
GlobalCenter, a web-hosting business. In September 2000, the Company entered
into an agreement to sell GlobalCenter to Exodus Communications, Inc.
("Exodus"). The sale of GlobalCenter to Exodus closed in January 2001.
Commencing with the quarterly period ended December 31, 2000, the Company
classified GlobalCenter in the Company's financial statements as a discontinued
operation, retroactive to the date of the Frontier acquisition. In the sale,
the Company received 108.15 million shares of Exodus common stock, which were
valued at $1,918 based on the closing sale price of the Exodus common stock
over a specified period just prior to the closing of the transaction. The value
of such Exodus shares exceeded the aggregate value of the GlobalCenter net
assets sold by $126, or $82 on an after-tax basis. The Company recognized the
$82 after-tax gain in results from discontinued operations in the first quarter
of 2001. The Company carried the investment in the Exodus shares as a
marketable security available for sale pursuant to SFAS No. 115.
Concurrent with the agreement to sell GlobalCenter, the Company and Exodus
entered into a network services agreement (the "NSA") whereby Exodus committed
to purchase 50% of its network capacity requirements outside of Asia from the
Company over a 10-year period. As an incentive to Exodus to migrate its network
traffic to the Company, the agreement included a $100 pricing discount, or
credit, for Exodus over the first two years of the NSA. The Company planned to
record the $100 pricing discount as a reduction of revenues, which, as services
were provided over the life of the contract, would be treated as a sales
discount in the recognition of revenue under the NSA. The Company believed that
this discount was consistent with terms that would have been offered to any
other third party customer with the same product profile and commitment size
and therefore that recording the $100 as a sales discount was reasonable and
appropriate. In addition, Exodus paid to the Company $200 in nonrefundable
deposits for capacity, $100 in September 2000 and $100 in December 2000, which
the Company recognized as deferred revenue. The Company discussed this
accounting for the gain and sales discount with its independent public
accountant, Arthur Andersen, who concurred with this accounting treatment.
The Company has reassessed these matters and has determined to restate its
consolidated financial statements with respect to the accounting for the gain
on the sale of GlobalCenter. As restated, the value of the Exodus shares
received in excess of the GlobalCenter net assets sold of $126 is treated as a
deferred gain to be recognized as a reduction of operating expenses on a
straight-line basis over the 10-year term of the NSA or upon judicial release
from the Company's obligations under the NSA, if this were to occur earlier in
accordance with the guidance provided in SAB 101, Frequently Asked Questions
No. 4. This results in a reversal of the $82 after-tax gain that had been
recognized in the first quarter of 2001 and the recognition of $12 of pre-tax
gain per year over the 10-year term of the NSA commencing in 2001 (which
results in recognition of $3 of such gain in each of the quarters ended March
31, 2001, June 30, 2001 and September 30, 2001).
In September 2001, Exodus filed for bankruptcy. As a result, the commitments
under the NSA were never realized as service was substantially halted upon the
bankruptcy filing by Exodus. The Company is not assuming
F-31
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
the Exodus contract in the Company's bankruptcy proceeding. Accordingly, upon
emergence by the Company from bankruptcy, the balances of the deferred revenue
(approximately $167) and the deferred gain on the sale (approximately $89) will
both be eliminated in accordance with fresh start accounting guidelines under
SOP 90-7.
Deferred Taxes
Sale of ILEC business
In July 2000, the Company entered into a stock purchase agreement to sell
the ILEC business to Citizens Communications, Inc. ("Citizens") for $3,650 in
cash. During the quarterly period ending September 30, 2000, the Company
classified the ILEC business in its consolidated financial statements as a
discontinued operation, retroactive to the date of the Frontier acquisition. In
connection with this change to reflect the ILEC business as a discontinued
operation, the Company evaluated its accounting for the ILEC sale and
reevaluated its original purchase price allocation for the Frontier
acquisition. As a result, at such time, the Company (1) reallocated $1,500 in
goodwill of the Frontier purchase price to the ILEC business (which had
previously been allocated no goodwill) and (2) recorded a $1,000 deferred tax
liability pursuant to SFAS No. 109, "Accounting for Income Taxes" ("SFAS No.
109"), in connection with the sale of the ILEC business as the Company's
financial reporting basis exceeded its tax basis in its investment in the ILEC
business. The Company recorded the $1,000 deferred tax liability as an
adjustment to goodwill in the Frontier acquisition purchase price allocation,
effective as of the date of the Frontier acquisition. The $1,500 re-allocation
was deemed necessary as the Company concluded that it would be inappropriate
for a gain to be recognized on the sale of this business so shortly after the
acquisition of the ILEC since the Company invested little into the ILEC segment
since it was acquired, market valuations of ILECs had not changed significantly
in that period (September 28, 1999 date of acquisition through July 2000), and
the financial performance of the business had changed very little since its
acquisition. The Company's original purchase price allocation, which reflected
no goodwill allocation to the ILEC business, was based upon an appraisal
performed by a third party in February 2000 and was consistent with the
Company's and the market's view at the time that the value of the Frontier
acquisition was primarily related to the long distance business. However, the
Company believed the third party transaction with Citizens in July 2000 was a
better indicator of fair value of the ILEC business acquired in September 1999
than the February 2000 valuation report and should have been reflected in the
purchase price allocation. The Company also believed that, since the purchase
price allocation was being revisited and this temporary difference arose during
this re-allocation period, recording the deferred tax liability as a purchase
price adjustment was reasonable and appropriate. The Company discussed this
accounting for deferred taxes with its independent public accountant, Arthur
Andersen, who concurred with this accounting treatment.
The Company has since reassessed this matter and determined that under SFAS
No. 109 it is appropriate to restate the Company's consolidated financial
statements for the treatment of the deferred tax as follows:
The original calculation of the deferred tax liability was incorrect and
therefore has been reduced from $1,000 to $600. The corrected $600 deferred tax
liability has been recorded as a deferred tax expense to discontinued
operations in the third quarter of 2000 rather than as an adjustment to the
Frontier acquisition purchase price (i.e., goodwill).
This deferred tax expense and related liability restated in the third
quarter of 2000 are completely reversed in the second quarter of 2001 to
deferred tax benefit from discontinued operations. The corresponding current
tax liability was offset by losses and other tax attributes of continuing
operations in the fourth quarter of 2001.
F-32
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
Sale of GlobalCenter
In connection with the sale of GlobalCenter to Exodus discussed above, the
Company recorded an $850 deferred tax liability pursuant to SFAS No. 109 as the
Company's financial reporting basis exceeded its tax basis in its investment in
GlobalCenter. The Company recorded the deferred tax liability as an adjustment
to goodwill in the Frontier acquisition purchase price allocation, effective as
of the date of the Frontier acquisition. The Company believed that, since the
Company sold the business within one year of its acquisition, this temporary
difference arose during the re-allocation period and the final allocation of
purchase price in connection with the Frontier acquisition had yet to be
recorded, recording the deferred tax liability as a purchase price adjustment
to the Frontier acquisition was reasonable and appropriate. The Company also
discussed this accounting for deferred taxes with its independent public
accountant, Arthur Andersen, who concurred with this accounting treatment.
The Company has since reassessed this matter and determined that under SFAS
No. 109 it is appropriate to restate the Company's consolidated financial
statement for the treatment of the deferred tax as follows:
The original calculation of the deferred tax liability was incorrect and
therefore has been reduced from $850 to $535. The corrected $535 deferred tax
liability has been recorded as a deferred tax expense in the third quarter of
2000 rather than as an adjustment to the Frontier acquisition purchase price
(i.e., goodwill).
Due to the bankruptcy filing of Exodus in September 2001, the Company
recorded a non-temporary write-down of the entire value of its investment in
the common stock of Exodus (equal to $1,918) in the third quarter of 2001. As a
result, the deferred tax expense and related liability restated in the third
quarter of 2000 are completely reversed in the third quarter of 2001 to
deferred tax benefit.
Global Marine Installation Revenue
During the year ended December 31, 2000 and the nine months ended September
30, 2001, certain contractors that were responsible for constructing the
Company's undersea systems subcontracted certain sub-sea cable laying and
sub-sea cable burial work to GMS, a wholly-owned subsidiary of the Company.
These subcontracting arrangements were entered into at arm's length between the
contractors and GMS and were not bargained for in the course of the Company's
negotiations with the contractors. Therefore, the Company believed that
recognizing revenue at the consolidated level for these subcontracting services
provided by GMS was reasonable and appropriate.
The Company has since reassessed the accounting for these services provided
by GMS, and determined that revenue should not have been recognized separately
at the consolidated level for these subcontracting services. However,
management has concluded that the impact to the Company's net loss was
immaterial. Accordingly, the Company has restated its consolidated financial
statements to eliminate the recognition of this revenue. The decreases in
revenue were offset primarily by decreases in related operating expenses and,
to a lesser extent, by the impact of other unrelated adjustments. The result of
this restatement is a decrease in both revenue and other operating expenses of
approximately $97 for the nine months ended September 30, 2001 and
approximately $63 for the year ended December 30, 2000.
The following tables set forth the effect of the restatements on the
Company's consolidated statements of operations for the quarters ending
September 30, 2001, June 30, 2001 and March 31, 2001 and for the year ended
December 31, 2000, the consolidated statements of cash flows for the nine
months ended September 30, 2001
F-33
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
and the year ended December 31, 2000 and consolidated balance sheets as of
September 30, 2001, June 30, 2001, March 31, 2001 and December 31, 2000. The
tables do not reflect the subsequent retroactive reclassification of AGC and
IPC into discontinued operations or the reclassification of the extraordinary
loss on the extinguishment of debt to "other income" and the related taxes to
"income tax expense" in accordance with SFAS No. 145 (see Note 8). The
consolidated balance sheet, statement of operations and statement of cash flows
as of and for the nine months ended September 30, 2001 do not reflect the GMS
installation and maintenance segment as part of the Company's continuing
operations. The GMS installation and maintenance segment had been classified as
a discontinued operation in the third quarter of 2001 due to the commencement
of negotiations in October 2001 to sell GMS and exit this segment, which plans
have since been terminated (see Note 8).
F-34
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
CONDENSED CONSOLIDATED BALANCE SHEET AS AT SEPTEMBER 30, 2001
(UNAUDITED)
As
Previously As
Reported Adjustments Restated
---------- ----------- --------
ASSETS:
Cash and cash equivalents.......................................... $ 2,260 $ -- $ 2,260
Restricted cash and cash equivalents............................... 119 -- 119
Accounts receivable, net........................................... 506 -- 506
Other current assets and prepaid costs............................. 503 (51) 452
------- ------- -------
Total current assets........................................... 3,388 (51) 3,337
Property and equipment, net........................................ 12,058 (956) 11,102
Goodwill and intangibles, net...................................... 8,291 -- 8,291
Other assets....................................................... 1,005 (104) 901
Net assets of discontinued operations.............................. 769 -- 769
------- ------- -------
Total assets................................................... $25,511 $(1,111) $24,400
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable................................................... $ 189 $ -- $ 189
Accrued construction costs......................................... 781 -- 781
Other current liabilities.......................................... 2,020 (33) 1,987
------- ------- -------
Total current liabilities...................................... 2,990 (33) 2,957
Long-term debt..................................................... 7,647 -- 7,647
Deferred revenue................................................... 2,758 (1,065) 1,693
Deferred credits and other......................................... 1,244 73 1,317
------- ------- -------
Total liabilities.............................................. 14,639 (1,025) 13,614
------- ------- -------
MINORITY INTEREST..................................................... 828 -- 828
------- ------- -------
MANDATORILY REDEEMABLE AND CUMULATIVE
CONVERTIBLE PREFERRED STOCK......................................... 3,160 -- 3,160
------- ------- -------
SHAREHOLDERS' EQUITY:
Common stock, 3,000,000,000 shares authorized, par value $0.01 per
share, 909,661,678 shares issued as of September 30, 2001........ 9 -- 9
Treasury stock, 22,033,758 shares.................................. (209) -- (209)
Additional paid-in capital and other shareholders' equity.......... 13,544 -- 13,544
Accumulated deficit................................................ (6,460) (86) (6,546)
------- ------- -------
6,884 (86) 6,798
------- ------- -------
Total liabilities and shareholders' equity..................... $25,511 $(1,111) $24,400
======= ======= =======
F-35
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
As
Previously As
Reported Adjustments Restated
------------ ------------ ------------
REVENUES................................................ $ 793 $ (49) $ 744
OPERATING EXPENSES...................................... 1,690 (45) 1,645
------------ ------------ ------------
OPERATING LOSS.......................................... (897) (4) (901)
OTHER INCOME (EXPENSE).................................. (2,155) (2) (2,157)
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE
BENEFIT FOR INCOME TAXES.............................. (3,052) (6) (3,058)
Benefit for income taxes............................. 198 535 733
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS......................... (2,854) 529 (2,325)
Discontinued operations, net of tax.................. (494) -- (494)
------------ ------------ ------------
NET LOSS................................................ (3,348) 529 (2,819)
Preferred stock dividends............................ (59) -- (59)
------------ ------------ ------------
LOSS APPLICABLE TO COMMON SHAREHOLDERS.................. $ (3,407) $ 529 $ (2,878)
============ ============ ============
LOSS PER COMMON SHARE, BASIC AND DILUTED:
Loss from continuing operations applicable to common
shareholders....................................... $ (3.28) $ 0.60 $ (2.68)
============ ============ ============
Loss from discontinued operations, net............... $ (0.56) $ -- $ (0.56)
============ ============ ============
Loss applicable to common shareholders............... $ (3.84) $ 0.60 $ (3.24)
============ ============ ============
Shares used in computing basic and diluted loss per
share.............................................. 887,105,667 887,105,667 887,105,667
============ ============ ============
F-36
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
As
Previously As
Reported Adjustments Restated
---------- ----------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................ $(4,594) $1,050 $(3,544)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Income from discontinued operations............................. (80) (600) (680)
Impairment of long-lived assets................................. 545 -- 545
Loss on sale of ILEC............................................ 208 -- 208
Gain on sale of GlobalCenter.................................... (82) 82 --
Non-cash portion of restructuring costs......................... 116 -- 116
Gain on sale of marketable securities, net...................... (7) -- (7)
Loss on write down of investments............................... 2,106 -- 2,106
Equity in loss of affiliates.................................... 47 -- 47
Depreciation and amortization................................... 1,168 (5) 1,163
Provision for doubtful accounts................................. 105 -- 105
Stock related expenses.......................................... 16 -- 16
Deferred income taxes........................................... (415) (535) (950)
Minority Interest............................................... (129) -- (129)
Other........................................................... (19) -- (19)
Changes in operating assets and liabilities..................... 1,433 (772) 661
------- ------ -------
Net cash provided by (used in) operating activities.......... 418 (780) (362)
------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................................. (3,282) 780 (2,502)
Proceeds from sale of ILEC.......................................... 3,369 -- 3,369
Investments in and advances to/from affiliates, net................. (65) -- (65)
Change in restricted cash and cash equivalents...................... 27 -- 27
Sales (purchases) of marketable equity securities, net.............. 61 -- 61
------- ------ -------
Net cash provided by investing activities.................... 110 780 890
------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net......................... 8 -- 8
Proceeds from long-term debt........................................ 4,101 -- 4,101
Repayment of short-term borrowings.................................. (1,000) -- (1,000)
Repayment of long term debt......................................... (2,694) -- (2,694)
Preferred dividends................................................. (164) -- (164)
Minority interest investment in subsidiary.......................... 10 -- 10
Other............................................................... (20) -- (20)
------- ------ -------
Net cash provided by financing activities.................... 241 -- 241
------- ------ -------
CASH FLOWS FROM DISCONTINUED OPERATIONS................................ 54 -- 54
------- ------ -------
NET DECREASE IN CASH AND CASH EQUIVALENTS.............................. 823 -- 823
CASH AND CASH EQUIVALENTS, beginning of period......................... 1,437 -- 1,437
------- ------ -------
CASH AND CASH EQUIVALENTS, end of period............................... $ 2,260 $ -- $ 2,260
======= ====== =======
F-37
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
CONDENSED CONSOLIDATED BALANCE SHEET AS AT JUNE 30, 2001
(UNAUDITED)
As
Previously As
Reported Adjustments Restated
---------- ----------- --------
ASSETS:
Cash and cash equivalents.......................................... $ 1,923 $ -- $ 1,923
Restricted cash and cash equivalents............................... 167 -- 167
Accounts receivable, net........................................... 758 -- 758
Other current assets and prepaid costs............................. 661 (33) 628
------- ------- -------
Total current assets........................................... 3,509 (33) 3,476
Property and equipment, net........................................ 11,823 (822) 11,001
Goodwill and intangibles, net...................................... 10,085 (850) 9,235
Other assets....................................................... 1,372 (106) 1,266
------- ------- -------
Total assets................................................... $26,789 $(1,811) $24,978
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Short-term borrowings.............................................. $ 61 $ -- $ 61
Accounts payable................................................... 344 -- 344
Accrued construction costs......................................... 942 -- 942
Other current liabilities.......................................... 2,425 (33) 2,392
------- ------- -------
Total current liabilities...................................... 3,772 (33) 3,739
Long-term debt..................................................... 6,048 6,048
Deferred revenue................................................... 2,694 (924) 1,770
Deferred credits and other liabilities............................. 1,427 (239) 1,188
------- ------- -------
Total liabilities.............................................. 13,941 (1,196) 12,745
------- ------- -------
MINORITY INTEREST..................................................... 874 -- 874
------- ------- -------
MANDATORILY REDEEMABLE AND CUMULATIVE
CONVERTIBLE PREFERRED STOCK......................................... 3,159 -- 3,159
------- ------- -------
SHAREHOLDERS' EQUITY:
Common stock, 3,000,000,000 shares authorized, par value $0.01 per
share, 908,681,193 shares issued as of June 30, 2001............. 9 -- 9
Treasury stock, 22,033,758 shares.................................. (209) -- (209)
Additional paid-in capital and other shareholders' equity.......... 12,127 -- 12,127
Accumulated deficit................................................ (3,112) (615) (3,727)
------- ------- -------
8,815 (615) 8,200
------- ------- -------
Total liabilities and shareholders' equity..................... $26,789 $(1,811) $24,978
======= ======= =======
F-38
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
As
Previously As
Reported Adjustments Restated
------------ ------------ ------------
REVENUES................................................ $ 1,069 $ (13) $ 1,056
OPERATING EXPENSES...................................... 1,608 (16) 1,592
------------ ------------ ------------
OPERATING LOSS.......................................... (539) 3 (536)
OTHER INCOME (EXPENSE).................................. (97) (1) (98)
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE
BENEFIT FOR INCOME TAXES.............................. (636) 2 (634)
Benefit for income taxes............................. 77 -- 77
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS......................... (559) 2 (557)
Discontinued operations, net of tax.................. (71) 600 529
------------ ------------ ------------
NET LOSS................................................ (630) 602 (28)
Preferred stock dividends............................ (59) -- (59)
------------ ------------ ------------
LOSS APPLICABLE TO COMMON SHAREHOLDERS.................. $ (689) $ 602 $ (87)
============ ============ ============
LOSS PER COMMON SHARE, BASIC AND DILUTED:
Loss from continuing operations applicable to common
shareholders....................................... $ (0.70) $ -- $ (0.70)
============ ============ ============
Loss from discontinued operations, net............... $ (0.08) $ 0.68 $ 0.60
============ ============ ============
Loss applicable to common shareholders............... $ (0.78) $ 0.68 $ (0.10)
============ ============ ============
Shares used in computing basic and diluted loss per
share.............................................. 886,109,573 886,109,573 886,109,573
============ ============ ============
F-39
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
CONDENSED CONSOLIDATED BALANCE SHEET AS AT MARCH 31, 2001
(UNAUDITED)
As
Previously As
Reported Adjustments Restated
---------- ----------- --------
ASSETS:
Cash and cash equivalents.......................................... $ 1,245 $ -- $ 1,245
Restricted cash and cash equivalents............................... 139 -- 139
Accounts receivable, net........................................... 942 -- 942
Other current assets and prepaid costs............................. 737 -- 737
------- ------- -------
Total current assets........................................... 3,063 -- 3,063
Property and equipment, net........................................ 10,915 (496) 10,419
Goodwill and intangibles, net...................................... 11,224 (1,850) 9,374
Other assets....................................................... 2,361 (38) 2,323
Net assets of discontinued operations.............................. 2,464 -- 2,464
------- ------- -------
Total assets................................................... $30,027 $(2,384) $27,643
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Short-term borrowings.............................................. $ 1,000 $ -- $ 1,000
Accounts payable................................................... 239 -- 239
Accrued construction costs......................................... 744 -- 744
Other current liabilities.......................................... 2,602 (1,000) 1,602
------- ------- -------
Total current liabilities...................................... 4,585 (1,000) 3,585
Long-term debt..................................................... 7,385 -- 7,385
Deferred revenue................................................... 2,243 (531) 1,712
Deferred credits and other liabilities............................. 1,410 364 1,774
------- ------- -------
Total liabilities.............................................. 15,623 (1,167) 14,456
------- ------- -------
MINORITY INTEREST..................................................... 918 -- 918
------- ------- -------
MANDATORILY REDEEMABLE AND CUMULATIVE
CONVERTIBLE PREFERRED STOCK......................................... 3,159 -- 3,159
------- ------- -------
SHAREHOLDERS' EQUITY:
Common stock, 3,000,000,000 shares authorized, par value $0.01 per
share, 907,727,383 shares issued as of March 31, 2001............ 9 -- 9
Treasury stock, 22,033,758 shares.................................. (209) -- (209)
Additional paid-in capital and other shareholders' equity.......... 13,009 -- 13,009
Accumulated deficit................................................ (2,482) (1,217) (3,699)
------- ------- -------
10,327 (1,217) 9,110
------- ------- -------
Total liabilities and shareholders' equity..................... $30,027 $(2,384) $27,643
======= ======= =======
F-40
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 2001
(UNAUDITED)
As
Previously As
Reported Adjustments Restated
------------ ------------ ------------
REVENUES................................................ $ 1,082 $ (48) $ 1,034
OPERATING EXPENSES...................................... 1,595 (50) 1,545
------------ ------------ ------------
OPERATING LOSS.......................................... (513) 2 (511)
OTHER INCOME (EXPENSE).................................. (95) (1) (96)
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE
BENEFIT FOR INCOME TAXES.............................. (608) 1 (607)
Benefit for income taxes............................. 46 -- 46
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS......................... (562) 1 (561)
Discontinued operations, net of tax.................. (54) (82) (136)
------------ ------------ ------------
NET LOSS................................................ (616) (81) (697)
Preferred stock dividends............................ (59) -- (59)
------------ ------------ ------------
LOSS APPLICABLE TO COMMON SHAREHOLDERS.................. $ (675) $ (81) $ (756)
============ ============ ============
LOSS PER COMMON SHARE, BASIC AND DILUTED:
Loss from continuing operations applicable to common
shareholders....................................... $ (0.70) $ -- $ (0.70)
============ ============ ============
Loss from discontinued operations, net............... $ (0.06) $ (0.09) $ (0.15)
============ ============ ============
Loss applicable to common shareholders............... $ (0.76) $ (0.09) $ (0.85)
============ ============ ============
Shares used in computing basic and diluted loss per
share.............................................. 884,702,182 884,702,182 884,702,182
============ ============ ============
F-41
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31, 2000
As
Previously As
Reported Adjustments Restated
---------- ----------- --------
ASSETS:
Cash and cash equivalents.......................................... $ 1,477 $ -- $ 1,477
Restricted cash and cash equivalents............................... 146 -- 146
Accounts receivable, net........................................... 880 -- 880
Other current assets and prepaid costs............................. 679 -- 679
------- ------- -------
Total current assets........................................... 3,182 -- 3,182
Property and equipment, net........................................ 10,030 -- 10,030
Goodwill and intangibles, net...................................... 11,481 (1,850) 9,631
Other assets....................................................... 1,523 -- 1,523
Net assets of discontinued operations.............................. 3,969 -- 3,969
------- ------- -------
Total assets................................................... $30,185 $(1,850) $28,335
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Short-term borrowings.............................................. $ 1,000 $ -- $ 1,000
Accounts payable................................................... 401 -- 401
Accrued construction costs......................................... 811 -- 811
Other current liabilities.......................................... 2,455 (1,000) 1,455
------- ------- -------
Total current liabilities...................................... 4,667 (1,000) 3,667
------- ------- -------
Long-term debt..................................................... 6,271 -- 6,271
Deferred revenue................................................... 1,700 -- 1,700
Deferred credits and other liabilities............................. 1,740 285 2,025
------- ------- -------
Total liabilities.............................................. 14,378 (715) 13,663
------- ------- -------
MINORITY INTEREST..................................................... 949 -- 949
------- ------- -------
MANDATORILY REDEEMABLE AND CUMULATIVE
CONVERTIBLE PREFERRED STOCK......................................... 3,158 -- 3,158
------- ------- -------
SHAREHOLDERS' EQUITY:
Common stock, 3,000,000,000 shares authorized, par value $0.01 per
share, 906,339,273 shares issued as of December 31, 2000......... 9 -- 9
Treasury stock, 22,033,758 shares.................................. (209) -- (209)
Additional paid-in capital and other shareholders' equity.......... 13,766 -- 13,766
Accumulated deficit................................................ (1,866) (1,135) (3,001)
------- ------- -------
11,700 (1,135) 10,565
------- ------- -------
Total liabilities and shareholders' equity..................... 30,185 $(1,850) $28,335
======= ======= =======
F-42
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR
THE YEAR ENDED DECEMBER 31, 2000
As Previously
Reported Adjustments As Restated
------------- ------------ ------------
REVENUES.................................................. $ 3,789 $ (63) $ 3,726
OPERATING EXPENSES........................................ 5,185 (63) 5,122
------------ ------------ ------------
OPERATING LOSS............................................ (1,396) -- (1,396)
OTHER INCOME (EXPENSE).................................... (57) -- (57)
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE
BENEFIT (PROVISION) FOR INCOME TAXES.................... (1,453) -- (1,453)
Benefit (Provision) for income taxes................... 145 (535) (390)
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS........................... (1,308) (535) (1,843)
Discontinued operations, net of tax.................... (308) (600) (908)
------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE CHANGE....................................... (1,616) (1,135) (2,751)
Extraordinary loss on retirement of debt. net of tax... (42) -- (42)
Cumulative effect of change in accounting principle.... (9) -- (9)
------------ ------------ ------------
NET LOSS.................................................. (1,667) (1,135) (2,802)
Charge for conversion of preferred stock............... (92) -- (92)
Preferred stock dividends.............................. (221) -- (221)
------------ ------------ ------------
LOSS APPLICABLE TO COMMON SHAREHOLDERS.................... $ (1,980) $ (1,135) $ (3,115)
============ ============ ============
LOSS PER COMMON SHARE, BASIC AND DILUTED:
Loss from continuing operations applicable to common
shareholders......................................... $ (1.92) $ (0.63) $ (2.55)
============ ============ ============
Discontinued operations................................ $ (0.36) $ (0.71) $ (1.08)
============ ============ ============
Extraordinary loss on retirement of debt, net of tax... $ (0.05) $ -- $ (0.05)
============ ============ ============
Cumulative effect of changes in accounting principles,
net.................................................. $ (0.01) $ -- $ (0.01)
============ ============ ============
Loss applicable to common shareholders................. $ (2.35) $ (1.34) $ (3.69)
============ ============ ============
Shares used in computing basic and diluted loss per
share................................................ 844,153,231 844,153,231 844,153,231
============ ============ ============
F-43
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
CONSOLIDATED STATEMENT OF CASH FLOWS FOR
THE YEAR ENDED DECEMBER 31, 2000
As
Previously As
Reported Adjustments Restated
---------- ----------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................... $(1,667) $(1,135) $(2,802)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Loss from discontinued operations...................................... 308 600 908
Cumulative effect of change in accounting principal.................... 9 -- 9
Depreciation and amortization.......................................... 1,381 -- 1,381
Extraordinary loss on retirement of debt............................... 42 -- 42
Gain from sale of subsidiary's common stock and related subsidiary
stock sale transactions.............................................. (303) -- (303)
Stock related expenses................................................. 48 -- 48
Equity in loss of affiliates........................................... 67 -- 67
Provision for doubtful accounts........................................ 72 -- 72
Deferred income taxes.................................................. 38 535 573
Minority interest (income) expense..................................... (15) -- (15)
Other.................................................................. 26 -- 26
Changes in operating assets and liabilities............................ 905 (177) 728
------- ------- -------
Net cash provided by operating activities........................... 911 (177) 734
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................................ (4,289) 177 (4,112)
Investments in and advances to/from affiliates, net........................ (110) -- (110)
Purchases of marketable securities, net.................................... (201) -- (201)
Proceeds from the sale of unconsolidated affiliates........................ 164 -- 164
Change in restricted cash and cash equivalents............................. 9 -- 9
------- ------- -------
Net cash used in investing activities............................... (4,427) 177 (4,250)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net................................ 785 -- 785
Proceeds from issuance of preferred stock, net............................. 1,113 -- 1,113
Proceeds from short-term borrowings........................................ 1,000 -- 1,000
Proceeds from long-term debt............................................... 2,093 -- 2,093
Repayment of long term debt................................................ (1,578) -- (1,578)
Preferred dividends........................................................ (193) -- (193)
Minority interest investment in subsidiary................................. 548 -- 548
Finance and organization costs incurred.................................... (48) -- (48)
Other...................................................................... (34) -- (34)
------- ------- -------
Net cash provided by financing activities........................... 3,686 -- 3,686
------- ------- -------
CASH FLOWS FROM DISCONTINUED OPERATIONS....................................... (323) -- (323)
------- ------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS..................................... (153) -- (153)
CASH AND CASH EQUIVALENTS, beginning of period................................ 1,630 -- 1,630
------- ------- -------
CASH AND CASH EQUIVALENTS, end of period...................................... $ 1,477 $ -- $ 1,477
======= ======= =======
F-44
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
5. RESTRUCTURING COSTS AND RELATED IMPAIRMENTS
In August 2001, the Company announced that due to the duration and severity
of the slowdown in the economy and the telecommunications industry, it would be
necessary to reduce operating expenses as well as reduce and reprioritize
capital expenditures in an effort to be in a position to benefit when the
economy recovers. In an effort to address the Company's lowered profitability,
during the year ended December 31, 2001, the Company's Board of Directors
approved a restructuring plan to effectuate the realignment and integration of
the Company's current regional organizational structure into integrated global
functions such as network operations, customer care, information systems,
finance, and sales and marketing. The realignment and integration resulted in
the elimination of approximately 2,800 positions across a majority of the
Company's business functions and job classes, including the Company's
installation and maintenance segment, GMS. In addition, as part of the plan,
the Company implemented a significant consolidation of offices and other
related real estate facilities. As a result of these initiatives, the Company
recorded a restructuring charge of $410 during the year ended December 31,
2001. The components of this charge consisted of $71 related to employee
terminations, $270 related to facility closures, and $69 related to various
other restructuring items.
On January 28, 2002, the Company and certain of its subsidiaries filed
voluntary petitions for relief under chapter 11 of the Bankruptcy Code and
subsequently filed the Plan of Reorganization. Throughout 2002, the Company
continued its efforts to integrate functions within the Company to increase
efficiencies and to reduce costs. As a result of these continued initiatives
and adjustments to the plans adopted in 2001 due to the chapter 11 filing, the
Company recorded a net restructuring charge of $95 which has been recorded as a
reorganization item (see Note 21) during the year ended December 31, 2002. The
components of this charge consist of $51 related to employee terminations, $51
related to facility closures, and a $(7) release of charges related to various
other restructuring items.
The employee-related costs included in the restructuring charges for the
years ended December 31, 2002 and 2001 were $51 and $71, respectively. These
were comprised primarily of severance-related payments and outplacement costs
for all employees involuntarily terminated. These charges included $2 and $10
for 2002 and 2001, respectively, of termination-related benefits for employees
in the installation and maintenance segment. Upon the Company's chapter 11
filing on January 28, 2002, severance payments for U.S. employees previously
terminated were stayed and those employees filed claims with the Bankruptcy
Court. As a result, the Company classified $24 of the employee-related
restructuring liability as subject to compromise. In July of 2002, the
Bankruptcy Court approved $3 of priority payments to 680 employees terminated
within 90 days of the filing, reducing the employee-related subject to
compromise liability to $21 at December 31, 2002. Upon consummation of the Plan
of Reorganization, the Company intends to make an additional $2 of non-priority
payments to 556 former employees terminated more than 90 days prior to the
Company's bankruptcy filing but prior to receipt of their full severance
benefit payout. These payments were approved by the Bankruptcy Court in 2002
subject to meeting certain conditions.
The costs related to facility closures included in the restructuring charges
for the years ended December 31, 2002 and 2001 were $51 and $270, respectively.
In 2001, the $270 of costs are composed of continuing building lease
obligations and estimated decommissioning costs and broker commissions for 130
sites, offset by anticipated third-party sub-lease payments. It also includes
impairment charges of $63 related to leasehold improvements and abandoned
office equipment related to these facility closures. In 2002 the net costs
related to facility closures are composed of continuing building lease
obligations and estimated decommissioning costs and broker commissions for an
additional 133 sites, offset by anticipated third-party sub-lease payments.
This includes $3 related to the closure of certain regional offices of the
installation and maintenance segment. The initial charge recorded was further
reduced by the release of the related reserve for United States facilities
F-45
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
rejected through the chapter 11 bankruptcy process and other sites terminated
with the landlords. In 2002, the Company filed petitions in the court to reject
the operating leases for 131 sites in the United States, resulting in a
rejection claim liability of $66 as of December 31, 2002, included in
"liabilities subject to compromise".
The other costs included in the restructuring charges for the years ended
December 31, 2002 and 2001 were $(7) and $69, respectively. The 2001 charge
comprised primarily a $53 write-off of information systems that the Company
would no longer be utilizing as a result of system integration. Approximately
$7 of the 2002 charge was released due to a reevaluation of the hardware that
could be integrated into other Company systems. The restructuring charges for
the years ended December 31, 2002 and 2001 also include contract termination
costs of $1 and $16, respectively.
As of December 31, 2002, 247 sites, consisting of approximately 4 million
square feet, have been vacated and approximately 5,300 employees have been
terminated as a result of these restructuring plans. These adopted plans and
the related liability include an additional 16 sites, consisting of
approximately 118,000 square feet, identified for closure during 2003.
As described in Note 3, effective January 1, 2003 the Company adopted SFAS
No. 146 for any exit or disposal activities initiated after December 31, 2002.
The table below details the activity of the restructuring reserve in the
accompanying consolidated balance sheets for the years ended December 31, 2002
and 2001:
Balance at January 1, 2001.. $ --
Additions:
Employee separations..... 71
Facility closings........ 270
Other.................... 69
-----
410
-----
Deductions:
Employee separations..... (13)
Facility closings........ (62)
Other.................... (48)
-----
(123)
-----
Balance at December 31, 2001 $ 287
-----
Additions:
Employee separations..... 51
Facility closings........ 51
Other.................... (7)
-----
95
-----
Deductions:
Employee separations..... (80)
Facility closings........ (24)
Other.................... (5)
-----
(109)
-----
Balance at December 31, 2002 $ 273
=====
F-46
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
The restructuring reserve as of December 31, 2002 includes $103 classified
as an "other liability" in liabilities subject to compromise (see Note 16).
6. IMPAIRMENT OF LONG-LIVED ASSETS
Installation and maintenance segment goodwill and other identifiable
intangibles impairment
On October 4, 2001, in accordance with Board of Directors authorization, the
Company commenced negotiations to sell substantially all of GMS, the
installation and maintenance segment of the Company, and permanently exit the
installation and maintenance segment. Based on these events, the segment was
classified as a discontinued operation commencing in the third quarter of 2001.
In addition, in the third quarter of 2001, the Company recorded an impairment
charge of $545 relating to the entire remaining net carrying value of goodwill
and other identifiable intangibles remaining from the Company's acquisition of
GMS on July 2, 1999, as these assets would not be realized through the sale of
the business, based upon information available at the measurement date.
The Company's Plan of Reorganization and purchase agreement with ST
Telemedia contemplated that the Company would retain its non-core businesses
previously being evaluated for disposal, including GMS. Therefore, the Company
terminated its plans to exit this segment. Accordingly, this segment is no
longer classified as a discontinued operation and the Company's consolidated
financial statements have been reclassified to reflect GMS as part of
continuing operations for all periods presented. The accounting for
discontinued operations changed on January 1, 2002 as a result of SFAS No. 144;
however, the transition rules for SFAS No. 144 provide that the accounting for
discontinued operations that arose prior to January 1, 2002 would not have to
conform with SFAS No. 144 until January 1, 2003. Therefore, as the decision to
retain the segment occurred during 2002, all amounts have been reclassified
into operations as required by EITF Issue No. 90-16 "Accounting for
Discontinued Operations Subsequently Retained."
Fourth Quarter 2001 Impairment, Continuing Operations
In the fourth quarter of 2001, a series of events transpired that resulted
in changes in facts and circumstances that indicated to the Company that the
net carrying value of its long-lived assets might be impaired. These "trigger"
events included, but were not limited to: the continuing economic slowdown,
change in the leadership of the Company in October 2001 followed by a
significant cost reduction and restructuring effort across the entire business,
the sale of three businesses by the Company between January 2001 and December
2001 (GlobalCenter, ILEC and IPC), the change in the business outlook due
primarily to the overcapacity in the telecommunications market, negotiations
for a waiver from the Company's secured lenders from potential violations of
certain financial covenants, and difficulty in obtaining new revenue to fill
the Company's recently completed global network. In addition, the Company
signed several non-disclosure arrangements with several potential investors
during the fourth quarter of 2001. In the strategic discussions with the
potential investors, it was evident that the value they were attributing to the
Company's business was below the existing net carrying value of the assets held.
In addition, the Company filed for chapter 11 bankruptcy protection on
January 28, 2002 and signed a letter of intent to be acquired by Hutchison and
ST Telemedia. Negotiations continued with Hutchison and ST Telemedia until an
agreement was reached on August 9, 2002 (as amended since in May 2003 to
provide for ST Telemedia as the sole acquirer - see Note 2) to sell 61.5% of
the New GCL's equity for $250. These events and the capital structure
contemplated for the Company's planned reorganization also demonstrated
impairments in the Company's long-lived asset carrying values.
F-47
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
Due to these events the Company conducted an undiscounted cash flow analysis
as of December 31, 2001, following the finalization of its revised business and
financial plan for 2002 and beyond. The undiscounted cash flows calculated as a
result of this revised model were not adequate to support the net carrying
amount of long-lived assets. The fair values, as required by SFAS No. 121, did
not consider the value of such assets in a forced sale or liquidation and were
based primarily upon discounted estimated future cash flows and comparative
market prices. The assumptions supporting the estimated future cash flows,
including the discount rates and estimated terminal values used, reflect
management's best available estimates. The discount rate used of 17% was
primarily based upon the weighted-average cost of capital for comparable
companies. The discounted cash flows attributable to continuing operations
approximated the long-lived asset value inherent in the independently
negotiated third party transaction with ST Telemedia. This was important to the
Company in arriving at its conclusions on an appropriate impairment charge in
the fourth quarter of 2001 as it believed the best indicator of fair value is
usually reflected in a third party transaction in which assets are bought or
sold between willing parties other than in a forced or liquidation sale.
As a result of the cumulative impact of these facts, the Company recorded a
long-lived asset impairment charge of $16,636 for continuing operations in the
fourth quarter of 2001 in accordance with the guidelines set forth under SFAS
No. 121, which resulted in a full write-off of goodwill and other identifiable
intangibles ($8,028) and a remaining net carrying value of property and
equipment for continuing operations of $1,000, following a tangible asset
impairment charge of $8,608.
Fourth Quarter 2001 Impairment, Discontinued Operations
AGC, which is reflected as a discontinued operation for all periods
presented (see Note 8), performed a similar recoverability test on its long
lived assets during the fourth quarter of 2001 due to changes in facts and
circumstances including poor earnings performance, the continuing economic
slowdown, and overcapacity in the telecommunications market, among other
things. In addition, events transpired subsequent to December 31, 2001 that
provided further evidence of the impairment event as of December 31, 2001.
Specifically, AGC sold its interests in three joint ventures in April of 2002
for $120; PCL, filed for bankruptcy protection in July 2002 and was
subsequently approved for sale in June 2003 for $63; and AGC filed for
bankruptcy protection in November of 2002 and was subsequently approved for
sale in March 2003 for $80.
These events and conditions resulted in AGC and its subsidiaries, including
PCL, conducting an undiscounted cash flow analysis as of December 31, 2001,
following the finalization of AGC's revised business and financial plan for
2002 and beyond. The undiscounted cash flows calculated as a result of this
revised model were not adequate to support the net carrying amount of
long-lived assets. The discounted cash flows attributable to their operations
approximated the long-lived asset value inherent in their independently
negotiated third party transactions.
The Company recorded an impairment charge during the fourth quarter of 2001
aggregating $2,399 in connection with AGC's long-lived assets. This impairment
charge represented the shortfall between the long-lived asset net carrying
values from the discounted future cash flow stream and the estimated long-lived
asset fair value in the sales of AGC and its PCL subsidiary. The aggregate
impairment charge of $2,399, which is included as "discontinued operations" in
the accompanying consolidated statements of operations, included the following:
. Full impairment aggregating $100 in goodwill and other identifiable
intangibles;
. Impairment charge of $2,299 in connection with AGC's tangible net assets,
including PCL.
F-48
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
7. MERGER
The Company entered into a merger with IXnet, Inc. ("IXnet") and its parent
company, IPC Communications, Inc. ("IPC") on June 14, 2000, which has been
accounted for in the accompanying consolidated financial statements under the
purchase method of accounting for business combinations in accordance with
Accounting Principles Board Opinion No. 16 "Business Combinations". The
purchase price and net liabilities assumed for IXnet of $3,023 had been
allocated to goodwill and other intangible assets and was being amortized on
the straight-line method over a period of 10 years. However, as a result of the
Company's impairment review and subsequent adjustment recorded in the fourth
quarter of 2001, the remaining goodwill and intangible asset value resulting
from the merger was completely written-off as of December 31, 2001 (see Note 6).
Pro Forma Condensed Financial Information
The following unaudited pro forma condensed consolidated financial
information of the Company has been prepared to demonstrate the results of
operations had the acquisition of the non-Asian operations of IXnet been
completed at the beginning of the period presented.
The pro forma information does not attempt to show how the Company, after
effecting the transaction described above, would actually have performed if the
transaction occurred prior to the commencement of this period. If the
transaction had actually occurred in a prior period, the financial performance
of the Company and its constituent businesses would likely have been different.
The pro forma financial information is not necessarily indicative of the future
results that the Company would have experienced after the completion of this
transaction.
December 31,
2000
------------
(unaudited)
Revenues................................................. $ 3,526
============
Loss from continuing operations.......................... $ (1,825)
============
Net loss................................................. $ (2,848)
============
Loss from continuing operations applicable to common
Shareholders........................................... $ (2,139)
============
Loss applicable to common shareholders................... $ (3,162)
============
Loss per common share:
Loss from continuing operations applicable to common
shareholders basic and diluted......................... $ (2.53)
============
Loss applicable to common shareholders basic and diluted. $ (3.75)
============
Shares used in computing loss per share basic and diluted 844,153,231
============
F-49
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
8. DISCONTINUED OPERATIONS AND DISPOSITIONS
Asia Global Crossing ("AGC")
On November 24, 1999, the Company entered into an agreement with Softbank
Corp. and Microsoft Corporation to establish the AGC joint venture. The Company
contributed to the joint venture its development rights in East Asia Crossing
("EAC"), an approximately 11,000 mile undersea network that would link several
countries in eastern Asia, and its 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 in cash to AGC and
together committed to purchases of at least $200 in capacity on the Global
Crossing network over a three-year period. AGC was established as a pan-Asian
telecommunications carrier providing Internet, data and voice services to
wholesale and business customers.
On January 12, 2000, the Company established a joint venture, Hutchison
Global Crossing ("HGC"), with Hutchison Whampoa Limited ("Hutchison Whampoa")
to pursue fixed-line telecommunications and Internet opportunities in Hong
Kong. For its 50% share, Hutchison Whampoa 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 Whampoa agreed that
any fixed-line telecommunications activities it pursues in China would be
carried out by the joint venture. For its 50% share, the Company provided to
Hutchison Whampoa $400 in Global Crossing 6 3/8% 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 its network and certain media
distribution center capabilities, which together were valued at $350, as well
as $50 in cash.
On October 12, 2000, AGC completed its initial public offering ("IPO") of
shares of common stock and the Company contributed to AGC its 50% interest in
HGC and its 49% interest in Global Access Limited ("GAL"). After giving effect
to the initial public offering and related transactions, the Company's economic
interest in AGC was reduced to 56.9% from a pre-IPO level of 93%. The Company
recognized a gain of $303, net of related expenses, on the IPO and related
subsidiary stock sale transaction in accordance with SAB No. 51.
On April 25, 2002, AGC and Vectant, a wholly owned subsidiary of Marubeni,
announced a restructuring of their two joint ventures, PCL and GAL. Upon
completion of the restructuring (including the exercise of the option described
below), AGC indirectly owned 100 percent of PCL, the owner of the Pacific
Crossing transpacific cable system, and Vectant owned 100% of GAL, a
terrestrial network provider in Japan. As part of the realignment, Vectant
purchased from AGC a GAL shareholder loan receivable for approximately $23 and
the two companies entered into a new commercial relationship. Under the terms
of the restructuring agreement, AGC transferred its 49 percent interest in GAL
to Vectant and Vectant transferred a 20% stake in PCL to AGC. In addition,
Vectant granted AGC a call option to purchase Vectant's remaining 15.5 percent
interest in PCL, exercisable when certain conditions were satisfied. No
significant gain or loss was recognized on such transactions as both entities
had a minimal fair value.
On April 30, 2002, AGC agreed to sell its interest in three joint ventures
for $120 in cash to its partner Hutchison Whampoa. The sale included its 50
percent interest in each of HGC, the Hong Kong fixed-line telecommunications
company, and Hutchison GlobalCenter, an internet data center company, as well
as its 42.5 percent interest in ESD Services, an e-commerce operator. As AGC
had recorded a $450 impairment of such interests in 2001 in accordance with APB
No. 18, there was no gain or loss recognized on such transactions in 2002.
F-50
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
On November 17, 2002, AGC and one of its wholly owned subsidiaries, Asia
Global Crossing Development Company ("AGCDC"), filed voluntary petitions for
relief under the Bankruptcy Code. On the same date, AGC commenced joint
provisional liquidation cases in Bermuda. Similarly, on July 19, 2002, PCL, a
majority owned subsidiary of AGC and operator of PC-1, and certain of its
subsidiaries filed voluntary petitions for relief under the Bankruptcy Code. On
the same date, PCL commenced joint provisional liquidation cases Bermuda. AGC's
and PCL's bankruptcy cases are being administered separately and are not
consolidated with the GC Debtors' chapter 11 cases.
As a result of the chapter 11 petitions, the Company's ability to exert
control and exercise influence over AGC's and PCL's management decisions
through its equity interest was substantially eliminated. Furthermore, the
nature of the reorganization plans of AGC and PCL were such that the Company
would no longer have access to or a continuing involvement in the businesses of
AGC and PCL. Due to the Company's loss of control and lack of continuing
involvement in AGC's and PCL's operations, the Company effectively disposed of
its rights and obligations by abandoning its equity ownership effective on the
date of AGC's and PCL's chapter 11 petitions. AGC and PCL have been accounted
for as discontinued operations for all periods presented in accordance with
SFAS No. 144. As a result of the abandonment, the Company recognized a gain of
approximately $1,184 in the accompanying statement of operations for the year
ended December 31, 2002, representing its interest in AGC's cumulative net loss
at the time.
On March 11, 2003, Asia Netcom, a company organized by China Netcom
Corporation (Hong Kong) on behalf of a consortium of investors, acquired
substantially all of AGC's operating subsidiaries (except PCL) in a sale
pursuant to the Bankruptcy Code. On June 11, 2003, AGC's and AGCDC's bankruptcy
cases were converted from reorganizations under chapter 11 of the Bankruptcy
Code to chapter 7 liquidation proceedings. The Company no longer had control or
effective ownership in any of the assets formerly operated by AGC effective as
of AGC's bankruptcy petition. No recovery is expected for AGC's shareholders,
including the Company.
On April 15, 2003, PCL entered into an asset purchase agreement pursuant to
which it agreed to sell substantially all of its assets, including PC-1, to
Pivotal Telecom, LLC ("Pivotal") for $63. In June 2003, the United States
Bankruptcy Court of Delaware approved the sale pursuant to sections 363 and 365
of the Bankruptcy Code. The Company will receive no recovery in its capacity as
an indirect equity holder in PCL.
IPC and IXnet Asia
On July 10, 2001, the Company exchanged the Asian operations of IXnet and
IPC as well as the Company's territorial rights in Australia and New Zealand
with AGC for 26.8 million shares of AGC common stock. This increased the
Company's ownership in AGC by 2% to 58.9% at the time of the transaction
closing. The transaction had no impact on consolidated results as the
transaction was accounted for in accordance with AICPA Interpretation No. 39 of
APB No. 16 "Transfers and Exchanges Between Companies Under Common Control".
The transaction was undertaken to delineate the geographic responsibilities of
the Company and AGC.
On October 4, 2001, the Company's Board of Directors approved a plan to
divest IPC, a non-core operation. As described in Note 7, the Company had
acquired IPC and its wholly-owned subsidiary IXnet in a merger transaction on
June 14, 2000. IPC designs, manufactures, installs and services turret systems,
which provide desktop access to time-sensitive voice communications and data
for the financial services community. IXnet was
F-51
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
not included in the plan of disposal. On November 16, 2001, the Company entered
into an agreement to sell IPC to an investment group led by Goldman Sachs
Capital Partners 2000 for an aggregate purchase price of $360 in cash less
certain holdback requirements and working capital and purchase price
adjustments as stipulated in the agreement. On December 20, 2001, the
transaction closed, resulting in cash proceeds to the Company of $301, net of
$22 paid directly to AGC, deal costs of $8, working capital adjustments paid at
closing of $9 and holdback requirements of $20. The $301 in net proceeds was
placed directly into a restricted cash account for the benefit of the
administrative agent to the Senior Secured Corporate Credit Facility in
accordance with the terms of the Bank Waiver that the Company negotiated with
its lenders at that time. The Company recorded an after tax loss on the sale of
IPC of approximately $120, which is reflected in the results from discontinued
operations for the year ended December 31, 2001. The operating results and
financial position of IPC from June 14, 2000, the date of acquisition, through
December 20, 2001 are accounted for as discontinued operations in the
accompanying consolidated financial statements.
Incumbent local exchange carrier business
On June 29, 2001, the Company completed the sale of its incumbent local
exchange carrier ("ILEC") business, acquired as part of its acquisition of
Frontier Corporation in September 1999, to Citizens Communications Company
("Citizens"). The sale of the ILEC resulted from the consummation of the Stock
Purchase Agreement, dated as of July 11, 2000 (the "Agreement"), as amended,
among GCL, GCNA, and Citizens. In April 2001, the Company and Citizens amended
the Stock Purchase Agreement to provide for, among other things, (i) an
acceleration of the anticipated closing date for the transaction and (ii) an
adjustment to the purchase price, reflecting a reduction in the amount of cash
to be received by the Company at closing in connection with the transaction
from $3,650 to $3,500, subject to adjustments concerning closing date
liabilities and working capital balances, and a $100 credit, subsequently
reduced in July 2002 to $65, which would be applied against future services to
be rendered to Citizens over a five year period. Pursuant to the transaction,
the parties also entered into an agreement under which Citizens would purchase
long distance services from the Company for resale to the ILEC's customers. In
connection with this sale, the associated pension assets and related
liabilities were to be transferred to Citizens. As a result of the Company's
bankruptcy filing, the transfer of the pension assets and related liability was
delayed pending approval of the Bankruptcy Court. While the transfer of the
pension assets and related liabilities was delayed, the Company segregated the
assets related to the ILEC employees during 2001. In December, 2002, the
Bankruptcy Court approved the transfer of the pension assets and related
liabilities to Citizens, with the actual transfer of the assets occurring in
February 2003. The sale of the ILEC to Citizens, which was subject to both
Federal and state regulatory approvals, closed on June 29, 2001. As a result of
customary adjustments based on closing date liabilities and working capital
balances, the Company received cash proceeds of $3,369 at closing and recorded
an after-tax loss from the sale of approximately $206. As disclosed in Note 4,
the Company restated the results of discontinued operations related to the loss
on the sale of discontinued operations and the related deferred income taxes in
connection with the Company's initial accounting for the disposition of the
ILEC.
GlobalCenter
During September 2000, the Company entered into a definitive merger
agreement under which Exodus Communications, Inc. ("Exodus") would acquire the
Company's web hosting services division, GlobalCenter. As a result of this
transaction, the Company exited the web-hosting business and has restated its
consolidated financial statements to reflect the financial position and results
of operations of GlobalCenter as a discontinued operation for all periods
presented since the date of acquisition.
F-52
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
On January 10, 2001, the Company completed the sale of GlobalCenter to
Exodus for 108.15 million shares of Exodus common stock. As disclosed in Note
4, the Company restated the results of discontinued operations related to the
gain on the sale of discontinued operations and the related deferred income
taxes in connection with the Company's initial accounting for the disposition
of GlobalCenter. As a result of the restatement there is no gain on the
disposal of GlobalCenter. The value of the Exodus shares acquired was $1,918,
based on the closing sales price of Exodus common stock prior to the closing of
the transaction. Due to a constant decline in the value of the Company's
investment in Exodus during the first three quarters of 2001, economic
conditions in the marketplace during the second half of 2001, and the filing of
bankruptcy protection by Exodus on September 26, 2001, management concluded
that the impairment was other than temporary and wrote-off the full value of
this security resulting in a charge of $1,918 which has been included in the
Company's consolidated results of operations for the year ended December 31,
2001. The Company's beneficial ownership was less than 20% and the Company had
no significant influence over Exodus. The accompanying consolidated financial
statements reflect the operating results and financial position of GlobalCenter
as discontinued operations for all periods presented.
The following is a summary of the operating results and net assets of AGC,
IPC, ILEC and GlobalCenter included in discontinued operations for the years
ended December 31, 2002, 2001 and 2000:
December 31, December 31,
2002 2001
------------ ------------
Balance Sheet Data:
Current assets of discontinued operations.......... $-- $ 616
Property, plant and equipment...................... -- 143
Other assets....................................... -- 102
--- -------
Total assets of discontinued operations......... -- 861
--- -------
Current liabilities of discontinued operations..... -- 574
Long-term debt..................................... -- 1,050
Deferred revenue................................... -- 236
Other long term assets............................. -- 31
--- -------
Total liabilities of discontinued operations.... -- 1,891
--- -------
Net liabilities of discontinued operations......... $-- $(1,030)
=== =======
December 31,
December 31, December 31, 2000
2002 2001 (Restated)
------------ ------------ ------------
Income Statement Data:
Revenue............................................................. $ 93 $ 743 $ 1,157
Operating expenses.................................................. (205) (823) (1,484)
Asset impairment charges............................................ -- (2,399) --
------ ------- -------
Operating loss...................................................... (112) (2,479) (327)
Minority interest in net loss....................................... 1 949 15
Interest income (expense), net...................................... (93) (8) 15
Other expenses, net................................................. (30) (591) (42)
Benefit (provision) for income taxes................................ -- 539 (669)
------ ------- -------
Loss from discontinued operations, net of tax....................... (234) (1,590) (1,008)
Gain (loss) on disposal/abandonment of discontinued operations, net
of tax of $1,035 in 2001.......................................... 1,184 (326) --
------ ------- -------
Discontinued operations, net..................................... $ 950 $(1,916) $(1,008)
====== ======= =======
F-53
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
Certain Former Discontinued Operations Subsequently Retained: GMS
In accordance with board authorization on October 4, 2001, the Company
commenced negotiations to sell substantially all of GMS and permanently exit
the installation and maintenance segment. Based on these events, the segment
was classified as a discontinued operation commencing in the third quarter of
2001. However, both the Company's Plan of Reorganization and Purchase Agreement
with STT contemplate that the Company will retain its non-core businesses
previously being evaluated for disposal, including GMS. Therefore, the Company
terminated its plans to exit this segment. Accordingly, this segment is no
longer classified as a discontinued operation and the Company's consolidated
financial statements have been reclassified to reflect GMS as part of
continuing operations for all periods presented. The accounting for
discontinued operations changed on January 1, 2002 as a result of SFAS No. 144;
however, the transition rules for SFAS No. 144 provide that the accounting for
discontinued operations that arose prior to January 1, 2002 would not have to
conform with SFAS No. 144 until January 1, 2003. Therefore, as the decision to
retain the segment occurred during 2002 all amounts have been reclassified into
continuing operations in accordance with EITF Issue No. 90-16 "Accounting for
Discontinued Operations Subsequently Retained."
Discontinued Operations and Extraordinary Loss Reclassification for the Year
Ended December 31, 2000
As previously discussed, the operating results of AGC and IPC have been
retroactively reclassified to discontinued operations in the consolidated
financial statements for the years ended December 31, 2002, 2001, and 2000 in
accordance with SFAS No. 144. The Company's predecessor auditor has ceased its
operations and these modifications are required to be reported upon by the
Company's successor auditor. This disclosure is required under those standards
to reflect the impact of the modifications on the consolidated financial
statements reported on by a predecessor auditor that has ceased to exist. The
following table sets forth the effect of this retroactive reclassification on
the consolidated statements of operations, after the restatement described in
Note 4, for the year ended December 31, 2000.
As discussed in Note 3, in the fourth quarter of 2002 the Company adopted
SFAS No. 145, which requires reclassification of the extraordinary loss on the
extinguishment of debt recognized during the year ended December 31, 2000 to
"other income" and the related taxes to "income tax expense".
F-54
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000
Discontinued
Operations and
As Extraordinary As Restated
Restated (see Loss after
Note 4) Reclassifications Reclassifications
------------- ----------------- -----------------
REVENUES................................................. $ 3,726 $ (221) $ 3,505
OPERATING EXPENSES....................................... 5,122 (299) 4,823
------------ ------------ ------------
OPERATING LOSS........................................... (1,396) 78 (1,318)
OTHER INCOME (EXPENSE)................................... (57) (34) (91)
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE
BENEFIT (PROVISION) FOR INCOME TAXES................... (1,453) 44 (1,409)
Benefit (Provision) for income taxes.................. (390) 14 (376)
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS.......................... (1,843) 58 (1,785)
Discontinued operations, net of tax................... (908) (100) (1,008)
------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE CHANGE ..................................... (2,751) (42) (2,793)
Extraordinary loss on retirement of debt. net of tax.. (42) 42 --
Cumulative effect of change in accounting principle... (9) -- (9)
------------ ------------ ------------
NET LOSS................................................. (2,802) -- (2,802)
Preferred stock dividends............................. (221) -- (221)
Charge for conversion of preferred stock.............. (92) -- (92)
------------ ------------ ------------
LOSS APPLICABLE TO COMMON SHAREHOLDERS................... $ (3,115) $ -- $ (3,115)
============ ============ ============
LOSS PER COMMON SHARE, BASIC AND DILUTED:
Loss from continuing operations applicable to common
shareholders........................................ $ (2.55) $ 0.06 $ (2.49)
============ ============ ============
Discontinued operations............................... $ (1.08) $ (0.11) $ (1.19)
============ ============ ============
Extraordinary loss on retirement of debt, net of tax.. $ (0.05) $ 0.05 $ --
============ ============ ============
Cumulative effect of change in accounting principles,
net................................................. $ (0.01) $ -- $ (0.01)
============ ============ ============
Loss applicable to common shareholders................ $ (3.69) $ -- $ (3.69)
============ ============ ============
Shares used in computing basic and diluted loss per
share............................................... 844,153,231 844,153,231 844,153,231
============ ============ ============
F-55
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
9. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
December 31, December 31,
2002 2001
------------ ------------
Accounts receivable...................
Billed............................. $ 493 $ 728
Unbilled........................... 123 218
----- -----
Total accounts receivable............. 616 946
Allowances......................... (134) (128)
----- -----
Accounts receivable, net of allowances $ 482 $ 818
===== =====
The fair value of accounts receivable balances approximates their carrying
value because of their short-term nature. The Company is exposed to
concentrations of credit risk from other telecommunications providers (see Note
3).
10. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31, 2002
-----------------------------------------
Net
Carrying Accumulated Book
Value Depreciation Impairment Value
-------- ------------ ------------ ------
Land................................. $ 4 $ -- $ -- $ 4
Buildings............................ 70 (3) -- 67
Leasehold improvements............... 42 (5) -- 37
Furniture, fixtures and equipment.... 60 (11) -- 49
Transmission equipment............... 821 (82) -- 739
Vessels and marine equipment......... 95 (5) -- 90
Construction in progress............. 73 -- -- 73
------- ------- ------- ------
Total property and equipment, net. $ 1,165 $ (106) $ -- $1,059
======= ======= ======= ======
December 31, 2001
-----------------------------------------
Net
Carrying Accumulated Impairment Book
Value Depreciation (see Note 6) Value
-------- ------------ ------------ ------
Land................................. $ 30 $ -- $ (26) $ 4
Buildings............................ 360 (25) (287) 48
Leasehold improvements............... 448 (76) (333) 39
Furniture, fixtures and equipment.... 839 (291) (515) 33
Transmission equipment............... 9,241 (1,656) (6,800) 785
Vessels and marine equipment......... 704 (274) (358) 72
Construction in progress............. 288 -- (269) 19
------- ------- ------- ------
Total property and equipment, net. $11,910 $(2,322) $(8,588) $1,000
======= ======= ======= ======
F-56
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
Assets recorded under capital lease agreements included in property and
equipment consisted of $40 and $414 of cost less accumulated amortization and
impairment charges of $3 and $379 at December 31, 2002 and 2001, respectively.
During the years ended December 31, 2002 and 2001, respectively, the Company
recorded $0 and $91 of capitalized interest to property and equipment.
Depreciation expense for the years ended December 31, 2002, 2001 and 2000
was approximately $137, $968 and $818, respectively. Included in depreciation
expense for the years ended December 31, 2002, 2001 and 2000 was approximately
$0, $16 and $219, respectively, of non-cash cost of capacity sold.
11. INVESTMENTS IN AND ADVANCES TO/FROM AFFILIATES, NET
The Company's investment in affiliates consists of the following:
December 31,
------------
2002 2001
---- ----
S. B. Submarine Systems Company Ltd................... $32 $29
NTT World Engineering Marine Corporation Inc.......... 4 8
International Cableship Pte Ltd....................... 21 16
Other investments and advances to/from affiliates, net (4) 17
--- ---
Total.......................................... $53 $70
=== ===
The following investments in affiliates were acquired on July 2, 1999 as a
result of the acquisition of GMS and are accounted for under the equity method
of accounting.
S. B. Submarine Systems Company Ltd.
The Company established S.B. Submarine Systems Company Ltd. ("SBSS") with
China Telecom to provide route surveys and installation and maintenance
services for submarine cable systems principally in China and the Asia-Pacific
region. The Company has a 49% interest in SBSS.
NTT World Engineering Marine Corporation Inc.
The Company established NTT World Engineering Marine Corporation Inc.
("NTTWEM") with NTT Communications to provide cable installation and repair
services in the Far East and Southeast Asia regions. The Company has a 25%
interest in NTTWEM.
International Cableship Pte Ltd.
The Company established International Cableship Pte Ltd. ("ICPL") with
Singapore Telecom and ASEAN Cableship Pte Ltd. to provide cable maintenance in
South East Asia and the Indian Ocean. The Company has a 30% interest in ICPL.
ICPL's cash flow and future profitability is dependent on revenues generated
under ship leases with two customers, one of which is GMS.
F-57
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
12. OTHER CURRENT LIABILITIES
At December 31, 2002 and 2001, other current liabilities consisted of the
following:
December 31,
-----------
2002 2001
---- ------
Accrued liabilities....................................................... $189 $ 446
Accrued operations, administration & maintenance costs.................... 23 34
Accrued payroll and related benefits...................................... 91 73
Accrued installation project costs........................................ 17 64
Restructuring reserves.................................................... 170 287
Accrued interest and dividends............................................ -- 130
Deferred revenue.......................................................... 274 317
Taxes payable............................................................. 50 239
Current portion of capital lease obligations and inland service agreements 19 22
Merger and exited business reserves....................................... 34 202
Other..................................................................... 31 28
---- ------
Total other current liabilities........................................ $898 $1,842
==== ======
13. DEBT
At December 31, 2002 and 2001, the outstanding debt obligations of GCL and
its subsidiaries consisted of the following:
December 31,
Fiscal Year ----------------
Maturity Interest Rates 2002 2001
----------- -------------- ------- -------
Senior notes.................................................. 2004 - 2009 7.25%--9.63% $ 4,100 $ 4,100
Credit facilities............................................. 2004 - 2006 Floating 2,211 2,203
Dealer remarketable securities................................ 2003 6.00% 200 200
Other debt.................................................... 2004 - 2021 8.80%--9.30% 130 120
Total debt.................................................... 6,641 6,623
Less: discount on long-term debt, net......................... -- (34)
Liabilities subject to compromise............................. (6,641) --
Long-term debt in default, reclassified to current liabilities
not subject to compromise................................... -- (6,589)
------- -------
Long-term debt, net of discount............................ $ -- $ --
======= =======
The contractual principal maturities of long-term debt for the five years
subsequent to 2002 were: 2003--$14; 2004--$1,986; 2005--$269; 2006--$1,172;
2007--$1,000; 2008 and later--$2,200. As a result of the Company's bankruptcy,
all of the above debt will be canceled upon the effective date of the Plan of
Reorganization. All of the foregoing amounts are pre-petition obligations
classified as subject to compromise in the accompanying December 31, 2002
balance sheet. The $6,589 of long-term debt as at December 31, 2001 is
classified as current due to the Company being in default of the loan covenants
as a result of the Company's bankruptcy filing on January 28, 2002.
F-58
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
Liabilities Subject to Compromise
On January 28, 2002, the Company filed voluntary petitions for relief under
chapter 11 of the Bankruptcy Code. In accordance with SOP 90-7, the Company's
long-term and short-term debt has been reclassified to "liabilities subject to
compromise". Prior to the Commencement Date, the Company's primary sources of
working capital had been cash flows from operations and borrowings from the
issuance of "senior notes" and amounts received from "credit facilities". Due
to the proceedings under chapter 11, the Company is in default on its debt
agreements. While operating under chapter 11, the Company is prohibited from
paying interest due under the terms of the debt covenants on pre-petition
debts. As a result, the Company ceased accruing interest on all long-term debt
subject to compromise, also in accordance with SOP 90-7. On a combined GC
Debtor basis, third-party contractual interest expense, not accrued or
recorded, totaled $519 for the period January 28, 2002 to December 31, 2002.
See Note 2 for further discussion of the Company's bankruptcy.
Senior Notes
On January 29, 2001, GCHL completed a private offering of $1,000 in
aggregate principal amount of 8.70% Senior Notes due 2007. The net proceeds
from the offering were used to refinance existing indebtedness under the
"Credit Facilities" described below.
On November 12, 1999, GCHL issued two series of senior unsecured notes. The
9 1/8% senior notes were due November 15, 2006 with a face value of $900 and
the 9 1/2% senior notes were due November 15, 2009 with a face value of $1,100.
Interest on the notes was due May 15 and November 15 of each year, beginning on
May 15, 2000.
On May 18, 1998, GCHL issued 9 5/8% senior notes due May 15, 2008, with a
face value of $800. Interest on the notes was due May 15 and November 15 of
each year.
On September 30, 1999, the Company acquired Frontier Corporation
("Frontier") resulting in Frontier becoming a wholly owned subsidiary of the
Company. At the date of acquisition, Frontier had issued and outstanding $300
of 7 1/4% Senior Notes due May 14, 2004. Interest on the notes was due May 15
and November 15 each year.
Guarantee of Subsidiary Debt
As described above, GCHL currently has outstanding four classes of public
indebtedness. These securities include (i) $900 of 9 1/8% Senior Notes due
2006, (ii) $800 of 9 5/8% Senior Notes due 2008, (iii) $1,100 of 9 1/2% Senior
Notes due 2009 and (iv) $1,000 of 8.70% Senior Notes due 2007. 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.
Credit Facilities
On July 2, 1999, the Company, through GCHL and GCNA, entered into a $3,000
senior secured corporate credit facility (as amended, the "Corporate Credit
Facility") with several lenders. In August 2000, the Company amended and
restated the terms of the existing senior secured credit agreement, increasing
the total remaining amount of the Corporate Credit Facility from $1,000 to
$2,250. As amended, the Corporate Credit Facility consisted of a $1,000
revolving credit facility due July 2004, a $700 revolving term facility that
converted to a term loan with a maturity date in July 2004 and a $550 term loan
with a maturity date in June 2006. At December 31, 2002 and 2001, the amount
outstanding under the Corporate Credit Facility was $2,211 and $2,203,
respectively, which was the full amount available less letters of credit issued
thereunder.
F-59
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
In October 2000, the Company, through a direct subsidiary of GCNA, entered
into a $1,000 unsecured credit facility ("Bridge Loan"). Proceeds from the
Bridge Loan were used to repay approximately $768 of outstanding indebtedness
incurred in connection with an acquisition of Racal Telecom in November 1999
and for general corporate purposes. The Bridge Loan was funded through a
commercial paper conduit. Interest was payable at LIBOR plus 1.00%. In June
2001, the Company completed the sale of its ILEC business to Citizens
Communication (see Note 8). Proceeds from the sale were used to repay the
$1,000 Bridge Loan. Additional proceeds were used to reduce the outstanding
borrowings under the Corporate Credit Facility and for general corporate
purposes
Dealer Remarketable Securities ("DRS")
The 6% DRS were originally issued by Frontier and were outstanding at the
date of acquisition. Interest was payable on April 15 and October 15 each year.
The holders of these notes had the right to put the notes back to the Company
in October 2003, depending on the interest rate environment at that time. In
October 2001, due to the reduction of the Company's credit ratings, the put
option was terminated by the noteholders and the maturity date was accelerated
from October 2013 to October 2003. As a result, the Company paid $14, the
present value of the put option on that date, to the noteholders. This payment
was offset by the unamortized balance of $7 of the put option proceeds received
by the Company on the DRS issuance date resulting in $7 of "other expense."
Other borrowings
At December 31, 2002 the Company had a $10 short-term bank loan bearing
interest at 8.8% per annum. The short-term loan was used by the Company to
secure a letter of credit in favor of the Peruvian Government for import
duties. This loan is classified within "liabilities subject to compromise" at
December 31, 2002. In addition, at December 31, 2002 and 2001, $20 of 9.3%
medium term notes and $100 of 9% Debentures due 2021, both issued by Frontier
prior to the date of acquisition, remained outstanding.
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. As a
result of the Company's bankruptcy filing on January 28, 2002 the Company was
in default of the covenants.
Retirement of Debt
As noted above in "Credit Facilities", 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 of unamortized
deferred financing costs as a result of this extinguishment which is reflected
in "other income (expense), net" in the accompanying consolidated statement of
operations for the year ended December 31, 2000 in accordance with SFAS No. 145
(see Note 3). The Company has provided a full valuation allowance related to
this loss due to the uncertainty of realizing any future tax benefit.
As part of the merger with IPC (see Note 8), the Company assumed $247 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 a loss of $18
which is reflected in "income (loss) from discontinued operations" in the
accompanying consolidated statement of operations for the year ended December
31, 2000. The Company provided a full valuation allowance related to this loss
due to the uncertainty of realizing any future tax benefit.
F-60
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
In December 1997, Frontier entered into an interest rate hedge agreement
that effectively converted $200 of its 7 1/4% Senior Notes into a floating rate
based LIBOR index rate plus 1.26%. The original termination date of the
interest rate swap agreement was May 2004; however, the Company terminated the
agreement in March 2001 for a realized gain of $1.
New Senior Secured Notes
As further discussed in Note 2, upon the Company's consummation of the Plan
of Reorganization and emergence from bankruptcy, all of its outstanding debt
will be retired.
GC North American Holdings, one of the Company's domestic subsidiaries, will
issue $200 aggregate principal amount of the New Senior Secured Notes upon
GCL's emergence from bankruptcy. On December 4, 2003, the Bankruptcy Court
approved an amendment to the Plan of Reorganization pursuant to which the New
Senior Secured Notes will be issued to ST Telemedia rather than to our banks
and unsecured creditors, with the gross proceeds of such issuance being
distributed to such banks and unsecured creditors in lieu of any interest in
the New Senior Secured Notes. The notes will mature on the third anniversary of
their issuance. Interest will accrue at 11% per annum and will be paid
semi-annually.
The New Senior Secured Notes will be guaranteed by New GCL and all of its
material subsidiaries. The New Senior Secured Notes will be senior in right of
payment to all other indebtedness of New GCL and its material subsidiaries,
except that they will be equal in right of payment with (i) one or more working
capital facilities in an aggregate principal amount of up to $150 (the "Working
Capital Facilities") and (ii) a limited amount of certain other senior
indebtedness. The New Senior Secured Notes will be secured by a first priority
lien on the stock and assets of GMS and Global Crossing (UK) Telecommunications
Limited. In addition, any sale of those subsidiaries will trigger mandatory
prepayment of the New Senior Secured Notes to the extent of the proceeds of any
such sale. To the extent proceeds of any such sales are other than cash, such
proceeds shall be substituted for the collateral. Payment of the New Senior
Secured Notes will also be secured by a lien on substantially all the other
assets of New GCL and its material subsidiaries, such lien to be second in
priority to the lien on the Working Capital Facilities.
GC North American Holdings may redeem the New Senior Secured Notes, plus
accrued and unpaid interest, at any time without penalty or premium. In the
event of a change of control, GC North American Holdings will be obligated to
offer to redeem the notes at 101% of the outstanding principal amount plus
accrued and unpaid interest.
14. OTHER DEFERRED LIABILITIES
At December 31, 2002 and 2001, other deferred liabilities consisted of the
following:
December 31,
------------
2002 2001
---- ----
Long-term obligations under capital lease............ $216 $266
Long-term obligations under inland service agreements 9 9
Post employment benefit obligations.................. 2 27
Deferred gain on the sale of Global Center........... -- 114
Rent leveling and other.............................. 13 12
---- ----
Total other deferred liabilities.................. $240 $428
---- ----
F-61
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
15. 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, 2002, future minimum payments under these capital leases are
as follows and are included in other current liabilities and other deferred
liabilities in the accompanying consolidated balance sheet:
Year Ending December 31,
2003.......................................... $ 43
2004.......................................... 58
2005.......................................... 33
2006.......................................... 33
2007.......................................... 33
Thereafter.................................... 320
-----
Total minimum lease payments.................. 520
Less: amount representing maintenance payments (4)
Less: amount representing interest............ (238)
-----
Present value of minimum lease payments....... $ 278
=====
The Company has commitments under various non-cancelable operating leases
for office and equipment space, vessels, equipment rentals and other leases
which in addition to rental payments, require payments for insurance,
maintenance, property taxes, and other executory costs related to the leases.
Estimated future minimum lease payments on operating leases are approximately
as follows:
Year Ending December 31,
2003.................... $ 166
2004.................... 156
2005.................... 142
2006.................... 117
2007.................... 108
Thereafter.............. 739
------
Total................... $1,428
======
The leases have various expiration dates and renewal options through 2045.
Rental expense related to office space, vessels and equipment for the years
ended December 31, 2002, 2001, and 2000 was $182, $201, and $128, respectively.
Under the Bankruptcy Code, the Company may assume or reject executory
contracts, including lease obligations. Therefore, the commitments shown above
may not reflect actual cash outlays in the future periods. For the year ended
December 31, 2002, the Company rejected leases which eliminated $398 in future
minimum lease payments. In connection with the Company's rejection of these
operating leases during the year ended December 31, 2002, the Company recorded
$66 classified as "other liabilities" in liabilities subject to compromise (see
Note 16). This liability represents the maximum allowable damage recoverable by
the affected landlords under the Bankruptcy Code.
F-62
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
16. LIABILITIES SUBJECT TO COMPROMISE
Claims against the GC Debtors in existence prior to the Commencement Date
are reflected in the accompanying consolidated balance sheets as "liabilities
subject to compromise".
Since the date of the Purchase Agreement, the Bankruptcy Court has approved
various settlement agreements with certain vendor creditors of the Company,
including several significant vendor creditors. During the year ended December
31, 2002, the Company recognized the effect of settlement agreements with
certain vendor creditors. These settlements resolved certain claims against
certain GC Debtor entities as well as non-debtor entities which total
approximately $500, resulting in a reduction of both "liabilities subject to
compromise" for certain GC Debtor entities and "liabilities not subject to
compromise" for certain non-debtor entities. As a result of the vendor
settlements, the Company has recognized a reorganization gain of $255 (see Note
21) representing the reduction in liabilities owed to such vendor creditors,
offset by the cash settlement payments made to such creditors.
The following table summarizes the components of liabilities subject to
compromise in the accompanying consolidated balance sheets as of December 31,
2002:
December 31, 2002
-----------------
Accounts payable......................... $ 115
Accrued construction costs............... 132
Accrued cost of access................... 279
Accrued interest and dividends........... 181
Other liabilities........................ 653
Debt obligations......................... 6,641
Deferred gain on the sale of GlobalCenter 101
Obligations under capital lease.......... 34
------
Total liabilities subject to compromise.. $8,136
======
17. PREFERRED STOCK
Outstanding preferred stock as of December 31, 2002 and 2001 consists of the
following:
December 31,
-------------
2002 2001
------ ------
(in millions)
Mandatorily redeemable preferred stock.................................................. $ 526 $ 517
------ ------
Cumulative convertible preferred stock:
6 3/8% Cumulative Convertible Preferred Stock, 3,086,874 and 5,438,230 shares issued
and outstanding as of December 31, 2002 and 2001, respectively, $100 liquidation
preference per share............................................................... 309 527
7% Cumulative Convertible Preferred Stock, 2,109,892 and 2,600,000 shares issued and
outstanding as of December 31, 2002 and 2001, respectively, $250 liquidation
preference per share............................................................... 527 630
6 3/8% Cumulative Convertible Preferred Stock, Series B, 400,000 shares issued and
outstanding as of December 31, 2002 and 2001, respectively, $1,000 liquidation
preference per share............................................................... 400 400
6 3/4% Cumulative Convertible Preferred Stock, 2,840,990 and 4,488,050 shares issued
and outstanding as of December 31, 2002 and 2001, respectively, $250 liquidation
preference per share............................................................... 682 1,087
------ ------
Total cumulative convertible preferred stock............................................ 1,918 2,644
------ ------
Total preferred stock................................................................... $2,444 $3,161
====== ======
F-63
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
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 in cash. The Company reserved for
future issuances up to 2,500,000 shares to pay dividends. Dividends accrued as
of December 31, 2002 and 2001 were $9 and $5 respectively. Unamortized issuance
costs were $0 and $10 as of December 31, 2002 and 2001, respectively.
Prior to the Commencement Date the holders of the GCHL Preferred Stock were
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 were paid in cash or paid by issuing additional
preferred stock (i.e. pay-in-kind) until June 1, 2002, after which they were to
be paid in cash.
Dividends were payable semi-annually in arrears on each June 1 and December
1. No dividends were declared in 2002 following the Commencement Date. As of
December 31, 2001, all dividends had been paid in cash with the exception of
the final 2001 dividend, declared on November 5, 2001, which was paid in kind
through a distribution of 0.0525 preference shares for each share held as at
November 15, 2001. At that time 262,500 additional shares of GCHL Preferred
Stock were issued.
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.
Pursuant to the Plan of Reorganization, the GCHL Mandatorily Redeemable
Preferred Stock will be canceled and the holders of such stock shall not
receive or retain any property.
Cumulative Convertible Preferred Stock
In April 2000, the Company issued 4,000,000 shares of 6 3/4% Cumulative
Convertible Preferred Stock for net proceeds of approximately $970. 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
F-64
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
approximately $146. Dividends accrued as of December 31, 2002 and 2001 were $22
and $16 respectively. 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, 2002 and 2001 were $6 and $4 respectively.
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, the Company issued 2,600,000 shares of 7% cumulative
convertible preferred stock for net proceeds of $630. 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, 2002 and 2001
were $11 and $8, respectively. The preferred stock can be redeemed, at the
Company's option, starting in 2004 at specified premiums declining to par in
2009.
In November 1999, the Company issued 10,000,000 shares of 6 3/8% cumulative
convertible preferred stock for net proceeds of approximately $969. 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, 2002 and 2001 were $8 and $6, respectively. The preferred stock can be
redeemed, at the Company's option, starting in 2004 at specified premiums
declining to par in 2009.
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 to 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.
Pursuant to the Plan of Reorganization, the Cumulative Convertible Preferred
Stock will be canceled and the holders of Cumulative Convertible Preferred
Stock shall not receive or retain any property.
Preferred stock dividends included the following:
December 31,
------------------
2000
--------
2002 2001 Restated
---- ---- --------
Preferred stock dividends..................... $19 $236 $219
Amortization of preferred stock issuance costs -- 2 2
--- ---- ----
Total.................................. $19 $238 $221
=== ==== ====
F-65
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
18. SHAREHOLDERS' EQUITY (DEFICIT)
The Company's common stock was traded on the New York Stock Exchange
("NYSE") under the symbol "GX" until January 28, 2002, at which time the NYSE
suspended trading of GCL's common stock due to the Company's chapter 11
bankruptcy filing. As a result of the suspension and subsequent delisting of
GCL's common stock from the NYSE, the shares began quotation on the
over-the-counter ("OTC") market under the symbol "GBLXQ" on January 29, 2002.
Pursuant to the Plan of Reorganization (see Note 2), the holders of common
stock shall not receive or retain any property.
April 2000 Offering
On April 14, 2000, the Company issued approximately 21.7 million shares of
common stock for net proceeds of approximately $688. 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.
19. OTHER OPERATING EXPENSES
Other operating expenses for the years ended December 31, 2002, 2001, and
2000 consist of the following:
December 31,
----------------------
Restated
2002 2001 2000
------ ------ --------
Cost of access.................................................................. $2,047 $1,961 $1,636
Third party maintenance......................................................... 158 191 155
------ ------ ------
Total cost of access and maintenance......................................... 2,205 2,152 1,791
------ ------ ------
Cost of sales................................................................... 233 471 345
Real estate and related taxes................................................... 154 238 213
Stock related expenses.......................................................... -- 21 48
Bad debt expense................................................................ 77 124 69
Other selling, general & administrative expenses, including all employee related
costs......................................................................... 744 1,226 1,077
------ ------ ------
Total other operating expenses............................................... 1,208 2,080 1,752
------ ------ ------
Total cost of access & maintenance and other operating expenses................. $3,413 $4,232 $3,543
====== ====== ======
20. INCOME TAXES
The benefit (provision) for income taxes is comprised of the following:
December 31,
-------------------
2000
--------
2002 2001 Restated
---- ------ --------
Current................................. $102 $ 877 $ 197
Deferred................................ -- 970 (573)
---- ------ -----
Total income tax benefit (provision). $102 $1,847 $(376)
==== ====== =====
F-66
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
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 benefit
(provision) for income taxes recorded relates to income earned by certain
subsidiaries of the Company which are located in jurisdictions which impose
income taxes.
The following is a summary of the significant items giving rise to
components of the Company's deferred tax assets and liabilities:
December 31,
----------------------------------------
2002 2001
------------------- -------------------
Assets Liabilities Assets Liabilities
------- ----------- ------- -----------
Bad debt reserve...................... $ 110 $ -- $ 109 $ --
Research and development costs........ -- (76) -- (75)
Property and equipment................ 1,326 -- 1,803 --
Net operating loss (NOL) carryforwards 1,489 -- 365 --
Deferred revenue...................... 105 -- 149 --
Other................................. 210 -- 307 --
------- ---- ------- ----
3,240 (76) 2,733 (75)
Valuation allowance................... (3,164) -- (2,658) --
------- ---- ------- ----
$ 76 $(76) $ 75 $(75)
======= ==== ======= ====
The Company recorded an increase in the valuation allowance provision of
$506 and $2,488 for the years ended December 31, 2002 and 2001, respectively.
The valuation allowance is related to deferred tax assets due primarily to the
uncertainty of realizing the full benefit of the NOL carryforwards. In
evaluating the amount of valuation allowance needed, the Company considers
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 tax benefit for U.S. NOL carryforwards of
approximately $86 were utilized in 2001. The Company's NOLs begin to expire in
2003.
Upon consummation of the Plan of Reorganization (see Note 2), most of the
capital loss carryforwards and the net operating loss carryforwards are
expected to be eliminated. Other tax attributes, including asset bases, could
also be reduced. The Company is still reviewing the overall tax impact of the
Plan of Reorganization.
Tax benefits were recognized for changes in tax laws and status of $35 in
2001 for a change in tax status in GMS for the adoption of the tonnage tax and
$12 in 2002 for a change in the US NOL carryback period to 5 years.
The Company and its subsidiaries' income tax returns are routinely examined
by various tax authorities. In connection with such examinations, tax
authorities have raised issues and proposed tax adjustments. The Company is
reviewing the issues raised and will contest any adjustments it deems
appropriate. In management's opinion, adequate provision for income taxes has
been made for all open years.
F-67
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
The Company has closed its tax years through 2001 with the U.S. Internal
Revenue Service and recorded the results of the examination in the fourth
quarter of 2001. Based on the completion of the examination in the fourth
quarter of 2002, a tax benefit of approximately $100 was recorded for the 2002
net operating loss and capital loss that were carried back to previous years.
21. REORGANIZATION ITEMS
Reorganization items are expenses or income that are incurred or realized by
the GC Debtors as a result of the reorganization and are disclosed separately
in the Company's consolidated statement of operations as required by SOP 90-7.
These items include professional fees, restructuring costs and retention plan
costs relating to the reorganization. These expenses and costs are offset by
interest earned on cash accumulated as a result of the GC Debtors' not paying
their pre-petition liabilities during the pendency of the bankruptcy cases as
well as vendor settlements. Reorganization items for the year ended December
31, 2002 and a description of such items are as follows:
Year ended
December 31,
2002
------------
Professional fees.................. $ 133
Restructuring costs................ 95
Retention plan costs............... 40
Vendor settlements................. (255)
Deferred finance costs............. 102
Interest income, net............... (20)
------------
Total reorganization items, net. $ 95
============
Net cash used for reorganization items was $292 for the year ended December
31, 2002.
Professional fees
Professional fees relate to legal, accounting, financial advisory and
restructuring services directly associated with the Company's reorganization
process, including certain professional costs incurred by Hutchison,
ST Telemedia, the Bank Lenders and the Unsecured Creditors.
Restructuring costs
Restructuring costs relate to the Company's efforts to consolidate real
estate facilities and reduce its workforce as part of the reorganization
process. The costs relate to certain real estate facilities the Company has
decided to vacate and/or close as well as severance costs relating to certain
positions within the organization that are not critical to the ongoing
operations of the Company. In addition, since the Commencement Date, the
Company has rejected a significant number of property lease obligations within
its rights under the Bankruptcy Code. For further information regarding the
restructuring efforts of the Company, see Note 5.
Retention plan costs
On May 24, 2002, the Bankruptcy Court approved an employee retention program
for key employees. The retention program was designed to encourage key
employees and key executives to remain with the GC Debtors
F-68
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
by providing them additional compensation. The additional compensation
consisted of a total of up to $10 which was available to approximately 300
employees who had been identified as key to the debtors' business or
restructuring efforts. After consultation with the Creditors Committee, the GC
Debtors modified the retention program to include 417 key employees at an
additional aggregate cost of up to $8. The retention program contemplated
distributions, in four equal installments, to designated employees who were
employed by the GC Debtors on the Commencement Date, July 1, 2002, October 1,
2002 and the earlier to occur of the filing of a chapter 11 plan of
reorganization or the sale of all or substantially all of the assets of the GC
Debtors. The GC Debtors' Plan of Reorganization was confirmed on December 17,
2002. In addition, under the retention program, a discretionary pool of an
additional $5 would be used, on an exception basis, to retain employees who had
not been previously identified as a key employee, but who, in the discretion of
the Company's Chief Executive Officer, are or became essential to the GC
Debtors' reorganization efforts. Furthermore, the Company instituted a
quarterly bonus program during the year ended December 31, 2002. Payments under
this program were made if the Company obtained specific financial targets each
quarter. However, during the difficult period of reorganization, management
also viewed this program as an important tool to retain employees. As such,
quarterly bonus payments have also been classified as retention costs. The $40
of retention plan costs consists of $16 and $24 in expenses under the Company's
retention plan and quarterly bonus program, respectively.
Vendor settlements
One of the most significant creditor constituencies in the GC Debtors'
chapter 11 cases is a relatively small number of equipment and construction
vendors who hold claims against the GC Debtors as well as wholly-owned,
non-debtor subsidiaries of GCL. Many of these vendors are essential to the
restructuring of the Company because the GC Debtors' network is based on
equipment manufactured by the vendors. These vendors maintain the GC Debtors'
network systems, provide warranty and other services, and grant the use of
certain intellectual property. Moreover, many of these vendors hold claims
against non-debtor subsidiaries who are not entitled to the protections of the
Bankruptcy Code. Accordingly, the Company entered into negotiations with these
vendor creditors in an attempt to resolve their claims and the claims that the
GC Debtors have against them.
Since the date of the Purchase Agreement, the Bankruptcy Court has approved
various settlement agreements with certain vendor creditors of the Company.
During the year ended December 31, 2002, the Company recognized the effect of
settlement agreements with certain vendor creditors. These settlements resolved
certain claims against certain GC Debtors as well as non-debtor entities which
total approximately $500, resulting in the reduction of both liabilities
subject to compromise for certain GC Debtors and liabilities not subject to
compromise for certain non-debtor entities. As a result of the vendor
settlements, the Company has recognized a reorganization gain of $255
representing the reduction in liabilities owed to such vendor creditors, offset
by the case settlement payments made to such creditors. The Company anticipates
additional settlements in the remaining period of the cases.
Deferred finance costs
In order to record its debt instruments at the amount allowed by the
Bankruptcy Court in accordance with SOP 90-7, as of the Commencement Date, the
Company wrote off all of its debt issuance costs and discounts related to debt
(collectively, "Deferred Finance Costs") as a component of reorganization
items, resulting in a charge of $102.
F-69
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
22.INCOME (LOSS) PER COMMON SHARE
The following is a reconciliation of the numerators and the denominators of
the basic and diluted income (loss) per share:
December 31,
----------------------------------------
2000
------------
2002 2001 Restated
------------ ------------ ------------
Loss from continuing operations..................... $ (296) $ (20,478) $ (1,785)
Preferred stock dividends........................... (19) (238) (221)
Charge for conversion of preferred stock............ -- -- (92)
------------ ------------ ------------
Loss from continuing operations applicable to common
Shareholders...................................... $ (315) $ (20,716) $ (2,098)
============ ============ ============
Weighted average share outstanding:
Basic and diluted................................ 903,217,277 886,471,473 844,153,231
------------ ------------ ------------
Loss from continuing operations applicable to common
Shareholders
Basic and diluted................................ $ (0.35) $ (23.37) $ (2.49)
============ ============ ============
The Company had a loss from continuing operations for the three years ended
December 31, 2002, 2001 and 2000. As a result, diluted loss per share is the
same as basic, as any potentially dilutive securities would reduce the loss per
share from continuing operations.
Dilutive loss per share for the years ending December 31, 2002, 2001, and
2000 does not include the effect of the following potential shares, as they are
anti-dilutive:
December 31,
Potential common shares excluded from ------------------
the calculation of diluted loss per share (in millions) 2000
------------------------------------------------------- ---- ---- --------
2002 2001 Restated
---- ---- --------
Cumulative convertible preferred stock......... 44 62 61
Stock options.................................. -- 11 37
Stock warrants................................. -- -- 12
-- -- ---
Total....................................... 44 73 110
== == ===
In addition, stock options and warrants having an exercise price greater
than the average market price of the common shares of 89 million, 97 million
and 13 million, calculated on a weighted average basis, for the years ended
December 31, 2002, 2001 and 2000, respectively, were excluded from the
computation of diluted loss per share.
23.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
F-70
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
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. As of December 31, 2002, the total number of shares authorized for
grants under the stock option plan was approximately 155,000,000. Upon
consummation of the Company's Plan of Reorganization, all outstanding options
in respect of the Company's common stock will be canceled.
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, 2002 and 2001, 8.3 million and
3.5 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 were scheduled to vest over a period of
zero to three years. As of December 31, 2002 and 2001, 7.3 million and 11.6
million stock options under the IPC and IXnet plans remained outstanding while
7.0 million and 10.5 million options remained vested, respectively.
Additional information regarding options granted and outstanding for the
years ended December 31, 2002, 2001, and 2000 are summarized below:
Number of Weighted-
Options Average
Outstanding Exercise Price
----------- --------------
Balance as of December 31, 1999 78,639,506 $18.76
Granted................. 50,527,641 25.92
Exercised............... (13,996,555) 6.24
Cancelled/forfeited..... (17,461,295) 34.66
----------- ------
Balance as of December 31, 2000 97,709,297 $21.41
Granted................. 49,731,480 10.22
Exercised............... (5,401,476) 2.93
Cancelled/forfeited..... (26,878,828) 19.38
----------- ------
Balance as of December 31, 2001 115,160,473 $17.92
Granted................. -- --
Exercised............... -- --
Cancelled/forfeited..... (42,748,356) 18.96
----------- ------
Balance as of December 31, 2002 72,412,117 $17.31
=========== ======
On December 12, 2001 the Compensation Committee of the Company's Board of
Directors approved a total of 19,388,110 stock options to be granted to
employees at an exercise price of $1.12 per share. As a result of the
significant downturn in the Company's operations and related events, the terms
of this stock option grant were never communicated to the employees and, as a
result, a mutual understanding of these terms between the Company and employees
did not crystallize. For purposes hereof and in accordance with SFAS No. 123,
F-71
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
"Accounting for Stock-Based Compensation", the employee stock option grants on
December 12, 2001 are not included in the pro forma calculation of net loss and
basic and diluted loss per share (see Note 3) and the calculation of granted,
outstanding and exercisable stock options for the years ended December 31, 2002
and 2001, respectively.
The following tables summarize information concerning outstanding and
exercisable options for the years ended December 31, 2002 and 2001,
respectively:
December 31, 2002
---------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------ --------------------------
Weighted
Average Weighted Weighted
Remaining Average 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 10,282,902 7.00 $ 1.09 8,388,195 $ 1.05
2.43 to 10.10... 12,518,488 7.68 6.14 6,429,383 6.16
10.25 to 13.09.. 9,059,904 6.02 11.66 8,330,627 11.73
13.14 to 19.82.. 17,712,135 6.81 16.92 12,301,705 16.84
19.85 to 26.25.. 8,854,409 6.73 24.46 7,627,086 24.80
27.04 to 30.00.. 5,085,754 7.36 28.86 4,565,500 29.05
$30.06 to $61.38 8,898,525 6.86 44.61 8,522,072 44.36
---------- ---- ------ ---------- ------
Total........ 72,412,117 6.92 $17.31 56,164,569 $18.75
========== ==== ====== ========== ======
December 31, 2001
---------------------------------------------------------------------
Options Outstanding Options Exercisable
- - ------------------------------------------ --------------------------
Weighted
Average Weighted Weighted
Remaining Average 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 13,434,497 7.72 $ 1.26 9,459,864 $ 1.27
2.43 to 10.10... 21,405,403 8.88 6.35 4,719,603 7.18
10.25 to 13.09.. 13,376,283 7.09 11.60 10,584,986 11.77
13.14 to 19.82.. 25,170,040 7.86 16.81 11,555,809 15.79
19.85 to 26.25.. 18,295,296 7.86 24.59 11,328,288 25.11
27.04 to 30.00.. 10,623,573 8.42 29.28 3,958,008 29.20
$30.06 to $61.38 12,855,381 7.84 44.47 7,557,055 44.35
----------- ---- ------ ---------- ------
Total........ 115,160,473 7.99 $17.92 59,163,613 $18.39
=========== ==== ====== ========== ======
During the years ended December 31, 2002 and 2001, the Company recorded in
additional paid-in capital $0 and $24, respectively, of amortization 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 2002, 2001 and 2000, the Company recognized expense of $0, $21 and $48,
respectively, of stock compensation relating to the stock incentive plan and
the vested economic rights to purchase common stock.
F-72
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
Stock Warrants
At December 31, 2002, the Company had outstanding stock warrants to purchase
17,009,038 shares of common stock at an exercise price of $9.50 per share. The
stock warrants were issued in 1998 to certain executive officers and directors,
providing them the right to purchase common stock. On August 14, 2003 stock
warrants to purchase 12,100,000 shares of common stock had expired. Upon
consummation of our Plan of Reorganization, the remainder of the stock warrants
will be canceled.
Management Incentive Plan
Pursuant to the Plan of Reorganization, the Company will adopt a new
management stock incentive plan upon emergence from bankruptcy. This plan will
include a pool of stock options or other stock-based grants in respect of
approximately 3.5 million common shares of New GCL. Grants will be made by the
Compensation Committee of the Board of Directors of New GCL.
24. EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
The Company sponsors a number of defined contribution plans. The principal
defined contribution plans are discussed individually below. Other defined
contribution plans are not significant individually and therefore have been
summarized in aggregate below.
Through December 31, 2001, the Company offered its qualified employees the
opportunity to participate in a defined contribution retirement plan, the
Global Crossing 401(k) Plan, qualifying under the provisions of Section 401(k)
of the Internal Revenue Code. Each eligible employee could contribute on a
tax-deferred basis a portion of their annual earnings not to exceed certain
limits. The Company matched one-half of the individual employee contributions
up to a maximum level not exceeding 7.5% of the employee's compensation. The
Company's contributions to the plan vested immediately. This plan was
terminated effective December 31, 2001 and the net assets merged into the
Global Crossing Employees' Retirement Savings Plan. Expenses recorded by the
Company relating to the Global Crossing 401(k) Plan were approximately $2 and
$1 for the years ended December 31, 2001 and 2000, respectively.
Through December 31, 2001, the Company also sponsored a number of defined
contribution plans for Frontier employees. The most significant plan, the
Frontier Employees' Retirement Savings Plan, covered non-bargaining employees,
who were able to elect to make contributions through payroll deduction. Each
eligible employee could contribute on a tax-deferred basis a portion of their
annual earnings not to exceed certain limits. The Company provided 100%
matching contributions in the form of Global Crossing Ltd. common stock up to
6% of gross compensation, and could, at the discretion of management, provide
additional matching contributions based upon Frontier's financial results. The
common stock used for matching contributions was purchased on the open market
by the plan's trustee. This plan and other defined contribution plans for
Frontier employees were terminated effective December 31, 2001 and the net
assets merged into the Global Crossing Employees' Retirement Savings Plan.
Expenses recorded by the Company relating to all plans offered to Frontier
employees was $12 and $13 for the years ended December 31, 2001 and 2000,
respectively.
Through December 31, 2001, IPC sponsored a defined contribution plan, the
IPC Information Systems 401(k) Profit Sharing Plan, qualifying under the
provisions of Section 401(k) of the Internal Revenue Code for
F-73
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
qualified employees of IPC and IXnet. Each eligible employee could contribute,
on a tax-deferred basis, a portion of their annual earnings not to exceed
certain limits. The Company matched 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
from the date of acquisition through December 31, 2000. On January 1, 2001, the
plan was frozen and all new contributions were prohibited. All other plan
transactions such as fund transfers and hardship withdrawals continued to be
permitted. From January 1, 2001, qualified employees of IPC and IXnet were
entitled to contribute to the Global Crossing 401(k) Plan. On December 31,
2001, the net assets of the IPC Information Systems 401(k) Profit Sharing Plan
were merged into the Global Crossing Employees' Retirement Savings Plan. On
December 20, 2001, IPC was sold. On March 28, 2002, the portion of the Global
Crossing Employees' Retirement Savings Plan net assets that belonged to IPC
employees was transferred to the new owners of IPC.
On December 31, 2001, the net assets of various plans including the Global
Crossing 401(k) Plan, Frontier Employees' Retirement Savings Plan and IPC
Information Systems 401(k) Profit Sharing Plan were merged into the Global
Crossing Employees' Retirement Savings Plan (the "Plan"). The Plan qualifies
under 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 provided 100% matching contributions up to
6% of gross compensation through February 2002. Effective, March 2002 the
Company provides 50% matching contributions up to 6% of gross compensation. The
Company's contributions to the Plan vest immediately. Expenses recorded by the
Company relating to the Plan were approximately $6 for the year ended December
31, 2002.
The Company also sponsors a defined contribution plan for employees of GMS.
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 GMS plan were not material to
the financial statements for the years ended December 31, 2002, 2001 and 2000,
respectively.
On May 24, 2000, the Company established a defined contribution 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 $5, $7 and $2 for the years ended December 31, 2002, 2001 and
2000, respectively.
Other defined contribution plans sponsored by the Company are individually
not significant. On an aggregate basis the expenses recorded by the Company
relating to these plans were approximately $3 and $5 for the years ended
December 31, 2002 and 2001, respectively. There were no expenses relating to
these plans during the year ended December 31, 2000.
F-74
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
The table below provides a summary of the expenses recorded by the Company
relating to each of the significant plans for the years ended December 31,
2002, 2001 and 2000:
2000
--------
2002 2001 Restated
---- ---- --------
Global Crossing 401(k) Plan /1/....................... $-- $ 2 $ 1
Frontier Employees' Retirement Savings Plan /1/....... -- 12 13
IPC Information Systems 401(k) /1/.................... -- -- 1
Global Crossing Employees' Retirement Savings Plan /1/ 6 -- --
Global Crossing (UK) Telecommunications Ltd Plan...... 5 7 2
Other plans........................................... 3 5 --
--- --- ---
Total expense...................................... $14 $26 $17
=== === ===
/1/ On December 31, 2001 the net assets of various plans including the
Global Crossing 401(k) Plan, Frontier Employees' Retirement Savings Plan and
IPC Information Systems 401(k) Profit Sharing Plan were merged into the
Global Crossing Employees' Retirement Savings Plan.
Pension Plans
The Company sponsors a number of both contributory and non-contributory
employee pension plans available to eligible Frontier, Global Crossing (UK)
Telecommunications Limited and GMS employees as well as to the Company's senior
management team. In addition, the Company also sponsors a postretirement
benefit plan for eligible Frontier employees.
Changes in the projected benefit obligation for all pension plans sponsored
by the Company are as follows.
Pension Plans Post Retirement Plan
----------- -------------------
2002 2001 2002 2001
---- ----- ---- -----
Benefit obligation at beginning of year $174 $ 613 $ 1 $ 121
Service cost........................... 7 8 -- --
Interest cost.......................... 9 26 -- 5
Amendments............................. -- (7) -- --
Actuarial loss (gain).................. (5) 4 -- 4
Employee contributions................. -- 1 -- --
Benefits paid.......................... (7) (22) -- (6)
Settlements............................ (3) (14) -- --
Spin-off to Citizens................... -- (435) -- (122)
Curtailments........................... -- -- -- (1)
---- ----- --- -----
Benefit obligation at end of year...... $175 $ 174 $ 1 $ 1
==== ===== === =====
F-75
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
Changes in the fair value of assets for all pension plans sponsored by the
Company follows.
Pension Plans Post Retirement Plan
----------- -------------------
2002 2001 2002 2001
---- ----- ---- ----
Fair value of plan assets at beginning of year $150 $ 777 $-- $ 4
Actual return on plan assets.................. (23) (38) -- --
Employer contribution......................... 4 23 -- 5
Employee contributions........................ -- 2 -- --
Benefits paid................................. (7) (21) -- (3)
Spin-off to Citizens.......................... 3 (593) -- (6)
---- ----- --- ----
Fair value of plan assets at end of year...... $127 $ 150 $-- $ --
==== ===== === ====
The funded status for all pensions plans sponsored by the Company is as
follows.
Pension Plans Post Retirement Plan
------------ -------------------
2002 2001 2002 2001
------ ---- ----- -----
Funded status..................................... $ (48) $(24) $ (1) $ (1)
Unrecognized prior service cost................... -- (3) -- --
Unrecognized net (gain) loss...................... 72 41 -- --
Adjustment required to recognize minimum liability (2) (3) -- --
------ ---- ----- -----
Prepaid (accrued) benefit cost, net............... $ 22 $ 11 $ (1) $ (1)
====== ==== ===== =====
Details on the effect on operations of principal pension plans sponsored by
the Company are as follows.
Pension Plans Post Retirement Plan
-------------------- --------------------
2000 2000
-------- --------
2002 2001 Restated 2002 2001 Restated
---- ---- -------- ---- ----- --------
Service cost................................. $ 6 $ 7 $ 4 $-- $ -- $ 1
Interest cost on projected benefit obligation 10 26 39 -- 5 8
Expected return on plan assets............... (14) (45) (71) -- -- --
Net amortization and deferral................ -- 3 (1) -- -- --
Recognized net actuarial loss................ -- -- -- -- -- --
Recognized curtailment (gain) loss........... (3) (3) -- -- -- --
---- ---- ---- --- ----- ---
Net periodic pension (benefit) cost.......... (1) (12) (29) -- 5 9
Settlements.................................. -- 2 -- -- -- --
Recognized due to spin-off to Citizens....... -- 241 -- -- (111) --
---- ---- ---- --- ----- ---
Net (benefit) cost........................... $ (1) $231 $(29) $-- $(106) $ 9
==== ==== ==== === ===== ===
F-76
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
Actuarial assumptions used to determine costs and benefits for pension plans
sponsored by the Company are as follows.
2002 2001 2000
----------- ------------ ----------
Discount rate............ 5.5 - 6.5% 5.75 - 7.25% 6.0 - 7.5%
Compensation increases... 3.8 - 4.25% 4.0 - 4.25% 4.0 - 5.0%
Expected return on assets 7.3 - 8.5% 8.0 - 9.5% 8.0 - 9.5%
In June, 2001, the Company sold its Incumbent Local Exchange Carrier
business ("ILEC") to Citizens Communications Company ("Citizens"). In
connection with this sale, the associated pension assets and related liability
were to be transferred to Citizens. As a result of the Company's bankruptcy
filing the transfer of the pension assets and related liability was delayed
pending approval of the Bankruptcy Court.
While the transfer of the pension assets and related liability was delayed,
the Company segregated the assets related to the ILEC employees during 2001.
Although the assets remained in the Company's control as of December 31, 2002,
Citizens effectively administered benefit payments to the ILEC employees for
the 2002 plan year. In December 2002, the Bankruptcy Court approved the
transfer of the pension assets and related liability to Citizens, with the
actual transfer of the assets occurring in February 2003.
The Global Marine Pension Plan ("GMS Plan") is a contributory pension plan
provided to certain GMS' employees and officers. As at December 31, 2002 the
accumulated benefit obligation ("ABO") of the GMS Plan exceeded the fair value
of the GMS Plan's assets by $42. As a result, the Company recognized an
additional minimum pension liability of $42 for the year ended December 31,
2002. None of the Company's other pension plans' ABO's exceed the fair value of
their respective pension plans assets as at December 31, 2002.
The projected benefit obligation, accumulated benefit obligation, and fair
value of assets relating to the GMS Plan were $106, $87, and $64, respectively,
at December 31, 2002, and $86, $64 and $69, respectively, at December 31, 2001.
Amounts relating to the GMS Plan that are recognized in the consolidated
statement of financial position are as follows:
December 31,
- ------------
2002 2001
- ---- ----
Prepaid benefit cost................ $ 18 $14
Accrued benefit liability........... (23) --
Additional minimum pension liability 42 --
---- ---
Net amount recognized............... $ 37 $14
==== ===
25. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses derivative financial instruments for purposes other than
trading to enhance its ability to manage various forms of risk, including
market price risk on equity securities it holds as investments, and interest
rate and foreign currency exchange risks, which exist as part of its ongoing
business operations. Derivative instruments are entered into for periods
consistent with related underlying exposures and do not constitute positions
independent of those exposures.
F-77
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
The Company designates derivatives as either fair value hedges or cash flow
hedges.
Cash Flow Hedges
Sonus Hedge
In May 2001, the Company entered into a collar pertaining to an equity
investment in order to reduce its exposure to changes in the investment's
market value. Because this equity collar was classified as a cash flow hedge,
any unrealized gains or losses were recognized in the stockholders' equity
section of the balance sheet.
The Company held an equity investment in Sonus Networks, Inc. ("Sonus"),
which consisted of 484,346 shares of Sonus Series C and D Convertible Preferred
Stock, with a cost basis of $7. After the initial public offering of Sonus, the
Company converted the preferred stock into common stock. In April 2001, the
Company entered into a Variable Forward Transaction ("VFT") with Goldman Sachs
Financial Markets on the Sonus shares, with maturities in 2004 and 2005. The
VFT was an equity collar on the Sonus shares with a revolving loan (borrowing)
arrangement. The Company had borrowed a total of $61, which remained
outstanding as of September 30, 2001. In accordance with SFAS No. 133, the
equity collar was marked to market through the stockholders' equity section of
the balance sheet, and, as a result, the Company had recorded an unrealized
gain of $40 in Other Comprehensive Income at September 30, 2001.
In the fourth quarter of 2001, because of a reduction in the Company's
credit ratings, the outstanding revolving loan was called by Goldman Sachs. As
a result, the debt (revolving loan) was repaid, the hedge (equity collar) was
closed and the Sonus shares were sold. The net settlement between the debt and
the hedge resulted in a cash outflow of $20 (debt of $61, less the realized
gain on the hedge of $41 included in "loss from write-down and sale of
investments, net"). The Company also sold its Sonus shares for $9. Therefore,
the net cash outflow of the closure of the hedge, debt and shares was $11. The
Company recognized a gain of $2 on the sale of the shares, which was recorded
in the quarter ended December 31, 2001.
PCL Hedge
As a result of the consolidation of PCL, a majority-owned subsidiary of AGC,
in 2000, the Company had an $850 aggregate non-recourse senior secured loan
facility ("PC-1 Credit Facility") for construction start-up and financing
costs. The PC-1 Credit Facility was comprised of $840 of a multiple draw-down
term loan and a $10 working capital facility. The PC-1 Credit Facility was not
guaranteed by GCL but instead 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 PC-1 Credit Facility, the Company
selected loan arrangements as either a Eurodollar loan or an Alternative Base
Rate ("ABR") loan. The Eurodollar interest rate was LIBOR plus 2.25-2.50% and
the ABR interest rate was the greater of (a) the Prime Rate and (b) the Federal
Funds Effective Rate plus 0.5%, in either case plus 1.25-1.50%. The loans
contained a pre-payment clause that allowed the Company to pay down the balance
sooner than scheduled.
In order to better manage PCL's exposure to interest rate risk, the Company
had entered into two interest rate swap transactions with Deutsche Bank and
CIBC Oppenheimer, based on one month LIBOR, to minimize its exposure to
increases in interest rates on its borrowings. The swap transactions fixed the
floating interest rate at 4.985% on a notional amount of borrowings of $500
until January 31, 2004. It was the Company's intention that the debt would be
outstanding in a sufficient amount to cover the amount of the derivative. If
the borrowings were prepaid under the loan agreement, the Company expected to
replace the loan with another borrowing with a
F-78
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
materially similar risk exposure. Because the swaps were classified as cash
flow hedges, and were 100% effective, in accordance with SFAS No. 133, any
unrealized gains or losses from changes in fair value were recorded in the
stockholder's equity section of the balance sheet as other comprehensive income
(loss). As of December 31, 2001, the Company recognized $14 in other
comprehensive income related to the PC-1 Credit Facility interest rate swaps.
As discussed in Note 2, on July 19, 2002, PCL and certain of its
subsidiaries filed voluntary petitions for relief under the Bankruptcy Code.
Accordingly, for purposes of the Company's consolidated financial statements,
PCL and its subsidiaries were no longer included in the Company's consolidated
and consolidating financial statements as described in Note 3, Summary of
Significant Accounting Policies. The bankruptcy caused the PC-1 Credit Facility
to be in default and the debt was called. As of June 30, 2002, the Company
recognized $12 in other comprehensive loss related to the PC-1 Credit Facility
interest rate swaps. In July 2002, as PCL net assets were abandoned and removed
from the consolidated financial statements, the Company recognized the $12 loss
in the consolidated statements of operations related to the PC-1 Credit
Facility interest rate swaps.
26. FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, restricted cash and cash
equivalents, accounts receivable, accrued construction costs, accounts payable,
accrued liabilities, accrued interest, obligations under inland services
agreements and capital leases approximate their fair value. Fair value as at
December 31, 2002 cannot be estimated for liabilities subject to compromise,
other than the senior notes described in Note 13 under the caption "Senior
Notes." 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,
2002 2001
-------------- --------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
Senior notes, net of discount......... $4,100 $14 $4,066 $414
Mandatorily redeemable preferred stock 526 5 517 19
Cumulative convertible preferred stock 1,918 28 2,644 95
Interest rate swap transactions....... -- -- -- 14
27. COMMITMENTS, CONTINGENCIES AND OTHER
Tyco Litigation
During 2000, the Company and Tyco Telecommunications (US) Inc. and a number
of its corporate affiliates ("Tyco") asserted numerous claims against one
another in litigation and arbitration proceedings as a result of disputes
arising out of the development, installation and maintenance of the Company's
subsea fiber optic cable systems. Pursuant to a partial settlement dated August
30, 2000, the Company paid approximately $19 related to the early termination
of the operations, administration and maintenance ("OA&M") agreement between
the parties. On October 4, 2001, GCL entered into agreements with Tyco settling
the Company's pending lawsuit against Tyco related to Tyco's agreements to
install the SAC cable system. On the same date, the parties also entered into
agreements settling the outstanding arbitration claims between them concerning
contracts for the development of the AC-1 fiber-optic cable system.
Guarantees of Certain Lease Obligations of Exodus
GCHL and GCNA, both wholly-owned subsidiaries of the Company, remained as
guarantors with respect to certain GlobalCenter real estate lease agreements
following the sale of GlobalCenter to Exodus in January 2001.
F-79
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
The lease agreements related to administrative and technical facilities located
throughout the United States, Europe, and the Asia/Pacific region. On an
aggregated basis, the annual lease payments averaged approximately $70 per year
over the life of the leases. The remaining lease terms expire between 2002 and
2025. On September 26, 2001, Exodus filed for bankruptcy protection. In October
2001, Exodus executed an agreement with the Company that provided the Company
with certain rights to direct the disposition of the applicable leasehold
interests in Exodus' bankruptcy proceedings. This agreement, which was subject
to the approval of the bankruptcy court overseeing Exodus' bankruptcy
proceedings, would likely have substantially eliminated the risk of
acceleration of payments due under these leases as long as obligations under
the leases were satisfied by Exodus or the Company as they became due. In the
fourth quarter of 2001 and continuing in January of 2002, prior to the
Company's bankruptcy filing, the Company remitted $6 to various landlords
relating to these leases and pursuant to the agreements. As part of the
Company's first day orders in bankruptcy on January 28, 2002, all of the
guarantees of Exodus leases were rejected. The lease rejection claims of the
applicable landlords are unsecured claims in the Company's bankruptcy
proceeding, which will be eliminated upon emergence from bankruptcy.
Special Committee Investigation
On February 4, 2002, the Company issued a press release announcing, among
other things, that it had formed a special committee of its board of directors
to investigate allegations made by a former finance department employee in
August 2001. Commencing in April 2002, membership on the special committee was
assumed by three independent directors of the Company, whom the board had
appointed to fill vacancies following the Company's bankruptcy in January 2002.
Among other matters, the employee made allegations regarding the propriety,
business purpose and accounting treatment of certain concurrent transactions
for the purchase and sale of telecommunications capacity and services between
the Company and its carrier customers. In its investigation, the special
committee reviewed 16 of 36 concurrent transactions entered into by the Company
between the fourth quarter of 2000 and the third quarter of 2001 (the "Core
Transactions"). The Core Transactions represented the majority of the value of
the concurrent transactions entered into by the Company during that time frame.
In addition to addressing the substance of the employee's allegations, the
committee also reviewed the circumstances surrounding the Company's retention
of its outside counsel, Simpson Thacher & Bartlett LLP ("Simpson Thacher"), for
the purpose of inquiring into the allegations and Simpson Thacher's performance
pursuant to the Company's retention.
The special committee completed its investigation after a year-long inquiry
and filed its report with the Bankruptcy Court on March 10, 2003 pursuant to an
order of the Court. The special committee's complete report is available
through the Bankruptcy Court. The special committee summarized its findings and
conclusions, in part, as follows: (1) each of the Core Transactions had a
legitimate business purpose at the time it was entered into and each was
subjected to a process of internal corporate review and approval (albeit one
not always rigorously applied); (2) the Company's sharply increased reliance on
concurrent transactions in the first and second quarters of 2001, when reviewed
in retrospect, was not a prudent or financially sound business decision; (3)
neither the Company nor Simpson Thacher intended to conceal or suppress the
former employee's allegations, although Simpson Thacher did not adequately
investigate or respond to the allegations and did not adequately discharge its
professional obligations to the Company; (4) the Company relied in good faith
on advice received from Arthur Andersen in accounting for the concurrent
transactions; and (5) the Company relied in good faith on advice received from
Simpson Thacher and Arthur Andersen in its public disclosures regarding the
concurrent transactions.
F-80
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
Securities and Exchange Commission Investigation
On February 5, 2002, the SEC commenced a formal investigation into the
Company's concurrent transactions and related accounting and disclosure issues.
The Company has been cooperating with the SEC by providing documents and other
information to the SEC staff, which has taken testimony from current and former
directors, officers, and employees of the Company. To resolve the SEC's
investigation, the Company and certain former officials have entered into
negotiations with the SEC staff with a view to settlement, although to date
settlement has not been reached. As part of the chapter 11 process, the SEC
filed a proof of claim asserting contingent and unliquidated amounts against
the Company. However, on November 14, 2003, the Bankruptcy Court approved a
stipulation among the Company, the SEC and the Company's unsecured creditors
committee in which the SEC withdrew its proof of claim, with prejudice.
The Company has restated certain previously issued financial statements to
record the concurrent transactions at historical carrying value rather than at
fair value. See Note 4.
Department of Justice Inquiry
In early 2002, the U.S. Attorney's Office for the Central District of
California, in conjunction with the Federal Bureau of Investigation (the
"FBI"), began conducting an investigation into the Company's concurrent
transactions and related accounting and disclosure issues. The Company has
provided documents to the U.S. Attorney's office and the FBI, and FBI
representatives have interviewed a number of current and former officers and
employees of the Company. The Company does not know whether the investigation
is ongoing or has concluded.
Department of Labor Investigation
The Department of Labor ("DOL") is conducting an investigation related to
the Company's administration of its benefit plans, including the acquisition
and maintenance of investments in the Company's 401(k) employee savings plans.
The Company has been cooperating with the DOL by providing documents and other
information to the DOL staff, and the DOL has interviewed a number of current
and former officers and employees of the Company. The Company and certain
current and former officers and directors have been negotiating with the DOL
staff over the terms of a potential settlement, but no agreement has been
reached. If the DOL were to impose a civil monetary penalty on the Company,
such a penalty would be discharged upon consummation of the Plan of
Reorganization.
Shareholder Class Actions and Other Actions
Following the Company's filing for bankruptcy on January 28, 2002,
approximately 50 purported shareholder class action lawsuits were filed against
certain of the Company's current and former officers and directors. The
plaintiffs allege that the defendants committed fraud under the federal
securities laws in connection with the Company's financial statements and
disclosures and certain other public statements made by Company representatives
and seek compensatory damages, costs and expenses, and equitable and other
relief. The class actions have been consolidated in the United States District
Court for the Southern District of New York under the caption In re Global
Crossing Ltd. Securities Litigation. In addition, a number of individual
securities cases or other actions based on federal or state law claims and
arising out of similar underlying facts have been filed (and in the future,
additional cases may be filed) against certain current and former officers,
directors, and employees of the Company, seeking damages for alleged violations
of federal and state securities
F-81
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
laws, breach of fiduciary duties, violations of state whistle-blower statutes,
and allegations that certain former employees were improperly restricted from
selling stock before its price collapsed. The Company is involved only
indirectly in these cases and is not a named defendant.
The Company denies any liability for the claims asserted in these actions
and understands that the Company's former and present officers and directors
have been negotiating the terms of a settlement with the plaintiffs in the
consolidated securities action, but that no agreement has been reached. Any
monetary liability that the Company may have in respect of these cases would be
discharged upon consummation of the Company's Plan of Reorganization.
ERISA Class Actions
Following the Company's filing for bankruptcy on January 28, 2002,
plaintiffs filed over 15 purported class actions against the Company's current
and former officers, directors, and employees pursuant to the Employee
Retirement Income Security Act of 1974 ("ERISA") in connection with the
administration of the Company's 401(k) retirement savings plans. The plaintiffs
allege, among other things, that the ERISA fiduciaries breached their duties to
the 401(k) plan participants by directing or otherwise being responsible for
the plans' acquiring and continuing to maintain investments in the Company's
common stock. The United States District Court for the Southern District of New
York has consolidated most of these actions under the caption In re Global
Crossing Ltd. ERISA Litigation. The consolidated complaint seeks, among other
things, a declaration that the defendants breached their fiduciary duties to
the plaintiff class, an order compelling defendants to make good on the losses
sustained by the plans, the imposition of a constructive trust on any amounts
by which the defendants were unjustly enriched by their actions, and an order
of equitable restitution. Although the Company is named as a defendant in the
consolidated ERISA case, plaintiffs assert in their consolidated complaint that
they will not prosecute their action against the Company unless or until the
Bankruptcy Court lifts or grants relief from the automatic stay of litigation
imposed by the Bankruptcy Code. The Company denies any liability for the claims
asserted in these matters and understands that the Company's past and present
officers and directors have been negotiating the terms of a settlement with the
plaintiffs in these actions, but that no agreement has been reached. Any
monetary liability that the Company may have in respect of these cases would be
discharged upon consummation of the Company's Plan of Reorganization.
On April 30, 2002, an additional case, Pusloskie v. Winnick et al., was
commenced in the United States District Court for the Southern District Court
against certain current and former directors, officers and employees of the
Company. This case is brought on behalf of putative classes of former employees
of the Company and asserts claims for breach of fiduciary duties in connection
with the administration of one of the Company's 401(k) retirement plans. This
additional case does not name the Company as a defendant and was not
consolidated with the other ERISA cases.
Change-of-Control Severance Plan Class Action
Plaintiffs have filed a purported class action against the Company's current
and former officers, directors, and employees and against the Frontier
Corporation/Global Crossing Change of Control Severance Plan (the "Severance
Plan") under ERISA in connection with the administration of the Severance Plan.
The plaintiffs allege, among other things, that the purported ERISA fiduciaries
and the Severance Plan breached their duties to the plan's participants in
suspending payments of severance benefits in connection with the Company's
bankruptcy filing. The case has been coordinated (but not consolidated) with
the securities and the other ERISA class actions in the Southern District of
New York, where it is pending under the caption Simonetti v. Perrone.
F-82
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
The Company is not named as a defendant in the Simonetti case. The Company
denies any liability for the claims asserted and understands that the
defendants have been negotiating the terms of a settlement with the plaintiffs
but that no agreement has been reached. Any monetary liability that the Company
may have in respect of this case will be discharged upon consummation of the
Plan of Reorganization.
JPMorgan Chase Litigation
On October 27, 2003, the Company's primary lender, JPMorgan Chase Bank, in
its role as administrative agent for a consortium of banks participating in the
Corporate Credit Facility, filed an action in the New York State Supreme Court
for New York County, captioned JPMorgan Chase Bank v. Winnick, et al., against
a number of current and former officers, directors and employees of the Company
alleging that the defendants fraudulently reported misleading and untrue
financial statements and records of compliance with certain financial covenants
in the credit facility. The complaint asserts claims of fraud, aiding and
abetting fraud, conspiracy to commit fraud, negligent misrepresentation, and
aiding and abetting negligent misrepresentation. The complaint seeks damages of
at least $1,700, pre-judgment interest, and costs and expenses, including
attorneys' fees. The Company is not a defendant in the litigation.
Initial Public Offering Litigation
On June 12, 2002, certain plaintiffs filed a consolidated complaint
captioned In re Global Crossing Ltd. Initial Public Offering Securities
Litigation in the United States District Court for the Southern District of New
York alleging that certain current and former officers and directors of the
Company violated the federal securities laws through agreements with
underwriters in connection with the Company's initial public offering and other
offerings of Company shares. The Complaint seeks damages in an unstated amount,
pre-judgment and post- judgment interest, and attorneys' and expert witness
fees. This consolidated action involving the Company is further consolidated in
the United States District Court for the Southern District of New York with
cases against approximately 309 other public issuers and their underwriters
under the caption In re Initial Public Offering Securities Litigation. Pursuant
to the automatic stay of litigation imposed by the Bankruptcy Code, the Company
is not a defendant in this action. The Company believes that any liability it
may have in respect of this action is subject to indemnification by the firms
that acted as underwriters in the applicable securities offerings. Any monetary
liability would, in any event, be discharged upon consummation of the Company's
Plan of Reorganization.
Claim by the United States Department of Commerce
A claim was filed in the Company's bankruptcy proceedings by the United
States Department of Commerce on October 30, 2002 asserting that an undersea
cable owned by PCL, a former subsidiary of the Company, violates the terms of a
Special Use permit issued by the National Oceanic and Atmospheric
Administration. The Company believes responsibility for the asserted claim
rests entirely with the Company's former subsidiary. An identical claim has
also been filed in the bankruptcy proceedings of the former subsidiary in
Delaware. The Company understands that the claimant has reached an agreement
with PCL to transfer the Special Use permit to Pivotal Telecom as part of a
larger sale of assets (see Note 8). That agreement was approved by PCL's
bankruptcy court on October 7, 2003. Under the terms of the agreement, Pivotal
has assumed liability for any payment or performance obligations under the
permit on a go-forward basis. PCL and the claimant have agreed to use their
best efforts to resolve the remaining compliance issues. As a result of this
development, the Company believes it is now clear that it has no remaining
liability for the obligations imposed by the permit on either a pre-petition or
post-petition basis. As a result, the Company filed its objection to this claim
with the bankruptcy court on November 7, 2003.
F-83
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
United Kingdom Anti-Trust Investigation
In 2002 an investigation was commenced by the United Kingdom Office of Fair
Trading ("OFT") into an allegation that various subsea cable operator entities,
including Global Crossing, had engaged in an illegal agreement to collectively
boycott a location in the United Kingdom and a means for the landing of subsea
telecommunications cables in the United Kingdom. Global Crossing responded to
that investigation in 2002 denying the allegation.
In August 2003, the OFT extended its investigation to include allegations of
price fixing and information sharing on the level of fees that the subsea
entities would pay landowners for permission to land submarine
telecommunication cables on their land in the United Kingdom. Global Crossing
responded to those allegations on October 10, 2003.
In the event that the OFT determines that the Company engaged in
anti-competitive behavior, the OFT may impose a fine up to a maximum of 10% of
the responsible party's revenue in the field of activity in the United Kingdom
for up to three years preceding the year on which the infringement ended. The
Company disputes the charges and will be defending itself vigorously.
Qwest Rights-of-Way Litigation
In May 2001, a purported class action was commenced against three of the
Company's subsidiaries in the United States District Court for the Southern
District of Illinois. The complaint alleges that the Company had no right to
install a fiber optic cable in rights-of-way granted by the plaintiffs to
certain railroads. Pursuant to an agreement with Qwest Communications
Corporation, the Company has an indefeasible right to use certain fiber optical
cables in a fiber optic communications system constructed by Qwest within the
rights-of-way. The complaint alleges that the railroads had only limited
rights-of-way granted to them that did not include permission to install fiber
optic cable for use by Qwest or any other entities. The action has been brought
on behalf of a national class of landowners whose property underlies or is
adjacent to a railroad right-of-way within which the fiber optic cables have
been installed. The action seeks actual damages in an unstated amount and
alleges that the wrongs done by the Company involve fraud, malice, intentional
wrongdoing, willful or wanton conduct and/or reckless disregard for the rights
of the plaintiff landowners. As a result, plaintiffs also request an award of
punitive damages. The Company has made a demand of Qwest to defend and
indemnify the Company in the lawsuit. In response, Qwest has appointed defense
counsel to protect the Company's interests.
The Company's North American network includes capacity purchased from Qwest
on an IRU basis. Although the amount of the claim is unstated, an adverse
outcome could have an adverse impact on the Company's ability to utilize large
portions of its North American network. This litigation is stayed against the
Company pending its emergence from bankruptcy, and the plaintiffs' pre-petition
claims against the Company will be discharged at that time in accordance with
its Plan of Reorganization. By agreement between the parties, the Plan of
Reorganization preserves plaintiffs' rights to pursue any post-confirmation
claims of trespass or ejectment. If the plaintiffs were to prevail, the Company
could lose its ability to operate its North American network, although it
believes that it would be entitled to indemnification from Qwest for any losses
under the terms of the IRU agreement under which Global Crossing originally
purchased this capacity.
F-84
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
In September 2002, Qwest and certain of the other telecommunication carrier
defendants filed a proposed settlement agreement in the United States District
Court for the Northern District of Illinois. On July 25, 2003, the court
granted preliminary approval of the settlement and entered an order enjoining
competing class action claims, except those in Louisiana. The settlement and
the court's injunction are opposed by some, but not all, of the plaintiffs'
counsel and are on appeal before the U.S. Court of Appeals for the Seventh
Circuit.
Customs Tax Audit
A foreign tax authority has concluded a preliminary audit of the Company's
books and records for the years ended December 31, 2001 and 2000 and has made
certain initial findings adverse to the Company including the following:
failure to disclose discounts on certain goods imported into the country,
failure to include the value of software installed on certain computer
equipment, and clerical errors in filed import documents.
The Company has responded to the preliminary audit disputing the results and
is awaiting a response from the tax authority detailing its formal position on
the audit. The potential customs and duties exposure, including possible treble
penalties to the Company could be as high as $25--$35.
Softbank Arbitration and Microsoft Settlement
At the time of the formation of the Asia Global Crossing joint venture,
Microsoft and Softbank each committed to purchases of at least $100 in capacity
on the Company's network over a three-year period. Softbank failed to satisfy
that commitment, and its remaining unsatisfied commitment of $85.5, which it
was required to utilize by December 31, 2002, had been the subject of a
recently concluded arbitration proceeding. The arbitration, commenced by Global
Crossing in September 2002, alleged that Softbank breached its contractual
obligations to Global Crossing and sought $85.5 in damages. Softbank's defense
was that its commitment was extinguished as a result of the Company's loss of
control of Asia Global Crossing and Pacific Crossing Limited, and that in any
event it was entitled to offset any monies owed by various credits and
abatements due from the Company. In a final award issued on October 30, 2003,
the arbitration panel found that Softbank is liable to Global Crossing for
breach of the underlying commercial commitment agreement in the net amount of
approximately $20, after abatements and offsets, together with an additional
award of interest in the amount of approximately $0.2.
On April 1, 2003, the Company entered into a settlement agreement with
Microsoft to resolve a number of contractual disputes regarding its remaining
capacity commitment obligations, including allegations by Microsoft that were
similar to those made by Softbank in the above-referenced arbitration
proceedings. The settlement resulted in a reduction in Microsoft's remaining
unsatisfied commitment from approximately $76 to approximately $61. Most of the
restructured commitment is subject to GCL's emergence from bankruptcy and a
smaller portion is also contingent on the satisfactory completion of a
performance test of the Company's Western European network. The restructured
commitment requires Microsoft to purchase capacity on the Company's owned
network, except that 15% of Microsoft's commitment can be used by it for the
purchase of off-network access services.
Bankruptcy Filings
As discussed in Note 2, the GC Debtors filed for protection under chapter 11
of the Bankruptcy Code. Although the Company expects to consummate its Plan of
Reorganization and emerge from chapter 11
F-85
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
reorganization proceedings shortly after the filing of this annual report on
Form 10-K, disputes with respect to the amount of allowed claims owed by the GC
Debtors to certain of their general unsecured creditors remain outstanding. GCL
expects many of these disputes to remain outstanding for months after it
emerges from bankruptcy. A resolution adverse to the GC Debtors of any or all
of these claims would not result in a change in the distributions under the
Plan of Reorganization to any of the classes of holders of claims and interests.
Subsea Systems Construction Upgrades
As of December 31, 2002, the Company was committed under contracts to
upgrade its Mid-Atlantic Crossing system for future construction costs totaling
$22.
Access and Maintenance Purchase Commitment Obligations
The Company has purchase commitments with third party access vendors that
require it to make payments to purchase network services, capacity and
telecommunications equipment through 2008. Some of these access vendor
commitments require the Company to maintain minimum monthly and/annual
billings, in certain cases based on usage. In addition, the Company has
purchase commitments with third parties that require it to make payments for
operations, administration and maintenance services for certain portions of its
network through 2025.
OGCbuying.solutions Claim
Global Crossing (UK) Telecommunications Limited ("GCUKTL") has been notified
by the UK government buying department, OGCbuying.solutions ("OGC"), of OGC's
contractual right to buy, for a fixed sum of (Pounds)0.75, dedicated equipment
used by GCUKTL for the provisioning of certain network services under an
agreement dated November 15, 1996 (the "MTS Agreement"). OGC has indicated that
this purchase right would not normally arise until termination of the MTS
Agreement in 2006. However, OGC has also indicated that it will not approve the
change of control to ST Telemedia and, as a result of a change of control
clause in the MTS Agreement, the MTS Agreement may be terminated, precipitating
the purchase right. GCUKTL does not now own the dedicated equipment required
for the provision of service under the MTS Agreement, and if OGC was to
continue to assert its contract rights, GCUKTL might have to purchase this
equipment at a premium from third party suppliers or their equipment lease
financiers in order to be able to discharge its obligation to OGC.
28. RELATED PARTY TRANSACTIONS
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 continued to impose restrictions on the
transfer of Global Crossing common stock which the IPC stockholders acquired in
the merger. Under these provisions, Mr. Walsh could 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 could 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.
F-86
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
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 vested on each of the first three
anniversaries of the June 14, 2000 closing of the acquisition.
Loans to Executive Officers
In July 1998, one of the Company's subsidiaries provided a $0.25
interest-free relocation loan to Dan J. Cohrs, an executive officer of the
Company until May 2003. This loan was forgiven in full by the Company in
December 2001.
In November 2000, one of the Company's subsidiaries loaned $8 to Thomas J.
Casey, then Global Crossing's chief executive officer and a director. The loan
bore interest at the rate of 6.01% per annum and was secured by a second deed
of trust on Mr. Casey's residence. The principal of and accrued interest on the
loan were to be due in full in October 2005 or upon the earlier termination of
Mr. Casey's employment for cause or due to his voluntary resignation. The loan
and interest was forgiven in full in connection with the replacement of Mr.
Casey with Mr. Legere as chief executive officer in October 2001.
In February 2001, one of the Company's subsidiaries made a $3 interest-free
loan to Jose Antonio Rios, an executive officer of GCL. The loan was forgivable
in three equal installments on the first, second and third anniversaries of the
date of grant, subject to Mr. Rios' continued employment with the Company. $1
of this loan was forgiven by its terms in each of February 2002 and February
2003.
In March 2001, one of the Company's subsidiaries loaned $1.8 to David Walsh,
then an executive officer of the Company. The loan bore interest at the rate of
4.75% per annum and was secured by a second mortgage on his residence. The
principal and accrued interest on the loan were to be due in full in March 2002
or upon the earlier termination of Mr. Walsh's employment. Mr. Walsh repaid
this loan in full after his employment was terminated in October 2001.
In September 2001, one of the Company's subsidiaries loaned $0.5 to a life
insurance trust created by S. Wallace Dawson, Jr., then an executive officer of
GCL. The loan was repayable in full in September 2061 or, if earlier, upon the
death of the last to survive of Mr. Dawson and his wife. This loan was used to
purchase a joint variable life insurance policy with initial face value amount
of approximately $8. The outstanding balance of the loan accrued interest at
the rate of 5.49% per annum, payable upon maturity of the loan. The full $0.5
original principal amount plus accrued interest remains outstanding on the date
of this annual report. The loan was considered impaired and fully reserved as
of December 31, 2002.
In April 2001, the GCL Compensation Committee and Board of Directors
approved of a program (the "Program") in which financial accommodations could
be made to executive officers of the Company who were in danger of suffering
forced sales of their GCL common stock at a time when the stock was trading at
what appeared to be depressed levels. David Walsh and Lodwrick Cook are the
only executives who participated in the Program.
Pursuant to the Program, in August 2001 one of the Company's subsidiaries
provided approximately $1.4 of cash collateral to secure an approximately $1.4
margin loan balance in Mr. Walsh's commercial brokerage
F-87
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
account, which loan was secured by 746,973 shares of GCL common stock owned by
Mr. Walsh. Mr. Walsh agreed to cause the Company's cash collateral to be
returned by December 31, 2001, together with interest at the average rate of
interest applicable to loans under the Company's revolving credit facility. Mr.
Walsh repaid the cash collateral to the Company, together with accrued
interest, after his employment was terminated in October 2001.
In April 2001, a $7.5 guarantee was approved for Mr. Cook under the Program.
Certain interim arrangements were put in place in which one of the Company's
subsidiaries effectively guaranteed up to $7.5 of the obligations of Mr. Cook,
his wife and a trust for the benefit of Mr. Cook and members of his family
under an existing margin loan, with such guarantee being secured by certain
cash and securities of the Company. In July 2001, these interim arrangements
were replaced by a $7.5 letter of credit issued under the Company's
then-existing senior secured revolving credit facility. This letter of credit
supported a $7.5 commercial bank loan that the Cooks used to refinance their
margin loan in full. This bank loan was also secured by 2.5 million shares of
GCL common stock pledged by the Cooks. At the time the letter of credit was
issued, the Cooks entered into a reimbursement agreement providing for the
reimbursement to the Company of any amounts drawn under the letter of credit,
together with interest at the rate applicable to the Cook's commercial bank
loan or, if higher, the rate of interest applicable to the letter of credit
reimbursement obligation under our revolving credit facility. In July 2002, the
bank loan matured and the Cooks failed to repay the loan. The lender then drew
under the letter of credit. As of the date of this annual report, no
reimbursement payments have been made to the Company under the aforementioned
reimbursement agreement. Pursuant to the Plan of Reorganization, the Company's
reimbursement claim will be transferred to the agent for the creditors under
its revolving credit facility and any recoveries against the Cooks will be
distributed to such creditors. The loan was considered impaired and fully
reserved as of December 31, 2002.
During 1999 through 2002 the Company made approximately $5 in loans to other
employees. As of December 31, 2002, all employee loans mentioned herein have
been either paid in full, forgiven or fully reserved for collectibility.
Joint Venture Between AGC and ST Telemedia
On May 20, 2000, AGC entered into a non-binding memorandum of understanding
with a majority owned subsidiary of ST Telemedia ("Starhub") to enter into
joint venture agreements for the purpose of forming two joint ventures, each of
which was to be 50% owned by AGC and Starhub. On January 12, 2001, AGC and
Starhub executed the first joint venture agreement, forming Starhub Asia Global
Crossing Pte Ltd ("SAGC"). SAGC was established to build and operate backhaul
and telehouses in Singapore and to connect a terrestrial network within
Singapore to connect with AGC's Pan Asian East Asia Crossing ("EAC") subsea
system. On May 8, 2002, AGC and Starhub announced that SAGC would become a
wholly-owned subsidiary of AGC. This modification occurred to more
appropriately reflect the respective capacity needs of AGC and Starhub. Under
the terms of the modification, AGC was to continue to utilize the Starhub
network for its Singapore backhaul. Similarly, Starhub was to continue to
access AGC's network for its international capacity needs. As a result of AGC's
chapter 11 petitions and subsequent sale of substantially all of AGC's
operating subsidiaries on March 11, 2003 (see Note 8), there is no longer any
continuing relationship between AGC and Starhub.
Transactions with Pacific Capital Group and its Affiliates
Pacific Capital Group, Inc. ("PCG") is a merchant bank specializing in
telecommunications, media and technology and having a substantial equity
investment in GCL (before giving effect to the cancellation of GCL's equity
securities upon the Company's emergence from bankruptcy). PCG is controlled by
Gary Winnick, former
F-88
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
chairman of the board of GCL from its inception through December 2002. In
addition, Lodwrick Cook and some of the Company's former officers and directors
are or at one time were affiliated with PCG.
In 1999, the Company entered into a lease with North Crescent Realty V, LLC,
which is managed by and affiliated with PCG, with respect to the Company's then
executive offices in Beverly Hills, California. Global Crossing engaged an
independent real estate consultant to review the terms of its occupancy of the
building, and the consultant found the terms to be consistent with market terms
and conditions and the product of an arm's length negotiation. During 2001, the
Company made payments under this lease in the amount of approximately $0.333
per month. PCG subleased a portion of this space from Global Crossing during
2001 at a cost of approximately $3.50 per square foot, which approximated the
Company's costs under the lease. The amount of space subleased from Global
Crossing started the year at approximately 2,700 square feet but decreased
during the year until PCG vacated the premises by the end of the year. The
Company relocated out of the Beverly Hills facility in March 2002. In
connection with the Company's bankruptcy proceedings, Global Crossing rejected
the Beverly Hills lease at that time, thereby terminating its obligations under
the lease.
PCG has fractional ownership interests in certain aircraft previously used
by the Company. The Company reimbursed PCG for PCG's cost of maintaining these
ownership interests such that PCG realized no profit from the relationship.
During 2000, PCG billed the Company approximately $0.27. There were no billings
from PCG in 2002 or 2001 as the Company terminated the agreement at the end of
2000. In 2002, PCG paid the Company $0.232 in reimbursement of an amount
contractually due to the Company after the Company's use of such aircraft
terminated.
Relationship with Brownstein Hyatt & Farber, P.C.
Norman Brownstein, a director of the Company from May 2000 through November
2001, is Chairman of the law firm of Brownstein Hyatt & Farber, P.C. During
2001, the Company paid approximately $1.445 to Brownstein Hyatt & Farber for
legal and lobbying services. In addition, in his capacity as a consultant, in
March 2001 Mr. Brownstein was issued options to purchase 100,000 shares of GCL
common stock at an exercise price of $17.15 per share, such options vesting
ratably on each of the first three anniversaries of the date of grant. In 2001,
Global Crossing also paid Brownstein Hyatt & Farber $0.156 for rent and shared
office expenses in respect of approximately 2,300 square feet of office space
in Washington, D.C. that the Company leased from that firm.
Certain Agreements with Asia Global Crossing
GCL and AGC entered into an agreement that governed 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 sold
telecommunications services to third-party customers directly and indirectly
through GCL and its subsidiaries. AGC's revenues from such sales of
telecommunications services for the years ended December 31, 2002, 2001 and
2000 were $14, $25 and $101 respectively. For the years ended December 31,
2002, 2001 and 2000, AGC purchased telecommunication services of approximately
$51, $84 and $25 respectively from the Company.
The Company provided AGC with general corporate services, including
accounting, legal, human resources, information systems services and other
office functions. The related charges were allocated to AGC based on estimated
usage of the common resources at agreed upon rates believed by management to be
reasonable.
F-89
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
As discussed in Note 8, on November 17, 2002 AGC and one of its wholly owned
subsidiaries filed for relief under the Bankruptcy Code. On March 11, 2003,
Asia Netcom, a company organized by China Netcom Corporation (Hong Kong) on
behalf of a consortium of investors, acquired substantially all of AGC's
operating subsidiaries (except PCL) in a sale pursuant to the Bankruptcy Code.
On June 11, 2003, AGC's bankruptcy case was converted from reorganizations
under chapter 11 of the Bankruptcy Code to liquidation proceedings under
chapter 7. Due to the Company's loss of control and lack of continuing
involvement with AGC, transactions between the Company and AGC subsequent to
November 17, 2002, are not considered to be related party in nature.
Relationship with Simpson Thacher & Bartlett LLP
Simpson Thacher was the Company's principal corporate counsel from the
Company's inception in 1997 through its bankruptcy filing in January 2002. D.
Rhett Brandon, a Simpson Thacher partner, served concurrently as the Company's
acting vice president and general counsel from mid-September 2001 through
February 2002, while remaining a partner of and receiving compensation from
Simpson Thacher, which billed the Company fees that included Mr. Brandon's time
charges, incurred at his usual hourly rate. The Company made aggregate payments
of approximately $17.1 and $3.8 to Simpson Thacher for fees and disbursements
in 2001 and 2002, respectively, including significant payments made within 90
days of the date on which the Company first filed for protection under the
Bankruptcy Code. It is possible that a portion of these payments may be
recoverable by the Company in an avoidance action under the Bankruptcy Code or
otherwise. Pursuant to the Plan of Reorganization, the Company's rights to
pursue any such action will be transferred to a liquidating trust established
for the benefit of the Company's creditors, to whom any recovery will be
distributed.
CEO Employment Agreement and Loan Forgiveness
On October 3, 2001, GCL hired Mr. Legere as its chief executive officer.
Until Mr. Legere's employment with AGC terminated on January 11, 2002, Mr.
Legere also continued at the same time to serve as chief executive officer of
AGC, then still a subsidiary of the Company. On the date of his hiring by GCL,
Mr. Legere's employment agreement with AGC was effectively amended and restated
in a new employment agreement among GCL, AGC and Mr. Legere (the "October 3,
2001 Employment Agreement"); provided that AGC's obligations under Mr. Legere's
February 12, 2000 employment agreement technically continued, with any
compensation paid under that agreement being offset against the employers'
obligations under the October 3, 2001 Employment Agreement.
The October 3, 2001 Employment Agreement provided for a three-year term and
a base salary of $1.1, a target annual bonus of $1.375, a signing bonus in the
net after-tax amount of $3.5, and 5 million options to purchase GCL common
stock. The agreement also changed the terms applicable to the $10 balance then
outstanding on Mr. Legere's promissory note to AGC. Specifically, Global
Crossing agreed to pay after-tax amounts sufficient to cover all taxes
attributable to the forgiveness of Mr. Legere's loan. These tax-related
payments in respect of the three $5 installments were payable on January 1,
2002, October 1, 2002 and February 1, 2003, respectively. The tax-related
payment in respect of the forgiveness of the first $5 installment was made by
the Company on or about January 1, 2002. This payment, in the amount of
approximately $4.8, also included a tax gross-up in respect of interest imputed
on Mr. Legere's loan in 2001. The $10 loan balance was forgiven in full in
connection with the termination of Mr. Legere's employment by AGC on January
11, 2002. No tax-related payment was ever made in respect of the forgiveness of
the $10 balance of Mr. Legere's loan.
F-90
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
After the GC Debtors' January 28, 2002 bankruptcy filing, on April 8, 2002,
the GC Debtors filed a motion to assume the October 31, 2001 Employment
Agreement, subject to certain modifications, including a temporary voluntary
30% reduction in Mr. Legere's base salary. Mr. Legere's employment agreement
was the subject of extensive negotiation and review by the creditors committee
and the agent for the Company's bank creditors. Numerous additional concessions
were made by Mr. Legere in order to attain the approval of the creditors
committee, including the tying of Mr. Legere's annual bonus opportunity to the
attainment of specified corporate and individual performance goals subject to
the approval of the creditors committee and the bank creditors, and the waiver
of certain relocation expenses and certain additional severance, retention and
other benefits, including the tax-related payments referenced above that would
have totaled approximately $8.8 in respect of the $10 of Mr. Legere's loan
forgiven on January 11, 2002. In light of these concessions, the agreement
provided Mr. Legere with (1) a $3.2 retention bonus payable in four equal
installments on June 4, 2002, July 31, 2002, October 31, 2002 and January 31,
2003 and (2) the opportunity to earn a performance fee up to $4 based on the
value to be received by the creditors of the Company in its chapter 11
reorganization (the "Contingent Performance Fee"). The Bankruptcy Court
approved the assumption of the modified employment agreement on May 31, 2002.
The $3.2 retention bonus payments were made by the Company to Mr. Legere on the
dates specified above; however, no Contingent Performance Fee will be paid to
Mr. Legere if his proposed new employment agreement (described in the
immediately succeeding paragraph) goes into effect upon consummation of the
Plan of Reorganization.
Upon the Company's emergence from bankruptcy, the Company expects to enter
into a new employment agreement with Mr. Legere (the "Emergence Employment
Agreement"), the form of which has been approved by ST Telemedia. This
agreement will supersede the Bankruptcy Period Employment Agreement, except
with respect to certain rights Mr. Legere had under the latter agreement
relating to indemnification, liability insurance and the resolution of disputes
thereunder.
The Emergence Employment Agreement: (1) provides Mr. Legere with an annual
base salary of $1.1 and a target annual bonus of $1.1; (2) entitles Mr. Legere
to attend all meetings of New GCL's Board of Directors and to receive all
materials provided to the members of the Board, subject to certain limited
exceptions; (3) extends the term of the agreement through the fourth
anniversary of the date on which the agreement becomes effective (the
"Agreement Effective Date"); (4) entitles Mr. Legere to a $2.7 bonus payable on
the Agreement Effective Date but supersedes any rights he would otherwise have
in respect of the Contingent Performance Fee; (5) entitles Mr. Legere to an
initial grant of options to purchase not less than 0.69 percent of the fully
diluted shares of New GCL Common Stock (including dilution due to conversion of
preferred shares), such options to vest in full upon termination of Mr.
Legere's employment by the Company without "cause" or upon Mr. Legere's death,
"disability" or resignation for "good reason" (as such quoted terms are defined
in the agreement; such terms being collectively referred to as "Designated
Terminations"); (6) provides for the payment of severance to Mr. Legere in the
event of a Designated Termination in an amount ranging from one to three times
the sum of Mr. Legere's base salary and target annual bonus, depending on the
date of such termination, plus certain other benefits and payments; and (7)
entitles Mr. Legere to reimbursement (on an after-tax basis) for certain excise
taxes should they apply to payments made to Mr. Legere by the Company.
Transactions with Withit.com
In June 2001, the Company entered into an agreement with Withit.com
("Withit"), a company owned and controlled by Joseph Perrone Jr., the son of
Joseph P. Perrone, a former executive officer of the Company. Pursuant to that
agreement, the Company engaged Withit to perform certain integration,
implementation and co-marketing services relating to a one-way IP-based voice
extension product that the Company intended to market
F-91
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
to the financial services industry. The Company paid Withit an initial
installment of $0.25 and undertook to pay an equal amount upon its acceptance
of the product in accordance with the terms of the agreement. The Company paid
Withit the second $0.25 installment in December 2001, and also paid Withit
$0.125 for out-of-pocket expenses incurred in purchasing certain equipment to
be used in the implementation of the new product and $0.115 for support and
consulting services performed during the latter half of 2001. In total the
Company paid Withit $0.74.
Because of budgetary constraints and a change in product development
strategy, among other factors, the Company did not implement or market the
voice extension product that was the subject of the Withit agreement. The
extent to which Withit in fact provided the deliverables that were contractual
prerequisites for the Company's second $0.25 payment in December 2001 is also
an open question.
Commencing in April 2002, an independent committee of the GCL Board of
Directors reviewed these matters with the support of outside counsel. The
committee found that Mr. Perrone had influenced the Company's decision to enter
into the agreement with Withit in a manner the committee deemed inappropriate.
At the independent committee's recommendation, the Board imposed a $0.325
monetary penalty on Mr. Perrone and reassigned him to other duties within the
Company. Although Mr. Perrone disagreed with the committee's findings, before
he left the Company's employ for other reasons he paid this amount in full by
consenting to the withholding of a portion of quarterly and annual bonuses
otherwise due him.
Prior to the above-described relationship, Withit also subleased
approximately 4,125 square feet of office space in Chicago from the Company
from August 2000 through July 2002 at a monthly rent of approximately $0.0045.
In late 2001, Withit had fallen approximately $0.032 in arrears in its rental
obligations under the sublease, although it paid all arrearages in full upon
termination of the sublease in July 2002.
F-92
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
29. 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 GMS subsidiary, providing
cable installation and maintenance services. The Company's two reportable
segments are telecommunications services and installation and maintenance
services. Segments are determined based on products and services delivered to
groups of customers. The Company's chief decision maker monitors the revenue
streams of the various products and geographic locations, and 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
----
2002 2001 Restated
------ -------- --------
Revenues:
Commercial................................... $1,252 $ 1,395 $ 1,242
Consumer..................................... 44 110 169
Carrier:.....................................
Service Revenue.......................... 1,533 1,519 1,360
Sales type lease revenue................. -- 18 312
Amortization of prior period IRUs........ 74 80 25
------ -------- -------
Total carrier................................ 1,607 1,617 1,697
------ -------- -------
Telecommunications service revenue........... 2,903 3,122 3,108
Installation and maintenance segment revenue. 213 537 397
------ -------- -------
Consolidated revenues........................ $3,116 $ 3,659 $ 3,505
====== ======== =======
Selected Financial Information:
Operating income (loss):
Telecommunication services............... $ (393) $(18,838) $(1,322)
Installation and maintenance............. (41) (874) 4
------ -------- -------
Consolidated............................. $ (434) $(19,712) $(1,318)
====== ======== =======
Total assets:
Telecommunication services............... $2,369 $ 2,868
Installation and maintenance............. 269 485
Assets of discontinued operations........ -- 861
------ --------
Consolidated............................. $2,635 $ 4,214
====== ========
Cash paid for capital expenditures:
Telecommunications services.................. $ 275 $ 2,577
Installation and maintenance................. 6 66
------ --------
Consolidated................................. $ 281 $ 2,643
====== ========
F-93
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
Company information provided on geographic sales is based on the order
location of the customer. Long-lived assets are based on the physical location
of the assets. The following table presents revenue and long-lived asset
information for geographic areas:
2000
----
2002 2001 Restated
------------------ ------------------ -----------
Long- Long-
Lived Lived
----- -----
Revenue/(1)/ Assets Revenue/(1)/ Assets Revenue/(1)/
----------- ------ ----------- ------ -----------
North America
United States...... $2,271 $ 347 $2,481 $ 339 $2,677
Other.............. 23 1 32 1 27
------ ------ ------ ------ ------
2,294 348 2,513 340 2,704
------ ------ ------ ------ ------
Europe
The Netherlands.... 6 32 5 27 68
Germany............ 20 30 12 24 118
United Kingdom..... 643 251 790 239 472
Other.............. 43 90 34 72 37
------ ------ ------ ------ ------
712 403 841 362 695
------ ------ ------ ------ ------
Asia
Singapore.......... 92 -- 293 -- 106
------ ------ ------ ------ ------
92 -- 293 -- 106
------ ------ ------ ------ ------
Latin America
Brazil............. 7 17 -- 15 --
Argentina.......... 3 16 1 13 --
St. Croix.......... -- 13 -- 11 --
Panama............. 2 11 4 10 --
Other.............. 6 41 7 35 --
------ ------ ------ ------ ------
18 98 12 84 --
------ ------ ------ ------ ------
International waters.. -- 210 -- 214 --
------ ------ ------ ------ ------
Consolidated Non-U.S.. $ 845 $ 712 $1,178 $ 661 $ 828
------ ------ ------ ------ ------
Consolidated Worldwide $3,116 $1,059 $3,659 $1,000 $3,505
====== ====== ====== ====== ======
- --------
(1)There were no individual customers in 2002, 2001 or 2000 that accounted for
more than 10% of consolidated revenue.
F-94
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
30. DEBTOR FINANCIAL INFORMATION
The condensed combined financial statements of the GC Debtors are presented
below. These statements reflect the financial condition and results of
operations of the GC Debtors on a combined basis, including certain amounts and
transactions between GC Debtors and non-debtor subsidiaries of the Company
which are eliminated in the consolidated financial statements.
Condensed Combined Balance Sheet
December 31, 2002
----------------------------------------------
Eliminations
&
Debtors Non-Debtors Adjustments Consolidated
-------- ----------- ------------ ------------
ASSETS:
Cash and cash equivalents................................. $ 290 $ 133 $ -- $ 423
Restricted cash and cash equivalents...................... 325 2 -- 327
Accounts receivable, net.................................. 333 149 -- 482
Other current assets and prepaid costs.................... 129 89 -- 218
-------- ------- ------- --------
Total current assets................................... 1,077 373 -- 1,450
Property and equipment, net............................... 600 459 -- 1,059
Investments in and advances to/from affiliates, net....... 5,413 -- (5,360) 53
Other assets.............................................. 52 21 -- 73
-------- ------- ------- --------
Total assets.............................................. $ 7,142 $ 853 $(5,360) $ 2,635
======== ======= ======= ========
LIABILITIES:
Liabilities not subject to compromise
Accounts payable....................................... $ 58 $ 83 $ -- $ 141
Accrued construction costs............................. 7 31 -- 38
Accrued cost of access................................. 198 37 -- 235
Other current liabilities.............................. 514 388 (4) 898
-------- ------- ------- --------
Total current liabilities.............................. 777 539 (4) 1,312
Deferred revenue....................................... 1,321 402 (285) 1,438
Investments in and advances due to affiliates, net..... -- 1,931 (1,931) --
Other deferred liabilities............................. 72 168 -- 240
-------- ------- ------- --------
Total liabilities not subject to compromise............ 2,170 3,040 (2,220) 2,990
-------- ------- ------- --------
Liabilities subject to compromise
Accounts payable....................................... 115 -- -- 115
Accrued construction costs............................. 110 22 -- 132
Accrued cost of access................................. 279 -- -- 279
Accrued interest and dividends......................... 181 -- -- 181
Other liabilities...................................... 653 -- -- 653
Debt obligations....................................... 6,641 -- -- 6,641
Obligations under capital leases....................... 34 -- -- 34
Deferred gain on sale of Global Center................. 101 -- -- 101
-------- ------- ------- --------
Total liabilities subject to compromise* .............. 8,114 22 -- 8,136
-------- ------- ------- --------
MANDATORILY REDEEMABLE AND CUMULATIVE CONVERTIBLE
PREFERRED STOCK.......................................... 2,444 -- -- 2,444
-------- ------- ------- --------
SHAREHOLDERS' DEFICIT:
Common stock.............................................. 9 73 (73) 9
Treasury stock............................................ (209) (209)
Additional paid-in capital and other shareholder's deficit 14,388 2,857 (3,239) 14,006
Accumulated deficit....................................... (19,983) (4,930) 172 (24,741)
-------- ------- ------- --------
Total shareholders' deficit............................ (5,586) (2,209) (3,140) (10,935)
-------- ------- ------- --------
Total liabilities and shareholders' deficit............ $ 7,142 $ 853 $(5,360) $ 2,635
======== ======= ======= ========
- --------
* Total liabilities subject to compromise is the current estimate by the GC
Debtors of the total claims that will be restructured in their chapter 11
cases.
F-95
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
Condensed Combined Statement of Operations
Eliminations
&
Debtors Non-Debtors Adjustments Consolidated
------- ----------- ------------ ------------
REVENUES................................. $2,551 $ 873 $(308) $3,116
OPERATING EXPENSES:
Cost of access and maintenance........ 1,989 331 (115) 2,205
Other operating expenses.............. 915 493 (200) 1,208
Depreciation and amortization......... 85 52 -- 137
------ ------ ----- ------
2,989 876 (315) 3,550
------ ------ ----- ------
OPERATING INCOME (LOSS).................. (438) (3) 7 (434)
OTHER INCOME (EXPENSE):
Equity in income (loss) of affiliates. -- 6 -- 6
Interest income....................... 28 -- (26) 2
Interest expense...................... (54) (47) 26 (75)
Other income (expense), net........... 154 193 (149) 198
------ ------ ----- ------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE REORGANIZATION ITEMS AND INCOME
TAXES.................................. (310) 149 (142) (303)
------ ------ ----- ------
REORGANIZATION ITEMS:
Professional fees..................... (128) (5) -- (133)
Retention plans costs................. (40) -- -- (40)
Vendor settlements.................... 220 35 -- 255
Interest income, net.................. 15 5 -- 20
Restructuring charges................. (9) (86) -- (95)
Deferred financing fees............... (102) -- -- (102)
------ ------ ----- ------
(44) (51) -- (95)
------ ------ ----- ------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE BENEFIT (PROVISION) FOR INCOME
TAXES.................................. (354) 98 (142) (398)
Benefit (provision) for income taxes.. 109 (7) -- 102
------ ------ ----- ------
INCOME (LOSS) FROM CONTINUING OPERATIONS. (245) 91 (142) (296)
Income from discontinued operations... -- 950 -- 950
------ ------ ----- ------
NET INCOME (LOSS)........................ (245) 1,041 (142) 654
Preferred stock dividends............. (19) -- -- (19)
------ ------ ----- ------
INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS........................... $ (264) $1,041 $(142) $ 635
====== ====== ===== ======
F-96
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
31. SUPPLEMENTAL CASH FLOW INFORMATION
Years Ended December 31,
-----------------------
2000
2002 2001 Restated
----- ------- --------
SUPPLEMENTAL INFORMATION ON NON-CASH FINANCING ACTIVITIES:
Common stock issued to holders of preferred stock........................... $ 797 $ 27 $ 445
===== ======= =======
Common stock acquired from sale of Global Center............................ $ -- $ 1,918 $ --
===== ======= =======
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING ACTIVITIES:
Costs incurred for construction in progress and capacity available for sale. $(143) $(2,471) $(3,752)
(Decrease)/Increase in accrued construction costs........................... (305) (179) 379
Write back of accrued construction costs on vendor settlements.............. 167 -- --
Amortization of deferred finance costs...................................... -- 7 7
----- ------- -------
Cash paid for property and equipment........................................ $(281) $(2,643) $(3,366)
===== ======= =======
Detail of acquisitions:
Assets acquired............................................................. $ -- $ -- $ 3,694
Liabilities assumed......................................................... -- -- (796)
----- ------- -------
Common stock issued......................................................... $ -- $ -- $ 2,898
===== ======= =======
Investments in affiliates:
Preferred stock issued for investment in joint venture...................... $ -- $ -- $ 400
===== ======= =======
Effect of consolidation of joint venture.................................... $ (26) $ -- $ --
===== ======= =======
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..................................................... $ 177 $ (108) $ 15
Other current assets.................................................... 59 204 (234)
Other long-term assets.................................................. 79 (45) 28
Deferred revenue........................................................ (22) 291 1,034
Current liabilities other than debt..................................... 252 38 148
Deferred credits and other.............................................. (18) (880) (407)
----- ------- -------
$ 527 $ (500) $ 584
===== ======= =======
Restricted cash received from sale of IPC...................................... $ -- $ 301 $ --
===== ======= =======
Cash paid for interest and income taxes:
Interest paid and capitalized............................................... $ 20 $ 484 $ 475
===== ======= =======
Interest paid (net of capitalized interest)................................. $ 20 $ 393 $ 388
===== ======= =======
Cash (received) paid for income taxes, net.................................. $ (93) $ (91) $ 49
===== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-97
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
32. SUBSEQUENT EVENTS
Restructuring costs and related impairments
During the nine months ended September 30, 2003, the Company adopted certain
restructuring plans within the telecommunications services segment and an
additional restructuring plan within the installation and maintenance segment.
The restructuring plans eliminate redundant positions, significantly modify the
existing management structure and integrate global functional units and their
responsibilities to increase overall efficiency and reduce operating costs. The
restructuring plans will result in the elimination of more than 250 employees,
approximately 100 of whom are employees of the installation and maintenance
segment and the balance of whom are employees of the telecommunications
services segment. The restructuring plans for the telecommunications services
segment will also result in the closure of three facilities. As a result of the
restructuring plans, the Company recorded restructuring charges of $13 related
to post-termination benefits for affected employees and less than $1 for
continuing building lease obligations and related decommissioning costs.
The Company expects to incur approximately $3 of costs in the future related
to the closure of one of the facilities that will be expensed as incurred in
accordance with SFAS No. 146.
No additional restructuring plans have been adopted through the date of this
filing.
33. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's unaudited quarterly results are as follows:
2002 Quarter Ended
-----------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
Revenue................................... $ 801 $ 790 $ 760 $ 765
Operating loss............................ (193) (87) (54) (100)
(Loss) income from continuing operations.. (372) (146) 68 154
Net (loss) income......................... (432)/1/ (221) 539/2/ 768/3/
(Loss) income applicable to common
shareholders............................ (451) (221) 539 768
(Loss) income from continuing operations
applicable to common shareholders per
common share............................ (0.44)/4/ (0.16) 0.08 0.17
(Loss) income applicable to common
shareholders per common share........... (0.50) (0.24) 0.59 0.85
Shares used in computing basic and diluted
(loss) income per share................. 896,184,896 902,318,163 908,761,371 908,762,710
F-98
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
2001 Quarter Ended
---------------------------------------------------------------
March 31 June 30 September 30
Restated Restated Restated December 31
------------ ------------ ------------ ------------
Revenue...................................... $ 951 $ 961 $ 894 $ 853
Operating loss............................... (489) (490) (1,382) (17,351)
Loss from continuing operations.............. (549) (533) (2,782) (16,614)
Net loss..................................... (697) (28) (2,819) (18,850)
Loss applicable to common shareholders....... (756)/5/ (87)/6/ (2,878)/7/ (18,911)/8/
Loss from continuing operations applicable to
common shareholders per common share/9/.... (0.69) (0.67) (3.20) (18.77)
Loss applicable to common shareholders per
common share............................... (0.85) (0.10) (3.24) (21.29)
Shares used in computing basic and diluted
(loss) income per share.................... 884,702,182 886,109,573 887,105,667 888,110,988
- --------
/1/ Includes $102 reorganization items expense related to the write off of
deferred finance costs (see Note 21).
/2/ Includes an after tax gain of $546 on the abandonment of PCL which was
recorded as gain from discontinued operations (see Note 8) and $200
reorganization items gain on vendor settlements (see Note 21).
/3/ Includes an after tax gain of $638 on the abandonment of AGC which was
recorded as gain from discontinued operations (see Note 8) and $55
reorganization items gain on vendor settlements (see Note 21).
/4/ Included in the calculation of loss from continuing operations applicable
to common shareholders per common share for the quarter ended March 31 is
$19 of preferred stock dividends.
/5/ Includes an after tax loss of $130 on the sale of the ILEC which was
recorded as loss from discontinued operations (see Note 8).
/6/ Includes an additional after tax loss of $76 (total $206) on the sale of
the ILEC, as a result of adjustments to closing date liabilities and
working capital balances, which was recorded as loss from discontinued
operations (see Note 8) and a $600 tax benefit related to the reversal of
the restatement of the deferred tax liability on the sale of the ILEC
which is included in discontinued operations (see Note 4).
/7/ Includes $294 restructuring charges (see Note 5), $545 goodwill impairment
charges (see Note 6), $2,084 of write down of investments (see Note 3),
and $535 tax benefit related to the reversal of the restatement of the
deferred tax liability on the sale of GlobalCenter which is included in
continuing operations (see Note 4).
/8/ Includes $116 restructuring charges (see Note 5), an after tax loss of
$120 on the sale of IPC which was recorded as loss from discontinued
operations (see Note 8), $114 write down of an equity investment (see Note
3), $16,636 of asset impairment charges in continuing operations (see Note
6), and $2,849 of goodwill, equity investment, and asset impairment
charges related to AGC and PCL which was recorded in discontinued
operations (see Notes 3, 6 and 8).
/9/ Included in the calculation of loss from continuing operations applicable
to common shareholders per common share is $59.5 of preferred stock
dividends for the quarters ended December 31, September 30, June 30, and
March 31.
F-99
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In provisional liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions, except number of sites, square footage, share and per share
information)
Due to the restatement of previously issued financial statements (see Note
4), and the effects of changes in the designation of discontinued operations
(see Note 8), the following adjustments have been made to the previously
reported quarterly financial data:
Quarter Ended March 31, 2001 (unaudited)
----------------------------------------------------------
As Restatement Discontinued
Previously Adjustments Operations
Reported (see Note 4) Reclassifications Restated
------------ ------------ ----------------- ------------
Revenue........................................................... $ 1,082 $ (48) $ 83 $ 951
Operating loss.................................................... (513) 2 22 (489)
(Loss) income from continuing operations.......................... (562) 1 12 (549)
Net (loss) income................................................. (616) (81) -- (697)
(Loss) income applicable to common shareholders................... (675) (81) -- (756)
(Loss) income from continuing operations applicable to common
shareholders per common share/1/................................. (0.70) -- 0.01 (0.69)
(Loss) income applicable to common shareholders per common
share............................................................ (0.76) (0.09) -- (0.85)
Shares used in computing basic and diluted (loss) income per share 884,702,182 884,702,182 884,702,182 884,702,182
Quarter Ended June 30, 2001 (unaudited)
----------------------------------------------------------
As Restatement Discontinued
Previously Adjustments Operations
Reported (see Note 4) Reclassifications Restated
------------ ------------ ----------------- ------------
Revenue........................................................... $ 1,069 $ (13) $ (95) $ 961
Operating loss.................................................... (539) 3 46 (490)
(Loss) income from continuing operations.......................... (559) 602 (576) (533)
Net (loss) income................................................. (630) 602 -- (28)
(Loss) income applicable to common shareholders................... (689) 602 -- (87)
(Loss) income from continuing operations applicable to common
shareholders per common share/1/................................. (0.70) 0.68 (0.65) (0.67)
(Loss) income applicable to common shareholders per common
share............................................................ (0.78) 0.68 -- (0.10)
Shares used in computing basic and diluted (loss) income per share 886,109,573 886,109,573 886,109,573 886,109,573
Quarter Ended September 30, 2001 (unaudited)
----------------------------------------------------------
As Restatement Discontinued
Previously Adjustments Operations
Reported (see Note 4) Reclassifications Restated
------------ ------------ ----------------- ------------
Revenue........................................................... $ 793 $ (49) $ 150 $ 894
Operating loss.................................................... (897) (4) (481) (1,382)
(Loss) income from continuing operations.......................... (2,854) 529 (457) (2,782)
Net (loss) income................................................. (3,348) 529 -- (2,819)
(Loss) income applicable to common shareholders................... (3,407) 529 -- (2,878)
(Loss) income from continuing operations applicable to common
shareholders per common share/1/................................. (3.28) 0.60 (0.52) (3.20)
(Loss) income applicable to common shareholders per common
share............................................................ (3.84) 0.60 -- (3.24)
Shares used in computing basic and diluted (loss) income per share 887,105,667 887,105,667 887,105,667 887,105,667
- --------
/1/Included in the calculation of loss from continuing operations applicable to
common shareholders per common share is $59.5 of preferred stock dividends
for the quarters ended September 30, June 30, and March 31.
F-100
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(In Provisional Liquidation in the Supreme Court of Bermuda)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions except number of sites, square footage, share and per share
information)
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in millions)
Column A Column B Column C Column D Column E
------------ ---------- ---------- ---------- ----------
Additions
--------------------------------------------------------
Balance at Charged to Charged to Balance at
Beginning of cost and other end of
Description period expenses accounts Deductions period
----------- ------------ ---------- ---------- ---------- ----------
2002
Reserve for uncollectible accounts and
customer credits..................... $ 128 $ 77 $103 $(174) $ 134
Restructuring reserves................. $ 287 $ 95 $ 0 $(109) $ 273
Deferred tax valuation allowance....... $2,658 $ 506 $ -- $ -- $3,164
2001
Reserve for uncollectible accounts and
customer credits..................... $ 139 $ 124 $ 64 $(199) $ 128
Restructuring reserves................. $ 0 $ 410 $ 19 $(142) $ 287
Deferred tax valuation allowance....... $ 170 $2,488 $ -- $ -- $2,658
2000 Restated
Reserve for uncollectible accounts and
customer credits..................... $ 96 $ 69 $ 24 $ (50) $ 139
Deferred tax valuation allowance....... $ 53 $ 130 $(13) $ -- $ 170
F-101
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 December 8, 2003 by the undersigned thereunto duly authorized.
GLOBAL CROSSING LTD.
By: /s/ John J. Legere
--------------------------
John J. Legere
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on December 8, 2003 by the following persons on
behalf of the Registrant in the capacities indicated.
By: /s/ John J. Legere
--------------------------
John J. Legere
Chief Executive Officer
and Director
(Principal Executive
Officer)
By: /s/ Daniel O'Brien
--------------------------------------------------------------
Daniel O'Brien
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
By: /s/ Lodwrick M.Cook
--------------------------
Lodwrick M. Cook
Director and Deputy
Chairman of the Board
By: /s/ Alice T. Kane
--------------------------
Alice T. Kane
Director
By: /s/ Jeremiah D. Lambert
--------------------------
Jeremiah D. Lambert
Director and Co-Chairman
of the Board
By: /s/ Myron E. Ullman, III
--------------------------
Myron E. Ullman, III
Director and Co-Chairman
of the Board
S-1