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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-24565
GLOBAL CROSSING LTD.
BERMUDA 98-0189783
(I.R.S. Employer Identification
(State or other jurisdiction of 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:
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Title of Each Class Names of Each Exchange on Which Registered
Common Stock, par value $.01 per share Nasdaq National Market
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the common stock of the Registrant held by
non-affiliates of the Registrant on March 12, 1999, based on the closing price
of the common stock reported on the Nasdaq National Market on such date of
$49.38 per share, was $4,556,300,411.
The number of shares of the Registrant's common stock, par value $0.01 per
share, outstanding as of March 12, 1999, was 411,343,072.
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GLOBAL CROSSING LTD. AND SUBSIDIARIES
For The Fiscal Year Ended December 31, 1998
INDEX
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Page
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Part I.
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Information Regarding Forward-Looking Statements........................ 1
Item 1. Business...................................................... 1
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Item 2. Properties................................................... 20
Item 3. Legal Proceedings............................................ 20
Item 4. Submission of Matters to a Vote of Security Holders.......... 20
Part II.
Item 5. Market for the Registrant's Common Stock and Related
Shareholder Matters.......................................... 21
Item 6. Selected Financial Data...................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk... 34
Item 8. Financial Statements and Supplementary Data.................. 34
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 34
Part III.
Item 10. Directors and Executive Officers of the Registrant........... 35
Item 11. Executive Compensation....................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 45
Item 13. Certain Relationships and Related Transactions............... 46
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.......................................................... 51
Consolidated Financial Statements....................................... F-1
Signatures.............................................................. S-1
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PART I
In this Annual Report on Form 10-K, "GCL" refers to Global Crossing Ltd. and
the "Company," "Global Crossing," "We," "Our" and "Us" refers to GCL and its
consolidated subsidiaries (unless the context otherwise requires).
In this Annual Report on Form 10-K, share amounts and values relating to our
common stock have been adjusted (unless the context otherwise requires) for
the 2-for-1 stock split of our common stock, in the form of a stock dividend,
effectuated on March 9, 1999.
Throughout this Annual Report on Form 10-K, references to "dollars" and "$"
are to United States dollars.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
We have included "forward-looking statements" throughout this Annual Report
on Form 10-K. These statements describe our attempt to predict future
occurrences. We use the words "believe," "anticipate," "expect," "intend" and
similar expressions to identify forward-looking statements. Forward-looking
statements are subject to a number of risks, assumptions and uncertainties,
such as:
. our ability to complete our systems within currently estimated time
frames and budgets,
. our ability to sell capacity on our systems,
. our successful transition from a system development company to an
operating company, and
. our ability to compete effectively in a rapidly evolving and price
competitive marketplace.
This list is only an example of some of the risks, uncertainties and
assumptions that may affect our forward-looking statements. If any of these
risks or uncertainties materialize (or fail to materialize), or if the
underlying assumptions prove incorrect, actual results may differ materially
from those projected in the forward-looking statements.
ITEM 1. BUSINESS
Overview
Global Crossing Ltd. is the world's first independent global provider of
state-of-the-art Internet and long distance telecommunications facilities and
related services utilizing a network of undersea and terrestrial digital fiber
optic cable systems (the "Global Crossing Network"). We believe we are the
first to offer "one-stop shopping" for our customers to multiple destinations
worldwide. We currently operate as a "carriers' carrier", providing tiered
pricing and segmented products to licensed providers of international
telecommunications services. Capacity on the Global Crossing Network is
offered to all customers on an open, equal access basis. The systems completed
or under development will form a state-of-the-art interconnected worldwide
high capacity fiber optic network: Atlantic Crossing ("AC-1") and Atlantic
Crossing-2 ("AC-2"), undersea systems connecting the United States and Europe;
Pacific Crossing ("PC-1"), an undersea system connecting the United States and
Asia; Mid Atlantic Crossing ("MAC"), an undersea system connecting the eastern
United States and the Caribbean; Pan American Crossing ("PAC"), an undersea
system connecting the western United States, Mexico, Panama, Venezuela and the
Caribbean; South American Crossing ("SAC"), an undersea and terrestrial system
connecting the major cities of South America to MAC, PAC and the rest of the
Global Crossing Network; Pan European Crossing ("PEC"), a terrestrial system
connecting 24 European cities to AC-1; and a terrestrial system to be operated
by Global Access Ltd. connecting certain cities in Japan to PC-1 ("GAL"). The
undersea component of this initial portion of the Global Crossing Network
totals 68,100 km and the terrestrial component adds 13,300 km for a total of
81,400 km. We are in the process of developing several new undersea and
terrestrial cable systems and evaluating other business development
opportunities which will complement the Global Crossing Network.
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Recent Developments--Frontier Transaction
On March 16, 1999, we entered into a definitive agreement and plan of merger
with Frontier Corporation, a New York corporation ("Frontier"), that will
result in Frontier becoming a wholly-owned subsidiary of GCL or of a new
parent holding company of GCL. The board of directors of each company has
approved the merger.
The combined companies had 1998 annual sales in excess of $3 billion, 1998
earnings before interest, taxes, depreciation and amortization (EBITDA) of
more than $1 billion and have a total current equity market capitalization of
nearly $30 billion. The merger enables the Frontier nationwide customer base
to fully leverage the capabilities and efficiencies of the Global Crossing
Network and allows us to take full advantage of Frontier's sales and marketing
expertise, distribution channels, intelligent network platform and Frontier's
customer care and billing system. In addition, the merger adds Frontier's
state-of-the-art digital fiber optic cable system located in the United States
to the Global Crossing Network.
The all-stock transaction is currently valued at approximately $11 billion.
The actual number of shares of GCL common stock to be exchanged for each share
of Frontier common stock will be determined by dividing $62.00 by a volume
weighted average of trading prices for GCL common stock for a pricing period
prior to the closing, but will not be less than 1.0919 shares (if GCL's
average stock price exceeds $56.78) or, except as provided in the next
sentence, more than 1.7939 shares (if GCL's average stock price is less than
$34.56). If GCL's average stock price is less than $34.56, Frontier may
terminate the merger unless GCL then agrees to provide additional merger
consideration, in the form of additional shares of GCL common stock or cash,
to ensure that Frontier shareholders receive $62 of value for each Frontier
share. The merger is intended to qualify as a tax-free reorganization and is
expected to be accounted for as a purchase.
Completion of the transaction is anticipated to occur during the third
quarter of 1999. The transaction is subject to the majority vote of the
shareholders of GCL and the vote of two-thirds of the common shareholders of
Frontier and to other customary conditions such as receipt of regulatory
approvals. Shareholders of GCL representing more than a majority of the voting
power of GCL common stock have agreed to vote in favor of the transaction.
Business Activity
Our business is designed to meet the varying needs of the global
telecommunications market. We offer customers the ability to purchase capacity
on demand, thereby (i) eliminating their need to commit the substantial
capital which would be required to build cable capacity and (ii) decreasing
the risks associated with forecasting their future capacity requirements.
Compared with traditional cable systems, we offer more comprehensive, flexible
and low-cost purchasing alternatives designed to meet current market
requirements of international carriers and Internet Service Providers
("ISPs"), including direct international city-to-city connectivity, the
ability to purchase capacity periodically and discounts based upon aggregate
volume purchased on the Global Crossing Network.
Each of the systems completed or under development is upgradeable through
the addition of optical and electronic equipment to capacities significantly
beyond its initial capacity at a fraction of the original system cost. These
upgrades are expected to lead to lower unit cost of capacity and lower prices,
resulting in significant growth in market demand for telecommunications
capacity. In addition, we are currently evaluating other undersea and
terrestrial cable projects intended to further our strategy of developing an
integrated global network to serve approximately 100 of the largest
metropolitan communications markets worldwide.
We anticipate that future revenues, beyond those obtained from the sale of
the initial capacity on our first eight cable systems, will come from several
sources. First, since each of the systems we are building is upgradeable, this
additional capacity can be sold. We also expect to build new systems providing
service to additional geographic areas. In addition, if the full upgradeable
capacity of our initial systems is reached, we expect to build or acquire
additional systems to meet future demand. As our global network is developed,
we expect to generate additional revenues by broadening our product line to
include many forms of bandwidth services.
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GCL's predecessor, Global Crossing Ltd., LDC ("Old GCL"), was formed in
March 1997 to capitalize on the accelerating growth of international voice and
data telecommunications traffic. The significant increase in Internet usage
and other bandwidth-intensive applications and the growing use of corporate
networks have substantially increased the demand for international fiber optic
cable capacity. The proliferation of telecommunications service providers due,
in large part, to industry deregulation and privatization of foreign
telecommunications companies has further contributed to increased demand for
such international cable capacity. Additionally, we believe other
technological developments, such as improvements in "last mile" access
technology, including xDSL, cable modems, broadband wireless technology, and
the increasing video content of Internet applications, will result in further
capacity demand growth.
We started development of the Global Crossing Network in March 1997, when we
contracted for the construction of AC-1, a 14,300 km digital fiber optic
undersea cable system that links New York, the United Kingdom, the Netherlands
and Germany. This system offers 40 Gbps of initial service capacity,
upgradeable to a minimum of 80 Gbps. AC-1 started service on its United States
to United Kingdom segment in May 1998, and the full system, consisting of a
four fiber pair self-healing ring, was completed in February 1999.
In April 1998, we entered into a joint venture which contracted for the
construction of PC-1, a 21,000 km digital fiber optic undersea cable system
that will link the United States and Japan and will initially offer 80 Gbps of
service capacity, upgradeable to a minimum of 160 Gbps. PC-1, consisting of a
four fiber pair self healing ring, is scheduled to start initial service in
March 2000. In June 1998, we contracted for the construction of MAC, a 7,300
km digital fiber optic undersea cable system consisting of a two fiber pair
self-healing ring that will connect New York, Florida and the Caribbean and
will initially offer 20 Gbps of service capacity, upgradeable to a minimum of
40 Gbps. In addition, in July 1998, we contracted for the construction of PAC,
a 9,500 km two fiber pair digital undersea cable that will connect California,
Mexico, Panama, Venezuela and the Caribbean and will initially offer 20 Gbps
of service capacity, upgradeable to a minimum of 40 Gbps. In March 1999, we
announced SAC, a 16,000 km, four fiber pair self-healing ring undersea cable
and 2,000 km four fiber pair terrestrial system that upon completion will link
the major cities of South America to the rest of the Global Crossing Network
through MAC and PAC and will initially offer 40 Gbps of service capacity
upgradeable to a minimum of 80 Gbps. We are also developing PEC, a 10,000 km
terrestrial system with 24 to 72 fiber pairs that, upon completion, will be a
self-healing ring linking 24 European cities with AC-1. We also recently
obtained a 49% economic interest in Global Access Ltd., which is constructing
GAL, a 1,300 km fiber optic terrestrial system that will connect PC-1 at its
landing points in Shima and Ajigaura with Tokyo, Osaka and Nagoya. Finally, in
March 1999, we announced our intention to develop and construct AC-2, an
additional eight fiber pair cable connecting the United States to Europe. AC-2
will be integrated with the two cables of AC-1, adding a third high-capacity
cable across the Atlantic for the Global Crossing Network and providing AC-2
with self-healing capabilities.
Once completed, the undersea and terrestrial segments of the Global Crossing
Network will form an integrated worldwide network with multiple access points
offering low-cost wholesale capacity. In addition to the announced segments of
the Global Crossing Network, we have made, and expect to continue to make,
acquisitions of fiber capacity which complement our fiber optic network and
which address customer demands for global city-to-city connectivity. We intend
to pursue such connectivity in approximately 100 of the largest metropolitan
communications markets worldwide.
Business Strategy
Our mission is to create the world's first independent, global, state-of-
the-art fiber optic network designed to offer our customers the highest
quality city-to-city communications connectivity among approximately 100 of
the largest metropolitan communications markets worldwide. The principal
elements of our business strategy are to:
Create a Worldwide Network. Upon completion, the currently announced
segments of the Global Crossing Network will directly connect Asia, North
America, Europe, Central America, South America and the Caribbean utilizing
state-of-the-art fiber optic technology. By developing or acquiring
terrestrial capacity, we offer
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customers low-cost global city-to-city connectivity. We also intend to
actively pursue additional opportunities for the expansion and utilization of
the Global Crossing Network, including complementary businesses and
facilities.
We have entered into contractual arrangements to provide terrestrial service
between our landing stations in the United States and the United Kingdom, New
York City and London, respectively, as well as other arrangements to provide
terrestrial capacity in Germany and the Netherlands.
In addition, through PEC we plan to provide terrestrial services to 24
European cities; through SAC we intend to provide terrestrial capacity to the
major South American cities; and through a 49% investment in Global Access
Ltd., which owns GAL and is being constructed by Marubeni Corp. of Japan
("Marubeni"), we intend to offer terrestrial services to PC-1 customers from
PC-1's Japanese landing stations directly to Tokyo, Osaka and Nagoya at prices
lower than existing alternatives.
Maintain Position as a Leading Wholesale Service Provider. We are the
world's first independent global provider of state-of-the-art Internet and
long distance telecommunications facilities and related services utilizing a
network of undersea and terrestrial digital fiber optic cable systems. We also
offer our customers a combination of volume-based purchasing flexibility,
typically according to a tiered scale with various incentive levels, and
volume discounts for purchases of capacity on our network.
Utilize State-of-the-Art Technology. The Global Crossing Network is being
engineered and constructed using advanced fiber optic technology, self-healing
ring structures, erbium doped fiber amplifier repeaters, dense wave division
multiplexing ("DWDM") and redundancies of capacity to ensure instantaneous
restoration. We are also developing state-of-the-art network architecture to
provide our customers flexibility in managing their bandwidth needs. We
believe that incorporating such technology in the Global Crossing Network
will:
. provide, upon system completion, a seamless, high capacity global
network with flexible management of bandwidth,
. provide a cost advantage over existing alternatives,
. make it more reliable than competing systems,
. allow us to offer substantially more capacity than existing cable
systems, and
. enable the capacity of each of our cable systems to be upgraded rapidly
and at a fraction of the initial system cost.
Maintain Position as Low-Cost Provider. We plan to maintain our position as
a low-cost provider of facilities and services to our customers relative to
our competitors. We believe that this low-cost position results from a
combination of:
. low sales, marketing and general and administrative costs,
. ownership of state-of-the-art facilities, resulting in low unit costs
and low operating and maintenance costs that will be passed on to our
customers, and
. purchasing efficiencies.
Provide "One-Stop" Sales and Service. Through both our marketing and sales
force, as well as our ongoing operations, administrative and maintenance
support, we plan to offer one-stop sales and service support to customers
worldwide. We currently employ 21 marketing professionals located in
Morristown, New Jersey; Los Angeles, California; London, England; and other
major cities throughout the world to facilitate the sales of our
telecommunications capacity and increase market awareness and name
recognition. The efforts of the sales force have resulted in significant
contractual arrangements with international telecommunications carriers. In
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addition, we are developing centralized operations, administration and
maintenance work centers to serve the entire Global Crossing Network,
including a customer care center, network operations center and technical
support center. Through such agreements, we will provide our customers with a
single point of contact regarding capacity sales through regional sales and
marketing offices in Morristown, New Jersey; Los Angeles, California; London,
England; and in Asia, and provisioning and billing on the Global Crossing
Network through our customer care center and network operations center.
Leverage Extensive Management Experience. We have assembled and will
continue to build a strong management team comprised of executives with
extensive operating experience in the telecommunications industry and in the
development of cable systems. Robert Annunziata, our Chief Executive Officer,
came to us from a position as head of the Business Services Division of AT&T
Corp. ("AT&T"). For 15 years, prior to joining AT&T, Mr. Annunziata served at
Teleport Communications Group, most recently as Chairman and Chief Executive
Officer. Teleport was the first large competitive local exchange carrier in
the United States, laying 10,000 miles of fiber optic cable and installing 50
local switches connecting 85 major United States metropolitan service areas.
Jack Scanlon, one of our Vice Chairmen of the Board, was President and General
Manager of the Cellular Networks and Space Sector of Motorola, Inc.,
responsible for approximately $6 billion in annual revenues and 16,000
employees. Mr. Scanlon has over 30 years of experience in the
telecommunications industry, including 24 years with AT&T and Bell
Laboratories. In addition, William Carter, our senior executive in charge of
system development, was formerly the President and Chief Executive Officer of
AT&T Submarine Systems International ("SSI"), overseeing the research and
development, engineering, implementation and integration of AT&T's
international cable and satellite facilities. Mr. Carter had been at AT&T for
30 years prior to joining us. During Mr. Carter's tenure, SSI had the leading
worldwide market share in the undersea cable industry. Thomas J. Casey, one of
our Vice Chairmen of the Board and our Managing Director, was co-head of
Merrill Lynch & Co.'s global communications investment banking group, where
Mr. Casey oversaw equity, debt and merger and acquisition assignments for
U.S., European and Asian telecommunications, media and technology information
services companies. Robert B. Sheh, our Executive Vice President--Construction
and Operations, joined us from a position as Chief Executive Officer of Stone
and Webster Engineering Ltd. and was previously President of the Ralph M.
Parsons Company, a worldwide engineering and construction firm, where for over
20 years Mr. Sheh oversaw many large turnkey engineering and construction
programs and projects. Dan J. Cohrs, our Chief Financial Officer, was formerly
Vice President and Chief Planning and Development Officer at GTE Corp.
("GTE"), where he was responsible for corporate development activities,
including mergers and acquisitions and strategic transactions, as well as
strategic planning and competitive analysis. In addition, our system
development team includes several individuals with extensive experience with
major undersea cable and telecommunications industry participants.
The Global Crossing Network
As part of our mission to create an independent, global, state-of-the-art
fiber optic cable network, connecting major cities worldwide, the Global
Crossing Network is being engineered and constructed as an integrated network
along the most heavily trafficked international corridors in the world with
undersea networks including AC-1 and AC-2 (United States to Europe) and PC-1
(United States to Asia). Furthermore, during 1998 we announced plans to build
and integrate terrestrial networks into this global network structure
including PEC (trans-Europe) and GAL (trans-Japan). MAC, SAC and PAC will
directly connect the Caribbean, South America and Central America to the
network. Of the fiber optic cable systems currently operational or under
development, AC-1, AC-2, MAC, PAC and PEC are wholly-owned projects, while PC-
1 and GAL are being developed through joint ventures with one or more
partners, principally Marubeni. We have a 58% economic interest in PC-1 and a
49% economic interest in Global Access Ltd., which is constructing GAL.
Marubeni will manage the development, sales and operations associated with
GAL. The undersea portion of SAC is currently planned to be wholly-owned,
while the terrestrial portion is expected to be constructed through joint-
venture arrangements.
We have successfully marketed capacity on our systems to licensed
telecommunications providers, including post, telephone and telegraph
companies ("PTTs"), ISPs and established and emerging telecommunications
companies. Sales on our systems commenced in October 1997 and, through
December 31,
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1998, we had entered into Capacity Purchase Agreements ("CPAs") with customers
providing for contract sales of $1,052 million, of which $364 million of
payments (including deposits) have been received. The $1,052 million includes
over $100 million related to the sale of dark fiber on PEC. The balances of
the payments are scheduled to be collected over approximately the next three
years. Our customers now total more than 33 international telecommunications
carriers, including AT&T, MCI Worldcom Inc., Deutsche Telekom AG, GTE, Cable &
Wireless PLC ("Cable & Wireless"), Equant NV, Qwest Communications
International Inc. ("Qwest"), Teleglobe Canada Inc., Swisscom AG, PTT Telecom
BV, Telia AB, Level 3 Communications, Inc. and a number of emerging
telecommunications companies.
The following table contains information regarding the system cost, initial
Ready For Service ("RFS") date and ownership structure of our systems.
Information relating to AC-1 is based upon historical results, while
information for all other systems is estimated.
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System Cost(1) Ownership
System (millions) RFS Date(1) Structure
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AC-1 $ 750 Wholly-Owned
February 1999 (Full Ring)
AC-2 750 Wholly-Owned
March 2001
PC-1 1,200 March 2000 (Initial) Joint Venture
July 2000 (Full Ring)
MAC 330 December 1999 Wholly-Owned
PAC 495 February 2000 Wholly-Owned
SAC 1,130 December 2000 (First Phase) Wholly-Owned (undersea)
March 2001 (Full Ring) Joint Venture (terrestrial)
PEC 850 December 1999 (First Phase) Wholly-Owned
GAL 190 December 1999 (First Phase) Joint Venture
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$5,695
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(1) Total system costs include anticipated financing costs, but exclude the
costs of potential future upgrades and any amount capitalized with respect
to the warrants issued in exchange for the rights to certain of such
systems (the "PCG Warrants"). See Note 10 to our consolidated financial
statements. Certain factors, such as increases in interest rates and
delays in construction, could result in higher actual costs or later RFS
dates than currently estimated.
Atlantic Crossing
AC-1, our first undersea fiber optic cable in the Atlantic region, is a
14,300 km four fiber pair self-healing ring that connects the United States
and Europe with landing stations in the United States, the United Kingdom, the
Netherlands and Germany. AC-1 is equipped with state-of-the-art DWDM, and the
full ring initially offers 40 Gbps of service capacity, which is upgradeable
to a minimum of 80 Gbps using DWDM technology. AC-1 started service on its
United States to United Kingdom segment during May 1998, and the full system
was completed during February 1999.
The total cost of AC-1 excluding upgrade payments was approximately $750
million. Furthermore, we recently entered into a $50 million contract with
Tyco Submarine System Ltd. ("TSSL") to upgrade AC-1 capacity from 40 Gbps to
80 Gbps. In addition to the contract with TSSL for construction of the system,
we have entered into other agreements with TSSL for services and support
associated with operations, administration and maintenance of the system.
We have successfully marketed capacity on AC-1 and entered into CPAs with
customers providing for contract sales representing approximately 35% of the
sales capacity of 512 circuits on the AC-1 system as of December 31, 1998. In
the case of AC-1, we generally grant customers who have entered into CPAs
options to acquire additional capacity on AC-1. The amount of such future
capacity depends upon a number of factors, including upgrades to the system,
future prices for AC-1 capacity and the amount of unsold capacity on certain
future dates. The timing of payments by purchasers under CPAs generally
depends on when customers request activation of the capacity acquired.
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On March 24, 1999, we announced our intention to develop and construct AC-2,
an additional eight fiber pair cable connecting the United States to Europe.
AC-2 will be integrated with the two cables of AC-1, adding a third high-
capacity cable across the Atlantic for the Global Crossing Network and
providing AC-2 with self-healing capabilities. The new cable will cost
approximately $750 million and is expected to be in service in the first
quarter of 2001. AC-2 would significantly increase the capacity that we would
be able to offer customers on the transatlantic route.
Pacific Crossing
PC-1, our first undersea fiber optic cable in the Pacific region, is being
developed as a 21,000 km, four fiber pair self-healing ring. When completed,
it will connect California and Washington in the western United States with
two landing sites in Japan. PC-1 is designed to operate initially at 80 Gbps
of service capacity, upgradeable to a minimum of 160 Gbps, using DWDM
technology.
In April 1998, we executed a construction contract with TSSL for the
construction of PC-1, which provides for a system completion date of July 2000
at a total cost of approximately $1,200 million (excluding potential future
upgrades and amounts capitalized with respect to the PCG Warrants). Equity
investments in PC-1 are currently estimated at $400 million (of which we will
provide approximately $231 million), with the remaining $800 million to be
financed through incurrence of non-recourse project indebtedness. The credit
agreement for the financing of such indebtedness was executed in July 1998.
Mid-Atlantic Crossing
MAC is being developed as a 7,300 km two fiber pair self-healing ring that,
upon completion, will connect New York, the Caribbean and Florida. MAC will be
connected to AC-1 via its cable station in Brookhaven, New York and to SAC via
its cable station anticipated to be constructed in St. Croix, United States
Virgin Islands, providing connectivity between Europe, the eastern United
States, the Caribbean and South America. This system is being designed to
operate initially at 20 Gbps of service capacity, upgradeable to a minimum of
40 Gbps using DWDM technology.
In June 1998 and October 1998, we executed a contract with Alcatel Submarine
Networks ("Alcatel") and TSSL, respectively, for the construction of MAC,
which provides for a system completion date of December 1999 at a total cost
of approximately $330 million (excluding potential future upgrades and amounts
capitalized with respect to the PCG Warrants). We intend to finance MAC with
an approximately $110 million equity contribution along with approximately
$220 million of non-recourse project indebtedness obtained during November
1998.
Pan American Crossing
PAC is being developed as a 9,500 km two fiber pair cable that, upon
completion, will connect California, Mexico, Panama, Venezuela and the
Caribbean. PAC is being designed to interconnect with PC-1 through our landing
station anticipated to be constructed in Grover Beach, California, with MAC
through our landing station anticipated to be constructed in St. Croix, United
States Virgin Islands and with SAC through our landing station anticipated to
be constructed in Fort Amador, Panama. We anticipate that PAC will cross
Panama via an existing terrestrial right-of-way. PAC is being designed to
operate initially at 20 Gbps of service capacity, upgradeable to a minimum of
40 Gbps using DWDM technology.
In July 1998, we executed a contract with TSSL for the construction of PAC
which provides for a system completion date of February 2000 at an estimated
total cost of $495 million (excluding potential future upgrades and amounts
capitalized with respect to the PCG Warrants). We intend to finance PAC with
an approximately $200 million equity contribution and non-recourse project
indebtedness of approximately $295 million. The contractual commitment for
this project indebtedness was obtained in July 1998.
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South American Crossing
On March 11, 1999, GCL announced plans for the development of SAC, an 18,000
km undersea and terrestrial fiber optic network directly linking the major
cities of South America through MAC and SAC to the United States, Mexico,
Central America, the Caribbean, Asia and Europe. The Company expects that SAC
will cost approximately $1,130 million to construct and will commence service
in 2000. The Company plans to build SAC in three phases. The first two phases,
providing Argentina and Brazil with connectivity to the Global Crossing
Network, are scheduled to commence service in the fourth quarter of 2000. The
final phase, completing the loop around the continent, is scheduled for
completion in the first quarter of 2001. The undersea portion of SAC is
currently planned to be wholly-owned, while the terrestrial portion is
expected to be constructed through joint-venture arrangements.
Upon construction, the undersea portion of SAC will constitute a state-of-
the-art four-fiber pair, self-healing ring, built using advanced DWDM
technology. Undersea portions of the ring are expected to connect to landing
sites at St. Croix (United States Virgin Islands), Fortaleza (Brazil), Rio de
Janeiro (Brazil), Santos (Brazil), Las Toninas (Argentina), Valparaiso
(Chile), Lurin (Peru), Buenaventura (Colombia) and Fort Amador (Panama).
Terrestrial segments are expected to connect to most major South American
cities, including Rio de Janeiro, Sao Paulo (Brazil), Buenos Aires
(Argentina), Santiago (Chile), Lima (Peru), Cali (Colombia) and Bogota
(Colombia). The SAC ring is expected to be completed on its southern-most end
by a terrestrial link across the Andes between Las Toninas and Valparaiso. The
PAC system from Panama to St. Croix is expected to complete the ring.
Initially, SAC is expected to have a capacity of 40 Gbps and to be upgradable,
using DWDM technology, to a minimum of 80 Gbps.
Terrestrial Capacity
In addition to the undersea segments of the Global Crossing Network, we have
acquired or constructed, and expect to continue to acquire or construct,
terrestrial fiber capacity to complement our undersea cable systems and
complete a global network to meet customer demands for worldwide city-to-city
connectivity.
Pan European Crossing. We recently announced plans to build PEC which, upon
completion, will be a self-healing ring offering connectivity between AC-1 and
24 European cities, including London, Paris, Strasbourg, Amsterdam, Rotterdam,
Antwerp, Brussels, Berlin, Frankfurt, Munich, Stuttgart, Hamburg, Hanover,
Dusseldorf, Cologne and Copenhagen. We also plan to connect additional
European cities to this system. PEC is initially planned as a 10,000 km system
with 24 to 72 fiber pairs as well as spare conduits. We are currently
negotiating with various parties for the acquisition of rights of way and the
acquisition or construction of conduits. Furthermore, Lucent Technologies,
Inc. ("Lucent") will supply fiber and equipment as well as project management
and integration services. Based on these arrangements, we believe that the
construction costs for the system will be approximately $850 million
(excluding potential future upgrades). We will develop PEC in several phases,
initially providing connectivity among 24 cities. The initial phase has an
anticipated completion date during December 1999. The second phase will add
five cities and has an anticipated completion date in 2000.
Global Access Ltd. We recently obtained a 49% interest in Global Access
Ltd., a company which will own and operate GAL, a fiber optic terrestrial
system being developed in Japan that, among other things, will connect the PC-
1 cable stations with three cities in Japan. Through GAL, we intend to offer
terrestrial services to PC-1 customers at prices substantially lower than
those currently available. GAL is initially planned as a 1,300 km system.
Global Access Ltd. is currently negotiating with various parties for the
construction of GAL and, based on those negotiations, we believe that the
construction costs for GAL will be approximately $190 million. The initial
expected RFS date for the first phase of GAL's development is December 1999.
Purchased Capacity. We have acquired terrestrial connectivity between AC-1
landing stations in the United States and the United Kingdom to provide city-
to-city service from New York City to London, and have also entered into
agreements to provide terrestrial service in Germany and the Netherlands.
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Additional Network Expansion Opportunities
We are in the process of planning several new cable systems and evaluating
other business development opportunities which will complement the Global
Crossing Network. There can be no assurance that we will ultimately elect to
proceed with such opportunities or, if we do so, that such opportunities will
help us achieve and sustain operating profitability.
Further Expansion Opportunities. The demand for capacity on the routes
served by the Global Crossing Network and other cable systems are projected to
have substantial growth, greatly exceeding current usage and available
capacities. To address such demand, we plan to evaluate and, as appropriate,
build or acquire additional systems on such routes. It is anticipated that
such systems, where possible, will be restored on the existing systems and
will achieve further cost efficiencies through the use of existing landing
stations.
Other Activities
Neptune Acquisition. During November 1998, our indirect subsidiary, GC
Pacific Landing Corp., entered into an agreement and plan of merger with
Neptune Communications, L.L.C. ("Neptune") and its wholly-owned subsidiary,
Neptune Communications Corp. ("NCC"), whereby GC Pacific Landing will merge
with and into NCC in exchange for 2,239,642 shares of our common stock.
Neptune is controlled by The Carlyle Group, an international investment firm
("Carlyle"), and was formed to pursue opportunities in the undersea cable
business. Carlyle's managing director William Conway serves on our Board of
Directors.
Possible Investments. Our Board of Directors has approved in principle the
making of minority investments in telecommunications companies and ISPs that
do not compete with us in our core business and that are current or
prospective purchasers of capacity on the Global Crossing Network. Such
investments may consist of purchases of equity securities for either cash or
exchanges of capacity on the Global Crossing Network. Such investments may be
managed either by us directly or, if our Board of Directors deems advisable,
by one or more third-party investment advisers so as to minimize potential
conflicts of interest and the amount of time allocated by our senior
management to such investments.
Financing Plan
As of December 31, 1998, the approximately $750 million initial cost of AC-1
had been fully financed. The first contracted upgrade will be funded through
operating cash flow.
We estimate the total cost of developing and deploying AC-2, PC-1, MAC, PAC,
SAC, PEC and GAL to be approximately $4,945 million (excluding costs of
potential future upgrades and the amounts capitalized with respect to the PCG
Warrants) which is comprised of $750 million for AC-2, $1,200 million for PC-
1, $330 million for MAC, $495 million for PAC, $1,130 million for SAC, $850
million for PEC and $190 million for GAL. PC-1 will be financed by total
equity investments of $400 million (we expect to provide approximately $231
million), with the remaining $800 million of estimated costs to be financed
initially through non-recourse project indebtedness at the PC-1 level. With
respect to MAC and PAC, we intend to make equity investments of approximately
$110 million in MAC and $200 million in PAC. We have obtained $220 million in
non-recourse project financing from certain lenders to finance the initial
construction costs of MAC. We expect to finance the remaining estimated $295
million in costs for PAC through non-recourse indebtedness and have negotiated
a contractual commitment for such financings.
During October 1998, we announced the development of PEC for which the
construction costs are estimated to be $850 million. A portion of these costs
will be paid from the proceeds of the recent issuance by our direct
subsidiary, Global Crossing Holdings Ltd. ("GCH"), of 10 1/2% Senior
Exchangeable Preferred Stock due 2008
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("GCH Preferred Stock"). Further, we expect to raise additional capital
required to finance this system through a combination of commercial bank
borrowings, non-recourse project debt, vendor financing and sales of dark
fiber. In this regard, we signed an agreement with Cable & Wireless for the
sale of more than $100 million of dark fiber on PEC. During January 1999, we
entered into a supply contract with Lucent to provide fiber and equipment for
this system and, as part of this contract, Lucent will also furnish financing
along with project management and integration services.
We have traditionally secured project indebtedness for approximately 65% of
system costs. The actual amounts of our future capital requirements (including
with respect to AC-2 and SAC) will depend on certain factors including the
cost of developing our cable systems, the speed of developing our systems and
the pricing of our services. There can be no assurance that financing for such
systems will be available to us or, if available, that such financing can be
obtained on a timely basis or on acceptable terms.
System Performance
AC-1, AC-2, PC-1, MAC, SAC, PEC and GAL are each designed to be installed
with self-healing ring technology to optimize system availability and
performance. Both span and ring switching protection are provided. Span
switching protects a system against failures which affect individual fibers.
Ring switching protects a system against complete failures between terminating
landing sites. Because such technology will protect any single system failure
in less than 300 milliseconds, no single system failure would have any
material effect on customer service. Accordingly, the estimated system
availability on any point-to-point link on such systems is 99.995%. The AC-1
system has experienced, mostly prior to RFS, a number of faults, generally
resulting from commercial fishing activity or shipping, causing the system to
rely on its ring switching protection capability. Because of the self-healing
ring architecture of the AC-1 system and the proper performance of its ring
switching protection capability, which protects and reroutes traffic from
single failures, such faults did not result in any loss of customer traffic.
Similar failures could occur in the future and, in the event of simultaneous
failures on two or more segments, loss of customer traffic would occur.
As undersea and terrestrial cable systems achieve greater capacities (i.e.,
carry more traffic along their transmission paths), it is important to provide
a "self-restoration solution" because existing systems do not have enough
capacity to provide restoration for these new high performance cable systems.
Single span systems must enter into reciprocal arrangements either with other
fiber-optic operators or with satellite carriers to pick up and deliver a
portion or all of the traffic if a system failure should occur. Providing
self-restoration through our ring design with the switching techniques
described above offers a distinguishing advantage over single span systems
with external restoration.
With respect to PAC, which does not employ self-healing ring technology, we
are exploring options to enter into restoration arrangements with terrestrial
fiber optic cable operators to protect against traffic interruptions. We may
enter into similar arrangements to protect against catastrophic system
malfunction on our other cable systems.
Sales and Marketing
We market capacity on our systems to telecommunications providers, including
PTTs, ISPs and established and emerging telecommunications companies. Our
current customers represent a broad array of telecommunications companies.
Our initial sales strategy emphasizes the sale of capacity on an
Indefeasible Right of Use ("IRU") basis, whereby the customer purchases a unit
of capacity for the remaining design life of a particular cable system. On AC-
1, we are selling capacity in an increment of 155 megabits per second (Mbps),
known as an STM-1, for the 25-year design life of the system. For the other
Global Crossing cable systems, we expect to sell capacity to customers at the
STM-1 level, as well as in smaller increments, based upon the demand levels
along certain routes. We have instituted a tiered pricing schedule for all of
our systems which provides for volume discounts, as well as allowing customers
to reduce their average circuit cost as more circuits are purchased.
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We have made selective wholesale acquisitions of terrestrial capacity,
thereby enabling customers to achieve city-to-city connectivity through the
Global Crossing Network at prices significantly lower than if such customers
had attempted to purchase such terrestrial capacity independently. For AC-1
customers, we enter into contractual arrangements providing terrestrial
capacity between our landing stations in the United States and the United
Kingdom, and New York City and London, respectively. In addition, Deutsche
Telekom and Royal PTT Nederland ("KPN") provide terrestrial capacity directly
to our AC-1 customers in Germany and the Netherlands, respectively.
Furthermore, through SAC, GAL and PEC, we plan to provide terrestrial
connectivity directly on our own network to cities in South America, Japan and
Europe.
To facilitate sales of capacity on the Global Crossing Network as well as to
increase market awareness and name recognition, we are establishing regional
sales and marketing companies initially in the United States, the United
Kingdom and Asia. Customers will soon be able to purchase capacity anywhere on
our Global Crossing Network system by signing a single CPA with any of the
regional sales and marketing companies. We have been able to recruit and train
a full-service sales and marketing team of professionals who had previously
worked at traditional telecommunications companies, emerging
telecommunications companies and submarine cable design and construction
companies. In total, we have employed 21 marketing professionals as of
December 31, 1998, with offices in: Hamilton, Bermuda; Los Angeles and San
Francisco, California; Morristown, New Jersey; Miami, Florida; London,
England; Amsterdam, the Netherlands; Tokyo, Japan; and Buenos Aires,
Argentina.
During the pre-operational period for AC-1, in which we generated
significant pre-sales of capacity, we held project information meetings
(otherwise known as data gathering meetings) in order to better educate
potential customers about AC-1 and our other planned cable systems. Attendees
of such meetings were affiliated with both existing and prospective customers
and represented a variety of sectors of the telecommunications industry. We
expect to continue to organize at least one major international conference per
year in order to provide customers with updated information on the Global
Crossing Network. We will also continue to host regional project information
meetings focusing on specific regions as we expand coverage in new geographic
areas.
We plan to reinforce customer awareness through a variety of marketing
campaigns, including international conferences and regional marketing events,
participation in key industry and user group conferences, trade shows,
speaking engagements, press conferences and promotional campaigns. In
addition, our marketing team engages in regular visits to current and
prospective customers to obtain a greater understanding of their individual
needs and promote the advantages of the Global Crossing Network.
Due to the breadth of the Global Crossing Network, we are uniquely
positioned to offer worldwide capacity to our customers. Many customers
acknowledge that their need for large bandwidth is increasing, but they are
often doubtful with regard to the precise routes where their particular growth
will take place. In order to stimulate customer loyalty and leverage this
uncertainty, we have developed the Global Crossing Network Offer ("GCNO"). The
GCNO allows customers who can make a multi-year dollar denominated commitment
to our network with the flexibility to activate capacity where they need it in
a "just-in-time" manner in return for volume discounted pricing. As our
network continues to expand, we are exploring other marketing programs that
will provide further benefits to our customers and position Global Crossing as
the broadband infrastructure provider of choice.
We are also planning to offer our customers wholesale services in addition
to the long term IRUs which we currently sell to our customers. Such offerings
may include intermediate term capacity leases, metered bandwidth and internet
transit services. We expect to begin offering these products and services
before the end of 1999.
Summary of Principal Terms of Standard Contractual Documentation
Capacity Purchase Agreements (CPAs)
In general, a CPA provides for the sale of capacity on an IRU basis, whereby
the purchaser acquires a unit of capacity for the remaining design life of a
particular system, generally 25 years from the RFS date of the
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system. Upon execution of a CPA we generally receive cash for 10% of the
purchase price immediately, with the balance of the purchase price due upon
activation of the capacity. A limited number of CPAs provide for payment of
the purchase price in installments over two to four years. Each customer is
required to pay its allocable share of the cost of operating, maintaining and
repairing the system each year. Performance under CPAs is conditioned upon
achieving the RFS date for a system and upon the obtaining of certain
approvals, consents, governmental authorizations, licenses and permits. In
some CPAs, customers who have purchased capacity on systems prior to the date
the system has self-healing ring capacity have contractually required full
self-healing ring capability as a legal condition which, if not satisfied,
would enable them to terminate the CPA and require us to refund capacity
payments.
In general, neither party is liable to the other under a CPA for
consequential, incidental, indirect or special damages sustained by reason of
(i) any failure in or breakdown on the system or the facilities associated
with the system, (ii) the failure of any inland carrier to perform the terms
and conditions of any agreement to which it and the purchaser are parties or
(iii) for any interruption of service, whatever the cause and however long it
shall last. CPAs are generally subject to an arbitration clause.
Inland Services Agreements (ISAs)
We have entered into agreements with certain terrestrial fiber cable
providers to purchase terrestrial capacity on such systems for resale to our
customers. In general, the term of each ISA is 25 years starting in 1998 or
until the system is retired, whichever occurs first. In certain cases, we have
the option to extend the term of each ISA for an additional five years.
Neither party to an ISA is responsible for any loss, damage, delay or failure
of performance resulting from an event of "force majeure."
Operations, Administration and Maintenance Support
We are developing our own worldwide operations, administration and
maintenance ("OA&M") support center to serve each of our cable systems. Such
support will be handled through three work centers: a Customer Care Center
("CCC"), a Network Operations Center ("NOC") and a Technical Support Center
("TSC"). We currently anticipate that the CCC will be located in Bermuda and
that both the NOC and TSC will be located in the United Kingdom.
Customer Care Center. The CCC will provide capacity purchasers with a single
point of contact for service provisioning, interconnect coordination support,
billing and billing inquiries and adjustments.
Network Operations Center. The NOC will handle operations, administrative
and maintenance activities for each of our cable systems, including new
services provisioning, network performance, repair and restoration activities.
Capacity provisioning which relates to activation of overall capacity on our
system, or allocation of capacity to large users, is also performed by the
NOC. Management of network performance entails detection and response to
system degradation and other performance parameters, as well as preventative
activities.
Technical Support Center. The TSC will be a 24-hour center managed by
highly-trained experts to handle technical inquiries from purchasers regarding
project management, status of services provisioning, system performance and
interconnection arrangements.
Pursuant to the AC-1 Operations, Administration & Maintenance agreement,
TSSL will provide OA&M support on behalf of AC-1 for a term of eight years
following the commencement of commercial operations. As of December 31, 1998,
we were committed under the AC-1 OA&M agreement to make payments totaling
approximately $247 million. This agreement is extendable at our option for two
additional periods of 8 1/2 years each.
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Competition
Existing and Planned Cable Systems
The routes addressed by our planned systems are currently served by several
cable systems as well as satellites. Currently, there are several fiber optic
transatlantic cable systems, each of which competes directly with AC-1.
Primary future sources of transatlantic competition for us may result from,
among others, (i) TAT-14, a transatlantic cable system which is being
developed by its consortium members, including British Telecom, AT&T, France
Telecom and Deutsche Telekom, (ii) Flag Atlantic-1, a transatlantic system
which is being developed by Flag Telecom and Global Telesystems Group Inc. and
(iii) Gemini, a transatlantic cable system being operated and marketed by MCI
WorldCom, Inc. and Cable & Wireless. We believe that such other cable systems
will compete directly with our Atlantic capacity and the commitments of the
developers and other carriers on these systems could substantially reduce
estimated demand for capacity on our systems.
Similarly, there are several cable systems currently operating between the
United States and Asia, the route to be served by PC-1. PC-1 may face
competition in the transpacific market from, among others, (i) the China--U.S.
Cable Network, a transpacific system being developed as a "private cable
system" by fourteen large carriers, including SBC Communications Inc. ("SBC"),
MCI WorldCom Inc., AT&T and Sprint, most of which have traditionally sponsored
consortium cables and (ii) the Japan--U.S. Cable Network, a transpacific
system being developed by a consortium of major telecommunications carriers,
including MCI WorldCom Inc., AT&T, Kokusai Denshin Denwa Co. Ltd. ("KDD"),
Nippon Telegraph and Telephone Corp. ("NTT"), Cable & Wireless and GTE.
Although we believe that such other cable systems will not satisfy the demand
for capacity between the United States and Japan and that there is currently
enough demand projected to accommodate all such systems, such other cable
systems will receive commitments for capacity that PC-1 could have received in
their absence. Moreover, while a number of the participants in these cable
systems have purchased capacity on our other systems, it is likely that these
participants will seek to satisfy their capacity requirements for traffic
between the United States and Asia with the systems they are sponsoring and
not with PC-1.
In addition, we will face competition on our planned trans-European network.
There are several carriers, including Viatel, KPN-Qwest, MCI WorldCom, Inc., a
joint venture between Deutsche Telekom and France Telecom, British Telecom and
Hermes, which are currently planning or building trans-European network
assets.
Other regional and global systems are being considered by developers,
including Project Oxygen, a global system being evaluated by the CTR Group,
Ltd. In addition, we may face competition from existing and planned regional
systems and satellites on our MAC, PAC and SAC routes, where entrants are
vying for purchases from a small but rapidly growing customer base.
Satellite Transmission
When comparing cable transmission against satellite transmission, we believe
that cable has a distinct advantage with respect to latency (i.e.,
transmission delay) and voice quality. Cable transmission has a lower cost per
circuit, attributable in part to higher capacity and longer expected equipment
life than satellite transmission. Satellite transmission is generally
considered to have a comparative advantage versus cable transmission for
mobile communications only in the area of point-to-multipoint broadcast and
"thin route" transmission, as opposed to the more common point-to-point, high
volume transmission for which cable usage is considered to be preferable.
In early 1997, the Federal Communications Commission ("FCC") granted Ka-band
licenses and orbital locations to 13 companies. The firms developing future
satellite technology envision a network of satellites that will provide
broadband data transmission with data rates of 2 Mbps, 20 Mbps, and even 155
Mbps. Potential participants in the field include Astrolink, Skybridge,
Teledesic, CyberStar and SpaceWay, which are seeking to provide high bandwidth
transmission networks. Due to (i) the significant initial costs related to
these systems, (ii) the risks relating to satellite launch systems and (iii)
the significantly lower transmission capacity versus current fiber optic
systems, we believe that the new satellite systems will not be able to offer
competitive cost per unit of transmission capacity in the dense metropolitan
markets we are targeting. Further, we believe we will
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have at least four years lead time to help us solidify a sustainable
competitive market position before true broadband satellite service commences.
Suppliers
There are currently three major supply companies in the undersea cable
industry: TSSL, Alcatel and Kokusai Denshin Denwa--Submarine Cable Systems
("KDD--SCS"). Cable & Wireless and Pirelli also have a presence in the
industry and there are a number of smaller suppliers which have focused
primarily on regional routes or non-repeatered systems. TSSL completed
construction of AC-1, is responsible for the design and installation of PAC,
and together with KDD-SCS (as a subcontractor), is responsible for design and
installation of PC-1. Alcatel and TSSL are responsible for the design and
construction of MAC. There are multiple suppliers available for terrestrial
systems.
Regulation
In the ordinary course of development, construction and operation of our
fiber optic cable systems, we will be required to obtain and maintain various
permits, licenses and other authorizations both in the United States and in
international jurisdictions where our cables land or in the territories in
which terrestrial fiber optic systems are being constructed, and we will be
subject to applicable telecommunications regulations in such jurisdictions. In
particular, submarine cable landing or similar licenses as well as other
infrastructure construction authorizations will be required in many of the
jurisdictions where our planned undersea cable systems will land or
terrestrial segments will be constructed. We are both filing applications for
cable landing licenses with the FCC (and, where necessary, regulatory agencies
in other countries) and, where available, seeking private carriage status for
these systems. These licenses are typically issued for a term of years (in the
case of the FCC-issued cable landing licenses, 25 years) and are subject to
renewal. The law of several international jurisdictions limits foreign
ownership, direct or indirect, of entities holding cable landing licenses, or
building terrestrial infrastructures. In connection with the implementation of
the World Trade Organization ("WTO") Basic Telecommunications Agreement, the
FCC adopted regulations establishing an open entry standard for applicants
from WTO member countries, including a rebuttable presumption that
applications from carriers from WTO member countries do not pose concerns that
would justify denial of an application on competitive grounds. In addition, we
and, in some cases, our joint venture partners, are obtaining licenses from a
number of jurisdictions to construct, operate, and sell capacity on
terrestrial fiber optic cable systems.
Construction of each of our cable systems also requires the acquisition and
maintenance of various environmental and other construction related permits
and licenses in the ordinary course of business. Our undersea construction
contracts are generally "turnkey" arrangements, whereby the contractor is
obligated to obtain and maintain all such licenses and permits. Although we
expect that the construction contracts for each of our other planned undersea
cable systems will impose the burden of acquiring and maintaining construction
licenses and permits on the contractor for each of such systems, there can be
no assurance that such contractor will successfully obtain such permits and
licenses.
Employees
As of December 31, 1998, we had approximately 148 employees. We consider our
relations with our employees to be good.
Financial Information by Business Segment and Geographic Area
See Note 3 of our consolidated financial statements for information
regarding our revenues and assets by business segment and geographic region.
Risk Factors
Statements contained in this Annual Report on Form 10-K regarding our
expectations with respect to the Global Crossing Network, related financings,
future operations and other information, which can be identified by
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the use of forward-looking terminology, such as "may," "will," "expect,"
"anticipate," "intend," "estimate," "believe," "seek" or "continue," or the
negative thereof or other variations thereon or comparable terminology, are
forward-looking statements. The discussions set forth below constitute
cautionary statements identifying important factors with respect to such
forward-looking statements, including risks and uncertainties, that could
cause actual results to differ materially from results referred to in the
forward-looking statements. There can be no assurance that our expectations
regarding any of these matters will be fulfilled.
Limited Operating History
We were organized in March 1997 and have a limited operating history. Our
financial information relates principally to a period in which we were
constructing and developing AC-1 and, until May 1998, had minimal revenues and
operating costs. Despite recognizing approximately $424 million in revenues,
we have incurred a net loss applicable to common shareholders of approximately
$148 million for the period from March 19, 1997 (Date of Inception) through
December 31, 1998, due primarily to the termination of certain advisory
services agreements, the incurrence of stock-related expense, the
extraordinary loss on the retirement of certain senior notes, preferred stock
dividends and the redemption of certain preferred stock. We have financed our
net losses, debt service, capital expenditures and other cash needs to date
through operations, the proceeds of sales of common stock and mandatorily
redeemable preferred stock and the issuance of debt, including non-recourse
indebtedness of Atlantic Crossing Ltd. ("ACL"), Pacific Crossing Ltd. ("PCL")
and Mid-Atlantic Crossing Ltd. ("MACL"). We will require substantial
additional capital in order to carry out our business plan.
Our success will depend substantially on sales of capacity on our systems.
Our sales and marketing efforts (primarily on AC-1) have resulted in executed
CPAs as of December 31, 1998 to purchase capacity totaling $1,052 million,
including related sales of third party terrestrial capacity and approximately
$100 million of dark fiber sales on PEC. We cannot be certain that we will
continue to be successful in selling capacity on AC-1 or our other systems
under development. Additionally, we cannot be certain that we will be able to
realize our business plan. Furthermore, even if we realize our plan, we still
may not be able to sustain operating profitability or generate sufficient cash
flow to service our indebtedness.
Leverage
We have incurred a high level of debt. As of December 31, 1998, we had a
total of $1,377 million of total liabilities, including approximately $1,112
million in senior indebtedness, of which $276 million was secured. We also
have mandatorily redeemable preferred stock outstanding with a face value of
$500 million. In addition, PCL entered into a $850 million non-recourse credit
facility with respect to PC-1, under which PCL had incurred $200 million of
indebtedness as of December 31, 1998. We have also entered into a $300 million
commitment letter for project financing for PAC.
The amount of our debt could have important consequences for our future,
including, among other things:
. cash from operations may be insufficient to meet the principal and
interest on our indebtedness as it becomes due,
. payments of principal and interest on borrowings may leave us with
insufficient cash resources for our operations, and
. restrictive debt covenants may impair our ability to obtain additional
financing.
Our ability to repay our debt depends upon a number of factors, many of
which are beyond our control. In addition, we rely on dividends, loan
repayments and other intercompany cash flows from our subsidiaries to repay
our obligations. Our operating subsidiaries intend to enter into various
credit arrangements. Accordingly, once they enter into these credit
arrangements, the payment of dividends from our operating subsidiaries and the
making and repayments of loans and advances will become subject to statutory,
contractual and other restrictions.
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In addition, if we are unable to generate sufficient cash flow to meet our
debt service requirements, we may have to renegotiate the terms of our long
term debt. There can be no assurance that we would be able to successfully
renegotiate such terms or refinance our indebtedness when required or that
satisfactory terms of any such refinancing would be available. If we were not
able to refinance our indebtedness or obtain new financing under these
circumstances, we would have to consider other options, such as:
.sales of certain assets to meet our debt service obligations,
.sales of equity,
.negotiations with our lenders to restructure applicable indebtedness, or
.other options available to us under applicable law.
Substantial Future Capital Requirements
We will require substantial capital investment to implement our business
plan. Because we anticipate that each of our systems will require separate
financing in addition to our equity investment in each system, we intend to
raise additional non-recourse debt or equity capital at the system level to
meet these financing requirements. We currently estimate that our capital
resources, together with the additional capital that we intend to raise at the
system level, will be sufficient to fund our currently planned systems. If we
are unable to fund the development of our systems, our business, financial
condition and results of operations will be materially adversely affected.
Risks Related to Completing our Cable Systems
Our ability to achieve our strategic objectives will depend in large part
upon the successful, timely and cost-effective completion of our planned cable
systems as well as on achieving substantial capacity sales on these systems
once they become operational. The construction of our systems will be affected
by a variety of factors, uncertainties and contingencies, many of which are
beyond our control. There can be no assurance that each of these systems will
be completed at the cost and in the time frame currently estimated by us, or
even at all. Although we will be awarding contracts for construction of our
systems to certain suppliers who in most cases are expected to be bound by a
fixed-price construction cost schedule, and to provide guarantees in respect
of completion dates and system design specifications, there can be no
assurance that the actual construction costs or the time required to complete
these systems will not exceed our current estimates. Such circumstances could
have a material adverse effect on our results of operations or financial
condition.
Our successful completion of our cable systems will depend, among other
things, upon:
.our ability to manage their construction effectively,
.our ability to obtain all construction and operating permits and licenses,
.third-party contractors performing their obligations on schedule, and
.our ability to enter into favorable construction contracts with a limited
number of suppliers.
Failure with respect to any of the foregoing may significantly delay or
prevent completion of one or more of our systems, which could have a material
adverse effect on our business, financial condition and results of operations.
Sales of Capacity; Realization of Other Revenues
Our ability to achieve our business objectives will also depend in large
part upon our sales and marketing capabilities. We have assembled a dedicated
sales and marketing force. We depend upon the ability of such employees to
effectively market and sell capacity. We cannot be certain that we will be
able to effectively sell capacity on our cable systems. If we are unable to
effectively sell capacity on our cable systems, our results of operations
could be materially adversely affected.
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We intend to grow revenues and profits by:
.upgrading capacity on our planned systems,
.developing additional undersea cable projects,
.developing or purchasing additional terrestrial fiber capacity, and
.introducing new services.
If we are unable to effect these upgrades, develop additional cable
projects, develop or obtain additional terrestrial capacity or introduce new
services, our business, financial condition and results of operations could be
adversely affected.
Termination of Capacity Purchase Agreements
Under some AC-1 CPAs, the customer may terminate the agreement if we do not
obtain and hold certain governmental authorizations, approvals, consents,
licenses and permits. CPAs for our other systems may contain similar
provisions. If a substantial number of CPAs are terminated for any of the
foregoing reasons, our business, financial condition and results of operations
could be materially adversely affected.
Competition
The international telecommunications industry is highly competitive. We face
competition from existing and planned systems along each of our planned
routes. We also compete with satellite providers, including existing
geosynchronous satellites and low- and medium-earth orbit systems now under
construction. We compete primarily on the basis of price, availability,
transmission quality and reliability, customer service and the location of our
systems. Traditionally, carriers have made substantial long term investments
in ownership of cable capacity. There can be no assurance that we will be able
to compete successfully against systems to which prospective customers have
made long term commitments.
Relationship with Principal Shareholders; Conflicts of Interest
As of March 12, 1999, Pacific Capital Group, Inc. ("PCG") had a 23.14%
beneficial ownership interest in GCL. We have entered into various
transactions with PCG and have assumed the on-going development of PC-1, PAC
and MAC from an affiliate of PCG. Mr. Gary Winnick, Co-Chairman of our Board
of Directors, controls PCG and its subsidiaries. In addition, several of our
other officers and directors are affiliated with PCG. Furthermore, Canadian
Imperial Bank of Commerce ("CIBC") had a 22.15% beneficial ownership interest
in GCL as of March 12, 1999. CIBC and its affiliates have acted as
underwriter, lender or initial purchaser in several of our financial
transactions in connection with the development and construction of our
systems. Several members of our Board of Directors are employees of an
affiliate of CIBC.
As of March 12, 1999, PCG and CIBC collectively, beneficially, owned 45.29%
of our outstanding common stock. Accordingly, PCG and CIBC may be able to
materially influence the outcome of matters submitted to a vote of our
shareholders, including the election of directors.
Certain of our directors and executive officers also serve as officers and
directors of other companies. Additionally, certain of our officers and
directors are active investors in the telecommunications industry. Service as
a director or officer of our Company and as a director or officer of another
company could create conflicts of interest when the director or officer is
faced with decisions that could have different implications for us and the
other company. A conflict of interest could also exist with respect to
allocation of time and attention of persons who are directors or officers of
both us and another company. The pursuit of these other business interests
could distract these officers from pursuing opportunities on our behalf. Such
conflicts of interest could have a material adverse effect on our financial
condition.
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<PAGE>
Transition to Operating Company
The transition from a development stage company to an operating company
places significant demands on our management and operations. We are in the
process of expanding the management and operational capabilities necessary for
this transition.
Our ability to manage this transition successfully will depend on, among
other things:
. expanding, training and managing our employee base, including
attracting, retaining and motivating highly skilled personnel,
. taking over or outsourcing our customer interface and operations,
administrative and maintenance systems,
.procuring terrestrial capacity to provide connectivity to inland cities,
and
.controlling expenses.
There can be no assurance that we will succeed in developing all or any of
these capabilities, and any failure to do so could have a material adverse
effect on our results of operations.
Rapid Growth in a Changing Industry; Pricing Uncertainties
Part of our strategy is to construct several cable systems in a short time
frame in order to take advantage of the supply and demand imbalance that
currently exists and is projected to exist in the global marketplace. Each of
our currently announced systems is expected to be operational between now and
2000. As a result of this aggressive strategy, we are experiencing rapid
expansion and expect it to continue for the foreseeable future. This growth
has increased our operating complexity. At the same time, the international
telecommunications industry is changing rapidly due to, among other things:
.the easing of regulatory constraints,
.the privatization of established carriers,
.the expansion of telecommunications infrastructure,
.the globalization of the world's economies, and
.the changing technology for wireless and satellite communication.
Much of our planned growth is predicated upon the growth in demand for
international telecommunications capacity. There can be no assurance that such
anticipated demand growth will occur.
The fiber optic cable transmission industry has experienced significant per
circuit price declines resulting from technological advances in fiber optic
technology. Recent changes in technology caused prices for circuits to go down
even further. If there is less demand than we project or a bigger drop in
prices per circuit than we project, there could be a material adverse effect
on our business, financial condition and results of operations. There can be
no assurance, even if our projections with respect to such factors are
realized, that we will be able to implement our strategy or that our strategy
will be successful in the rapidly evolving telecommunications market.
Rapid Technological Change
The telecommunications industry is subject to rapid and significant changes
in technology. For instance, recent technological advances permit substantial
increases in the transmission capacity of both new and existing fiber. The
introduction of new products or the emergence of new technologies also may
reduce the cost and increase the supply of certain services similar to those
provided by us. While we believe that being the first to construct and to
market cable systems with significant capacity on certain routes may stop
competitors from
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overbuilding in those situations, we cannot predict the behavior of potential
competitors who might otherwise build a system even if it would be
uneconomical. We believe that for the foreseeable future, technology changes
will neither materially affect the continued use of fiber optic cable nor
materially hinder our ability to deploy the state-of-the-art technology.
However, we cannot predict the effect of technological changes on our
operations and such changes could have a material adverse effect on our
business, financial condition and results of operations.
Operations Risks
Each of our systems will be subject to the risks inherent in a large-scale,
complex fiber optic telecommunications system. The operations, administration,
maintenance and repair of these systems requires the coordination and
integration of sophisticated and highly specialized hardware and software
technologies and equipment located throughout the world. There can be no
assurance that, even if built to specifications, our systems will 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.
AC-1 has, and each of our other systems are expected to have, a design life
of generally 25 years; however, there can be no assurance of the actual useful
life of any of these systems. A number of factors will affect the useful life
of each of our systems, including, among other things:
.quality of construction,
.unexpected deterioration, and
.technological or economic obsolescence.
Failure of any of our systems to operate for its full design life could have
a material adverse effect on our business, financial condition and results of
operations.
Dependence on Key Personnel
Our future success depends on the skills, experience and efforts of the
officers and key technical and sales employees. As some of these officers and
employees are new, we cannot be certain that we will be able to integrate new
management into our existing operations. In addition, competition for these
individuals is intense, and we may not be able to attract, motivate and retain
highly skilled qualified personnel. We do not have "key person" life insurance
policies covering any of our employees.
Risks Associated with International Operations
We will derive substantial revenues from international operations. We intend
to have substantial physical assets in several jurisdictions along the routes
of our planned systems.
Accordingly, our business is subject to certain risks inherent in
international operations. These risks include:
.political and economic conditions,
.unexpected changes in regulatory environments,
.exposure to different legal standards, and
.difficulties in staffing and managing operations.
We have not experienced any material adverse effects with respect to our
foreign operations arising from such factors. However, problems associated
with such risks could arise in the future. Finally, managing operations in
multiple jurisdictions will place further strain on our ability to manage our
overall growth.
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Effect of Government Regulation
We will, in the ordinary course of development, construction and operation
of our fiber optic cable systems, be required to obtain and maintain various
permits, licenses and other authorizations in both the United States and in
international jurisdictions where our cables land and exist. In particular,
undersea cable landing or similar licenses will be required in many of the
jurisdictions where our systems will land and exist. Such licenses are
typically issued for a term of years, subject to renewal. Moreover, the
licenses may subject our business and operations to varying forms of
regulation, which could change over the course of time. If we fail to obtain
or renew a license or if there is a material change in the nature of the
regulation to which we are subject, there could be a material adverse effect
on our business, financial condition and results of operations. Specifically,
we must obtain construction and operating licenses during the construction
phase of each of our cable systems. Although we intend that the construction
contracts for each of our cable systems impose the burden of acquiring and
maintaining construction licenses and permits on the contractor for each of
such systems, there can be no assurance that such contractor will successfully
obtain such permits and licenses. If we or the contractor fail to obtain or
maintain any construction or operating license, there could be a material
adverse effect on our business, financial condition and results of operations.
Dependence on Third Parties
We depend and will continue to depend upon third parties to:
.construct systems and provide equipment and maintenance,
.provide access to certain origination and termination points of our
systems in various jurisdictions,
.construct and operate landing stations in certain of such jurisdictions,
.acquire rights of way,
.provide terrestrial capacity to our customers through contractual
arrangements, and
. act as joint venture participants with regard to PC-1, GAL and,
potentially, with regard to other future systems, including potentially
the terrestrial portion of SAC.
There can be no assurance that such third parties will perform their
contractual obligation or that they will not be subject to political or
economic events which may have a material adverse effect on our business,
financial condition and results of operations.
We entered into commission sharing agreements providing for the payment to
third parties of commissions with respect to marketing of capacity on the AC-1
and PC-1 systems. Payments of these commissions is fully contingent upon our
receipt of cash payment under the related CPAs and, accordingly, payment by us
of these commissions has no material effect on our liquidity.
ITEM 2. PROPERTIES
We lease executive and administrative offices at our headquarters in
Hamilton, Bermuda. We own a cable station in Brookhaven, New York and a cable
station in White Sands, United Kingdom. We lease cable station space in Sylt,
Germany and cable station space in Beverwijk, the Netherlands. Such cable
station leases run for the anticipated 25-year term of AC-1. We also lease
office space in Amsterdam, the Netherlands; Los Angeles and San Francisco,
California; Morristown, New Jersey; London, England; New York, New York; Coral
Gables, Florida; and Buenos Aires, Argentina.
ITEM 3. LEGAL PROCEEDINGS
We are not presently subject to any material legal claims or proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
Price Range of Common Stock
Our common stock began to trade on both the Nasdaq National Market ("NNM")
and the Bermuda Stock Exchange under the symbol "GBLX" following our Initial
Public Offering ("IPO") of common stock on August 14, 1998 at a per share
price of $9.50. The table below sets forth, on a per share basis for the
periods indicated, the high and low closing sales prices for the common stock
as reported by the NNM.
<TABLE>
<CAPTION>
Price Range
------------
High Low
------ -----
<S> <C> <C>
Fiscal Year 1998
Third Quarter (from August 14, 1998)...................... $12.75 $8.00
Fourth Quarter............................................ $23.50 $8.63
</TABLE>
The closing sale price of the common stock as reported by the NNM on March
12, 1999 was $49.38. As of March 12, 1999, there were approximately 335
holders of record of our common stock.
Dividend Policy; Restriction on Payment of Dividends
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. The terms of certain of our debt instruments also place
limitations on our ability to pay dividends. Future dividends, if any, will be
at the discretion of the Board of Directors and will depend upon, among other
things, our operations, capital requirements and surplus, general financial
condition, contractual restrictions and such other factors as the Board of
Directors may deem relevant.
Application of Proceeds
During August 1998, we completed our IPO (File No. 333-53393; effective date
August 13, 1998) for which we received net proceeds of approximately $391
million. Through December 31, 1998, we have used $114 million of proceeds from
the IPO for (i) equity investments of approximately $75 million for MAC and
$32 million for PAC and (ii) $7 million for general corporate purposes. We
intend to use the balance of these funds for (i) construction of the Global
Crossing Network, (ii) investments in telecommunications companies and ISPs,
(iii) investment in Global Access Ltd., and (iv) general corporate purposes.
As of December 31, 1998, unused proceeds were invested in short-term,
interest-bearing United States government securities and certain other short
term, investment grade securities.
Recent Sales of Unregistered Securities
In 1998 we issued the following equity securities that were not registered
under the Securities Act of 1933, as amended.
(a) 5,000,000 shares of GCH Preferred Stock issued on December 2, 1998 by
our wholly-owned subsidiary, GCH, and sold to each of Salomon Smith Barney,
Merrill Lynch & Co., CIBC Oppenheimer, Deutsche Bank Securities, Goldman,
Sachs & Co., Morgan Stanley Dean Witter, Chase Securities Inc. and
Donaldson, Lufkin & Jenrette;
(b) 900,000 Class B shares and 375,000 Class E shares of common stock of
Old GCL at $0.33 per share issued in January 1998 to additional
shareholders of Old GCL;
(c) 300,000 Class E shares of common stock of Old GCL at $0.33 per share
issued during April 1998 to an additional shareholder of Old GCL;
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(d) upon formation of GCL in March 1998, 2,400,000 shares of our common
stock, at its par value of $.01 per share to Old GCL; and
(e) in August 1998, 349,355,274 shares of our common stock, at its par
value of $.01 per share, to Old GCL.
The GCH Preferred Stock was resold only to institutional investors that are
"qualified institutional buyers" within the meaning of Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act") or pursuant to
Regulation S under the Securities Act. All issuances specified above were made
in reliance upon an exemption from the registration provisions of the
Securities Act set forth in Section 4(2) thereof relative to transactions by
an issuer not involving any public offering or the rules and regulations
thereunder. All of such shares of common stock are deemed restricted
securities within the meaning of Rule 144 under the Securities Act. The GCH
Preferred Stock was exchanged in March 1999 for identical securities
registered under the Securities Act.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data as of December 31, 1998 and 1997,
for the year ended December 31, 1998 and for the period from March 19, 1997
(Date of Inception) to December 31, 1997, respectively, are derived from our
audited consolidated financial statements and should be read in conjunction
with the audited consolidated financial statements and notes included in this
Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Period from
March 19, 1997
Year Ended (Date of Inception)
December 31, 1998 to December 31, 1997
----------------- --------------------
(In thousands, except share and
per share information)
<S> <C> <C>
Statement of Operations Data:
Revenues................................ $ 424,099 $ --
------------ ------------
Expenses:
Cost of capacity sold................... 178,492 --
Operations, administration and
maintenance............................ 18,056 --
Sales and marketing..................... 26,194 1,366
Network development..................... 10,962 78
General and administrative.............. 26,844 1,657
Stock related expense(1)................ 39,374 --
Provision for doubtful accounts......... 4,233 --
Termination of advisory services
agreement(2)........................... 139,669 --
------------ ------------
443,824 3,101
------------ ------------
Operating loss.......................... (19,725) (3,101)
Equity in loss of affiliates............ (2,508) --
Interest income (expense):
Interest income....................... 29,986 2,941
Interest expense...................... (42,880) --
Provision for income taxes(3)........... (33,067) --
------------ ------------
Loss before extraordinary item.......... (68,194) (160)
Extraordinary loss on retirement of
senior notes(4)........................ (19,709) --
------------ ------------
Net loss................................ (87,903) (160)
Preferred stock dividends(5)............ (12,681) (12,690)
Redemption of preferred stock(6)........ (34,140) --
------------ ------------
Net loss applicable to common
shareholders........................... $ (134,724) $ (12,850)
============ ============
NET LOSS PER COMMON SHARE
Loss applicable to common shareholders
before extraordinary item
Basic and diluted...................... $ (0.32) $ (0.04)
============ ============
Extraordinary item
Basic and diluted...................... $ (0.06) $ --
============ ============
Net loss applicable to common
shareholders
Basic and diluted...................... $ (0.38) $ (0.04)
============ ============
Shares used in computing basic and
diluted loss per share................. 358,735,340 325,773,934
============ ============
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
---------- --------
(In thousands)
<S> <C> <C>
Balance sheet data:
Current assets including cash and cash equivalents and
restricted cash and cash equivalents.................... $1,002,115 $ 27,744
Long term restricted cash and cash equivalents........... 367,600 --
Long term accounts receivable............................ 43,315 --
Construction in progress and capacity available for
sale(7)................................................. 1,003,056 518,519
Deferred finance and organization costs, net of
accumulated amortization................................ 45,757 25,934
Investment in affiliates(8).............................. 177,334 --
---------- --------
$572,197
Total assets............................................ $2,639,177
========== ========
Current liabilities..................................... $ 251,890 $ 90,817
Long term debt.......................................... 269,598 162,325
Senior notes............................................ 796,495 150,000
Long term deferred revenue.............................. 25,325 --
Obligations under inland service agreements and capital
leases ................................................ 24,520 3,009
Deferred income taxes................................... 9,654 --
---------- --------
Total Liabilities....................................... 1,377,482 406,151
Mandatorily redeemable preferred stock(9)................ 487,375 91,925
Shareholders' equity.....................................
Common stock............................................ 4,328 3,258
Treasury stock.......................................... (209,415) --
Other shareholders' equity.............................. 1,067,470 71,023
Accumulated deficit..................................... (88,063) (160)
---------- --------
Total shareholders' equity............................... 774,320 74,121
---------- --------
Total liabilities and shareholders' equity............... $2,639,177 $572,197
========== ========
</TABLE>
- --------
(1) During the year ended December 31, 1998, we recognized $37 million from a
total of $94 million of stock related expense relating to stock options
and rights to purchase stock, issued during such period, which entitle the
holders to purchase common stock. The remaining $57 million will be
recognized as follows: $28 million in 1999, $21 million in 2000 and $8
million in 2001.
(2) Includes a charge for the termination of the advisory services agreement
as of June 30, 1998. See Item 13. GCL acquired the rights from those
entitled to fees payable under the advisory services agreements in
consideration for the issuance of common stock having an aggregate value
of $135 million and the cancellation of approximately $3 million owed to
GCL under a related advance agreement. As a result of this transaction,
GCL recorded a non-recurring charge in the approximate amount of $138
million during the year ended December 31, 1998. In addition, we
recognized approximately $2 million of advisory fees incurred prior to
termination of the contract.
(3) Reflects income taxes on profits earned during the year ended December 31,
1998 in jurisdictions where we have a taxable presence. A significant
portion of our operating losses have been incurred in non-taxable
jurisdictions and, therefore, these operating losses cannot be applied to
offset our future taxable earnings.
(4) On May 18, 1998, a portion of the proceeds from the issuance of the GCH
Senior Notes was used to repurchase the 12% Senior Notes Due 2004 of
Global Telesystems Holdings Ltd. ("GTH") , an indirect subsidiary of GCL.
We recognized an extraordinary loss of $20 million in connection with this
repurchase, comprising a repurchase premium of approximately $10 million
and the write-off of approximately $10 million of unamortized deferred
financing costs.
(5) The preferred stock dividends for the year ended December 31, 1998 include
dividends from both the GCH Preferred Stock and the 14% senior increasing
rate redeemable exchangeable preferred stock of GTH (the "GTH Preferred
Stock"). The GCH Preferred Stock is mandatorily redeemable on December 1,
2008 and exchangeable at any time by GCH into notes at the option of GCH.
The GCH Preferred Stock entitles the holders to receive cumulative
compounding dividends at an annual rate of 10 1/2%. The dividends can be
paid in cash or prior to June 1, 2002 with the issuance of additional GCH
Preferred Stock at the option of GCH.
The holders of the GTH Preferred Stock were entitled to receive cumulative,
compounding dividends at an initial annual rate of 14%. Preferred stock
dividends include cumulative 14% dividends and amortization of the discount
and issuance costs. Effective June 17, 1998, we used proceeds from the GCH
Senior Notes to redeem all outstanding GTH Preferred Stock. All dividends
prior to the redemption had been paid through the issuance of additional
preferred stock and charged against additional paid-in capital.
(6) As a result of the redemption of the GTH Preferred Stock, we incurred a
one time $34 million charge against additional paid-in capital. The charge
consisted of: (i) a $16 million charge for redemption premium and (ii) a
write-off of $18 million of unamortized discount and unamortized deferred
financing costs.
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<PAGE>
(7) Construction in progress and capacity available for sale includes direct
and indirect expenditures for construction of AC-1 and other systems and
is stated at cost. Included are costs incurred under (i) the construction
contracts; (ii) advisory, consulting and legal fees; (iii) interest
(including amortization of debt issuance costs incurred during the
construction phase); and (iv) other costs necessary for developing AC-1
and other systems. Additionally, we granted the PCG Warrants to PCG, a
shareholder, for the PC-1, MAC and PAC systems and related rights. The
$275 million value of the common stock was allocated to Construction in
Progress in the amount of $112 million and as Investment in affiliates in
the amount of $163 million.
(8) Includes $163 million as of December 31, 1998, as described above,
representing the value of the PCG Warrants applicable to PCL.
(9) The December 31, 1998 amount includes (i) $500 million of GCH Preferred
Stock, less (ii) $17 million reflecting the unamortized issue costs, plus
$4 million of accrued dividends. The December 31, 1997 amount includes (i)
$100 million of the GTH Preferred Stock originally issued, plus (ii) $10
million of GTH Preferred Stock issued as dividends thereon, less (iii) $19
million reflecting the unamortized discount and issue costs, plus $1
million of accrued dividends. We redeemed all of the outstanding GTH
Preferred Stock effective as of June 17, 1998.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We are the world's first independent global provider of state-of-the-art
Internet and long distance telecommunication facilities and related services
utilizing a network of undersea and terrestrial digital fiber optic cable
systems. We started development in March 1997, when we entered into a contract
with TSSL for the design, development, construction and installation of AC-1,
and obtained commitments for its initial financing.AC-1, our first fiber optic
cable system, is a four fiber pair self-healing ring connecting (i) the United
States to the United Kingdom, (ii) the United Kingdom to the Netherlands and
Germany, (iii) the Netherlands to Germany and (iv) Germany to the United
States. The first segment of AC-1, the United States to United Kingdom route,
was completed and commenced operations in May 1998, and the entire AC-1 system
commenced operations in February 1999.
Until May 1998, when the United States to United Kingdom segment of AC-1
reached RFS, we were a development stage company and since inception have been
involved in the planning, financing, marketing, organization, development,
design and construction of the AC-1 system and seven other planned systems
(AC-2, PC-1, MAC, PAC, SAC, PEC and GAL). We achieved a number of significant
milestones, including (i) the recruitment of experienced professionals in
undersea cable and telecommunications operations, (ii) the signing of
construction contracts on AC-1, PC-1, MAC and PAC, (iii) the execution of the
AC-1, PC-1 and MAC credit facilities and the execution of a financing
commitment with respect to PAC, (iv) completion of the AC-1 ring, (v) the
issuance of $800 million in principal amount of GCH Senior Notes, (vi) the
initial public offering of our common stock, (vii) the issuance of $500
million in principal amount of GCH Preferred Stock and (viii) the execution of
$1,052 million of CPAs for undersea and terrestrial capacity and dark fiber
sales.
Revenues and Deferred Revenues
Sales Revenue and Deferred Revenue
Customers may enter into CPAs to purchase an IRU in units of capacity on any
of our fiber optic cable systems. The purchase price for such capacity is non-
refundable once the applicable segment purchased is RFS. The IRU purchased
entitles the customer to all rights and obligations of ownership of the
capacity for a period of 25 years after the system RFS date. Where available
on a specific system, our CPAs generally provide that the system will have
self-healing ring capability, which means that, in the event of interruption,
capacity on any segment of a system will be instantaneously restored either on
another system segment or within the same segment so that the same point-to-
point connectivity is maintained.
Revenues from the sale of capacity are recognized in the period that the
rights and obligations of ownership transfer to the purchaser, which occurs
when (i) the purchaser obtains the right to use the capacity, which can only
be suspended if the purchaser fails to pay the full purchase price or fulfill
its contractual obligations, (ii) the purchaser is obligated to pay OA&M costs
and (iii) the segment of the system related to the capacity purchased is
available for service. Customers who have entered into CPAs for capacity have
paid deposits toward the purchase price, and such amounts have been included
as deferred revenue in the consolidated financial statements. In some CPAs,
customers who have purchased capacity on systems prior to the date the system
has self-healing ring capacity have contractually required full self-healing
ring capability as a legal condition which, if not satisfied, would enable
them to terminate the CPA and requires us to refund capacity payments.
Operating Lease Revenue and Deferred Revenue
In addition to sales type leases, we may enter into operating lease
agreements to lease capacity on our systems. These agreements may grant the
customer a right to use capacity for periods of time which may be
substantially less than the design life of the capacity (generally 25 years).
We will amortize revenues from these operating lease agreements over the lives
of the agreements, with cash received but not yet recognized as operating
revenues, recorded in the consolidated financial statements as deferred
revenue.
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<PAGE>
OA&M Revenue
Pursuant to the terms of our existing CPAs, we are obliged to use
commercially reasonable efforts to cause the AC-1 system to be maintained in
efficient working order and in accordance with industry standards. In exchange
for the operating, administration and maintenance services provided by ACL
through the OA&M agreement with TSSL, customers are obligated for the term of
their IRU to pay for their allocable share of the costs for operating and
maintaining the system. Customers appoint members to a System Advisory
Committee, which is charged with the responsibility of directing the
operations and maintenance of AC-1. Customers pay 110% of ACL's cost to
operate and maintain the system based on their pro-rata share of total
capacity subject to annual maximum amounts per circuit purchased of $250,000
per transatlantic circuit and $50,000 per European circuit. Each customer's
pro-rata share is effectively calculated by taking the weighted average of
their purchased capacity over total capacity sold multiplied by 110% of actual
costs incurred to customers quarterly in advance based on the prior year's
actual costs. These amounts are non-refundable, and should a customer fail to
make an OA&M payment, ACL may suspend all rights to capacity granted under the
IRU. Undersea OA&M revenues are recognized in the period that the related
services are provided. On an annual basis, the actual OA&M costs we incur are
accumulated and an adjustment is made to true up actual OA&M revenues so that
they equal 110% of actual costs incurred, provided specified contractual
limits have not been reached.
Construction in Progress; Capacity Available for Sale; Cost of Capacity Sold
Construction costs incurred with respect to each segment of a cable system
are reflected as "Construction in Progress" in our consolidated balance sheets
until a segment becomes operational, at which time such costs are reflected as
Capacity Available for Sale. Capacity Available for Sale is recorded at the
lower of cost or fair value less cost to sell and is charged to Cost of
Capacity Sold in the period the related revenues are recognized. Fair value of
capacity is derived from a third party consultant's market study of expected
sales of capacity.
We record the cost of acquiring terrestrial capacity in Capacity Available
for Sale in amounts equal to the present value of future payment obligations
associated with the acquisition of such terrestrial capacity (excluding from
such payments amounts attributable to operations and maintenance costs).
Construction in Progress includes direct expenditures for construction of
systems, including advisory, consulting and legal fees, interest during
construction and amortized debt issuance costs incurred during the
construction phase.
Cost of sales
Cost of undersea sales in any period is calculated based on the ratio of
capacity revenues recognized in the period to total expected capacity revenues
over the life of the systems multiplied by the total costs incurred to
construct the system. This calculation of the cost of sales amount matches
costs with the value of each sale relative to total expected revenues. Until
the entire system is completed, for purposes of calculating cost of sales, the
total system costs incurred will include an estimate of remaining costs to be
incurred to complete the entire system. The calculation of cost of undersea
sales is based on total system cost including both the initial system cost and
the cost of system upgrades that management has the intent and ability to
complete, provided the need for such upgrades is supported by an independent
consultant's revenue forecast. Changes in management's estimate of the total
expected revenues to be derived from sales of capacity will result in
adjustments to the calculation of cost of sales. These adjustments will be
recorded on a prospective basis over future periods commencing with the period
during which management revises its estimate. The cost of terrestrial capacity
directly related to undersea sales is charged to cost of sales in the period
that the related revenue is recognized.
Operating type lease cost of sales
Costs relating to operating type lease revenue will be classified as a
depreciable asset and depreciated over the estimated useful life of the
capacity.
27
<PAGE>
Operating Expenses
In addition to cost of capacity sold, our operating expenses principally
comprise of sales and marketing, operations and maintenance, general and
administrative and network development costs. Costs relating to the evaluation
of possible additional systems are expensed as incurred.
Results of Operations for the Year Ended December 31, 1998 and the Period from
March 19, 1997 (Date of Inception) to December 31, 1997
Revenues
During the year ended December 31, 1998, we executed commitments with our
customers to purchase capacity on our systems plus the sale of dark fiber on
PEC totaling $911 million, bringing the total since inception to $1,052
million. Of this amount, we recognized revenues of $418 million on sales of
capacity relating to AC-1 for the year ended December 31, 1998, in addition to
revenues from operations and maintenance services of $6 million. The remaining
$634 million of capacity sales has not yet been reflected as revenue in the
consolidated financial statements because either the segment has not reached
RFS or the purchaser has not obtained the right to use the capacity. During
the year ended December 31, 1998, we entered into CPAs with 33 international
telecommunications carriers and sold approximately 35% of the sales capacity
of 512 circuits on the AC-1 system.
Expenses
Cost of capacity sold. For the year ended December 31, 1998, we recognized
$178 million in cost of capacity sold, resulting in a gross margin on capacity
sales of 57%. Cost of capacity sold for the year ended December 31, 1998 also
includes $38 million relating to terrestrial capacity sold which we had
purchased from third parties. We calculate undersea cost of capacity sold for
AC-1 based on the ratio of the period's actual revenue to total expected
revenues, assuming minimum projected sales capacity of 512 circuits,
multiplied by the construction cost of the system. This calculation of cost of
sales matches costs with the relative value of each sale. There were no sales
or related costs recognized during the period from March 19, 1997 (Date of
Inception) to December 31, 1997, as we were in our development stage.
Operations, administration and maintenance ("OA&M"). We incurred OA&M costs
of $18 million during the year ended December 31, 1998. We entered into an
agreement with TSSL relating to operations, administration and maintenance of
AC-1, which limits our total OA&M expense for the system. We anticipate that
our OA&M costs will be largely recovered through charges to our customers
under the terms of CPAs. There were no OA&M costs during the period from March
19, 1997 (Date of Inception) to December 31, 1997, as we were in our
development stage.
Sales and marketing. During the year ended December 31, 1998, we incurred
sales and marketing expenses of $26 million, including selling commissions of
$20 million incurred on capacity sales recognized during this period. During
the period from March 19, 1997 (Date of Inception) to December 31, 1997, we
incurred sales and marketing costs of approximately $1 million. The increase
from 1997 was due to additions in personnel and occupancy costs, plus
marketing, commissions paid and other promotional expenses to support our
rapid growth.
Network development. We incurred network development costs during the year
ended December 31, 1998 of $11 million relating to the development of systems.
During the period from March 19, 1997 (Date of Inception) to December 31,
1997, these costs were $0.1 million. The increase from 1997 was due to
additional personnel, and costs to explore new projects.
General and administrative. General and administrative expenses totaled $27
million during the year ended December 31, 1998 and were comprised principally
of salaries, employee benefits and recruiting fees for staffing of multiple
systems, travel, insurance costs and rent expenses, plus depreciation and
amortization. During the period from March 19, 1997 (Date of Inception) to
December 31, 1997, we incurred general and administrative costs of $2 million.
28
<PAGE>
Termination of Advisory Services Agreement with PCG Telecom Services LLC. In
connection with the development and construction of AC-1, we entered into an
Advisory Services Agreement with PCG Telecom Services LLC, an affiliate,
providing for the payment by us of an advisory fee of 2% of the gross revenues
of ACL over a 25 year term. Our Board of Directors also approved similar
advisory fees and authorized us to enter into similar agreements with respect
to other cable systems under development by us. We have acquired the rights of
the persons entitled to the fees payable under these agreements in
consideration for the issuance to such persons of shares of our common stock,
which had at the time of issuance an aggregate value of $135 million, and the
cancellation of approximately $3 million owed to us under a related advance
agreement. In addition, we recognized approximately $2 million of advisory
fees incurred prior to termination of the contract.
Stock related expense. Through December 31, 1998, we recorded as a charge to
paid-in capital $94 million of unearned compensation relating to awards under
our stock incentive plan plus the grant of certain economic rights and options
to purchase common stock granted to a senior executive. The unearned
compensation is being recognized as an expense over the vesting period of
these options and economic rights.
For the year ended December 31, 1998, we recognized as an expense $31
million of stock related compensation relating to our stock incentive plan and
$6 million for the vested economic rights to purchase common stock and $2
million in respect of shares of common stock issued during the year. The
remaining $57 million of unearned compensation will be recognized as follows:
$28 million in 1999, $21 million in 2000 and $8 million in 2001. Our stock
incentive plan commenced in January 1998, and therefore no issuances were made
during the period from March 19, 1997 (Date of Inception) to December 31,
1997.
Equity in loss of Affiliates. During 1998, we entered into joint venture
agreements to construct and operate PC-1 and GAL. PC-1 is owned and operated
by PCL. We have an economic interest in PCL represented by a 50% direct voting
interest and, through one of the joint venture partners, a further 8% economic
non-voting interest. We have a 49% interest in Global Access Ltd., which
operates GAL. Our equity in the loss of PC-1 for the year ended December 31,
1998 was $3 million.
Interest Income and Interest Expense
Interest income. We reported interest income of $30 million during the year
ended December 31, 1998 and $3 million during the period from March 19, 1997
(Date of Inception) to December 31, 1997. Such interest income represents
earnings on cash raised from financings, the IPO, the issuance of the GCH
Preferred Stock, operations and CPA deposits.
Interest expense. During the year ended December 31, 1998, we incurred $93
million in interest costs, including the amortization of finance costs and
debt discount. Of this amount, we capitalized to construction in progress
interest of $50 million and expensed $43 million. During the period from March
19, 1997 (Date of Inception) to December 31, 1997, we incurred interest
expense of $10 million, which was capitalized to construction in progress.
Provision for income taxes
The income tax provision of $33 million for the year ended December 31, 1998
provides for taxes on profits earned from capacity sales and OA&M revenues
where our subsidiaries have a presence in taxable jurisdictions. During the
period from March 19, 1997 (Date of Inception) to December 31, 1997, we
incurred operating losses, which relate to non-taxable jurisdictions and
therefore cannot be applied against future taxable earnings. Accordingly, no
tax provision or deferred tax benefit was recorded as of December 31, 1997.
Extraordinary item
During May 1998, we recognized an extraordinary loss of $20 million in
connection with the repurchase of GTH's outstanding senior notes ("GTH Senior
Notes"), comprising of a premium of $10 million and a write-off of $10 million
of unamortized deferred financing costs.
29
<PAGE>
Preferred stock dividends
During the year ended December 31, 1998, we recorded preferred stock
dividends of approximately $13 million. Preferred stock dividends for the
period from March 19, 1997 (Date of Inception) to December 31, 1997 were $13
million. Of the $13 million recorded in 1998, $4 million relates to the GCH
Preferred Stock issued during December 1998.
Redemption of preferred stock
The redemption of GTH's outstanding preferred stock ("GTH Preferred Stock")
occurred in June 1998 and resulted in a $34 million charge against equity.
This amount was comprised of a $16 million redemption premium and a write-off
of $18 million of unamortized discount and issuance costs. The redemption
premium and write-off of unamortized discount and issuance costs are treated
as a deduction to arrive at net loss applicable to common shareholders in the
consolidated statements of operations.
Net loss and Net loss applicable to common shareholders
We incurred a net loss of $88 million for the year ended December 31, 1998,
compared to a net loss of $0.2 million in the period from March 19, 1997 (Date
of Inception) to December 31, 1997. The net loss for the year ended December
31, 1998 reflects an extraordinary loss on retirement of the GTH Senior Notes
of $20 million and a non-recurring charge of $140 million relating to the
termination of the Advisory Services Agreement. Our net income before these
items was $72 million.
During the year ended December 31, 1998, we reported a net loss applicable
to common shareholders of $135 million. This loss reflects preferred stock
dividends of $13 million and the redemption cost of GTH Preferred Stock of $34
million. During the period from March 19, 1997 (Date of Inception) to December
31, 1997, we incurred a net loss applicable to common shareholders of $13
million after GTH Preferred Stock dividends of $13 million.
Balance Sheet as of December 31, 1998
Restricted cash and cash equivalents (current and long term). At December
31, 1998, current and long-term restricted cash and cash equivalents included:
(i) $231 million restricted for PC-1 construction, (ii) $89 received pursuant
to CPAs on AC-1 which may be used only in accordance with the terms of the AC-
1 Credit Facility, (iii) $66 million restricted for MAC construction, (iv) $38
million reserved for funding future interest payable on the GCH Senior Notes
and (v) $21 million restricted for miscellaneous items.
Capacity available for sale, construction in progress and investment in
affiliates. Our investment in capacity available for sale, construction in
progress and investment in affiliates totaled approximately $1,180 million as
of December 31, 1998. This amount includes the value of system development
contributed to us by PCG. Upon our IPO each PCG Warrant then outstanding was
converted into a fraction of our common stock based upon the ratio of the per
share valuation at the time of conversion less the per share exercise price of
the warrants, divided by the per share valuation at the time of conversion,
together with a new warrant ("New PCG Warrants") to purchase the remaining
fraction of shares at an exercise price equal to $9.50 (the price to public
per share of the IPO). These amounts increased additional paid-in capital by
$275 million and was allocated on a pro rata basis to PCL, PAC and MAC
according to the estimated cost of each system. Accordingly, we recorded $163
million as an investment in PCL and $64 million and $48 million as
Construction in Progress for PAC and MAC, respectively.
Long term debt and senior notes. The long term debt of $270 million as of
December 31, 1998 represents primarily the long term portion of our
outstanding balance on the AC-1 Credit Facility. The senior notes balance of
$796 million represents the net proceeds from our issuance of the GCH Senior
Notes, adjusted for the unamortized amount of the debt discount.
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<PAGE>
Mandatorily redeemable preferred stock. The mandatorily redeemable preferred
stock of $487 million as of December 31, 1998 represents the net proceeds
received from our $500 million offering of GCH Preferred Stock offering during
December 1998, less $17 million in fees and issuance costs plus $4 million in
accrued dividends. These fees and issuance costs are being amortized over the
term of the obligation.
During the year ended December 31, 1998, we reimbursed an amount of $7
million to PCG, a shareholder, relating to system evaluation costs incurred by
PCG. This amount was treated as a dividend and charged against additional
paid-in capital.
Liquidity and Capital Resources
Our principal capital expenditures involve the construction of the Global
Crossing Network as well as purchases of terrestrial capacity. As of
December 31, 1998, we incurred approximately $750 million of capital
expenditures for AC-1. Furthermore, we entered into a $50 million contract
with TSSL to upgrade AC-1 capacity. As of December 31, 1998, the remaining
unpaid construction costs of $75 million will be paid from cash on hand. As of
December 31, 1998, we had borrowings outstanding of $267 million under the
AC-1 Credit Facility.
In addition to AC-1, we are currently developing seven additional systems
(AC-2, PC-1, MAC, PAC, SAC, PEC and GAL) and estimate the total construction
cost of such systems to be approximately $4,945 million (excluding costs of
potential future upgrades and the amounts capitalized with respect to the PCG
Warrants, but including financing and operating costs while the systems are
under construction).
We entered into a supply contract with TSSL to construct PC-1 for which the
estimated cost is $1,200 million. Equity investments in PC-1 will be
$400 million, of which we will provide $231 million and our joint venture
partners will provide the balance. We placed our equity portion in escrow and
included it in restricted cash and cash equivalents. Effective July 1998, we
entered into a credit agreement for $850 million ($800 million for
construction and $50 million for the initial upgrade) of non-recourse project
debt for PC-1.
We also entered into supply contracts with Alcatel and TSSL requiring
payments of approximately $243 million to construct MAC (the total project
cost will also include approximately $87 million for financing and start-up
costs while MAC is under construction). In November 1998, we obtained
$260 million of non-recourse bank financing for MAC. The remaining costs will
be funded from cash on hand.
Further, we entered into a supply contract with TSSL requiring payments of
approximately $418 million to construct PAC (the total project cost will also
include approximately $77 million for financing and start-up costs while PAC
is under construction). During July 1998, we signed a commitment letter for up
to $300 million of non-recourse project debt financing for this system. The
balance will be funded from cash on hand.
In March 1999, we announced AC-2 and SAC, for which the construction costs
are estimated to be $750 million and $1,130 million, respectively. We expect
to finance such costs through a combination of commercial bank borrowings,
non-recourse debt, vendor financing and cash on hand.
During October 1998, we announced the development of PEC for which the
construction costs are estimated to be $850 million. A portion of these costs
will be paid from cash on hand. Further, we expect to raise additional capital
required to finance this system through a combination of commercial bank
borrowings, non-recourse project debt, vendor financing and sales of dark
fiber. In this regard, we signed an agreement with Cable & Wireless for the
sale of more than $100 million of dark fiber on PEC. During January 1999, we
entered into a supply contract with Lucent Technologies Inc. to provide fiber
and equipment for this system and, as part of this contract, Lucent will also
furnish financing.
Lastly, we entered into a joint venture contract with Marubeni to construct
GAL at an estimated cost of $190 million. We have funded our 49% interest in
this system from cash on hand.
Because the cost of developing and constructing our systems, as well as
operating our business, will depend on a variety of factors (including our
ability to successfully negotiate construction supply contracts at favorable
31
<PAGE>
prices, our ability to generate sufficient sales, changes in the competitive
environment of the markets we serve, the levels of participation by our joint
venture partners, and changes in technology), actual costs and revenues may
vary, possibly materially, from expected amounts. Such variations may impact
our future capital requirements. The development of additional systems, which
we may pursue, would lead to additional future capital requirements.
Cash provided by operating activities was $209 million for the year ended
December 31, 1998 and $5 million for the period from March 19, 1997 (Date of
Inception) to December 31, 1997, which principally represents cash received
from deposits and payments for activated capacity pursuant to signed CPAs,
plus interest income, less sales and marketing, network development and
general and administrative expenses paid.
During the first quarter of 1999, we will adopt Statement of Position 98-5,
"Reporting on the Cost of Start-Up Activities," issued by the American
Institute of Certified Public Accountants. This statement requires that
certain start-up expenditures previously capitalized during system development
must now be expensed; however, our cash flow will not be affected.
Cash provided by financing activities was $1,027 million for the year ended
December 31, 1998, primarily represents borrowings under the AC-1 and MAC
Credit Facilities, proceeds from the issuance of GCH Senior Notes, the GCH
Preferred Stock and our IPO, less amounts paid for finance and organization
costs, the issuance of common and preferred stock, the repayment of long term
debt, the redemption of the GTH Preferred Stock, the retirement of the GTH
Senior Notes and the increase in amounts held in restricted cash and cash
equivalents. At December 31, 1998, our working capital amounts to
$750 million.
During May 1998, we obtained $796 million in net proceeds from the issuance
of the GCH Senior Notes due 2008. These proceeds were used (i) to purchase all
of the $150 million aggregate principal amount of outstanding GTH Senior
Notes, (ii) to redeem all of the $100 million aggregate principal amount of
outstanding GTH Preferred Stock, (iii) to repay in full the $67 million then
outstanding under a bridge credit facility, (iv) to make approximately
$315 million of equity investments in PC-1, MAC and PAC and (v) for general
corporate purposes, including $74 million to fund a one-year interest reserve
on the GCH Senior Notes. In August 1998, we completed our IPO, from which we
received net proceeds of $391 million, and during December 1998, we issued GCH
Preferred Stock, from which we received net proceeds of approximately
$483 million. We have or intend to use these proceeds for (i) construction of
the Global Crossing Network, (ii) investment in telecommunications companies
and ISPs, (iii) investments in GAL and (iv) general corporate purposes. As of
December 31, 1998, unused proceeds were invested in short-term, interest-
bearing U.S. Government securities and certain other short term, investment
grade securities.
Cash provided by financing activities of $425 million for the period from
March 19, 1997 (Date of Inception) to December 31, 1997, relates to net
proceeds from the issuance of common stock, GTH Preferred Stock and GTH Senior
Notes, and borrowings under the AC-1 Credit Facility, less finance and
organization costs related to the issuance of common and preferred stock and
the increase in proceeds held in restricted cash and cash equivalents. At
December 31, 1997, our working capital deficit was $63 million.
Cash used in investing activities was approximately $431 million and
$429 million for the year ended December 31, 1998, and the period from
March 19, 1997 (Date of Inception) to December 31, 1997, respectively, and
represents cash paid for construction in progress, capacity available for sale
and investments in affiliates.
We have extended financing to a small number of customers in connection with
certain CPAs. The financing terms provide for installment payments over a
period of up to four years. We believe that our extension of financing to our
customers will not have a material effect on our liquidity.
We believe that our current cash and cash equivalents, credit facilities and
cash generated from operations will satisfy our expected working capital and
capital expenditure requirements through December 31, 1999.
32
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Inflation
Management does not believe that its business is impacted by inflation to a
significantly different extent than the general economy.
Year 2000 Compliance
We believe that our computer information systems are Year 2000 ("Y2K")
compliant. We have established a Y2K compliance task force. The task force has
identified no potential material adverse effect on the two core components of
our services: (i) transmission of capacity and (ii) management and maintenance
of the transmission paths. Our anticipated worst case scenario is failure of
our Network Operations Center. In the event the worst case scenario occurs
management of the network can be performed at the terminal stations with the
network element managers or at the equipment bays with the craft interface
terminal. No or minimal additional cost would be incurred as we have already
included the cost for back-up management of the network into the AC-1 business
case analysis.
We are also subject to external forces that generally affect industry and
commerce, such as utility, transportation or other infrastructure failures and
interruptions. In addition to reviewing our own systems, we are submitting
requests to third party service providers to obtain information as to their
compliance efforts. We have received assurances from our major suppliers, TSSL
and Lucent, stating Y2K compliance status of their respective systems
regarding AC-1 (our only active system at this time). In addition, we received
assurance from Alcatel, a supplier to MAC, that Alcatel is also Y2K compliant.
In the event that any of our material third party service providers do not
successfully and timely achieve Y2K compliance, our business or operations
could be adversely affected. We are developing contingency plans to address
any potential Y2K compliance failure due to significant third party failures,
although no such failure is expected. To date, response from material third
party service providers has not shown any of them to be non-compliant with Y2K
readiness plans.
We believe that costs of addressing our Y2K compliance will not have a
material adverse impact on our financial condition or results of operations.
Euro Conversion
On January 1, 1999, a single currency called the Euro was introduced in
Europe. Eleven of the fifteen member countries of the European Union agreed to
adopt the Euro as their common legal currency on that date. Fixed conversion
rates between these countries' existing currencies (legacy currencies) and the
Euro were established as of that date. The legacy currencies are scheduled to
remain legal tender in these participating countries between January 1, 1999
and January 1, 2002 (not later than July 1, 2002). During this transition
period, parties may settle transactions using either the Euro or a
participating country's legacy currency.
As most of our sales and expenditures are denominated in United States
dollars, management does not believe that the Euro conversion will have a
material adverse impact on our business or financial condition. We do not
expect the cost of system modifications to be material and we will continue to
evaluate the impact of the Euro conversion.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The table below provides information about our market sensitive financial
instruments and constitutes a "forward-looking statement." Our major market
risk exposure is changing interest rates. Our policy is to manage interest
rates through use of a combination of fixed and floating rate debt. Interest
rate swaps may be used to adjust interest rate exposures when appropriate,
based upon market condition.
<TABLE>
<CAPTION>
Fair Value
Expected maturity dates 1999 2000 2001 2002 2003 Thereafter Total December 31, 1998
- ----------------------- ------- ------- -------- ------- ----- ---------- -------- -----------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEBT
Non Current -- US$
denominated
AC-1 Credit Facility.... $ 6,393 $99,555 $141,600 $19,251 -- -- $266,799 $266,799
Average interest rates
-- variable........... (1) (1) (1) (1)
MAC Credit Facility..... -- -- 9,192 -- -- -- 9,192 9,192
Average interest rates
-- variable........... (2) (2) (2) (2)
Senior notes............ -- -- -- -- -- 800,000 800,000 834,000
Average interest rates
-- fixed.............. 9.6%
Mandatorily Redeemable
Preferred Stock........ -- -- -- -- -- 500,000 500,000 484,375
Average interest rates
-- fixed.............. 10.5%
Obligations under ISAs
and capital lease
obligations
US$ denominated......... 13,934 9,654 1,076 1,075 1,073 20,826 47,638 47,638
Average interest rates
-- fixed.............. 10.5% 10.5% 10.5% 10.5% 10.5% 10.5%
Sterling, German Mark
and Dutch Guilder
denominated............ 4,367 3,974 4,437 4,602 4,775 143,115 165,270 165,270
Average interest rates
-- fixed.............. 10.8% 10.8% 10.8% 10.8% 10.8% 10.8%
DERIVATIVE INSTRUMENTS
Interest rate swap
floating for fixed - ..
Contract notional
amount (3)............ 200,000 -- -- -- -- -- 200,000 26
Fixed rate assumed by
GCL................... 5.8%
Variable rate assumed
by counterparty....... (4)
</TABLE>
- --------
(1) The interest rate is one month LIBOR plus 2.0% which was 7.0% as of
December 31, 1998.
(2) The interest rate is one month LIBOR plus 3.0% which was 8.0% as of
December 31, 1998.
(3) Expired January 31, 1999.
(4) The interest rate is one month LIBOR.
Foreign Currency Risk
Most of our sales and expenditures are denominated in United States dollars.
Assets and liabilities denominated in foreign currencies at year end are
translated into United States dollars at the rate of exchange at the balance
sheet date and income and expense accounts are translated at the average
exchange rates during the period. Resulting translation adjustments are
recorded directly to a separate component of shareholders' equity. Such
translation adjustments were not material as of and for the year ended
December 31, 1998 and as of and for the period from March 19, 1997 (Date of
Inception) to December 31, 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index included on page F-1, Index to Consolidated Financial
Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
34
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the
directors and executive officers of GCL.
The Bye-laws of GCL provide for a Board of Directors consisting of up to 18
members divided into three classes with terms of three years each. Mr. Casey,
Mr. Brown, Mr. Porter, Mr. Phoenix, Mr. Levine and Mr. Conway were elected as
Class A Directors, with a term expiring in 1999; Mr. Cook, Mr. Lee, Mr. Raben,
Mr. Kent and Mr. Scanlon were elected as Class B Directors, with a term
expiring in 2000; and Mr. Winnick, Mr. Bloom, Mr. Kehler, Mr. Weinberger, Mr.
Steed and Mr. Ogasawara were elected as Class C Directors, with a term
expiring in 2001.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gary Winnick............ 51 Co-Chairman of the Board and Director
Lodwrick M. Cook........ 70 Co-Chairman of the Board and Director
Thomas J. Casey......... 46 Managing Director, Vice Chairman of the Board and Director
Jack M. Scanlon......... 57 Vice Chairman of the Board and Director
Robert Annunziata....... 50 Chief Executive Officer
David L. Lee............ 49 President, Chief Operating Officer and Director
Barry Porter............ 41 Senior Vice President and Director
Abbott L. Brown......... 55 Senior Vice President and Director
Dan J. Cohrs............ 45 Senior Vice President and Chief Financial Officer
James C. Gorton......... 37 Senior Vice President, General Counsel and Secretary
Robert B. Sheh.......... 59 Executive Vice President
Jay R. Bloom............ 43 Director
William E. Conway....... 49 Director
Dean C. Kehler.......... 42 Director
Geoffrey J.W. Kent...... 56 Director
Jay R. Levine........... 42 Director
Toshiaki Ogasawara...... 67 Director
William P. Phoenix...... 42 Director
Bruce Raben............. 45 Director
Michael R. Steed........ 49 Director
Hillel Weinberger....... 45 Director
</TABLE>
Gary Winnick--Mr. Winnick, founder of GCL, has been Co-Chairman of the Board
of GCL since January 1998 and, prior thereto, was Chairman of the Board since
March 1997. Mr. Winnick is the founder and has been the Chairman and Chief
Executive Officer of Pacific Capital Group ("PCG") since 1985, having been in
the principal equity investment and merchant banking business since that time.
Lodwrick M. Cook--Mr. Cook has been Co-Chairman of the Board of GCL since
January 1998 and Vice Chairman and Managing Director of PCG since 1997. Prior
to joining PCG, Mr. Cook spent 39 years at Atlantic Richfield Co., serving as
President and Chief Executive Officer from 1985 to 1995 and as Chairman of the
Board of Directors from 1986 to 1995, when he became Chairman Emeritus. Mr.
Cook is also a member of the Board of Directors of Castle and Cooke, Litex and
Ocean Energy, Inc.
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<PAGE>
Thomas J. Casey--Mr. Casey was elected Vice Chairman of the Board of GCL in
December 1998 and was appointed Managing Director of GCL in September 1998.
Prior to joining GCL, Mr. Casey was co-head of Merrill Lynch & Co.'s Global
Communications Investment Banking Group for three years. From 1990 to 1995,
Mr. Casey was a partner and co-head of the telecommunications and media group
of the law firm of Skadden, Arps, Slate, Meagher and Flom.
Jack M. Scanlon--Mr. Scanlon has been Vice Chairman of the GCL Board of
Directors since March 1999 and has been a director of GCL since April 1998.
Mr. Scanlon was Chief Executive Officer of GCL from April 1998 to March 1999.
Prior to joining GCL, Mr. Scanlon was President and General Manager of the
Cellular Networks and Space Sector of Motorola Inc. and had been affiliated
with Motorola Inc. since 1990. Mr. Scanlon was Chief Operating Officer of
Cambridge Technology Group from 1988 to 1990 and, prior thereto, spent 24
years with AT&T and Bell Laboratories, rising to Group Vice President at AT&T.
Robert Annunziata--Mr. Annunziata has been Chief Executive Officer of GCL
since March 1999. From September 1998 to February 1999, Mr. Annunziata was
President of AT&T's $22 billion business services group, responsible for the
AT&T global network. Prior thereto, Mr. Annunziata was Chairman and Chief
Executive Officer of the Teleport Communications Group from 1983 to 1998.
Prior to joining Teleport, Mr. Annunziata served 17 years at AT&T in a variety
of increasingly senior operations, sales and marketing positions.
David L. Lee--Mr. Lee has been President and Chief Operating Officer and a
director of GCL since March 1997. He has also been a managing director of PCG
since 1989. Prior to joining PCG, Mr. Lee was Group Vice President of Finance
and Acquisitions at TRW Information Systems Group.
Barry Porter--Mr. Porter is Senior Vice President, Corporate Development and
a director of GCL. Mr. Porter has been a director of GCL since 1997 and has
also been a managing director of PCG since 1993. From 1986 to 1993, Mr. Porter
was affiliated with Bear, Stearns & Co. Inc., rising to Senior Managing
Director in the investment banking department.
Abbott L. Brown--Mr. Brown is Senior Vice President, Corporate Affairs and a
director of GCL. Mr. Brown has been a director of GCL since 1997 and was a
managing director and Chief Financial Officer of PCG from 1994 to 1998. From
1990 through 1994, Mr. Brown was Executive Vice President, Chief Financial
Officer and a member of the board of directors of Sony Pictures Entertainment
Inc., a wholly-owned subsidiary of Sony Corporation. Prior thereto, Mr. Brown
was a partner in the international accounting firm of Price Waterhouse LLP.
Dan J. Cohrs--Mr. Cohrs has been Senior Vice President and Chief Financial
Officer of GCL since May 1998. From 1993 to 1998, Mr. Cohrs was affiliated
with GTE Corporation, rising to the position of Vice President and Chief
Planning and Development Officer in 1997. From 1990 to 1993, he was at
Northwest Airlines and served as Vice President of International Finance
(Tokyo, Japan); from 1986 to 1990, he was at the Marriott Corporation and
served in such capacities as Vice President of Financial Planning and
Acquisitions and Vice President of Project Finance; and from 1983 to 1986, he
was a Strategy and Financial Consultant at Marakon Associates.
James C. Gorton--Mr. Gorton became Senior Vice President and General Counsel
of GCL in July 1998 and Secretary of GCL in August 1998. From 1994 to 1998,
Mr. Gorton was a partner in the New York law firm of Simpson Thacher &
Bartlett, and had been associated with the firm since 1986. Mr. Gorton
received a J.D. degree from New York University Law School.
Robert B. Sheh--Mr. Sheh has been Executive Vice President -- Construction &
Operations since February 1999. From 1992 to 1998, Mr. Sheh served as
President and Chief Executive Officer of International Technology Corporation
and as Chairman and Chief Executive of Air & Water Technologies. From 1989 to
1992, Mr. Sheh served as President of The Ralph M. Parsons Company, a
worldwide engineering and construction company. Mr. Sheh was associated with
The Ralph M. Parsons Company for over 20 years.
36
<PAGE>
Jay R. Bloom--Mr. Bloom, a director of GCL since March 1997, is a managing
director of CIBC Oppenheimer Corp. ("CIBC Oppenheimer"), co-head of its High
Yield Group and co-head of CIBC World Markets High Yield Merchant Banking
Funds. Mr. Bloom also serves on the board of directors of Heating Oil
Partners, L.P., Consolidated Advisers Limited, L.L.C. and Morris Material
Handling, Inc. Prior to joining CIBC Oppenheimer in August 1995, Mr. Bloom was
a founder and managing director of The Argosy Group L.P. From 1984 to 1990,
Mr. Bloom was a managing director in the Mergers and Acquisitions Group of
Drexel Burnham Lambert Incorporated. Mr. Bloom was an investment banker
associated with Lehman Brothers Kuhn Loeb Incorporated from 1982 to 1984 and,
from 1981 to 1982, practiced law at Paul Weiss Rifkind Wharton & Garrison in
New York.
William E. Conway--Mr. Conway became a director of GCL in August 1998. Mr.
Conway has been a managing director of The Carlyle Group since 1987. Mr.
Conway was Senior Vice President and Chief Financial Officer of MCI
Communications Corporation from 1984, until he jointly founded The Carlyle
Group in August 1987. Mr. Conway serves as director to GTS Duratek, Inc.,
Nextel Communications, Inc. and Hownet International Corporation.
Dean C. Kehler--Mr. Kehler, a director of GCL since March 1997, is a
managing director of CIBC Oppenheimer and co-head of its High Yield Group. In
addition, Mr. Kehler is a member of CIBC's Investment Committee and co-head of
CIBC World Markets High Yield Merchant Banking Funds. Prior to joining CIBC
Oppenheimer in 1995, Mr. Kehler was a founder and managing director of The
Argosy Group. From 1985 to 1990, Mr. Kehler was a managing director in the
Mergers and Acquisitions Group, Co-Head of Merchant Banking and a member of
the Corporate Finance Executive Committee of Drexel Burnham Lambert
Incorporated. From 1979 to 1985, Mr. Kehler was an investment banker at Lehman
Brothers. Mr. Kehler serves on the board of directors of Booth Creek Group,
Inc., Telebanc Financial Corporation and Heating Oil Partners, L.P.
Geoffrey J.W. Kent--Mr. Kent, a director of GCL since August 1998, is
Chairman and Chief Executive Officer of the Abercrombie & Kent Group of
companies and has been associated with these companies since 1967.
Jay R. Levine--Mr. Levine, a director of GCL since March 1997, is a managing
director of CIBC Oppenheimer and manages the CIBC World Markets High Yield
Merchant Banking Funds. Prior to joining CIBC Oppenheimer in May 1997, from
September 1996 to April 1997, Mr. Levine was President of PPMJ Inc., a private
consulting firm that advised its clients on private equity investments. From
August 1990 to June 1996, Mr. Levine was a senior executive in the Morningside
and Springfield Group, Inc., a private investment company. Mr. Levine serves
as a director of Aircraft Service International Group, Consolidated Advisers
Limited, L.L.C., Heating Oil Partners, L.P. and Evercom, Inc.
Toshiaki Ogasawara--Mr. Ogasawara, a director of GCL since August 1998, has
been Chairman and Publisher of The Japan Times, Limited since 1985 and
President and Representative Director of Nifco Inc. since 1967. Mr. Ogasawara
serves as Chairman and Representative Director of FM Inter-Wave, Inc. and
Simmons Co. Ltd.
William P. Phoenix--Mr. Phoenix, a director of GCL since March 1997, is a
managing director of CIBC Oppenheimer and co-head of Credit Capital Markets.
Prior to joining CIBC Oppenheimer in 1995, Mr. Phoenix had been the Managing
Director of CIBC since 1982. Mr. Phoenix serves as a director of the
Electrolux Corporation.
Bruce Raben--Mr. Raben, a director of GCL since March 1997, is a managing
director of CIBC Oppenheimer. Prior to joining CIBC Oppenheimer in January
1996, Mr. Raben was a founder, managing director and co-head of the Corporate
Finance Department of Jefferies & Co., Inc. since 1990. Mr. Raben serves as a
director of Optical Security, Inc., Evercom, Inc., Terex Corporation and
Equity Marketing, Inc.
37
<PAGE>
Michael R. Steed--Mr. Steed, a director of GCL since March 1997, is Senior
Vice President of Investments for the Union Labor Life Insurance Company,
ULLICO Inc. ("ULLICO") and its family of companies and President of Trust Fund
Advisors, ULLICO's investment management subsidiary. Mr. Steed joined ULLICO
in November 1992 after serving seven years as President and Founder of
A.F.I.C. Group, Ltd., a financial and investment consulting firm. From 1983 to
1985, Mr. Steed was the Executive Director of the Democratic National
Committee. Mr. Steed serves as a director of The Lewis & Clark Snake River
Beverage Company.
Hillel Weinberger--Mr. Weinberger, a director of GCL since June 1997, has
been a Senior Vice President of Loews/CNA Holdings Corp. since 1988. Prior
thereto, Mr. Weinberger was a Senior Vice President of Presidential Life from
1982 to 1988.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Committee Report
Compensation Philosophy
The Company's compensation philosophy is to relate the compensation of the
Company's executive officers to measures of Company performance that
contribute to increased value for the Company's shareholders.
To assure that compensation policies are appropriately aligned with the
value the Company creates for shareholders, the Company's compensation
philosophy for executive officers takes into account the following goals:
.enhancing shareholder value;
. representing a competitive and performance-oriented environment that
motives executive officers to achieve a high level of individual,
business unit and corporate results in the business environment in which
they operate;
. relating incentive-based compensation to the performance of each
executive officer, as measured by financial and strategic performance
goals; and
. enabling the Company to attract and retain top quality management.
The Compensation Committee of the Board of Directors (the "Committee")
periodically reviews the components of compensation for the Company's
executive officers on the basis of this philosophy and periodically evaluates
the competitiveness of its executive officer compensation program relative to
comparable companies. When the Committee determines that executive officer
compensation adjustments or bonus awards are necessary or appropriate, it
makes recommendations to the Board of Directors. The Board has sole authority
to modify executive officer compensation and award annual bonuses.
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code")
limits the deductibility of certain annual compensation payments in excess of
$1 million to its executive officers. It is the objective of the Compensation
Committee to administer compensation plans in compliance with the provisions
of Section 162(m) where feasible and where consistent with the Company's
compensation philosophy as stated above.
Executive Compensation Components
The major components of compensation for executive officers, including the
Chief Executive Officer (the "CEO"), are base salary, annual bonuses and stock
option grants. Each component of the total executive officer compensation
package emphasizes a different aspect of the Company's compensation
philosophy.
. Base Salary. Base salaries for executive officers, including the CEO,
are initially set upon hiring by the Co-Chairman and the CEO, based on
recruiting requirements (i.e., market demand), competitive pay
practices, individual experience and breadth of knowledge, internal
equity considerations and other objective and subjective factors.
Increases to base salary are determined by the Board upon the
38
<PAGE>
recommendation of the CEO and the Compensation Committee. Increases are
determined primarily on an evaluation of competitive data, the
individual's performance and contribution to the Company and the
Company's overall performance. Base salaries are periodically reviewed
by the Compensation Committee.
. Target Annual Bonuses. The Company relies to a large degree on annual
bonus compensation to attract, retain and reward executives of
outstanding abilities and to motivate them to perform to the full extent
of their abilities. Target bonuses for executive officers, including the
CEO, are determined on the basis of competitive bonus levels, level of
responsibility, ability to influence results on a corporate or business
unit level and, on occasion, subjective factors. Annual bonuses for
executive officers are determined by the Board upon recommendations by
the CEO and the Compensation Committee.
. Stock Option Grants. The only current long-term incentive opportunity
for executive officers, including the CEO, is the award of stock option
grants awarded under the 1998 Global Crossing Stock Incentive Plan. In
contrast to bonuses that are paid for prior year accomplishments, stock
option grants represent incentives tied to future stock appreciation.
They are intended to provide executive officers with a direct incentive
to enhance shareholder value. Options are awarded at the discretion of
the Board, based on recommendations of the CEO and Compensation
Committee, to persons holding key management positions. Options vest
over a three-year period with a maximum term of ten years. Option grants
are determined primarily based on an evaluation of competitive data and
the anticipated contribution that the executive officer will make to the
Company.
The Committee conducts annually a full review of the performance of the
Company and its executive officers in assessing compensation levels. The
Committee considers various qualitative and quantitative indicators of both
the Company and the individual performance of its executive officers. This
review evaluates the Company's performance both on a short- and long-term
basis. The Committee may consider such future quantitative measures as Total
Shareholder Return ("TSR"). Return on Shareholders' Equity ("ROSE"). Return on
Capital Employed ("ROCE") and percent change in operating and net income. The
Committee may also consider qualitative measures such as leadership,
experience, strategic direction and overall contribution to the Company.
In addition, the Committee evaluates compensation in light of the
compensation practices of other companies in the telecommunications industry
and peer group companies as may be determined by the Committee. These
companies are used as a reference standard for establishing levels of base
salary, bonus and stock options. For 1998, executive officer compensation was
targeted at the 75th percentile relative to peer group companies in the
telecom industry.
1999 Executive Compensation Review
Based on the factors set forth above, the Committee recommended that the
Board of Directors approve salary increases and 1998 bonus awards for all
executive officers, except in the case of Mr. Casey who had recently joined
the Company. The CEO and Co-Chairman recommended against additional stock
option grants to executive officers at this time. The Committee agreed with
that recommendation.
Jack Scanlon held the position of CEO from April 1998 through February 1999.
In determining Mr. Scanlon's salary increase and 1998 bonus award, the
Committee reviewed the performance of the Company against its goals. During
1998, the Company began operation of the first leg of its global fiber optic
network, held its initial public offering and executed capacity purchase
agreements totaling more than one billion dollars. The Committee believes that
Mr. Scanlon was instrumental in leading the Company to achieve these
milestones.
THE COMPENSATION COMMITTEE
Lodwrick M. Cook
Michael R. Steed
Jay R. Levine
39
<PAGE>
Summary Compensation Table
The table below sets forth information concerning compensation paid to
certain executive officers during the last fiscal year.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------------ ---------------------------------------------
Securities
Other Restricted Underlying
Annual Stock Options/ LTIP All Other
Year Salary Bonus(1) Compensation Award(s) SARs Payouts Compensation(2)
---- -------- --------- ------------ ---------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jack M. Scanlon......... 1998 $450,000 $ 480,000 $213,569 -- 3,600,000 -- --
Chief Executive Officer
Thomas J. Casey......... 1998 266,667 533,333 -- -- 2,000,000 -- --
Managing Director
William B. Carter....... 1998 600,000 1,050,000 -- -- 3,000,000 -- $5,000
President, Global
Crossing 1997 200,000 750,000 -- -- -- -- --
Development Co.
James C. Gorton......... 1998 147,179 710,000 -- -- 1,500,000 -- --
Senior Vice President
and
General Counsel
Jack Finlayson.......... 1998 156,923 841,667 -- -- 1,470,000 -- --
President, Global
Crossing International,
Ltd.
</TABLE>
- --------
(1) These amounts reflect a combination of signing bonuses and annual bonuses.
(2) Represents the Company's matching 401(k) contributions.
Certain Compensation Arrangements
The 1998 Global Crossing Ltd. Stock Incentive Plan (the "Stock Incentive
Plan") provides that, upon a "change in control," certain awards granted under
the Stock Incentive Plan may, in the sole discretion of GCL's Board of
Directors, be deemed to vest immediately. A "change in control" is defined
under the Stock Incentive Plan as the occurrence of any of the following: (i)
any person or entity (other than a person or entity holding securities
representing 10% or more of the combined voting power of GCL's outstanding
securities as of July 15, 1998, GCL, any trustee or other fiduciary holding
securities under an employee benefit plan of GCL, or any company owned,
directly or indirectly, by the shareholders of GCL in substantially the same
proportions as their ownership of stock of GCL) becomes the beneficial owner
(as defined under Rule 13d-3 promulgated under the Securities Exchange Act of
1934, as amended) of securities of GCL (a) in excess of the interest held by
the existing shareholders of GCL as of July 15, 1998 and (b) representing 30%
or more of the combined voting power of GCL's then outstanding securities;
(ii) during any period of 24 months, individuals who at the beginning of such
period constituted the Board of Directors and any new director (other than any
directors who meet certain exceptions specified in the Stock Incentive Plan)
whose election was approved in advance by a vote of at least two-thirds of the
directors then still in office cease for any reason to constitute at least a
majority of the Board of Directors; (iii) the shareholders of GCL approve any
transaction pursuant to which GCL is merged or consolidated with any other
company, other than a merger or consolidation which would result in
shareholders of GCL immediately prior thereto continuing to own more than 65%
of the combined voting power of the voting securities of GCL or such surviving
entity, outstanding after such merger or consolidation; or (iv) the
shareholders of GCL approve a plan of complete liquidation of GCL or an
agreement for the sale or disposition by GCL of all or substantially all of
GCL's assets, other than the liquidation of GCL into a wholly owned
subsidiary.
The Company has entered into an employment agreement, dated as of April 1,
1998, with Mr. Jack Scanlon, providing for Mr. Scanlon's employment as GCL's
Chief Executive Officer for a term of two years and continuing thereafter for
successive two-year terms, unless either GCL or Mr. Scanlon provides at least
three months' notice in advance of the expiration of the then current term. In
connection with such agreement, Mr. Scanlon was issued an option to purchase a
total of 3,600,000 shares of GCL common stock at an exercise
40
<PAGE>
price of $0.83 per share. Such options vest in 25% increments upon the first
day of employment and at the end of each of the first three years of Mr.
Scanlon's employment with GCL. Upon a "change in control", as defined in the
Stock Incentive Plan, vesting of all such options shall immediately occur, and
Mr. Scanlon shall be entitled to terminate the agreement and receive a lump
sum payment equal to the sum of two times Mr. Scanlon's then annual base
salary and bonus.
GCL has entered into an employment arrangement with Mr. Jack Finlayson,
which grants Mr. Finlayson the option to sell 300,000 shares of common stock
to GCL at $6.66 per share after two years of employment.
In September 1998, Mr. Thomas Casey was hired by PCG as its President.
Subsequently during that month, it was agreed among PCG, GCL and Mr. Casey
that, in addition to Mr. Casey's role as President of PCG, Mr. Casey would
also serve as Managing Director of GCL. In connection with Mr. Casey's dual
employment, GCL and PCG established an arrangement whereby each entity would
be responsible for a portion of Mr. Casey's salary and long-term compensation
based upon the relative amount of time spent by Mr. Casey on matters
pertaining to such entity. Initially, 80% of Mr. Casey's salary and long-term
compensation was allocated to GCL and 20% of such amounts was allocated to
PCG, subject to adjustment and re-allocation on an annual basis. On March 18,
1999, in recognition of the time spent by Mr. Casey on GCL matters to such
date and his expected ongoing responsibilities with GCL, the GCL Board of
Directors elected to assume the full amount of Mr. Casey's salary and long-
term compensation, with Mr. Casey serving full time in his role with GCL as
Managing Director and Vice Chairman of the Board of Directors.
Compensation of Outside Directors
Each director who is not an employee of GCL receives cash compensation of
$2,500 for each meeting of the Board of Directors that such director attended
after February 28, 1998. In addition, each of directors Bloom, Kehler, Levine,
Phoenix, Raben, Steed and Weinberger received options to purchase 120,000
shares of GCL common stock. The exercise price of the options is $0.83 per
share, and each such option has a term of 10 years. Each director's first
30,000 options became immediately exercisable, the next 45,000 options will
become exercisable on April 3, 1999 and the remaining 45,000 options will
become exercisable on April 3, 2000, in each case so long as such director
continues to be a director of GCL on such date. On August 13, 1998, each of
directors Conway, Kent and Ogasawara also received options to purchase 120,000
shares of GCL common stock. The exercise price of the options is $3.33 per
share, and each such option has a term of 10 years. Each of such director's
first 30,000 options became immediately exercisable, the next 45,000 options
will become exercisable on August 13, 1999 and the remaining 45,000 options
will become exercisable on August 13, 2000, in each case so long as such
director continues to be a director of GCL on such date.
41
<PAGE>
Option Grants in Last Fiscal Year
The table below sets forth information concerning options granted to certain
executive officers during the last fiscal year. As of December 31, 1998,
options representing a total of 17,386,667 shares of common stock had been
issued to officers or directors of GCL at exercise prices ranging from $0.83
per share to $9.50 per share.
<TABLE>
<CAPTION>
Potential Realizable Value At
Assorted Annual Rates of Stock Price
Individual Grants Appreciation for Option Term
---------------------------------------------- ---------------------------------------
Number of % of Total
Securities Options
Underlying Granted to
Options Employees in Exercise or Expiration
Name Granted Fiscal Year Base Price Date 0% 5% 10%
- ---- ---------- ------------ ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jack M. Scanlon......... 3,600,000 13.09% $0.83(1) 04/01/08 $ -- $ 1,890,457 $ 4,790,790
Chief Executive Officer
Thomas J. Casey......... 2,000,000 (2) 2.00(3) 09/24/08 18,250,000 32,242,905 53,710,770
Managing Director
William B. Carter....... 3,000,000 10.91 0.83(1) 09/02/07 -- 1,575,381 3,992,325
President, Global
Crossing Development
Co.
James C. Gorton......... 1,500,000 5.45 3.33(1) 06/12/08 -- 3,146,045 7,972,697
Senior Vice President
and General Counsel
Jack Finlayson.......... 1,170,000 4.25 3.33(1) 06/12/08 -- 2,453,915 6,218,703
President, Global 300,000 1.09 9.50(4) 06/12/08 -- 1,792,350 4,542,166
Crossing
International, Ltd.
</TABLE>
- --------
(1) Market price on the grant date prior to the date of GCL's initial public
offering of its common stock as determined by the Board of Directors.
(2) Thomas J. Casey has been granted economic rights to 2,000,000 shares of
common stock at an effective price of $2.00 per share.
(3) The closing market price per share of common stock on the grant date was
$11.13.
(4) A portion of Mr. Finlayson's options were granted at $9.50 (the initial
public offering price of GCL's common stock). For the purpose of
calculating the 5% and 10% potential realizable values, a price of $9.50
was used.
42
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The table below sets forth information concerning exercises of stock options
by certain executive officers during the last fiscal year and the fiscal year-
end value of such executive officer's unexercised options.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Options Options(2)
------------------------- -------------------------
Shares Acquired Value
Name on Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jack M. Scanlon......... 119,760 $2,115,560 780,240 2,700,000 $16,952,665 $58,664,250
Chief Executive Officer
Thomas J. Casey(3)...... -- -- 666,668 1,333,332 13,708,361 27,416,639
Managing Director
William B. Carter....... 119,760 2,115,560 880,240 2,000,000 19,125,415 43,455,000
President, Global
Crossing Development
Co.
James C. Gorton......... -- -- 375,000 1,125,000 7,210,313 21,630,938
Senior Vice President
and General Counsel
Jack Finlayson.......... 29,984 521,234 555,016 885,000 10,671,570 15,166,838
President, Global
Crossing
International, Ltd.
</TABLE>
- --------
(1) Amounts indicated are based upon the difference between the exercise price
and the closing market price on the exercise date.
(2) Amounts indicated are based upon the difference between the exercise price
and the closing market price per share of common stock of $22.56 on
December 31, 1998.
(3) Amounts indicated are with respect to the economic rights of Mr. Casey to
2,000,000 shares of GCL common stock as referenced above.
Compensation Committee Interlocks and Insider Participation
The Compensation committee of the GCL Board of Directors consists of Messrs.
Cook, Steed and Levine. Messrs. Cook, Steed and Levine were involved in
certain transactions described under "Certain Relationships and Related
Transactions" in Item 13 below.
43
<PAGE>
Comparison of Cumulative Total Returns
The graph below compares the cumulative total shareholder return on GCL
common stock for the period from August 14, 1998, the initial date of trading
of GCL common stock, to December 31, 1998 with the cumulative total return on
each of the Nasdaq National Market Composite Index and a peer group of other
fiber optic cable providers (Qwest, Level 3 Communications, Inc., Metromedia
Fiber Network, Inc., IXC Communications, Inc. and Equant NV) (the "Fiber
Index") over the same period. The graph assumes $100 invested on August 14,
1998 in GCL common stock and $100 invested on such date in each of the Nasdaq
National Market Composite Index and the Fiber Index.
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Fiber Index
(QWST, LVLT, NASDAQ National
GBLX MFNX, IIXC, ENT) Market Composite Index
<S> <C> <C>
8/14/98 100 100 100
8/31/98 88.82 69.06 83.17
9/30/98 109.87 84.97 93.97
10/31/98 151.32 96.2 98.27
11/30/98 199.34 105.41 108.16
12/31/98 237.5 131.68 121.61
</TABLE>
44
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 12, 1999, certain information
regarding the beneficial ownership of GCL common stock by (i) each person or
entity who is known to GCL to own beneficially 5% or more voting common stock
of GCL, (ii) each director and executive officer of GCL and (iii) all
directors and executive officers of GCL as a group. To GCL's knowledge, each
such shareholder has sole voting and investment power with respect to the
shares shown, unless otherwise noted. Amounts appearing in the table below
include (i) all shares of common stock outstanding as of March 12, 1999, (ii)
all shares of common stock issuable upon the exercise of options within 60
days of March 12, 1999 and (iii) all shares of common stock issuable upon the
exercise of warrants within 60 days of March 12, 1999. The warrants described
below as "New PCG Warrants" and "GCL Warrants" each represent the right to
immediately purchase shares of GCL common stock at an exercise price of $9.50
per share.
<TABLE>
<CAPTION>
Beneficial Ownership of Common Stock
--------------------------------------------------------------
Shares
Shares Subject to Subject to Shares
Number of New PCG GCL Subject to Percentage
Shares(1) Warrants Warrants Options of Class
----------- ----------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Pacific Capital Group, 93,189,150 6,050,004 2,515,788 0 23.14%
Inc.(2)................
150 El Camino Drive,
Suite 204
Beverly Hills,
California 90212
Canadian Imperial Bank 97,026,800 0 0 375,000 22.15%
of Commerce(3).........
161 Bay Street, 8th
Floor - BCE Place
P.P. Box 500
M5J258, Toronto, Canada
Continental Casualty 40,075,170 0 0 0 9.11%
Company................
CNA Plaza, Floor 23
South
Chicago, Illinois 60685
MRCo, Inc. ............. 33,180,260 0 697,934 0 7.71%
111 Massachusetts
Avenue NW
Washington, DC 20001
Gary Winnick(4)......... 93,189,150 6,050,004 2,515,788 1,200,000 23.42%
Lodwrick M. Cook........ 3,580,452 950,002 0 182,000 1.07%
Jack M. Scanlon......... 119,760 0 0 1,680,240 *
Thomas J. Casey(5)...... 666,668 0 0 0 *
Robert Annunziata....... 0 0 0 1,000,000 *
William B. Carter....... 119,760 0 0 880,240 *
Dan J. Cohrs............ 10,000 0 0 450,000 *
David L. Lee(6)......... 20,004,020 1,825,002 663,456 600,000 5.25%
Abbott L. Brown(7)...... 11,201,340 1,450,002 367,666 600,000 3.10%
Barry Porter(8)......... 18,219,748 1,825,002 610,266 600,000 4.83%
James C. Gorton......... 0 0 0 375,000 *
Jack Finlayson.......... 29,984 0 0 555,016 *
Robert Sheh............. 0 0 0 300,000 *
Hillel Weinberger(9).... 42,661,800 0 0 75,000 9.72%
Jay R. Bloom(10)........ 97,026,800 0 0 375,000 22.15%
Dean C. Kehler(10)...... 97,026,800 0 0 375,000 22.15%
Jay R. Levine(10)(11)... 97,026,800 0 0 375,000 22.15%
William P.
Phoenix(10)(11)........ 97,026,800 0 0 375,000 22.15%
Bruce Raben(10)(11)..... 97,026,800 0 0 375,000 22.15%
Michael R. Steed(12).... 33,180,260 0 697,934 75,000 7.72%
William E. Conway....... 0 0 0 30,000 *
Toshiaki Ogasawara...... 100,000 0 0 30,000 *
Geoffrey J.W. Kent...... 0 0 0 30,000 *
All Directors and
Executive Officers as a
Group.................. 319,976,408 12,100,012 4,855,110 9,037,496 78.69%
</TABLE>
45
<PAGE>
- --------
* Percentage of shares beneficially owned does not exceed one percent.
(1) As of March 12, 1999, 411,343,072 shares of common stock were issued and
outstanding. An additional 10,723,696 shares of common stock would have
been issuable upon the exercise of options within 60 days of March 12,
1999; an additional 12,500,012 shares of common stock would have been
issuable upon the exercise of New PCG Warrants within 60 days of March 12,
1999 and an additional 5,108,358 shares of common stock would have been
issuable upon the exercise of GCL Warrants within 60 days of March 12,
1999.
(2) Includes shares of common stock and common stock warrants owned by GKW
Unified Holdings, LLC, a company formed for the benefit of Gary Winnick
and members of his family and managed by PCG.
(3) Includes shares of common stock issuable upon the exercise of options
granted to GCL directors affiliated with CIBC.
(4) Includes (i) all shares of common stock and shares of common stock
issuable upon the exercise of warrants owned by GKW Unified Holdings, LLC,
of which PCG is manager, (ii) all shares of common stock and shares of
common stock issuable upon the exercise of warrants owned by PCG, of which
Mr. Winnick is Chairman and Chief Executive Officer and (iii) all shares
of common stock held by Casey Pacific Holdings LLC, which PCG controls for
purposes of voting.
(5) Includes (i) all shares of common stock owned by Casey Pacific Holdings
LLC, which is beneficially owned by Mr. Casey and (ii) all shares of
common stock owned by Casey Global Holdings LLC, which is beneficially
owned by Mr. Casey.
(6) Includes (i) all shares of common stock and shares of common stock
issuable upon the exercise of warrants owned by San Pasqual Corp., of
which Mr. Lee and his family are the sole shareholders and (ii) all shares
of common stock and shares of common stock issuable upon the exercise of
warrants owned by the David and Ellen Lee Family Trust, of which Mr. Lee
is a trustee.
(7) Includes (i) all shares of common stock and shares of common stock
issuable upon the exercise of warrants owned by Ridgestone Corp., of which
members of Mr. Brown's family are the sole shareholders and (ii) all
shares of common stock and shares of common stock issuable upon the
exercise of warrants owned by the Brown Living Trust, of which Mr. Brown
is a trustee.
(8) Includes all shares of common stock and shares of common stock issuable
upon the exercise of warrants owned by Galenight Corp., of which Mr.
Porter is the sole shareholder.
(9) Includes all shares of common stock owned by Continental Casualty Company,
an affiliate of Loews/CNA Holdings Corp. Mr. Weinberger is an officer of
Loews/CNA Holdings Corp. Includes shares of common stock held by Global
Crossing Trust 1998, with respect to which Mr. Weinberger serves as
trustee, and shares of common stock held by Global Crossing Partners, of
which Mr. Weinberger is a managing partner.
(10) Includes all shares of common stock beneficially owned by CIBC. Each of
Messrs. Bloom, Kehler, Levine, Phoenix and Raben is an employee of an
affiliate of CIBC.
(11) Beneficial ownership of all shares of common stock indicated is
disclaimed.
(12) Includes all shares of common stock owned by MRCo, Inc. Mr. Steed is the
Senior Vice President of ULLICO and the President of MRCo, Inc., which is
a wholly owned subsidiary of ULLICO.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1998, Global Crossing entered into certain transactions described
below with affiliates and certain of its officers and directors.
Transactions with PCG and its Affiliates
Global Crossing entered into certain transactions with PCG and its
affiliates, including PCG Telecom Services LLC ("PCG Telecom") and Ocean
Systems International LLC ("OSI"), in connection with the development by PCG
and its affiliates of several of its systems, including AC-1, PC-1, PAC and
MAC. In January 1998, the GCL Board of Directors elected to assume the ongoing
development of systems from OSI. PCG and its affiliates are controlled by Mr.
Gary Winnick, the Co-Chairman of the GCL Board of Directors, and certain other
officers and directors of GCL either currently are or at one time were
affiliated with PCG, including Messrs. Cook, Casey, Lee, Porter and Brown.
46
<PAGE>
Advisory Services Agreements. In August 1998, GCL acquired the rights to
advisory fees payable under certain advisory services agreements with PCG
Telecom in consideration for the issuance, through PCG Telecom, to the persons
entitled to receive such fees of shares of GCL common stock with an aggregate
value at such time of $135 million and the cancellation of $3 million owed to
Global Crossing under a related advance agreement. All of the obligations of
Global Crossing in respect of the advisory services agreements were
terminated. The Company obtained a fairness opinion from an independent
financial advisor in connection with this transaction. The Company incurred
approximately $2 million of advisory fees under the advisory services
agreements prior to their termination. As a result of this transaction, the
Company incurred a charge of approximately $138 million, which has been
reflected in its statement of operations for the year ended December 31, 1998.
Of this amount, $135 million was determined by applying the 2% advisory fee to
projected revenues for the Company's systems. The present value of the
aggregate advisory fees was then calculated at $155.5 million, using a
discount rate of 12% in respect of AC-1 and 15% in respect of other systems.
This amount was subsequently reduced to $135 million. Both the discount rates
and the ultimate valuation were determined as a result of a negotiation
process, including a disinterested director of GCL and the various persons
entitled to fees under the advisory services agreements. The shares of common
stock issued in connection with the termination of the Company's obligations
under the advisory services agreements were received by the following persons
in the following amounts:
<TABLE>
<CAPTION>
Shares of
Recipient Common Stock
--------- ------------
<S> <C>
Gary Winnick (including PCG and PCG Telecom)................. 6,515,154
CIBC......................................................... 1,340,000
ULLICO....................................................... 733,158
Lodwrick M. Cook............................................. 609,948
Abbott L. Brown.............................................. 1,367,422
David L. Lee................................................. 1,822,422
Barry Porter................................................. 1,822,422
----------
Total...................................................... 14,210,526
==========
</TABLE>
PCG Warrants. Global Crossing Ltd., LDC ("Old GCL") and PCG entered into a
warrant agreement, dated as of January 21, 1998 (the "PCG Warrant Agreement"),
pursuant to which Old GCL issued PCG three separate warrants (collectively,
the "PCG Warrants") providing PCG with the right to purchase (i) 18,453,184 of
Old GCL's Class B shares of common stock for an aggregate purchase price of
$50,000,000; (ii) an additional 9,226,594 of Old GCL's Class B shares of
common stock for an aggregate purchase price of $31,250,000; and
(iii) an additional 9,226,594 of Old GCL's Class B shares for an aggregate
purchase price of $37,500,000. Such PCG Warrants would entitle PCG to acquire
an additional 10% of the capital stock of Old GCL (as of the date
of issuance of the PCG Warrants), with the exercise price of each PCG Warrant
based upon a different market valuation of the Company. In connection with the
issuance of the PCG Warrants, PC-1, MAC and PAC (then under development) were
acquired by the Company, as was the development team that had been assembled
by PCG. Rights under each of the PCG Warrants were divided among Messrs.
Winnick, Cook, Brown, Lee and Porter in the following percentages: 50%, 8%,
12%, 15% and 15%, respectively.
The Board of Directors of Old GCL amended the terms of the PCG Warrants to
give each holder the option to convert each share under warrant into a
fraction of a Class B share of common stock of Old GCL based upon the ratio of
the current per share valuation at the time of conversion less the per share
exercise price of the warrant divided by the current per share valuation at
the time of conversion multiplied by the number of warrants to be converted,
together with a new warrant (collectively, the "New PCG Warrants") to purchase
the remaining fraction of such Class B share at an exercise price equal to
$9.50, which was the price per share of GCL common stock on the date of GCL's
initial public offering in August 1998. The New PCG Warrants will terminate on
August 13, 2003, five years from the date of issuance. Prior to GCL's initial
public offering, PCG converted the PCG Warrants in such manner into Class B
shares of common stock of Old GCL and New PCG Warrants, utilizing the
anticipated price per share of GCL common stock at GCL's initial public
offering as the current per
47
<PAGE>
share valuation for such purposes, with GCL assuming the obligations of Old
GCL under the New PCG Warrants (the "PCG Warrant Conversion"). Upon the PCG
Warrant Conversion, Messrs. Winnick, Cook, Brown, Lee and Porter transferred
200,000, 50,000, 50,000, 50,000 and 50,000 New PCG Warrants, respectively, to
Nelson S. Zand, an employee of PCG.
Following such transactions, shares of common stock of Old GCL and New PCG
Warrants issued in connection with the conversion of the PCG Warrants were
issued to the following persons in the following amounts:
<TABLE>
<CAPTION>
Shares of
Common Stock New PCG
Name of Old GCL Warrants
---- ------------ ----------
<S> <C> <C>
Gary Winnick..................................... 12,203,178 6,050,004
David L. Lee..................................... 3,660,950 1,825,002
Barry Porter..................................... 3,660,950 1,825,002
Abbott L. Brown.................................. 2,928,758 1,450,002
Lodwrick M. Cook................................. 1,952,504 950,002
Nelson S. Zand................................... 0 400,000
---------- ----------
Total.......................................... 24,406,340 12,500,012
========== ==========
</TABLE>
Advance Agreements. The Company entered into an advance agreement, dated as
of March 24, 1998, with PCG Telecom, pursuant to which the Company agreed to
make advances to PCG Telecom in respect of fees owed to PCG Telecom under the
advisory services agreement relating to AC-1 in an amount not to exceed 1% of
the amounts payable under capacity purchase agreements executed by an
affiliate of the Company. This advance agreement was terminated and the
obligation of PCG Telecom to repay $3 million to the Company thereunder
canceled in connection with the termination of the advisory service agreements
discussed above.
Of the $4,669,340 advanced to PCG Telecom under this advance agreement, the
following amounts were paid to directors, executive officers and shareholders
of the Company:
<TABLE>
<CAPTION>
Name Amount
---- ----------
<S> <C>
Gary Winnick............................................... $3,191,630(1)
David L. Lee............................................... 481,130
Barry Porter............................................... 481,130
Abbott L. Brown............................................ 320,754
MRCo, Inc.................................................. 194,696
----------
Total.................................................... $4,669,340
==========
</TABLE>
- --------
(1) Includes amounts received by PCG, including reimbursement of PCG expenses
of $1,987,914.
Assignment of Rights. As part of the consideration for the assumption by the
Company of the rights of OSI to the ongoing development of cable systems, in
the first quarter of 1998 the Company paid PCG $7.0 million for costs incurred
by PCG to such date in connection with such development.
Thomas Casey Employment Arrangements. In September 1998, Mr. Thomas Casey
was hired by PCG as its President. Subsequently during that month, it was
agreed among PCG, GCL and Mr. Casey that, in addition to Mr. Casey's role as
President of PCG, Mr. Casey would also serve as Managing Director of GCL. In
connection with Mr. Casey's dual employment, GCL and PCG established an
arrangement whereby each entity would be responsible for a portion of Mr.
Casey's salary and long-term compensation based upon the relative amount of
time spent by Mr. Casey on matters pertaining to such entity. Initially, 80%
of Mr. Casey's salary and long-term compensation was allocated to GCL and 20%
of such amounts was allocated to PCG, subject to adjustment and re-allocation
on an annual basis. On March 18, 1999, in recognition of the time spent
48
<PAGE>
by Mr. Casey on GCL matters to such date and his expected ongoing
responsibilities with GCL, the GCL Board of Directors elected to assume the
full amount of Mr. Casey's salary and long-term compensation, with Mr. Casey
serving full time in his role with GCL as Managing Director and Vice-Chairman
of the Board of Directors.
Transactions with CIBC and its Affiliates
During 1998, CIBC and its affiliates entered into certain financing
transactions with Global Crossing in connection with the development and
construction of our systems. In particular, CIBC or one of its affiliates: (i)
arranged and was the initial lender under a $200 million bridge facility,
which was repaid and terminated on May 18, 1998; (ii) is one of the lead
agents under a $482 million credit facility for AC-1; (iii) was an initial
purchaser in connection with the May 1998 issuance by GCH of its $800 million
senior notes; (iv) together with other lenders, entered into a credit
agreement with an affiliate of Global Crossing, effective July 30, 1998, for
the $850 million non-recourse project debt financing of PC-1; (v) together
with other lenders, issued a $104 million loan to Pacific Crossing Ltd. to
make the initial payments with respect to the construction contract for PC-1,
which was repaid and terminated on July 30, 1998; (vi) was an underwriter in
the August 1998 initial public offering of common stock of GCL; (vii) was an
initial purchaser in the December 1998 offering of GCH's 10 1/2% senior
exchangeable preferred stock due 2008; and (viii) together with other lenders,
entered into a credit agreement with MACL, effective November 25, 1998, for
the $260 million non-recourse project debt financing of MAC. During 1998,
Global Crossing paid CIBC and its affiliates approximately $19 million (plus
$6 million from a joint venture of Global Crossing) in fees in connection with
these transactions. CIBC has substantial beneficial ownership in GCL, and
certain members of the Board of Directors of GCL are employees of an affiliate
of CIBC, including Messrs. Bloom, Kehler, Phoenix, Raben and Levine.
Transactions with Worldport
During 1998, the Company and Worldport Communications, Inc. ("Worldport")
entered into a capacity purchase agreement, pursuant to which Worldport will
acquire a total of seven STM-1s of capacity on AC-1 in a transaction that
occurred in the ordinary course of business of the Company and on terms and
conditions no less favorable to the Company than those contained in its other
capacity purchase agreements. Worldport also executed a memorandum of
understanding to purchase capacity on other systems on the Global Crossing
Network. Certain officers and directors of the Company, including Mr. Winnick,
Mr. Cook, Mr. Scanlon, Mr. Lee, Mr. Porter, Mr. Brown, Mr. Raben, Mr. Bloom,
Mr. Kehler and Mr. Steed, have direct or indirect equity ownership positions
in Worldport, aggregating less than 10% of the current common stock of
Worldport. In addition, Continental Casualty Corporation, with which Mr.
Weinberger is affiliated, holds warrants to purchase common stock in
Worldport, aggregating less than 1% of the current common stock of Worldport
and has also engaged in certain debt financing transactions with Worldport.
Transactions with Telecommunications Development Corporation
Prior to the initial public offering of the Company, Telecommunications
Development Corporation, a Cayman Islands corporation ("TDC"), owned
22,033,758 shares of GCL common stock, as well as warrants to purchase an
additional 582,954 shares of GCL common stock. TDC was formed in 1996 for the
purpose of making investments in start-up telecommunications companies and one
of the companies in which TDC invested was GCL. Mr. Lee was the Chairman, and
Mr. Winnick was a director of TDC. Messrs. Lee, Winnick, Brown and Porter
beneficially owned a majority of the outstanding common stock of TDC and
approximately 29% of the outstanding preferred stock of TDC. The balance of
such stock was owned by persons not affiliated with GCL (the "Unaffiliated
Shareholders"). TDC informed GCL that, in connection with the August 1998
initial public offering of GCL common stock, it was undergoing a
reorganization to facilitate the ability of Unaffiliated Shareholders to sell
GCL common stock in the open market following the initial public offering. In
connection with this reorganization, TDC proposed a transaction (the "TDC
Exchange") pursuant to which GCL acquired the 22,033,758 shares of common
stock owned by TDC in exchange for 21,733,758 newly-issued shares of GCL
49
<PAGE>
common stock, based on a $9.50 price per share. The TDC Exchange was intended
to enable TDC to achieve the reorganization without the incurrence of gain for
tax purposes. Following the TDC Exchange, TDC distributed all shares of common
stock and warrants for shares of GCL common stock owned by it to the holders
of its preferred and common stock and then liquidated (the "TDC Liquidation").
The TDC Exchange was approved by a committee of disinterested members of GCL's
Board of Directors. The benefit to GCL from the TDC Exchange was that it
effectively acquired 300,000 shares of common stock for no cost. Following the
TDC Exchange and TDC Liquidation, shares of GCL common stock and the warrants
originally held by TDC were issued to the following persons in the following
amounts:
<TABLE>
<CAPTION>
Shares of
Common Stock
Shares of Underlying
Name Common Stock GCL Warrants
---- ------------ ------------
<S> <C> <C>
Gary Winnick................................... 4,797,080 131,428
David L. Lee................................... 5,433,234 150,300
Barry Porter................................... 1,625,816 44,634
Abbott L. Brown................................ 541,940 14,878
Non-affiliates................................. 9,335,688 241,714
---------- -------
Total........................................ 21,733,758 582,954
========== =======
</TABLE>
50
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS 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, 1998 and 1997
Consolidated Statements of Operations for the year ended December
31, 1998 and for the period from March 19, 1997 (Date of Inception)
to December 31, 1997
Consolidated Statements of Shareholders' Equity for the year ended
December 31, 1998 and for the period from March 19, 1997 (Date of
Inception) to December 31, 1997
Consolidated Statements of Cash Flows for the year ended December
31, 1998 and for the period from March 19, 1997 (Date of Inception)
to December 31, 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
None.
3. Exhibit Index:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
2.1f Agreement and Plan of Merger, dated March 16, 1999, among the
Registrant, Frontier Corporation and GCF Acquisition Corp.
3.1a Memorandum of Association of Global Crossing Ltd.
3.2b Amended and Restated Bye-Laws of Global Crossing Ltd.
3.3a Certificate of Incorporation of Change of Name of Global Crossing Ltd.
3.4a Memorandum of Increase of Share Capital for Global Crossing Ltd.
4.1a Form of Certificate for Common Stock.
4.2a Form of Registration Rights Agreement among the Registrant and the
investors named therein.
4.3e Registration Rights Agreement, dated as of December 2, 1998, among
Global Crossing Holdings Ltd. and the other parties named therein.
4.4b Indenture, dated as of May 18, 1998, between Global Crossing Holdings
Ltd. and United States Trust Company of New York, as Trustee.
4.6a Credit Agreement, dated as of June 27, 1997 (the "Credit Agreement"),
among Global Telesystems Ltd., various financial institutions named
therein, Deutsche Bank AG, New York Branch and Canadian Imperial Bank
of Commerce, as Lead Agents, Deutsche Bank AG, New York Branch, as
Administrative Agent, Canadian Imperial Bank of Commerce, as
Syndication Agent, Documentation Agent and the Issuing Bank and
Deutsche Morgan Grenfell Inc. and CIBC Gundy Securities Corp., as
Arrangers.
4.7a First Amendment and Consent, dated as of December 15, 1997, to the
Credit Agreement, among Global Telesystems Ltd., the lenders named
therein, Deutsche Bank AG, New York Branch and Canadian Imperial Bank
of Commerce, as Lead Agents, Deutsche Bank AG, New York Branch, as
Administrative Agent, Canadian Imperial Bank of Commerce, as
Syndication Agent, Documentation Agent and the Issuing Bank and
Deutsche Morgan Grenfell Inc. and CIBC Gundy Securities Corp., as
Arrangers.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
4.8a Second Amendment and Consent, dated as of June 12, 1998, to the Credit
Agreement, among Atlantic Crossing Ltd., (formerly know as Global
Telesystems Ltd.), the lenders named therein, Deutsche Bank AG, New
York Branch and Canadian Imperial Bank of Commerce, as Lead Agents,
Deutsche Bank AG, New York Branch, as Administrative Agent, Canadian
Imperial Bank of Commerce, as Syndication Agent, Documentation Agent
and the Issuing Bank and Deutsche Morgan Grenfell Inc. and CIBC Gundy
Securities Corp., as Arrangers.
4.9e Credit Agreement, dated as of November 25, 1998, among Mid-Atlantic
Crossing Ltd., various financial institutions named therein, Deutsche
Bank AG, New York Branch and CIBC Inc., as lead agents, Deutsche Bank
AG, New York Branch, as administrative agent, Canadian Imperial Bank
of Commerce, as syndication agent and CIBC Inc., as documentation
agent.
9.1a Form of Stockholders Agreement among the Registrant and the investors
named therein.
10.1c 1998 Global Crossing Ltd. Stock Incentive Plan.
10.2a Project Development and Construction Contract, dated as of March 18,
1997, among AT&T Submarine Systems, Inc. and Global Telesystems Ltd.
10.3a Project Development and Construction Contract, dated as of April 21,
1998, among Tyco Submarine Systems, Ltd. and Pacific Crossing Ltd.
10.4a Project Development and Construction Contract, dated as of June 2,
1998, among Alcatel Submarine Networks and Mid-Atlantic Crossing Ltd.
10.5d Project Development and Construction Contract, dated as of July 21,
1998, among Tyco Submarine Systems, Ltd. and Pan American Crossing
Ltd.
10.6f Stock Option Agreement, dated March 16, 1999, between the Registrant
and Frontier Corporation.
10.7f Voting Agreement, dated March 16, 1999, among certain shareholders of
the Registrant parties thereto, Frontier Corporation and, for certain
purposes only, the Registrant.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen & Co.
27.1 Financial Data Schedule.
</TABLE>
- --------
(a) Incorporated by reference to Global Crossing Ltd. Registration Statement
on Form S-1 (File No. 333-53393).
(b) Incorporated by reference to Global Crossing Holdings Ltd. Registration
Statement on Form S-4 (File No. 333-61457).
(c) Incorporated by reference to Global Crossing Ltd. Registration Statement
on Form S-8 filed on December 11, 1998 (File No. 333-68825).
(d) Incorporated by reference to Global Crossing Ltd. Quarterly Report on
Form 10-Q filed for the quarter ended September 30, 1998.
(e) Incorporated by reference to Global Crossing Holding Ltd. Registration
Statement on Form S-4 (File No. 333-69459).
(f) Incorporated by reference to Global Crossing Ltd. Current Report on Form
8-K filed on March 18, 1999.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the last quarter
of the period covered by this report.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
52
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997.............. F-3
Consolidated Statements of Operations for the year ended December 31, 1998
and for the period from March 19, 1997 (Date of Inception) to December
31, 1997................................................................. F-4
Consolidated Statements of Shareholders' Equity for the year ended
December 31, 1998 and for the period from March 19, 1997 (Date of
Inception) to December 31, 1997.......................................... F-5
Consolidated Statements of Cash Flows for the year ended December 31, 1998
and for the period from March 19, 1997 (Date of Inception) to December
31, 1997................................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
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, 1998 and
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for the year ended December 31, 1998 and for the period
from March 19, 1997 (Date of Inception) to December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
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, 1998 and 1997, and the results of their
operations and their cash flows for the year ended December 31, 1998 and for
the period from March 19, 1997 (Date of Inception) to December 31, 1997, in
conformity with accounting principles generally accepted in the United States.
Arthur Andersen & Co.
Hamilton, Bermuda
February 1, 1999
(Except with respect to the matters
discussed in Note 16, as to which
the dates are March 9, 1999 and March 16, 1999)
F-2
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share information)
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............... $ 806,593 $ 1,453
Restricted cash and cash equivalents.... 77,190 25,275
Accounts receivable, net of allowance
for doubtful accounts of $4,233........ 71,195 --
Other assets and prepaid costs.......... 47,137 1,016
---------- --------
Total current assets.................... 1,002,115 27,744
Restricted cash and cash equivalents...... 367,600 --
Accounts receivable....................... 43,315 --
Capacity available for sale............... 574,849 21,200
Construction in progress.................. 428,207 497,319
Deferred finance and organization costs,
net of accumulated amortization of
$10,130
as of December 31, 1998 and $2,247 as of
December 31, 1997........................ 45,757 25,934
Investment in affiliates.................. 177,334 --
---------- --------
Total assets............................ $2,639,177 $572,197
========== ========
LIABILITIES:
Current liabilities:
Accrued construction costs.............. $ 129,081 $ 52,004
Accounts payable and accrued
liabilities............................ 31,990 1,658
Accrued interest........................ 10,053 1,641
Deferred revenue........................ 44,197 5,325
Income taxes payable.................... 15,604 --
Current portion of long term debt....... 6,393 --
Current portion of obligations under
inland services agreements and capital
leases................................. 14,572 30,189
---------- --------
Total current liabilities............... 251,890 90,817
Long term debt............................ 269,598 162,325
Senior notes.............................. 796,495 150,000
Deferred revenue.......................... 25,325 --
Obligations under inland services
agreements and capital leases............ 24,520 3,009
Deferred income taxes..................... 9,654 --
---------- --------
Total liabilities....................... 1,377,482 406,151
---------- --------
MANDATORILY REDEEMABLE PREFERRED STOCK
(5,000,000 shares issued and outstanding
as of December 31, 1998, $100 liquidation
preference per share (including $4,375 in
accrued dividends and net of unamortized
issuance costs of $17,000))............... 487,375 --
---------- --------
MANDATORILY REDEEMABLE PREFERRED STOCK
(109,830 shares issued and outstanding as
of December 31, 1997, $1,000 liquidation
preference per share (including $1,281 in
accrued dividends and net of unamortized
discount and issuance costs of $12,224 and
$6,962, respectively)).................... -- 91,925
---------- --------
SHAREHOLDERS' EQUITY:
Common stock, 600,000,000 shares
authorized, par value $.01,
432,776,246 shares issued as of December
31, 1998 and
325,773,934 shares issued and
outstanding as of December 31, 1997...... 4,328 3,258
Treasury stock, 22,033,758 shares......... (209,415) --
Other shareholders' equity................ 1,067,470 71,023
Accumulated deficit....................... (88,063) (160)
---------- --------
774,320 74,121
---------- --------
Total liabilities and shareholders'
equity................................. $2,639,177 $572,197
========== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share information)
<TABLE>
<CAPTION>
Period from
March 19, 1997
Year Ended (Date of Inception)
December 31, 1998 to December 31, 1997
----------------- --------------------
<S> <C> <C>
REVENUES............................... $ 424,099 $ --
----------- -----------
EXPENSES:
Cost of capacity sold................ 178,492 --
Operations, administration and
maintenance......................... 18,056 --
Sales and marketing.................. 26,194 1,366
Network development.................. 10,962 78
General and administrative........... 26,844 1,657
Stock related expense................ 39,374 --
Provision for doubtful accounts...... 4,233 --
Termination of Advisory Services
Agreement........................... 139,669 --
----------- -----------
443,824 3,101
----------- -----------
OPERATING LOSS......................... (19,725) (3,101)
EQUITY IN LOSS OF AFFILIATES........... (2,508) --
INTEREST INCOME (EXPENSE):
Interest income...................... 29,986 2,941
Interest expense..................... (42,880) --
----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM................ (35,127) (160)
Provision for income taxes........... (33,067) --
----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM......... (68,194) (160)
Extraordinary loss on retirement of
senior notes........................ (19,709) --
----------- -----------
NET LOSS............................... (87,903) (160)
Preferred stock dividends............ (12,681) (12,690)
Redemption of preferred stock ....... (34,140) --
----------- -----------
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS.......................... $ (134,724) $ (12,850)
=========== ===========
NET LOSS PER COMMON SHARE
Loss applicable to common shareholders
before extraordinary item
Basic and diluted.................... $ (0.32) $ (0.04)
=========== ===========
Extraordinary item
Basic and diluted.................... $ (0.06) $ --
=========== ===========
Net loss applicable to common
shareholders
Basic and diluted.................... $ (0.38) $ (0.04)
=========== ===========
Shares used in computing basic and
diluted loss per share................ 358,735,340 325,773,934
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share information)
<TABLE>
<CAPTION>
Other Shareholders'
Common Stock Treasury Stock Equity
------------------ -------------------- ------------------------
Additional Total
Paid-in Unearned Accumulated Shareholders'
Shares Amount Shares Amount Capital(a) Compensation Deficit Equity
----------- ------ ---------- --------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
for cash in March 1997
(Date of Inception),
net of $1,264 issuance
costs.................. 325,773,934 $3,258 -- $ -- $ 83,713 $ -- $ -- $ 86,971
Preferred stock
dividends.............. -- -- -- -- (12,690) -- -- (12,690)
Net loss for the period. -- -- -- -- -- -- (160) (160)
----------- ------ ---------- --------- ---------- -------- -------- --------
Balance, December 31,
1997................... 325,773,934 3,258 -- -- 71,023 -- (160) 74,121
Issuance of common stock
for cash............... 1,575,000 16 -- -- 2,772 -- -- 2,788
Cash reimbursement to
certain shareholders... -- -- -- -- (7,047) -- -- (7,047)
Unearned compensation... -- -- -- -- 93,758 (93,758) -- --
Amortization of
compensation expense... -- -- -- -- 37,111 -- 37,111
PCG Warrants............ 24,406,340 244 -- -- 275,054 -- -- 275,298
Issuance of common stock
in exchange for
termination of Advisory
Services Agreement..... 14,210,526 142 -- -- 134,858 -- -- 135,000
Preferred stock
dividends.............. -- -- -- -- (12,681) -- -- (12,681)
Premium on redemption of
preferred stock........ -- -- -- -- (34,140) -- -- (34,140)
Common stock
transactions with
certain shareholders... 21,733,758 217 22,033,758 (209,415) 209,198 -- -- --
Issuance of common stock
in connection with
initial public
offering, net of
$30,916 issuance costs. 44,420,000 444 -- -- 390,630 -- -- 391,074
Issuance of common stock
from exercise of stock
options................ 656,688 7 -- -- 692 -- -- 699
Net loss................ -- -- -- -- -- -- (87,903) (87,903)
----------- ------ ---------- --------- ---------- -------- -------- --------
Balance, December 31,
1998................... 432,776,246 $4,328 22,033,758 $(209,415) $1,124,117 $(56,647) $(88,063) $774,320
=========== ====== ========== ========= ========== ======== ======== ========
</TABLE>
- --------
(a) Additional Paid-in Capital has been charged retroactively for the par value
of the shares issued as a result of the 2-for-1 stock split effected in the
form of a stock dividend effective on March 9, 1999.
See accompanying notes.
F-5
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Period From
March 19, 1997
Year Ended (Date of Inception)
December 31, 1998 to December 31, 1997
----------------- --------------------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING
ACTIVITIES:
Net loss applicable to common
shareholders.......................... $(134,724) $(12,850)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Equity in loss of affiliates........... 2,508 --
Depreciation and amortization.......... 541 39
Provision for doubtful accounts........ 4,233 --
Termination of Advisory Services
Agreement ............................ 135,000 --
Stock related expenses................. 39,374 --
Preferred stock dividends.............. 12,681 12,690
Redemption of preferred stock.......... 34,140 --
Extraordinary loss on retirement of
senior notes.......................... 19,709 --
Capacity available for sale excluding
cash expenditures for investing
activities............................ 123,329 (21,200)
Provision for deferred income taxes.... 9,654 --
Changes in operating assets and
liabilities:
Increase in accounts receivable....... (118,743) --
Increase in other assets and prepaid
costs................................ (46,662) (1,032)
Increase in deferred revenue.......... 64,197 5,325
Increase in income taxes payable ..... 15,604 --
Increase in accounts payable and
accrued liabilities.................. 30,332 1,249
Increase in obligations under inland
services agreements.................. 17,554 20,900
--------- --------
Net cash provided by operating
activities........................... 208,727 5,121
--------- --------
CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES:
Proceeds from issuance of common stock,
net................................... 392,298 73,736
Proceeds from issuance of preferred
stock, net............................ 483,000 92,470
Proceeds from issuance of senior notes. 796,495 150,000
Proceeds from long term debt........... 290,556 162,325
Repayment of long term debt............ (176,890) --
Retirement of 1997 issued senior notes. (159,750) --
Redemption of 1997 issued preferred
stock................................. (134,372) --
Finance and organization costs
incurred.............................. (37,665) (28,181)
Cash reimbursement to certain
shareholders.......................... (7,047) --
Increase in restricted cash and cash
equivalents........................... (419,515) (25,275)
--------- --------
Net cash provided by financing
activities........................... 1,027,110 425,075
--------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Cash paid for construction in progress
and capacity available for sale....... (413,996) (428,743)
Investment in affiliates............... (16,701) --
--------- --------
Net cash used in investing activities. (430,697) (428,743)
--------- --------
NET INCREASE IN CASH AND CASH
EQUIVALENTS............................ 805,140 1,453
CASH AND CASH EQUIVALENTS, beginning of
period................................. 1,453 --
--------- --------
CASH AND CASH EQUIVALENTS, end of peri-
od..................................... $ 806,593 $ 1,453
========= ========
SUPPLEMENTAL INFORMATION ON NON-CASH
FINANCING ACTIVITIES:
Common stock distributed to holders of
preferred stock....................... $ -- $ 13,235
========= ========
SUPPLEMENTAL INFORMATION ON NON-CASH
INVESTING ACTIVITIES
Costs incurred for construction in
progress and capacity available for
sale.................................. $ 607,865 $497,319
Increase in accrued construction costs. (77,077) (52,004)
Increase in accrued interest........... (8,412) (1,641)
Amortization of deferred finance and
organization costs.................... (7,883) (2,223)
(Increase) decrease in obligations
under capital leases.................. 11,660 (12,298)
PCG Warrants........................... (112,157) --
Increase in accrued liabilities........ -- (410)
--------- --------
Cash paid for construction in progress
and capacity available for sale $ 413,996 $428,743
========= ========
SUPPLEMENTAL INFORMATION ON NON-CASH
INVESTING ACTIVITIES:
Cost of investments in affiliates...... $(179,842) $ --
PCG Warrants........................... 163,141 $ --
--------- --------
$ (16,701) $ --
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid and capitalized.......... $ 39,424 $ 8,136
========= ========
Interest paid (net of capitalized
interest)............................. $ 33,854 $ --
========= ========
Cash paid for taxes.................... $ 7,809 $ --
========= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Throughout these consolidated financial statements, references to "dollars"
and "$"
are to United States dollars.
1. BACKGROUND AND ORGANIZATION
Global Crossing Ltd. (together with its consolidated subsidiaries, "GCL" or
the "Company") is an independent provider of global Internet and long distance
telecommunications facilities and services utilizing a network of undersea and
terrestrial digital fiber optic cable systems (the "Global Crossing Network").
The Company operates as a "carriers' carrier", providing tiered pricing and
segmented products to licensed providers of international telecommunications
services. Capacity on the Global Crossing Network is offered to all customers
on an open, equal access basis. The systems under development by the Company
will form a state-of-the-art interconnected worldwide high capacity fiber
optic network.
During March 1997, Global Crossing Ltd., LDC ("Old GCL"), formerly GT Parent
Holdings LDC, was incorporated as an exempted limited duration company in the
Cayman Islands. In March 1998, GCL, a Bermuda company, was formed as a wholly-
owned subsidiary of Old GCL. At that time, Old GCL contributed its investment
in Global Telesystems Holdings Ltd. ("GTH") to GCL. During April 1998, GCL
formed a wholly-owned subsidiary, Global Crossing Holdings Ltd. ("GCH"), a
Bermuda company, and contributed its investment in GTH to GCH upon its
formation.
In January 1998, Old GCL effected a 100-for-1 stock split of each of its
Class A, B, C and D common stock and undesignated stock and amended the par
value of each share of common stock from $.0001 per share to $.000001 per
share. Prior to GCL's Initial Public Offering ("IPO") in August 1998, GCL
declared a stock dividend to Old GCL resulting in Old GCL holding 1.5 shares
of common stock of GCL for each share of common stock of Old GCL outstanding.
Pursuant to the terms of the Articles of Association of Old GCL and prior to
the Company's IPO, each holder of Class D shares of Old GCL converted such
shares into a fraction of a Class E share of Old GCL based upon a valuation at
the time of such conversion, together with a warrant to purchase the remaining
fraction of such Class E share at an exercise price based upon such market
valuation. In addition, each holder of Class E shares of Old GCL had such
Class E shares converted into Class B shares of Old GCL. Accordingly, each
holder of Class D and Class E shares ultimately received Class B shares, with
the warrants to purchase Class E shares received by former Class D
shareholders then cancelled in exchange for warrants ("New GCL Warrants") to
purchase shares of Common Stock of GCL at an exercise price equal to the IPO
price of $9.50 per share.
Subsequent to the above transaction and prior to the Company's IPO, each
shareholder of Old GCL (other than Canadian Imperial Bank of Commerce
("CIBC"), a major shareholder) exchanged their interests in Old GCL for shares
of common stock of GCL held by Old GCL at a rate of 1.5 shares of common stock
of GCL for each share of common stock of Old GCL ("Old GCL Exchange"). CIBC
did not participate in the above mentioned transaction and continues to
maintain such ownership of GCL through Old GCL, which is now a wholly owned
subsidiary of CIBC.
Because Old GCL, GCL and GCH were entities under common control, the
transfers by Old GCL to GCL and GCL to GCH and the Old GCL Exchange were
accounted for similar to a pooling of interests. The consolidated financial
statements presented have been retroactively restated to reflect these
transactions as if they had occurred as of March 19, 1997 (Date of Inception).
In February 1999, the Board of Directors declared a 2-for-1 split of the
Company's common stock in the form of a stock dividend which was effective on
March 9, 1999. All share information presented in these consolidated financial
statements gives retroactive effect to the 100-for-1 stock split in January
1998, 1.5-for-1 stock dividend in August 1998 and 2-for-1 stock dividend on
March 9, 1999.
F-7
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. The significant
accounting policies are summarized as follows:
a) Principles of Consolidation
The consolidated financial statements include the accounts of GCL and its
wholly owned subsidiaries. All significant intercompany transactions have been
eliminated. Investments in affiliates, in which GCL has significant influence
but does not exercise control, are accounted for using the equity method.
b) Development Stage Company
The Company was in its development stage until May 1998 when the United
States to United Kingdom segment of the AC-1 system was placed into service
and the Company began generating significant revenues.
Successful future operations are subject to several risks, including the
ability of the Company to ensure the successful, timely and cost-effective
completion of fiber optic cable systems as well as to successfully market and
generate significant revenue from the sale of capacity of the systems. GCL may
encounter problems, delays and expenses, many of which may be beyond its
control. There can be no assurance that the cable systems will be completed
within the time frame and that capacity sales will meet expectations, or that
substantial delays would not adversely affect GCL's achievement of profitable
operations.
c) 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 at the date of purchase to
be cash equivalents.
Current and long term restricted cash and cash equivalents includes the
following:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1997
------ ------
(in
millions)
<S> <C> <C>
Funds restricted for PC-1 construction..................... $ 231 $ --
Funds restricted under the AC-1 Credit Facility............ 89 5
Funds restricted for MAC construction...................... 66 --
Funding for future interest on senior notes................ 38 20
Other...................................................... 21 --
----- ------
Total...................................................... 445 25
Less: Current portion of restricted cash and cash
equivalents............................................... (77) (25)
----- ------
Long term restricted cash and cash equivalents............. $ 368 $ --
===== ======
</TABLE>
F-8
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
d) Revenue and Deferred Revenue, Cost of Sales and Maintenance Costs
i) Revenue and Deferred Revenue
Sales Type Lease Revenue and Deferred Revenue
Customers of the Company can enter into Capacity Purchase Agreements
("CPAs") to purchase an Indefeasible Right of Use ("IRU") in units of capacity
on any of the Company's fiber optic cable systems ("Systems") described in
Note 3. The purchase price for capacity on a System is non-refundable once the
applicable segment purchased on a System is Ready For Service ("RFS"). The IRU
purchased entitles the customer to all rights and obligations of ownership of
the capacity for a period of 25 years after the System RFS date. The Company's
CPAs generally provide that the System will have self-healing ring capability,
which means capacity on any segment of a System will be instantaneously
restored either on another System segment or within the same segment in the
event of interruption so that the same point-to-point connectivity is
maintained.
Revenues from the sale of capacity are recognized in the period that the
rights and obligations of ownership transfer to the purchaser, which occurs
when (i) the purchaser obtains the right to use the capacity, which can only
be suspended if the purchaser fails to pay the full purchase price or fulfill
its contractual obligations, (ii) the purchaser is obligated to pay
Operations, Administration and Maintenance ("OA&M") costs and (iii) the
segment of a System related to the capacity purchased is available for
service. Customers who have entered into CPAs for capacity have paid deposits
toward the purchase price and such amounts have been included as deferred
revenue in the accompanying consolidated balance sheets. In some CPAs,
customers who have purchased capacity on a System prior to the date the System
has self-healing ring capacity have contractually required full self-healing
ring capability as a legal condition which, if not satisfied, would enable
them to terminate the CPA and require the Company to refund capacity payments.
Payments received relating to such CPAs on AC-1 are included in deferred
revenue in the accompanying consolidated balance sheets.
The Company has entered into contracts, called Inland Services Agreements
("ISAs"), to obtain IRUs for terrestrial capacity. The Company in turn sells
this third party terrestrial capacity under separate CPAs to certain customers
for the purpose of extending capacity from certain System landing stations to
major telecommunication cities. The purchase price for terrestrial capacity is
non-refundable and grants the customer an IRU, which entitles the customer to
all rights and obligations of ownership for terms of 25 years after the RFS
date of the related System.
Operating Type Lease Revenue and Deferred Revenue
In addition to sales type leases, the Company may enter into operating lease
agreements to lease capacity on its Systems. These agreements may grant the
customer a right to use capacity for periods of time which may be
substantially less than the design life of the capacity (generally 25 years).
The Company will amortize revenues from these operating lease agreements over
the lives of the agreements, with cash received but not yet recognized as
operating revenue, recorded in the accompanying consolidated balance sheets as
deferred revenue.
OA&M Revenue
Pursuant to the terms of its existing CPAs, the Company is obliged to use
commercially reasonable efforts to cause AC-1 to be maintained in efficient
working order and in accordance with industry standards. In exchange for the
OA&M services provided by Atlantic Crossing Ltd. ("ACL") through the OA&M
agreement with Tyco Submarine Systems Ltd. ("TSSL"), customers are obligated
for the term of the IRU to pay for their allocable share of the costs for
operating and maintaining the System. Customers appoint members to a System
Advisory Committee, which is charged with the responsibility of directing the
operations and maintenance of the System.
F-9
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Customers pay for 110% of ACL's cost to operate and maintain AC-1 based on
their pro-rata share of total capacity subject to annual maximum amounts per
circuit purchased of $250,000 per transatlantic circuit and $50,000 per
European circuit. Their pro-rata share is effectively calculated by taking the
weighted average of purchased capacity over total capacity multiplied by 110%
of actual costs incurred. These OA&M costs are billed to customers quarterly
in advance based on the prior year's actual costs. Payments are non-
refundable, and should a customer fail to make an OA&M payment, ACL may
suspend all rights to capacity granted under the IRU. Undersea OA&M revenues
are recognized in the period the services are provided. On an annual basis,
the actual OA&M costs incurred by the Company are accumulated and an
adjustment is made to true up actual OA&M revenues so that they equal 110% of
actual costs incurred, provided specified contractual limits have not been
reached.
ii) Cost of Sales
Sales Type Lease Cost of Sales
Cost of undersea sales in any period is calculated based on the ratio of
capacity revenues recognized in the period to total expected capacity revenues
over the life of the System multiplied by the total costs incurred to
construct the System. This calculation of cost of sales matches costs with the
value of each sale relative to total expected revenues. Until the entire
System is completed, for purposes of calculating cost of sales, the total
System costs incurred will include an estimate of remaining costs to be
incurred to complete the entire System plus the cost of System upgrades that
management has the intent and ability to complete, provided the need for such
upgrades is supported by a third party consultant's independent revenue
forecast.
During 1998, the Company entered into ISAs to obtain IRUs for terrestrial
capacity for terms of 25 years. Under the IRUs, the Company is required to pay
an up-front non-recurring charge plus, in certain cases, monthly recurring
charges over a 25 year period and, in exchange, obtains all rights and
obligations of ownership. The Company has accounted for the IRUs as capital
leases. The cost of acquiring this terrestrial capacity is charged to cost of
sales in the period that the related revenue is recognized. The Company
capitalized the present value of total future payments (excluding OA&M costs)
in capacity available for sale and recorded an equal amount as an obligation
under ISAs in the accompanying consolidated balance sheets.
Customers who purchased AC-1 capacity prior to February 22, 1999 ("AC-1 RFS
date") were granted 80% of the unsold capacity ("residual capacity"), if any,
12 1/2 years after the AC-1 RFS date. However, based on sales projections
provided by a third party consultant, management believes it is highly
unlikely that there will be a material amount of unsold capacity on AC-1 at
such time. The Company has no constraints on the pricing or structure of sales
of residual capacity and the Company would expect that if such capacity had
any remaining value, it would enter into one or more transactions to dispose
of such capacity prior to such date to realize such remaining value. As a
result, the right to residual capacity is not a substantive right.
In the period the Company commits to purchase upgrades to increase System
capacity, the total expected System capacity revenues and cost of the System
used in the cost of sales calculation will change to take into account the
further increase in System cost and in System capacity. The total expected
System capacity revenues used by the Company in its cost of sales calculation
will always be limited by total sales forecasted by a third party consultant
which is updated on an annual basis. The AC-1 System was designed to be
upgradable so as to increase the initial design capacity of 256 circuits
available for sale. The Company has contracted with TSSL to upgrade capacity
on AC-1 to 512 circuits. Based on the current third party consultant's sales
forecast, the Company expects to sell all 512 circuits available for sale.
F-10
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition to capacity upgrades, management's estimate of future expected
capacity revenues may change due to a number of factors, including possible
variances in actual sales prices and volume from management's estimates.
Management will continually evaluate these factors in conjunction with the
updated third party consultant's sales forecast and, as necessary, revise its
estimate of the total expected revenues to be derived over the life of a
System. Changes in management's estimate of the total expected revenues to be
derived from sales of capacity result in adjustments to the calculations of
cost of sales which are recorded on a prospective basis over future periods
commencing in the period management revises its estimate.
Under their respective CPAs, certain customers have been provided options to
purchase additional capacity at specified prices for specified future periods
as well as the option to purchase additional capacity should the Company
upgrade the AC-1 capacity in the future. In many cases, prices under the
options to purchase capacity during these specified periods are lower than the
current price for capacity charged to the customer. Management's estimate of
future revenues for purposes of calculating cost of sales takes into
consideration prices under these options.
Operating Type Lease Cost of Capacity
Costs relating to operating type lease revenues will be classified as a
depreciable asset and depreciated over the estimated useful life of the
capacity.
iii) Maintenance Costs
The Company has entered into an OA&M agreement with TSSL whereby TSSL is
obligated to provide operating, administration and maintenance functions to
AC-1, which include management and maintenance of a Network Operating Center,
assumption of vessel costs, obtaining and renewing all operating permits,
providing repair equipment, providing cable protection and ordering and
restocking equipment spares. The OA&M agreement is for an initial term of
eight years with two renewal periods of eight and one half years each at the
Company's option. The OA&M costs related to this agreement are expensed as
incurred.
OA&M costs relating to ISAs are expensed as incurred and the related revenue
is recognized in the period the services are provided.
e) Commissions and Advisory Services Fees
The Company's policy is to record sales commissions and advisory fee
expenses and related payable upon the recognition of revenue so as to
appropriately match these costs with the related revenue. Under the Advisory
Services Agreement ("ASA"), which was terminated by December 31, 1998, the
Company paid PCG Telecom Services LLC ("PCG Telecom") and its affiliates 2% of
revenues for advisory services performed. Under the Sales Agency Agreement
("SAA") the Company pays TSSL a commission based on a percentage of capacity
revenues.
f) Construction in Progress
Costs incurred prior to a segment's completion are reflected as construction
in progress in the accompanying consolidated balance sheets and recorded as
capacity available for sale at the date each segment of the System becomes
operational. Capacity available for sale is recorded at the lower of cost or
fair value less costs to sell and is charged to costs of sales in the period
the related revenues are recognized. Fair value of capacity is derived from a
third party consultant's market study of expected sales of capacity.
F-11
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Construction in progress includes direct expenditures for construction of a
System and is stated at cost. Capitalized costs include costs incurred under
the construction contract; advisory, consulting and legal fees; interest; 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
System becomes probable are expensed as incurred.
Interest incurred, which includes the amortization of deferred finance fees
and issuance discount ("interest cost"), are capitalized to construction in
progress in accordance with Statement of Financial Accounting Standards No.
34, "Capitalization of Interest Costs" ("SFAS 34"). Total interest cost
incurred and interest capitalized to construction in progress during the
periods were:
<TABLE>
<CAPTION>
Period from
March 19, 1997
(Date of
Year Ended Inception) to
December 31, 1998 December 31, 1997
----------------- -----------------
(In thousands)
<S> <C> <C>
Interest cost incurred..................... $92,813 $9,777
======= ======
Interest cost capitalized to construction
in progress............................... $49,933 $9,777
======= ======
</TABLE>
g) Deferred Finance and Organization Costs
Costs incurred to obtain financing through the issuance of senior notes and
long term debt have been reflected as an asset in the accompanying
consolidated balance sheets. Costs incurred to obtain financing through the
issuance of preferred stock have been reflected as a reduction in the carrying
value of the issued preferred stock. 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. In 1998, certain preferred
stock was redeemed at which time the remaining balance of unamortized discount
and offering costs was charged against additional paid-in capital. During the
construction period, the amortized portion of deferred financing costs
relating to the senior notes and the long term debt are included in
construction in progress as a component of interest capitalized or recorded as
interest expense in accordance with SFAS 34. The amortized portion of the
deferred financing costs relating to the preferred stock is included as a
component of preferred stock dividends.
h) Translation of Foreign Currencies
Substantially all of the Company's international subsidiaries use their
local currency as their functional currency. For those subsidiaries using the
local currency 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. Where the U.S. dollar is the functional currency,
translation adjustments are recorded in the accompanying consolidated
statements of operations. None of the Company's translation adjustments were
material as of and for the year ended December 31, 1998 and as of and for the
period from March 19, 1997 (Date of Inception) to December 31, 1997.
i) Stock Option Plan
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and, accordingly, recognizes compensation expense for stock option
grants to the extent that the estimated fair value of the stock exceeds the
exercise price of the option at the measurement date. The compensation expense
is charged against operations ratably over the vesting period of the options.
F-12
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
j) Interest Rate Derivatives
The Company uses a derivative financial instrument for the purpose of
reducing its exposure to adverse fluctuations in interest rates. The
counterparty to the only derivative financial instrument in effect as of
December 31, 1998 is CIBC. The Company is exposed to credit loss in the event
of nonperformance by CIBC. As of December 31, 1998 the Company does not
utilize derivative financial instruments for trading or other speculative
purposes.
For interest rate derivatives to qualify for hedge accounting, the debt
instrument being hedged must expose the Company to interest rate risk and, at
the inception of the derivative instrument and throughout the period the
derivative is held, there must be a high correlation of changes in the market
value of the derivative and interest expense of the hedged item. Gains and
losses on interest rate derivatives and other derivative instruments which do
not meet this criteria would be recorded in the statement of operations.
As discussed in Note 5, the Company has entered into an interest rate swap
agreement to hedge its exposure to interest rates on its long term debt. Since
this agreement qualifies for hedge accounting, the net cash amounts paid or
received on the agreement are accrued and recognized as an adjustment to
interest expense on the related debt.
k) Net Loss Per Share
Losses per share are calculated in accordance with Statement of Financial
Accounting Standards No. 128 "Earnings Per Share." Share and per share data
presented reflects all stock dividends and stock splits.
The following is a reconciliation of the numerators and the denominators of
the basic and diluted loss per share:
<TABLE>
<CAPTION>
Period from
March 19, 1997
Year Ended (Date of Inception)
December 31, 1998 to December 31, 1997
----------------- --------------------
(In thousands, except share
and per share information)
<S> <C> <C>
Basic and Diluted
Loss before extraordinary item......... $ (68,194) $ (160)
Preferred stock dividends.............. (12,681) (12,690)
Redemption of preferred stock.......... (34,140) --
----------- -----------
Loss applicable to common shareholders
before extraordinary item............. $ (115,015) $ (12,850)
=========== ===========
Weighted average share outstanding:
Basic and diluted...................... 358,735,340 325,773,934
----------- -----------
Loss applicable to common shareholders
before extraordinary item:
Basic and diluted...................... $ (0.32) $ (0.04)
=========== ===========
</TABLE>
Dilutive options and warrants did not have an effect on the computation of
diluted loss per share in 1998 and 1997 since they were anti-dilutive.
F-13
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
l) Income Taxes
The Company recognizes current and deferred income tax assets and
liabilities based upon all events that have been recognized in the
consolidated financial statements as measured by the provision of the enacted
tax laws.
m) Recently Adopted and New Accounting Standards
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 is effective for periods beginning after December 15,
1997. There was no impact to the consolidated financial statements due to the
adoption of SFAS 130 in 1998. The Financial Accounting Standards Board has
also issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"), which is
effective for periods beginning after June 15, 1999. Management does not
expect the impact of the adoption of SFAS 133 on the Company's consolidated
financial position or results of operations to be material.
The American Institute of Certified Public Accountants recently issued
Statement of Position 98-5, "Reporting on the Cost of Start-Up Activities"
("SOP 98-5"). The Company is required to adopt SOP 98-5 during January, 1999.
The adoption of SOP 98-5 will result in a charge against net income in the
statement of operations of the first quarter of 1999 which management
estimates will be approximately $15 million. This charge is comprised
primarily of costs incurred for System startup activities that were previously
capitalized to Systems not yet ready for service. The $15 million charge
represents less than 1% of the projected total costs of the Systems currently
under development by the Company.
n) Reclassifications
Certain prior year amounts have been reclassified in the consolidated
financial statements for consistent presentation.
3. GLOBAL CROSSING NETWORK
GCL is a provider of Internet and long distance telecommunications
facilities and related services supplying its customers with global "point-to-
point" connectivity. As such, the Company is engaged in only one business
segment worldwide, and derives its revenues from customers located in the
following geographic regions: the Americas, Europe and Asia Pacific. The
Company also maintains long-lived assets in these regions; however, the
majority of these assets are in international waters. In addition, the Company
derives all of its revenues from companies in the Internet and long distance
telecommunications industry and, as a result, has concentration of credit risk
in this industry.
F-14
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Financial information relating to the Company's consolidated operations by
geographic area was as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- -------------------
Long-Lived Long-Lived
Revenues(a) Assets(b) Revenues Assets(b)
----------- ---------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C>
North America
United States...................... $200,489 $ 70,555 $ -- $ 50,169
Canada............................. 68,351 -- -- --
----------------------------------------
268,840 70,555 -- 50,169
----------------------------------------
Europe
The Netherlands.................... 46,832 --
Germany............................ 35,933 --
Other.............................. 72,494 --
----------------------------------------
155,259 161,535 -- 107,412
----------------------------------------
Asia Pacific......................... -- -- -- --
International waters................. -- 770,966 -- 360,937
----------------------------------------
Consolidated......................... $424,099 $1,003,056 $ -- $518,518
======== ========== ======== ========
</TABLE>
- --------
(a) Revenues for the year ended December 31, 1998 by region are classified
according to the location of the customer. During 1998, there was one customer
located in the United States that accounted for 16% of consolidated revenue,
another customer located in Canada that accounted for 16% of consolidated
revenue, and one customer located in the Netherlands that accounted for 11% of
consolidated revenue.
(b) Long-lived assets include capacity available for sale and construction in
progress as of December 31.
Atlantic Crossing ("AC-1")
ACL, formerly Global Telesystems Ltd., an indirect wholly-owned subsidiary
of GCL, entered into a fixed price contract with TSSL for the construction of
AC-1, an upgradeable undersea fiber optic cable ring, connecting New York, the
United Kingdom, the Netherlands and Germany. AT&T Corp. provided ACL with a
guarantee in respect of TSSL's obligations under the contract. Certain
segments of AC-1 were accepted by ACL and made available for commercial
service during 1998. TSSL retains title ownership of segment assets in United
States territory until GT Landing Corp., a United States wholly-owned
subsidiary of ACL, exercises its $10,000 bargain purchase option to purchase
title. Pursuant to the contract, TSSL granted GT Landing Corp. an IRU for the
estimated 25 year life of the system. GT Landing Corp. accounted for the IRU
as a capital lease, since the IRU transfers the risks and rewards of ownership
to GT Landing Corp. The United States assets governed by this IRU includes all
landing station assets (with the exception of the building and land, to which
GT Landing Corp. has title), fiber optic cable located in the United States
and the landing license. The Company entered into a capital lease for the
landing station building and conduit in both Germany and the Netherlands. ACL
entered into a $482 million credit facility to finance, in part, the
construction and financing of AC-1.
Mid-Atlantic Crossing ("MAC")
Mid-Atlantic Crossing Ltd. ("MACL"), an indirect wholly-owned subsidiary of
GCL, entered into fixed price contracts with Alcatel Submarine Networks in
June 1998 and TSSL in October 1998 for the construction of MAC, an upgradeable
undersea fiber optic cable ring connecting New York, the Caribbean and
Florida. The
F-15
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
estimated cost of the System is $330 million and is expected to be ready for
service in December 1999 ("MAC RFS date"). Companies have been incorporated in
each country in which the cable will land in order to own the portion of the
System located in each country and the related territorial waters. MACL
entered into a $260 million credit facility to finance, in part, the
construction and financing of MAC. See Note 5.
Pan American Crossing ("PAC")
In July 1998, the Company, through its indirect wholly-owned subsidiary, Pan
American Crossing Ltd. ("PACL"), entered into a fixed price contract with TSSL
for the construction of PAC, an upgradeable undersea fiber optic cable System
connecting California, Mexico and Panama and the Caribbean. The estimated cost
of the System is $495 million. PACL signed a commitment letter to obtain up to
$300 million of non-recourse indebtedness to finance, in part, the
construction and financing of PAC.
Pan European Crossing ("PEC")
The Company is also developing PEC, a 10,000 km upgradeable terrestrial
fiber optic system connecting 24 European cities to each other and to AC-1.
The construction costs of PEC are estimated to be $850 million. In October
1998, the Company entered into an agreement with VersaTel Telecom Europe B.V.
("VersaTel") whereby the Company will secure ownership of optical fiber
conduits on VersaTel's routes connecting Amsterdam, Brussels and the French
border by March 1999 in exchange for capacity and dark fiber on PEC. In
addition, in October 1998, the Company executed an agreement with Cable &
Wireless PLC for the sale of dark fiber on PEC for a purchase price of over
$100 million. Furthermore, in November 1998, the Company executed an agreement
with GasLINE for the construction of a portion of PEC located in Germany. The
Company is currently negotiating with other parties for the acquisition of
rights of way and the acquisition or construction of conduits. Lucent will
supply fiber and equipment for PEC as well as project management and
integration services.
4. INVESTMENT IN AFFILIATES
In addition to the wholly-owned Systems discussed in Note 3, GCL has
invested in Pacific Crossing Ltd. and Global Access Ltd. (together
"affiliates") which are developing Pacific Crossing ("PC-1") and GAL
respectively, which are also part of the Global Crossing Network.
Investment in Pacific Crossing Ltd. ("PCL")
In April 1998, a wholly-owned subsidiary of GCL entered into a joint venture
to construct PC-1 which is owned and operated by PCL. The Company has an
economic interest in PCL represented by a 50% direct voting interest and,
through one of the joint venture partners, owns a further 8% economic non-
voting interest. PCL entered into a contract in April 1998 with TSSL to
construct PC-1 for a total price of approximately $1,200 million, which will
be financed through a $400 million equity contribution by the joint venture
partners and an $850 million credit facility. In July 1998, an $850 million
aggregate senior secured non-recourse loan facility (the "PCL Credit
Facility") was executed for the construction and financing costs of PC-1. The
PCL Credit Facility is comprised of an $840 million multiple drawdown term
loan facility and a $10 million working capital facility. In July 1998, an
initial drawdown was made on the term loan facility to repay a $104 million
promissory note used for initial construction costs on PC-1 as well as fees
incurred to secure the credit facility. The Company also placed $231 million
into a restricted cash collateral account to satisfy its equity funding
commitment for its 58% joint venture economic interest in PCL.
F-16
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investment in Global Access Ltd.
In December 1998, a wholly-owned subsidiary of GCL entered into a joint
venture, Global Access Ltd., to construct and operate GAL, a terrestrial cable
system connecting Tokyo, Osaka and Nagoya with PC-1. The Company has a 49%
interest in Global Access Ltd.
The investment in affiliates as of December 31, 1998 consists of the following
items:
<TABLE>
<S> <C>
(In thousands)
Carrying value of investment in PCL...................... $ (2,502)
PC-1 development costs................................... 163,141
Carrying value of investment in Global Access Ltd. ...... 16,695
--------------
Investment in affiliates................................. $ 177,334
==============
</TABLE>
The PC-1 development costs represent the estimated unamortized value of the
PCG Warrants as of December 31, 1998 which were granted to Pacific Capital
Group ("PCG") in exchange for the PC-1 system and related rights. In
connection with the formation of PCL, the Company agreed to make available to
PCL the consideration received by the Company in connection with the grant of
the PCG Warrants in addition to the $231 million cash investment to be made by
the Company. See Note 10 for a description of PCG Warrants.
5. LONG TERM DEBT, OBLIGATIONS UNDER INLAND SERVICES AGREEMENTS AND CAPITAL
LEASES
AC-1 Credit Facility
During 1997, ACL entered into a $410 million aggregate senior secured non-
recourse loan facility (the "AC-1 Credit Facility") with a group of banks led
by an affiliate of CIBC and Deutsche Bank AG, for the construction and
financing costs of AC-1. During 1997, the AC-1 Credit Facility was amended to
increase it to $482 million, comprised of a $472 million multiple draw down
term loan facility (the "Term Facility") and a $10 million working capital
facility (the "Working Capital Facility"), to extend AC-1 to include, among
other things, a Netherlands landing site. The AC-1 Credit Facility is secured
by pledges of the stock of ACL and its subsidiaries and security interests in
its assets and revenues. The unused portion of the AC-1 Credit Facility as of
December 31, 1998 was approximately $38 million. Any amounts repaid to the
lenders cannot be re-borrowed, and are effectively permanent reductions in the
AC-1 Credit Facility.
Under the AC-1 Credit Facility, ACL may select loan arrangements as either a
Eurodollar loan or an Alternative Base Rate ("ABR") Loan. The Eurodollar
interest rate is LIBOR plus 2.0% and the ABR interest rate is the greatest of
(a) the Prime Rate, (b) the Base CD Rate plus 1% and (c) the Federal Funds
Effective Rate plus 0.5%, plus 1.0%. As of December 31, 1998, all outstanding
loans were Eurodollar loans. ACL pays a commitment fee of 0.5% per annum on
the unused portion of the AC-1 Credit Facility. The AC-1 Credit Facility
contains various covenants that (i) limit further indebtedness by ACL and its
subsidiaries, (ii) limit the ability of ACL to pay dividends, (iii) require
ACL to meet certain minimum capacity sales levels and (iv) require ACL to meet
a minimum interest coverage ratio for the years 1999 through to maturity of
the AC-1 Credit Facility. The AC-1 Credit Facility is repayable in eight semi-
annual installments ("Mandatory Repayment"). All revenues received as of
December 31, 1998 have been used to fund reserve accounts (see Note 2c), and
thereafter were applied against the borrowings. The amount repaid prior to the
AC-1 RFS date was used to reduce the Mandatory Repayment for 1999 to $7
million. The remaining balance is repayable through installments of $100
million in 2000, $141 million in 2001 and $19 million in 2002. Furthermore,
ACL is required to apply against the
F-17
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
borrowings 50% of excess cash flows received after the AC-1 RFS date. If any
Mandatory Repayment amount exceeds the outstanding loan balance, then the
outstanding loan balance will be repaid. Excess cash flow is defined under the
terms of the AC-1 Credit Facility as all cash received from revenues during
the period reduced by the payment of OA&M expenses, commissions under the
Sales Agency Agreement, and transfers to certain reserve accounts.
Effective December 31, 1997, ACL entered into an interest rate swap
transaction based on one month LIBOR to minimize its exposure to increases in
interest rates on its borrowings. The swap transaction was amended on February
2, 1998 and currently fixes ACL's floating interest rate at 5.7825% on a
notional amount of borrowings ranging between $200 million and $310 million
until January 31, 1999.
MAC Credit Facility
During November 1998, MACL entered into a $260 million aggregate senior
secured non-recourse loan facility (the "MAC Credit Facility") with a group of
banks led by CIBC and Deutsche Bank AG, for the construction and financing
costs of MAC. The MAC Credit Facility is comprised of a $250 million multiple
draw down term loan facility (the "MAC Term Facility") and a $10 million
working capital facility (the "MAC Working Capital Facility"). Of the $250
million MAC Term Facility, $31 million is restricted for purposes of funding
the first System upgrade. The MAC Credit Facility is secured by pledges of the
stock of MACL and its subsidiaries and security interests in its assets and
revenues.
Under the MAC Credit Facility, MACL may select loan arrangements as either a
Eurodollar loan or an Alternative Base Rate ("ABR") Loan. The Eurodollar
interest rate is LIBOR plus 3.0% and the ABR interest rate is the greater of
(a) the Prime Rate and (b) the Federal Funds Effective Rate plus 0.5%, plus
2.0%. As of December 31, 1998, all outstanding loans were Eurodollar loans.
MAC Credit Facility contains various covenants that (i) limit further
indebtedness by MACL and its subsidiaries, (ii) limit the ability of MACL to
pay dividends, (iii) require MACL to meet certain minimum capacity sales
levels and (iv) require MACL to meet a minimum interest coverage ratio for the
years 2000 through to the maturity of the MAC Credit Facility. The MAC Credit
Facility is repayable in ten semi-annual installments commencing on the first
August 31, November 30, February 28, or May 31 occurring 165 days after the
MAC RFS date, with $38 million of the principal amount due in the initial
year, $45 million due in the second year, and $59 million due in each of the
third, fourth, and fifth years. If at any semi-annual installment date the
outstanding loan balance is lower than the installment amounts noted in the
previous sentence, then the outstanding loan balance amount will be repaid.
F-18
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long Term Debt
Long term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
--------- ---------
(In thousands)
<S> <C> <C>
AC-1 Credit Facility.................................... $ 266,799 $ 162,325
MAC Credit Facility..................................... 9,192 --
--------- ---------
Total debt.............................................. 275,991 162,325
Less: current portion of long term debt................. (6,393) --
--------- ---------
Long term debt.......................................... $ 269,598 $ 162,325
========= =========
Maturities of long term debt are as follows:
<CAPTION>
Year Ending December 31, (In thousands)
<S> <C> <C>
1999.................................................... $ 6,393
2000.................................................... 99,555
2001.................................................... 150,792
2002.................................................... 19,251
---------
Total................................................... $ 275,991
=========
</TABLE>
Capital Leases and Obligations under Inland Service Agreements
As described in Note 3, the Company has capitalized the minimum lease
payments of the IRU held by GT Landing Corp. on AC-1 assets held in the United
States. The Company has been granted a bargain purchase option to purchase for
$10,000 all rights and title to these assets at any time during the term of
this contract which is 25 years from the AC-1 RFS date. The Company has also
capitalized to construction in progress in the accompanying balance sheets
building and conduit leases in the Netherlands and Germany. As of December 31,
1998, the present value of the payments under these capital leases is $8
million ($12 million as of December 31, 1997).
Contracts to purchase terrestrial capacity have a duration of 25 years which
represents more than 75 percent of the economic life of the asset being
purchased. Certain of these contracts require payments over the 25 year
period. As of December 31, 1998, the present value of the payments under these
contracts (excluding amounts attributable to operations and maintenance) has
been recorded as obligations under ISAs in the accompanying consolidated
balance sheets in the amount of $31 million ($21 million as of December 31,
1997).
F-19
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1998 future minimum payments under these ISAs and capital
leases are as follows:
<TABLE>
<S> <C>
Year Ending December 31, (In thousands)
1999............................................................ $ 18,301
2000............................................................ 13,628
2001............................................................ 5,513
2002............................................................ 5,677
2003............................................................ 5,848
Thereafter until 2023........................................... 163,941
--------------
Total minimum lease payments.................................... 212,908
Less: Amount representing maintenance payments.................. (131,515)
--------------
81,393
Less: Amount representing interest.............................. (42,301)
--------------
Present value of net minimum lease payments..................... $ 39,092
==============
</TABLE>
6. SENIOR NOTES
New Senior Notes
The 9 5/8% senior notes due May 15, 2008 issued by GCH, with a face value of
$800 million ("New Senior Notes"), are general unsecured obligations of GCH
and rank senior to any future subordinated indebtedness of GCH and are equal
in right of payment with any future unsecured senior indebtedness of GCH. GCL
and several of GCH's subsidiaries have issued guarantees in respect of these
New Senior Notes, see Note 14. The first interest payment of $38 million on
the New Senior Notes was paid during November 1998. The Company has set aside
$38 million to fund the second interest payment due May 15, 1999. Interest is
payable semi-annually in arrears on each May 15 and November 15. The New
Senior Notes are redeemable at the option of GCH on May 15, 2003 at 104.813%,
May 15, 2004 at 103.208%, on May 15, 2005 at 101.604% and on May 15, 2006 and
thereafter at par. The New Senior Notes are redeemable at the option of the
holders thereof only upon the occurrence of a change in control in GCL. The
indenture governing the New Senior Notes imposes certain limitations on the
ability of GCH and its subsidiaries to, among other things, (i) incur
additional indebtedness (including senior indebtedness) and (ii) pay certain
dividends and make certain other restricted payments and investments.
Old Senior Notes
The 12% senior notes issued by GTH with a face value of $150 million, due
March 31, 2004, were repurchased in May 1998 with the proceeds from the
issuance of the New Senior Notes. The Company recognized an extraordinary loss
of $20 million on repurchase comprising a premium of approximately $10 million
and a write-off of approximately $10 million of unamortized deferred financing
costs.
7. MANDATORILY REDEEMABLE PREFERRED STOCK
10 1/2% Mandatorily Redeemable Preferred Stock
In December 1998, GCH authorized the issuance of 7,500,000 shares of
preferred stock at a liquidation preference of $100.00 per share plus
accumulated and unpaid dividends. In December 1998, 5,000,000 shares of
F-20
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
GCH Preferred Stock were issued for $500 million in cash and as of December
31, 1998, 5,000,000 shares were issued and outstanding. The Company reserved
for future issuances up to 2,500,000 shares to pay dividends.
The holders of the preferred stock are entitled to receive cumulative, semi-
annual compounding dividends at an annual rate of 10 1/2% of the $100
liquidation preference per share. At the Company's option, accrued dividends
may be paid in cash or paid by issuing additional preferred stock (i.e. pay-
in-kind) until June 1, 2002, at which time they must be paid in cash.
Dividends are payable semi-annually in arrears on each June 1 and December 1.
The preferred stock ranks senior to all common stock of GCH with respect to
dividend rights, rights of redemption or rights on liquidation and on priority
with any future preferred stock of GCH. The preferred stock is junior in right
of payment of all indebtedness of GCH 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
at redemption prices starting at 105.25% of the liquidation preference in
2003, declining to 103.5% in 2004, 101.75% in 2005 and 100% thereafter. During
the period ended December 31, 1998, no dividends were paid and $4 million in
cumulative dividends were accrued and included in preferred stock as of
December 31, 1998.
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.
14% Mandatorily Redeemable Preferred Stock
In March 1997, GTH authorized 500,000 shares of preferred stock at a
liquidation preference of $1,000 per share. Effective March 25, 1997, 100,000
shares were issued by GTH and there were 109,830 shares as of December 31,
1997 issued and outstanding.
In connection with the issuance of the preferred stock, the holders thereof
purchased an aggregate of 22,500,000 shares of Old GCL's Class A common stock
for total proceeds of $8 million. Additionally, in connection with the
issuance of the preferred stock, the initial purchaser of the preferred stock
received 39,705,900 shares of Old GCL's Class A common stock for no additional
consideration representing 15% of the aggregate number of Old GCL's Class A, B
and C shares outstanding, after giving effect to the issuance. The initial
purchaser had the right to distribute these Class A shares to purchasers of
the preferred stock.
The fair value of the 39,705,900 shares of Old GCL's Class A common stock
distributed to preferred shareholders was based on the $.33 per share paid by
the holders of preferred stock for the 22,500,000 Old GCL's Class A shares
purchased for cash. The Company recorded the $13 million estimated fair value
of the Old GCL's Class A common stock issued to the purchasers as a discount
in the carrying value of the preferred stock as of December 31, 1997.
F-21
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1998, proceeds from the issuance of the New Senior Notes were used
to redeem this preferred stock. The redemption resulted in a $34 million
charge against additional paid-in capital comprised of a $16 million
redemption premium and $18 million of unamortized discount and issuance cost
on the preferred stock on the date of the redemption. The redemption premium
and write-off of unamortized discount and issuance costs on the preferred
stock were treated as a deduction to arrive at the net loss applicable to
common shareholders in the consolidated statement of operations.
Preferred stock dividends included the following:
<TABLE>
<CAPTION>
Period from
March 19,
1997 (Date of
Year Ended Inception) to
December 31, 1998 December 31, 1997
----------------- -----------------
(In thousands)
<S> <C> <C>
Preferred stock dividends.................. $11,712 $11,112
Amortization of discount on preferred
stock..................................... 618 1,011
Amortization of preferred stock issuance
costs..................................... 351 567
------- -------
$12,681 $12,690
======= =======
</TABLE>
8. EMPLOYEE BENEFIT PLANS
During 1998, the Company adopted a stock option plan under which options to
acquire up to 33,215,730 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 is recognized only to
the extent that the market price of the stock exceeds the exercise price.
Terms and conditions of the Company's options, including exercise price and
the period in which options are excisable, generally are at the discretion of
the Compensation and Stock Option Committee of the Board of Directors;
however, no options are exercisable more than ten years after date of grant.
Additional information regarding options granted and outstanding for the
year ended December 31, 1998 is summarized below:
<TABLE>
<CAPTION>
Weighted
Options Average
Available Number of Exercise
For Grant Options Price
----------- ---------- --------
<S> <C> <C> <C>
Balances as of December 31, 1997.......... -- -- --
Authorized .............................. 33,215,730
Granted.................................. (30,762,466) 30,762,466 $2.85
Exercised................................ (656,688) 1.06
Cancelled................................ 3,253,000 (3,253,000) 1.11
----------- ---------- -----
Options outstanding as of December 31,
1998..................................... 5,706,264 26,852,778 $3.11
</TABLE>
F-22
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables summarize information concerning outstanding and
exercisable options at December 31, 1998.
<TABLE>
<S> <C> <C> <C> <C> <C>
Options Outstanding Options Exercisable
-------------------------------------------------- ----------------------------
Weighted Average Weighted Average Weighted Average
Range of Number Remaining Contractual Exercise Price Number Exercise Price
Exercise Prices Outstanding Life (in years) per Share Exercisable per Share
---------------- ----------- --------------------- ---------------- ----------- ----------------
$0.83 15,717,280 9.2 $ 0.83 4,803,833 $ 0.83
2.00 to 3.33 6,844,598 9.5 3.13 1,625,000 3.33
9.50 to 13.26 4,290,900 9.7 11.44 302,834 11.34
---------------- ----------- --------------------- ---------------- ----------- ----------------
Total 26,852,778 9.3 $ 3.11 6,731,667 $ 1.91
=========== ===================== ================ =========== ================
</TABLE>
During 1998, the Company entered into an employment arrangement with a key
executive, and granted him economic rights to purchase 533,334 shares of
common stock and options to purchase 1,066,667 shares of common stock, in each
case at $2.00 per share. The economic rights vested immediately and the
options will vest over two years. The Company recorded the excess of the fair
market value of these options and rights over the purchase price as unearned
stock compensation in the amount of $15 million during the year ended December
31, 1998. The unearned compensation is being recognized as an expense over the
vesting period of the rights and options.
Through December 31, 1998, the Company recorded in additional paid-in
capital $94 million of unearned compensation, relating to awards under the
stock incentive plan plus the grant of certain economic rights and options to
purchase common stock granted to a senior executive as discussed above. During
the year the Company recognized expense of $31 million of stock related
compensation relating to the stock incentive plan and $6 million for the
vested economic rights to purchase common stock. The remaining $57 million of
unearned compensation will be recognized as follows: $28 million in 1999, $21
million in 2000 and $8 million in 2001. In addition, the Company recognized $2
million in stock related expense for shares issued during the year.
As permitted by SFAS No. 123, the Company accounted for employee stock
options under APB 25 and is recognizing compensation expense over the vesting
period to the extent that the fair value of the stock on the date the options
were granted exceeded the exercise price. Had compensation cost for the
Company's stock-based compensation plans been determined consistent with the
SFAS No. 123 fair value approach, the impact on the Company's loss applicable
to common shareholders and loss per share would be as follows:
<TABLE>
<CAPTION>
Period from
March 19, 1997
Year Ended (Date of Inception) to
December 31, 1998 December 31, 1997
----------------- ----------------------
(In thousands, except per
share information)
<S> <C> <C>
Net loss applicable to common
shareholders:
As reported.................. $(134,724) $(12,850)
Pro forma.................... $(141,585) $(12,850)
Basic and diluted net loss per
share:
As reported.................. $(0.38) $(0.04)
Pro forma.................... $(0.39) $(0.04)
</TABLE>
F-23
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under SFAS No. 123, the fair value of each option is estimated on the date
of grant using the Black-Scholes option-pricing model assuming a four year
expected life with the following assumption:
<TABLE>
<CAPTION>
Weighted
Expected Expected Risk Free Average Estimated
Date Granted Dividend Yield Volatility Interest Rate Fair Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
January 21 * 0% 0% 5.45% $0.16
April 03 * 0% 0% 5.45% 3.77
June 12 * 0% 0% 5.45% 4.92
August 09 0% 32% 5.45% 3.19
September 14 0% 32% 5.45% 9.51
September 18 0% 32% 5.45% 3.44
December 01 0% 42% 5.45% 9.77
</TABLE>
- -------------------------------------------------------------------------------
* Option granted prior to the Company's IPO
During 1998, the weighted average fair value of options issued at market value
was $0.88 and those issued less than market value was $5.33.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion the existing models do not necessarily
provide a reliable single measure of the fair value of the Company's options.
401(k) Plan
The Company offers its qualified employees the opportunity to participate in
a defined contribution retirement plan qualifying under the provisions of
Section 401(k) of the Internal Revenue Code. Each eligible employee may
contribute on a tax-deferred basis a portion of their annual earnings not to
exceed certain limits. The Company matches one-half of individual employee
contributions up to a maximum level not exceeding 7.5% of the employee's
compensation. The Company's contributions to the plan vest immediately.
Expenses recorded by the Company relating to its 401(k) plan were
approximately $0.2 million for the year ended December 31, 1998, the first
year of the 401(k) plan.
F-24
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, restricted cash and cash
equivalents, accounts receivable, accrued construction costs, accounts payable
and accrued liabilities, accrued interest, obligations under inland services
agreements and capital leases and long term debt approximate their fair value.
The fair value of the senior notes, mandatorily redeemable preferred stock and
the interest rate swap are based on market quotes and the fair values are as
follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-------------------------- --------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
(In thousands) (In thousands) ---
<S> <C> <C> <C> <C> <C>
Senior notes............ $(796,495) $(834,000) $(150,000) $(150,000)
Mandatorily redeemable
preferred stock........ (487,375) (484,375) (91,925) (91,925)
Interest rate swap...... -- (26) -- (115)
</TABLE>
10. RELATED PARTY TRANSACTIONS
Advisory Services Agreement ("ASA")
ACL entered into the ASA with PCG Telecom, an affiliate of PCG which is a
shareholder of GCL. Under the ASA, PCG Telecom provided ACL with advice in
respect of the development and maintenance of AC-1, development and
implementation of marketing and pricing strategies and the preparation of
business plans and budgets. As compensation for its advisory services, PCG
Telecom received a 2% fee on the gross revenues of the Company over a 25 year
term, subject to certain restrictions, with the first such payment to occur at
the AC-1 RFS date. Advances on fees payable under the ASA were being paid to
PCG Telecom at a rate of 1% on signed CPAs until the ASA was terminated, as
described below. Fees paid under the ASA to PCG Telecom were shared amongst
Union Labor Life Insurance Company ("ULLICO"), PCG, CIBC, and Messrs. Winnick,
Cook, Brown, Lee and Porter, all of whom are shareholders of GCL. Effective
June 1998, GCL acquired the rights under the ASA for common stock and
contributed such rights to the Company as the ASA was terminated. This
transaction was recorded in the consolidated financial statements as an
increase in additional paid-in capital of $135 million and a charge against
operations in the amount of $138 million. The $138 million is comprised of a
$135 million settlement of the fees that would have been payable and the
cancellation of $3 million owed to the Company under a related advance
agreement. The $135 million amount was calculated by applying the 2% advisory
services fee to projected future revenues and discounting the amount relating
to AC-1 revenues by 12% and the amount relating to all other system's revenues
by 15%. The result of this calculation was $156 million, which amount was
subsequently reduced to $135 million. Both the discount rates and the ultimate
valuation were determined as a result of a negotiation process including a non
management director of the Company and the various persons entitled to fees
under the ASA. The Company obtained a fairness opinion from an independent
financial advisor in connection with this transaction. In addition, the
Company incurred approximately $2 million of advisory fees prior to
termination of the contract, for a total expense of $140 million for the year
ended December 31, 1998.
PCG Warrants
Prior to January 21, 1998, PCG and its affiliates began development of
systems other than AC-1, namely PC-1, MAC and PAC. Through January 21, 1998,
such development included assembling a management team, negotiating with
potential suppliers, partners, financing sources, obtaining preliminary market
and feasibility studies and developing technical requirements. During January
1998, the Board determined that it was in the Company's best interests to
pursue these new systems, obtain the results of the work and the employees
then
F-25
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
within the scope of activity of PCG and broaden the goals, objectives and
business plan of the Company. In consideration of PCG transferring the results
of its activities and becoming limited in its future activities in fiber optic
telecommunications other than through GCL, the Board approved and the
shareholders subsequently ratified a transaction whereby PCG received
approximately $7 million (representing PCG's costs related thereto) and Old
GCL entered into a warrant agreement ("PCG Warrants") under which PCG was
issued three separate warrants permitting PCG to purchase (i) 18,453,184 of
Old GCL's Class B shares for an aggregate price of $50 million; (ii) an
additional 9,226,594 of Old GCL's Class B shares for an aggregate price of $31
million; and (iii) an additional 9,226,594 of Old GCL's Class B shares for an
aggregate price of $38 million. The PCG Warrants were granted in exchange for
the rights to commence the development of the new projects that previously had
been under development by an affiliate of PCG.
PCG Warrants became exercisable upon the completion of the IPO. The PCG
Warrants give each holder the option to convert each share under warrant into
a fraction of a Class B share based upon the ratio of the current per share
valuation at the time of conversion less the per share exercise price of the
warrant divided by the current per share valuation at the time of conversion
multiplied by the 36,906,372 shares available under the PCG Warrants, together
with a new warrant ("New PCG Warrants") to purchase the remaining fraction of
such Class B share at an exercise price equal to the then current per share
valuation. Prior to the IPO, the holders of the PCG Warrants exercised their
warrants to acquire Class B shares by way of the cashless conversion and the
New PCG Warrants were issued with an exercise price based on the per share
valuation at the conversion date.
The Company accounted for the cashless conversion of the PCG Warrants, which
occurred as of June 1998, using the current estimated per share valuation at
the expected conversion date, multiplied by the number of Class B shares
estimated to be converted in exchange for the PCG Warrants. The resulting
value under this calculation is approximately $213 million, which was
allocated to the new systems in exchange for the PCG Warrants. In connection
with the formation of PCL, the Company agreed to make available to PCL the
consideration received by the Company in connection with the grant of the PCG
Warrants, in addition to the $231 million cash investment made by the Company.
Therefore, the Company recorded an increase in its investment in PCL in the
amount of approximately $127 million and an increase in construction in
progress for PAC and MAC in the amounts of approximately $50 million and $36
million, respectively, with a corresponding increase of $213 million in
additional paid-in capital. The $213 million was allocated on a pro rata basis
to the three projects according to the estimated cost of each system. The
Company's accounting for the PCG Warrants is pursuant to Emerging Issues Task
Force 96-18, "Accounting for Equity Instruments with Variable Terms that are
Issued for Consideration other than Employee Services under FASB Statement No.
123" ("EITF 96-18"). Under EITF 96-18, the fair value of equity instruments
issued for consideration other than employee services should be measured using
the stock price or other measurement assumptions as of the date at which a
firm commitment for performance level has been reached. The Company has
recorded the estimated value of the PCG Warrants as of June 1998, since the
IPO was probable at that date. The $213 million value attributed to the PCG
Warrants as of June 1998 was adjusted to the actual value of $275 million on
the date of the IPO based upon the $9.50 price per share of the IPO.
The Company gave accounting recognition for the New PCG Warrants on the date
these warrants were issued, which was the date of the IPO. The Company valued
each of the New PCG Warrants at $3.48 based on an independent valuation based
on the IPO price of $9.50 per share. The New PCG Warrants had a total value of
approximately $43 million. The Company recorded the actual value of the New
PCG Warrants in a manner similar to that described above whereby the total
value was allocated to the investment in PC-1, MAC and PAC based on their
relative total contract costs.
F-26
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other transactions
In 1998, an affiliate of CIBC was one of the initial purchasers of the New
Senior Notes and preferred stock, a member of the PC-1 and MAC credit facility
syndicates, and was also one of the underwriters of the IPO. CIBC and its
affiliates were paid $19 million in fees and credit facility interest during
the year ended December 31, 1998. In 1997, GCL paid an affiliate of CIBC
approximately $25 million in fees related to the financing obtained under the
Old Senior Notes, the AC-1 Credit Facility, and the issuance of the GCH
Preferred Stock. Of the fees incurred, approximately $6 million related to
underwriting and commitment fees pertaining to the issuance of the GTH
Preferred Stock and was recorded as a reduction in the carrying value of the
GTH Preferred Stock, approximately $9 million related to underwriting,
commitment and advisory fees in connection with the issuance of the Old Senior
Notes and approximately $10 million related to fees associated with obtaining
the AC-1 Credit Facility which was recorded as deferred finance costs.
In 1998, the Company signed a CPA with Worldport Communications, Inc.
("Worldport"), to acquire capacity on AC-1. Certain officers and directors of
the Company have direct or indirect equity ownership positions in Worldport,
aggregating less than 10% of the current common stock of Worldport. This
transaction occurred in the ordinary course of business of the Company and on
terms and conditions no less favorable to the Company than in its other CPAs.
The Company recognized $8 million in revenue from their CPAs with the
remaining $50 million to be recognized in future periods.
In 1998, GCL purchased all common shares owned by Telecommunications
Development Corporation ("TDC") in the Company in exchange for 300,000 fewer
newly issued shares of common stock based upon the per share value at the
repurchase date. The transaction benefited GCL since 300,000 fewer shares were
outstanding after the repurchase without any cost to GCL. This transaction was
accounted for as the acquisition of treasury stock and was recorded as $209
million, the fair value of the consideration given. Certain officers and
directors of the Company, held direct or indirect equity ownership positions
in TDC, resulting in these officers and directors having a majority of the
outstanding common stock of TDC. Following this transaction, TDC distributed
all of its shares of common stock and GCL warrants to the holders of its
common stock and was then liquidated.
In 1997, the Company paid $7 million in fees to PCG and certain of its key
executives, who are shareholders of GCL, and another shareholder for services
provided in respect of obtaining the AC-1 Credit Facility, Old Senior Notes
and the GTH Preferred Stock financing. Of the fees paid, $5 million was
allocated to the AC-1 Credit Facility and Old Senior Notes and recorded as
deferred finance costs, $1 million was allocated to the GCH Preferred Stock
and recorded as a reduction in the carrying value of the preferred stock and
$1 million was recorded as common stock issuance costs.
11. TAXES
The Company accounts for income taxes in accordance with Statement of
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). The
provision for income taxes is composed of the following:
<TABLE>
<CAPTION>
Period from
March 19, 1997
Year Ended (Date of Inception) to
December 31, 1998 December 31, 1997
----------------- ----------------------
(In thousands)
<S> <C> <C>
Current............................. $23,413 $ --
Deferred............................ 9,654 --
------- -------
Total income tax expense............ $33,067 $ --
======= =======
</TABLE>
F-27
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.
Bermuda does not impose a statutory income tax and consequently the
provision for income taxes recorded relates to income earned by certain
subsidiaries of the Company which are located in jurisdictions which impose
income taxes.
Since the Company did not recognize any income for the period March 19, 1997
(Date of Inception) to December 31, 1997, no tax provision was reflected in
earlier periods.
The following is a summary of the significant items giving rise to
components of the Company's deferred tax assets and liabilities:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1998 1997
------------------- -------------------
Assets Liabilities Assets Liabilities
------- ----------- ------- -----------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Revenue recognition..................... $ -- $ 6,116 $ -- $ --
Fixed assets............................ -- 4,042 -- --
Stock related compensation.............. 504 -- -- --
------- ------- ------- -------
$ 504 $10,158 $ -- $ --
======= ======= ======= =======
</TABLE>
12. COMMITMENTS
As of December 31, 1998, ACL was committed under contracts with TSSL for
remaining construction costs of AC-1 and its upgrades totaling approximately
$75 million and is committed under the OA&M contract with TSSL to quarterly
payments, over the next eight years, totaling approximately $247 million which
will be borne by the Company's customers.
ACL is committed to paying TSSL commissions ranging from 3% to 7% on
revenues received until 2002, subject to certain reductions. The Company also
has a commission sharing agreement with TSSL whereby GCL has primary
responsibility for the marketing and sale of capacity of AC-1 and PC-1 and
will share a percentage of commissions payable to TSSL as consideration for
assuming primary responsibility for the sales effort and marketing of the
Company's projects. The SAA with TSSL will terminate in March 2002 with an
option by the Company to extend it until March 2005.
As of December 31, 1998, MACL was committed under its contracts with Alcatel
Submarine Networks and TSSL for future construction costs totaling
approximately $204 million and as of December 31, 1998 and PACL was committed
under its contract with TSSL for future construction costs totaling
approximately $218 million.
GCL and its subsidiaries have commitments under various operating leases.
Estimated future minimum lease payments on operating leases are approximately
as follows:
<TABLE>
<CAPTION>
Year Ending December 31, (In thousands)
<S> <C>
1999..................................................... $ 4,137
2000..................................................... 4,261
2001..................................................... 3,897
2002..................................................... 3,581
2003..................................................... 3,380
Thereafter............................................... 19,911
-------
Total................................................. $39,167
=======
</TABLE>
F-28
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's unaudited quarterly results are as follows:
<TABLE>
<CAPTION>
1998 Quarter Ended
--------------------------------------------------------
March 31 June 30 September 30 December 31
------------------- ---------- ------------ -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues................ $ -- $ 101,256 $117,693 $205,150
Operating income (loss). (3,794) (123,649) 31,994 75,724
Income (loss) before
extraordinary loss..... (3,722) (135,725) 15,229 56,024
Net income (loss)....... (3,722) (155,434) 15,229 56,024
Net income (loss)
applicable to common
shareholders........... $ (8,129) $ (193,473) $ 15,229 $ 51,649
======== ========== ======== ========
Income (loss) per common
share before
extraordinary item,
basic.................. $ (0.02) $ (0.52) $ 0.04 $ 0.13
======== ========== ======== ========
Net income (loss) per
common share, basic.... $ (0.02) $ (0.58) $ 0.04 $ 0.13
======== ========== ======== ========
Income (loss) per common
share before
extraordinary item,
diluted................ $ (0.02) $ (0.52) $ 0.04 $ 0.12
======== ========== ======== ========
Net income (loss) per
common share, diluted.. $ (0.02) $ (0.58) $ 0.04 $ 0.12
======== ========== ======== ========
<CAPTION>
Period from
March 19, 1997 1997 Quarter Ended
(Date of Inception) ----------------------------------------
to March 31, 1997 June 30 September 30 December 31
------------------- ---------- ------------ -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues................ $ -- $ -- $ -- $ --
Operating loss.......... -- (142) (669) (2,290)
Income (loss) before
extraordinary loss..... -- 1,205 485 (1,850)
Net income (loss)....... -- 1,205 485 (1,850)
Net loss applicable to
common shareholders.... $ (195) $ (2,836) $ (3,692) $ (6,127)
======== ========== ======== ========
Net loss per common
share, basic and
diluted................ $ -- $ (0.01) $ (0.01) $ (0.02)
======== ========== ======== ========
</TABLE>
F-29
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. SUMMARIZED FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES AND
NON-GUARANTOR SUBSIDIARIES
As described in Note 1, because Old GCL, GCL and GCH were entities under
common control, the transfers by Old GCL to GCL and GCL to GCH and the Old GCL
Exchange were accounted for similar to a pooling of interests. Old GCL, GCL
and GTH each provide a guarantee of the New Senior Notes described in Note 6.
Additionally, Global Crossing International, Inc. ("GCI"), a wholly owned
subsidiary of GCH that provides marketing and development services to GCL,
along with its wholly owned subsidiaries, also provide guarantees of the New
Senior Notes. All guarantees are full, unconditional, joint and several. To
the extent companies providing a guarantee have excess cash, dividends or
loans of this cash can be made to GCH without restriction. Two of the
Company's non-guarantor subsidiaries are restricted under long term debt
agreements from making any dividends or loans to GCH effectively for the
duration of such long term debt agreements. Separate financial statements of
each subsidiary guarantor have not been provided because they would not be
meaningful to investors.
<TABLE>
<CAPTION>
Elimination
(In thousands) GCL GCH Guarantors Non-guarantors Entries Consolidated
- ------------------------ -------- ---------- ---------- -------------- ----------- ------------
Balance Sheet as of
December 31, 1998
<S> <C> <C> <C> <C> <C> <C>
Current assets.......... $ 5,270 $ 828,279 $ 17,266 $ 156,431 $ (5,131) $1,002,115
Restricted cash and cash
equivalents............ -- -- 3,590 364,010 -- 367,600
Accounts receivable,
net.................... -- -- -- 43,315 -- 43,315
Capacity available for
sale................... -- 6,175 11,771 556,903 -- 574,849
Construction in
progress............... -- 2,139 3,134 423,889 (955) 428,207
Deferred finance and
organization costs,
net.................... -- 30,922 -- 17,434 (2,599) 45,757
Investments in and
advances to
subsidiaries........... 772,685 1,211,795 460,728 372,104 (2,817,312) --
Investment in
affiliates............. -- -- -- 177,334 -- 177,334
-------- ---------- -------- ---------- ----------- ----------
Total assets............ $777,955 $2,079,310 $496,489 $2,111,420 $(2,825,997) $2,639,177
======== ========== ======== ========== =========== ==========
Current liabilities..... $ 3,635 $ 11,760 $ 5,965 $ 224,730 $ 5,800 $ 251,890
Long term debt.......... -- -- -- 269,598 -- 269,598
Senior notes............ -- 796,495 -- -- -- 796,495
Deferred revenue........ -- -- -- 25,325 -- 25,325
Obligations under inland
services agreements and
capital leases......... -- -- -- 24,520 -- 24,520
Deferred income taxes... -- -- -- 9,654 -- 9,654
Mandatorily redeemable
preferred stock........ -- 487,375 -- -- -- 487,375
Shareholders' equity.... 774,320 783,680 490,524 1,557,593 (2,831,797) 774,320
-------- ---------- -------- ---------- ----------- ----------
Total liabilities and
shareholders' equity... $777,955 $2,079,310 $496,489 $2,111,420 $(2,825,997) $2,639,177
======== ========== ======== ========== =========== ==========
- -------------------------------------------------------------------------------------------------
</TABLE>
F-30
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Elimination
(In thousands) GCL GCH Guarantors Non-guarantors Entries Consolidated
- ------------------------ --------- -------- ---------- -------------- ----------- ------------
Statement of Operations
For the Year Ended
December 31, 1998
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ -- $ 45 $ 14,004 $423,356 $ (13,306) $ 424,099
--------- -------- --------- -------- --------- ---------
Cost of capacity sold... -- 552 3,110 174,830 -- 178,492
Operations,
administration and
maintenance............ -- -- -- 18,056 -- 18,056
Termination of Advisory
Services Agreement..... -- 82,194 -- 57,475 -- 139,669
Stock related expense... 29,033 59 4,851 2,179 3,252 39,374
Selling, general and
administrative......... 11,126 1,161 18,169 40,810 (3,033) 68,233
--------- -------- --------- -------- --------- ---------
40,159 83,966 26,130 293,350 219 443,824
--------- -------- --------- -------- --------- ---------
Operating income (loss). (40,159) (83,921) (12,126) 130,006 (13,525) (19,725)
Other income (expense),
net.................... 1,371 (16,834) (6,723) 7,743 (959) (15,402)
Provision for income
taxes.................. -- -- (1,132) (31,935) -- (33,067)
Extraordinary loss on
retirement of senior
notes.................. -- (9,750) (9,959) -- -- (19,709)
--------- -------- --------- -------- --------- ---------
Net income (loss) before
equity income (loss) of
subsidiaries........... (38,788) (110,505) (29,940) 105,814 (14,484) (87,903)
Equity in income (loss)
of subsidiaries........ (49,115) 61,390 107,389 -- (119,664) --
--------- -------- --------- -------- --------- ---------
Net income (loss)....... (87,903) (49,115) 77,449 105,814 (134,148) (87,903)
Preferred stock
dividends.............. -- (12,681) -- -- -- (12,681)
Redemption of preferred
stock.................. -- -- (34,140) -- -- (34,140)
--------- -------- --------- -------- --------- ---------
Net income (loss)
applicable to common
shareholders $ (87,903) $(61,796) $ 43,309 $105,814 $(134,148) $(134,724)
========= ======== ========= ======== ========= =========
<CAPTION>
Elimination GCL
(In thousands) GCL GCH Guarantors Non-guarantors Entries Consolidated
- ------------------------ --------- -------- ---------- -------------- ----------- ------------
Statement of Cash Flow
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended
December 31, 1998
Cash flows from
operating activities... $ (22) $(19,991) $ (19,159) $247,125 $ 774 $ 208,727
--------- -------- --------- -------- --------- ---------
Cash flows from
financing activities:
Finance and
organization costs
incurred.............. -- (32,232) -- (5,433) -- (37,665)
Investment in and
advances from (to)
subsidiaries.......... (382,063) (224,765) 150,815 471,710 (15,697) --
Proceeds from issuance
of common stock, net.. 392,298 12 24 96 (132) 392,298
Proceeds from issuance
of preferred stock,
net................... -- 483,000 -- -- -- 483,000
Cash reimbursement to
certain shareholders.. (7,047) -- -- -- -- (7,047)
Redemption of preferred
stock................. -- -- (134,372) -- -- (134,372)
Proceeds from long term
debt.................. -- -- -- 290,556 -- 290,556
Repayment of long term
debt.................. -- -- -- (176,890) -- (176,890)
Proceeds from issuance
of senior notes....... -- 796,495 -- -- -- 796,495
Retirement of senior
notes................. -- (159,750) -- -- -- (159,750)
Repayment of debt...... -- (15,055) -- -- 15,055 --
(Increase) decrease in
restricted cash and
cash equivalents,
current and long term. -- (37,861) 16,242 (397,896) -- (419,515)
--------- -------- --------- -------- --------- ---------
Net cash provided by
financing activities. 3,188 809,844 32,709 182,143 (774) 1,027,110
--------- -------- --------- -------- --------- ---------
Cash flows from
investing activities:
Cash paid for
construction in
progress and capacity
available for sale ... -- -- (7,205) (406,791) -- (413,996)
Investment in
affiliates............ -- -- -- (16,701) -- (16,701)
--------- -------- --------- -------- --------- ---------
Net cash used in
investing activities. -- -- (7,205) (423,492) -- (430,697)
--------- -------- --------- -------- --------- ---------
Net increase in cash and
cash equivalents....... 3,166 789,853 6,345 5,776 -- 805,140
Cash and cash
equivalents, beginning
of year................ -- -- 1,299 154 -- 1,453
--------- -------- --------- -------- --------- ---------
Cash and cash
equivalents, end of
year................... $ 3,166 $789,853 $ 7,644 $ 5,930 $ -- $ 806,593
========= ======== ========= ======== ========= =========
</TABLE>
- --------------------------------------------------------------------------------
F-31
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Old Non- Elimination
(In thousands) GCL GCL GCH Guarantors Guarantors Entries Consolidated
- ------------------------ -------- -------- -------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet as of
December 31, 1997
Current assets.......... $ 33 $ 12 $ 12 $ 21,307 $ 6,597 $ (217) $ 27,744
Capacity available for
sale................... -- -- -- 21,200 -- 21,200
Construction in
progress............... -- -- -- 9,014 488,305 -- 497,319
Investments in and
advances to
subsidiaries........... 73,964 73,952 73,940 276,897 -- (498,753) --
Deferred finance and
organization costs,
net.................... 208 -- 169 10,619 15,107 (169) 25,934
-------- -------- -------- --------- -------- --------- ---------
Total assets............ $ 74,205 $ 73,964 $ 74,121 $ 317,837 $531,209 $(499,139) $ 572,197
======== ======== ======== ========= ======== ========= =========
Current liabilities..... $ 72 $ -- $ -- $ 1,972 $ 88,978 $ (205) $ 90,817
Long term debt.......... -- -- -- -- 162,325 -- 162,325
Senior notes............ -- -- -- 150,000 -- -- 150,000
Obligations under inland
service agreements and
capital leases......... -- -- -- -- 3,009 -- 3,009
Mandatorily redeemable
preferred stock........ -- -- -- 91,925 -- -- 91,925
Shareholders' equity.... 74,133 73,964 74,121 73,940 276,897 (498,934) 74,121
-------- -------- -------- --------- -------- --------- ---------
Total liabilities and
shareholders' equity... $ 74,205 $ 73,964 $ 74,121 $ 317,837 $531,209 $(499,139) $ 572,197
======== ======== ======== ========= ======== ========= =========
Statement of Operation
Period from March 19,
1997 (Date of
Inception) to December
31, 1997
Interest income......... $ -- $ -- $ -- $ 556 $ 2,385 $ -- $ 2,941
Selling, general and
administrative......... 42 -- -- 200 2,859 -- 3,101
-------- -------- -------- --------- -------- --------- ---------
Net income (loss) before
equity income (loss) of
subsidiaries........... (42) -- -- 356 (474) -- (160)
Equity in loss of
subsidiaries........... (118) (118) (118) (474) -- 828 --
-------- -------- -------- --------- -------- --------- ---------
Net loss................ (160) (118) (118) (118) (474) 828 (160)
Preferred stock
dividends.............. -- -- -- (12,690) -- -- (12,690)
-------- -------- -------- --------- -------- --------- ---------
Net loss applicable to
common shareholders.... $ (160) $ (118) $ (118) $ (12,808) $ (474) $ 828 $ (12,850)
======== ======== ======== ========= ======== ========= =========
<CAPTION>
Old Non- Elimination
(In thousands) GCL GCL GCH Guarantors Guarantors Entries Consolidated
- ------------------------ -------- -------- -------- ---------- ---------- ----------- ------------
Statement of Cash Flows
For the Period from March
19, 1997
(Date of Inception) to
December 31, 1997
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities... $ -- $ -- $ -- $ 528 $ 4,593 $ -- $ 5,121
-------- -------- -------- --------- -------- --------- ---------
Cash flows provided by
financing activities:
Finance and
organization costs
incurred.............. -- -- -- (16,456) (11,725) -- (28,181)
Investment in and
advances to
subsidiaries.......... (75,000) (75,000) (75,000) (272,468) -- 497,468 --
Proceeds from issuance
of common stock and
additional paid-in
capital............... 75,000 75,000 75,000 73,736 272,468 (497,468) 73,736
Proceeds from issuance
of preferred stock.... -- -- -- 92,470 -- -- 92,470
Proceeds from long term
debt.................. -- -- -- -- 162,325 -- 162,325
Proceeds from issuance
of senior notes....... -- -- -- 150,000 -- -- 150,000
Increase in restricted
cash and cash
equivalents, current
and long term ........ -- -- -- (19,851) (5,424) -- (25,275)
-------- -------- -------- --------- -------- --------- ---------
Net cash provided by
financing activities. -- -- -- 7,431 417,644 -- 425,075
-------- -------- -------- --------- -------- --------- ---------
Cash flows from
investing activities:
Cash paid for
construction in
progress and capacity
available for sale.... -- -- -- (6,660) (422,083) -- (428,743)
-------- -------- -------- --------- -------- --------- ---------
Net cash used in
investing activities. -- -- -- (6,660) (422,083) -- (428,743)
-------- -------- -------- --------- -------- --------- ---------
Net increase in cash and
cash equivalents....... -- -- -- 1,299 154 -- 1,453
Cash and cash
equivalents, beginning
of period.............. -- -- -- -- -- -- --
-------- -------- -------- --------- -------- --------- ---------
Cash and cash
equivalents, end of
period................. $ -- $ -- $ -- $ 1,299 $ 154 $ -- $ 1,453
======== ======== ======== ========= ======== ========= =========
</TABLE>
F-32
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. OLD GCL COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
Information with respect to Old GCL common stock and additional paid-in
capital prior to the Old GCL Exchange is as follows:
Common Stock:
Authorized:
1,000,000,000 Class A common stock of $.00000067 par value
1,000,000,000 Class B common stock of $.00000067 par value
1,000,000,000 Class C common stock of $.00000067 par value
3,000,000,000 Class D common stock of $.00000067 par value
1,000,000,000 Class E common stock of $.00000067 par value
43,000,000,000 undesignated common stock of $.00000067 par value
As discussed in Note 1, in January 1998, Old GCL effected a 100 for 1 stock
split of each of the Class A, B, C and D common stock and undesignated stock
and amended the par value of each share of common stock from $.0001 per share
to $.000001 per share. Shares of common stock of Old GCL outstanding have been
retroactively restated to reflect the equivalent number of shares of GCL that
were issued in the Old GCL Exchange as discussed in Note 1. Class A shares,
Class B shares and Class C shares all had voting rights. On March 25, 1997,
Old GCL issued 22,500,000 Class A shares, 101,250,000 Class B shares,
101,250,000 Class C shares for $.33 per share, resulting in aggregate proceeds
of $75 million. In addition to the 22,500,000 Class A shares issued to the
preference shareholders for cash in connection with the issuance of the
preference shares, a total of 39,705,900 Class A shares were distributed to
the initial preference shareholder representing 15% of the aggregate number of
Class A, B and C shares outstanding. In addition, warrants to acquire a
maximum of 92,880 shares of common stock of Old GCL were issued into escrow
for the benefit of the holders of preferred stock. Effective January 21, 1998,
Old GCL authorized 1,000,000,000 new Class E non-voting shares.
Certain of the Class B shareholders were issued a total of 66,176,400 Class
D shares on March 25, 1997. Of the $34 million of proceeds received from the
issuance of Class B shares, $3 million was allocated to the Class D shares
representing the estimated fair value of the Class D shares based on an
independent valuation. Class D shares were non-voting shares which carried
special preference rights on the cash distributions made by Old GCL. Class D
shareholders were to receive 10% of cash distributions to common shareholders
once the internal rate of return to Class C shareholders exceeded 10%, and
then increasing to 20% of cash distributions to common shareholders once the
internal rate of return to Class C shareholders exceeded 30%. Effective
January 1998, Class D share rights were amended such that Class D shareholders
received the option to convert each Class D share into one Class E share upon
payment to Old GCL of $.74 per share or to a fraction of a Class E share based
upon a valuation at the time of such conversion, together with a warrant to
purchase the remaining fraction of such Class E share at an exercise price
based upon such market valuation. By granting to holders of the Class D shares
an option to convert such shares into Class E shares, the Company obtained
effective assurance that it could effect a change to a corporate structure in
the event of a major equity event, such as a merger or other business
combination or in the event of an IPO by GCL, of its common stock, since the
holders of the Class D shares would need to exercise their options in order to
participate directly in benefits of a merger or acquisition of the Company or
in order to obtain the benefits of any trading market for the common stock of
the Company; no trading market was expected to develop for the Class D shares.
The grant of the options to Class D shareholders represents an equity
transaction since the Company granted these shareholders amended share rights
in the form of options with new warrants. Since the Company had an accumulated
deficit, the charge
F-33
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
(Formerly Global Crossing Ltd., LDC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
was made against additional paid in capital, which had no impact on the
consolidated financial statements. The Company accounted for the new warrants
as an equity transaction on the date the warrants were issued, which was the
IPO date of August 13, 1998.
In 1998, the Company issued, at a price of $0.33 per share, 900,000 Class B
shares and 675,000 Class E shares. Since the estimated fair value of shares
exceeded the issue price, the Company increased stock related expense and
shareholders' equity by $2 million in 1998.
16. SUBSEQUENT EVENTS
Lucent Agreement
On January 26, 1999, GCL signed a technology agreement with Lucent
Technologies Inc. that will give the Company access to Lucent's terrestrial
and undersea fiber optic technology. In addition, the Company entered into a
supply contract with Lucent to provide fiber and equipment for PEC. As part of
the supply contract, Lucent will provide certain financing for PEC. The
agreement with Lucent also provides for financing of future systems if they
are selected as the contractor.
Stock dividend
On February 3, 1999 the Board of Directors declared a 2-for-1 stock split in
the form of a stock dividend to shareholders of record on February 16, 1999
effective March 9, 1999. All share information presented in these consolidated
financial statements gives retroactive effect to this transaction.
South American Crossing
On March 11, 1999, GCL announced plans for the development of South American
Crossing ("SAC"), an 18,000 km undersea and terrestrial fiber optic network
directly linking the major cities of South America through MAC and PAC to the
United States, Mexico, Central America, the Carribean, Asia and Europe. GCL
expects that SAC will cost approximately $1,130 million to construct. Service
is scheduled to commence in the fourth quarter of 2000, with full ring
completion expected in the first quarter of 2001. The Company plans to build
SAC in three phases. The first two phases, providing Argentina and Brazil with
connectivity to the Global Crossing Network, are scheduled to commence service
in the fourth quarter of 2000. The final phase, completing the loop around the
continent, is scheduled for completion in the first quarter of 2001. The
undersea portion of SAC is currently planned to be wholly-owned, while the
terrestrial portion is expected to be constructed through joint-venture
arrangements.
Frontier Acquisition
On March 16, 1999, GCL entered into a definitive agreement and plan of
merger with Frontier Corporation, a New York corporation ("Frontier"), that
will result in Frontier becoming a wholly-owned subsidiary of GCL or of a new
parent holding company of GCL. The board of directors of each company has
approved the merger. Completion of the transaction is anticipated to occur
during the third quarter of 1999. The transaction is subject to approval by
the shareholders of GCL and Frontier and to other customary conditions, such
as receipt of regulatory approvals.
Atlantic Crossing-2
On March 24, 1999, GCL announced its intention to develop and construct
Atlantic Crossing-2 ("AC-2"), an additional eight fiber pair cable connecting
the United States to Europe. AC-2 will be integrated with the two cables of
AC-1, adding a third high-capacity cable across the Atlantic for the Global
Crossing Network and providing AC-2 with self-healing capabilities. The new
cable will cost approximately $750 million and is expected to be in service in
the first quarter of 2001.
F-34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf on March 31, 1999 by the undersigned, thereunto duly authorized.
Global Crossing Ltd.
By: /s/ Dan J. Cohrs
---------------------
Dan J. Cohrs
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 31, 1999 by the following persons on
behalf of the registrant and in the capacities indicated.
<TABLE>
<S> <C>
</TABLE>
Signatures Title
/s/ Gary Winnick Co-Chairman of the Board and
- ------------------------------------- Director
Gary Winnick
/s/ Lodwrick M. Cook Co-Chairman of the Board and
- ------------------------------------- Director
Lodwrick M. Cook
/s/ Thomas J. Casey Managing Director, Vice Chairman of
- ------------------------------------- the Board and Director
Thomas J. Casey
/s/ John M. Scanlon Vice Chairman of the Board and
- ------------------------------------- Director
John M. Scanlon
/s/ Robert Annunziata Chief Executive Officer
- -------------------------------------
Robert Annunziata
/s/ David L. Lee President, Chief Operating Officer
- ------------------------------------- and Director
David L. Lee
/s/ Barry Porter Senior Vice President and Director
- -------------------------------------
Barry Porter
/s/ Abbott L. Brown Senior Vice President and Director
- ------------------------------------- (principal accounting officer)
Abbott L. Brown
/s/ Dan J. Cohrs Senior Vice President and Chief
- ------------------------------------- Financial Officer
Dan J. Cohrs
Director
- -------------------------------------
Hillel Weinberger
S-1
<PAGE>
<TABLE>
<S> <C>
</TABLE>
Signatures Title
/s/ Jay R. Bloom Director
- -------------------------------------
Jay R. Bloom
/s/ Dean C. Kehler Director
- -------------------------------------
Dean C. Kehler
/s/ Jay R. Levine Director
- -------------------------------------
Jay R. Levine
/s/ William P. Phoenix Director
- -------------------------------------
William P. Phoenix
/s/ Bruce Raben Director
- -------------------------------------
Bruce Raben
/s/ Michael R. Steed Director
- -------------------------------------
Michael R. Steed
/s/ William E. Conway Director
- -------------------------------------
William E. Conway
/s/ Toshiaki Ogasawara Director
- -------------------------------------
Toshiaki Ogasawara
/s/ Geoffrey J.W. Kent Director
- -------------------------------------
Geoffrey J.W. Kent
S-2
<PAGE>
Exhibit 21.1
------------
Subsidiaries of the Registrant
SUBSIDIARY JURISDICTION OF
- ---------- ----------------
INCORPORATION
-------------
Global Crossing Network Center Ltd. Bermuda
Global Crossing International, Ltd. Bermuda
Atlantic Crossing Holdings Ltd. Bermuda
Pacific Crossing Holdings Ltd. Bermuda
Mid-Atlantic Crossing Holdings Ltd. Bermuda
Pan American Crossing Holdings Ltd. Bermuda
Global Crossing Landing Holdings Ltd. Bermuda
GC St. Croix Co. U.S. Virgin Islands
Global Crossing Network Center UK Ltd. UK
Global Crossing Development Co. Delaware
Global Crossing Holdings U.K. Ltd. UK
Global Crossing Marketing USA Inc. Delaware
Global Crossing Europe Ltd UK
Global Crossing USA Inc. Delaware
US Crossing Delaware
Atlantic Crossing Ltd. Bermuda
GCT Pacific Holdings Ltd. Bermuda
Mid-Atlantic Crossing Ltd. Bermuda
Pan American Crossing Ltd. Bermuda
GC Pacific Landing Corp. Delaware
<PAGE>
2
Global Crossing Marketing U.K. Ltd. UK
GT Landing Corp. Delaware
Global Telesystems GmbH Germany
GT Netherlands B.V. Netherlands
GT U.K. Ltd. UK
Atlantic Crossing Holdings U.K. Ltd. UK
Pacific Crossing Ltd. Bermuda
Mid-Atlantic Crossing Holdings U.K. Ltd. UK
Pan-American Crossing UK Ltd. UK
PAC Panama Ltd. Bermuda
PC Landing Corp. Delaware
PCL Japan Ltd. Japan
Pacific Crossing UK Limited UK
MAC Landing Corp. Delaware
PAC Landing Corp. Delaware
Pan American Crossing B.V. Landing Netherlands
Global Crossing Mexicana S. de R.L. de C.V. Mexico
GC Pan European Crossing Holdings B.V. Netherlands
GC Pan European Crossing France Sarl France
GC Pan European Crossing Deutschland GmbH Germany
GC Pan European Crossing UK Ltd. UK
GC Pan European Crossing Belgie B.V.B.A. Belgium
Global Crossing Ireland Ltd Ireland
Gloval Crossing Services Ireland Ltd. Ireland
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Annual Report on Form 10-K into the Company's previously
filed Registration Statement on Form S-8, File No. 333-68825.
Arthur Andersen & Co.
/s/ Arthur Andersen & Co.
Hamilton, Bermuda
March 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GLOBAL
CROSSING LTD. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 MAR-19-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 883,783<F1> 26,728<F2>
<SECURITIES> 0 0
<RECEIVABLES> 71,195 0
<ALLOWANCES> 4,233 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,002,115 27,744
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 2,639,177 572,197
<CURRENT-LIABILITIES> 251,890 90,817
<BONDS> 1,090,613 315,334
487,375 91,925
0 0
<COMMON> 4,328 3,258
<OTHER-SE> 769,992 70,863
<TOTAL-LIABILITY-AND-EQUITY> 2,639,177 572,197
<SALES> 424,099<F3> 0<F4>
<TOTAL-REVENUES> 424,099 0
<CGS> 178,492 0
<TOTAL-COSTS> 439,591 3,101
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 4,233 0
<INTEREST-EXPENSE> 42,880 0
<INCOME-PRETAX> (35,127) (160)
<INCOME-TAX> 33,067 0
<INCOME-CONTINUING> (134,724) (12,850)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (19,709) 0
<CHANGES> 0 0
<NET-INCOME> (134,724) (12,850)
<EPS-PRIMARY> (0.38) (0.04)
<EPS-DILUTED> (0.38) (0.04)
<FN>
<F1>BALANCE SHEET AS OF 12/31/98
<F2>P&L FOR PERIOD ENDED 12/31/98
<F3>P&L FOR PERIOD FROM 3/19/97 TO 12/31/97
<F4>BALANCE SHEET AS OF 12/31/97
</FN>
</TABLE>
