<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
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.
(Exact name of registrant as specified in its charter)
BERMUDA 98-0189783
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
WESSEX HOUSE
45 REID STREET
HAMILTON HM12, BERMUDA
(Address of principal executive offices)
(441) 296-8600
(Registrant's telephone number, including area code)
----------------
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 [_]
The number of shares, $0.01 par value each, of the registrant's common stock
outstanding as of November 10, 2000: 907,683,489 shares, including 22,033,758
treasury shares.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
For the quarter ended September 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations................ 3
Condensed Consolidated Balance Sheets.......................... 4
Condensed Consolidated Statements of Cash Flows................ 5
Condensed Consolidated Statements of Comprehensive Income...... 7
Notes to Condensed Consolidated Financial Statements........... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 28
Item 2. Changes in Securities and Use of Proceeds...................... 28
Item 3. Defaults Upon Senior Securities................................ 29
Item 4. Submission of Matters to A Vote of Security Holders............ 29
Item 5. Other Information.............................................. 29
Item 6. Exhibits and Reports on Form 8-K............................... 29
</TABLE>
2
<PAGE>
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE................. $ 1,013,072 $ 234,582 $ 2,864,186 $ 599,362
------------ ------------ ------------ ------------
EXPENSES:
Cost of sales.......... 599,875 129,014 1,810,964 279,307
Operations,
administration and
maintenance........... 132,075 16,325 324,673 42,650
Sales and marketing.... 96,128 13,986 259,418 38,676
Network development.... 31,568 7,401 77,280 21,141
General and
administrative........ 227,222 38,702 559,776 103,405
Depreciation and
amortization.......... 160,427 12,170 391,038 16,370
Goodwill and
intangibles
amortization.......... 235,461 3,758 548,464 3,758
------------ ------------ ------------ ------------
1,482,756 221,356 3,971,613 505,307
------------ ------------ ------------ ------------
OPERATING INCOME
(LOSS)................. (469,684) 13,226 (1,107,427) 94,055
EQUITY IN INCOME (LOSS)
OF AFFILIATES.......... (11,128) 71 (30,186) (5,471)
MINORITY INTEREST....... 6,640 -- (5,990) --
OTHER INCOME (EXPENSE):
Interest income........ 23,598 13,996 71,309 45,663
Interest expense....... (111,944) (35,084) (290,240) (81,538)
Other income
(expense), net........ (10,657) 223,661 (23,916) 215,982
------------ ------------ ------------ ------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE PROVISION FOR
INCOME TAXES........... (573,175) 215,870 (1,386,450) 268,691
Benefit (provision)
for income taxes...... 23,783 (80,016) 116,913 (110,055)
------------ ------------ ------------ ------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS.. (549,392) 135,854 (1,269,537) 158,636
Discontinued operations,
net of tax............. 23,090 -- 75,042 --
Extraordinary loss on
retirement of debt, net
of tax................. (17,795) (14,865) (17,795) (14,865)
Cumulative effect of
change in accounting
principle, net of tax.. -- -- -- (14,711)
------------ ------------ ------------ ------------
NET INCOME (LOSS)....... (544,097) 120,989 (1,212,290) 129,060
Preferred stock
dividends............. (58,258) (14,071) (162,056) (41,313)
Charge for conversion
of preferred stock.... -- -- (92,277) --
------------ ------------ ------------ ------------
INCOME (LOSS) APPLICABLE
TO COMMON
SHAREHOLDERS........... $ (602,355) $ 106,918 $ (1,466,623) $ 87,747
============ ============ ============ ============
INCOME (LOSS) PER COMMON
SHARE:
Income (loss) from
continuing operations
applicable to common
shareholders
Basic................ $ (0.69) $ 0.30 $ (1.84) $ 0.28
============ ============ ============ ============
Diluted.............. $ (0.69) $ 0.27 $ (1.84) $ 0.28
============ ============ ============ ============
Discontinued operations,
net of tax
Basic and diluted.... $ 0.02 $ -- $ 0.09 $ --
============ ============ ============ ============
Extraordinary loss on
retirement of debt, net
of tax
Basic................ $ (0.02) $ (0.04) $ (0.02) $ (0.04)
============ ============ ============ ============
Diluted.............. $ (0.02) $ (0.03) $ (0.02) $ (0.04)
============ ============ ============ ============
Cumulative effect of
change in accounting
principle, net of tax
Basic and diluted.... $ -- $ -- $ -- $ (0.04)
============ ============ ============ ============
Income (loss) applicable
to common shareholders
Basic................ $ (0.69) $ 0.26 $ (1.77) $ 0.21
============ ============ ============ ============
Diluted.............. $ (0.69) $ 0.24 $ (1.77) $ 0.21
============ ============ ============ ============
Shares used in computing
income (loss) per share
Basic................ 878,397,391 412,672,234 829,601,734 412,224,517
============ ============ ============ ============
Diluted.............. 878,397,391 447,517,642 829,601,734 423,967,291
============ ============ ============ ============
</TABLE>
See accompanying notes to these unaudited condensed consolidated
financial statements.
3
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents....................... $ 1,191,714 $ 1,629,546
Restricted cash and cash equivalents............ 57,270 17,092
Accounts receivable, net........................ 961,532 861,583
Other assets and prepaid costs.................. 412,441 223,862
----------- -----------
Total current assets............................ 2,622,957 2,732,083
Restricted cash and cash equivalents.............. 18,459 138,118
Accounts receivable, net.......................... 27,497 52,052
Property and equipment, net....................... 8,828,849 5,057,102
Goodwill and intangibles, net..................... 10,640,256 7,825,554
Investment in and advances to/from affiliates,
net.............................................. 605,101 317,957
Other assets...................................... 1,389,014 655,594
Net assets of discontinued operations............. 2,473,451 2,502,850
----------- -----------
Total assets.................................. $26,605,584 $19,281,310
=========== ===========
LIABILITIES:
Current liabilities:
Accrued construction costs...................... $ 665,983 $ 275,361
Accounts payable and accrued liabilities........ 1,180,732 926,766
Deferred revenue................................ 230,549 124,775
Income taxes payable............................ -- 127,449
Current portion of long term debt............... 773,411 2,071
Other current liabilities....................... 246,870 259,729
----------- -----------
Total current liabilities....................... 3,097,545 1,716,151
Long-term debt.................................... 5,329,897 4,899,596
Deferred revenue.................................. 1,163,424 382,305
Deferred credits and other........................ 912,864 669,326
----------- -----------
Total liabilities............................. 10,503,730 7,667,378
----------- -----------
MINORITY INTEREST................................... 497,722 351,338
----------- -----------
MANDATORILY REDEEMABLE AND CUMULATIVE CONVERTIBLE
PREFERRED STOCK.................................... 3,157,503 2,084,697
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock, 3,000,000,000 shares authorized,
par value $.01 per share, 904,808,263 and
799,137,142 shares issued as of September 30,
2000 and December 31, 1999, respectively....... 9,048 7,992
Treasury stock, 22,033,758 shares............... (209,415) (209,415)
Other shareholders' equity...................... 14,058,893 9,578,927
Accumulated deficit............................. (1,411,897) (199,607)
----------- -----------
Total shareholders' equity.................... 12,446,629 9,177,897
----------- -----------
Total liabilities and shareholders' equity.... $26,605,584 $19,281,310
=========== ===========
</TABLE>
See accompanying notes to these unaudited condensed consolidated balance
sheets.
4
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-----------------------
2000 1999
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $(1,212,290) $ 129,060
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Cumulative effect of change in accounting
principle.......................................... -- 14,711
Net income from discontinued operations............. (75,042) --
Equity in loss of affiliates........................ 30,186 5,471
Depreciation and amortization....................... 939,502 20,128
Provision for doubtful accounts..................... 62,894 24,211
Stock related expenses.............................. 35,566 38,611
Deferred income taxes............................... 16,072 12,353
Non-cash cost of sales.............................. 252,228 180,589
Non-cash portion of US West termination agreement... -- (103,384)
Minority interest................................... 5,990 --
Extraordinary loss on retirement of debt............ 17,795 14,865
Changes in operating assets and liabilities......... 433,598 194,279
----------- ----------
Net cash provided by operating activities......... 506,499 530,894
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for construction in progress and capacity
available for sale.................................. (2,409,033) (1,068,912)
Investment in and advances to/from affiliates, net... (122,933) (35,574)
Effect of the consolidation of PC-1, net of cash
acquired............................................ (19,979) --
Cash acquired in stock acquisition................... 9,910 --
Acquisitions, net of cash acquired................... -- (787,269)
Change in restricted cash............................ 97,395 144,211
Purchase of marketable securities.................... (173,460) --
Purchases of property and equipment.................. (496,464) (240,013)
----------- ----------
Net cash used in investing activities............. (3,114,564) (1,987,557)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net.......... 775,506 7,368
Proceeds from issuance of preferred stock, net....... 1,111,676 --
Proceeds from long term debt......................... 1,037,390 2,509,083
Repayment of long term debt.......................... (804,604) (1,485,074)
Preferred dividends.................................. (122,800) (41,313)
Minority interest investment in subsidiary........... 84,275 --
Finance costs incurred............................... (15,651) (82,728)
----------- ----------
Net cash provided by financing activities............. 2,065,792 907,336
----------- ----------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS.......... 104,441 --
----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.. (437,832) (549,327)
CASH AND CASH EQUIVALENTS, beginning of period........ 1,629,546 806,593
----------- ----------
CASH AND CASH EQUIVALENTS, end of period.............. $ 1,191,714 $ 257,266
=========== ==========
</TABLE>
See accompanying notes to these unaudited condensed consolidated
financial statements.
5
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
SUPPLEMENTAL INFORMATION:
Costs incurred for construction in progress and
capacity available for sale....................... $(2,695,514) $(1,127,731)
Accrued construction costs......................... 229,809 52,272
Amortization of deferred finance costs and other... 56,672 6,547
----------- -----------
Cash paid for construction in progress and capacity
available for sale................................ $(2,409,033) $(1,068,912)
=========== ===========
Non-cash purchases of property and equipment....... $ -- $ (38,300)
=========== ===========
Detail of acquisitions:
Assets acquired.................................... $ 3,694,283 $11,647,010
Liabilities assumed................................ (796,258) (3,097,457)
----------- -----------
Common stock issued................................ $ 2,898,025 $ 6,116,842
=========== ===========
Net cash paid for acquisitions..................... $ -- $ 787,269
Cash acquired in acquisitions...................... (-- ) 121,131
----------- -----------
Cash paid for acquisitions, including transaction
fee............................................... $ -- $ 908,400
=========== ===========
Investments in affiliates:
Costs of investments in affiliates................. $ (259,519) $ (35,574)
Effects of consolidation of PCL.................... (263,414) --
Preferred stock issued for investment in joint
venture........................................... 400,000 --
----------- -----------
$ (122,933) $ (35,574)
=========== ===========
Common stock issued for preferred dividends.......... $ 4,603 $ --
=========== ===========
Conversion of preferred stock to common stock........ $ 441,862 $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid and capitalized...................... $ 351,570 $ 77,988
=========== ===========
Interest paid (net of capitalized interest)........ $ 219,289 $ 41,234
=========== ===========
Cash paid for taxes................................ $ 92,413 $ 11,369
=========== ===========
</TABLE>
See accompanying notes to these unaudited condensed consolidated financial
statements.
6
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ---------------------
2000 1999 2000 1999
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
Net income (loss).................... $(544,097) $120,989 $(1,212,290) $129,060
Unrealized gain on securities...... 17,846 -- 372,328 --
Foreign currency translation
adjustment........................ (84,374) 26,996 (176,720) 17,772
--------- -------- ----------- --------
Comprehensive income (loss).......... $(610,625) $147,985 $(1,016,682) $146,832
========= ======== =========== ========
</TABLE>
See accompanying notes to these unaudited condensed consolidated financial
statements.
7
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(In thousands, except share and per share amounts)
(Unaudited)
(1) Organization and Background
Global Crossing Ltd. (a Bermuda company, together with its consolidated
subsidiaries, "GCL" or the "Company") is building and offering services over
the world's first independent global fiber optic network, consisting of 101,000
announced route miles and serving five continents, 27 countries and more than
200 major cities. Upon completion of our currently announced systems, our
network and our telecommunications and Internet product offerings will be
available in markets constituting over 80% of the world's international
telecommunications traffic.
The Company's strategy is to be the premier provider of global broadband
Internet Protocol ("IP") and data services for both wholesale and retail
customers. The Company is building a state-of-the-art fiber optic network that
management believes to be of unprecedented global scope and scale to serve as
the backbone for this strategy. Management believes that the Company's network
will enable it to be the low cost service provider in most of its addressable
markets.
Global Crossing Ltd. serves as a holding company for its subsidiaries'
operations, including the operations of the following acquired entities: Global
Marine Systems (acquired July 2, 1999), Frontier Corporation (acquired
September 28, 1999), Racal Telecom (acquired November 24, 1999), a 50% interest
in the Hutchison Global Crossing joint venture (completed January 12, 2000) and
IPC Communications ("IPC") and IXnet, Inc. ("IXnet") (acquired June 14, 2000).
The acquisition of these entities is referred to as the "Acquisitions. " In
addition, the Company has a significant ownership interest in Asia Global
Crossing ("AGC").
AGC, a joint venture with Softbank Corp. and Microsoft Corporation, intends
to become the first truly pan-Asian telecommunications carrier to offer
worldwide bandwidth and data communications. The Asia Global Crossing joint
venture was established on November 24, 1999. On October 6, 2000, AGC completed
an initial public offering ("IPO") of 68 million shares of its common stock, at
a price of $7.00 per share. GCL's economic ownership interest changed from 93%
to 56.9% as a result of the offering and related transactions. See footnote 13
for further discussion.
On July 11, 2000, the Company entered into an agreement to sell the
Incumbent Local Exchange Carrier ("ILEC") business segment to Citizens
Communications Company ("Citizens") for $3.65 billion in cash, subject to
certain adjustments concerning closing date liabilities, working capital
balances and performance measurements as defined in the agreement. In
connection with the sales agreement, the Company and Citizens entered into a
strategic agreement to provide long distance services to the ILEC business. The
ILEC segment has been shown in the accompanying financial statements as
discontinued operations. The sale is expected to close in the first quarter of
2001.
In June 2000, the Company restated its financial statements to revise the
estimated useful life of goodwill related to GlobalCenter from 10 to 5 years.
GlobalCenter was acquired in September 1999 as part of the Frontier
acquisition. As a result, loss applicable to common shareholders for the year
ended December 31, 1999 and accumulated deficit as of December 31, 1999
increased by $41 million. Loss applicable to common shareholders for the three
months ended March 31, 2000 also increased by $41 million as a result of the
additional goodwill amortization.
During September 2000, the Company's board of directors approved a
definitive merger agreement under which Exodus Communications ("Exodus") will
acquire the Company's complex web hosting services division, GlobalCenter, for
shares of Exodus common stock equal to $6.5 billion divided by the average
8
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
closing price of Exodus common stock during a ten day period prior to the
close. The average closing price of the Exodus common stock is subject to a
collar of between $56.41 and $65.55. After the transaction is consummated,
GCL's investment in Exodus will approximate 20%. The two companies also signed
a 10-year network services agreement, making GCL the primary network provider
to Exodus, and a marketing service agreement. In connection with the
transaction, AGC entered into a joint venture with Exodus to provide complex
web hosting and managed services in Asia. The sale is expected to close in the
first quarter of 2001.
(2) Basis of Presentation
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial reporting and Securities and Exchange
Commission ("SEC") regulations. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, the unaudited interim
condensed consolidated financial statements reflect all adjustments necessary
to fairly present the results of operations, financial position and cash flows
for the periods presented. The results of operations for any interim period are
not necessarily indicative of results for the full year. These financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-K/A for
the fiscal year ended December 31, 1999.
(3) Significant Accounting Policies
Revenue Recognition--Revenue from Capacity Purchase Agreements ("CPAs") that
meet the criteria of sales-type lease accounting are recognized in the period
that the rights and obligations of ownership transfer to the purchaser, which
occurs when (i) the purchaser obtains the right to use the capacity, which can
only be suspended if the purchaser fails to pay the full purchase price or
fulfill its contractual obligations, (ii) the purchaser is obligated to pay
Operations, Administration and Maintenance ("OA&M") costs and (iii) the segment
of a system related to the capacity purchased is available for service. Certain
customers who have entered into CPAs for capacity have paid deposits toward the
purchase price which have been included as deferred revenue in the accompanying
consolidated balance sheets.
Prior to July 1, 1999, substantially all CPAs were treated as sales-type
leases as described in Statement of Financial Accounting Standards ("SFAS") No.
13, "Accounting for Leases" ("SFAS 13"). On July 1, 1999, the Company adopted
Financial Accounting Standards Board ("FASB") Interpretation No. 43, "Real
Estate Sales, an interpretation of FASB Statement No. 66" ("FIN 43"), which
requires prospective transactions to meet the criteria set forth in Statement
of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate"
("SFAS 66") to qualify for sales-type lease accounting. Since sales of
terrestrial capacity did not meet the new criteria, the terrestrial portion of
CPAs executed subsequent to June 30, 1999 were recognized over the terms of the
contracts, as services.
The Company offers customers flexible bandwidth products to multiple
destinations and anticipates that many of the contracts for subsea circuits
entered into will be part of a service offering. Therefore, the Company
anticipates that many of these contracts will not meet the criteria of sales-
type lease accounting and will be accounted for as operating leases.
Consequently, the Company will defer revenue related to those circuits and
amortize that revenue over the appropriate term of the contract. Accordingly,
the Company will treat cash received, but not recognized, as deferred revenue.
In certain circumstances, should a contract meet all of the requirements of
sales-type lease accounting, the Company will recognize revenue without
deferral upon payment and activation.
9
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The principal effect of the change in the type of contracts offered to the
Company's customers beginning on January 1, 2000 is that an increasing
percentage of capacity sales will be accounted for as operating leases rather
than sales-type leases, resulting in more revenue from such sales being
deferred into future periods than was previously the case. Accordingly, this
change in contract terms will reduce revenue recognized upon activation of
circuits in earlier periods and increase revenue recognized in later periods.
As of September 30, 2000, the Company had an aggregate backlog of
approximately $105 million in capacity sales contracts for which revenue will
be recognized using sales-type lease accounting upon activation. For the
remaining backlog as of that date, revenue will be recognized using operating
lease accounting, that is amortized over the life of the contract. For the
three and nine months ended September 30, 2000, $53 million and $313 million,
respectively, was recognized using sales-type lease accounting, compared to
$138 million and $489 million for the three and nine months ended September 30,
1999, respectively.
Impairment of Long-Lived Assets--The Company periodically evaluates whether
facts and circumstances have occurred that indicate the carrying amount of a
long-lived asset may be impaired. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if a write-down to market value or
discounted cashflow is required. During the three and nine months ended
September 30, 2000, the Company wrote down $3 million and $41 million,
respectively, of long-lived assets related to accrued losses on sales
contracts.
Marketable Equity Securities--Investments covered under the scope of SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities" are
classified as "available for sale" and are carried at fair value with any
unrealized gain or loss, net of tax, included in other shareholders' equity.
For the three and nine months ended September 30, 2000, the Company had
unrealized gains on securities of $18 million and $373 million, net of
provision for income taxes of $12 and $249 million, respectively.
Pending Accounting Standards--In December 1999, the SEC issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements" which is required to be adopted by the Company in the quarter ended
December 31, 2000. SAB 101 clarifies certain conditions regarding the
culmination of an earnings process and customer acceptance requirements in
order to recognize revenue. The adoption of this new requirement is not
expected to have a material impact on the financial position or results of
operations of the Company.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of SFAS No.
133", which deferred SFAS No. 133's effective date to fiscal quarters beginning
after June 15, 2000. This statement standardizes the accounting for derivatives
and hedging activities and requires that all derivatives be recognized in the
statement of financial position as either assets or liabilities at fair value.
Changes in the fair value of derivatives that do not meet the hedge accounting
criteria are to be reported in earnings. The Company is currently evaluating
the impact of adopting this standard.
(4) Net Loss Applicable to Common Shareholders
Basic Earnings Per Share ("EPS") is computed by dividing net loss available
to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted. The dilutive effect of the assumed exercise of stock
options and convertible securities was anti-dilutive for the three and nine
months ended September 30, 2000. The impact of dilutive options, warrants and
convertible securities increases the weighted average shares outstanding to
916,904,742 and 876,954,446 for the three and
10
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
nine months ended September 30, 2000, respectively. The dilutive effect of the
assumed exercise of stock options and convertible securities was 34,845,408
shares and 11,742,774 shares for the three and nine months ended September 30,
1999, respectively.
(5)Acquisitions
On June 14, 2000, the Company completed its acquisition of IXnet and its
parent company, IPC, resulting in IXnet and IPC becoming wholly owned
subsidiaries of the Company. The Company issued 1.184 shares of the Company's
common stock for each outstanding share of common stock of IXnet and 5.417
shares of the Company's common stock for each outstanding share of common stock
of IPC, for a total of 58.2 million shares of Global Crossing common stock. The
purchase price of $3.8 billion reflects a Global Crossing stock price of $49.77
per share, the average price before and after the definitive merger agreement
was entered into on February 22, 2000, and includes long-term debt assumed and
the fair market value of options issued by Global Crossing. The excess of the
purchase price over net liabilities assumed of $3.4 billion was allocated to
goodwill and other intangible assets, which are being amortized on the
straight-line method over 10 years.
The Acquisitions are being accounted for under the purchase method of
accounting for business combinations. The purchase price of Frontier and Global
Marine Systems has been allocated based upon the fair market value of the
acquired assets and liabilities. The purchase price of Racal Telecom, IPC and
IXnet has not yet been allocated based upon fair market value. The Company will
make final purchase price allocations, which may differ from the estimate
presented. Following are the unaudited pro forma results of the Company,
assuming the Acquisitions, as adjusted for the sale of the ILEC segment, had
been completed at the beginning of the period presented:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue................. $ 1,013,072 $ 889,441 $ 3,032,650 $ 2,754,628
============ ============ ============ ============
Income (loss) from
continuing operations
applicable to common
shareholders........... $ (607,650) $ (243,953) $ (1,672,289) $ (783,034)
============ ============ ============ ============
Income (loss) applicable
to common
shareholders........... $ (602,355) $ (217,905) $ (1,707,319) $ (702,452)
============ ============ ============ ============
Loss per common share:
Income (loss) from
continuing operations
applicable to common
shareholders, basic
and diluted.......... $ (0.69) $ (0.30) $ (1.94) $ (0.95)
============ ============ ============ ============
Income (loss)
applicable to common
shareholders, basic
and diluted.......... $ (0.69) $ (0.26) $ (1.98) $ (0.85)
============ ============ ============ ============
Shares used in
computing loss per
share, basic and
diluted.............. 878,397,391 826,163,727 862,875,081 825,716,010
============ ============ ============ ============
</TABLE>
11
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Land.............................................. $ 2,195 $ 689
Buildings......................................... 25,614 21,755
Leasehold improvements............................ 243,871 92,585
Furniture, fixtures and equipment................. 1,295,692 717,570
Transmission equipment............................ 4,462,342 1,851,401
---------- ----------
6,029,714 2,684,000
Accumulated depreciation.......................... (575,849) (82,663)
---------- ----------
5,453,865 2,601,337
Construction in progress.......................... 3,374,984 2,455,765
---------- ----------
Total Property and Equipment.................... $8,828,849 $5,057,102
========== ==========
</TABLE>
(7) Accrued liabilities
Included in accrued liabilities as of September 30, 2000, is a settlement
payment of $19 million to Tyco Submarine Systems Ltd. ("Tyco") in relation to
the early termination of the OA&M Agreement for the Atlantic Crossing-1 SubSea
System. In addition, Atlantic Crossing and Tyco have agreed to drop their
respective claims under the OA&M Agreement. Other claims asserted in
arbitration remain pending. Refer to Legal Proceedings located in Part II of
this report for further information on the arbitration proceeding.
(8) Long-term Debt
In August 2000, we amended and restated the terms of our existing senior
secured credit agreement, increasing the total amount available to be drawn
under the facility from $1 billion to $2.25 billion, consisting of a $1 billion
revolving credit facility which matures in July 2004, a $700 million revolving
term facility that converts to a term loan in August 2002 and matures in July
2004 and a $550 million term loan that matures in June 2006. The borrowings
under the facilities may be used for working capital and general corporate
purposes.
As part of the acquisition of IPC Communications, Inc., the Company assumed
$247 million of 10 7/8% Senior Discount Notes which were due in 2008. In August
and September 2000, the Company repaid the debt and as a result, recorded an
extraordinary loss of $18 million, net of tax.
(9) Shareholders' Equity
In April 2000, the Company issued 21,673,706 shares of its common stock for
net proceeds of approximately $694 million. In connection with this
transaction, certain of the Company's shareholders sold an aggregate of
21,326,294 shares of common stock, for which the Company received no proceeds.
In April 2000, the Company issued 4,000,000 shares of 6 3/4% cumulative
convertible preferred stock at a liquidation preference of $250 per share for
net proceeds of approximately $970 million. Each share of preferred stock is
convertible into 6.3131 shares of common stock, based on a conversion price of
$39.60.
12
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Dividends on the preferred stock are cumulative from the date of issue and will
be payable on January 15, April 15, July 15 and October 15 of each year
beginning on July 15, 2000, at the annual rate of 6 3/4%. In May 2000, pursuant
to an over-allotment option held by the underwriters of the preferred stock,
the Company issued an additional 600,000 shares of 6 3/4% cumulative
convertible preferred stock for net proceeds of approximately $146 million.
In April 2000, the Company issued in privately negotiated transactions with
certain holders of its 6 3/8% cumulative convertible preferred stock an
aggregate of 12,363,489 shares of its common stock in exchange for an aggregate
of 4,559,970 shares of preferred stock. The fair market value of the shares of
common stock issued by the Company in excess of what would have been issued by
the Company upon conversion of the preferred stock, in accordance with the
terms of the preferred stock, is included in the accompanying financial
statements in net loss applicable to common shareholders.
(10) Segment Information
The Company is a worldwide provider of Internet and long distance
telecommunications facilities and related services supplying its customers with
global "point to point" connectivity and, through its Global Marine Systems
subsidiary, providing cable installation and maintenance services. The
Company's reportable segments include telecommunications services and
installation and maintenance services. The Company's chief decision maker
monitors the revenue streams of the various products and geographic locations.
The operations are managed and financial performance is evaluated based on the
delivery of multiple integrated services to customers over a single network.
The information below summarizes certain financial data of the Company:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
TELECOMMUNICATIONS SERVICES:
Revenue:
Commercial................ $ 453,538 $ -- $ 1,139,070 $ --
Consumer.................. 39,482 -- 124,015 --
Carrier:
Sales-type leases....... 52,583 137,934 313,368 489,311
Services................ 349,393 11,912 978,149 25,313
----------- ----------- ----------- -----------
Total Carrier......... 401,976 149,846 1,291,517 514,624
----------- ----------- ----------- -----------
Total revenue............... $ 894,996 $ 149,846 $ 2,554,602 $ 514,624
=========== =========== =========== ===========
Operating income (loss)..... $ (454,717) $ 38,293 $(1,064,976) $ 119,124
=========== =========== =========== ===========
Adjusted EBITDA............. $ 321,365 $ 162,129 $ 919,912 $ 413,350
=========== =========== =========== ===========
Cash paid for capital
expenditures............... $ 1,194,495 $ 1,061,736 $ 2,846,347 $ 1,649,431
=========== =========== =========== ===========
Total assets................ $22,824,213 $11,677,375 $22,824,213 $11,677,375
=========== =========== =========== ===========
</TABLE>
13
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<S> <C> <C> <C> <C>
INSTALLATION AND
MAINTENANCE:
Revenue.................. $ 118,076 $ 84,736 $ 309,584 $ 84,736
=========== =========== =========== ===========
Operating income (loss).. $ 10,264 $ 7,287 $ 8,718 $ 7,287
=========== =========== =========== ===========
Adjusted EBITDA.......... $ 33,711 $ 9,303 $ 78,857 $ 9,303
=========== =========== =========== ===========
Cash paid for capital
expenditures............ $ 9,157 $ 66,600 $ 59,150 $ 66,600
=========== =========== =========== ===========
Total assets............. $ 1,307,920 $ 1,245,640 $ 1,307,920 $ 1,245,640
=========== =========== =========== ===========
NON-RECURRING RESULTS:
Operating income (loss).. $ (25,231) $ (32,354) $ (51,169) $ (32,354)
=========== =========== =========== ===========
Adjusted EBITDA.......... $ (25,231) $ (32,354) $ (51,169) $ (32,354)
=========== =========== =========== ===========
Total assets (1)......... $ 2,473,451 $ 2,432,711 $ 2,473,451 $ 2,432,711
=========== =========== =========== ===========
CONSOLIDATED:
Revenue.................. $ 1,013,072 $ 234,582 $ 2,864,186 $ 599,360
=========== =========== =========== ===========
Operating income (loss).. $ (469,684) $ 13,226 $(1,107,427) $ 94,057
=========== =========== =========== ===========
Adjusted EBITDA.......... $ 329,845 $ 139,078 $ 947,600 $ 390,299
=========== =========== =========== ===========
Cash paid for capital
expenditures............ $ 1,203,652 $ 1,128,336 $ 2,905,497 $ 1,716,031
=========== =========== =========== ===========
Total assets............. $26,605,584 $15,355,726 $26,605,584 $15,355,726
=========== =========== =========== ===========
</TABLE>
--------
(1)Includes net assets of discontinued operations.
Adjusted Earnings before Interest, Taxes, Depreciation and Amortization, or
Adjusted EBITDA, is calculated as operating income (loss) plus depreciation and
amortization, goodwill and intangibles amortization, non-cash cost of capacity
sold, stock related expenses and incremental cash deferred revenue. This
definition is consistent with financial covenants contained in the Company's
major financial agreements and management uses Adjusted EBITDA to monitor its
compliance with the Company's financial covenants and to measure the
performance and liquidity of its reportable segments. This information should
not be considered as an alternative to any measure of performance as
promulgated under GAAP. Our calculation of Adjusted EBITDA may be different
from the calculation used by other companies and, therefore, comparability may
be limited. The calculation of Adjusted EBITDA is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ---------------------
2000 1999 2000 1999
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
Operating income (loss).......... $(469,684) $ 13,226 $(1,107,427) $ 94,055
Goodwill and intangible
amortization.................... 235,461 3,758 548,464 3,758
Depreciation and amortization.... 160,427 12,170 391,038 16,370
Stock related expense............ 8,879 12,535 35,566 38,611
Non-cash cost of capacity sold... 40,854 66,413 252,228 180,589
Incremental cash deferred
revenue......................... 353,908 30,976 827,731 56,916
--------- -------- ----------- --------
Adjusted EBITDA.................. $ 329,845 $139,078 $ 947,600 $390,299
========= ======== =========== ========
</TABLE>
14
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(11) Reclassifications
Certain prior year amounts have been reclassified in the condensed
consolidated financial statements for consistent presentation.
(12) Discontinued Operations
On July 11, 2000, the Company entered into a stock purchase agreement to
sell the ILEC business segment to Citizens for $3.65 billion in cash, subject
to certain adjustments concerning closing date liabilities, working capital
balances and performance measurements as defined in the agreement. In
connection with the sales agreement, the Company and Citizens entered into a
strategic agreement whereby the Company will continue to provide long distance
services to customers within the ILEC business. The segment is shown in the
accompanying financial statements as discontinued operations. The sale is
anticipated to be completed in the first quarter of 2001. The Company
anticipates income from discontinued operations; therefore, no losses have been
accrued. The net after tax proceeds from the disposal of discontinued
operations will decrease goodwill recorded upon the acquisition of Frontier by
the Company in September 1999. Summary financial information of the ILEC
business segment is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Assets.......................................... $2,825,057 $2,886,502
Liabilities..................................... (351,606) (383,652)
---------- ----------
Net assets of discontinued operations............. $2,473,451 $2,502,850
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
2000 2000
------------- -------------
<S> <C> <C>
INCOME STATEMENT DATA:
Revenue........................................ $186,628 $562,127
Expenses....................................... 147,339 438,230
-------- --------
Operating income............................... 39,289 123,897
Interest income, net........................... 4,920 17,133
Other income................................... 631 186
Provision for income taxes..................... (21,750) (66,174)
-------- --------
Income from discontinued operations............ $ 23,090 $ 75,042
======== ========
</TABLE>
(13) Subsequent Events
AGC IPO
On October 6, 2000, AGC completed its IPO in which it sold 68 million shares
of common stock at a price to the public of $7.00 per share. In November 2000,
pursuant to an over-allotment option granted to the underwriters of the IPO,
AGC sold an additional 500,000 shares of its common stock at $7.00 per share.
GCL's economic ownership interest in AGC after the offerings and related
transactions was reduced to 56.9%.
15
<PAGE>
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concurrently with the IPO, AGC issued $408 million of its 13.375% Senior
Notes due 2010. AGC intends to use the approximately $850 million in net
proceeds from this offering and the IPO to build the AGC network, make
investments in telecommunications and internet companies, repay some of AGC's
indebtedness and for general corporate purposes.
Also concurrently with the IPO, GCL's 50% interest in Hutchison Global
Crossing and 49% interest in Global Access Limited were each contributed to
AGC. In connection with this transaction, AGC purchased GCL's interest in
shareholder loans made to these entities and agreed to indemnify GCL for
certain contingent liabilities relating to Hutchison Global Crossing.
Repayment of Credit Facilities
In October 2000, we repaid approximately $755 million of borrowings under
the credit facilities incurred in connection with the Company's purchase of
Racal Telecom in November 1999. The source of funds for the debt repayment is a
new debt facility entered into by a subsidiary of GCL with a maturity date of
April 12, 2002. The Company has written-off approximately $24 million of
deferred financing costs as a result of this extinguishment.
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Recent Financial Accounting Developments
During the third and fourth quarters of 1999, changes in our business
activities, together with a newly effective accounting standard, caused us to
modify some of our practices regarding recognition of revenue and costs related
to sales of capacity. None of the accounting practices described below affect
our cash flows.
As a result of Financial Accounting Standards Board ("FASB") Interpretation
No. 43, "Real Estate Sales, an interpretation of FASB Statement No. 66" ("FIN
43"), which became effective July 1, 1999, we have accounted for revenue from
terrestrial circuits sold after that date as operating leases and have
amortized that revenue over the terms of the related contracts. Previously, we
had recognized these sales as current revenue upon activation of the circuits.
This deferral in revenue recognition has no impact on cash flow.
With the consummation of our acquisition of Frontier Corporation
("Frontier") on September 28, 1999, service offerings became a significant
source of our revenue. Consequently, we initiated service contract accounting
for our subsea systems during the fourth quarter of 1999, because we, since
that date, no longer hold subsea capacity exclusively for sale. As a result,
since the beginning of the fourth quarter of 1999, we have depreciated
investments in both subsea and terrestrial systems over their remaining
economic lives and have recognized revenue related to service contracts over
the terms of the contracts. We have recognized revenue and costs related to the
sale of subsea circuits upon activation, if the criteria of sales-type lease
accounting have been satisfied with respect to those circuits.
During the fourth quarter of 1999, our global network service capabilities
were significantly expanded by the activation of several previously announced
systems and by the integration of other networks obtained through acquisition
and joint venture agreements. With this network expansion, we began offering
our customers flexible bandwidth products to multiple destinations, which makes
the historical practice of fixed, point-to-point routing of traffic and
restoration capacity both impractical and inefficient. To ensure the required
network flexibility, we modified our standard capacity purchase agreements and
our network management in a manner that precludes the use of sales-type lease
accounting.
Because of these contract changes and the network management required to
meet customer demands for flexible bandwidth, multiple destinations and system
performance, most of the contracts for subsea circuits entered into after
January 1, 2000 have been part of a service offering and, therefore, do not
meet the criteria of sales-type lease accounting and are accounted for as
operating leases. Consequently, we defer revenue related to those circuits and
amortize it over the appropriate term of the contract. In certain
circumstances, if a contract meets all of the requirements of sales-type lease
accounting, we will recognize revenue without deferral upon payment and
activation.
The principal effect of the change in the type of contracts offered to our
customers beginning on January 1, 2000 is that an increasing percentage of our
capacity sales are being accounted for as operating leases rather than sales-
type leases, resulting in more revenue from such sales being deferred into
future periods than was previously the case. Accordingly, this change in
contract terms reduces revenue recognized upon activation of the circuits in
earlier periods and increases revenue recognized in later periods.
As of September 30, 2000, we had an aggregate backlog of approximately $105
million in capacity sales contracts for which revenue will be recognized using
sales-type lease accounting upon activation. For the remaining backlog as of
that date, revenue will be recognized using operating lease accounting, that is
amortized over the life of the contract.
We note that accounting practice and authoritative guidance regarding the
applicability of sales-type lease accounting to the sale of capacity is still
evolving. Based on the accounting practices described above, we believe that
additional changes, if any, in accounting practice or authoritative guidance
affecting sales of capacity would have little or no impact on our financial
position, results of operations, cash flows and financial statements taken as a
whole.
17
<PAGE>
Restatements
Sale of Incumbent Local Exchange Carrier Business Segment
On July 11, 2000, we entered into an agreement to sell our incumbent local
exchange carrier business segment, acquired as part of our acquisition of
Frontier, to Citizens Communications for $3.65 billion in cash, subject to
adjustments concerning closing date liabilities and working capital balances.
We and Citizens Communications also entered into a strategic agreement under
which we will provide long distance services to the ILEC business. The
transaction is subject to both federal and state regulatory approvals, which
are expected to take approximately nine months from the date of the agreement
to obtain. As a result of this transaction, our financial statements reflect
the financial position and results of operations of the incumbent local
exchange carrier business segment as discontinued operations for all periods
presented since the date of the Frontier acquisition.
Useful Life of GlobalCenter Goodwill
Subsequent to the issuance of our audited financial statements for the year
ended December 31, 1999 and our unaudited financial statements for the three
months ended March 31, 2000, and following discussion with representatives of
the Securities and Exchange Commission's Division of Corporation Finance
concerning its review of our financial statements, we restated our financial
statements for these periods to revise the estimated useful life of the $1.5
billion goodwill related to GlobalCenter from 10 years to 5 years. GlobalCenter
was acquired by us in September 1999 as part of the Frontier acquisition.
As a result, loss applicable to common shareholders for the year ended
December 31, 1999 and accumulated deficit as of December 31, 1999 increased by
$41 million. Loss applicable to common shareholders for the three months ended
March 31, 2000 also increased by $41 million as a result of the additional
goodwill amortization. The restatement has no impact on cash flow or compliance
with our debt agreements.
Acquisitions
The Company completed its acquisitions of Frontier (acquired September 28,
1999), Global Marine Systems (acquired July 2, 1999), Racal Telecom (acquired
November 24, 1999), a 50% interest in the Hutchison Global Crossing joint
venture (completed January 12, 2000) and IPC Communications and IXnet, Inc.
(acquired June 14, 2000). The acquisition of these entities is referred to as
the "Acquisitions", as adjusted for the sale of the ILEC segment. The increase
in revenue and expenses for the three and nine months ended September 30, 2000
is primarily due to these transactions. As the Acquisitions occurred just
before or subsequent to September 30, 1999, the comparability of the results of
operations for the three and nine months ended September 30, 2000 and 1999 is
limited.
Results of Operations for the Three Months Ended September 30, 2000 and
September 30, 1999
Revenue. Revenue for the three months ended September 30, 2000 increased
331% to $1.0 billion as compared to $235 million for the three months ended
September 30, 1999. For the three months ended September 30, 2000, $53 million
in revenue was recognized using sales-type lease accounting, while the
remaining $349 million in revenue from our telecommunications services segment
was accounted for using operating lease accounting. For the three months ended
September 30, 1999, $138 million in revenue was recognized using sales-type
lease accounting, while the remaining $12 million in revenue from our
telecommunications services segment was accounted for using operating lease
accounting. The increase in overall revenue is due to the Acquisitions,
partially off-set by the Company's business practice of selling a greater
proportion of capacity under terms that require amortization of revenue over
the contract life rather than terms that qualify for revenue recognition upon
the activation of the circuits.
Cash revenue (revenue plus the cash portion of the change in deferred
revenue) for the three months ended September 30, 2000 increased 415% to $1.4
billion compared to $266 million for the three months ended September 30, 1999.
The increase is due to the Acquisitions and an increase in the cash portion of
the change in deferred revenue due to the deferral of revenues using operating
lease accounting.
18
<PAGE>
On a pro forma basis, giving effect to the Acquisitions, revenues for the
three months ended September 30, 2000 increased 13% to $1.0 billion as compared
to $889 million for the three months ended September 30, 1999. The increase in
pro forma revenue is primarily due to an increase in revenue from data
products.
Cost of sales. Cost of sales for the three months ended September 30, 2000
was $600 million, or 59% of revenue, compared to $129 million, or 55% of
revenue, for the three months ended September 30, 1999. The dollar increase is
primarily attributable to the increase in revenue. Reduced margins for the
three months ended September 30, 2000 compared to the three months ended
September 30, 1999 were due to lower prices of subsea capacity sold to
customers.
Non-cash cost of undersea capacity sold was $41 million and $66 million
during the three months ended September 30, 2000 and 1999, respectively.
Included in the three months ended September 30, 2000 is $3 million in accrued
losses on sales contracts.
Operations, administration and maintenance ("OA&M"). OA&M costs for the
three months ended September 30, 2000 were $132 million, or 13% of revenue,
compared to $16 million, or 7% of revenue, for the three months ended September
30, 1999. The increase is primarily a result of the cost incurred in connection
with the development of the Global Network Operations Center, the expansion of
the Global Crossing network, the expenses of the Acquisitions and the
cancellation of a third party OA&M agreement.
Sales and marketing. Sales and marketing expenses for the three months ended
September 30, 2000 were $96 million, or 9% of revenue, compared to $14 million,
or 6% of revenue, for the three months ended September 30, 1999. The increase
from 1999 was due to the additional expenses attributable to the Acquisitions,
expenses related to additions in headcount, plus occupancy and advertising
costs.
Network development. Network development costs for the three months ended
September 30, 2000 were $32 million, or 3% of revenue, compared to $7 million,
or 3% of revenue, for the three months ended September 30, 1999. The increase
is due to the additional expenses attributable to the Acquisitions and
additional salaries, employee benefits and professional fees associated with
the expansion of the Global Crossing network.
General and administrative. General and administrative expenses for the
three months ended September 30, 2000 were $227 million, or 22% of revenue,
compared to $39 million, or 16% of revenue, for the three months ended
September 30, 1999. The increase was comprised principally of salaries,
employee benefits and recruiting for the Company's increased staffing for
multiple systems, travel, professional fees, insurance and occupancy costs.
These increases are primarily attributable to the Acquisitions.
Depreciation and amortization. Depreciation and amortization for the three
months ended September 30, 2000 was $160 million, compared to $12 million for
the three months ended September 30, 1999. The increase is due to the
Acquisitions and depreciation of subsea systems placed in service.
Goodwill and intangibles amortization. Goodwill and intangibles amortization
for the three months ended September 30, 2000 was $235 million, compared to $4
million for the three months ended September 30, 1999, as the Acquisitions
occurred just before or subsequent to September 30, 1999.
Equity in loss of affiliates. Equity in loss of affiliates was $11 million
for the three months ended September 30, 2000, compared to income of $71
thousand for the three months ended September 30, 1999. The decrease is
primarily due to losses of the Hutchison Global Crossing joint venture that was
entered into in January 2000.
Minority interest. Minority interest income for the three months ended
September 30, 2000 was $7 million and relates to minority interest in net
losses of Pacific Crossing-1 ("PC-1") and Asia Global Crossing ("AGC").
19
<PAGE>
Interest income and interest expense. Interest income for the three months
ended September 30, 2000 was $24 million, compared to $14 million for the three
months ended September 30, 1999. The increase is due to interest earned on cash
raised from financings and on capacity purchase agreement deposits. Interest
expense for the three months ended September 30, 2000 was $112 million,
compared to $35 million for the three months ended September 30, 1999. The
increase is due to higher levels of debt outstanding resulting from the
Acquisitions and capital spending on the expansion of the Global Crossing
network.
Other income (expense), net. Other income (expense), net for the three
months ended September 30, 2000 was an expense of $11 million, compared to
income of $224 million for the three months ended September 30, 1999. The
decrease is primarily due to a $210 million termination fee paid by US West,
Inc. in connection with the termination of its merger agreement with the
Company in July 1999 and foreign exchange losses incurred during the three
months ended September 30, 2000.
Benefit (provision) for income taxes. During the three months ended
September 30, 2000, we recognized a benefit for income taxes of $24 million
primarily related to recognition of deferred tax assets for net operating loss
carryforwards. During the three months ended September 30, 1999, we recognized
a provision for income taxes of $80 million to provide for taxes on profits
earned from telecommunications services, installation and maintenance and other
income where subsidiaries of the Company have a presence in taxable
jurisdictions.
Income from discontinued operations. During the three months ended September
30, 2000, we reported income from discontinued operations of $23 million, net
of tax of $22 million, due to the pending sale of our incumbent local exchange
carrier business segment.
Extraordinary loss on retirement of debt. In September 2000, the Company
recognized an extraordinary loss resulting from the repayment of debt assumed
in connection with the IPC acquisition. The Company incurred an extraordinary
loss of $18 million, net of tax, resulting from the amount paid in excess of
the book value of the notes, the write-off of deferred financing costs, and
fees paid to the solicitation agent and legal counsel. In July 1999, the
Company recognized an extraordinary loss resulting from the repayment of
existing debt in connection with the issuance of its $3 billion Senior Secured
Credit Facility, comprised of a write-off of $15 million of unamortized
deferred financing costs.
Net income (loss). Net loss for the three months ended September 30, 2000
was $544 million, compared to net income of $121 million for the three months
ended September 30, 1999.
Preferred stock dividends. Preferred stock dividends for the three months
ended September 30, 2000 were $58 million compared to $14 million for the three
months ended September 30, 1999. The increase is due to the additional
issuances of preferred stock in November 1999, December 1999, January 2000 and
April 2000, the proceeds of which are used to fund acquisitions and capital
expenditures.
Net income (loss) applicable to common shareholders. During the three months
ended September 30, 2000, the Company reported net loss applicable to common
shareholders of $602 million compared to net income applicable to common
shareholders of $107 million for the three months ended September 30, 1999.
Adjusted EBITDA. Our operating income (loss) plus depreciation and
amortization, goodwill and intangibles amortization, stock related expenses,
non-cash cost of capacity sold and the change in the cash portion of deferred
revenue ("Adjusted EBITDA") was $330 million for the three months ended
September 30, 2000, compared to $139 million for the three months ended
September 30, 1999. The increase in Adjusted EBITDA is due to the Acquisitions
and the increase in the cash portion of the change in deferred revenue for the
three months ended September 30, 2000 compared to the three months ended
September 30, 1999. Our definition of Adjusted EBITDA is consistent with
financial covenants contained in our financial agreements and is used by our
management to monitor compliance with our financial covenants and to measure
the performance and liquidity of our reportable segments. This information
should not be considered as an alternative to any measure of performance as
promulgated under GAAP. Our calculation of Adjusted EBITDA may be different
from the calculation used by other companies and, therefore, comparability may
be limited.
20
<PAGE>
Results of Operations for the Nine Months Ended September 30, 2000 and
September 30, 1999
Revenue. Revenue for the nine months ended September 30, 2000 increased 378%
to $2.9 billion as compared to $599 million for the nine months ended September
30, 1999. For the nine months ended September 30, 2000, $313 million in revenue
was recognized using sales-type lease accounting, while the remaining $978
million in revenue from our telecommunications services segment was accounted
for using operating lease accounting. For the nine months ended September 30,
1999, $489 million in revenue was recognized using sales-type lease accounting,
while the remaining $25 million in revenue from our telecommunications services
segment was accounted for using operating lease accounting. The increase is due
to the Acquisitions, partially off-set by the Company's business practice of
selling a greater proportion of capacity under terms that require amortization
of revenue over the contract life rather than terms that qualify for revenue
recognition upon the activation of the circuits.
Cash revenue (revenue plus the cash portion of the change in deferred
revenue) for the nine months ended September 30, 2000 increased 464% to $3.7
billion compared to $656 million for the nine months ended September 30, 1999.
The increase is due to the Acquisitions and an increase in the cash portion of
the change in deferred revenue resulting from increased circuit sales and the
deferral of revenues using operating lease accounting.
On a pro forma basis, giving effect to the Acquisitions as of January 1,
1999, revenues for the nine months ended September 30, 2000 increased 10% to
$3.0 billion as compared to $2.8 billion for the nine months ended September
30, 1999. The increase in pro forma revenue is primarily due to an increase in
revenue from data products.
Cost of sales. Cost of sales for the nine months ended September 30, 2000
was $1.8 billion, or 63% of revenue, compared to $279 million, or 47% of
revenue, for the nine months ended September 30, 1999. The increase is
primarily attributable to the increase in revenue. Reduced margins for the nine
months ended September 30, 2000 compared to the nine months ended September 30,
1999 were due to lower margins in the businesses acquired and lower prices of
subsea capacity sold to customers.
Non-cash cost of undersea capacity sold was $252 million and $181 million
during the nine months ended September 30, 2000 and 1999, respectively.
Included in the nine months ended September 30, 2000 is $41 million in accrued
losses on sales contracts.
Operations, administration and maintenance ("OA&M"). OA&M costs for the nine
months ended September 30, 2000 were $325 million, or 11% of revenue, compared
to $43 million, or 7% of revenue, for the nine months ended September 30, 1999.
The increase is primarily a result of the cost incurred in connection with the
development of the Global Network Operations Center, the expansion of the
Global Crossing network, the expenses of the Acquisitions and the cancellation
of a third party OA&M agreement.
Sales and marketing. Sales and marketing expenses for the nine months ended
September 30, 2000 were $259 million, or 9% of revenue, compared to $39
million, or 6% of revenue, for the nine months ended September 30, 1999. The
increase from 1999 was due to the additional expenses attributable to the
Acquisitions, expenses related to additions in headcount, plus occupancy and
advertising costs.
Network development. Network development costs for the nine months ended
September 30, 2000 were $77 million, or 3% of revenue, compared to $21 million,
or 4% of revenue, for the nine months ended September 30, 1999. The increase is
due to the additional expenses attributable to the Acquisitions and additional
salaries, employee benefits and professional fees associated with the expansion
of the Global Crossing network.
General and administrative. General and administrative expenses for the nine
months ended September 30, 2000 were $560 million, or 20% of revenue, compared
to $103 million, or 17% of revenue, for the nine months ended September 30,
1999. The increase was comprised principally of salaries, employee
21
<PAGE>
benefits and recruiting for the Company's increased staffing for multiple
systems, travel, professional fees, insurance and occupancy costs. These
increases are primarily attributable to the Acquisitions.
Depreciation and amortization. Depreciation and amortization for the nine
months ended September 30, 2000 was $391 million, compared to $16 million for
the nine months ended September 30, 1999. The increase is due to the
Acquisitions and depreciation of subsea systems placed in service.
Goodwill and intangibles amortization. Goodwill and intangibles amortization
for the nine months ended September 30, 2000 was $548 million, compared to $4
million for the three months ended September 30, 1999, as the Acquisitions
occurred just before or subsequent to September 30, 1999.
Equity in loss of affiliates. Equity in loss of affiliates was $30 million
and $5 million for the nine months ended September 30, 2000 and 1999,
respectively. The increase is primarily due to losses of the Hutchison Global
Crossing joint venture that was entered into in January 2000.
Minority interest. Minority interest expense for the nine months ended
September 30, 2000 was $6 million and relates to minority interest in net
income of PC-1, partially off-set by net losses of AGC.
Interest income and interest expense. Interest income for the nine months
ended September 30, 2000 was $71 million, compared to $46 million for the nine
months ended September 30, 1999. The increase is due to interest earned on cash
raised from financings and on capacity purchase agreement deposits. Interest
expense for the nine months ended September 30, 2000 was $290 million, compared
to $82 million for the nine months ended September 30, 1999. The increase is
due to higher levels of debt outstanding resulting from the Acquisitions and
capital spending on the expansion of the Global Crossing network.
Other income (expense), net. Other income (expense), net for the nine months
ended September 30, 2000 was an expense of $24 million, compared to income of
$216 million for the nine months ended September 30, 1999. The decrease is
primarily due to a $210 million termination fee paid by US West, Inc. in
connection with the termination of its merger agreement with the Company in
July 1999 and foreign exchange losses incurred during the nine months ended
September 30, 2000.
Benefit (provision) for income taxes. During the nine months ended September
30, 2000, we recognized a benefit for income taxes of $117 million due to the
revision of an income tax provision related to prior year items and recognition
of deferred tax assets for net operating loss carryforwards. During the nine
months ended September 30, 1999, we recognized a provision for income taxes of
$110 million to provide for taxes on profits earned from telecommunications
services, installation and maintenance and other income where subsidiaries of
the Company have a presence in taxable jurisdictions.
Income from discontinued operations. During the nine months ended September
30, 2000, we reported income from discontinued operations of $75 million, net
of tax of $66 million, due to the pending sale of our incumbent local exchange
carrier business segment.
Cumulative effect of change in accounting principle. The Company adopted
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Cost of Start-Up
Activities," issued by the American Institute of Certified Public Accountants,
during the nine months ended September 30, 1999. SOP 98-5 requires that certain
start-up expenditures previously capitalized during system development must now
be expensed. The Company incurred a one-time charge during the nine months
ended September 30, 1999 of $15 million (net of tax benefit of $1.4 million)
that represents start-up costs incurred and capitalized during previous
periods.
Extraordinary loss on retirement of debt. In September 2000, the Company
recognized an extraordinary loss resulting from the repayment of debt in
connection with the IPC acquisition. The Company incurred an extraordinary loss
of $18 million, net of tax, resulting from the amount paid in excess of the
book value of the
22
<PAGE>
notes, the write-off of deferred financing costs, and fees paid to the
solicitation agent and legal counsel. In July 1999, the Company recognized an
extraordinary loss resulting from the repayment of existing debt in connection
with the issuance of its $3 billion Senior Secured Credit Facility, comprised
of a write-off of $15 million of unamortized deferred financing costs.
Net income (loss). Net loss for the nine months ended September 30, 2000 was
$1.2 billion, compared to net income of $129 million for the nine months ended
September 30, 1999.
Preferred stock dividends. Preferred stock dividends for the nine months
ended September 30, 2000 were $162 million compared to $41 million for the nine
months ended September 30, 1999. The increase is due to the additional
issuances of preferred stock in November 1999, December 1999, January 2000 and
April 2000, the proceeds of which are used to fund acquisitions and capital
spending.
Charge for conversion of preferred stock. Charge for conversion of preferred
stock of $92 million for the nine months ended September 30, 2000 resulted from
the fair market value of the shares of our common stock issued by the Company
in privately negotiated exchange transactions with holders of preferred stock
in excess of what would have been issued by the Company upon conversion of the
preferred stock in accordance with the terms of the preferred stock.
Net income (loss) applicable to common shareholders. During the nine months
ended September 30, 2000, the Company reported net loss applicable to common
shareholders of $1.5 billion compared to net income applicable to common
shareholders of $88 million, for the nine months ended September 30, 1999.
Adjusted EBITDA. Our operating income (loss) plus depreciation and
amortization, goodwill and intangibles amortization, stock related expenses,
non-cash cost of capacity sold and the change in the cash portion of deferred
revenue ("Adjusted EBITDA") was $948 million for the nine months ended
September 30, 2000 compared to $390 million for the nine months ended September
30, 1999. The increase in Adjusted EBITDA is due to the Acquisitions and the
increase in the cash portion of the change in deferred revenue for the nine
months ended September 30, 2000 compared to the nine months ended September 30,
1999. Our definition of Adjusted EBITDA is consistent with financial covenants
contained in our financial agreements and is used by our management to monitor
compliance with our financial covenants and to measure the performance and
liquidity of our reportable segments. This information should not be considered
as an alternative to any measure of performance as promulgated under GAAP. Our
calculation of Adjusted EBITDA may be different from the calculation used by
other companies and, therefore, comparability may be limited.
Liquidity and Capital Resources
Global Crossing estimates the remaining cost of developing and deploying the
announced systems on the Global Crossing network to be approximately $3.0
billion, excluding costs of potential future upgrades. We anticipate that all
of these systems will be completed by the middle of 2001. The Company and its
affiliates raised approximately $2.13 billion by increasing the size of its
corporate credit facility ($1.25 billion), the initial public offering of 68
million shares of AGC common stock ($476 million), and the issuance by AGC of
13.375% Senior Notes ($408 million). When combined with the $3.65 billion in
estimated pre-tax cash proceeds from the sale of the ILEC and the Company's
expected operating cash flow, Global Crossing expects to be in a position to
fully fund all of its anticipated business expansion plans without further
financing activities.
In October 2000, we repaid approximately $755 million of borrowings under
the credit facilities incurred in connection with the Company's purchase of
Racal Telecom in November 1999. The source of funds for the debt repayment is a
new debt facility entered into by a subsidiary of GCL.
During August and September 2000, we repaid indebtedness, with a book value
of $230 million, assumed in connection with the IPC acquisition. As a result of
the transaction, the Company recorded an extraordinary loss of $18 million.
In August 2000, we amended and restated the terms of our existing senior
secured corporate credit facility, increasing the aggregate amount available to
be borrowed from $1 billion to $2.25 billion, consisting of a
23
<PAGE>
$1 billion revolving credit facility which matures in July 2004, a $700 million
revolving term facility that converts to a term loam in August 2002 and matures
in July 2004; and a $550 million term loan that matures in June 2006. The
borrowings under the facilities may be used for working capital and general
corporate purposes.
On July 11, 2000, we entered into an agreement to sell our incumbent local
exchange carrier segment for $3.65 billion. The proceeds from the sale will be
used to reduce indebtedness and to invest in network and product capabilities.
The sale is expected to close in the first quarter of 2001.
In April 2000, we issued 21,673,706 shares of our common stock for net
proceeds of approximately $694 million and 4,000,000 shares of 6 3/4%
cumulative convertible preferred stock at a liquidation preference of $250 for
net proceeds of approximately $970 million. In May 2000, pursuant to an over-
allotment option held by the underwriters of the preferred stock, the Company
issued an additional 600,000 shares of 6 3/4% cumulative convertible preferred
stock for net proceeds of approximately $146 million. We are using the proceeds
of these offerings for general corporate purposes, principally capital for the
expansion of our business.
The Company has extended limited amounts of financing to customers in
connection with certain capacity sales. The financing terms provide for
installment payments of up to four years. The Company believes that its
extension of financing to its customers will not have a material effect on the
Company's liquidity.
Cash provided by operating activities was $506 million and $531 million for
the nine months ended September 30, 2000 and 1999, respectively. The balances
principally represent cash received from capacity sales and interest income
received, less sales and marketing, network development and general and
administrative expenses paid.
Cash used in investing activities was $3.1 billion and $2.0 billion for the
nine months ended September 30, 2000 and 1999, respectively. The balances
represent cash paid for construction in progress, purchases of marketable
securities, purchases of property and equipment and cash investments in
affiliates. The increase in cash used in investing activities primarily relates
to the construction costs incurred on expansion of the Global Crossing network.
Cash provided by financing activities was $2.1 billion and $907 million for
the nine months ended September 30, 2000 and 1999, respectively. The balances
represent borrowings under the senior secured corporate credit facility,
proceeds from the issuance of common and preferred stock, partially offset by
repayments of long-term debt and payment of dividends on preferred stock.
During August and September 2000, the Company paid a total of $239 million to
extinguish the remaining balance of certain IPC indebtedness assumed in the IPC
acquisition. The increase in cash provided by financing activities primarily
relates to proceeds from the issuance of common and preferred stock.
We have a substantial amount of indebtedness. Based upon the current level
of operations, our management believes that our cash flows from operations,
together with available borrowings under our credit facility, and our continued
ability to raise capital, will be adequate to meet our anticipated requirements
for working capital, capital expenditures, acquisitions and other discretionary
investments, interest payments and scheduled principal payments for the
foreseeable future. There can be no assurance, however, that the our business
will continue to generate cash flow at or above current levels or that
currently anticipated improvements will be achieved. Also, there can be no
assurance that our business facility and our continued ability to raise capital
will be adequate to meet our anticipated requirements for working capital,
capital expenditures, acquisitions and other discretionary investments,
interest payments and scheduled principal payments for the foreseeable future.
If we are unable to generate sufficient cash flow and raise capital to service
our debt, we may be required to reduce capital expenditures, refinance all or a
portion of our existing debt or obtain additional financing.
24
<PAGE>
Inflation
Management does not believe that its business is impacted by inflation to a
significantly different extent than the general economy.
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 the Company's sales and expenditures are denominated in United
States dollars, management does not believe that the Euro conversion will have
a material adverse impact on the business or its financial condition. The
Company does not expect the cost of system modifications to be material and the
Company will continue to evaluate the impact of the Euro conversion.
Information Regarding Forward-Looking Statements
The Company has included "forward-looking statements" throughout this
quarterly report filed on Form 10-Q. These forward-looking statements describe
management's intentions, beliefs, expectations or predictions for the future.
The Company uses the words "believe," "anticipate," "expect," "intend" and
similar expressions to identify forward-looking statements. Such forward-
looking statements are subject to a number of risks, assumptions and
uncertainties that could cause the Company's actual results to differ
materially from those projected in such forward-looking statements. These
risks, assumptions and uncertainties include:
. the ability to complete systems within the currently estimated time
frames and budgets;
. the ability to compete effectively in a rapidly evolving and price
competitive marketplace;
. changes in business strategy;
. changes in the nature of telecommunications regulation in the United
States and other countries;
. the successful integration of newly-acquired businesses; and
. the impact of technological change.
This list is only an example of some of the risks, uncertainties and
assumptions that may affect the Company's forward-looking statements. The
Company undertakes no obligation to update any forward-looking statements made
by it.
25
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The table below provides information about the Company's market sensitive
financial instruments and constitutes a "forward-looking statement." The
Company's major market risk exposure is changing interest rates. The Company's
policy is to manage interest rates through use of a combination of fixed and
floating rate debt. Interest rate swaps may be used to adjust interest rate
exposures when appropriate, based upon market conditions.
<TABLE>
<CAPTION>
Fair Value
September 30,
Expected maturity dates 2000 2001 2002 2003 2004 Thereafter Total 2000
----------------------- ------- ------ ------- -------- -------- ---------- ---------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEBT
Non Current--US$
denominated
9 1/2% Senior Notes due
2009................... -- -- -- -- -- $1,100,000 $1,100,000 $1,093,813
Average interest
rates--fixed.......... 9.5%
9 1/8% Senior Notes due
2006................... -- -- -- -- -- 900,000 900,000 890,625
Average interest
rates--fixed.......... 9.1%
9 5/8% Senior Notes due
2008................... -- -- -- -- -- 800,000 800,000 798,000
Average interest
rates--fixed.......... 9.6%
Senior Secured Revolving
Credit Facility........ -- -- -- -- $567,000 -- 567,000 567,000
Average interest
rates--variable....... (1)
Senior Secured Credit
Facility--Term Loan B.. -- -- -- -- -- 550,000 550,000 550,000
Average interest
rates--variable....... (2)
Racal Term Loan A....... 584,804 -- -- -- -- -- 584,804 584,804
Average interest
rates--variable....... (3)
Racal Term Loan B and
Ancillary Facility..... 182,751 -- -- -- -- -- 182,751 182,751
Average interest
rates--variable....... (4)
Medium Term Notes, 8.8%-
9.3% Due 2000 to 2021.. -- 71,500 -- -- 20,000 100,000 191,500 180,812
Average interest
rates--fixed.......... 8.9% 9.3% 9.0%
7 1/4% Senior Notes due
2004................... -- -- -- -- 300,000 -- 300,000 278,265
Average interest
rates--fixed.......... 7.3%
Pacific Crossing Term
Loan A-1............... -- 80,000 $90,000 $110,000 115,000 30,000 425,000 425,000
Average interest
rates--variable....... (6)
Pacific Crossing Term
Loan B................. -- 3,260 3,260 3,260 3,260 311,960 325,000 325,000
Average interest
rates--variable....... (7)
6% Dealer Remarketable
Securities (DRS) due
2013................... -- -- -- -- -- 200,000 200,000 192,851
Average interest
rates--fixed.......... (5)
Other................... 2,253 100 -- -- -- 4,495 6,848 6,848
Average interest
rates--fixed.......... (8)
DERIVATIVE INSTRUMENTS
Interest rate swap
floating for fixed--
Contract notional
amount................. -- -- -- -- 200,000 -- 200,000 205,913
Fixed rate assumed by
GCL................... (9)
Variable rate assumed by
Counterparty........... 7.3%
Interest rate swap fixed
for floating--Contract
notional amount........ 365,502 -- -- -- 500,000 -- 865,502 859,917
Average floating rate
assumed by GCL........ (10)
Average fixed rate
assumed by
Counterparty.......... 7% 5.0%
Foreign currency
forward--Sterling
Denominated Contract
notional amount........ 163,652 -- -- -- -- -- 163,652 1,593
Fixed conversion rate... 1.4612
</TABLE>
26
<PAGE>
--------
(1) The interest rate is 3 month US dollar LIBOR + 2.25%. The effective
interest rate was 8.9% as of September 30, 2000.
(2) The interest rate is US dollar LIBOR + 2.75%. The effective interest rate
was 9.4% as of September 30, 2000.
(3) The interest rate is British pound LIBOR + 2.50%. The effective interest
rate was 8.6% as of September 30, 2000.
(4) The interest rate on Term Loan B and the Ancillary Facility is British
pound LIBOR + 2.50%. The weighted-average interest rate was 8.6% as of
September 30, 2000.
(5) The interest rate is fixed at 6.0% until October 2003. At that time, the
remarketing dealer (J.P. Morgan) has the option to remarket the notes at
prevailing interest rates or tender the notes for redemption.
(6) The interest rate is 1 month US dollar LIBOR + 2.25%, which was 8.9% as of
September 30, 2000.
(7) The interest rate is 1 month US dollar LIBOR + 2.50%, which was 9.1% as of
September 30, 2000.
(8) Various fixed and floating rate obligations with interest rates ranging
from 0% to 9.3%.
(9) The interest rate is 6 month US dollar LIBOR + 1.26%, which is set in
arrears.
(10) There are two fixed for floating interest rate swaps denominated in
British pounds. GCL receives interest rates based on 3 month British pound
LIBOR, which was 6.2% on September 30, 2000. GCL also has two US dollar
denominated swaps. The interest rate is 1 month US dollar LIBOR, which was
6.6% as of September 30, 2000.
Foreign Currency Risk
For those subsidiaries using the U.S. dollar as their functional currency,
translation adjustments are recorded in the accompanying condensed consolidated
statements of operations.
For those subsidiaries not using the U.S. dollar as their functional
currency, assets and liabilities are translated at exchange rates in effect at
the balance sheet date and income and expense accounts at average exchange
rates during the period. Resulting translation adjustments are recorded
directly to a separate component of shareholders' equity. As of and for the
nine months ended September 30, 2000 and 1999, the Company incurred a foreign
currency translation loss of $177 million and gain of $18 million,
respectively. Foreign currency transaction gains and losses are included in the
statement of operations as incurred.
27
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 16, 1999, Frontier was served with a summons and complaint in a
lawsuit commenced in New York State Supreme Court, New York County, by a
Frontier shareholder alleging that Frontier and its board breached their
fiduciary duties by failing to obtain the highest possible acquisition price
for Frontier in the definitive merger agreement with the Company. The action
has been framed as a purported class action and seeks compensatory damages and
injunctive relief. The claims against Frontier were asserted in the same action
as similar but separate claims against US West, Inc. However, the claims
against Frontier have been severed from the US West claims. In February 2000,
the Court granted the Company's motion to transfer the action to Monroe County.
The Company believes the asserted claims are without merit and is defending
itself vigorously.
On May 22, 2000, Global Crossing Ltd. and its subsidiary, South American
Crossing (Subsea) Ltd., filed a lawsuit against Tyco Submarine Systems Ltd. in
the United States District Court for the Southern District of New York. Global
Crossing's complaint alleges fraud, theft of trade secrets, breach of contract,
and defamation related to Tyco's agreements to install the South American
Crossing fiber-optic cable system. Global Crossing seeks damages, including
punitive damages, in excess of $1 billion and attorneys' fees and costs, as
well as a declaration that the construction and development agreement with Tyco
is void due to Tyco's alleged fraud and injunctive relief barring Tyco from
further misappropriation of trade secrets and confidential information. On June
13, 2000, Tyco answered the complaint, denying the material allegations and
asserting a variety of defenses to such claims. Additionally, Tyco asserted
counterclaims that South American Crossing (Subsea) Ltd. breached its
construction and development agreement with Tyco. Tyco seeks damages of not
less than $150 million, attorneys' fees and costs and a declaration that, among
other things, the construction and development agreement is a valid,
enforceable contract and that South American Crossing (Subsea) Ltd. breached
the contract or, in the alternative, terminated the contract for convenience.
On July 5, 2000, Global Crossing answered Tyco's counterclaims, denying the
material allegations.
In addition, on May 22, 2000, Global Crossing's subsidiary, Atlantic
Crossing Ltd., together with certain of its affiliates, filed arbitration
claims against Tyco for breaches of its obligations in connection with various
contracts for the development of the Atlantic Crossing-1 fiber-optic cable
system. Global Crossing seeks unspecified monetary damages, a declaration that
certain of its obligations under the various contracts relating to Atlantic
Crossing-1 are terminated and a return of misappropriated intellectual
property. On June 22, 2000, Tyco responded to such claims, denying the material
allegations. Tyco additionally asserted counterclaims that Global Crossing and
its subsidiaries breached their various obligations under the various contracts
relating to Atlantic Crossing-1. Tyco seeks, among other things, the denial of
all relief sought by Global Crossing and awards aggregating not less than $155
million and unspecified damages for breach of the agreements. In a settlement
agreement dated as of August 30, 2000, Atlantic Crossing entered into an
agreement with Tyco for the early termination of one of the contracts relating
to Atlantic Crossing-1, the Operations, Administration and Maintenance
Agreement ("OA&M") Agreement, in return for the payment of $19 million to Tyco.
In addition, Atlantic Crossing and Tyco have agreed to drop their respective
claims under the OA&M Agreement in the arbitration. The other claims asserted
in arbitration remain pending.
Global Crossing does not believe that the commencement of these actions with
Tyco will have an impact on Global Crossing's network and/or the timely
completion of any of its systems. Global Crossing intends to pursue its claims
against Tyco vigorously and to defend itself vigorously against Tyco's
counterclaims, which counterclaims it believes to be without merit.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
28
<PAGE>
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits
<TABLE>
<C> <S>
2.1 Stock Purchase Agreement, dated as of July 11, 2000, by and among Global
Crossing Ltd., Global Crossing North America, Inc. and Citizens
Communications Company (incorporated by reference to the Registrant's
Current Report on Form 8-K dated July 11, 2000 (date of earliest event
reported), filed on July 19, 2000).
2.2 Agreement and Plan of Merger among Exodus Communications, Inc., Einstein
Acquisition Corp., Global Crossing GlobalCenter Holdings, Inc.,
GlobalCenter Holding Co., GlobalCenter Inc., and Global Crossing North
America, Inc., dated as of September 28, 2000 (incorporated by reference
to the Registrant's Current Report on Form 8-K dated September 28, 2000
(date of earliest event reported), filed on October 17, 2000).
4.1 Amended and Restated Credit Agreement dated as of August 10, 2000 among
Global Crossing Ltd., Global Crossing Holdings Ltd., Global Crossing
North America, Inc., the Lenders party thereto and The Chase Manhattan
Bank as Administrative Agent (filed herewith).
10.1 Asia Global Crossing 2000 Stock Incentive Plan (incorporated by reference
to Exhibit 10.14 to the Registration Statement on Form S-1/A of Asia
Global Crossing Ltd. filed on September 27, 2000).
27.1 Financial Data Schedule (filed herewith).
</TABLE>
(b) Reports on Form 8-k.
During the quarter ended September 30, 2000, Global Crossing Ltd. filed the
following Current Report on Form 8-K:
1. Current report on Form 8-K dated July 11, 2000 (date of earliest
event reported), filed on July 19, 2000, for the purpose of reporting,
under Item 5, an agreement for the sale of Global Crossing's incumbent
local exchange business to Citizens Communications Company.
29
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBAL CROSSING LTD.,
a Bermuda corporation
/s/ Dan J. Cohrs
By: _________________________________
Dan J. Cohrs
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
November 14, 2000
30
