<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
----------------
FORM 8-K/A
CURRENT REPORT
----------------
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 15, 1999
Global Crossing Holdings Ltd.
(Exact name of registrant as specified in its charter)
Bermuda 333-61457 98-0186828
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification No.)
Wessex House, 45 Reid Street HM12
Hamilton, Bermuda (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (441) 296-8600
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On November 24, 1999, Global Crossing Ltd., a Bermuda company ("Global
Crossing"), completed its acquisition of Racal Telecom, a group of wholly
owned subsidiaries of Racal Electronics plc. A copy of the Sale Agreement,
dated October 10, 1999, among Controls and Communications Limited, The Racal
Corporation, Racal Electronics plc and Global Crossing is incorporated by
reference herein to Exhibit 10.31 to Global Crossing's Registration Statement on
Form S-4 filed on January 11, 2000.
Item 5. Other Events.
On November 15, 1999, Global Crossing announced its agreement to
establish a joint venture with Hutchison Whampoa Limited to pursue fixed-line
telecommunications and Internet opportunities in Hong Kong. The Subscription
and Sale and Purchase Agreement, dated November 15, 1999, among Hutchison
Whampoa Limited, Hutchison Telecommunications Limited, Global Crossing and HCL
Holdings Limited is incorporated by reference herein to Exhibit 10.33 to Global
Crossing's Registration Statement on Form S-4 filed on January 11, 2000.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Combined financial statements of Racal Telecom for each of the
three years ended March 31, 1999
(b) Combined financial statements of HCL Holdings Limited and
subsidiaries for each of the three years ended December 31, 1998
(c) Combined financial statements of HCL Holdings Limited and
subsidiaries for the nine months ended September 30, 1999
and 1998
(d) Pro forma Global Crossing financial information for the year ended
December 31, 1998 and as of and for the nine months ended September
30, 1999
<PAGE>
Combined Financial Information Relating to Racal Telecom
For each of the three years ended March 31, 1999
<PAGE>
Report of the Independent Chartered Accountants
To the Directors of Racal Telecommunications Limited, Racal Telecommunications
Networks Limited, Racal Internet Services Limited and Racal Telecommunications
Inc (collectively "Racal Telecom").
We have audited the accompanying combined balance sheets of Racal Telecom at 31
March 1999 and 31 March 1998, and the related combined profit and loss accounts
and combined cash flow statements for each of the three years ended 31 March
1999 all expressed in pounds sterling and prepared on the basis set out in note
1 to the combined financial information. The combined financial information is
the responsibility of the directors of Racal Telecom. Our responsibility is to
express an opinion on the combined financial information based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United Kingdom, which are substantially consistent with those of the
United States of America. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial information is
free from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial information. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
information presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial information referred to above present
fairly, in all material respects, the combined financial position of Racal
Telecom at 31 March 1999 and 31 March 1998, and the combined results of their
operations and their combined cash flows for each of the three years ended 31
March 1999, in conformity with generally accepted accounting principles in the
United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in certain
significant respects from accounting principles generally accepted in the United
States of America. Application of accounting principles generally accepted in
the United States would have affected combined net income/(loss) for each of the
two years ended 31 March 1999 and combined equity shareholders' funds at 31
March 1999 and 31 March 1998, to the extent summarised in Note 32 to the
combined financial information.
/s/ Deloitte & Touche
Deloitte & Touche
Chartered Accountants
London
England
8 October 1999
2 December as to note 5.
17 December 1999 as to notes 29, 30, 31 and 32.
<PAGE>
RACAL TELECOM COMBINED FINANCIAL INFORMATION
COMBINED PROFIT AND LOSS ACCOUNT
For the three years ended 31 March 1999
<TABLE>
<CAPTION>
Year ended Year ended Year ended
31 March 31 March 31 March
Note 1997 1998 1999
(pound)m (pound)m (pound)m
<S> <C> <C> <C> <C>
Turnover 3 260.0 273.0 295.8
Share of turnover in joint ventures - - 0.4
------- ------- -------
Total turnover 260.0 273.0 296.2
------- ------- -------
Operating profit 4 42.0 38.3 11.2
Share of operating loss in joint ventures - - (0.2)
------- ------- -------
Total operating profit 42.0 38.3 11.0
Cost of fundamental reorganisation 5 - - (9.8)
------- ------- -------
Trading profit 42.0 38.3 1.2
Gain on disposal of fixed asset investment 10 - - 0.2
Net interest payable 6 (15.2) (15.1) (21.6)
------- ------- -------
Profit/(loss) on ordinary activities before taxation 26.8 23.2 (20.2)
Tax (charge)/credit on profit/(loss) on ordinary activities 8 (2.6) (0.5) 2.4
------- ------- -------
Retained profit/(loss) on ordinary activities after taxation 24.2 22.7 (17.8)
======= ======= =======
</TABLE>
All results are derived from continuing operations.
There were no recognised gains or losses other than the profit/(loss) for any
year shown.
<PAGE>
RACAL TELECOM COMBINED FINANCIAL INFORMATION
COMBINED BALANCE SHEETS
31 March 1998 and 31 March 1999
<TABLE>
<CAPTION>
31 March 31 March
Note 1998 1999
(pound)m (pound)m
<S> <C> <C> <C>
Fixed assets
Tangible fixed assets 9 268.6 283.3
Investments:
Joint venture: share of gross assets 0.2 13.7
share of gross liabilities - (12.1)
-------- -------
10 0.2 1.6
Other 10 0.8 -
-------- -------
269.6 284.9
-------- -------
Current assets
Stocks 11 6.9 7.7
Debtors due within one year 12 79.1 108.4
Debtors due after more than one year 13 9.8 15.8
Cash at bank and in hand 8.0 6.5
-------- -------
103.8 138.4
Creditors: amounts falling due within one year 14 (203.4) (283.5)
-------- -------
Net current liabilities (99.6) (145.1)
-------- -------
Total assets less current liabilities 170.0 139.8
Creditors: amounts falling due after more than one year 15 (86.4) (72.7)
Provisions for liabilities and charges 17 (2.0) (3.3)
-------- -------
Net assets 81.6 63.8
======== =======
Capital and reserves
Combined called up share capital 18 19.9 19.9
Combined profit and loss account 19 61.7 43.9
-------- -------
Equity shareholders' funds 20 81.6 63.8
======== =======
</TABLE>
<PAGE>
RACAL TELECOM COMBINED FINANCIAL INFORMATION
COMBINED CASH FLOW STATEMENTS
For the three years ended 31 March 1999
<TABLE>
<CAPTION>
Year ended Year ended Year ended
31 March 31 March 31 March
Note 1997 1998 1999
(pound)m (pound)m (pound)m
<S> <C> <C> <C> <C>
Net cash inflow from operating activities 21 84.6 69.0 34.2
Returns on investments and servicing of finance 22 (15.2) (15.1) (21.6)
Taxation
UK corporation tax (paid)/received (3.9) (2.2) 1.2
Capital expenditure and financial investment 23 (77.2) (75.6) (65.9)
Acquisitions and disposals 0.5 - -
-------- ------- -------
Cash outflow before financing (11.2) (23.9) (52.1)
Financing
Net change in amounts borrowed 21.5 31.7 62.7
Capital element of finance lease/hire purchase payments (1.4) (15.0) (12.1)
-------- ------- -------
Net cash inflow from financing 20.1 16.7 50.6
-------- ------- -------
Increase/(decrease) in net cash in the year 8.9 (7.2) (1.5)
======== ======= =======
Reconciliation of net cash flow to movement in net debt
Increase/(decrease) in cash in the year (8.9) 7.2 1.5
Cash inflow from increase in debt and lease financing 20.1 16.7 50.6
-------- ------- -------
11.2 23.9 52.1
Net debt at start of year 24 140.1 151.3 175.2
-------- ------- -------
Net debt at end of year 24 151.3 175.2 227.3
======== ======= =======
Net debt at end of year
Loans due within one year 24 55.6 87.3 150.0
Net cash at bank and in hand 24 (15.3) (8.0) (6.5)
-------- ------- -------
Net borrowings 24 40.3 79.3 143.5
Obligations under finance leases 24 111.0 95.9 83.8
-------- ------- -------
Net debt 24 151.3 175.2 227.3
======== ======= =======
</TABLE>
<PAGE>
RACAL TELECOM COMBINED FINANCIAL INFORMATION
NOTES ON THE COMBINED FINANCIAL INFORMATION
For the three years ended 31 March 1999
1. BASIS OF PREPARATION
The combined profit and loss accounts and balance sheets comprise an
aggregation of the amounts included in the financial statements of Racal
Telecommunications Limited, Racal Telecommunications Networks Limited,
Racal Internet Services Limited and Racal Telecommunications, Inc
(collectively "Racal Telecom") for the three years ended 31 March 1999.
Racal Telecommunication Inc.'s investment in International Optical
Network LLC has been equity accounted in these combined financial
statements.
The combined financial information includes management charges and
management allocations from the other Racal Electronics Plc Group
companies. Interest and taxation charges reflect the Racal Telecom's
results as part of a larger group. These management charges, cost
allocations and interest and taxation charges are not necessarily
indicative of the costs that would have been incurred if Racal Telecom
had operated as a separate entity.
The pension cost attributable to Racal Telecom has been based upon the
allocation of the pension charges incurred by the Racal Electronics Plc
Group in respect of Racal Telecom's employees who are members of Group
pension schemes as calculated in accordance with SSAP24. The charges
included within the combined financial statements reflect the pension
arrangements of the Racal Electronics Plc Group and are therefore not
necessarily representative of the pension cost of Racal Telecom under
separate ownership.
These combined financial statements have been prepared on the going
concern basis which assumes that funding will be made available for the
foreseeable future by the Global Crossing (Bidco) Limited (See note 29).
2. ACCOUNTING POLICIES
The combined financial information was prepared in accordance with
applicable accounting standards. The particular accounting policies
adopted are described below.
a. Basis of accounting
The accounts are prepared under the historical cost convention.
b. Turnover
Turnover represents invoiced sales (net of sales related taxes) by
Racal Telecom to outside customers. Where contracts are entered
into to lease the entire capacity of fibre optic strands to other
parties ("dark fibre contracts") for substantially the estimated
useful life of those strands, these contracts are accounted for as
sales in the period in which the later of contract signature or
the fibre being ready for use occurs. Revenue from equipment
leased to customers under operating leases is recorded as turnover
rateably over the lives of the leases.
c. Stocks
Stocks and work in progress are valued at the lower of cost and
estimated net realisable value less progress payments received.
Cost includes manufacturing overheads. Long-term contract work in
progress is valued at cost plus attributable profits, less
foreseeable losses, less progress payments received.
<PAGE>
RACAL TELECOM COMBINED FINANCIAL INFORMATION
NOTES ON THE COMBINED FINANCIAL INFORMATION
For the three years ended 31 March 1999
2. ACCOUNTING POLICIES (continued)
d. Leases
Tangible fixed assets held under finance leases and the related
lease obligations are recorded in the balance sheet at the fair
value of the leased assets at the inception of the lease. The
excesses of the lease payments over the recorded lease obligations
are treated as finance charges which are amortised over each lease
term to give a constant rate of charge on the remaining balance of
the obligations.
Rental costs under operating leases are charged to the profit and
loss account in equal annual amounts over the periods of the
leases.
e. Provision for asset impairment
Provision is made for asset impairment if the asset's recoverable
amount (the higher of net realisable value and value in use) falls
below its carrying value. The discount rate applied to future cash
flows is based on the cost to the company of funding from Racal
Electronics Group.
f. Depreciation
Depreciation is provided on all tangible fixed assets at such
rates as to write off the cost of those assets in equal
installments over their expected useful lives as follows:
Leasehold properties the term of the lease
Non-network plant and machinery 2-10 years
Transmission networks 5-21 years
g. Investment in finance leases
The total net investment in finance leases included in the balance
sheet represents total lease payments receivable net of finance
charges relating to future accounting periods together with
estimated residual values. Finance charges are allocated to
accounting periods so as to give a constant rate of return on the
net cash investment in the lease.
h. Deferred taxation
Deferred taxation is provided at the anticipated tax rates on
timing differences arising from the inclusion of items of income
and expenditure in taxation computations in periods different from
those in which they are included in the financial statements to
the extent that it is probable that a liability or asset will
crystallise in the future.
i. Pension costs
Pension costs, which are periodically calculated by professionally
qualified actuaries, are charged against profits so that the
expected costs of providing pensions are recognised during the
period in which benefit is derived from the employees' services.
The cost of the various pension schemes may vary from the funding,
dependent upon actuarial advice with any difference between
pension cost and funding being treated as a provision or
prepayment.
<PAGE>
RACAL TELECOM COMBINED FINANCIAL INFORMATION
NOTES ON THE COMBINED FINANCIAL INFORMATION
For the three years ended 31 March 1999
3. TURNOVER
All turnover is derived from telecommunications services.
Geographical analysis by destination
<TABLE>
<CAPTION>
Year ended Year ended Year ended
31 March 31 March 31 March
1997 1998 1999
(pound)m (pound)m (pound)m
<S> <C> <C> <C>
United Kingdom 258.3 271.8 294.6
The Americas 0.1 - 0.1
Other European 1.6 1.2 1.1
------- ------- -------
260.0 273.0 295.8
======= ======= =======
4. OPERATING PROFIT
<CAPTION>
Year ended Year ended Year ended
31 March 31 March 31 March
1997 1998 1999
(pound)m (pound)m (pound)m
<S> <C> <C> <C>
External turnover 260.0 273.0 295.8
Cost of sales (177.5) (193.6) (240.5)
------- ------- -------
Gross profit 82.5 79.4 55.3
Selling, distribution and administrative costs (40.5) (41.1) (44.1)
------- ------- -------
Combined operating profit 42.0 38.3 11.2
======= ======= =======
Combined operating profit was arrived at after charging/(crediting):
<CAPTION>
Year ended Year ended Year ended
31 March 31 March 31 March
1997 1998 1999
(pound)m (pound)m (pound)m
<S> <C> <C> <C>
Revenue on dark fibre contracts - - (10.3)
Depreciation of tangible fixed assets:
Own assets 15.3 20.3 28.7
Finance leased assets 15.3 14.5 13.9
Payments under operating leases:
Land and buildings - 0.1 1.0
Plant and machinery 5.7 8.5 7.1
======= ======= =======
</TABLE>
<PAGE>
RACAL TELECOM COMBINED FINANCIAL INFORMATION
NOTES ON THE COMBINED FINANCIAL INFORMATION
For the three years ended 31 March 1999
5. COST OF FUNDAMENTAL REORGANISATION
The cost of fundamental reorganisation represents the consultancy and
redundancy costs of the restructuring of Racal Telecom that commenced in
December 1998. Following a strategic review, Racal Telecom embarked on a
reorganisation plan to focus its operations into three distinct
divisions. Racal Telecom will provide business telecommunications
services to customers, Racal Translink will provide infrastructure
services and Racal Fieldforce will provide field service support. This
reorganisation resulted in a major shift in the nature and focus of the
organisation and is therefore treated as an exceptional item under UK
GAAP.
The costs were comprised of:
Year ended 31
March 1999
(pound) m
Asset impairment losses on a number of outsourcing
contracts 5.6
Redundancy costs 1.0
Consultancy costs 2.8
Other 0.4
-------
9.8
=======
All costs were incurred in the period except for redundancy costs for
which a provision was made based on notices given to employees prior to
31 March 1999.
In the period from the 1 April 1999 until 15 October 1999 a further
(pound)4.0 million of expenditure had been incurred.
6. NET INTEREST PAYABLE
<TABLE>
<CAPTION>
Year ended Year ended Year ended
31 March 31 March 31 March
1997 1998 1999
(pound)m (pound)m (pound)m
<S> <C> <C> <C>
Interest payable:
Racal group and other borrowings repayable within five years (6.2) (7.9) (13.3)
Finance charges on hire purchase contracts and finance leases (9.1) (8.1) (8.4)
------- ------ ------
(15.3) (16.0) (21.7)
Less interest receivable:
Other 0.1 0.9 0.1
------- ------ ------
Net interest payable (15.2) (15.1) (21.6)
======= ====== ======
</TABLE>
<PAGE>
RACAL TELECOM COMBINED FINANCIAL INFORMATION
NOTES ON THE COMBINED FINANCIAL INFORMATION
For the three years ended 31 March 1999
<TABLE>
<CAPTION>
7. EMPLOYEES
1997 1998 1999
No. No. No.
<S> <C> <C> <C>
(a) Average number of employees
United Kingdom 3,036 3,093 3,183
======= ======= =======
(pound)m (pound)m (pound)m
(b) Staff costs (including directors)
Wages and salaries 51.7 72.1 77.4
Social security costs 5.5 5.7 6.3
Pension costs - (2.2) (3.2)
Contributions to employee share trusts - - 4.7
------- ------- -------
57.2 75.6 85.2
======= ======= =======
</TABLE>
8. TAX CHARGE/(CREDIT) ON PROFIT/(LOSS) ON ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
Year ended Year ended Year ended
31 March 31 March 31 March
1997 1998 1999
(pound)m (pound)m (pound)m
<S> <C> <C> <C>
Tax charge/(credit) on profit/(loss) on ordinary activities was:
Corporation tax at 31% (1998: 31%, 1997: 33%) 2.0 (1.2) (3.6)
Deferred taxation 1.4 1.7 1.3
Under/over in prior year (0.8) - (0.1)
------- ------- -------
2.6 0.5 (2.4)
======= ======= =======
</TABLE>
The tax credits in the period arise as a result of the utilisation of tax
losses by way of group relief for which payment will be received.
<PAGE>
RACAL TELECOM COMBINED FINANCIAL INFORMATION
NOTES ON THE COMBINED FINANCIAL INFORMATION
For the three years ended 31 March 1999
9. TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
Non-
Trans- network
mission plant and Leasehold
networks machinery properties Total
(pound)m (pound)m (pound)m (pound)m
<S> <C> <C> <C> <C>
Balance 31 March 1997 331.4 13.4 1.5 346.3
Transfer from other group companies 1.7 0.1 - 1.8
Additions at cost 68.6 5.6 0.9 75.1
Disposals at cost (2.5) (2.3) - (4.8)
------- ------- ------- -------
Balance 31 March 1998 399.2 16.8 2.4 418.4
Transfers from other group companies 0.6 - - 0.6
Transfers to other group companies (2.0) - - (2.0)
Additions at cost 56.6 14.2 1.8 72.6
Disposals at cost (6.2) (1.2) - (7.4)
------- ------- ------- -------
Balance 31 March 1999 448.2 29.8 4.2 482.2
------- ------- ------- -------
Accumulated depreciation and
provision for asset impairment
Balance 1 April 1997 108.8 9.0 0.5 118.3
Charge for the year 32.0 2.6 0.2 34.8
Disposals (1.2) (2.1) - (3.3)
------- ------- ------- -------
Balance 31 March 1998 139.6 9.5 0.7 149.8
Charge for the year 37.5 4.5 0.6 42.6
Impairment loss 8.0 - - 8.0
Disposals (0.8) (0.7) - (1.5)
------- ------- ------- -------
Balance 31 March 1999 184.3 13.3 1.3 198.9
------- ------- ------- -------
Net book value at 31 March 1999 263.9 16.5 2.9 283.3
======= ======= ======= =======
Net book value at 31 March 1998 259.6 7.3 1.7 268.6
======= ======= ======= =======
</TABLE>
A risk adjusted rate of 10% has been used for discounting the provision
for asset impairment.
The net book value of the tangible fixed assets includes(pound)70.8m (1998 -
(pound)84.7m) of assets held under finance leases and hire purchase agreements.
Fixed assets are net of (pound)2.0m which is a capital contribution to network
costs transferred from deferred revenue.
<PAGE>
RACAL TELECOM COMBINED FINANCIAL INFORMATION
NOTES ON THE COMBINED FINANCIAL INFORMATION
For the three years ended 31 March 1999
10. FIXED ASSET INVESTMENTS
<TABLE>
<CAPTION>
Joint Other
venture investments
(pound)m (pound)m
<S> <C> <C>
Balance 1 April 1997 - 0.8
Additions 0.2 -
------- -------
Balance 31 March 1998 0.2 0.8
Additions 1.6 -
Share of retained losses of joint venture for year (0.2) -
Disposals - (0.8)
------- -------
Balance 31 March 1999 1.6 -
======= =======
</TABLE>
Joint venture
Racal Telecommunications, Inc. owns a 50 per cent interest in
International Optical Network LLC which was incorporated under the State
of Delaware Limited Liability Company Act. The main business activity of
the company is the provision of telecommunications services.
Other investments
The holding at 1 April 1997 and 1 April 1998 represented a 8.33% holding
in Hitrail BV and a loan to the same of 1 million Ecus. During the
financial year ended 31 March 1999 the loan was reimbursed for 1.5
million Ecus and the shares sold at a gain of (pound)0.2 million.
11. STOCKS
<TABLE>
<CAPTION>
31 March 31 March
1998 1999
(pound)m (pound)m
<S> <C> <C>
Raw materials and components 3.4 3.8
Work in progress 3.5 3.9
------- -------
6.9 7.7
======= =======
12. DEBTORS DUE WITHIN ONE YEAR
31 March 31 March
1998 1999
(pound)m (pound)m
Trade debtors 47.5 59.9
Amounts owed by Racal Electronics Plc Group companies
0.6 6.4
Amounts owed by associated companies 0.8 0.7
Other debtors 2.9 1.6
Corporation tax recoverable 4.4 10.1
Prepayments and accrued income 22.9 29.7
------- -------
79.1 108.4
======= =======
</TABLE>
<PAGE>
RACAL TELECOM COMBINED FINANCIAL INFORMATION
NOTES ON THE COMBINED FINANCIAL INFORMATION
For the three years ended 31 March 1999
13. DEBTORS DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
31 March 31 March
1998 1999
(pound)m (pound)m
<S> <C> <C>
Other debtors 0.7 -
Corporation tax recoverable 0.4 -
Prepayments and accrued income 8.7 15.8
--------- --------
9.8 15.8
========= ========
14. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
31 March 31 March
1998 1999
(pound)m (pound)m
Loan due to group company 87.3 150.0
Trade creditors 35.0 23.3
Amounts owed to Racal Electronics Plc Group companies 13.1 12.5
Advance receipts 14.1 14.2
Current corporation tax 3.7 6.5
Obligations under finance leases (note 16) 13.2 14.8
Other taxes and social security costs 5.8 9.0
Other creditors 2.0 1.0
Accruals and deferred income 29.2 52.2
--------- --------
203.4 283.5
========= ========
15. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
31 March 31 March
1998 1999
(pound)m (pound)m
Obligations under finance leases (note 16) 82.7 69.0
Other creditors 3.7 2.9
Accruals and deferred income - 0.8
--------- --------
86.4 72.7
========= ========
</TABLE>
Obligations under finance leases and hire purchase contracts are secured
against hybrid transmitter networks and bear finance charges at rates
ranging from 7.9276% to 9.9266% per annum.
<PAGE>
RACAL TELECOM COMBINED FINANCIAL INFORMATION
NOTES ON THE COMBINED FINANCIAL INFORMATION
For the three years ended 31 March 1999
16. OBLIGATIONS UNDER FINANCE LEASES
<TABLE>
<CAPTION>
31 March 31 March
1998 1999
(pound)m (pound)m
<S> <C> <C>
Obligations under finance leases fall due as follows:
(a) between one and two years 13.7 14.5
(b) between two and five years 28.8 21.4
(c) in more than five years 40.2 33.1
------- --------
82.7 69.0
(d) in one year or less 13.2 14.8
------- --------
95.9 83.8
======= ========
17. PROVISIONS FOR LIABILITIES AND CHARGES
Deferred
taxation
provision
(pound)m
Balance 1 April 1997 0.5
Prior year adjustment (0.2)
Profit and loss account 1.7
--------
Balance 31 March 1998 2.0
Profit and loss account 1.3
--------
Balance 31 March 1999 3.3
========
</TABLE>
The provision for deferred taxation calculated on the liability method is
as follows:
<TABLE>
<CAPTION>
Amount Potential Amount Potential
provided liability provided liability
1998 1998 1999 1999
(pound)m (pound)m (pound)m (pound)m
<S> <C> <C> <C> <C>
Accelerated capital allowances
in the United Kingdom - (17.6) - (15.3)
Other timing differences (2.0) (2.0) (3.3) (3.3)
-------- -------- --------- ---------
(2.0) (19.6) (3.3) (18.6)
======== ======== ========= =========
</TABLE>
<PAGE>
RACAL TELECOM COMBINED FINANCIAL INFORMATION
NOTES ON THE COMBINED FINANCIAL INFORMATION
For the three years ended 31 March 1999
18. COMBINED CALLED UP SHARE CAPITAL
<TABLE>
<CAPTION>
31 March 31 March
1998 1999
(pound)m (pound)m
<S> <C> <C>
Authorised share capital
Racal Telecommunications Limited (2,000,000 ordinary shares of(pound)1
each) 2,000 2,000
Racal Telecommunications Networks Limited (19,250,000 ordinary
shares of(pound)1 each) 19,250 19,250
Racal Internet Services Limited (500,000 ordinary shares of(pound)1 each) 500 500
Racal Telecommunications, Inc. (1,000 ordinary shares of $1 each) 1 1
------- ---------
21,751 21,751
======= =========
Issued share capital
Racal Telecommunications Limited (100,000 ordinary shares of(pound)1
each) 100 100
Racal Telecommunications Networks Limited (19,250,000 ordinary
shares of(pound)1 each) 19,250 19,250
Racal Internet Services Limited (500,000 ordinary shares of(pound)1 each) 500 500
Racal Telecommunications, Inc. (1,000 ordinary shares of $1 each) 1 1
------- ---------
19,851 19,851
======= =========
19. COMBINED PROFIT AND LOSS ACCOUNT
(pound)m
Balance 1 April 1997 39.0
Retained profit for the year 22.7
---------
Balance 31 March 1998 61.7
Retained loss for the year (17.8)
---------
Balance 31 March 1999 43.9
=========
20. COMBINED RECONCILIATIONS OF MOVEMENTS IN EQUITY SHAREHOLDERS' FUNDS
1998 1999
(pound)m (pound)m
Profit/(loss) for the financial year 22.7 (17.8)
Opening equity shareholders' funds 58.9 81.6
------- ---------
Closing equity shareholders' funds 81.6 63.8
======= =========
</TABLE>
<PAGE>
RACAL TELECOM COMBINED FINANCIAL INFORMATION
NOTES ON THE COMBINED FINANCIAL INFORMATION
For the three years ended 31 March 1999
21. RECONCILIATION OF COMBINED OPERATING PROFIT TO NET CASH INFLOW FROM
OPERATING ACTIVITIES
<TABLE>
<CAPTION>
1997 1998 1999
(pound)m (pound)m (pound)m
<S> <C> <C> <C>
Operating profit 42.0 38.3 11.2
Depreciation 30.6 34.8 42.6
Increase in stocks (1.7) (3.1) (0.8)
Decrease/(increase) in debtors 1.2 (14.7) (30.0)
Increase in creditors 12.5 13.7 12.3
-------- ------- --------
Net cash inflow before exceptional items 84.6 69.0 35.3
Net cash outflow in respect of fundamental
reorganisation - - (1.1)
-------- ------- --------
Net cash inflow from operating activities 84.6 69.0 34.2
======== ======= ========
22. RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
1997 1998 1999
(pound)m (pound)m (pound)m
Interest received 0.1 0.9 0.1
Interest paid (6.2) (7.9) (13.3)
Interest element of finance lease payments (9.1) (8.1) (8.4)
-------- ------- --------
Net cash outflow for returns on investments and
servicing of finance (15.2) (15.1) (21.6)
======== ======= ========
23. CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
1997 1998 1999
(pound)m (pound)m (pound)m
Purchase of tangible fixed assets (78.2) (76.9) (73.2)
Purchase of investments - (0.2) (1.6)
Sale of tangible fixed assets 1.0 1.5 7.9
Sale of other investments - - 1.0
-------- ------- --------
Net cash outflow for capital expenditure and
financial investment (77.2) (75.6) (65.9)
======== ======= ========
</TABLE>
<PAGE>
RACAL TELECOM COMBINED FINANCIAL INFORMATION
NOTES ON THE COMBINED FINANCIAL INFORMATION
For the three years ended 31 March 1999
24. ANALYSIS OF NET DEBT
<TABLE>
<CAPTION>
At At
1 April Cash 31 March
1996 flow 1997
(pound)m (pound)m (pound)m
<S> <C> <C> <C>
Cash at bank and in hand 6.4 8.9 15.3
Debt:
Loans due within one year (34.1) (21.5) (55.6)
Obligations under finance leases (112.4) 1.4 (111.0)
--------- ------- -------
Net debt (140.1) (11.2) (151.3)
========= ======== =======
At At
1 April Cash 31 March
1997 flow 1998
(pound)m (pound)m (pound)m
Cash at bank and in hand 15.3 (7.3) 8.0
Debt:
Loans due within one year (55.6) (31.7) (87.3)
Obligations under finance leases (111.0) 15.1 (95.9)
--------- ------- -------
Net debt (151.3) (23.9) (175.2)
========= ======== =======
At At
1 April Cash 31 March
1997 flow 1998
(pound)m (pound)m (pound)m
Cash at bank and in hand 8.0 (1.5) 6.5
Debt:
Loans due within one year (87.3) (62.7) (150.0)
Obligations under finance leases (95.9) 12.1 (83.8)
--------- ------- -------
Net debt (175.2) (52.1) (227.3)
========= ======== =======
</TABLE>
25. PENSION SCHEMES
Racal Telecom participates in a number of pension schemes operated by the
Racal Electronics Plc Group, which cover the majority of its directors
and employees. The schemes are defined benefit arrangements and are
operated on a pre-funded basis.
Actuarial assessments covering expenses and contributions are carried out
by independent qualified actuaries.
At 31 March 1999, a prepayment of (pound)15.5 million was included in
prepayments due in more than one year (1998: (pound)9.1 million; 1997:
(pound)3.4 million). This represents the excess of the amounts funded
over the accumulated pension costs.
The last valuations of the schemes were carried out at 1 April 1998 and
the results of these valuations and details of the main actuarial
assumptions adopted for this purpose were given in the accounts of Racal
Electronics Plc, the ultimate parent company (see note 29).
<PAGE>
RACAL TELECOM COMBINED FINANCIAL INFORMATION
NOTES ON THE COMBINED FINANCIAL INFORMATION
For the three years ended 31 March 1999
26. FUTURE CAPITAL EXPENDITURE
<TABLE>
<CAPTION>
1997 1998 1999
(pound)m (pound)m (pound)m
<S> <C> <C> <C>
Contracted for but not provided for in the financial
statements 7.9 1.9 2.4
======== ======= =======
</TABLE>
27. CONTINGENT LIABILITIES
Within the Racal Electronics Plc Group there were cross guarantees to
secure fellow subsidiaries' overdrafts and Group banking facilities under
a `mass' bank account arrangement.
There are contingent liabilities in the event of any claim for breach or
non-performance of the terms of overseas contracts against which bank
guarantees have been issued amounting to (pound)0.4 million (1998:
(pound)0.6 million, 1997: (pound)0.4 million).
28. FINANCIAL COMMITMENTS
Racal Telecom has commitments under various operating lease agreements in
connection with land and buildings and other assets. Under these
agreements the payments to which the companies are committed during the
next financial year are as follows:
<TABLE>
<CAPTION>
Land and Other Land and Other
buildings assets buildings Assets
1998 1998 1999 1999
(pound)m (pound)m (pound)m (pound)m
<S> <C> <C> <C> <C>
Payable on operating leases that expire
between two and five years 2.6 3.7 2.5 4.7
Payable on operating leases that expire
after five years 1.7 2.4 1.2 0.1
--------- -------- ------ -------
4.3 6.1 3.7 4.8
========= ======== ====== =======
</TABLE>
29. POST BALANCE SHEET EVENTS and change in control
On 1 October 1999 the business, assets and liabilities relating to Racal
Translink and Racal Fieldforce (together "Transportation Services") were
separated from Racal Telecommunications Limited and sold at market value
to another company within the Racal Electronics Plc Group. The
consideration was (pound)78.0 million paid in cash and Racal
Telecommunications Limited recorded a (pound)45.9 million profit on
disposal.
On 8 October 1999 an interim dividend of (pound)100,000 was paid by Racal
Telecommunications Limited. On 23 November a further interim dividend of
(pound)92.0 million was paid by Racal Telecommunications Limited.
On 15 October 1999, Racal Telecommunications, Inc. received a capital
contribution of (pound)3.5 million from Racal Corporation, its parent
company.
<PAGE>
RACAL TELECOM COMBINED FINANCIAL INFORMATION
NOTES ON THE COMBINED FINANCIAL INFORMATION
For the three years ended 31 March 1999
29. POST BALANCE SHEET EVENTS AND CHANGE IN CONTROL (continued)
On 24 November 1999, the entire outstanding called up share capital of
Racal Telecommunications Limited, Racal Internet Services Limited, Racal
Telecommunications Networks Limited and Racal Telecommunications, Inc.
was acquired by Global Crossing (Bidco) Limited. Consideration consisted
of approximately (pound)743 million in cash, (pound)213 million in the
form of repayment of intercompany debt and (pound)44 million in the form
of assumption of net finance lease obligations. An additional (pound)2.1
million was paid in consideration of the pension fund surplus. Final
consideration payable is subject to a net asset adjustment.
On 24 November 1999, Racal Telecommunications Networks Limited issued a
further 30,000,000 ordinary shares of (pound)1 each at par in exchange
for a reduction in amounts owing to its immediate parent company, Global
Crossing (Bidco) Limited. On the same date, Racal Internet Services
Limited issued a further 8,000,000 ordinary `A' shares of (pound)1 each
at par for cash to Global Crossing (Bidco) Limited.
On 24 November 1999, Global Crossing (Bidco) Limited entered into a
(pound)400 million term loan and (pound)275 million revolving credit
facility (the `Senior Facility') to fund the acquisition of Racal Telecom
and provide additional working capital. On the same date, Racal
Telecommunications Limited, Racal Telecommunications Networks Limited,
Racal Internet Services Limited and Racal Telecommunications Inc entered
into guarantees to support Global Crossing (Bidco) Limited's liabilities
under the Senior Facility. With respect to Racal Telecommunications
Limited, Racal Telecommunications Networks Limited, and Racal Internet
Services Limited, these guarantees were in the form of a debenture
granting fixed and floating charges over their respective assets in
favour of the Senior Facility lenders.
30. ULTIMATE PARENT COMPANY
The ultimate parent company at 31 March 1999 was Racal Electronics Plc, a
company incorporated in Great Britain. Copies of the financial statements
of Racal Electronics Plc are available from Western Road, Bracknell,
Berkshire RG12 1RG, United Kingdom.
With effect from 24 November 1999, the ultimate parent company is Global
Crossing Ltd, a company incorporated in Bermuda. Copies of group
financial statements of Global Crossing Ltd are available from the
Investor Relations Department, 360 N.
Crescent Drive, Beverley Hills, CA 90210, USA.
31. RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
1997 1998 1999
(pound)m (pound)m (pound)m
<S> <C> <C> <C>
Transactions with Racal Electronics Plc Group and
associates
Turnover
Racal Electronics Plc Group Companies 1.7 1.9 0.9
Camelot Group Plc 23.3 20.4 18.4
------- ------- -------
25.0 22.3 19.3
------- ------- -------
Purchases
Racal Electronics Plc Group Companies (2.7) (2.3) (2.6)
------- ------- -------
Interest payable (Note 6)
Racal Electronics Plc Group (6.2) (7.9) (13.3)
------- ------- -------
Amounts due from Racal Electronics Plc Group
companies and associates (Note 12)
Racal Electronics Plc Group companies 0.6 6.4
Camelot Group Plc 0.8 0.7
------- -------
1.4 7.1
======= =======
</TABLE>
<PAGE>
RACAL TELECOM COMBINED FINANCIAL INFORMATION
NOTES ON THE COMBINED FINANCIAL INFORMATION
For the three years ended 31 March 1999
31. RELATED PARTY TRANSACTIONS (continued)
<TABLE>
<CAPTION>
31 March 31 March
1998 1999
(pound)m (pound)m
<S> <C> <C>
Amounts due to Racal Electronics Plc Group companies
(Note 14)
Loan due to Racal Electronics Plc Group 87.3 150.0
Other amounts due to Racal Electronics Plc Group
companies 13.1 12.5
------- -------
100.4 162.5
======= =======
</TABLE>
32. ADDITIONAL INFORMATION FOR US INVESTORS
The combined financial statements are prepared in accordance with
accounting principles generally accepted in the UK ("UK GAAP") which
differ in certain material respects from those generally accepted in the
United States ("US GAAP"). The differences that are material relate to
the following items and necessary adjustments are shown in the tables
that follow.
Deferred Taxation
Under UK GAAP, deferred tax is provided at the rates at which the
taxation is expected to become payable. No provision is made for amounts
which are not expected to become payable in the foreseeable future. Under
US GAAP, deferred taxes are recognised for the estimated future tax
effects attributable to all temporary differences at the time such
differences originate.
Exceptional items
Non-operating exceptional items under UK GAAP are treated as part of
ordinary income and expense under US GAAP. Expenses of (pound)9.8 million
arise in the period ended 31 March 1999.
Pension costs
Under both UK GAAP and US GAAP pension costs are for future pension
liabilities. However, there are differences in the methods of valuation
which give rise to GAAP adjustments to the pension costs and prepayments.
Overhead expense
Under UK GAAP certain network project costs that are capitalised would
not normally meet the criteria for capitalisation under US GAAP. As a
result adjustments were made to expense certain period costs that were
capitalised under UK GAAP. Net expenses of (pound)5.6 million, (pound)8.0
million and (pound)2.8 million were recognised for the years ended 31
March 1997, 31 March 1998 and 31 March 1999 respectively.
Deferred contract costs
Under UK GAAP, certain costs incurred after the commencement of long term
service contracts are deferred and amortised rateably over the contract.
Under US GAAP, such costs are expensed in the period incurred.
<PAGE>
RACAL TELECOM COMBINED FINANCIAL INFORMATION
NOTES ON THE COMBINED FINANCIAL INFORMATION
For the three years ended 31 March 1999
32. ADDITIONAL INFORMATION FOR US INVESTORS (continued)
RECONCILIATION OF RETAINED PROFIT/(LOSS) IN ACCORDANCE WITH UK GAAP TO
NET PROFIT/(LOSS) IN ACCORDANCE WITH US GAAP:
<TABLE>
<CAPTION>
Year ended Year ended
31 March 31 March
1998 1999
(pound)m (pound)m
<S> <C> <C>
Net profit/(loss) in accordance with UK GAAP 22.7 (17.8)
US GAAP adjustments:
Overhead expenses (8.0) (2.8)
Deferred contract costs 1.7 0.1
Pensions (0.7) (1.9)
Deferred taxation (3.6) 4.1
-------- -------
Net (loss)/income in accordance with US GAAP 12.1 (18.3)
======== =======
RECONCILIATION OF SHAREHOLDERS' FUNDS IN ACCORDANCE WITH UK GAAP AND IN
ACCORDANCE WITH US GAAP:
31 March 31 March
1998 1999
(pound)m (pound)m
Equity shareholders' funds in accordance with UK GAAP 81.6 63.8
US GAAP adjustments:
Overhead Expenses (17.6) (20.4)
Deferred contract costs (0.6) (0.5)
Pensions 0.7 (1.2)
Deferred taxation (12.7) (8.6)
-------- -------
Equity in accordance with US GAAP 51.4 33.1
======== =======
</TABLE>
The combined statements of cash flows prepared under UK GAAP differ in
certain presentational respects from the format required under Statement
of Cash Flows ("SFAS") 95. Under UK GAAP, a reconciliation of profit from
operations to cash flows from operating activities is presented in a
note, and cash paid for interest and income taxes are presented
separately from cash flows from operating activities.
Under SFAS 95, cash flows from operating activities are based on net
profit, include interest and income taxes, and are presented on the face
of the statement.
Summary consolidated cash flow information as presented in accordance
with SFAS 95 after US GAAP adjustments is shown below:
<PAGE>
RACAL TELECOM COMBINED FINANCIAL INFORMATION
NOTES ON THE COMBINED FINANCIAL INFORMATION
For the three years ended 31 March 1999
32. ADDITIONAl INFORMATION FOR US INVESTORS (continued)
<TABLE>
<CAPTION>
31 March 31 March
1998 1999
(pound)m (pound)m
<S> <C> <C>
Cash was provided by (used in):
Operating activities 42.4 8.7
Investing activities (66.3) (60.8)
Financing activities 16.7 50.6
------- --------
Net increase/(decrease) in cash (7.2) (1.5)
Cash at the beginning of the year 15.2 8.0
------- --------
Cash at the end of the year 8.0 6.5
======= ========
A reconciliation between the consolidated statements of cash flows
presented in accordance with UK GAAP and US GAAP is set out below:
31 March 31 March
1998 1999
(pound)m (pound)m
Operating activities:
Net cash inflow from operating activities (UK GAAP) 69.0 34.2
Net interest payable (15.1) (21.6)
UK Corporation tax (paid)/received (2.2) 1.2
Non-capitalisation of overhead expense (9.3) (5.1)
------- --------
Net cash provided by operating activities (US GAAP) 42.4 8.7
======= ========
31 March 31 March
1998 1999
(pound)m (pound)m
Investing activities:
Net cash outflow from capital expenditure, financial investments, (75.6) (65.9)
and acquisitions and disposals (UK GAAP)
Non-capitalisation of overhead expenses 9.3 5.1
------- --------
Net cash used in investing activities (US GAAP) (66.3) (60.8)
======= ========
31 March 31 March
1998 1999
(pound)m (pound)m
Financing activities:
Net cash inflow from financing (UK GAAP) and net cash provided by
financing activities (US GAAP) 16.7 50.6
======= ========
</TABLE>
<PAGE>
Combined Financial Statements of HCL Holdings Limited and Subsidiaries
For each of the three years ended December 31, 1998
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
HCL Holdings Limited
We have audited the accompanying combined balance sheets of HCL Holdings Limited
and its subsidiaries (the "Company") as of December 31, 1998, 1997 and 1996 and
the related combined statements of operations, owner's equity / (deficit) and
cash flows for each of the three years ended December 31, 1998, all expressed in
Hong Kong dollars. These combined financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in Hong Kong, which are substantially similar to those generally accepted in the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the Company
as of December 31, 1998, 1997 and 1996 and the combined results of their
operations, owner's equity / (deficit) and cash flows for each of the three
years ended December 31, 1998 in conformity with accounting principles generally
accepted in Hong Kong.
Accounting principles generally accepted in Hong Kong vary in some respects from
accounting principles generally accepted in the United States. The application
of the latter would have affected the determination of combined net income
expressed in Hong Kong Dollars for each of the three years ended December 31,
1998 and the determination of owner's equity/(deficit) and combined financial
position also expressed in Hong Kong Dollars at December 31, 1998, 1997 and 1996
to the extent summarized in Note 18 to the combined financial statements.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
Certified Public Accountants
Hong Kong
December 15, 1999
<PAGE>
<TABLE>
<CAPTION>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
COMBINED BALANCE SHEETS
(In thousands of Hong Kong dollars)
- --------------------------------------------------------------------------------------------------------
December 31,
1998 1997 1996
Note $ $ $
ASSETS
Current assets
<S> <C> <C> <C> <C>
Cash at bank 328 20,774 1,610
Trade accounts receivable 6 40,379 96,182 108,570
Due from affiliates 7 14,724 188,217 149,852
Other assets and prepaid costs 15,296 16,257 9,301
-------- -------- --------
Total current assets 70,727 321,430 269,333
Deferred expenditure 4 632,849 398,801 207,407
Property, plant and equipment 5 1,678,015 889,740 327,558
--------- -------- --------
TOTAL ASSETS 2,381,591 1,609,971 804,298
========= ========= ========
LIABILITIES
Current liabilities
Bank overdraft - 1,556 -
Accounts payable and accrued liabilities
8 294,568 365,788 164,632
Deferred income 7,340 6,387 -
Short term loan from the Excluded 9 154,567 220,538 106,639
Business
Due to affiliates 10 68,088 100 -
--------- -------- --------
Total current liabilities 524,563 594,369 271,271
Long term loan from an
affiliate 11 629,682 471,482 414,749
Long term loan from HCLNP's
then partners 12 1,517,825 840,827 251,681
--------- -------- --------
Total liabilities 2,672,070 1,906,678 937,701
--------- -------- --------
OWNER'S DEFICIT
Share capital, share of US$1, authorized,
issued and fully paid 13 - - -
Accumulated deficit (290,479) (296,707) (133,403)
--------- -------- --------
Total owner's deficit (290,479) (296,707) (133,403)
--------- -------- --------
TOTAL LIABILITIES AND OWNER'S
DEFICIT 2,381,591 1,609,971 804,298
========= ========= ========
See accompanying notes to the combined financial statements which are an
integral part of these statements
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS
(In thousands of Hong Kong dollars)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Year ended December 31,
Note 1998 1997 1996
$ $ $
REVENUES 950,120 1,262,106 790,995
---------- --------- --------
OPERATING EXPENSES
<S> <C> <C> <C>
Cost of services, exclusive of depreciation
and amortization shown below 937,639 1,377,444 804,220
Sales, general and administrative 163,216 169,205 139,929
Amortization of deferred expenditure 7,884 7,884 7,884
Depreciation of property, plant and 27,018 22,260 15,225
equipment
Provision for doubtful accounts 8,478 14,017 4,294
---------- --------- --------
TOTAL OPERATING EXPENSES 1,144,235 1,590,810 971,552
========== ========== =========
OPERATING LOSS (194,115) (328,704) (180,557)
Interest income 504 658 677
Interest expense (52,837) (37,634) (11,800)
Expenditure deferred during the year 4 241,932 199,278 57,607
Interest expense capitalized in property, plant and equipment 10,744 3,098 -
---------- --------- --------
NET PROFIT/(LOSS) BEFORE TAX 6,228 (163,304) (134,073)
PROVISION FOR TAX - - -
---------- --------- --------
NET PROFIT/(LOSS) 6,228 (163,304) (134,073)
========== ========= =========
See accompanying notes to the combined financial statements which are an
integral part of these statements.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
COMBINED STATEMENT OF CHANGES IN OWNER'S EQUITY/(DEFICIT)
(In thousands of Hong Kong dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
deficit
$
<S> <C>
Owner's equity as of January 1, 1996 670
Net loss from combined statement of operations (134,073)
---------
Owner's deficit as of December 31, 1996 (133,403)
Net loss from combined statement of operations (163,304)
---------
Owner's deficit as of December 31, 1997 (296,707)
Net profit from combined statement of operations 6,228
---------
Owner's deficit as of December 31, 1998 (290,479)
=========
See accompanying notes to the combined financial statements which are an
integral part of these statements.
- ----------------------------------------------------------------------------
</TABLE>
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
(In thousands of Hong Kong dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
Note 1998 1997 1996
$ $ $
<S> <C> <C> <C> <C>
Net cash inflow / (outflow) from operating activities (a) 244,952 24,527 (267,917)
--------- --------- ---------
Returns on investments and servicing of finance
Interest received 504 658 677
Interest paid (including amounts capitalized) (52,837) (37,634) (11,800)
--------- --------- ---------
Net cash outflow from returns on investments and servicing
of finance (52,333) (36,976) (11,123)
--------- --------- ---------
Investing activities
Payment for deferred expenditure (224,549) (187,915) (57,607)
Purchase of fixed assets (759,401) (541,878) (210,066)
Proceeds on disposals of fixed assets 3,214 72 -
--------- --------- ---------
Net cash outflow from investing activities (980,736) (729,721) (267,673)
--------- --------- ---------
Net cash outflow before financing (b) (788,117) (742,170) (546,713)
Financing
Proceeds from / (repayment) of short term loans from the
Excluded Business (65,971) 113,899 106,639
Long term loan borrowed from an affiliate 158,200 56,733 283,703
Long term loan borrowed from HCLNP's then partners 676,998 589,146 149,492
--------- --------- ---------
Net cash inflow from financing 769,227 759,778 539,834
========= ========= =========
Increase / (decrease) in cash and cash equivalents (18,890) 17,608 (6,879)
Cash and cash equivalents at beginning of year 19,218 1,610 8,489
--------- --------- ---------
Cash and cash equivalents at end of year 328 19,218 1,610
========= ========= =========
Analysis of the balances of cash and cash equivalents:
Bank balances 328 20,774 1,610
Bank overdraft - (1,556) -
--------- --------- ---------
328 19,218 1,610
========= ========= =========
See accompanying notes to the combined financial statements which are an
integral part of these statements.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS (Continued)
(In thousands of Hong Kong dollars)
--------------------------------------------------------------------------------------------------------------------
Notes to the combined statements of cash flows
(a) Reconciliation of net profit/(loss) before tax to net cash inflow /
(outflow) from operating activities
Year ended December 31,
1998 1997 1996
$ $ $
<S> <C> <C> <C>
Net profit / (loss) before tax 6,228 (163,304) (134,073)
Amortization of deferred expenditure 7,884 7,884 7,884
Depreciation of property, plant and equipment 27,018 22,260 15,225
(Gain) / loss on disposals of property, plant and equipment (549) (40) 2
Interest income (504) (658) (677)
Interest expense 24,710 23,173 11,800
Decrease / (increase) in trade accounts receivable 55,803 12,388 (66,587)
Decrease / (increase) in due from affiliates 173,493 (38,365) (145,453)
(Increase) / decrease in other assets and prepaid costs 961 (6,956) (9,301)
Increase / (decrease) in accounts payable and accrued liabilities (119,033) 161,658 61,952
Increase / (decrease) in deferred income 953 6,387 -
Increase / (decrease) in due to affiliates 67,988 100 (8,689)
-------- ------- ---------
Net cash inflow/(outflow) from operating activities 244,952 24,527 (267,917)
======== ======= =========
</TABLE>
(b) Analysis of changes in financing during the year
<TABLE>
<CAPTION>
Short term Long term
loan from the Long term loan from
Excluded loan from an HCLNP's
Business affiliate then partners
$ $ $
<S> <C> <C> <C>
At January 1, 1996 - 131,046 102,189
Cash inflows from financing 106,639 283,703 149,492
-------- ------- ---------
At December 31, 1996 106,639 414,749 251,681
Cash inflows from financing 113,899 56,733 589,146
-------- ------- ---------
At December 31, 1997 220,538 471,482 840,827
Cash (outflows) / inflows from financing (65,971) 158,200 676,998
-------- ------- ---------
At December 31, 1998 154,567 629,682 1,517,825
======== ======= =========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Throughout these notes to combined financial statements, references to "$" are
to thousands of Hong Kong dollars unless otherwise specified)
1 BUSINESS, ORGANIZATION AND BASIS OF PREPARATION
HCL Holdings Limited ("HCLH") and its subsidiaries ("the Company") provide
fixed network services, including international services, local fixed network
services, and multimedia services, in the Hong Kong Special Administrative
Region of the People's Republic of China ("HKSAR"). The Company is a wholly
owned subsidiary of, and is controlled by, Hutchison Whampoa Limited, a
company incorporated in Hong Kong and listed on The Stock Exchange of Hong
Kong Limited.
The Company's international services business provides services to customers
using several leased international transmission circuits for direct
transmission of international calls between its switches in Hong Kong and
switches in other countries.
The Company's multimedia services business provides a package of Internet
services including: internet access and dial-up services to residential and
corporate subscribers, content and e-service offerings, and will implement
and operate an Electronic Service Delivery system ("the ESD system") allowing
the public to interact with various departments of the HKSAR Government and
the private sector.
The construction and development of the Company's local fixed network fiber
optic backbone was completed in the first quarter of 1999 which enables the
Company to provide services to Hong Kong's business districts and certain
high density and private residential developments. With the extension of the
HKSAR Government's moratorium on the Issue of Further Local Fixed
Telecommunications Network Services Licenses and Licensing of Additional
External Facilities - Based Operators to January 2003, the Company will
expedite its network rollout and has made a commitment to the HKSAR
Government that it will invest a total of not less than HK$2 billion capital
expenditure for the purpose of developing, establishing and maintaining the
network for the provision of the service from January 1, 1999 up to December
31, 2002.
Pursuant to an agreement entered into on November 15, 1999 ("the Agreement")
between the Company, its holding company Hutchison Telecommunications
Limited, Hutchison Whampoa Limited, and Global Crossing Ltd. ("Global
Crossing"), the following transactions have occurred:
(a) The Company has undergone a reorganization ("the Reorganization")
involving transfers of certain businesses. These transfers were between
entities under the common control of Hutchison Whampoa Limited. The
following transfers have taken place:
(1) Prior to December 15, 1999 the business of the provision of paging,
call centers and other ancillary services and the sales of mobile
phones, pagers and accessories and certain other retailing
activities carried on and operated by a division of Hutchison
Communications Limited ("HCL"), a subsidiary of HCLH, and certain
other inactive subsidiaries of the Company (the "Excluded
Business"), were transferred to affiliates under the common control
of Hutchison Whampoa Limited for an aggregate consideration of
HK$1,705,220 which corresponded to the net liabilities of the
Excluded Business. The operations, assets and liabilities of the
Excluded Business statements, have not been included in these
combined financial statements on the basis that this business was
operated as a separate division with dedicated management.
- --------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
1 BUSINESS, ORGANIZATION AND BASIS OF PREPARATION (Continued)
(2) The Company and its subsidiaries acquired a 99.99% interest in
HCL Network Partnership ("HCLNP"), a partnership between three
affiliates under the common control of Hutchison Whampoa Limited
which owns the network equipment used by the Company to provide
local fixed network services, for HK$2,195,361 consideration.
This consideration was satisfied by the transfer of capital and
assumption of a loan payable by HCLNP to its then partners, which
are companies under the common control of Hutchison Whampoa
Limited, and will be capitalized as described in note 1(b) below.
The operations, assets and liabilities of HCLNP have been
included in the combined financial statements in a manner similar
to a pooling of interests. For each of the three years ended
December 31, 1998 the taxable losses of HCLNP were utilized by
its then partners for nil consideration and are not available for
use by the Company.
(b) In connection with the Reorganization, all of the Company's loans
payable to, amounts due to, and amounts due from, affiliates under the
common control of Hutchison Whampoa Limited will be capitalized
through the issue of two new shares to Hutchison Telecommunications
Limited.
(c) Upon completion of the transaction, Global Crossing will acquire one
share in the Company from Hutchison Telecommunications Limited and
directly provide to Hutchison Whampoa Limited US$400 million in
Global Crossing convertible preferred stock. Additionally the Company
will issue one share to Global Crossing in return for US$400 million,
which will be settled partly by cash and partly by capacity.
Following the completion of these transactions, the Company will be a 50-50
joint venture between Global Crossing and Hutchison Whampoa Limited. The
transaction with Global Crossing is scheduled to close in January 2000. The
Reorganization is required to be completed prior to closing.
Details of the Company's major subsidiaries after the Reorganization are
described in note 3 to the combined financial statements.
The Company had a net profit/(loss) of $6,228, ($163,304) and ($134,073)
for the three years ended December 31, 1998, 1997 and 1996 respectively and
at December 31, 1998, the Company had an owner's deficit of $290,479. The
Company is expected to incur future operating losses in 1999 and, as of
December 31, 1998 had significant commitments for capital expenditure. The
Company has been financed by way of intercompany loans from companies under
the common control of Hutchison Whampoa Limited. As set out in note 1(b),
upon completion, all shareholders' loan advanced to the Company up to
December 15, 1999 are to be capitalized through the issue of new shares.
The combined financial statements for the three years ended December 31,
1998 have been prepared on a going concern basis on the basis that
Hutchison Whampoa Limited will continue to provide financial support to the
Company up to December 31, 1999 and the Company will be able to secure
financing from its shareholders and/or other parties thereafter.
- --------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
2 Significant accounting policies
These financial statements have been prepared in accordance with accounting
principles generally accepted in Hong Kong ("HKGAAP"). The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements,
as well as the reported amounts of revenues and expenses during the
reporting years. Actual results could differ from those estimates. The
significant accounting policies are summarized as follows.
(a) Basis of combination
The combined financial statements include the accounts of HCLH and its
wholly owned subsidiaries excluding the Excluded Business and including
HCLNP as a result of the Reorganization described in note 1. All
significant transactions within the Company have been eliminated.
(b) Deferred expenditure
Deferred expenditure represents the pre-operating expenses, including
interest costs, of international services, local fixed network services and
multimedia services. Pre-operating expenses are amortized over 10 years
from the date of full commercial operations of each business line.
(c) Property, plant and equipment
Property, plant and equipment other than construction in progress are
stated at cost less accumulated depreciation.
Construction in progress, which includes direct expenditure for
construction of a network, is stated at cost. Capitalized costs include
costs incurred under the construction contract, consultancy fees and
interest incurred during the construction phase. Once all the activities
necessary to prepare the assets to be available for their use are
substantially completed, the construction in progress is transferred to
property, plant and equipment. No depreciation is provided in respect of
construction in progress.
Leasehold land is amortized over the remaining period of the lease.
Leasehold improvements are depreciated over the unexpired period of the
lease or 15%, whichever is shorter.
Other fixed assets are depreciated to write off their costs over their
estimated useful lives on a straight line basis at the following annual
rates from the date of commencement of full commercial operations:
Computer equipment 20%
Customer access network 4%-15%
Motor vehicles 25%
Network management system 6.67%
Office furniture and equipment 15%
Transmission, plant and site equipment 4-20%
Maintenance costs are expensed as incurred.
(d) Cash and cash equivalents
The Company considers cash at bank and bank overdraft to be cash
equivalents.
- --------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
2 Significant accounting policies (Continued)
(e) Revenues
Revenues in respect of international services, local fixed network services
and multimedia services are recognized when the services are rendered.
Interest income is recognized on an accrual basis.
(f) Interest cost
Interest cost incurred during the construction or acquisition of assets,
for the Company's own use, which require a period of time to bring them to
their intended use and interest cost incurred during the pre-operating
phase of a business line, is capitalized. Other interest cost is expensed
in the statement of operations as incurred.
(g) Advertising and promotion costs
Advertising and promotion costs are expensed as incurred. Advertising and
promotion costs amounted to $36,642, $33,276 and $65,346 for each of the
three years ended December 31, 1998, 1997 and 1996, respectively.
(h) Retirement benefit plans
The Company's employees are members of two pension schemes administered by
an affiliate which include the employees of the Company and of a number of
affiliates. The Company contributes to these schemes based upon
notification of charges from the administering company. The contributions
are charged immediately to the statement of operations.
The retirement contributions incurred and borne by the Company were
$12,407, $7,226 and $5 for each of the three years ended December 31, 1998,
1997 and 1996 respectively.
(i) Allowance for doubtful accounts
An allowance for doubtful accounts is provided based on an evaluation of
the recoverability of the receivables at the balance sheet date. Trade
accounts receivable are stated net of such allowance.
(j) Deferred income
Subscription income and income billed in advance is deferred and credited
to the statement of operations on a straight line basis over the related
period.
(k) Operating leases
Leases where substantially all the rewards and risks of ownership of assets
remain with the lessor are accounted for as operating leases. Rentals
applicable to such operating leases are charged to the profit and loss
account on a straight line basis over the lease term.
- --------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
2 Significant accounting policies (Continued)
(l) Translation of foreign currencies
The functional currency of the Company's operations is the Hong Kong
dollar.
Transactions in foreign currencies are translated at exchange rates ruling
at the transaction dates. Monetary assets and liabilities expressed in
foreign currencies at the balance sheet date are translated at rates of
exchange ruling at the balance sheet date. All exchange differences
arising are dealt with in the statement of operations.
(m) Income taxes
Deferred taxation is accounted for at the current tax rate in respect of
timing differences between profit as computed for taxation purposes and
profit as stated in the accounts to the extent that a liability or asset is
expected to be payable or receivable in the foreseeable future.
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ---------------------------------------------------------------------------------------------------------------------------------
3 Particulars of subsidiaries
Immediately following the completion of the Reorganization described in
note 1, and for the purpose of these combined financial statements, the
Company had the following operating subsidiaries:
Law under which Percentage interest
Name of partnership Partnership Principal activities Directly Indirectly
Established
- ----------------------- -------------- ----------------------------------------- ------------ ------------
<S> <C> <C> <C> <C>
HCL Network Partnership Hong Kong Ownership of fixed line network equipment - 99.99
Percentage of ordinary shares
held
-----------------------------
Place of
Name of company Incorporation Principal activities Directly Indirectly
- --------------- --------------- ------------------------------------------ --------- -----------
Hutchison Communications Limited Hong Kong Provision of fixed network and international 100 -
services
Hutchison Multimedia Services Hong Kong Provision of multimedia services - 100
Limited
ESD Services Limited (formerly Hong Kong Implementation of the operation of the - 100
known as Timbo Star Investment HKSAR's Electronic Service Delivery system
Limited)
</TABLE>
4 Deferred expenditure
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
$ $ $
<S> <C> <C> <C>
As of January 1 398,801 207,407 157,684
Additions 241,932 199,278 57,607
Amortization (7,884) (7,884) (7,884)
------- ------- -------
As of December 31 632,849 398,801 207,407
======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ---------------------------------------------------------------------------------------------------------------------------------
5 Property, plant and equipment
Office
Leasehold furniture and Motor Computer Customer
improvements equipment vehicles equipment access network
$ $ $ $ $
COST
<S> <C> <C> <C> <C> <C>
As of January, 1, 1996 156 1,993 355 3,428 9,655
Additions 1,356 - - - 56,224
Disposals - (3) - - -
------- -------- ------ ------ -------
As of December 31, 1996 1,512 1,990 355 3,428 65,879
Additions 3,958 - 2,082 36,929 130,409
Disposals - - (81) - -
Reclassification 13,377 - - 29,374 (64,769)
Transfer from construction in progress 180 - - 284 1,429
------- -------- ------ ------ -------
As of December 31, 1997 19,027 1,990 2,356 70,015 132,948
Additions 7,535 - - 16,982 164,066
Disposals - (28) - (3,387) -
Transfer from construction in progress 1,062 - - 814 31,836
------- -------- ------ ------ -------
As of December 31, 1998 27,624 1,962 2,356 84,424 328,850
====== ====== ====== ====== ======
ACCUMULATED DEPRECIATION
As of January 1, 1996 13 292 89 654 -
Depreciation for the year 26 301 89 686 -
Disposals - (1) - - -
------- -------- ------ ------ -------
As of December 31, 1996 39 592 178 1,340 -
Depreciation for the year 2,188 301 75 10,463 -
Disposals - - (49) - -
Reclassification 2,272 - - 5,654 -
------- -------- ------ ------ -------
As of December 31, 1997 4,499 893 204 17,457
Depreciation for the year 3,429 293 49 13,105 -
Disposals - (21) - (761) -
As of December 31, 1998 7,928 1,165 253 29,801 -
====== ====== ====== ====== =======
NET BOOK VALUE
As of December 31, 1996 1,473 1,398 177 2,088 65,879
====== ====== ====== ====== =======
As of December 31, 1997 14,528 1,097 2,152 52,558 132,948
====== ====== ====== ====== =======
As of December 31, 1998 19,696 797 2,103 54,623 328,850
====== ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
Network Transmitter
Management and site Construction
system equipment in progress Total
$ $ $ $
COST
<S> <C> <C> <C> <C>
As of January, 1, 1996 397 118,225 - 134,209
Additions 87 67,741 88,346 213,754
Disposals - - - (3)
------- -------- ------- --------
As of December 31, 1996 484 185,966 88,346 347,960
Additions 125,938 80,526 204,632 584,474
Disposals - - - (81)
Reclassification 133,993 (177,854) 65,879 -
Transfer from construction in progres 22,683 56,412 (80,988) -
------- -------- ------- --------
As of December 31, 1997 283,098 145,050 277,869 932,353
Additions 127,020 122,821 379,534 817,958
Disposals - - (32) (3,447)
Transfer from construction in progres 36,465 18,469 (88,646) -
------- -------- ------- --------
As of December 31, 1998 446,583 286,340 568,725 1,746,864
====== ======= ====== =========
ACCUMULATED DEPRECIATION
As of January 1, 1996 32 4,098 - 5,178
Depreciation for the year 9 14,114 - 15,225
Disposals - - - (1)
------- -------- ------- --------
As of December 31, 1996 41 18,212 - 20,402
Depreciation for the year 8,994 239 - 22,260
Disposals - - - (49)
Reclassification 10,046 (17,972) - -
------- -------- ------- --------
As of December 31, 1997 19,081 479 - 42,613
Depreciation for the year 9,862 280 - 27,018
Disposals - - - (782)
As of December 31, 1998 28,943 759 - 68,849
======== ======== ======= ========
NET BOOK VALUE
As of December 31, 1996 443 167,754 88,346 327,558
======== ======== ======= ========
As of December 31, 1997 264,017 144,571 277,869 889,740
======== ======== ======= ========
As of December 31, 1998 417,640 285,581 568,725 1,678,015
======== ======== ======= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ---------------------------------------------------------------------------------------------
6 Trade accounts receivable
December 31,
1998 1997 1996
$ $ $
<S> <C> <C> <C>
Trade accounts receivable 68,084 115,439 114,283
Less: allowance for doubtful accounts (27,705) (19,257) (5,713)
--------- -------- --------
40,379 96,182 108,570
========== ======== ========
</TABLE>
Allowance for doubtful accounts is analyzed as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
$ $ $
<S> <C> <C> <C>
As of January 1 19,257 5,713 1,419
Provision for the year 8,478 14,017 4,294
Amounts written off (30) (473) -
---------- -------- --------
As of December 31 27,705 19,257 5,713
========== ======== ========
</TABLE>
7 Due from affiliates
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
$ $ $
<S> <C> <C> <C>
Interest bearing 14,677 3,100 1,100
Non-interest bearing 47 185,117 148,752
---------- -------- --------
14,724 188,217 149,852
========== ======== ========
Amounts due from affiliates are unsecured and have no fixed repayment terms. The
interest bearing amounts due from affiliated companies bear interest at the Hong
Kong Interbank Offer Rate ("HIBOR") less 0.25%.
- ---------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- -------------------------------------------------------------------------------
8 Accounts payable and accrued liabilities
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
$ $ $
<S> <C> <C> <C>
Payables for acquisition of property plant
and equipment 108,258 60,445 20,947
Other creditors 3,319 35,471 18,203
Deposits from other carriers 28,080 22,702 9,038
Accrual for interconnection charges 71,243 134,350 77,396
Accrual for regulation fees 2,564 94,509 24,967
Accrual for professional fees 34,945 - -
Accrual for advertising and promotion expenses 18,861 - -
Other provisions 27,298 18,311 14,081
------- ------- -------
294,568 365,788 164,632
======= ======= =======
</TABLE>
9 Short term loan from the Excluded Business
The short term loan from the Excluded Business is a short term advance which
is unsecured and has no fixed repayment terms. For the period prior to May 1,
1997, the loan was interest free. From May 1, 1997 onwards the loan bore
interest at HIBOR less 0.25%.
10 Due to affiliates
The amounts due to affiliates are due to companies under the common control
of Hutchison Whampoa Limited, are unsecured, and have no fixed repayment
terms. For the period prior to May 1, 1998, the amounts due to affiliates
were interest free. From May 1, 1998 onwards, the amounts bore interest at
HIBOR less 0.25%.
11 Long term loan from an affiliate
The long term loan from an affiliate is due to a company under the common
control of Hutchison Whampoa Limited, is unsecured, and has no fixed
repayment terms. For the three years ended December 31, 1998 this loan bore
interest at HIBOR.
12 Long term loan from HCLNP's then partners
The funding for HCLNP has been by way of long term loans from HCLNP's then
partners. The amount is unsecured, interest free and has no fixed repayment
terms.
13 Share capital
The share capital of the company comprises 1 share of US$1 which is fully
paid.
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------------------------------------------------------
14 Related party transactions
The Company undertook the following transactions with related parties:
Year ended December 31,
1998 1997 1996
$ $ $
<S> <C> <C> <C>
Fees to affiliates
for the provision of management
and treasury services (Note a) 40,272 31,000 3,833
------- -------- -------
Share of common costs allocated
from an affiliate (Note a) 269,268 249,377 113,142
------- -------- -------
Interest payable to:
- affiliates 42,751 30,095 11,794
- the Excluded Business 10,084 7,532 -
------- -------- -------
Interest income receivable from a related company 431 543 677
------- -------- -------
(a) Certain operating expenses of the Company, along with certain other
affiliates under the common control of Hutchison Whampoa Limited, are
incurred by an affiliate under the common control of Hutchison Whampoa
Limited providing certain services and facilities to the Company and the
said other affiliates. These expenses relate to a number of different cost
centers. Essentially, the Company is charged a share of these common costs
based on the allocation, by reference to the respective allocation
percentages fixed in respect of each cost center, on the basis of projected
time consumption of services and facilities used by the business operations
sharing the relevant services and facilities. Similar arrangements will be
in place, for a period of time following the Reorganization set out in note
1, until an independent operating structure has been established. The
expenses for the period prior to the Reorganization are not necessarily
indicative of the future expenses to be incurred.
(b) An affiliate under the common control of Hutchison Whampoa Limited has
issued guarantees, counter indemnities and letters of awareness in respect
of a loan facility of $1,160,000 utilized by the Excluded Business and
guarantee line facilities amounting to $100,000 in respect of the Company.
Pursuant to the Reorganization set out in note 1 the loan facility is to be
transferred to an affiliate under the common control of Hutchison Whampoa
Limited and the guarantee line facilities will be replaced by a facility
arranged by the Company. The guarantee line facilities utilized by the
Company as of December 31, 1998 was $70,071. The Company is not charged for
these guarantees.
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
15 Taxes
The company had no taxable income for each of the three years ended December
31, 1998. The tax provision in the income statement is based on the notional
income tax expense the Company would have had on a stand alone basis. The
provision for income tax for each of the three years ended December 31,
1998, 1997 and 1996 differs from the amount of income tax determined by the
application of Hong Kong statutory income tax rate to pre-tax income as a
result of the following differences:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
$ $ $
<S> <C> <C> <C>
Income tax (charge) / credit at the Hong Kong statutory rate (996) 26,129 21,452
Effect of expenses not deductible for income tax (29) (1,466) (20)
Net deferred tax (asset) / liability not accounted for 1,025 (24,663) (21,432)
-------- -------- --------
Combined statement of operations - - -
======== ======== ========
</TABLE>
The deferred tax assets and liabilities of the Company at December 31, 1998,
1997 and 1996 were affected by certain intercompany tax sharing arrangements as
follows:
(a) tax losses of HCLNP were utilized by affiliates under the common control of
Hutchison Whampoa Limited for nil consideration.
(b) tax losses of the Excluded Business have been retained by the Company and
will be available for use against future profits.
- --------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
15 Taxes (Continued)
Deferred income tax reflects the tax effect of timing differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes and tax loss
carryforwards. There is no limitation in Hong Kong on the period in which
the Company's tax loss carryforwards can be utilized. The following is a
summary of the significant components of the Company's deferred tax assets
and liabilities:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
Assets Liabilities Assets Liabilities Assets Liabilities
$ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C> <C>
Tax losses 165,744 - 130,520 - 78,627 -
Accelerated depreciation allowances - 164,155 - 88,894 - 33,713
Other temporary differences - 100,688 - 63,249 - 32,801
-------- ------- -------- ------- ------ -------
165,744 264,843 130,520 152,143 78,627 66,514
Amount not required to be provided under - (99,099) - (21,623) (12,113) -
HKGAAP
-------- ------- -------- -------- ------ -------
Provided 165,744 165,744 130,520 130,520 66,514 66,514
======== ======= ======== ======== ====== =======
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
16 Commitments and contingencies
(a) The Company is committed under its contracts to purchase property plant and
equipment amounting to approximately $906,790, $711,768 and $281,895 as of
December 31, 1998, 1997 and 1996 respectively.
(b) The Company has commitments under various operating leases primarily
relating to land and buildings and lease lines in Hong Kong. Operating
lease expenses were $34,430, $27,865 and $5,325 for each of the three years
ended December 31, 1998, 1997 and 1996 respectively.
As of December 31, the Company had commitments to make payments in the next
twelve months under operating leases which expire as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
$ $ $
Land and buildings
<S> <C> <C> <C>
Within one year 459 459 198
In the second to fifth years inclusive 2,065 2,065 4,214
After the fifth year - - 1,021
----- ----- -----
2,524 2,524 5,433
===== ===== =====
Leased lines
Within one year 14,973 1,549 -
In the second to fifth years inclusive 21,060 18,708 -
------ ------ -----
36,033 20,257 -
====== ====== =====
</TABLE>
(c) The Company has performance guarantees given to:
(i) The Office of the Telecommunications Authority of Hong Kong in respect
of installation of a transmission network totaling approximately HK$19
million as of December 31, 1998.
(ii) Third party network operators in relation to the construction of
exchanges for approximately $51 million as of December 31, 1998.
(d) A potential claim has been made against the Company by a third party
network operator amounting to HK$45 million. No provision has been made
for this claim since in the preliminary advice of the senior counsel the
probability of a material loss crystallizing is remote.
(e) The Inland Revenue Department of Hong Kong is in dispute with one of the
Company's subsidiaries, Hutchison Communications Limited ("HCL") over a
claim made by HCL on HCL's profits tax return filed for the year of
assessment 1994/1995 in the amount of HK$57 million. As HCL has made no
taxable profits to date, the dispute will only re-open when HCL generates a
taxable profit after absorbing all other tax losses brought forward. In
calculating the deferred income tax assets and liabilities for the three
years ended December 31, 1998 no deferred income tax assets have been
accounted for in respect of the amount under dispute.
- --------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
17 Subsequent events
(a) As described in note 1, on November 15, 1999 the Company, Hutchison
Telecommunications Limited, Hutchison Whampoa Limited and Global Crossing
entered into the Agreement for the acquisition by Global Crossing of 50% of
the ordinary share capital of the Company. Further details are set out in
note 1 above.
(b) Pursuant to the provisions of the Agreement the Company has undergone the
Reorganization described in note 1(a) above and its loans payable to,
amounts due to, and amounts due from, affiliates under the common control
of Hutchison Whampoa Limited will be capitalized as set out in note 1(b)
above.
(c) On November 12, 1999 ESD Services Limited, a subsidiary of HCLH, entered
into a contract with the Government of the HKSAR to implement and operate
the ESD system as described in note 1 above. In connection with such
implementation and operation, ESD Services Limited has proposed to incur
capital expenditure on the ESD system amounting to approximately HK$80
million and Compaq Computer Limited is obliged to acquire 15% of the
ordinary share capital of ESD Services Limited. A performance bond for
approximately HK$12 million has been issued in favor of the Government of
the HKSAR in compliance with the contract.
- --------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
18 Summary of differences between HKGAAP and USGAAP
(a) The Company's combined financial statements are prepared in accordance with
accounting principles generally accepted in Hong Kong ("HKGAAP"), which
differ in some respects from accounting principles generally accepted in
the United States of America ("USGAAP"). Any differences in accounting
principles as they pertain to the accompanying combined financial
statements were immaterial except as described below:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
Note HK$ HK$ HK$
<S> <C> <C> <C> <C>
Net profit/(loss) under HKGAAP 6,228 (163,304) (134,073)
USGAAP adjustments:
Deferred expenditure (i) (234,048) (191,394) (49,723)
Capitalized interest (ii) (10,743) (3,098) -
General provisions (iii) (3,595) 6,686 30,170
Depreciation (iv) (37,368) (5,737) -
-------- --------- --------
Net loss under USGAAP (279,526) (356,847) (153,626)
======== ========= ========
Net loss per share under USGAAP (279,526) (356,847) (153,626)
======== ========= ========
Total owner's deficit under HKGAAP (290,479) (296,707) (133,403)
USGAAP adjustments:
Deferred expenditure (i) (656,501) (414,569) (215,291)
Accumulated amortization of deferred
expenditure (i) 23,652 15,768 7,884
Capitalized interest (ii) (13,841) (3,098) -
General provisions (iii) 33,261 36,856 30,170
Depreciation (iv) (43,105) (5,737) -
Deferred tax (liability) / asset not
required
to be provided under HKGAAP (v) (99,099) (21,623) 12,113
Deferred tax effect of USGAAP
adjustments 106,325 60,604 28,357
-------- --------- --------
Total owner's deficit under USGAAP (939,787) (628,506) (270,170)
======== ========= ========
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
Under HKGAAP, the statement of cash flows should be presented under the
following five standard headings: (a) operating activities; (b) returns on
investments and servicing of finance; (c) taxation; (d) investing
activities; and (e) financing. Under USGAAP, only three categories of cash
flow activities are presented: (a) operating; (b) investing; and (c)
financing. Cash flows from returns on investments and servicing of finance
and taxation would be classified under USGAAP as either operating,
investing or financing activities based on the nature of the specific
items. For example, under USGAAP, operating activities would include
interest received, dividends received from associated companies and
operating interest and profits tax paid, while investing activities would
include capitalized interest paid, and financing activities would include
ordinary and special interim dividends paid. Additionally, HKGAAP includes
bank overdrafts within the definition of cash and cash equivalents, whereas
USGAAP classifies bank overdrafts as financing activities. Also, under
HKGAAP operating profit is reconciled to cash flows provided by/used in
operating activities, while under USGAAP net income is adopted in place of
operating profit. The cash flow data by operating, investing and financing
activities in accordance with USGAAP are summarized below:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
$ $ $
Net cash provided/(used) by:
<S> <C> <C> <C>
Operating activities (31,928) (200,364) (336,647)
Investing activities (756,189) (541,806) (210,066)
Financing activities 767,671 761,334 539,834
-------- -------- --------
Decrease in cash and cash equivalents (20,446) 19,164 (6,879)
Cash and cash equivalents at beginning of year 20,774 1,610 8,489
-------- -------- --------
Cash and cash equivalents at end of year 328 20,774 1,610
======== ======== ========
</TABLE>
(i) Deferred expenditure
There is no accounting standard under HKGAAP on accounting for pre-
operating expenditure. The Company adopts the policy that pre-operating
expenses incurred prior to full commercial operations are deferred and
amortized on the straight line basis over a period of 10 years.
Under USGAAP, deferred expenditure should be charged to the statements of
operations as incurred in accordance with Statement of Position 98-5 and
should not be deferred.
(ii) Capitalized interest
The Company has capitalized certain interest costs incurred during the
course of construction of network assets and for the period from the date
the assets were available for use until the date of full commercial
operations.
Under USGAAP, the Company has not capitalized interest in property, plant
and equipment.
(iii) General provisions
There is no prescriptive accounting standard in relation to recording
provisions in HKGAAP and provisions are recorded based on estimated
liabilities.
Under the more prescriptive requirements of USGAAP certain provisions
recorded by the Company would not have been recorded.
- --------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
(iv) Depreciation
The Company commences depreciation of network assets from the date of full
commercial operations and calculates depreciation on a proportionate
straight line basis taking into account the number of subscribers compared
to the forecast capacity number of subscribers.
Under USGAAP depreciation must commence from the date the asset is
available for use and be calculated on a straight line basis.
(v) Deferred tax
Under HKGAAP, deferred taxation is accounted for at the current taxation
rate in respect of timing differences between profit as computed for
taxation purposes and profit as stated in the accounts to the extent that a
liability or an asset is expected to be payable or receivable in the
foreseeable future.
Under USGAAP, the Company is required to recognize deferred tax assets and
liabilities for the expected future tax consequences of all temporary
differences between the book and tax basis of assets and liabilities and
tax loss carryforwards. A valuation allowance is established for deferred
tax asset where it is considered more likely than not that the asset will
not be realized.
(b) Financial instruments
(i) Financial assets and liabilities
Financial assets of the Company include cash at bank, trade accounts
receivable, other assets, prepaid costs and amounts due from affiliates
under the common control of Hutchison Whampoa Limited. Financial
liabilities of the Company include bank overdraft, accounts payable,
accrued expenses, amounts due to affiliates under the common control of
Hutchison Whampoa Limited, long term loan from an affiliate under the
common control of Hutchison Whampoa Limited, long term loan from HCLNP's
then partners and loan from the Excluded Business. It is not practicable
to estimate the fair value of the long term loans from, amounts due to and
amounts due from affiliates under the common control of Hutchison Whampoa
Limited and the loan from the Excluded Business without incurring excessive
cost. The fair value of all other financial instruments approximate their
carrying amounts due to the nature or short maturity of these instruments.
Pursuant to the Reorganization described to in note 1 above, the loans
from, amounts due to, and amounts due from, affiliates under the common
control of Hutchison Whampoa Limited will be capitalized prior to the
scheduled closing date of the transaction with Global Crossing.
(ii) Concentration of credit risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and cash
equivalents, trade receivables and deposits, prepayments and other
receivables.
Cash and cash equivalents - substantially all the Company's cash and bank
balances are placed with a number of international banks in Hong Kong to
which the Company believes its exposure to risk is limited.
Trade receivables - these mainly represent service fee receivables from the
Company's customers in the HKSAR.
Deposits, prepayments and other receivable - these are spread among
numerous third parties.
- --------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
(c) Business segmental information
The Company conducts its business in one territory, Hong Kong and has
derived its revenue principally from the provision of international
services, local fixed network services and multimedia services to
customers. These are its three operating segments. For management purposes
the results of these three operating segments are analyzed separately.
Certain of the assets and liabilities of the international services and
local fixed network services segments are shared and grouped together for
management purposes. The segmental information for identifiable assets and
capital expenditure is based on the grouping together of the assets and
liabilities of international services and local fixed network services.
Segmental information in relation to revenues, operating income/(loss), and
depreciation and amortization is provided for each of the three operating
segments. Depreciation and amortization on separately identifiable
property, plant and equipment is charged to operating segments on an actual
basis. Depreciation in respect of shared assets is allocated to operating
segments by reference to the respective allocation percentages fixed in
respect of each cost on the basis of projected time consumption of services
and facilities by the business operation sharing the relevant services and
facilities. No depreciation was charged in respect of local fixed network
services because these segments were considered in the pre-operating stage
prior to January 1, 1999 and, accordingly, under HKGAAP and in the
management accounts, no depreciation was charged in respect of these
segments.
The Company is based in Hong Kong and its accounting records and management
information is based on accounting principles generally accepted in Hong
Kong. FAS 131 "Disclosures about Segments of an Enterprise and Related
Information" requires that the segmental information disclosed be based on
the information used by the Company's chief operating decision maker for
evaluating segmental performance and deciding how to allocate resources to
segments.
Summarized financial information by business segment is as follows:
<TABLE>
<CAPTION>
Combined Statements of Operations
Operating
Revenues income / (loss) Depreciation
$ $ $
<S> <C> <C> <C>
Year ended December 31, 1998
International services 886,157 53,443 27,018
Local fixed network services 62,889 (234,549) -
Multimedia services 1,074 (13,009) -
------- -------- ------
950,120 (194,115) 27,018
======= ========= ======
Year ended December 31, 1997
International services 1,259,837 (137,181) 22,260
Local fixed network services 2,269 (191,523) -
--------- -------- ------
1,262,106 (328,704) 22,260
Year ended December 31, 1996
International services 790,995 (122,937) 15,225
Local fixed network services - (57,620) -
--------- -------- ------
790,995 (180,557) 15,225
========= ========= ======
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------------------------------------
(c) Business segmental information (Continued)
Identifiable Capital
assets expenditure
$ $
<S> <C> <C>
Year ended December 31, 1998
International services and local
fixed network services 2,366,348 810,614
Multimedia services 15,243 7,344
--------- -------
2,381,591 817,958
========= =======
Year ended December 31, 1997
International services and local 1,609,971 584,474
fixed network services
Multimedia services - -
--------- -------
1,609,971 584,474
========= =======
Year ended December 31, 1996
International services and local fixed network services 804,298 213,754
Multimedia services - -
--------- -------
804,298 213,754
========= =======
</TABLE>
Reconciliation of segment operating loss to net profit/(loss) before tax
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
$ $ $
<S> <C> <C> <C>
Operating loss (194,115) (328,704) (180,557)
Interest income 504 658 677
Interest expense (52,837) (37,634) (11,800)
Expenditure deferred during 241,932 199,278 57,607
the year
Interest expense capitalized
in property, plant and equipment 10,744 3,098 -
--------- -------- ---------
Net profit/(loss) before tax 6,228 (163,304) (134,073)
under HKGAAP
Effect of USGAAP adjustments: (285,754) (193,543) (19,553)
--------- -------- ---------
Net loss under USGAAP (279,526) (356,847) (153,626)
========= ======== =========
The Company derives revenues from customers located primarily in Hong Kong
and the Company's long lived assets are located primarily in the HKSAR.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
(d) Recently adopted and new accounting standards in USGAAP
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Cost of Start-Up Activities"
("SOP 98-5"). SOP 98-5 is applicable for fiscal years beginning December
15, 1999. SOP 98-5 has been adopted in note 18(a) above for each of the
three years ended December 31, 1998.
The Financial Accounting Standards Board ("FASB") has issued certain
pronouncements which are not effective with respect to the fiscal years
presented in note 18(a) above.
SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities"
is effective for fiscal years beginning after June 15, 2000. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. It requires that an entity
recognizes all derivatives as either assets or liabilities in the statement
of financial position and measures those instruments at fair value. The
Company has evaluated the requirements of SFAS No.133 and believes that,
since it currently does not utilize derivative instruments in its
operations, the adoption of this new standard would not have a material
impact on note 18(a) above.
(e) Operating lease commitments
Under HKGAAP, commitments under operating leases represent payments in the
next twelve months under non cancelable operating leases.
Under USGAAP, commitments under operating leases represent minimum future
rented payments in total and for each of the next five years for operating
leases with non-cancelable operating leases with lease terms in excess of
one year as follows:-
$
For the year ending December 31, 1999 20,120
2000 14,563
2001 14,335
2002 3,531
2003 456
Thereafter 1,712
------
54,717
======
(f) Net profit/(loss) per share
Under USGAAP, historical net loss per share would be $279,526, $356,847 and
$153,626 for each of the three years ended 1998, 1997, 1996 respectively.
This is calculated based on one ordinary share in issue throughout the
three years ended December 31, 1998. The historical capital structure is
substantially different from the capital structure expected to be in place
following the Reorganization described in note 1 above.
- --------------------------------------------------------------------------------
<PAGE>
COMBINED FINANCIAL STATEMENTS OF HCL HOLDINGS LIMITED AND SUBSIDIARIES
For the nine months ended September 30, 1999 and 1998
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
COMBINED BALANCE SHEET
(In thousands of Hong Kong dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30,
1999
Note $
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Trade accounts receivable 6 44,073
Due from affiliates 7 37,238
Other assets and prepaid costs 33,334
-------------
Total current assets 114,645
Deferred expenditure 4 583,612
Property, plant and equipment 5 2,146,357
-------------
TOTAL ASSETS 2,844,614
=============
LIABILITIES
Current liabilities
Bank overdraft 1,076
Accounts payable and accrued liabilities 8 257,622
Deferred income 47,416
Short term loan from the Excluded Business 9 126,327
Due to affiliates 10 94,832
-------------
Total current liabilities 527,273
Long term loan from an affiliate 11 754,482
Long term loan from HCLNP's then partners 12 2,064,065
-------------
Total liabilities 3,345,820
-------------
OWNER'S DEFICIT
Share capital, share of US$1, authorized, issued and fully paid 13 -
Accumulated deficit (501,206)
-------------
Total owner's deficit (501,206)
=============
TOTAL LIABILITIES AND OWNER'S DEFICIT 2,844,614
=============
</TABLE>
See accompanying notes to the combined financial statements which are an
integral part of these statements.
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS
(In thousands of Hong Kong dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended September 30,
1999 1998
$ $
(unaudited) (unaudited)
<S> <C> <C>
REVENUES 615,940 735,933
----------- -----------
OPERATING EXPENSES
Cost of services, exclusive of depreciation and
amortization shown below 528,546 713,940
Sales, general and administrative 159,881 106,576
Amortization of deferred expenditure 49,237 5,913
Depreciation of property, plant and equipment 43,050 19,616
Provision for doubtful accounts 8,713 7,392
----------- -----------
TOTAL OPERATING EXPENSES 789,427 853,437
=========== ===========
OPERATING LOSS (173,487) (117,504)
Interest income 601 435
Interest expense (37,841) (39,988)
Expenditure deferred during the period - 190,681
Interest expense capitalized in property, plant
and equipment - 7,453
----------- -----------
NET (LOSS)/PROFIT BEFORE TAX (210,727) 41,077
PROVISION FOR TAX - -
----------- -----------
NET (LOSS)/PROFIT (210,727) 41,077
=========== ===========
</TABLE>
See accompanying notes to the combined financial statements which are an
integral part of these statements.
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
COMBINED STATEMENT OF CHANGES IN OWNER'S EQUITY/(DEFICIT)
(In thousands of Hong Kong dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
deficit
$
<S> <C>
Owner's deficit as of January 1, 1999 (290,479)
Net loss from combined statement of operations (unaudited) (210,727)
---------
Owner's deficit as of September 30, 1999 (unaudited) (501,206)
=========
</TABLE>
See accompanying notes to the combined financial statements which are an
integral part of these statements.
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
COMBINED STATEMENT OF CASH FLOWS
(In thousands of Hong Kong dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended September 30,
Note 1999 1998
$ $
(unaudited) (unaudited)
<S> <C> <C>
Net cash (outflow)/inflow from operating activities (a) (29,209) 231,648
----------- -----------
Returns on investments and servicing of finance
Interest received 601 435
Interest paid (including amounts capitalized) (37,841) (39,988)
----------- -----------
Net cash outflow from returns on investments and
servicing of finance (37,240) (39,553)
----------- -----------
Investing activities
Payment for deferred expenditure - (177,674)
Purchase of fixed assets (577,786) (495,528)
Proceeds on disposals of fixed assets 31 33
----------- -----------
Net cash outflow from investing activities (577,755) (673,169)
----------- -----------
Net cash outflow before financing (644,204) (481,074)
(b)
Financing
Repayment of short term loans from the
Excluded Business (28,240) (80,293)
Long term loan borrowed from an affiliate 124,800 107,500
Long term loan borrowed from HCLNP's then partners 546,240 434,787
----------- -----------
Net cash inflow from financing 642,800 461,994
=========== ===========
Decrease in cash and cash equivalents (1,404) (19,080)
Cash and cash equivalents at beginning of period 328 19,218
----------- -----------
Cash and cash equivalents at end of period (1,076) 138
=========== ===========
Analysis of the balances of cash and cash equivalents:
Bank balances - 184
Bank overdraft (1,076) (46)
----------- -----------
(1,076) 138
=========== ===========
</TABLE>
See accompanying notes to the combined financial statements which are an
integral part of these statements.
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
COMBINED STATEMENT OF CASH FLOWS (Continued)
(In thousands of Hong Kong dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Notes to the combined statements of cash flows
(a) Reconciliation of net (loss) / profit before tax to net cash (outflow)/inflow from operating activities
Nine months ended September 30,
1999 1998
$ $
(unaudited) (unaudited)
<S> <C> <C>
Net (loss)/profit before tax (210,727) 41,077
Amortization of deferred expenditure 49,237 5,913
Depreciation of property, plant and equipment 43,050 19,615
Loss on disposals of property, plant and equipment 5 39
Interest income (601) (435)
Interest expense 37,841 19,529
(Increase)/decrease in trade accounts receivable (3,694) 57,107
(Increase)decrease in due from affiliates (22,514) 174,679
(Increase)/decrease in other assets and prepaid costs (18,038) 345
Increase/(decrease) in accounts payable and accrued liabilities 29,412 (186,949)
Increase in deferred income 40,076 469
Increase in due to affiliates 26,744 100,259
----------- -----------
Net cash (outflow)/inflow from operating activities (29,209) 231,648
=========== ===========
</TABLE>
(b) Analysis of changes in financing during the year
<TABLE>
<CAPTION>
Short term Long term
loan from the Long term loan from
Excluded loan from HCLNP's
Business an affiliate then partners
$ $ $
<S> <C> <C> <C>
As of January 1, 1998 220,538 471,482 840,827
Cash (outflows) / inflows from financing (80,293) 107,500 434,787
----------- ----------- -----------
As of September 30, 1998 140,245 578,982 1,275,614
=========== =========== ===========
As of January 1, 1999 154,567 629,682 1,517,825
Cash (outflows) / inflows from financing (28,240) 124,800 546,240
----------- ----------- -----------
As of September 30, 1999 126,327 754,482 2,064,065
=========== =========== ===========
</TABLE>
See accompanying notes to the combined financial statements which are an
integral part of these statements.
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Throughout these notes to combined financial statements, references to "$" are
to thousands of Hong Kong dollars unless otherwise specified)
1 BUSINESS, ORGANIZATION AND BASIS OF PREPARATION
HCL Holdings Limited ("HCLH") and its subsidiaries ("the Company") provide
fixed network services, including international services, local fixed
network services, and multimedia services, in the Hong Kong Special
Administrative Region of the People's Republic of China ("HKSAR"). The
Company is a wholly owned subsidiary of, and is controlled by, Hutchison
Whampoa Limited, a company incorporated in Hong Kong and listed on The
Stock Exchange of Hong Kong Limited.
The Company's international services business provides services to
customers using several leased international transmission circuits for
direct transmission of international calls between its switches in Hong
Kong and switches in other countries.
The Company's multimedia services business provides a package of Internet
services including: internet access and dial-up services to residential and
corporate subscribers, content and e-service offerings, and will implement
and operate an Electronic Service Delivery system ("the ESD system")
allowing the public to interact with various departments of the HKSAR
Government and the private sector.
The construction and development of the Company's local fixed network fiber
optic backbone was completed in the first quarter of 1999 which enables the
Company to provide services to Hong Kong's business districts and certain
high density and private residential developments. With the extension of
the HKSAR Government's moratorium on the Issue of Further Local Fixed
Telecommunications Network Services Licenses and Licensing of Additional
External Facilities - Based Operators to January 2003, the Company will
expedite its network rollout and has made a commitment to the HKSAR
Government that it will invest a total of not less than HK$2 billion for
the purpose of developing, establishing and maintaining the network for the
provision of the service from January 1, 1999 up to December 31, 2002.
Pursuant to an agreement entered into on November 15, 1999 ("the
Agreement") between the Company, its holding company Hutchison
Telecommunications Limited, Hutchison Whampoa Limited, and Global Crossing
Ltd. ("Global Crossing"), the following transactions have occurred:
(a) The Company has undergone a reorganization ("the Reorganization")
involving transfers of certain businesses. These transfers were
between entities under the common control of Hutchison Whampoa
Limited. The following transfers have taken place:
(1) Prior to December 15, 1999 the business of the provision of
paging, call centers and other ancillary services and the sales
of mobile phones, pagers and accessories and certain other
retailing activities carried on and operated by a division of
Hutchison Communications Limited ("HCL"), a subsidiary of HCLH,
and certain other inactive subsidiaries of the Company (the
"Excluded Business"), were transferred to affiliates under the
common control of Hutchison Whampoa Limited for an aggregate
consideration of HK$1,705,220 which corresponded to the net
liabilities of the Excluded Business. The operations, assets and
liabilities of the Excluded Business statements, have not been
included in these combined financial statements on the basis that
this business was operated as a separate division with dedicated
management.
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------------------------------
1 BUSINESS, ORGANIZATION AND BASIS OF PREPARATION (Continued)
(2) The Company and its subsidiaries acquired a 99.99% interest in HCL
Network Partnership ("HCLNP"), a partnership between three affiliates
under the common control of Hutchison Whampoa Limited which owns the
network equipment used by the Company to provide local fixed network
services, for HK$2,195,361 consideration. This consideration was
satisfied by the transfer of capital and assumption of a loan payable
by HCLNP to its then partners, which are companies under the common
control of Hutchison Whampoa Limited, and will be capitalized as
described in note 1(b) below.
The operations, assets and liabilities of HCLNP have been included in
the combined financial statements in a manner similar to a pooling of
interests. For each of the two periods ended September 30, 1999 the
taxable losses of HCLNP were utilized by its then partners for nil
consideration and are not available for use by the Company.
(b) In connection with the Reorganization, all of the Company's loans
payable to, amounts due to, and amounts due from, affiliates under the
common control of Hutchison Whampoa Limited will be capitalized
through the issue of two new shares to Hutchison Telecommunications
Limited.
(c) Upon completion of the transaction, Global Crossing will acquire one
share in the Company from Hutchison Telecommunications Limited and
directly provide to Hutchison Whampoa Limited US$400 million in Global
Crossing convertible preferred stock. Additionally, the Company will
issue one share to Global Crossing in return for US$400 million, which
will be settled partly by cash and partly by capacity.
Following the completion of these transactions, the Company will be a 50-50
joint venture between Global Crossing and Hutchison Whampoa Limited. The
transaction with Global Crossing is scheduled to close in January 2000. The
Reorganization is required to be completed prior to closing.
Details of the Company's major subsidiaries after the Reorganization are
described in note 3 to the combined financial statements.
The Company had a net (loss)/profit of ($210,727) and $41,077 for the nine
months ended September 30, 1999 and 1998, respectively, and at September
30, 1999, the Company had an owner's deficit of $501,206. The Company is
expected to incur future operating losses in 1999 and, as of September 30,
1999 had significant commitments for capital expenditure. The Company has
been financed by way of intercompany loans from companies under the common
control of Hutchison Whampoa Limited. As set out in note 1(b), upon
completion, all shareholders' loan advanced to the Company up to December
15, 1999, are to be capitalized through the issue of new shares. The
combined financial statements for the nine months ended September 30, 1999
and 1998, respectively have been prepared on a going concern basis on the
basis that Hutchison Whampoa Limited will continue to provide financial
support to the Company up to December 31, 1999 and the Company will be able
to secure financing from its shareholders and/or other parties thereafter.
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------------------------------
2 Significant accounting policies
These financial statements have been prepared in accordance with accounting
principles generally accepted in Hong Kong ("HKGAAP"). The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements,
as well as the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. The
significant accounting policies are summarized as follows.
(a) Basis of combination
The combined financial statements include the accounts of HCLH and its
wholly owned subsidiaries excluding the Excluded Business and including
HCLNP as a result of the Reorganization described in note 1. All
significant transactions within the Company have been eliminated. The
results and cash flows for the nine months ended September 30, 1999 are
unaudited and included all adjustments considered necessary for a fair
presentation of the unaudited financial information.
(b) Deferred expenditure
Deferred expenditure represents the pre-operating expenses, including
interest costs, of international services, local fixed network services and
multimedia services. Pre-operating expenses are amortized over 10 years
from the date of full commercial operations of each business line.
(c) Property, plant and equipment
Property, plant and equipment other than construction in progress are
stated at cost less accumulated depreciation.
Construction in progress, which includes direct expenditure for
construction of a network, is stated at cost. Capitalized costs include
costs incurred under the construction contract, consultancy fees and
interest incurred during the construction phase. Once all the activities
necessary to prepare the assets to be available for their use are
substantially completed, the construction in progress is transferred to
property, plant and equipment. No depreciation is provided in respect of
construction in progress.
Leasehold land is amortized over the remaining period of the lease. The
building is depreciated over the remaining period of the lease. Leasehold
improvements are depreciated over the unexpired period of the lease or 15%,
whichever is shorter.
Other fixed assets are depreciated to write off their costs over their
estimated useful lives on a straight line basis at the following annual
rates:
Computer equipment 20%
Customer access network 4%-15%
Motor vehicles 25%
Network management system 6.67%
Office furniture and equipment 15%
Transmission, plant and site equipment 4-20%
Maintenance costs are expensed as incurred.
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------------------------------
2 Significant accounting policies (Continued)
(d) Cash and cash equivalents
The Company considers cash at bank and bank overdraft to be cash
equivalents.
(e) Revenues
Revenues in respect of international services, local fixed network services
and multimedia services are recognized when the services are rendered.
Interest income is recognized on an accrual basis.
(f) Interest cost
Interest cost incurred during the construction or acquisition of assets,
for the Company's own use, which require a period of time to bring them to
their intended use and interest cost incurred during the pre-operating
phase of a business line, is capitalized. Other interest cost is expensed
in the statement of operations as incurred.
(g) Advertising and promotion costs
Advertising and promotion costs are expensed as incurred. Advertising and
promotion costs amounted to $57,610 and $12,350 for each of the nine months
ended September 30, 1999 and 1998, respectively.
(h) Retirement benefit plans
The Company's employees are members of two pension schemes administered by
an affiliate which include the employees of the Company and of a number of
affiliates. The Company contributes to these schemes based upon
notification of charges from the administering company. The contributions
are charged immediately to the statement of operations.
The retirement contributions incurred and borne by the Company were $6,854
and $6,923 for each of the nine months ended September 30, 1999 and 1998
respectively.
(i) Allowance for doubtful accounts
An allowance for doubtful accounts is provided based on an evaluation of
the recoverability of the receivables at the balance sheet date. Trade
accounts receivable are stated net of such allowance.
(j) Deferred income
Subscription income and income billed in advance is deferred and credited
to the Statement of Operations on a straight line basis over the related
period.
(k) Operating leases
Leases where substantially all the rewards and risks of ownership of assets
remain with the lessor are accounted for as operating leases. Rentals
applicable to such operating leases are charged to the profit and loss
account on a straight line basis over the lease term.
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------------------------------
2 Significant accounting policies (Continued)
(l) Translation of foreign currencies
The functional currency of the Company's operations is the Hong Kong
dollar.
Transactions in foreign currencies are translated at exchange rates ruling
at the transaction dates. Monetary assets and liabilities expressed in
foreign currencies at the balance sheet date are translated at rates of
exchange ruling at the balance sheet date. All exchange differences
arising are dealt with in the statement of operations.
(m) Income taxes
Deferred taxation is accounted for at the current tax rate in respect of
timing differences between profit as computed for taxation purposes and
profit as stated in the accounts to the extent that a liability or asset is
expected to be payable or receivable in the foreseeable future.
3 Particulars of subsidiaries
Immediately following the completion of the Reorganization described in
note 1, and for the purpose of these combined financial statements, the
Company had the following operating subsidiaries:
<TABLE>
<CAPTION>
Law under which Percentage interest
partnership ------------------------
Name of partnership established Principal activities Directly Indirectly
- ------------------------------ ------------------- ---------------------------- ---------- ------------
<S> <C> <C> <C> <C>
HCL Network Partnership Hong Kong Ownership of fixed line - 99.99
network equipment
Percentage of
Ordinary Shares held
Place of ----------
Name of company incorporation Principal activities Directly Indirectly
- ------------------------------ ------------------- ---------------------------- ---------- ------------
Hutchison Communications Hong Kong Provision of fixed network 100 -
Limited and international services
Hutchison Multimedia Services Hong Kong Provision of multimedia - 100
Limited services
ESD Services Limited Hong Kong Implementation of the - 100
(formerly known as Timbo operation of the HKSAR's
Star Investment Limited) Electronic Service Delivery
system
</TABLE>
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------------------------------
4 Deferred expenditure
Nine months ended September 30,
1999
$
(unaudited)
As of January 1 632,849
Amortization (49,237)
---------
As of September 30 583,612
=========
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------------------------------
5 Property, plant and equipment
<TABLE>
<CAPTION>
Long term Office
leasehold furniture Customer Network Transmitter
land and Leasehold and Motor Computer access management and site
buildings improvements equipment vehicles equipment network system equipment
$ $ $ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COST
As of January 1, 1999 - 27,624 1,962 2,356 84,424 328,850 446,583 286,340
Additions 1,086 3,660 - - 11,178 86,236 85,849 60,224
Disposals - - (5) - (143) - - (1)
Transfer from construction
in progress 20,860 - - - 1,084 99,368 36,893 52,008
-------- ----------- -------- ------- -------- ------- --------- --------
As of September 30, 1999 21,946 31,284 1,957 2,356 96,543 514,454 569,325 398,571
-------- ----------- -------- ------- -------- ------- --------- --------
ACCUMULATED DEPRECIATION
As of January 1, 1999 - 7,928 1,165 253 29,801 - 28,943 759
Depreciation for the period 182 3,631 219 411 13,401 6,762 13,335 5,109
Disposals - - (3) - (128) - - -
-------- ----------- -------- ------- -------- ------- --------- --------
As of September 30, 1999 182 11,559 1,381 664 43,074 6,762 42,278 5,868
======== =========== ======== ======= ======== ======= ========= ========
NET BOOK VALUE
As of September 30, 1999 21,764 19,725 576 1,692 53,469 507,692 527,047 392,703
======== =========== ======== ======= ======== ======= ========= ========
As of January 1, 1999 - 19,696 797 2,103 54,623 328,850 417,640 285,581
======== =========== ======== ======= ======== ======= ========= ========
</TABLE>
Construction
in progress Total
$ $
COST
As of January 1, 1999 568,725 1,746,864
Additions 263,195 511,428
Disposals (18) (167)
Transfer from construction
in progress (210,213) -
----------- ---------
As of September 30, 1999 621,689 2,258,125
----------- ---------
ACCUMULATED DEPRECIATION
As of January 1, 1999 - 68,849
Depreciation for the period - 43,050
Disposals - (131)
----------- ---------
As of September 30, 1999 - 111,768
=========== =========
NET BOOK VALUE
As of September 30, 1999 621,689 2,146,357
----------- ---------
As of January 1, 1999 568,725 1,678,015
=========== =========
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------------------------------
6 Trade accounts receivable
September 30,
1999
$
(unaudited)
Trade accounts receivable 66,056
Less: allowance for doubtful accounts (21,983)
-------
44,073
=======
Allowance for doubtful accounts is analyzed as follows:
Nine months ended September 30,
1999
$
(unaudited)
As of January 1 27,705
Provision for the period 8,713
Amounts written off (14,435)
-------
As of September 30 21,983
=======
7 Due from affiliates
September 30,
1999
$
(unaudited)
Interest bearing 37,238
Non-interest bearing -
-------
37,238
=======
Amounts due from affiliates are unsecured and have no fixed repayment terms.
The interest bearing amounts due from affiliated companies bear interest at the
Hong Kong Interbank Offer Rate ("HIBOR") less 0.25%.
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------------------------------
8 Accounts payable and accrued liabilities
September 30,
1999
$
(unaudited)
Payables for acquisition of property plant and
equipment 41,900
Other creditors 23,091
Deposits from other carriers 26,646
Accrual for interconnection charges 38,123
Accrual for regulation fees 13,725
Accrual for professional fees 39,140
Accrual for advertising and promotion expenses 22,581
Other provisions 52,416
-------
257,622
=======
9 Short term loan from the Excluded Business
The short term loan from the Excluded Business is a short term advance which
is unsecured and has no fixed repayment terms. The loan bore interest at
HIBOR less 0.25%.
10 Due to affiliates
The amounts due to affiliates are due to companies under the common control
of Hutchison Whampoa Limited, are unsecured, and have no fixed repayment
terms. These amounts bore interest at HIBOR less 0.25%.
11 Long term loan from an affiliate
The long term loan from an affiliate is due to a company under the common
control of Hutchison Whampoa Limited, is unsecured, and has no fixed
repayment terms. For the nine months ended September 30, 1999 this loan bore
interest at HIBOR.
12 Long term loan from HCLNP's then partners
The funding for HCLNP has been by way of long term loans from HCLNP's then
partners. The amount is unsecured, interest free and has no fixed repayment
terms.
13 Share capital
The share capital of the company comprises 1 share of US$1 which is fully
paid.
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------------------------------
14 Related party transactions
The Company undertook the following transactions with related parties:
<TABLE>
<CAPTION>
Nine months ended September 30,
1999 1998
$ $
(unaudited) (unaudited)
<S> <C> <C>
Fees to affiliates
for the provision of management
and treasury services (Note a) 25,871 30,084
-------- --------
Share of common costs allocated
from an affiliate (Note a) 205,698 208,907
-------- --------
Interest payable to:
- affiliates 31,517 32,128
- the Excluded Business 6,324 7,859
-------- --------
Interest income receivable from a
related company 508 362
-------- --------
</TABLE>
(a) Certain operating expenses of the Company, along with certain other
affiliates under the common control of Hutchison Whampoa Limited, are
incurred by an affiliate under the common control of Hutchison Whampoa
Limited providing certain services and facilities to the Company and the
said other affiliates. These expenses relate to a number of different cost
centers. Essentially, the Company is charged a share of these common costs
based on the allocation, by reference to the respective allocation
percentages fixed in respect of each cost center, on the basis of projected
time consumption of services and facilities used by the business operations
sharing the relevant services and facilities. Similar arrangements will be
in place, for a period of time following the Reorganization set out in note
1, until an independent operating structure has been established. The
expenses for the period prior to the Reorganization are not necessarily
indicative of the future expenses to be incurred.
(b) An affiliate under the common control of Hutchison Whampoa Limited has
issued guarantees, counter indemnities and letters of awareness in respect
of a loan facility of $1,160,000 utilized by the Excluded Business and
guarantee line facilities amounting to $100,000 in respect of the Company.
Pursuant to the Reorganization set out in note 1 the loan facility is to be
transferred to an affiliate under the common control of Hutchison Whampoa
Limited and the guarantee line facilities will be replaced by a facility
arranged by the Company. The guarantee line facilities utilized by the
Company as of September 30, 1999 was $43,848. The Company is not charged
for these guarantees.
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDING LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------------------------------
15 Taxes
The company had no taxable income for each of the nine months ended
September 30, 1999 and 1998. The tax provision in the income statement is
based on the notional income tax expense the Company would have had on a
stand alone basis. The provision for income tax for each of the nine
months ended September 30, 1999 and 1998 differs from the amount of income
tax determined by the application of Hong Kong statutory income tax rate to
pre-tax income as a result of the following differences:
<TABLE>
<CAPTION>
Nine months ended September 30,
1999 1998
$ $
(unaudited) (unaudited)
<S> <C> <C>
Income tax credit / (charge) at the Hong Kong statutory
rate 33,716 (6,572)
Effect of expenses not deductible for income tax (7) (4)
Net deferred tax asset / (liability) not accounted for (33,709) 6,576
------- -----
Combined statement of operations - -
======= =====
</TABLE>
The deferred tax assets and liabilities of the Company at September 30,
1999 and 1998 were affected by certain intercompany tax sharing
arrangements as follows:
(a) tax losses of HCLNP were utilized by affiliates under the common control of
Hutchison Whampoa Limited, for nil consideration.
(b) tax losses of the Excluded Business have been retained by the Company and
will be available for use against future profits.
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDING LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------------------------------
15 Taxes (Continued)
Deferred income tax reflects the tax effect of timing differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes and tax loss
carryforwards. There is no limitation in Hong Kong on the period in which
the Company's tax loss carryforwards can be utilized. The following is a
summary of the significant components of the Company's deferred tax assets
and liabilities:
<TABLE>
<CAPTION>
September 30, 1999
Assets Liabilities
$ $
(unaudited) (unaudited)
<S> <C> <C>
Tax losses 191,463 -
Accelerated depreciation allowances - 214,367
Other temporary differences - 92,810
-------- --------
191,463 307,177
Amount not required to be provided under
HKGAAP - (115,714)
-------- --------
Provided 191,463 191,463
======== ========
</TABLE>
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------------------------------
16 Commitments and contingencies
(a) The Company is committed under its contracts to purchase property plant and
equipment amounting to approximately $1,145,177 as of September 30, 1999.
(b) The Company has commitments under various operating leases primarily
relating to land and buildings and lease lines in Hong Kong. Operating
lease expenses were $35,826 and $25,822 for each of the nine months ended
September 30, 1999 and 1998 respectively.
As of September 30, 1999, the Company had commitments to make payments in
the next twelve months under operating leases which expire as follows:
September 30,
1999
$
Land and buildings
Within one year -
In the second to fifth years inclusive 4,176
After the fifth year -
------
4,176
------
Leased lines
Within one year 2,766
In the second to fifth years inclusive 23,464
------
26,230
======
(c) The Company has performance guarantees given to:
(i) The Office of the Telecommunications Authority of Hong Kong in respect
of installation of a transmission network totaling approximately $19
million as of September 30, 1999.
(ii) Third party network operators in relation to the construction of
exchanges for approximately HK$25 million as of September 30,1999.
(d) A potential claim has been made against the Company by a third party
network operator amounting to HK$45 million. No provision has been made
for this claim since in the preliminary advice of the senior counsel the
probability of a material loss crystallizing is remote.
(e) The Inland Revenue Department of Hong Kong is in dispute with one of the
Company's subsidiaries, Hutchison Communications Limited ("HCL") over a
claim made by HCL on HCL's profits tax return filed for the year of
assessment 1994/1995 in the amount of HK$57 million. As HCL has made no
taxable profits to date, the dispute will only re-open when HCL generates a
taxable profit after absorbing all other tax losses brought forward. In
calculating the deferred income tax assets and liabilities for the nine
months ended September 30, 1999 and 1998 no deferred income tax assets have
been accounted for in respect of the amount under dispute.
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDING LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------------------------------
17 Subsequent events
(a) As described in note 1, on November 15, 1999 the Company, Hutchison
Telecommunications Limited, Hutchison Whampoa Limited and Global Crossing
entered into the Agreement for the acquisition by Global Crossing of 50% of
the ordinary share capital of the Company. Further details are set out in
note 1 above.
(b) Pursuant to the provisions of the Agreement the Company has undergone the
Reorganization described in note 1(a) above and its loans payable to,
amounts due to, and amounts due from, affiliates under the common control
of Hutchison Whampoa Limited will be capitalized as set out in note 1(b)
above.
(c) On November 12, 1999 ESD Services Limited, a subsidiary of HCLH, entered
into a contract with the Government of the HKSAR to implement and operate
the ESD system as described in note 1 above. In connection with such
implementation and operation, ESD Services Limited has proposed to incur
capital expenditure on the ESD system amounting to approximately HK$80
million and Compaq Computer Limited is obliged to acquire 15% of the
ordinary share capital of ESD Services Limited. A performance bond for
approximately HK$12 million has been issued in favor of the Government of
the HKSAR in compliance with the contract.
18 Summary of differences between HKGAAP and USGAAP
(a) The Company's combined financial statements are prepared in accordance with
accounting principles generally accepted in Hong Kong ("HKGAAP"), which
differ in some respects from accounting principles generally accepted in
the United States of America ("USGAAP"). Any differences in accounting
principles as they pertain to the accompanying combined financial
statements were immaterial except as described below:
<TABLE>
<CAPTION>
Nine months ended September 30,
1999 1998
Note HK$ HK$
<S> <C> <C> <C> <C>
Net (loss) / profit under HKGAAP (210,727) 41,077
USGAAP adjustments:
Deferred expenditure (i) 49,237 (184,768)
Capitalized interest (ii) - (7,453)
General provisions (iii) 1,762 (505)
Depreciation (iv) (31,020) (25,669)
-------- ---------
Net loss under USGAAP (190,748) (177,318)
======== =========
Net loss per share under USGAAP (190,748) (177,318)
======== =========
Total owner's deficit under HKGAAP (501,206) (255,630)
USGAAP adjustments:
Deferred expenditure (i) (656,501) (605,249)
Accumulated amortization of deferred (i) 72,889 21,681
expenditure
Capitalized interest (ii) (12,803) (10,551)
General provisions (iii) 35,024 36,351
Depreciation (iv) (75,165) (31,408)
Deferred tax liability not required to be
provided under HKGAAP (v) (115,714) (104,327)
Deferred tax effect of USGAAP adjustments 103,130 95,549
-------- ---------
Total owner's deficit under USGAAP (1,150,346) (853,584)
========== =========
</TABLE>
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------------------------------
Under HKGAAP, the statement of cash flows should be presented under the
following five standard headings: (a) operating activities; (b) returns on
investments and servicing of finance; (c) taxation; (d) investing
activities; and (e) financing. Under USGAAP, only three categories of cash
flow activities are presented: (a) operating; (b) investing; and (c)
financing. Cash flows from returns on investments and servicing of finance
and taxation would be classified under USGAAP as either operating,
investing or financing activities based on the nature of the specific
items. For example, under USGAAP, operating activities would include
interest received, dividends received from associated companies and
operating interest and profits tax paid, while investing activities would
include capitalized interest paid, and financing activities would include
ordinary and special interim dividends paid. Additionally, HKGAAP includes
bank overdrafts within the definition of cash and cash equivalents, whereas
USGAAP classifies bank overdrafts as financing activities. Also, under
HKGAAP operating profit is reconciled to cash flows provided by/used in
operating activities, while under USGAAP net income is adopted in place of
operating profit. The cash flow data by operating, investing and financing
activities in accordance with USGAAP are summarized below:
<TABLE>
<CAPTION>
Nine months ended September 30,
1999 1998
$ $
<S> <C> <C>
Net cash provided/(used) by:
Operating activities (66,449) 14,421
Investing activities (577,755) (495,495)
Financing activities 643,876 460,484
-------- ---------
Decrease in cash and cash equivalents (328) (20,590)
Cash and cash equivalents at beginning of year 328 20,774
-------- ---------
Cash and cash equivalents at end of year - 184
======== =========
</TABLE>
(i) Deferred expenditure
There is no accounting standard under HKGAAP on accounting for pre-
operating expenditure. The Company adopts the policy that pre-operating
expenses incurred prior to full commercial operations are deferred and
amortized on the straight line basis over a period of 10 years.
Under USGAAP, deferred expenditure should be charged to the statements of
operations as incurred in accordance with Statement of Position 98-5 and
should not be deferred.
(ii) Capitalized interest
The Company has capitalized certain interest costs incurred during the
course of construction of network assets and for the period from the date
the assets were available for use until the date of full commercial
operations.
Under USGAAP, the Company has not capitalized interest in property, plant
and equipment.
(iii) General provisions
There is no prescriptive accounting standard in relation to recording
provisions in HKGAAP and provisions are recorded based on estimated
liabilities.
Under the more prescriptive requirements of USGAAP certain provisions
recorded by the Company would not have been recorded.
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------------------------------
(iv) Depreciation
The Company commences depreciation of network assets from the date of full
commercial operations and calculates depreciation on a proportionate
straight line basis taking into account the number of subscribers compared
to the forecast capacity number of subscribers.
Under USGAAP depreciation must commence from the date the asset is
available for use and must be calculated on a straight line basis.
(v) Deferred tax
Under HKGAAP, deferred taxation is accounted for at the current taxation
rate in respect of timing differences between profit as computed for
taxation purposes and profit as stated in the accounts to the extent that a
liability or an asset is expected to be payable or receivable in the
foreseeable future.
Under USGAAP, the Company is required to recognize deferred tax assets and
liabilities for the expected future tax consequences of all temporary
differences between the book and tax basis of assets and liabilities and
tax loss carryforwards. A valuation allowance is established for deferred
tax asset where it is considered more likely than not that the asset will
not be realized.
(b) Financial instruments
(i) Financial assets and liabilities
Financial assets of the Company include cash at bank, trade accounts
receivable, other assets, prepaid costs and amounts due from affiliates
under the common control of Hutchison Whampoa Limited. Financial
liabilities of the Company include bank overdraft, accounts payable,
accrued expenses, amounts due to affiliates under the common controls of
Hutchison Whampoa Limited, long term loan from an affiliate under the
common control of Hutchison Whampoa Limited, long term loan from HCLNP's
then partners and loan from the Excluded Business. It is not practicable
to estimate the fair value of the long term loans from, amounts due to and
amounts due from affiliates under the common control of Hutchison Whampoa
Limited and the loan from the Excluded Business without incurring excessive
cost. The fair value of all other financial instruments approximate their
carrying amounts due to the nature or short maturity of these instruments.
Pursuant to the Reorganization described to in note 1 above, the loans
from, amounts due to, and amounts due from, affiliates under the common
control of Hutchison Whampoa Limited will be capitalized prior to the
scheduled closing date of the transaction with Global Crossing.
(ii) Concentration of credit risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and cash
equivalents, trade receivables and deposits, prepayments and other
receivables.
Cash and cash equivalents - substantially all the Company's cash and bank
balances are placed with a number of international banks in Hong Kong to
which the Company believes its exposure to risk is limited.
Trade receivables - these mainly represent service fee receivables from the
Company's customers in the HKSAR.
Deposits, prepayments and other receivable - these are spread among
numerous third parties.
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------------------------------
(c) Business segmental information
The Company conducts its business in one territory, Hong Kong and has
derived its revenue principally from the provision of international
services, local fixed network services and multimedia services to
customers. These are its three operating segments. For management purposes
the results of these three operating segments are analyzed separately.
Certain of the assets and liabilities of the international services and
local fixed network services segments are shared and grouped together for
management purposes. The segmental information for identifiable assets and
capital expenditure is based on the grouping together of the assets and
liabilities of international services and local fixed network services.
Segmental information in relation to revenues, operating income/(loss), and
depreciation and amortization is provided for each of the three operating
segments. Depreciation and amortization on separately identifiable
property, plant and equipment is charged to operating segments on an actual
basis. Depreciation in respect of shared assets is allocated to operating
segments by reference to the respective allocation percentages fixed in
respect of each cost on the basis of projected time consumption of services
and facilities by the business operation sharing the relevant services and
facilities. No depreciation was charged in respect of local fixed network
services because these segments were considered in the pre-operating stage
prior to January 1, 1999 and, accordingly, under HKGAAP and in the
management accounts, no depreciation was charged in respect of these
segments.
The Company is based in Hong Kong and its accounting records and management
information is based on accounting principles generally accepted in Hong
Kong. FAS 131 "Disclosures about Segments of an Enterprise and Related
Information" requires that the segmental information disclosed be based on
the information used by the Company's chief operating decision maker for
evaluating segmental performance and deciding how to allocate resources to
segments. As a result, the effect of certain Hong Kong accounting
principles not recorded in that information and adjustments to restate the
Company's financial statements on the basis of accounting principles in the
United States are not included in the segmental information presented
below.
Summarized financial information by business segment is as follows:
<TABLE>
<CAPTION>
Combined Statements of Operations
Operating
Revenues income / (loss) Depreciation
$ $ $
<S> <C> <C> <C> <C>
Nine months ended September 30, 1999
(unaudited)
International services 426,731 37,055 20,250
Local fixed network services 174,258 (143,288) 21,103
Multimedia services 14,951 (67,254) 1,697
-------- -------- -------
615,940 (173,487) 43,050
======== ======== =======
Nine months ended September 30, 1998
(unaudited)
International services 701,213 63,962 19,616
Local fixed network services 34,326 (177,235) -
Multimedia services 394 (4,231) -
-------- -------- -------
735,933 (117,504) 19,616
======== ======== =======
- ---------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------------------------------
(c) Business segmental information (Continued)
<TABLE>
<CAPTION>
Identifiable Capital
assets expenditure
$ $
<S> <C> <C> <C>
Nine months ended September 30, 1999
(unaudited)
International services and local fixed
network services 2,800,677 501,378
Multimedia services 43,937 10,050
--------- --------
2,844,614 511,428
========= ========
Capital
Expenditure
$
Nine months ended September 30, 1998
(unaudited)
International services and local fixed
network services 521,072
Multimedia services 4,126
--------
525,198
========
</TABLE>
Reconciliation of segment operating loss to net (loss) / profit before
taxes
<TABLE>
<CAPTION>
Nine months ended September 30,
1999 1998
$ $
(unaudited) (unaudited)
<S> <C> <C> <C>
Operating loss (173,487) (117,504)
Interest income 601 435
Interest expense (37,841) (39,988)
Expenditure deferred during the period - 190,681
Interest expense capitalized in property,
plant and equipment - 7,453
-------- --------
Net (loss) / profit before tax under (210,727) 41,077
HKGAAP
Effect of USGAAP adjustments: 19,979 (218,395)
-------- --------
Net loss under USGAAP (190,748) (177,318)
======== =========
</TABLE>
The Company derives revenues from customers located primarily in Hong Kong
and the Company's long lived assets are located primarily in the HKSAR.
- ------------------------------------------------------------------------------
<PAGE>
HCL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------------------------------
(d) Recently adopted and new accounting standards in USGAAP
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Cost of Start-Up Activities"
("SOP 98-5"). SOP 98-5 is applicable for fiscal years beginning December
15, 1999. SOP 98-5 has been adopted in note 18(a) above for each of the
nine months ended September 30, 1999 and 1998.
The Financial Accounting Standards Board ("FASB") has issued certain
pronouncements which are not effective with respect to the fiscal years
presented in note 18(a) above.
SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities"
is effective for fiscal years beginning after June 15, 2000. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. It requires that an entity
recognizes all derivatives as either assets or liabilities in the statement
of financial position and measures those instruments at fair value. The
Company has evaluated the requirements of SFAS No.133 and believes that,
since it currently does not utilize derivative instruments in its
operations, the adoption of this new standard would not have a material
impact on note 18(a) above.
(e) Operating lease commitments
Under HKGAAP, commitments under operating leases represent payments in the
next twelve months under non cancelable operating leases.
Under USGAAP commitments under operating leases represent minimum future
rented payments in total and for each of the next five years for operating
leases with non-cancelable operating leases with lease terms in excess of
one year as follows:
$
For the three months ending December 31, 1999 7,770
2000 22,917
2001 19,389
2002 5,606
2003 583
Thereafter 1,763
------
58,028
======
(f) Net profit/(loss) per share
Under USGAAP, historical net (loss) / profit per share would be ($210,727)
and $41,077 for each of the nine months ended 1999 and 1998 respectively.
This is calculated based on one ordinary share in issue throughout the
period ended September 30, 1999. The historical capital structure is
substantially different from the capital structure expected to be in place
following the Reorganization described in note 1 above.
- ------------------------------------------------------------------------------
<PAGE>
Pro Forma Global Crossing Financial Information
For the year ended December 31, 1998 and as of and for the nine months ended
September 30, 1999
<PAGE>
Global Crossing Ltd.
Selected unaudited pro forma financial information
The following unaudited pro forma condensed combined financial information
of Global Crossing Ltd., Global Marine Systems, Frontier, Racal Telecom and the
Hutchison Global Crossing joint venture, which we refer to as "Pro Forma Global
Crossing Ltd.", has been prepared to demonstrate how these companies or
businesses might have looked if (1) the Global Marine Systems acquisition and
related financing, (2) the Frontier acquisition, (3) the Racal Telecom
acquisition and related financing, (4) the Hutchison Global Crossing joint
venture, including the related issuance of the 6 3/8% cumulative convertible
preferred stock, Series B, of Global Crossing Ltd., (5) the offering of the 6
3/8% cumulative convertible preferred stock of Global Crossing Ltd. completed on
November 5, 1999, (6) the offering of the 9 1/8% senior notes due 2006 and the 9
1/2% senior notes due 2009 of Global Crossing Holdings Ltd. completed on
November 19, 1999 and the application of the net proceeds of that offering and
(7) the offering of the 7% cumulative convertible preferred stock of Global
Crossing Ltd. completed on December 15, 1999 had been completed as of the dates
or at the beginning of the periods presented. This pro forma information does
not give effect to the $350 million cash received in connection with the
formation of the Asia Global Crossing joint venture.
Global Crossing Ltd. has prepared the pro forma financial information using
the purchase method of accounting. Global Crossing Ltd. expects that it will
have reorganization and restructuring expenses and potential synergies relating
to the acquisitions of Global Marine Systems and Racal Telecom, the Hutchison
Global Crossing joint venture and the acquisition of Frontier's long distance
business and increased opportunities to earn more revenue as a result of those
transactions. The unaudited pro forma information does not reflect these
expenses and synergies.
The pro forma information, while helpful in illustrating the financial
characteristics of the combined company under one set of assumptions, does not
attempt to predict or suggest future results. The pro forma information also
does not attempt to show how the combined company would actually have performed
had the companies been combined throughout these periods. If the companies had
actually been combined in prior periods, these companies and businesses might
have performed differently. Pro forma financial information should not be relied
upon as an indication of the results that would have been achieved if the Global
Marine Systems, Frontier and Racal Telecom acquisitions and the Hutchison Global
Crossing joint venture had taken place earlier or the future results that the
companies will experience after completion of these transactions.
These unaudited pro forma condensed combined financial statements should be
read in conjunction with the historical financial statements of Global Crossing
Ltd., Global Marine Systems, Frontier, Racal Telecom and HCL Holdings, which
are incorporated by reference in this document.
Global Crossing Ltd. has tentatively considered the carrying value of the
acquired assets to approximate their fair value, with all of the excess of
those acquisition costs being attributable to goodwill. Global Crossing Ltd. is
in the process of fully evaluating the assets acquired and, as a result, the
purchase price allocation among the tangible and intangible assets acquired,
and their related useful lives, including goodwill, may change. The initial
evaluation of goodwill anticipates a useful life of 25 years.
78
<PAGE>
Pro Forma Global Crossing Ltd.
Unaudited Pro Forma Condensed Combined Balance Sheet
as of September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Global Racal Racal Hutchison Global
Crossing Financing Telecom Telecom Global Crossing Crossing
Historical(1) Adjustments(2) Pro Forma(3) Adjustments(4) Adjustments(5) Pro Forma
------------- -------------- ------------ -------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash, restricted cash
and investments....... $ 319,169 $ 3,571,800 $ 28,872 $(1,650,000) $(50,000) $ 1,839,243
(1,480,598) 1,100,000
Accounts receivable,
net................... 623,170 -- 107,933 -- -- 731,103
Prepaid and other...... 166,597 -- 47,813 -- -- 214,410
----------- ----------- -------- ----------- -------- -----------
Total current
assets.............. 1,108,936 2,091,202 184,618 (550,000) (50,000) 2,784,756
Restricted cash and cash
equivalents............ 297,088 -- -- -- -- 297,088
Accounts receivable..... 56,520 -- -- -- -- 56,520
Property, plant and
equipment, net......... 2,541,883 -- 416,176 -- (83,800) 2,874,259
Construction in
process................ 2,072,769 -- -- -- -- 2,072,769
Goodwill and other
intangibles, net....... 8,439,758 -- -- 1,562,857 -- 10,002,615
Other assets, net....... 593,812 29,700 54,887 29,787 -- 677,371
(30,815)
Investment in
affiliates............. 224,960 -- 5,013 -- 538,800 768,773
----------- ----------- -------- ----------- -------- -----------
Total Assets......... $15,335,726 $ 2,090,087 $660,694 $ 1,042,644 $405,000 $19,534,151
=========== =========== ======== =========== ======== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt........ $ -- $ -- $249,861 $ -- $ -- $ 249,861
Accrued construction
costs................. 181,353 -- -- -- -- 181,353
Accounts payable and
accrued expenses...... 818,265 2,750 141,615 48,287 5,000 1,015,917
Other current
liabilities........... 363,607 -- 14,975 -- -- 378,582
----------- ----------- -------- ----------- -------- -----------
Total current
liabilities......... 1,363,225 2,750 406,451 48,287 5,000 1,825,713
Long term debt.......... 3,088,913 (1,480,598) 102,223 1,100,000 -- 2,810,538
Senior notes............ 765,342 2,000,000 -- -- -- 2,765,342
Deferred credits and
other.................. 399,998 -- 46,377 -- -- 446,375
----------- ----------- -------- ----------- -------- -----------
Total Liabilities.... 5,617,478 522,152 555,051 1,148,287 5,000 7,847,968
----------- ----------- -------- ----------- -------- -----------
Mandatorily Redeemable
Preferred Stock........ 485,647 -- -- -- -- 485,647
6 3/8% Cumulative
Convertible Preferred
Stock................. -- 969,000 -- -- 400,000 1,369,000
7% Cumulative
Convertible Preferred
Stock................. -- 629,750 -- -- -- 629,750
Shareholders' equity:
Common stock........... 7,899 -- 32,728 (32,728) -- 7,899
Other shareholders'
equity................ 9,448,147 -- 5,818 (5,818) -- 9,448,147
Unearned compensation.. (72,799) -- -- -- -- (72,799)
Treasury stock......... (209,415) -- -- -- -- (209,415)
Retained earnings
(accumulated
deficit).............. 40,997 (30,815) 67,097 (67,097) -- 10,182
Accumulated other
comprehensive income.. 17,772 -- -- -- -- 17,772
----------- ----------- -------- ----------- -------- -----------
Total shareholders'
equity.............. 9,232,601 (30,815) 105,643 (105,643) -- 9,201,786
----------- ----------- -------- ----------- -------- -----------
Total liabilities and
shareholders'
equity.............. $15,335,726 $ 2,090,087 $660,694 $ 1,042,644 $405,000 $19,534,151
=========== =========== ======== =========== ======== ===========
</TABLE>
79
<PAGE>
Pro Forma Global Crossing Ltd.
Unaudited Pro Forma Condensed Combined Statements of Operations
For the Nine Months Ended September 30, 1999
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Global
Global Global Marine Racal
Crossing Marine Systems Frontier Frontier Financing Telecom
Historical (6) Systems (7) Adjustments Historical Adjustments Adjustments Pro Forma(3)
-------------- ----------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating
Revenues........... $ 623,573 $173,498 $ -- $1,995,556 $ -- $ -- $258,082
----------- -------- -------- ---------- --------- --------- --------
Operating Expenses:
Operating,
selling, general
and
administrative.... 470,781 127,165 -- 1,551,234 -- -- 257,498
Stock-related
expense........... 38,609 -- -- 10,412 (10,412)(11) -- --
Merger Expenses... -- -- -- 74,519 -- -- --
Depreciation and
amortization...... 16,370 13,090 -- 173,600 -- -- 46,451
Goodwill
Amortization...... 3,758 539 (539)(8) 25,749 (25,749)(12) -- --
14,126 (8) 292,284 (12)
----------- -------- -------- ---------- --------- --------- --------
529,518 140,794 13,587 1,835,514 256,123 -- 303,949
----------- -------- -------- ---------- --------- --------- --------
Operating income
(loss)............. 94,055 32,704 (13,587) 160,042 (256,123) -- (45,867)
Equity in income
(loss) of
affiliates......... (5,471) 4,539 -- 17,235 -- -- (560)
Other income
(expense):
Interest
expense........... (81,538) (6,869) (36,000)(9) (48,739) -- 52,183 (16) (30,908)
36,000 (16)
(182,487)(16)
Interest income... 45,663 511 -- 4,754 -- -- 3,089
Other income
(expenses)......... 215,982 143 -- (2,346) -- -- 369
----------- -------- -------- ---------- --------- --------- --------
Income (loss)
before taxes and
cumulative effect
of changes in
accounting
principle.......... 268,691 31,028 (49,587) 130,946 (256,123) (94,304) (73,877)
(Provision)
benefit for
income taxes...... (110,055) (11,885) 15,200 (10) (77,181) -- (15,200)(16) 22,411
----------- -------- -------- ---------- --------- --------- --------
Income (loss)
before cumulative
effect of changes
in accounting
principle.......... 158,636 19,143 (34,387) 53,765 (256,123) (109,504) (51,466)
Preferred stock
dividends......... (41,313) -- -- (510) 510 (13) (81,702)(17) --
Redemption of
preferred stock... -- -- -- -- (183)(14) -- --
----------- -------- -------- ---------- --------- --------- --------
Income (loss)
applicable to
common shareholders
before cumulative
changes in
accounting
principle (Basic).. 117,323 19,143 (34,387) 53,255 (255,796) (191,206) (51,466)
Diluted earnings
adjustment........ -- -- -- -- (180)(15) -- --
----------- -------- -------- ---------- --------- --------- --------
Income (loss)
applicable to
common shareholders
before cumulative
changes in
accounting
principle
(Diluted).......... $ 117,323 $ 19,143 $(34,387) $ 53,255 $(255,976) $(191,206) $(51,466)
=========== ======== ======== ========== ========= ========= ========
Income (loss) per
common share:
Income (loss)
applicable to
common
shareholders
before cumulative
effect of changes
in accounting
principle
Basic........... $ 0.28
===========
Diluted......... $ 0.28
===========
Shares used in
computing
information
applicable to
common
shareholders
Basic........... 412,224,517
===========
Diluted......... 423,967,291
===========
<CAPTION>
Hutchison
Racal Global Global
Telecom Crossing Crossing
Adjustments Adjustments(5) Pro Forma
---------------- -------------- ----------------
<S> <C> <C> <C>
Operating
Revenues........... $ -- $ -- $ 3,050,709
---------------- -------------- ----------------
Operating Expenses:
Operating,
selling, general
and
administrative.... -- -- 2,406,678
Stock-related
expense........... -- -- 38,609
Merger Expenses... -- -- 74,519
Depreciation and
amortization...... -- -- 249,511
Goodwill
Amortization...... 46,886 (4) 357,054
---------------- -------------- ----------------
46,886 -- 3,126,371
---------------- -------------- ----------------
Operating income
(loss)............. (46,886) -- (75,662)
Equity in income
(loss) of
affiliates......... -- (16,383) (12,939)
(12,299)
Other income
(expense):
Interest
expense........... (77,043)(18) -- (375,401)
Interest income... -- -- 54,017
Other income
(net)............. -- -- 214,148
---------------- -------------- ----------------
Income (loss)
before taxes and
cumulative effect
of changes in
accounting
principle.......... (123,929) (28,682) (195,837)
Provision
(benefit) for
income taxes...... 23,883 (19) -- (152,827)
---------------- -------------- ----------------
Income (loss)
before cumulative
effect of changes
in accounting
principle.......... (100,046) (28,682) (348,664)
Preferred stock
dividends......... -- (19,125) (142,140)
Redemption of
preferred stock... -- -- (183)
---------------- -------------- ----------------
Income (loss)
applicable to
common shareholders
before cumulative
changes in
accounting
principle (Basic).. (100,046) (47,807) (490,987)
Diluted earnings
adjustment........ -- -- (180)
---------------- -------------- ----------------
Income (loss)
applicable to
common shareholders
before cumulative
changes in
accounting
principle
(Diluted).......... $(100,046) $(47,807) $ (491,167)
================ ============== ================
Income (loss) per
common share:
Income (loss)
applicable to
common
shareholders
before cumulative
effect of changes
in accounting
principle
Basic........... $ (.64)
================
Diluted......... $ (.64)
================
Shares used in
computing
information
applicable to
common
shareholders
Basic........... 767,484,627 (20)
================
Diluted......... 767,484,627 (20)
================
</TABLE>
80
<PAGE>
Pro Forma Global Crossing Ltd.
Unaudited Pro Forma Condensed Combined Statements of Operations
For the year ended December 31, 1998
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Racal
Global Global Global Marine Telecom
Crossing Marine Systems Frontier Frontier Financing Pro
Historical Systems(7) Adjustments Historical Adjustments Adjustments Forma(3)
------------- ---------- ------------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues $ 424,099 $347,335 $ -- $2,593,558 $ -- $ -- $327,199
----------- -------- -------- ---------- --------- --------- --------
Operating Expenses:
Operating,
selling, general
and
administrative ... 264,781 233,209 -- 2,043,740 -- -- 296,723
Termination of
Advisory Services
Agreement......... 139,669 -- -- -- -- -- --
Stock related
expense........... 39,374 -- -- 6,616 (6,616)(11) -- --
Depreciation and
amortization...... -- 37,412 -- 189,804 -- 54,999
Goodwill
amortization...... -- 1,318 (1,318)(8) 36,002 (36,002)(12) -- --
28,253 (8) 389,712 (12)
----------- -------- -------- ---------- --------- --------- --------
443,824 271,939 26,935 2,276,162 347,094 -- 351,722
----------- -------- -------- ---------- --------- --------- --------
Operating income
(loss)............. (19,725) 75,396 (26,935) 317,396 (347,094) -- (24,523)
Equity in income
(loss) of
affiliates......... (2,508) 4,732 -- 16,711 -- -- (253)
Other income
(expense):
Interest
expense........... (42,880) (11,176) (48,000)(9) (55,318) -- 41,278 (16) (35,957)
48,000 (16)
(243,316)(16)
Interest income... 29,986 3,793 -- 5,084 -- -- 5,353
Other income
(expense)......... -- -- -- 23,230 -- -- 369
----------- -------- -------- ---------- --------- --------- --------
Income (loss)
before taxes,
extraordinary item
and cumulative
effect of changes
in accounting
principle.......... (35,127) 72,745 (74,935) 307,103 (347,094) (154,038) (55,011)
(Provision)
benefit for
income taxes...... (33,067) (25,693) 20,256 (10) (129,560) -- (20,256)(16) 16,954
----------- -------- -------- ---------- --------- --------- --------
Income (loss)
before
extraordinary item
and cumulative
effect of changes
in accounting
principle.......... (68,194) 47,052 (54,679) 177,543 (347,094) (174,294) (38,057)
Preferred stock
dividends......... (12,681) -- -- (1,005) 1,005 (13) (108,935)(17) --
Redemption of
preferred stock... (34,140) -- -- -- (183)(14) -- --
----------- -------- -------- ---------- --------- --------- --------
Income (loss)
applicable to
common shareholders
before
extraordinary item
and cumulative
changes in
accounting
principle (Basic).. (115,015) 47,052 (54,679) 176,538 (346,272) (283,229) (38,057)
Diluted earnings
adjustment........ -- -- -- 360 (360)(15) -- --
----------- -------- -------- ---------- --------- --------- --------
Income (loss)
applicable to
common shareholders
before
extraordinary item
and cumulative
changes in
accounting
principle
(Diluted).......... $ (115,015) $ 47,052 $(54,679) $ 176,898 $(346,632) $(283,229) $(38,057)
=========== ======== ======== ========== ========= ========= ========
Income (loss) per
common share:
Income (loss)
applicable to
common
shareholders
before
extraordinary
item and
cumulative effect
of changes in
accounting
principle
Basic........... $ (0.32)
===========
Diluted......... $ (0.32)
===========
Shares used in
computing
information
applicable to
common
shareholders
Basic........... 358,735,340
===========
Diluted......... 358,735,340
===========
<CAPTION>
Racal Hutchison Global
Telecom Global Crossing Crossing
Adjustments Adjustments(5) Pro Forma
--------------- -------------- ------------------
<S> <C> <C> <C>
Operating Revenues $ -- $ -- $ 3,692,191
--------------- -------------- ------------------
Operating Expenses:
Operating,
selling, general
and
administrative ... -- -- 2,838,453
Termination of
Advisory Services
Agreement......... -- -- 139,669
Stock related
expense........... -- -- 39,374
Depreciation and
amortization...... -- -- 282,215
Goodwill
amortization...... 62,514 (4) -- 480,479
--------------- -------------- ------------------
62,514 -- 3,780,190
--------------- -------------- ------------------
Operating income
(loss)............. (62,514) -- (87,999)
Equity in income
(loss) of
affiliates......... -- (21,844) (21,206)
(18,044)
Other income
(expense):
Interest
expense........... (102,723)(18) -- (450,092)
Interest income... -- -- 44,216
Other income
(expense)......... -- -- 23,599
--------------- -------------- ------------------
Income (loss)
before taxes,
extraordinary item
and cumulative
effect of changes
in accounting
principle.......... (165,237) (39,888) (491,482)
(Provision)
benefit for
income taxes...... 31,844 (19) -- (139,522)
--------------- -------------- ------------------
Income (loss)
before
extraordinary item
and cumulative
effect of changes
in accounting
principle.......... (133,393) (39,888) (631,004)
Preferred stock
dividends......... -- (25,500) (147,116)
Redemption of
preferred stock... -- -- (34,323)
--------------- -------------- ------------------
Income (loss)
applicable to
common shareholders
before
extraordinary item
and cumulative
changes in
accounting
principle (Basic).. (133,393) (65,388) (812,443)
Diluted earnings
adjustment........ -- -- --
--------------- -------------- ------------------
Income (loss)
applicable to
common shareholders
before
extraordinary item
and cumulative
changes in
accounting
principle
(Diluted).......... $(133,393) $(65,388) $ (812,443)
=============== ============== ==================
Income (loss) per
common share:
Income (loss)
applicable to
common
shareholders
before
extraordinary
item and
cumulative effect
of changes in
accounting
principle
Basic........... $ (1.15)
==================
Diluted......... $ (1.15)
==================
Shares used in
computing
information
applicable to
common
shareholders
Basic........... 708,518,093 (20)
==================
Diluted......... 708,518,093 (20)
==================
</TABLE>
81
<PAGE>
Pro Forma Global Crossing Ltd.
Notes to Unaudited Pro Forma Condensed Combined Financial
Statements
(1) This column represents the historical financial position of Global
Crossing Ltd. as of September 30, 1999, including the assets acquired in
the Frontier merger and the Global Marine Systems acquisition.
(2) These adjustments represent the proceeds, financing fees and assumed
repayment of existing debt related to the issuance of the 9 1/8% senior
notes due 2006 and the 9 1/2% senior notes due 2009 of Global Crossing
Holdings Ltd. and the 6 3/8% cumulative convertible preferred stock and 7%
cumulative convertible preferred stock, including the over-allotment, of
Global Crossing Ltd. In connection with the issuance of the outstanding
notes, Global Crossing Ltd. incurred approximately $29.7 million in
financing fees. The financing fees will be amortized over the life of the
debt. As a result of Global Crossing Ltd.'s decision to repay certain
existing debt, Global Crossing Ltd. recorded an extraordinary charge of
approximately $30.8 million during the fourth quarter of 1999.
(3) These adjustments reflect the restatement of Racal Telecom's results from
operations and balance sheet to United States GAAP, the disposal of the
Racal Translink and Racal Fieldforce divisions of Racal Telecommunications
Limited which were not acquired by Global Crossing Ltd., pro forma
adjustments to reflect the likely effect of the trading among Racal
Translink, Racal Fieldforce and Racal Telecom based on contractual
obligations among the divisions. These adjustments are summarised in the
tables below:
Racal Telecom Pro Forma
as of October 15, 1999
(in thousands)
<TABLE>
<CAPTION>
US GAAP and
BV Acquisition Accounting Racal
and Carve-Out Policy Telecom
Historical(a) Adjustments(b) Adjustments(d) Pro Forma
------------- -------------- ------------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash, restricted cash
and investments....... $ 28,872 $ -- $ -- $ 28,872
Accounts receivable,
net................... 107,760 173 -- 107,933
Prepaid and other...... 64,661 293 (17,141) 47,813
-------- ------ -------- --------
Total current
assets.............. 201,293 466 (17,141) 184,618
Property, plant and
equipment, net......... 442,835 8 (26,667) 416,176
Other assets, net....... 42,077 -- 12,810 54,887
Investment in affiliates 5,013 -- -- 5,013
-------- ------ -------- --------
Total Assets......... $691,218 $ 474 $(30,998) $660,694
======== ====== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt $249,568 $ 293 $ -- $249,861
Accounts payable and
accrued expenses...... 151,187 76 (9,648) 141,615
Other current
liabilities........... 14,333 -- 642 14,975
-------- ------ -------- --------
Total current
liabilities......... 415,088 369 (9,006) 406,451
Long-term debt $102,223 -- -- 102,223
Deferred credits and
other.................. 24,929 -- 21,448 46,377
-------- ------ -------- --------
Total Liabilities.... 542,240 369 12,442 555,051
-------- ------ -------- --------
Shareholders' equity:
Common stock........... 32,692 36 -- 32,728
Other shareholders'
equity................ 5,818 -- -- 5,818
Retained earnings
(accumulated
deficit).............. 110,468 69 (43,440) 67,097
-------- ------ -------- --------
Total shareholders'
equity.............. 148,978 105 (43,440) 105,643
-------- ------ -------- --------
Total liabilities and
shareholders'
equity.............. $691,218 $ 474 $(30,998) $660,694
======== ====== ======== ========
</TABLE>
82
<PAGE>
Racal Telecom Pro Forma
Unaudited Pro Forma Condensed Combined Statements of Operations
For the Forty-one Weeks Ended October 15, 1999
(in thousands)
<TABLE>
<CAPTION>
US GAAP and
BV Acquisition Accounting Racal
and Carve-Out Policy Telecom
Historical(a) Adjustments Adjustments(d) Pro Forma
------------ ----------- ----------- ---------
<S> <C> <C> <C> <C>
Operating Revenues...... $390,578 $(110,354)(c) $(22,447) $258,082
305 (b)
-------- --------- -------- --------
Operating Expenses:
Operating, selling,
general and
administrative........ 355,110 (99,595)(c) 1,737 257,498
246 (b)
Depreciation and
amortization.......... 61,774 (11,978)(c) (3,340) 46,451
(5)(b)
-------- --------- -------- --------
416,884 (111,332) (1,603) 303,949
-------- --------- -------- --------
Operating income
(loss)................. (26,306) 1,283 (20,844) (45,867)
Equity in income (loss)
of affiliates.......... (560) -- -- (560)
Other income (expense):
Interest expense....... (30,905) (3)(b) -- (30,908)
Interest income........ -- 3,089 (c) -- 3,089
Other income (expense). 76,390 (76,021)(c) -- 369
-------- --------- -------- --------
Income (loss) before
taxes and cumulative
effect of changes in
accounting principle... 18,619 (71,652) (20,844) (73,877)
(Provision) benefit for
income taxes.......... 3,563 (70)(b) 18,918 22,411
-------- --------- -------- --------
Income (loss) before
cumulative effect of
changes in accounting
principle.............. $ 22,182 $ (71,722) $ (1,926) $(51,466)
======== ========= ======== ========
</TABLE>
Racal Telecom Pro Forma
Unaudited Pro Forma Condensed Combined Statement of Operations
For the year ended December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
US GAAP and
BV Acquisition Accounting Racal
and Carve-Out Policy Telecom
Historical(a) Adjustments Adjustments(d) Pro Forma
------------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Operating Revenues $489,299 $(162,277)(c) $ (496) $327,199
673 (b)
-------- --------- ------- --------
Operating Expenses:
Operating, selling,
general and
administrative ....... 413,617 (124,687)(c) 7,298 296,723
495 (b)
Depreciation and
amortization.......... 73,376 (14,541)(c) (3,869) 54,999
33 (b)
-------- --------- ------- --------
486,993 (138,700) 3,429 351,722
-------- --------- ------- --------
Operating income
(loss)................. 2,306 (22,904) (3,925) (24,523)
Equity in income (loss)
of affiliates.......... (253) -- -- (253)
Other income (expense):
Interest expense....... (35,983) (14)(b) 40 (35,957)
Interest income........ 291 5,062 (c) -- 5,353
Other income
(expense)............. 369 -- -- 369
-------- --------- ------- --------
Income (loss) before
taxes, extraordinary
item and cumulative
effect of changes in
accounting principle... (33,270) (17,856) (3,885) (55,011)
(Provision) benefit for
income taxes.......... 3,946 6,053 (c) 7,025 16,954
(70)(b)
-------- --------- ------- --------
Income (loss) before
extraordinary item and
cumulative effect of
changes in accounting
principle.............. $(29,324) $ (11,873) $ 3,140 $(38,057)
======== ========= ======= ========
</TABLE>
(a) This column represents the combined historical results of operations
and financial position of Racal Telecommunications Limited, Racal
Telecommunications Networks Limited, Racal Internet Services Limited
and Racal Telecommunications Inc., which we refer to as "Racal
Telecom", in accordance with United Kingdom GAAP translated into
United States dollars. With
83
<PAGE>
respect to the information included in the Unaudited Pro Forma Condensed
Combined Balance Sheet as of September 30, 1999, the Racal Telecom
information is as of October 15, 1999. With respect to the information
included in the Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1998, the Racal Telecom
information is for the year ended March 31, 1999. With respect to the
information included in the Unaudited Pro Forma Condensed Combined
Statement of Operations for the nine months ended September 30, 1999,
the Racal Telecom information is for the 41 weeks ended October 15, 1999.
(b) During 1999, Racal Network Services BV was acquired by Racal
Telecommunications Networks Limited. These adjustments reflect the
financial position and results of operations of Racal Network Services
BV, as if this transaction had been completed as of the dates or at the
beginning of the periods presented.
(c) In July 1999, the Racal Telecom business was separated into three
divisions: Racal Telecom, Racal Translink and Racal Fieldforce. On
October 1, 1999, the Racal Translink and Racal Fieldforce businesses were
sold to another company within the Racal Electronics plc group. This
adjustment eliminates the results of operations of Racal Translink and
Racal Fieldforce, reflects the likely effect of the trading among Racal
Translink, Racal Fieldforce and Racal Telecom based on contractual
obligations among the divisions and adjusts the profit on disposal of
these operations. No taxation liabilities were incurred on the disposal
as this disposal was to another Racal Electronics plc group company.
(d) The Racal Telecom combined financial statements are prepared in
accordance with United Kingdom GAAP which differ in certain material
respects from United States GAAP. The difference that are material are
disclosed in the notes to the combined financial statements, incorporated
by reference. In addition, an adjustment has been made to treat sales of
dark fiber made by Racal Telecom after July 1, 1999 as operating leases,
recognizing income over the period of the service provision in
accordance with the provision of FASB Interpretation No. 43.
(4) These adjustments reflect the elimination of Racal Telecom's
shareholders' equity accounts, the excess consideration over the net
assets acquired (goodwill) and the related amortization expense. The
preliminary goodwill has been calculated as follows (in thousands):
<TABLE>
<S> <C> <C>
Total purchase price........................................ $1,650,000
Global Crossing Ltd. transaction costs...................... 18,500
----------
Total consideration......................................... 1,668,500
Less: Historical Racal Telecom net assets at October 15,
1999....................................................... 105,643
----------
Preliminary goodwill........................................ $1,562,857
==========
</TABLE>
Global Crossing Ltd. paid (Pounds)1 billion, approximately $1.65 billion, in
connection with the transaction. Global Crossing Ltd. partially financed the
acquisition of Racal Telecom through the incurrence of debt in the amount of
(Pounds)675 million, approximately $1.1 billion, with an interest rate of
approximately 9%. In connection with the issuance of this debt, Racal
incurred $29.8 million in financing fees. Global Crossing Ltd. has
tentatively considered the carrying value of the acquired assets to
approximate fair value, with all excess of those acquisition costs being
attributable to goodwill. Global Crossing Ltd. is in the process of fully
evaluating the assets to be acquired and, as a result, the purchase price
allocation among the tangible and intangible assets acquired, and their
related useful lives, may change. Global Crossing Ltd. currently anticipates
that goodwill associated with the transaction will be amortized over a 25-
year life.
(5) On November 15, 1999, Global Crossing Ltd. entered into an agreement with
Hutchison Whampoa Limited to form a joint venture to be called Hutchison
Global Crossing. This joint venture will be owned in equal parts by
Global Crossing Ltd. and Hutchison. In exchange for its 50% interest,
Hutchison agreed to contribute to the joint venture its existing
building-to-building fixed-line telecommunications network in Hong Kong
and certain Internet-related assets currently held by Hutchison
Telecommunications Limited. In exchange for Global Crossing Ltd.'s 50%
interest, Global Crossing Ltd. will contribute to the joint venture
international telecommunications capacity rights on its network and know-
how related to Internet data centers valued at $350 million and $50 million
in cash. In addition, Global Crossing Ltd. will issue to Hutchison $400
million aggregate liquidation preference of its 6 3/8% cumulative
convertible preferred stock, series B, convertible into its common stock.
The Hutchison Global Crossing joint venture is anticipated to be
accounted for as an unconsolidated joint venture under the equity method
of accounting.
84
<PAGE>
<TABLE>
<S> <C> <C>
Total Consideration
Cash contributed................................... $ 50,000
6 3/8% Cumulative Convertible Preferred Stock,
Series B.......................................... 400,000
Estimated cost of capacity contributed............. 83,800
Global Crossing Ltd. transaction costs............. 5,000
--------
Total consideration.................................. 538,800
Less:Historical net tangible book value of HCL
Holdings:
Historical HCL Holdings net liabilities at
September 30, 1999................................. $(148,395)
Cash contributed................................... 50,000
Cost of capacity contributed....................... 83,800
---------
Adjusted net tangible book value................... (14,595)
50% ownership interest............................. 7,297
---------
(7,298)
--------
Total Goodwill....................................... $546,098
========
</TABLE>
Global Crossing Ltd. has tentatively considered the carrying value of the
acquired assets to approximate their fair value, with all of the excess of
those acquisition costs being attributable to goodwill. Global Crossing
Ltd. is in the process of fully evaluating the assets to be acquired and,
as a result, the purchase price allocation among the tangible and
intangible assets acquired and their useful lives may change. Global
Crossing Ltd. currently anticipates that goodwill associated with the
merger will be amortized over a 25-year life.
These adjustments also include the assumed equity in the results of
operations of Hutchison Global Crossing for the nine months ended September
30, 1999 and the twelve months ended December 31, 1998.
(6) This column represents the historical results of operations for the nine
months ended September 30, 1999 including the results of Global Marine
Systems operations for the three months ended September 30, 1999.
(7) These columns represent the historical results of operations. With
respect to the information included in the Unaudited Pro Forma Condensed
Combined Statement of Operations for the year ended December 31, 1998,
the Global Marine Systems information is for the fiscal year ended March
31, 1999. For the nine months ended September 30, 1999, the results of
operations include Global Marine Systems for the six months ended June
30, 1999.
(8) These adjustments reflect the amortization expense of the excess
consideration over the net assets acquired (goodwill). The preliminary
goodwill has been estimated to be approximately $622 million. Global
Crossing Ltd. has tentatively considered the carrying value of the
acquired assets to approximate fair value, with all excess of those
acquisition costs being attributable to goodwill. Global Crossing Ltd. is
in the process of fully evaluating the assets acquired and, as a
result, the purchase price allocation among the tangible and intangible
assets acquired and their useful lives may change. Global Crossing Ltd.
currently anticipates that goodwill associated with the transaction will
be amortized over a 25-year life. Based upon a preliminary valuation,
Global Crossing Ltd. estimates that the purchase price allocation among
the tangible and intangible assets will result in a composite useful life
of approximately 22 years.
(9) This amount reflects the assumed interest expense, at an 8% interest
rate, incurred on the $600 million debt assumed issued as of the earliest
date presented in connection with the acquisition of Global Marine
Systems.
(10) These adjustments represent the tax benefit resulting from the interest
expense assumed in connection with the debt issued for the acquisition of
Global Marine Systems.
(11) These adjustments assume Frontier's stock related expenses would not have
been incurred had the merger occurred at the earliest date presented.
(12) These adjustments reflect the amortization expense of the excess
consideration over the net assets acquired (goodwill). The preliminary
goodwill has been estimated to be approximately $7.8 billion.
85
<PAGE>
Global Crossing Ltd. has tentatively considered the carrying value of the
acquired assets to approximate their fair value, with all of the excess of
those acquisition costs being attributable to goodwill. Global Crossing
Ltd. is in the process of fully evaluating the assets to be acquired and,
as a result, the purchase price allocation among the tangible and
intangible assets acquired and their related useful lives may change.
Global Crossing Ltd. currently anticipates that goodwill associated with
the merger will be amortized over a 25-year life. Based upon a preliminary
valuation, Global Crossing Ltd. estimates that the purchase price
allocation among the tangible and intangible assets will result in a
composite useful life of approximately 20 years.
(13) This adjustment assumes that Frontier's preferred stock dividends would
not have been incurred, as Frontier's preferred stock would have been
redeemed as of the earliest date presented.
(14) These adjustments represent the redemption of Frontier's 5.00%, second
5.00%, 5.65%, 4.60% and the Ausable 5 1/2% Series redeemable preferred
stock before completion of the merger at their respective premiums of the
total amount outstanding. The preferred stock was redeemed on July 1,
1999.
(15) To eliminate diluted earnings adjustment due to the combined net loss
position.
(16) These adjustments reflect (1) the reversal of historical interest expense
incurred on debt replaced by the senior credit facility and the 9 1/8%
senior notes due 2006 and the 9 1/2% senior notes due 2009 of Global
Crossing Holdings Ltd.; (2) the reversal of the pro forma interest expense,
and related tax benefit incurred on the $600 million debt assumed issued in
connection with the acquisition of Global Marine Systems; and (3) the
assumed interest expense incurred on the 9 1/8% senior notes due 2006 and
the 9 1/2% senior notes due 2009 of Global Crossing Holdings Ltd. and the
senior credit facility, including the amortization of deferred financing
fees, each assumed issued at the earliest date presented.
(17) These adjustments represent the assumed preferred stock dividends
incurred relating to the 6 3/8% cumulative convertible preferred stock
and 7% cumulative convertible preferred stock assumed issued as of the
earliest date presented.
(18) This amount reflects the assumed interest expense, at an 9% interest rate,
including the amortization of deferred financing fees incurred on the $1.1
billion debt assumed issued as of the earliest date presented in connection
with the acquisition of Racal Telecom.
(19) These adjustments represent the tax benefit resulting from the interest
expense assumed in connection with the debt issued for the acquisition of
Racal Telecom.
(20) Pro forma per share data are based on the number of Global Crossing
common shares that would have been outstanding had the merger occurred at
the earliest date presented. Global Crossing Ltd. issued 355,181,000
shares in connection with the Frontier merger.
86
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
GLOBAL CROSSING HOLDINGS LTD.
Dated: January 19, 2000 By: /s/ Robert Klug
-----------------------------------
Name: Robert Klug
Title: Director and Controller
