<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-61457
GLOBAL CROSSING HOLDINGS LTD.
(Exact name of registrant as specified in its charter)
BERMUDA 98-0186828
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
WESSEX HOUSE
45 REID STREET
HAMILTON HM12, BERMUDA
(Address of principal executive offices)
(441) 296-8600
(Registrant's telephone number, including area code)
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF GLOBAL CROSSING LTD., MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(A) AND (B) OF FORM 10-Q AND IS
THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
The number of shares, $0.01 par value each, of the registrant's common stock
outstanding as of August 2, 2000: 1,200,000 shares.
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1
<PAGE>
GLOBAL CROSSING HOLDINGS LTD. AND SUBSIDIARIES
For the Quarter Ended June 30, 2000
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Operations................ 3
Condensed Consolidated Balance Sheets.......................... 4
Condensed Consolidated Statements of Cash Flows................ 5
Condensed Consolidated Statements of Comprehensive Income...... 7
Notes to Condensed Consolidated Financial Statements........... 8
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 17
Item 6. Exhibits and Reports on Form 8-K.............................. 18
2
<PAGE>
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
GLOBAL CROSSING HOLDINGS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
REVENUE................................................. $ 320,867 $188,459 $ 657,622 $364,778
--------- -------- --------- --------
EXPENSES:
Cost of sales......................................... 255,680 80,905 455,248 150,292
Operations, administration and maintenance............ 54,843 14,299 105,197 26,325
Sales and marketing................................... 24,165 14,252 45,432 24,690
Network development................................... 24,816 6,350 42,924 13,632
General and administrative............................ 77,463 15,677 123,377 28,770
Depreciation and amortization......................... 65,541 3,828 118,489 4,039
Goodwill and intangibles amortization................. 26,318 - 55,983 -
--------- -------- --------- --------
528,826 135,311 946,650 247,748
--------- -------- --------- --------
OPERATING INCOME (LOSS)................................. (207,959) 53,148 (289,028) 117,030
EQUITY IN LOSS OF AFFILIATES............................ (13,431) (2,806) (19,060) (5,542)
MINORITY INTEREST....................................... 3,101 - (12,630) -
OTHER INCOME (EXPENSE):
Interest income....................................... 22,243 17,247 43,187 31,607
Interest expense...................................... (67,754) (22,675) (131,298) (46,454)
Other income (expense), net........................... (245) (7,683) (5,247) (7,683)
--------- -------- --------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (264,045) 37,231 (414,076) 88,958
Provision for income taxes............................ (11,282) (13,896) (14,712) (30,038)
--------- -------- --------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE............................. (275,327) 23,335 (428,788) 58,920
Cumulative effect of change in accounting principle,
net of income tax benefit........................... - - - (14,710)
--------- -------- --------- --------
NET INCOME (LOSS)....................................... (275,327) 23,335 (428,788) 44,210
Preferred stock dividends............................. (13,643) (14,197) (27,193) (27,241)
--------- -------- --------- --------
INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDER.......... $(288,970) $ 9,138 $(455,981) $ 16,969
========= ======== ========= ========
</TABLE>
See accompanying notes to these unaudited condensed consolidated financial
statements.
3
<PAGE>
GLOBAL CROSSING HOLDINGS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ----------
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents.................................. $ 781,287 $1,613,995
Restricted cash and cash equivalents....................... 55,415 17,092
Accounts receivable, net................................... 340,037 477,594
Other assets and prepaid costs............................. 272,549 201,779
----------- ----------
Total current assets....................................... 1,449,288 2,310,460
Restricted cash and cash equivalents......................... 38,921 138,118
Accounts receivable.......................................... 35,398 44,837
Property and equipment, net.................................. 5,397,642 3,336,895
Goodwill and intangibles, net................................ 1,836,737 1,971,357
Investment in and advances to/from affiliates, net........... 982,742 274,692
Other assets................................................. 777,778 245,414
----------- ----------
Total assets............................................. $10,518,506 $8,321,773
=========== ==========
LIABILITIES:
Current liabilities:
Accrued construction costs................................. $ 667,349 $ 275,361
Accounts payable and accrued liabilities................... 495,231 531,005
Deferred revenue........................................... 134,093 116,950
Current portion of long term debt.......................... 4,402 -
Other current liabilities.................................. 95,875 158,331
----------- ----------
Total current liabilities.................................. 1,396,950 1,081,647
Long-term debt............................................... 4,276,240 3,460,546
Deferred revenue............................................. 649,325 350,319
Deferred credits and other................................... 505,554 307,702
----------- ----------
Total liabilities........................................ 6,828,069 5,200,214
----------- ----------
MINORITY INTEREST.............................................. 490,931 351,338
----------- ----------
MANDATORILY REDEEMABLE PREFERRED STOCK......................... 487,073 485,947
----------- ----------
SHAREHOLDER'S EQUITY:
Common stock, par value $.01 per share, 1,200,000 shares
issued and outstanding, as of June 30, 2000 and
December 31, 1999, respectively.......................... 12 12
Additional paid-in capital and other shareholder's equity.. 3,263,073 2,406,126
Accumulated deficit........................................ (550,652) (121,864)
----------- ----------
Total shareholder's equity............................... 2,712,433 2,284,274
----------- ----------
Total liabilities and shareholder's equity............... $10,518,506 $8,321,773
=========== ==========
</TABLE>
See accompanying notes to these unaudited condensed consolidated balance sheets.
4
<PAGE>
GLOBAL CROSSING HOLDINGS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,2000 June 30,1999
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................... $ (428,788) $ 44,210
Adjustments to reconcile net loss to net
cash provided by operating activities:
Cumulative effect of change in accounting principle...... - 14,710
Equity in loss of affiliates............................. 19,060 5,542
Depreciation and amortization............................ 174,472 4,039
Provision for doubtful accounts.......................... 4,309 3,683
Stock related expenses................................... 7,897 8,556
Deferred income taxes.................................... (4,306) 14,513
Non-cash cost of sales................................... 211,374 114,125
Minority Interest........................................ 12,630 -
Changes in operating assets and liabilities.............. 297,619 (32,271)
----------- ---------
Net cash provided by operating activities.............. 294,267 177,107
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for construction in progress and capacity
available for sale........................................ (610,419) (568,472)
Investments in and advances to/from affiliates, net........ (543,732) (12,884)
Effect of the consolidation of PC-1, net of cash acquired.. (19,979) -
Change in restricted cash and cash equivalents............. 78,788 32,143
Purchases of marketable equity securities.................. (100,247) -
Purchases of property and equipment........................ (367,405) (16,296)
----------- ---------
Net cash used in investing activities.................. (1,562,994) (565,509)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt............................... 132,227 409,083
Repayment of long term debt................................ (30,714) (125,367)
Preferred dividends........................................ (26,250) (26,104)
Finance costs incurred..................................... - (3,238)
Minority interest investment in subsidiary................. 60,462 -
Cash contributions from GCL................................ 300,294 -
----------- ---------
Net cash provided by financing activities.............. 436,019 254,374
----------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................... (832,708) (134,028)
CASH AND CASH EQUIVALENTS, beginning of period............... 1,613,995 803,427
----------- ---------
CASH AND CASH EQUIVALENTS, end of period..................... $ 781,287 $ 669,399
=========== =========
</TABLE>
See accompanying notes to these unaudited condensed consolidated financial
statements.
5
<PAGE>
GLOBAL CROSSING HOLDINGS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,2000 June 30,1999
------------ -------------
<S> <C> <C>
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING ACTIVITIES:
Costs incurred for construction in progress and
capacity available for sale............................................ $(878,731) $(604,031)
Accrued construction costs.............................................. 231,171 29,223
Deferred finance costs capitalized...................................... 8,970 7,089
Capital lease obligations............................................... 37,141 (753)
--------- ---------
Cash paid for construction in progress and capacity
available for sale..................................................... $(610,419) $(568,472)
========= =========
Non-cash purchases of property and equipment............................ $ - $ (38,300)
========= =========
Investment affiliates:
Cost of investment in affiliates...................................... $(680,318) $ (12,884)
Effects of consolidation of PCL....................................... (263,414) --
Transfer of investment in joint venture from shareholder.............. 400,000 --
--------- ---------
$(543,732) $ (12,884)
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid and capitalized........................................... $ 193,652 $ 40,569
========= =========
Interest paid (net of capitalized interest)............................. $ 94,776 $ 14,832
========= =========
Cash paid for taxes..................................................... $ - $ 9,381
========= =========
</TABLE>
See accompanying notes to these unaudited condensed consolidated financial
statements.
6
<PAGE>
GLOBAL CROSSING HOLDINGS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2000 1999 2000 1999
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Net income (loss)........................ $(275,327) $23,335 $(428,788) $44,210
Unrealized gain on securities............ 257,501 - 257,501 -
Foreign currency translation adjustment.. (66,860) (4,294) (89,433) (9,224)
--------- ------- --------- -------
Comprehensive income (loss).............. $ (84,686) $19,041 $(260,720) $34,986
========= ======= ========= =======
</TABLE>
See accompanying notes to these unaudited condensed consolidated financial
statements.
7
<PAGE>
GLOBAL CROSSING HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(In thousands except share and per share amounts)
(Unaudited)
(1) Organization and Background
Global Crossing Holdings Ltd., a Bermuda company, ("GCH", and together with
its consolidated subsidiaries, the "Company"), is a wholly owned subsidiary of
Global Crossing Ltd. ("GCL", and together with its consolidated subsidiaries,
"Global Crossing"). Global Crossing is building and offering services over the
world's first independent global fiber optic network, consisting of 101,000
announced route miles serving five continents, 27 countries and more than 200
major cities. Upon completion of our currently announced systems, our network
and our telecommunications and Internet product offerings will be available in
markets constituting over 80% of the world's international communications
traffic.
Global Crossing's strategy is to be the premier provider of global
broadband Internet Protocol ("IP") and data services for both wholesale and
retail customers. Global Crossing is building a state-of-the-art fiber optic
network that management believes to be of unprecedented global scope and scale
to serve as the backbone for this strategy. Management believes that the Global
Crossing's network will enable it to be the low cost service provider in most of
its addressable markets.
Global Crossing Holdings Ltd. subsidiaries' operations includes the
operations of the following acquired entities: Global Marine Systems (acquired
July 2, 1999), Racal Telecom (acquired November 24, 1999) and a 50% interest in
the Hutchison Global Crossing joint venture (acquired January 12, 2000). The
acquisition of these entities is hereinafter referred to as the "Acquisitions."
In addition, the Company has a 93% ownership interest in Asia Global Crossing as
of June 30, 2000.
Asia Global Crossing, a joint venture with Softbank Corp. and Microsoft
Corporation, intends to become the first truly pan-Asian carrier to offer
worldwide bandwidth and data communications. The Asia Global Crossing joint
venture was established on November 24, 1999.
At December 31, 1999, the Company beneficially owned 57.75% of Pacific
Crossing Ltd. Before January 1, 2002, the Company's investment in Pacific
Crossing Ltd. was accounted for under the equity method because the Company was
not able to exercise effective control over Pacific Crossing Ltd. In March 2000,
the Company increased its interest in Pacific Crossing Ltd. to 64.5% and the
Pacific Crossing Ltd. Shareholders agreement was amended to give the Company
effective control due Pacific Crossing Ltd. As a result, the Company has
consolidated Pacific Crossing Ltd. as of January 1, 2000.
(2) Basis of Presentation
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial reporting and Securities and Exchange
Commission (SEC) regulations. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, the unaudited interim
condensed consolidated financial statements reflect all adjustments necessary to
a fairly present the results of operations, financial position and cash flows
for the periods presented. The results of operations for any interim period are
not necessarily indicative of results for the full year. These financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999.
(3) Significant Accounting Policies
Revenue Recognition - Revenue from Capacity Purchase Agreements ("CPAs")
that meet the criteria of sales-type lease accounting are recognized in the
period that the rights and obligations of ownership transfer to the purchaser,
which occurs when (i) the purchaser obtains the right to use the capacity, which
can only be suspended if the purchaser fails to pay the full purchase price or
fulfill its contractual obligations, (ii) the purchaser is obligated to pay
Operations, Administration and Maintenance ("OA&M") costs and (iii) the segment
of a system related to the capacity purchased is available for service. Certain
customers who have entered into CPAs for capacity have paid deposits toward the
purchase price which have been included as deferred revenue in the accompanying
consolidated balance sheets.
Prior to July 1, 1999, substantially all CPAs were treated as sales-type
leases as described in Statement of Financial Accounting Standards No. 13,
"Accounting for Leases" ("SFAS 13"). On July 1, 1999, the Company adopted
Financial Accounting Standards Board Interpretation No. 43, "Real Estate Sales,
an interpretation of FASB Statement No. 66" ("FIN 43"), which requires
prospective transactions to meet the criteria set forth in Statement of
Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate"
("SFAS 66") to qualify for sales-type lease accounting. Since sales of
terrestrial capacity did not meet the new criteria, the terrestrial portion of
CPAs executed subsequent to June 30, 1999 were recognized over the terms of the
contracts, as services.
8
<PAGE>
GLOBAL CROSSING HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Unaudited)
Global Crossing offers customers flexible bandwidth products to multiple
destinations and anticipates that many of the contracts for subsea circuits
entered into will be part of a service offering. Therefore, the Company
anticipates that many of these contracts will not meet the criteria of sales-
type lease accounting and will be accounted for as operating leases.
Consequently, the Company will defer revenue related to those circuits and
amortize that revenue over the appropriate term of the contract. Accordingly,
the Company will treat cash received, but not recognized, as deferred revenue.
In certain circumstances, should a contract meet all of the requirements of
sales-type lease accounting, the Company will recognize revenue without deferral
upon payment and activation.
The principal effect of the change in the type of contracts offered to the
Global Crossing's customers beginning on January 1, 2000 is that an increasing
percentage of capacity sales will be accounted for as operating leases rather
than sales-type leases, resulting in more revenue from such sales being deferred
into future periods than was previously the case. Accordingly, this change in
contract terms will reduce revenue recognized upon activation of circuits in
earlier periods and increase revenue recognized in later periods.
Impairment of Long-Lived Assets - The Company periodically evaluates whether
facts and circumstances have occurred that indicate the carrying amount of a
long-lived asset may be impaired. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if a write-down to market value or
discounted cashflow is required. During the three months ended June 30, 2000,
the Company wrote down approximately $38 million of long-lived assets related to
accrued losses on sales contracts.
Marketable Equity Securities - Investments covered under the scope of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" are classified as "available for
sale" and are carried at fair value with any unrealized gain or loss, net of
tax, being included in other shareholder's equity. For the three and six months
ended June 30, 2000, the Company had unrealized gain on securities of $258
million, net of provision for income taxes of approximately $172 million.
Pending Accounting Standards - In December 1999, the SEC issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which is required to be adopted by the Company in the quarter ended
December 31, 2000. SAB 101 clarifies certain conditions regarding the
culmination of an earnings process and customer acceptance requirements in order
to recognize revenue. The Company's management is currently assessing the impact
of SAB 101 on the results of operations and financial position of the Company.
(4) Net Income (Loss) Applicable to Common Shareholder
Since the Company is a wholly owned subsidiary of GCL, per share information
is not presented.
(5) Acquisitions
The Acquisitions are being accounted for under the purchase method of
accounting for business combinations. The initial purchase price was allocated
based on the estimated fair value of acquired assets and liabilities at the date
of acquisition. The Company will make final purchase price allocations based
upon final values for certain assets and liabilities. As a result, the final
purchase price allocation may differ from the presented estimate. Following is
the unaudited pro forma results of the Company, assuming the Acquisitions had
been completed at the beginning of the period presented:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1999 1999
------------- -----------
<S> <C> <C>
Revenue................................................ $376,136 $ 732,778
======== =========
Income (loss) applicable to common shareholder before
cumulative effect of change in accounting principle.. $(51,426) $(100,353)
======== =========
Income (loss) applicable to common shareholder......... $(51,426) $(115,063)
======== =========
</TABLE>
9
<PAGE>
(6) Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December
June 30,2000 31, 1999
------------ ----------
<S> <C> <C>
Land..................................... $ 347 $ 199
Buildings................................ 24,352 21,755
Leasehold improvements................... 31,775 29,096
Furniture, fixtures and equipment........ 683,996 493,945
Transmission equipment................... 2,242,346 968,972
---------- ----------
2,982,816 1,513,967
Accumulated depreciation................. (137,737) (44,695)
---------- ----------
2,845,079 1,469,272
Construction in progress................. 2,552,563 1,867,623
---------- ----------
Total property and equipment, net........ $5,397,642 $3,336,895
========== ==========
</TABLE>
(7) Segment Information
Global Crossing is a worldwide provider of Internet and long distance
telecommunications services and facilities services supplying its customers with
global "point to point" connectivity and, through its Global Marine Systems
subsidiary, providing cable installation and maintenance services. Global
Crossing's reportable segments include telecommunications services and
installation and maintenance services. Global Crossing's chief decision maker
monitors the revenue streams of the various products and geographic locations.
Global Crossing's chief decision maker uses Adjusted EBITDA to monitor its
compliance with Global Crossing's financial covenants and to measure the
performance and liquidity of its reportable segments. The operations are managed
based on the delivery of multiple, integrated services to customers over a
single network. Because this monitoring and evaluation does not take place at
the Company level, no business segment information is provided for the Company.
(8) Reclassifications
Certain prior year amounts have been reclassified in the condensed
consolidated financial statements for consistent presentation to current year
amounts.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Recent Financial Accounting Developments
During the third and fourth quarters of 1999, changes in our business
activities, together with a newly effective accounting standard, caused us to
modify some of our practices regarding recognition of revenue and costs related
to sales of capacity. None of the accounting practices described below affect
our cash flows.
As a result of Financial Accounting Standards Board (FASB) Interpretation
No. 43, "Real Estate Sales, an interpretation of FASB Statement No. 66" (FIN
43), which became effective July 1, 1999, we have accounted for revenue from
terrestrial circuits sold after that date as operating leases and have amortized
that revenue over the terms of the related contracts. Previously, we had
recognized these sales as current revenue upon activation of the circuits. This
deferral in revenue recognition has no impact on cash flow.
With the consummation of Global Crossing's acquisition of Frontier
Corporation on September 28, 1999, service offerings became a significant source
of our revenue. Consequently, we initiated service contract accounting for our
subsea systems during the fourth quarter, because we, since that date, no longer
hold subsea capacity exclusively for sale. As a result, since the beginning of
the fourth quarter, we have depreciated investments in both subsea and
terrestrial systems over their remaining economic lives and have recognized
revenue related to service contracts over the terms of the contracts. We have
recognized revenue and costs related to the sale of subsea circuits upon
activation, if the criteria of sales-type lease accounting have been satisfied
with respect to those circuits.
During the fourth quarter, our global network service capabilities were
significantly expanded by the activation of several previously announced systems
and by the integration of other networks obtained through acquisition and joint
venture agreements. With this network expansion, we began offering our customers
flexible bandwidth products to multiple destinations, which makes the historical
practice of fixed, point-to-point routing of traffic and restoration capacity
both impractical and inefficient. To ensure the required network flexibility, we
will modify our future capacity purchase agreements and our network management
in a manner that precludes the use of sales-type lease accounting.
Because of these contract changes and the network management required to meet
customer demands for flexible bandwidth, multiple destinations and system
performance, we anticipate that most of the contracts for subsea circuits
entered into after January 1, 2000 will be part of a service offering and,
therefore, will not meet the criteria of sales-type lease accounting and will be
accounted for as operating leases. Consequently, we will defer revenue related
to those circuits and amortize it over the appropriate term of the contract. In
certain circumstances, if a contract meets all of the requirements of sales-type
lease accounting, we will recognize revenue without deferral upon payment and
activation.
The principal effect of the change in the type of contracts offered to our
customers beginning on January 1, 2000 is that an increasing percentage of our
capacity sales will be accounted for as operating leases rather than sales- type
leases, resulting in more revenue from such sales being deferred into future
periods than was previously the case. Accordingly, this change in contract terms
will reduce revenue recognized upon activation of the circuits in earlier
periods and increase revenue recognized in later periods.
We note that accounting practice and authoritative guidance regarding the
applicability of sales-type lease accounting to the sale of capacity is still
evolving. Based on the accounting practices described above, we believe that
additional changes, if any, in accounting practice or authoritative guidance
affecting sales of capacity would have little or no impact on our financial
position, results of operations, cash flows and the financial statements taken
as a whole.
The Company completed its acquisitions of Global Marine Systems (acquired
July 2, 1999), Racal Telecom (acquired November 24, 1999) and a 50% interest in
the Hutchison Global Crossing joint venture (completed January 12, 2000). The
acquisition of these entities is referred to as the "Acquisitions." The increase
in revenue and expenses for the three and six months ended June 30, 2000 is
primarily due to these transactions. As the Acquisitions occurred subsequent to
June 30, 1999, the comparability of the results of operations for the three and
six months ended June 30, 2000 and 1999 is limited.
Results of Operations for the Three Months Ended June 30, 2000 and 1999
Revenue. Revenue for the three months ended June 30, 2000 increased 70% to
$321 million as compared to $189 million for the three months ended June 30,
1999. The increase is due to the Acquisitions, which are included in the results
of the second quarter of 2000, partially offset by the Company's business
practice of selling capacity under terms that require
11
<PAGE>
amortization of revenue over the contract life rather than terms that qualify
for revenue recognition upon the activation of the circuits.
Cost of sales. Cost of sales for the three months ended June 30, 2000 was
$256 million, or 80% of revenue, compared to $81 million, or 43% of revenue, for
the three months ended June 30, 1999. The increase is primarily attributable to
the increase in revenue. Reduced margins for the three months ended June 30,
2000 compared to the three months ended June 30, 1999 was due to lower margins
in the businesses acquired, lower prices of subsea capacity sold to customers
and a $38 million charge for losses on sales contracts.
Operations, administration and maintenance (OA&M). OA&M costs for the three
months ended June 30, 2000 were $55 million, or 17% of revenue, compared to $14
million, or 8% of revenue, for the three months ended June 30, 1999. The
increase is primarily a result of the cost incurred in connection with the
development of the Global Network Operations Center, the expansion of the Global
Crossing Network and the expenses of the Acquisitions.
Sales and marketing. Sales and marketing expenses for the three months ended
June 30, 2000 were $24 million, or 7% of revenue, compared to $14 million, or 8%
of revenue, for the three months ended June 30, 1999. The increase from 1999 was
due to the additional expenses attributable to the Acquisitions, expenses
related to additions in headcount, plus occupancy costs, marketing costs and
other promotional expenses.
Network development. Network development costs for the three months ended
June 30, 2000 was $25 million, or 8% of revenue, compared to $6 million, or 3%
of revenue, for the three months ended June 30, 1999. The increase is due to the
additional expenses attributable to the Acquisitions, additional salaries,
employee benefits and professional fees associated with the expansion of the
Global Crossing Network.
General and administrative. General and administrative expenses for the three
months ended June 30, 2000 were $77 million, or 24% of revenue, compared to $16
million, or 8% of revenue, for the three months ended June 30, 1999. The
increase was comprised principally of salaries, employee benefits and recruiting
from the Company's increased staffing for multiple systems, travel, professional
fees, insurance costs and occupancy costs. The increase in general and
administrative expenses is primarily attributable to the additional expenses
attributable to the Acquisitions.
Depreciation and amortization. Depreciation and amortization for the three
months ended June 30, 2000 was $66 million, or 21% of revenue, compared to $4
million for the three months ended June 30, 1999. The increase is due to the
Acquisitions and depreciation of subsea systems placed in service.
Goodwill and intangibles amortization. Goodwill and intangibles amortization
for the three months ended June 30, 2000 was $26 million resulting from the
Acquisitions, which occurred after June 30, 1999.
Minority interest. Minority interest for the three months ended June 30, 2000
was $3 million and relates to minority interest in net losses of PC-1 and AGC.
Equity in loss of affiliates. Equity in loss of affiliates was $13 million,
compared to $3 million for the three months ended June 30, 2000 and 1999,
respectively. The increase is due to losses of the Hutchison Global Crossing
joint venture that was entered into in January 2000.
Interest income and interest expense. Interest income for the three months
ended June 30, 2000 was $22 million, compared to $17 million for the three
months ended June 30, 1999. The increase is due to interest earned on cash
raised from financings and on capacity purchase agreement deposits. Interest
expense for the three months ended June 30, 2000 was $68 million, compared to
$23 million for the three months ended June 30, 1999. The increase is due to
higher levels of debt outstanding resulting from the Acquisitions and capital
spending on the expansion of the Global Crossing Network.
Provision for income taxes. We recognized a provision for income taxes of $11
million and $14 million for the three months ended June 30, 2000 and 1999,
respectively, to provide for taxes on profits earned from telecommunications
services, installation and maintenance and other income where subsidiaries of
the Company have a presence in taxable jurisdictions.
Net income (loss). Net loss for the three months ended June 30, 2000, was
$275 million compared to net income of $23 million for the three months ended
June 30, 1999.
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Income (loss) applicable to common shareholder. During the six months ended
June 30, 2000, the Company reported net loss applicable to common shareholder of
$289 million compared to net income of $17 million for the six months ended June
30, 1999.
Results of Operations for the Six Months Ended June 30, 2000 and June 30, 1999
Revenue. Revenue for the six months ended June 30, 2000 increased 80% to $658
million as compared to $365 million for the six months ended June 30, 1999. The
increase is due to the Acquisitions, which are included in the results of 2000,
partially off-set by the Company's business practice of selling capacity under
terms that require amortization of revenue over the contract life rather than
terms that qualify for revenue recognition upon the activation of the circuits.
Cost of sales. Cost of sales for the six months ended June 30, 2000 was
$455 million, or 69% of revenue, compared to $150 million, or 41% of revenue,
for the six months ended June 30, 1999. The increase is primarily attributable
to the increase in revenue. Reduced margins for the six months ended June 30,
2000 compared to the six months ended June 30, 1999 was due to lower margins in
the businesses acquired and lower prices of subsea capacity sold to customers.
Non-cash cost of undersea capacity sold was $211 million, including the $38
million charge for accrued losses, and $114 million during the six months ended
June 30, 2000 and 1999, respectively.
Operations, administration and maintenance (OA&M). OA&M costs for the six
months ended June 30, 2000 were $105 million, or 16% of revenue, compared to $26
million, or 7% of revenue, for the six months ended June 30, 1999. The increase
is primarily a result of the cost incurred in connection with the development of
the Global Network Operations Center, the expansion of the Global Crossing
Network and the expenses of the Acquisitions.
Sales and marketing. Sales and marketing expenses for the six months ended
June 30, 2000 were $45 million, or 7% of revenue, compared to $25 million, or 7%
of revenue, for the six months ended June 30, 1999. The increase from 1999 was
due to the additional expenses attributable to the Acquisitions, expenses
related to additions in headcount, plus occupancy costs, marketing costs and
other promotional expenses.
Network development. Network development costs for the six months ended June
30, 2000 was $43 million, or 7% of revenue, compared to $14 million, or 4% of
revenue, for the six months ended June 30, 1999. The increase is due to the
additional expenses attributable to the Acquisitions, additional salaries,
employee benefits and professional fees associated with the expansion of the
Global Crossing Network.
General and administrative. General and administrative expenses for the six
months ended June 30, 2000 were $123 million, or 19% of revenue, compared to $29
million, or 8% of revenue, for the six months ended June 30, 1999. The increase
was comprised principally of salaries, employee benefits and recruiting from the
Company's increased staffing for multiple systems, travel, professional fees,
insurance costs and occupancy costs. The increase in general and administrative
expenses is primarily attributable to the additional expenses attributable to
the Acquisitions.
Depreciation and amortization. Depreciation and amortization for the six
months ended June 30, 2000 was $118 million, compared to $4 million for the six
months ended June 30, 1999. The increase is due to the Acquisitions and
depreciation of subsea systems placed in service.
Goodwill and intangibles amortization. Goodwill and intangibles amortization
for the six months ended June 30, 2000 was $56 million resulting from the
Acquisitions, which occurred after June 30, 1999.
Equity in loss of affiliates. Equity in loss of affiliates was $19 million,
compared to $6 million for the six months ended June 30, 2000 and 1999,
respectively. The increase is due to losses of the Hutchison Global Crossing
joint venture that was entered into in January 2000.
Minority interest. Minority interest for the six months ended June 30, 2000
was $13 million and relates to minority interest in income of PC-1 and AGC.
Interest income and interest expense. Interest income for the six months
ended June 30, 2000 was $43 million, compared to $32 million for the six months
ended June 30, 1999. The increase is due to interest earned on cash raised from
financings and on Capacity purchase agreement deposits. Interest expense for the
six months ended June 30, 2000 was $131 million, compared to $46 million for the
six months ended June 30, 1999. The increase is due to higher levels of debt
outstanding resulting from the Acquisitions and capital spending on the
expansion of the Global Crossing Network.
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Provision for income taxes. We recognized a provision for income taxes of $15
million and $30 million for the six months ended June 30, 2000 and 1999,
respectively, to provide for taxes on profits earned from telecommunications
services, installation and maintenance and other income where subsidiaries of
the Company have a presence in taxable jurisdictions.
Cumulative effect of change in accounting principle. The Company adopted
Statement of Position 98-5 (SOP 98-5), "Reporting on the Cost of Start-Up
Activities," issued by the American Institute of Certified Public Accountants,
during the six months ended June 30, 1999. SOP 98-5 requires that certain start-
up expenditures previously capitalized during system development must now be
expensed. The Company incurred a one-time charge during the six months ended
June 30, 1999 of $15 million (net of tax benefit of $1.4 million) that
represents start-up costs incurred and capitalized during previous periods.
Net income (loss). Net loss for the six months ended June 30, 2000, was $429
million compared to net income of $44 million for the six months ended June 30,
1999.
Income (loss) applicable to common shareholder. During the six months ended
June 30, 2000, the Company reported net loss applicable to common shareholder of
$456 million compared to net income of $17 million for the six months ended June
30, 1999.
Liquidity and Capital Resources
Global Crossing estimates the total remaining cost of developing and
deploying the announced systems on the Global Crossing Network to be
approximately $3.3 billion, excluding costs of potential future upgrades. The
remaining financing needed to complete the Global Crossing Network and to fund
working capital requirements is expected to be obtained from issuances of common
or preferred stock, bank financing or through other corporate financing. Some of
this financing is expected to be incurred by wholly-owned subsidiaries or joint
venture companies as well as by GCL.
The Company has extended limited amounts of financing to customers in
connection with certain capacity sales. The financing terms provide for
installment payments of up to four years. The Company believes that its
extension of financing to its customers will not have a material effect on the
Company's liquidity.
Cash provided by operating activities was $294 million for the six months
ended June 30, 2000 and $177 million for the six months ended June 30, 1999. The
balances and principally represent cash received from capacity sales and
interest income received, less sales and marketing, network development and
general and administrative expenses paid.
Cash used in investing activities was $1,563 million and $566 million for the
six months ended June 30, 2000 and 1999, respectively and represents cash paid
for construction in progress, purchases of property, plant and equipment,
purchases of marketable equity securities and cash investments in affiliates.
Cash provided by financing activities was $436 million and $254 for the six
months ended June 30, 2000 and 1999, respectively, and primarily represents
borrowings under the senior secured corporate facility and cash contributions
from GCL, partially offset by repayments of borrowings under long term debt and
preferred dividends
Global Crossing, including Global Crossing Holdings, has a substantial amount
of indebtedness. Based upon the current level of operations, management believes
that the Company's cash flows from operations, together with available
borrowings under its credit facility, and its continued ability to raise
capital, will be adequate to meet the Company's anticipated requirements for
working capital, capital expenditures, acquisitions and other discretionary
investments, interest payments and scheduled principal payments for the
foreseeable future. There can be no assurance, however, that the Company's
business will continue to generate cash flow at or above current levels or that
currently anticipated improvements will be achieved. If the Company is unable to
generate sufficient cash flow and raise capital to service the Company's debt,
the Company may be required to reduce capital expenditures, refinance all or a
portion of its existing debt or obtain additional financing.
Inflation
Management does not believe that its business is impacted by inflation to a
significantly different extent than the general economy.
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Euro Conversion
On January 1, 1999, a single currency called the Euro was introduced in
Europe. Eleven of the fifteen member countries of the European Union agreed to
adopt the Euro as their common legal currency on that date. Fixed conversion
rates between these countries' existing currencies (legacy currencies) and the
Euro were established as of that date. The legacy currencies are scheduled to
remain legal tender in these participating countries between January 1, 1999 and
January 1, 2002 (not later than July 1, 2002). During this transition period,
parties may settle transactions using either the Euro or a participating
country's legacy currency.
As most of the Company's sales and expenditures are denominated in United
States dollars, management does not believe that the Euro conversion will have a
material adverse impact its the business or financial condition. The Company
does not expect the cost of system modifications to be material and the Company
will continue to evaluate the impact of the Euro conversion.
Information Regarding Forward-Looking Statements
The Company has included "forward-looking statements" throughout this
quarterly report filed on Form 10-Q. These forward-looking statements describe
management's intentions, beliefs, expectations or predictions for the future.
The Company uses the words "believe," "anticipate," "expect," "intend" and
similar expressions to identify forward-looking statements. Such forward-
looking statements are subject to a number of risks, assumptions and
uncertainties that could cause the Company's actual results to differ materially
from those projected in such forward-looking statements. These risks,
assumptions and uncertainties include:
. the ability to complete systems within the currently estimated time frames
and budgets;
. the ability to compete effectively in a rapidly evolving and price
competitive marketplace;
. changes in business strategy;
. changes in the nature of telecommunications regulation in the United States
and other countries;
. the successful integration of newly-acquired businesses; and
. the impact of technological change.
This list is only an example of some of the risks, uncertainties and assumptions
that may affect the Company's forward-looking statements. The Company undertakes
no obligation to update any forward-looking statements made by it.
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Part II
Other Information
Item 1. Legal Proceedings
On May 22, 2000, Global Crossing Ltd. and its subsidiary, South American
Crossing (Subsea) Ltd., filed a lawsuit against Tyco Submarine Systems Ltd. in
the United States District Court for the Southern District of New York. Global
Crossing's complaint alleges fraud, theft of trade secrets, breach of contract,
and defamation related to Tyco's agreements to install the South American
Crossing fiber-optic cable system. Global Crossing seeks damages, including
punitive damages, in excess of $1 billion and attorneys' fees and costs, as well
as a declaration that the construction and development agreement with Tyco is
void due to Tyco's alleged fraud and injunctive relief barring Tyco from further
misappropriation of trade secrets and confidential information. On June 13,
2000, Tyco answered the complaint, denying the material allegations and
asserting a variety of defenses to such claims. Additionally, Tyco asserted
counterclaims that South American Crossing (Subsea) Ltd. breached its
construction and development agreement with Tyco. Tyco seeks damages of not less
than $150 million, attorneys' fees and costs and a declaration that, among other
things, the construction and development agreement is a valid, enforceable
contract and that South American Crossing (Subsea) Ltd. breached the contract
or, in the alternative, terminated the contract for convenience. On July 5,
2000, Global Crossing answered Tyco's counterclaims, denying the material
allegations.
In addition, on May 22, 2000, Global Crossing's subsidiary, Atlantic
Crossing Ltd., together with certain of its affiliates, filed arbitration claims
against Tyco for breaches of its obligations in connection with various
contracts for the development of the Atlantic Crossing-1 fiber-optic cable
system. Global Crossing seeks unspecified monetary damages, a declaration that
certain of its obligations under the various contracts relating to Atlantic
Crossing-1 are terminated and a return of misappropriated intellectual property.
On June 22, 2000, Tyco responded to such claims, denying the material
allegations. Tyco additionally asserted counterclaims that Global Crossing and
its subsidiaries breached their various obligations under the various contracts
relating to Atlantic Crossing-1. Tyco seeks, among other things, the denial of
all relief sought by Global Crossing and awards aggregating not less than $155
million and unspecified damages for breach of the agreements.
Global Crossing does not believe that the commencement of these actions
with Tyco will have an impact on Global Crossing's network and/or the timely
completion of any of its systems. Global Crossing intends to pursue its claims
against Tyco vigorously and to defend itself vigorously against Tyco's
counterclaims, which counterclaims it believes to be without merit.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K.
None
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Global Crossing Holdings Ltd.,
a Bermuda corporation
By: /s/ Rob Klug
--------------
Rob Klug
Controller
(Principal Accounting Officer)
August 14, 2000
17
