<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 5, 2000
REGISTRATION NO. 333-37666
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ASIA GLOBAL CROSSING LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
BERMUDA 4813 98-022-4159
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
WESSEX HOUSE
45 REID STREET
HAMILTON HM12, BERMUDA
(441) 296-8600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CT CORPORATION SYSTEM
111 EIGHTH AVENUE
NEW YORK, NY 10011
(212) 479-8200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C> <C>
ALAN KLEIN, ESQ. CHARLES F. CARROLL, ESQ. ALISON RESSLER, ESQ.
SIMPSON THACHER & BARTLETT ASIA GLOBAL CROSSING LTD. SULLIVAN & CROMWELL
425 LEXINGTON AVENUE 360 N. CRESCENT DRIVE 1888 CENTURY PARK EAST
NEW YORK, NY 10017 BEVERLY HILLS, CA 90210 LOS ANGELES, CA 90067
(212) 455-2000 (310) 385-5200 (310) 712-6600
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis under Rule 415 under the Securities Act of 1933,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
under Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed under Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed under Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made under Rule 434, check
the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING UNDER SAID SECTION 8(a), MAY
DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO
BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION. DATED SEPTEMBER 5, 2000.
53,000,000 Shares
[Asia Global Crossing Logo]
Class A Common Stock
------------------
This is an initial public offering of shares of Class A common stock of
Asia Global Crossing Ltd. All of the shares of Class A common stock are being
sold under this prospectus by Asia Global Crossing.
Before this offering, there has been no public market for the Class A
common stock. Asia Global Crossing estimates that the initial public offering
price per share of the Class A common stock will be between $14.00 and $16.00.
Asia Global Crossing has applied for quotation of the Class A common stock on
the Nasdaq National Market under the symbol "AGCX".
See "Risk Factors" beginning on page 11 to read about factors you should
consider before buying shares of the Class A common stock.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Asia Global Crossing.......... $ $
</TABLE>
To the extent that the underwriters sell more than 53,000,000 shares of
Class A common stock, the underwriters have the option to purchase up to an
additional 7,950,000 shares of Class A common stock from Asia Global Crossing at
the initial public offering price less the underwriting discount.
------------------
The underwriters expect to deliver the shares on , 2000.
GOLDMAN, SACHS & CO. SALOMON SMITH BARNEY
MERRILL LYNCH & CO.
CHASE H&Q
CIBC WORLD MARKETS
CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEX. BROWN
LEHMAN BROTHERS
ABN AMRO ROTHSCHILD
A DIVISION OF ABN AMRO
INCORPORATED
------------------
Prospectus dated , 2000.
<PAGE> 3
[Five globes in a row showing different sides of the globe. Hand pointing to the
middle globe, which shows Asia. Arrow pointing to a row of signs for different
applications enabled by broadband technology, including a document, an envelope,
a speaker, a video camera, a sign symbolizing science and technology and a sign
symbolizing the globe.]
[Map of Asia and the western United States marked to indicate our Pacific
Crossing cable system.]
[Map of East Asia marked to indicate our East Asia Crossing cable system.]
[Map of Hong Kong, the New Territories and Lantau Island marked to indicate the
Hutchison Global Crossing terrestrial network.]
[Map of Japan marked to indicate the Global Access Limited terrestrial network
and landing sites of our Pacific Crossing and East Asia Crossing cable systems.]
[Text box with the following language: All depictions are based on completion of
announced systems. The northern segment of Pacific Crossing is in service. The
southern segment is scheduled to be ready for service by year-end 2000.
Hutchison Global Crossing is in service. The Ajigaura-Tokyo loop of Global
Access Limited is in service. The Shima-Osaka-Nagoya segment is expected to be
ready for service during the third quarter of 2000. The Tokyo-Shima-Nagoya
segment is expected to be ready for service during the second quarter of 2001.
East Asia Crossing is expected to link Japan and Hong Kong by year-end 2000. The
Philippines, Malaysia, Singapore and China, each of which is subject to
negotiations with regional partners, regulatory issues and other risks, could be
connected to East Asia Crossing by year-end 2001.]
<PAGE> 4
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER TO SELL THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT COVER OF
THIS PROSPECTUS.
------------------
We will apply to the Bermuda Monetary Authority for its consent to the
issue and transfer of the shares of Class A common stock that we may sell under
this prospectus. Approvals or permissions we expect to receive from the Bermuda
Monetary Authority do not constitute a guaranty by the Bermuda Monetary
Authority as to our performance or our credit worthiness. Accordingly, in giving
those approvals or permissions, the Bermuda Monetary Authority will not be
liable for our performance or default or for the correctness of any opinions or
statements expressed in this document.
We will file this document as a prospectus with the Registrar of Companies
in Bermuda. That filing will not constitute a guaranty by the Registrar as to
our performance or creditworthiness, nor does it suggest that the Registrar is
liable for our performance or default or the correctness of any opinions or
statements expressed in this document.
The Bermuda Monetary Authority has classified us as non-resident in Bermuda
for exchange control purposes. Accordingly, we may convert currency, other than
Bermuda currency, held for our account to any other currency without
restriction. Persons, firms or companies regarded as residents of Bermuda for
exchange control purposes require specific consent under the Exchange Control
Act, 1972 of Bermuda, and regulations promulgated under that Act, to purchase
any shares in our capital stock or any other securities that we may issue. Under
the terms of the consent that we expect the Bermuda Monetary Authority to give
to us, the issuance and transfer of the shares of Class A common stock between
persons, firms or companies regarded as non-resident in Bermuda for exchange
control purposes may be effected without further permission from the Bermuda
Monetary Authority.
3
<PAGE> 5
PROSPECTUS SUMMARY
This section contains a general summary of the information contained in
this prospectus. It may not include all the information that is important to
you. You should read the entire prospectus, including "Risk Factors" and the
financial statements and notes to those statements included in this prospectus,
before making an investment decision. Please also note that we have a limited
operating history, substantial indebtedness and substantial future capital
requirements.
The information in this prospectus assumes:
- the completion, concurrently with this offering, of the transactions
described under "Concurrent Transactions" on page 75; and
- the reallocation of our founding shareholders' percentage interests in us
as described under "Principal Shareholders -- Our Beneficial Ownership"
on page 72.
ASIA GLOBAL CROSSING
We intend to be a leading pan-Asian telecommunications carrier that
provides Internet, data, voice and Web-hosting services to wholesale and
business customers. We intend to offer data center services in Asia together
with GlobalCenter, Inc., a Global Crossing subsidiary.
Significant elements of our network are already operational, including:
- a trans-Pacific subsea cable;
- a key segment of our national network in Japan;
- a GlobalCenter data center in Tokyo; and
- the largest fully-fiber optic network in Hong Kong.
Directly and through joint ventures, we are currently constructing other
key elements of our network, including the following:
- an East Asian subsea cable;
- additional segments of our national networks in Japan and Hong Kong;
- city fiber networks in Tokyo and Osaka;
- two facilities in Tokyo providing collocation space; and
- additional GlobalCenter data centers in Tokyo and Hong Kong.
By the end of 2001, we expect our network to connect the principal
commercial and financial centers across Asia. In addition, we will offer our
customers worldwide Internet services and data services through seamless
connectivity within the Global Crossing network which, inclusive of our network,
is expected to span approximately 162,544 route kilometers, serving five
continents, 27 countries and more than 200 major cities.
In November 1999, we were formed as a joint venture among Global Crossing
Ltd., Microsoft Corporation and Softbank Corp. We intend to capitalize on the
anticipated significant growth in Asian Internet and telecommunications traffic
and the increasingly favorable regulatory environment. Our strategy is to form
strategic alliances or joint ventures in key markets in order to gain a
first-mover advantage, more readily penetrate local markets, overcome regulatory
barriers and develop exclusive relationships with leading telecommunications
providers in the Asian markets we intend to serve.
We currently offer the following services:
- managed bandwidth services to telecommunications carriers and Internet
companies;
- Internet transit services, including dedicated Internet access;
4
<PAGE> 6
- domestic and international private line services; and
- Web-hosting and Internet infrastructure services.
We intend to offer the following additional services:
- advanced Internet services, including e-mail hosting, unified messaging
and storage;
- data transport services; and
- integrated voice and data services, including multimedia services such as
video conferencing and e-commerce services.
We intend to replicate these network and service capabilities in each
market to which we extend our network. We also expect to benefit from Global
Crossing's telecommunications, sales and marketing expertise.
We have significant indebtedness, which we describe in the second risk
factor on page 11. We also need to obtain significant additional financing to
complete our network and implement our business plan. Until January 2000, we had
no revenues and minimal operating costs.
OUR CORPORATE INFORMATION
We are incorporated in Bermuda, and the address of our principal executive
offices is Wessex House, 45 Reid Street, Hamilton HM12, Bermuda. Our telephone
number is 441-296-8600. The address of our principal location in the United
States is 360 North Crescent Drive, Beverly Hills, California 90210. We also
have offices in Hong Kong and Tokyo.
All of our outstanding shares of common stock are currently held by Asia
Global Crossing Holdings Ltd. Upon consummation of this offering, we anticipate
that Asia Global Crossing Holdings will distribute to each of its shareholders,
other than Softbank, that shareholder's proportionate share of the total number
of shares of common stock we issue to Asia Global Crossing Holdings. Asia Global
Crossing Holdings will remain a wholly owned subsidiary of Softbank under a
different name. See "Principal Shareholders" beginning on page 72.
5
<PAGE> 7
THE OFFERING
Class A common stock
offered....................... 53.0 million shares
Common stock to be outstanding
after this offering......... 67.0 million shares of Class A common stock
481.8 million shares of Class B common stock
548.8 million aggregate shares
Voting rights................. Holders of our Class A common stock have one
vote per share, while holders of our Class B
common stock have 10 votes per share. After
this offering, the holders of our Class B
common stock will have approximately 98.8% of
the aggregate voting power of our capital
stock. Our founding shareholders, through their
ownership of our Class B common stock, will
have the power to elect all of our directors
and control shareholder decisions immediately
following this offering.
Conversion.................... Each share of Class B common stock will be
converted into one share of Class A common
stock upon the sale to a non-affiliate of our
founders. Shareholders of our Class A common
stock may not convert their shares into any
other class of our common stock.
Other common stock
provisions.................... With the exception of voting rights and
conversion rights, shares of our Class A common
stock and our Class B common stock are
identical.
Use of proceeds............... We intend to use the net proceeds of this
offering, together with the proceeds of our
anticipated concurrent debt offering, as
follows:
- to build our network;
- to make investments in telecommunications and
Internet companies and related businesses;
- to repay outstanding indebtedness under
shareholder loans;
- to purchase from Global Crossing shareholder
loans and future commitments it made to
Hutchison Global Crossing and Global Access
Limited; and
- for general corporate purposes.
Dividend policy............... We do not intend to pay dividends on our shares
of common stock in the foreseeable future.
Proposed Nasdaq National
Market symbol................. AGCX
The information above assumes the issuance of:
- 36.6 million additional shares of our Class B common stock to Global
Crossing at an assumed initial public offering price of $15.00 per share,
in connection with its contribution to us of its 49% interest in Global
Access Limited;
6
<PAGE> 8
- 9.2 million shares of our Class A common stock (assuming an initial
public offering price of $15.00 per share) to strategic investors in the
amounts indicated in "Business -- Recent Developments" on page 47; and
- 5.4 million shares of our Class A common stock and 444.6 million shares
of our Class B common stock to Asia Global Crossing Holdings for
distribution to its shareholders in the amounts indicated in "Principal
Shareholders" beginning on page 72.
The information above also assumes that Global Crossing will receive an
additional 595,500 shares of Class B common stock at an assumed initial public
offering price of $15.00 per share, which will reduce Goldman Sachs' interest in
us by an equal number of shares, in connection with Global Crossing's
contribution to us of its 50% interest in Hutchison Global Crossing. We explain
this transaction under "Concurrent Transactions -- Contribution of Global
Crossing's 50% interest in Hutchison Global Crossing" on page 75.
In addition, the information above does not include:
- 20.5 million shares of Class A common stock issuable upon the exercise of
outstanding stock options, 3.7 million of which will then be exercisable;
- 82.3 million shares of Class A common stock authorized and reserved for
issuance under our stock incentive plan;
- 7.95 million additional shares of Class A common stock that the
underwriters have the option to purchase from us; and
- 481.8 million shares of Class A common stock into which the shares of
Class B common stock may be converted.
7
<PAGE> 9
CONCURRENT DEBT OFFERING
Concurrently with this offering, we are also offering % senior notes
due 2010. We expect that this concurrent debt offering will be completed at the
same time as or after this offering of shares of our Class A common stock and
that the aggregate gross proceeds of our debt offering will be approximately
$400 million. Our offering of shares of Class A common stock is not conditioned
on our debt offering. We cannot assure you that we will be able to complete our
debt offering. At the time of sale, our notes will not be and have not been
registered under the Securities Act of 1933. The notes may not be offered or
sold in the United States absent subsequent registration or an applicable
exemption from registration requirements.
OUR CORPORATE STRUCTURE
The following diagram illustrates our corporate structure, simplified to
eliminate certain entities which act as holding companies.
LOGO
[Corporate structure chart showing Asia Global Crossing Ltd. owned 57.5% by
Global Crossing Ltd., 15.8% by each of Microsoft Corporation and Softbank Corp.
and 10.9% by the Public and Others. These ownership percentages are determined
based on an assumed initial public offering price per share of our Class A
common stock of $15.00. The corporate structure chart also shows Asia Global
Crossings Ltd. owning 100% of GCT Pacific Holdings, Ltd., 49% of Global Access
Limited, 50% of Hutchison Global Crossing Holdings Limited, 89% of Global Center
Japan Corporation, 100% of Global Crossing Japan Corporation and 100% of Asia
Global Crossing Development Co. The corporate structure chart also shows GCT
Pacific Holdings, Ltd. owning 50% of Pacific Crossing Ltd. and 100% of SCS
(Bermuda) Ltd., which in turn owns 14.5% of Pacific Crossing Ltd. The corporate
structure chart also shows GCT Pacific Holdings, Ltd. owning 100% of East Asia
Crossing Ltd. The corporate structure chart also shows Hutchinson Global
Crossing Holdings Limited owning a 100% of Hutchison Global Crossing Limited.]
---------------
* Ownership percentages are determined based on an assumed initial public
offering price per share of our Class A common stock of $15.00.
** We expect that GlobalCenter and Softbank will also become shareholders in
GlobalCenter Japan. We expect that GlobalCenter will have an indirect
approximate 26% interest and Softbank will have an approximate 38% interest
in GlobalCenter Japan. In that case, our percentage interest in GlobalCenter
Japan will be reduced to approximately 25%.
8
<PAGE> 10
SUMMARY HISTORICAL FINANCIAL INFORMATION
The table below shows our selected historical financial information
prepared in accordance with United States GAAP. This information has been
prepared using our consolidated financial statements as of the dates indicated
and for the year ended December 31, 1999, for the period from April 1, 1998,
date of inception, to December 31, 1998 and for the six months ended June 30,
2000 and 1999. The consolidated financial information as of December 31, 1999
and 1998 and for the year ended December 31, 1999 and for the period from April
1, 1998, date of inception, to December 31, 1998 has been derived from financial
statements audited by Arthur Andersen, independent public accountants. These
financial statements are included in this prospectus beginning on page F-1. We
derived the remaining data from unaudited consolidated financial statements.
In reading the following selected historical financial information, please
note the following:
- On September 24, 1999, we were formed as an indirect wholly owned
subsidiary of Global Crossing. On November 24, 1999, we became a wholly
owned subsidiary of a joint venture among Global Crossing, Softbank and
Microsoft, known as Asia Global Crossing Holdings Ltd.
- On November 24, 1999, Global Crossing contributed to us GCT Pacific
Holdings Ltd., a wholly owned subsidiary of Global Crossing which we
refer to as GCT Pacific. GCT Pacific owns our interest in Pacific
Crossing Ltd. Since we and GCT Pacific are entities under common control,
our consolidated financial statements include information relating to GCT
Pacific as if we were in existence on April 1, 1998, the date of
inception of GCT Pacific, in a method similar to a pooling of interest.
- On November 24, 1999, Global Crossing contributed all its rights in East
Asia Crossing to us.
- At December 31, 1999, we beneficially owned 57.75% of Pacific Crossing
Ltd. Before January 1, 2000, our investment in Pacific Crossing Ltd. was
accounted for under the equity method because we were not able to
exercise effective control over Pacific Crossing Ltd. In March 2000, we
increased our interest in Pacific Crossing Ltd. to 64.5%, and the Pacific
Crossing Ltd. shareholders agreement was amended to give us effective
control over Pacific Crossing Ltd. As a result, we have consolidated
Pacific Crossing Ltd. as of January 1, 2000.
- The first segment of Pacific Crossing-1 commenced service in December
1999, and we anticipate that the full system will be completed by year
end 2000.
- The financial information as of June 30, 2000 and for the six months
ended June 30, 2000 and 1999 are derived from our unaudited consolidated
financial statements. We have made adjustments, consisting of normal
recurring adjustments to present the consolidated financial position,
which in the opinion of our management are necessary for a fair
presentation. Results of operations for the six months ended June 30,
2000 are not necessarily indicative of the results that may be expected
for the full year or for any future period.
- Cash revenue is defined as revenue plus incremental cash deferred
revenue, which is the incremental change in deferred revenue relating to
cash receipts. We present cash revenue because it is a financial
indicator used by investors and analysts to compare companies on the
basis of cash receipts from sales of capacity and services. You should
not consider this information as an alternative to any measure of
performance as promulgated under GAAP.
- Adjusted EBITDA is defined as operating income (loss), plus goodwill
amortization, depreciation and amortization, non-cash cost of capacity
sold, stock related expenses and incremental cash deferred revenue. We
anticipate that this definition will be consistent with financial
covenants to be contained in our significant financing agreements. We
present Adjusted EBITDA because it is a financial indicator used by
investors and analysts to analyze and compare companies on the basis of
operating performance and because we believe that Adjusted EBITDA is an
additional, meaningful measure of performance and liquidity. We expect to
use Adjusted EBITDA to monitor our compliance with our financial
covenants and to understand the financial indicators investors and
analysts are using to measure our performance. You should not consider
this information as an alternative to any measure of performance as
promulgated under GAAP. Our calculation of Adjusted EBITDA may be
different from the calculation used by other companies and, therefore,
comparability may be limited.
9
<PAGE> 11
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1998
(DATE OF
SIX MONTHS ENDED JUNE 30, YEAR ENDED INCEPTION) TO
-------------------------- DECEMBER 31, DECEMBER 31,
2000 1999 1999 1998
------------ ----------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue................................... $ 108,680 $ -- $ -- $ --
Expenses.................................. 134,850 -- 1,201 --
---------- --------- ----------- ----------
Operating income (loss)................... (26,170) -- (1,201) --
Equity in income (loss) of affiliates..... -- (2,395) 9,893 (2,507)
Minority interest......................... (12,118) -- -- --
Other income, net......................... 6,797 5,440 11,598 5,374
---------- --------- ----------- ----------
Income (loss) before provision for
income taxes....................... (31,491) 3,045 20,290 2,867
Provision for income taxes................ -- -- -- --
---------- --------- ----------- ----------
Net income (loss)....................... $ (31,491) $ 3,045 $ 20,290 $ 2,867
========== ========= =========== ==========
Net income (loss) per common share:
Basic and diluted net income (loss) per
common share......................... $ (26.24) $ 2.54 $ 16.91 $ 2.39
========== ========= =========== ==========
Shares used in computing basic and diluted
net income (loss) per common share...... 1,200,000 1,200,000 1,200,000 1,200,000
========== ========= =========== ==========
Pro forma basic and diluted net income
(loss) per common share................. $ (0.07) $ 0.05
========== ===========
Shares used in computing pro forma basic
and diluted net income (loss) per common
share................................... 450,000,000 450,000,000
========== ===========
OTHER DATA:
Cash revenue.............................. $ 174,793 $ -- $ -- $ --
Adjusted EBITDA........................... 132,819 -- (1,201) --
Cash from operating activities............ 59,404 5,415 22,045 5,366
Cash used for investing activities........ (226,114) -- (90,652) (231,006)
Cash from financing activities............ $ 353,224 $ -- $ 73,013 $ 231,018
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------
2000 1999 1998
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 196,732 $ 9,784 $ 5,378
Restricted cash and cash equivalents................... 94,337 138,118 231,000
Property and equipment, net............................ 1,431,888 101,598 --
Total assets........................................... 1,914,063 603,843 397,037
Long-term debt......................................... 750,000 -- --
Total liabilities...................................... 1,022,524 102,533 --
Minority interest...................................... 141,254 -- --
Shareholder's equity................................... $ 750,285 $501,310 $397,037
</TABLE>
10
<PAGE> 12
RISK FACTORS
Before investing in our Class A common stock, you should carefully consider
the risks described below and the other information included in this prospectus.
RISK FACTORS RELATING TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAKES FORECASTING OUR FUTURE REVENUE AND OPERATING
RESULTS DIFFICULT, WHICH MAY IMPAIR OUR ABILITY TO MANAGE OUR BUSINESS AND YOUR
ABILITY TO ASSESS OUR PROSPECTS.
We were formed in November 1999, and our financial information before
January 2000 relates principally to a period in which we were constructing and
developing Pacific Crossing-1. Until January 2000, we had no revenues and
minimal operating costs. As a consequence, we have a limited history upon which
we can rely in planning and making the critical decisions that will affect our
future operating results. Similarly, because of the relatively immature state of
our business, it will be difficult for investors to evaluate our prospects. We
will need to make decisions in the immediate future regarding resource
allocations for network development and marketing and sales. If our predictions
about the best use of our resources turn out to be inaccurate, we may not make
the best use of our resources, and we may forego better opportunities. Our
limited history makes it difficult for investors to gauge our capability in
making these decisions.
WE HAVE SIGNIFICANT INDEBTEDNESS WHICH MAY RESTRICT OUR GROWTH, PLACE US AT A
COMPETITIVE DISADVANTAGE AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER
THE NOTES WE ARE OFFERING CONCURRENTLY WITH OUR SHARES.
As of June 30, 2000, on a pro forma basis giving effect to the contribution
to us of Global Crossing's interests in Hutchison Global Crossing and Global
Access Limited and our anticipated concurrent debt offering, we and our
consolidated subsidiaries had a total of $1,422.5 million of liabilities,
including approximately $400 million in senior indebtedness and $750 million of
secured debt.
In addition, as of June 30, 2000, Global Access Limited had a total of Y6
billion of short-term loans from affiliates, and Hutchison Global Crossing had
long-term loans from shareholders of HK$262.3 million. We anticipate that Global
Access Limited and Hutchison Global Crossing will incur additional indebtedness,
as described in "Description of Material Indebtedness -- Shareholder Loans" on
page 97.
Our substantial debt, including the notes we are concurrently offering, and
debt service requirements could affect our ability to operate our business and
may limit our ability to take advantage of potential business opportunities. For
example, our substantial debt and debt service requirements could:
- make it more difficult for us to satisfy our obligations with respect to
the notes we are offering concurrently with our shares and our other
indebtedness;
- limit our ability to obtain additional financing for acquisitions or
working capital to make investments or other expenditures or to obtain
additional financing on terms favorable to us;
- limit our ability to pay dividends on stock or make other restricted
payments;
- limit our ability to use assets as security in other transactions or sell
assets; and
- require us to dedicate a substantial portion of our cash flow from
operations to make interest and principal payments on our indebtedness,
reducing the funds that would otherwise be available to us for our
operations and future business opportunities.
11
<PAGE> 13
If we breach any of the covenants contained in the indenture that governs
the notes, we would be in default under the indenture. In that case, the
principal and accrued interest on the notes would become due and payable. In
addition, if we default under the indenture, that default could constitute a
cross-default under the instruments governing our other indebtedness. In that
event, our other indebtedness would also become due and payable. We may not be
able to repay all those amounts, and the lenders could proceed against us in
legal proceedings.
WE MAY NOT BE ABLE TO REPAY OR SERVICE OUR EXISTING DEBT; FAILURE TO DO SO OR TO
REFINANCE OUR DEBT COULD PREVENT US FROM COMPLETING OUR NETWORK OR IMPLEMENTING
OUR BUSINESS PLAN.
We may not be able to repay, service or refinance our existing debt or debt
that we may incur in connection with our concurrent debt offering, which could
prevent us from completing our network or implementing our business plan. Our
deficiency of earnings to fixed charges for the six-month period ended June 30,
2000 was approximately $49.2 million. Until we complete the principal segments
of our network, we will continue to spend more building the network than we will
earn from selling capacity on it. Accordingly, we expect to experience negative
cash flows after capital expenditures while we are developing our network. Our
ability to repay and service our debt depends upon a number of factors, many of
which are beyond our control. For example, if our revenues and cash flows fail
to grow, we may not be able to service or repay our existing debt. In addition,
we rely on dividends, loan repayments and other intercompany cash flows from our
subsidiaries and affiliates to repay and service our obligations. Some of our
operating subsidiaries and affiliates have entered into, and we expect that some
others will enter into, a senior secured corporate credit facility. Accordingly,
the payment of dividends from these operating subsidiaries and the making and
repayments of loans and advances are subject to statutory, contractual and other
restrictions. In addition, we expect to obtain additional financing whose terms
could impose additional restrictions on our operations and ability to pay
dividends and result in significant interest expense to us. If this happens, we
may be required to refinance or renegotiate the terms of our long-term debt. We
do not know if refinancing our debt will be possible at that time or if we will
be able to renegotiate successfully the terms of our long-term debt.
IF WE FAIL TO OBTAIN ADDITIONAL FINANCING, WE MAY NOT BE ABLE TO DEVELOP OUR
BUSINESS.
If we are unable to raise sufficient financing on satisfactory terms and
conditions in the future, we may not be able to expand our business. To complete
our network and implement our business plan, we anticipate that we will require
substantial additional equity and debt financing. For example, we are developing
Pacific Crossing-1 at a total projected cost of approximately $1.1 billion,
excluding any upgrades, and we have incurred debt of approximately $750 million
in its construction. We are also currently developing East Asia Crossing, and we
expect that the portion of East Asia Crossing connecting Japan, Hong Kong,
Taiwan and Korea will have a total projected cost of approximately $750 million
with additional costs to be incurred if and when we expand this network. Our
ability to obtain additional financing will depend upon a number of factors,
many of which are beyond our control. For example, we may not be able to obtain
additional financing because we already have substantial debt and because we may
not have sufficient cash flows to service or repay our existing or any
additional debt.
PRICE DECLINES FOR WHOLESALE BANDWIDTH CAPACITY MAY UNDERMINE OUR PROFITABILITY.
Declines in the price for wholesale bandwidth capacity may seriously
undermine our profitability. As a result of the construction of trans-Pacific
networks by our competitors, the price for wholesale bandwidth capacity in the
trans-Pacific market has started to decline rapidly. This price decline has
lowered the price at which we are able to sell our services in that market. More
drastic price declines have occurred in the trans-Atlantic market, where Global
Crossing operates. We believe that wholesale bandwidth pricing in the
trans-Pacific market is likely to continue to decline in future years, and we
expect to experience similar price declines in other markets in which we will
operate.
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Specifically, we anticipate that prices for our products and services and
network transmission capacity, in general, will continue to decline over the
next several years, due primarily to the following:
- price competition as various network providers continue to install
networks that might compete with ours;
- recent technological advances that result in substantial increases in the
transmission capacity of both new and, to a lesser extent, existing fiber
optic telecommunications networks; and
- strategic alliances or similar transactions, such as long-distance
capacity purchasing alliances among groups of carriers, that could
increase the parties' purchasing power.
There could also be a larger decline in prices than we expect.
THE LACK OF COMPETITIVE PRICING FOR OUR SERVICES MAY UNDERMINE OUR
PROFITABILITY.
Our services may not be competitively priced, which may negatively affect
our profitability. We have entered into an agreement with Global Crossing, which
we describe under "Transactions with Related Parties --Relationships Between
Ourselves and Global Crossing -- Agreement with Global Crossing" on page 74.
That agreement provides that a joint pricing committee will determine the
pricing of services outside Asia. We do not know whether the pricing committee
will set prices at a competitive level. Moreover, under the agreement, we are
obligated to use exclusively Global Crossing's network and services outside
Asia. Therefore, our ability to price services competitively may be further
undermined if Global Crossing's network and services are not priced
competitively.
WE MAY BE UNABLE TO DEPLOY PARTS OF OUR NETWORK ON A TIMELY OR COST-EFFICIENT
BASIS, WHICH MAY CAUSE OUR REVENUE TO DECLINE, RESULT IN OPERATING LOSSES OR
PLACE US AT A COMPETITIVE DISADVANTAGE.
Delays in the completion of parts of our network or the networks of our
joint ventures or failure to complete those parts in a cost-efficient manner
could cause our revenue to decline or result in operating losses. In addition,
such delays could place us at a competitive disadvantage in the markets in which
we intend to operate. Some of our competitors have encountered similar delays.
The timely and cost-efficient completion of Pacific Crossing-1, East Asia
Crossing and other parts of our network and the networks of our joint ventures
depends on a variety of factors, many of which we cannot control. Some of those
factors relate to the ability to connect to other networks, the availability of
suitable landing sites, favorable regulatory environment or rights-of-way and
unforeseen engineering or construction challenges.
IF WE FAIL TO EXPAND OUR MARKETING AND SALES OPERATIONS SUBSTANTIALLY, WE MAY
FAIL TO INCREASE MARKET AWARENESS AND SALES OF OUR SERVICES.
If we are unable to expand our marketing and sales operations, we may not
be able to increase market awareness or sales of our services, which may prevent
us from achieving and maintaining profitability. As of June 30, 2000, Global
Crossing's sales force generated $74.6 million in revenue for us, representing
69% of our revenue as of that date. As of June 30, 2000, our sales force
generated $34.1 million or 31% of our revenue. In addition, Global Access
Limited and Hutchison Global Crossing use their own sales forces to market and
sell their services. We have been expanding our sales force and plan to hire
additional marketing and sales personnel and system and consulting engineers,
particularly individuals with experience in the telecommunications industry. Our
services require a sophisticated sales effort that targets key people within our
prospective clients' organization. To target these key people, we need the
efforts of personnel with necessary contacts as well as specialized system and
consulting engineers within our organization. We may not be able to hire the
number of qualified sales personnel and system and consulting engineers we need
because competition for these individuals is intense and finding individuals
with relevant industry specific experience is difficult. In addition, we may not
have the financial capability to hire a sufficient number
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of qualified personnel. We expect to face greater difficulty attracting
personnel with equity incentives as a public company than we did as a privately
held company.
IF WE FAIL TO EXPAND OUR SERVICES, WE MAY NOT BE ABLE TO GROW OUR BUSINESS OR
IMPLEMENT OUR BUSINESS PLAN.
Failure to expand our services may restrict our ability to enter new
markets and develop and maintain new customers. For example, we may not be able
to compete effectively in countries in which there is an increasing consumer
demand for advanced Internet services unless we are able to provide those
services. However, in order to expand our services, we must undertake a number
of actions, which we may not be able to complete successfully. These actions
include:
- increase capacity on our planned systems;
- develop and acquire additional undersea cable projects;
- develop and acquire additional terrestrial fiber or capacity; and
- introduce new services and products, which leverage the capabilities of
existing and planned systems.
In addition, in some jurisdictions, a number of the services we propose to
offer may be subject to regulatory constraints which may affect the timing or
cost to us of offering those services, or ability to offer them at all. In
Taiwan, for example, we are currently not permitted to construct terrestrial
transmission facilities. Therefore, we will have to obtain the necessary
terrestrial connection to our undersea cables from other network operators,
which may increase our costs. In addition, at present we are permitted to sell
transmission capacity on our Taiwan network only to other facilities-based
providers, which may limit our customer base.
The success of our network will also be dependent on our continued ability
to provide high quality telecommunications services through upgrading our
systems and our ability to protect our network from external damage. As we grow,
the timing and implementation of our upgrades will become more important.
However, the quality and availability of our services could be disrupted because
of our inability to make timely or error-free upgrades to our network.
COMPETITION IN OUR INDUSTRY IS INTENSE AND GROWING, AND WE MAY BE UNABLE TO
COMPETE EFFECTIVELY.
Some of our competitors have announced plans to construct, have begun to
construct or are currently operating fiber optic networks across the Pacific
Ocean and across a number of Asian countries, including Japan and Hong Kong, two
of the key Asian telecommunications markets in which we operate. If we are
unable to compete effectively against these competitors, it could lead to price
reductions, lower revenue, under-utilization of our network, reduced operating
margins and loss of market share. Many of our competitors have, and some
potential competitors are likely to enjoy, competitive advantages, including:
- greater name recognition in a particular market;
- greater financial, technical, marketing and other resources;
- larger installed bases of customers; and
- well-established relationships with current and potential customers.
As a consequence, our competitors may be able to develop and expand their
network infrastructures and service offerings more quickly, adapt to new or
emerging technologies and changes in customer requirements more readily, take
advantage of acquisition and other opportunities more effectively, devote
greater resources to the marketing and sale of their products and adopt more
aggressive pricing policies than we can.
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In addition, new market entrants or the creation of stronger competitors
through combinations could result in increased price competition, which would
make it difficult for us to attract new customers, retain existing customers or
attain revenue and gross margin levels sufficient to generate a return on our
prior investment in our business. A list of our principal competitors is
included under "Business -- Competition" on page 60.
USE OF THE INTERNET, ELECTRONIC COMMERCE AND OTHER BANDWIDTH-INTENSIVE
APPLICATIONS IN ASIA MAY NOT INCREASE AS SUBSTANTIALLY AS WE EXPECT, WHICH WOULD
LIMIT DEMAND FOR CAPACITY AND SERVICES AND LIMIT OUR ABILITY TO INCREASE OUR
REVENUE.
Demand for our services may not grow as we expect, which could limit demand
for our services and limit our ability to increase our revenue. Our business
plan assumes that the use of the Internet, electronic commerce and other
bandwidth-intensive applications in Asia will increase substantially in the next
few years, in a manner similar to the increased use in the United States market
in the past few years. The potential for Internet growth in many Asian countries
is subject to a number of potential obstacles, including high access charges,
lower overall computer literacy, regulatory constraints and the wide-spread use
of the English language in Internet content and applications. In addition,
overall demand for our services in Asia may be reduced by unfavorable economic
conditions, such as the recent economic downturn of the Asian economies. If the
use of bandwidth-intensive applications in Asia does not increase as
anticipated, demand for many of our services, including sales of capacity, dark
fiber, which is fiber without electronic equipment attached, managed bandwidth
services and our value-added services, will be lower than we currently
anticipate. Our ability to generate revenue would be negatively affected as
well.
IF WE FAIL TO MANAGE EXPANSION EFFECTIVELY, WE MAY ENCOUNTER SIGNIFICANT
DIFFICULTIES IN OPERATING OUR BUSINESS.
We are experiencing rapid expansion and expect this expansion to continue
for the foreseeable future. If we fail to manage this expansion effectively, we
may encounter significant difficulties in operating our business. As a result of
this rapid expansion, we expect that we will need to continue to improve our
financial and managerial controls, reporting systems and procedures and will
need to continue to expand, train and manage our work force. This growth has
placed, and will continue to place, a significant strain on our management
systems and resources by requiring us to manage multiple relationships with
joint venture partners, customers, service providers and other third parties. In
addition, our expansion into various Asian countries has increased, and will
continue to increase, that strain by requiring us to deal with a number of
significantly different economic, political and regulatory environments. Our
expansion also requires, and will continue to require, significant travel time
by our management team.
IF ANY OF OUR SYSTEMS OR THE GLOBAL CROSSING SYSTEMS FAILS TO OPERATE FOR ITS
FULL DESIGN LIFE, OUR REVENUE AND ABILITY TO IMPLEMENT OUR BUSINESS PLAN MAY BE
SIGNIFICANTLY UNDERMINED.
Failure of any of our systems or the Global Crossing systems to operate for
its full design life could have a significantly negative impact on our revenue
and our ability to implement our business plan. Each of our systems and the
Global Crossing systems either has or is expected to have a design life of
generally 25 years; however, we cannot predict the actual useful life of any of
these systems. We believe that our systems and the Global Crossing systems are
subject to operational risks as we describe in the risk factor immediately
below.
OUR FACILITIES AND THE CABLE SYSTEMS ON WHICH WE DEPEND MAY FAIL, WHICH WOULD
INTERRUPT THE SERVICES WE PROVIDE AND MAKE IT DIFFICULT FOR US TO RETAIN AND
ATTRACT CUSTOMERS.
If our services are interrupted due to system failures, we risk losing
existing customers that are affected by the failures, and our ability to attract
and maintain new customers may be restricted. The operation, administration,
maintenance and repair of our and Global Crossing's systems require the
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coordination and integration of sophisticated and highly specialized hardware
and software technologies and equipment located throughout the world. We do not
know that, even if built to specifications, our systems or Global Crossing's
systems will function as expected in a cost-effective manner. The failure of the
hardware or software to function as required could render a cable system unable
to perform at design specifications. Subsea cable systems are also subject to
damage or breakage due to fishing nets, anchors or other factors. Although the
network structure used in our systems is intended to eliminate service
interruptions by automatically rerouting traffic, rerouting may not always be
successful. Furthermore, systems which are under construction are unable to
reroute until both loops of the ring are complete. Pacific Crossing-1 has
experienced failures to reroute traffic while under construction. Although we
are able to sell long-term capacity on a cable system before both loops of the
ring are complete, most customers are reluctant to repurchase value-added
services, such as leased lines, before the system is complete due to the risk of
service interruption.
IF WE FAIL TO OBTAIN ACCESS TO TERRESTRIAL NETWORKS IN KEY MARKETS, WE MAY NOT
BE ABLE TO REMAIN COMPETITIVE.
If we fail to connect our subsea cables with terrestrial networks in key
markets, we may not be able to maintain our existing customers or attract new
customers. We expect that in all key markets in Asia we will rely on joint
ventures with local parties to obtain access to terrestrial networks in those
markets. For example, in Japan and Hong Kong, we expect to connect our subsea
cables with the Hutchison Global Crossing and Global Access Limited networks.
However, we may not be able to form joint ventures in any or all key markets or,
even if we do form joint ventures, we may not be able to gain access to their
terrestrial networks. In that case, we will have to purchase the right to access
terrestrial networks of third parties on terms that will likely be less
favorable to us than the terms we would have obtained from one of our joint
ventures. This could prevent us from offering our services on competitive terms,
which could undermine our ability to maintain or attract customers.
LOSS OF KEY EXECUTIVE OFFICERS COULD WEAKEN OUR BUSINESS EXPERTISE AND DELAY THE
COMPLETION OF OUR NETWORK AND OTHER BUSINESS PLANS.
The loss of any of our key executive officers in the future could
significantly impede our financial plans, network completion, expansion of
services, marketing and other objectives. We believe that the growth and future
success of our business will depend in large part on our continued ability to
attract, motivate and retain highly-skilled qualified personnel. We may not be
successful in doing so, as the competition for qualified personnel in the
telecommunications industry is intense. We do not have key person life insurance
policies covering any of our employees.
SOME OF OUR OFFICERS AND DIRECTORS ARE SHAREHOLDERS, DIRECTORS AND OFFICERS OF
GLOBAL CROSSING OR OTHER COMPANIES AND MAY, AS A RESULT, HAVE CONFLICTS OF
INTEREST.
Some of our executive officers and directors may have conflicts of interest
which could have a materially negative impact on the management and growth of
our business. Some of our executive officers and directors are shareholders,
directors and officers of Global Crossing, which will own (after this offering
is completed and assuming the underwriters do not exercise their overallotment
option in this offering) 310,807,875 shares of our outstanding Class B common
stock, which will represent approximately 63.6% of the combined voting power of
all of our outstanding common stock. As of March 3, 2000, our directors and
executive officers as a group collectively beneficially owned approximately 14%
of the outstanding common stock of Global Crossing. In addition, some of our
directors and executive officers serve as officers and directors of other
companies and are active investors in the telecommunications industry. Being one
of our directors or officers and a shareholder, director or officer of another
company could create conflicts of interest when the director or officer is faced
with decisions that could have different implications for us and the other
company. A conflict of interest could also exist with respect to allocation of
time and attention of persons who are directors
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or officers of ours and another company. The pursuit of these other business
interests could distract these directors and officers from pursuing
opportunities on our behalf.
POLITICAL AND ECONOMIC CONDITIONS IN ASIA ARE UNPREDICTABLE AND MAY DISRUPT OUR
OPERATIONS IF THESE CONDITIONS BECOME UNFAVORABLE TO OUR BUSINESS.
We expect to derive a substantial percentage of our revenue from the Asian
market. Changes in political or economic conditions in the region are difficult
to predict and could negatively affect our operations or cause the Asian market
to become less attractive to businesses, which could reduce our revenues. Many
countries in Asia have experienced significant economic downturns in the past,
resulting in slower real gross domestic product growth for the entire region as
a result of higher interest rates and currency fluctuations. Declining economic
growth rates in the future could cause expenditures for telecommunications and
Internet-based products to decrease, which would negatively impact our business
and our profitability over time. In addition, an economic downturn in Asia could
also lead to a devaluation of currencies. This could decrease our revenue for
the Asian region as our customers are likely to demand less of our services,
since the cost of our services in their local currencies would increase.
BECAUSE MANY OF OUR CUSTOMERS DEAL PREDOMINANTLY IN FOREIGN CURRENCIES, WE MAY
BE EXPOSED TO EXCHANGE RATE RISKS, AND OUR NET INCOME MAY SUFFER DUE TO CURRENCY
TRANSLATIONS.
Because of foreign currency declines and regulatory restrictions, our
customers may be unable to pay for our services in United States dollars; in
that case, our net income may suffer due to currency translations. We primarily
invoice for international capacity in United States dollars and will invoice
international services in the same manner. However, most of our customers and
many of our prospective customers derive their revenue in currencies other than
United States dollars. The obligations of customers with substantial revenue in
foreign currencies may be subject to unpredictable and indeterminate increases
in the event that those currencies decline in value relative to the United
States dollar. Furthermore, those customers may become subject to exchange
control regulations restricting the conversion of their revenue currencies into
United States dollars. In that event, the affected customers may not be able to
pay us in United States dollars. In addition, in cases where we invoice for our
capacity and services in currencies other than United States dollars, our net
income may suffer due to currency translations if those currencies decline in
value relative to the United States dollar and we do not enter into currency
hedging arrangements in respect of those payment obligations. Declines in the
value of foreign currencies relative to the United States dollar could adversely
affect our ability to market our services to customers whose revenues are
denominated in those currencies. In addition, our obligations under the notes
and some of our other indebtedness are denominated in United States dollars. To
the extent that we are dependent on revenues denominated in foreign currencies
to service our debt requirements, fluctuations in the exchange rate between
those foreign currencies and the United States dollar may adversely affect our
ability to pay our obligations under the notes and some of our other
indebtedness.
OUR OPERATIONS ARE SUBJECT TO REGULATION IN THE COUNTRIES IN WHICH WE OPERATE
AND REQUIRE US TO OBTAIN AND MAINTAIN A NUMBER OF GOVERNMENTAL LICENSES AND
PERMITS. IF WE FAIL TO OBTAIN AND MAINTAIN THOSE LICENSES AND PERMITS, WE MAY
NOT BE ABLE TO CONDUCT OUR BUSINESS.
- Our international operations in the United States are governed by the
Submarine Cable Act and the Communications Act of 1934, as amended by the
Telecommunications Act of 1996. We may be required to file periodic
regulatory reports and pay regulatory fees in connection with our
operations in the United States. We may fail to comply with these
obligations, which could lead to the imposition of sanctions, up to and
including the revocation of our authorization to operate.
- Our operations in Asia are governed by the respective laws of the
countries in which we operate. The regulation of telecommunications
networks and services in those countries is
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changing rapidly and varies widely. In most of the countries in which we
have or plan to have operations, the telecommunications regulation is
evolving and in light of parallel technological, social and economic
developments may not always be clear or consistent. In addition, some
Asian countries limit competition for most services. In other countries,
where there is a commitment to open markets to foreign investment, the
liberalization trend may not continue, may slow down or may continue with
a narrow scope. We may fail to comply with the telecommunications laws
and regulations of one or more of the countries in which we operate,
which could result in the temporary or permanent suspension of
operations, including our cable stations or other systems which are key
links in our network, in one or more countries. In addition, many of the
countries in which we operate are conducting proceedings that will affect
the implementation of their telecommunications legislation. We cannot
predict the outcomes of these proceedings. The outcomes of these
proceedings may affect the manner in which we are permitted to provide
our services in these countries and may have a significantly negative
effect on our business.
- In the ordinary course of constructing our networks and providing our
services, we are required to obtain and maintain a variety of
telecommunications and other licenses and authorizations in the countries
in which we operate. In most countries, we expect that we will be
required to obtain one or more telecommunications authorizations to
construct our telecommunications networks and provide our
telecommunications services. We also must comply with a variety of
regulatory obligations, including obtaining permits to land our cables in
some or all of the territories they will be connected to. We may not be
able to obtain or maintain necessary licenses and authorizations or to
comply with the obligations imposed upon license holders in one or more
countries, which may result in sanctions, including the revocation of
authority to provide facilities or services in one or more countries. We
may not receive all requisite licenses on a timely basis or at all. We
have not yet applied for the requisite licenses in Korea, Taiwan,
Singapore, the Philippines, Malaysia or China. If the necessary licenses
are not granted to us or if the approval process takes more time than we
anticipate, it could have a significantly negative effect on our
operations. See "Regulation" on page 91.
- In some jurisdictions regulatory constraints and related considerations
may require us to rely on joint ventures or third parties to obtain and
maintain the licenses, permits and registrations we require to conduct
our planned operations in these jurisdictions. These arrangements may
create for us a number of risks, including loss of autonomy and
flexibility in our business planning and operations and the loss of
control over regulatory compliance.
REGULATORY RESTRICTIONS ON FOREIGN OWNERSHIP IN THE VARIOUS COUNTRIES IN WHICH
WE OPERATE MAY IMPEDE OUR ABILITY TO CONDUCT OUR BUSINESS AND IMPLEMENT OUR
BUSINESS PLAN.
Regulatory restrictions on foreign ownership in the Asian countries in
which we operate may restrict our ability to conduct our business and implement
our business plan. We expect to be able to enter into the majority of the Asian
markets through joint ventures with local partners. However, some countries may
prohibit us from owning a controlling interest in those joint ventures or from
entering into those transactions at all. For example, Korea and Taiwan currently
limit foreign ownership of telecommunication carriers like us to 49% and 68%
respectively. China does not currently allow foreign ownership of
telecommunications providers. However, China has committed itself to permitting
limited, non-controlling foreign ownership in some telecommunications providers
if it is admitted to the World Trade Organization.
IF OUR FUTURE TAX LIABILITIES ARE GREATER THAN WE ANTICIPATE, OUR BUSINESS MAY
BE NEGATIVELY IMPACTED.
We cannot predict the amount of tax to which we may become subject, as
changes in our business or applicable law or challenges by taxing authorities
may significantly increase the amount of
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taxes we have to pay. We believe that a significant portion of the income
derived from our undersea systems will not be subject to tax by either of:
- Bermuda, which currently does not have a corporate income tax, or
- some other countries in which we conduct activities or in which our
customers are located.
We base this belief upon:
- the anticipated nature and conduct of our business, which may change; and
- our understanding of our position under the tax laws of the various
countries in which we have assets or conduct activities, which position
is subject to review and possible challenge by taxing authorities and to
possible changes in law, which may have retroactive effect.
Our income derived from our undersea systems may, however, become subject
to taxation in the future in countries in which we operate as a result of
changes in the nature of our business or applicable tax laws. In that case, we
may have less cash flow than anticipated to conduct our business. This could
impair our ability to service our indebtedness.
IF YOU PURCHASE OUR CLASS A COMMON STOCK, YOU MAY BECOME SUBJECT TO THE PASSIVE
FOREIGN INVESTMENT COMPANY RULES.
We may be or may become a passive foreign investment company. In that case,
any of our shareholders that is a United States person would be liable to pay
tax at the then prevailing rates on ordinary income plus an interest charge upon
certain distributions by us or upon any gain recognized when that shareholder
sold our stock. We base our expectation that we are not and will not become a
passive foreign investment company, in part, on interpretations of existing law
that we believe are reasonable, but that have not been approved by any taxing
authority.
RISK FACTORS RELATING TO OUR RELATIONSHIP WITH OUR FOUNDING SHAREHOLDERS
OUR GOVERNANCE STRUCTURE MAY NOT PERMIT US TO RESPOND PROMPTLY TO IMPORTANT
MATTERS, WHICH MAY PUT US AT A COMPETITIVE DISADVANTAGE AGAINST COMPETITORS WHO
ARE ABLE TO MAKE IMPORTANT BUSINESS DECISIONS WITHOUT THE CONSENSUS OF THEIR
SHAREHOLDERS.
Under our bye-laws and the shareholders agreement among our founding
shareholders, the affirmative votes of our board members appointed by Microsoft
and Softbank are required for a number of important business decisions. For a
more detailed description of these important business decisions, see
"Transactions with Related Parties -- Relationships Among Ourselves and our
Founding Shareholders -- Actions requiring the approval of our directors
nominated by Microsoft and Softbank" on page 79. Neither our bye-laws nor the
shareholders agreement provides for any deciding vote if the board members
appointed by Microsoft and Softbank disagree on matters requiring their
approval. As a result of this governance structure, we may not be able to
respond promptly in the event of a disagreement among our founding shareholders
or the members of our board appointed by them with respect to important
strategic or operational matters. This may place us at a competitive
disadvantage against competitors who are able to make decisions without reaching
the consensus of their shareholders.
OUR FOUNDING SHAREHOLDERS HAVE INTERESTS THAT MAY CONFLICT WITH OURS, WHICH MAY
LEAD TO DECISIONS THAT MAY BE UNFAVORABLE TO US.
OUR FOUNDING SHAREHOLDERS OWN OR MAY ENGAGE IN COMPETING BUSINESSES. As
described under "Transactions with Related Parties -- Relationships Among
Ourselves and our Founding Shareholders -- Non-competition arrangements" on page
80, our founding shareholders have or may acquire interests in other businesses,
including telecommunications operators and Internet service providers, in a
number of countries in which we intend to operate. These businesses may compete
with us or may compete with us in the future. The existence of competing
activities and services may
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cause our founding shareholders to resist expansions of our business that would
otherwise present an attractive business opportunity for us.
OUR FOUNDING SHAREHOLDERS MAY ENGAGE IN OPPORTUNITIES IN OUR TERRITORY IF
THEY ARE OFFERED TO US AND WE DECLINE TO PURSUE THEM. THIS COMPETITION MAY CAUSE
A REDUCTION IN OUR MARKET SHARE AND OUR REVENUE. Our founding shareholders may
compete with us in our markets, which may cause a reduction in our market share
and revenue. As described under "Transactions with Related
Parties -- Relationships Among Ourselves and our Founding
Shareholders -- Non-competition arrangements" on page 80, under various
circumstances, our founding shareholders may pursue corporate opportunities that
might be appropriate for us, if they first present them to us and we choose not
to pursue them. If we initially decline to pursue opportunities, we may
experience situations where we are in direct competition with our founding
shareholders.
WE MAY NOT BE ABLE TO BENEFIT FROM MICROSOFT'S AND SOFTBANK'S COMMITMENT TO
PURCHASE A SIGNIFICANT AMOUNT OF CAPACITY ON OUR NETWORK. Our founding
shareholders have entered into a capacity commitment agreement described in more
detail under "Transactions with Related Parties -- Relationships Among Ourselves
and Our Founding Shareholders -- Capacity Commitment Agreement" on page 82. If
our founding shareholders terminate or amend that agreement, which they may do
without our consent, we may not be able to benefit fully or at all from
Microsoft's and Softbank's commitment under that agreement to purchase capacity
on Pacific Crossing-1 and Global Access Limited in an aggregate amount of
$200,000,000, each over a three-year period.
RISK FACTORS RELATING TO OUR CLASS A COMMON STOCK
WE EXPECT THAT THE PRICE OF OUR STOCK MAY FLUCTUATE SUBSTANTIALLY, WHICH COULD
NEGATIVELY AFFECT OUR SHAREHOLDERS.
Our stock price may fluctuate substantially due to the relatively small
percentage of our stock available publicly, fluctuations in the price of the
stock of companies in the telecommunications industry and general volatility in
the stock market. Approximately 10% of our market capitalization will be traded
publicly, which can result in a high degree of volatility in our stock price.
Historically, the market prices of comparable companies in the
telecommunications industry have been highly volatile. This risk is exacerbated
by our entering into geographical areas without political stability or freely
competitive environments. In addition, the stock market has experienced
volatility that has affected the market prices of equity securities of many
companies, and that has often been unrelated to the operating performance of
these companies. A number of other factors, many of which are beyond our
control, could also cause the market price of our common stock to fluctuate
substantially.
THERE MAY BE FUTURE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK THAT MAY
DEPRESS THE PRICE OF YOUR CLASS A COMMON STOCK.
Future sales of substantial amounts of common stock in the public market
could adversely affect prevailing market prices and the price of your Class A
common stock.
Upon completion of this offering and the strategic investments described
under "Business -- Recent Developments" on page 47, each based on an assumed per
share initial public offering price of $15.00, we will have outstanding 67.0
million shares of Class A common stock and 481.8 million shares of Class B
common stock. Of those shares, the 53.0 million shares we are selling in this
offering, plus any shares issued upon exercise of the underwriters' option to
purchase additional shares from us, will be freely tradable without restriction
under the Securities Act, unless purchased by our affiliates.
The remaining 14.0 million shares of Class A common stock outstanding, as
well as all of the shares of Class B common stock, are restricted securities
within the meaning of Rule 144. The rules affecting the sale of these securities
are summarized under "Shares Eligible for Future Sale" on
20
<PAGE> 22
page 103. Sales of restricted securities in the public market, or the
availability of these shares for sale, could adversely affect the market price
of your common stock.
Subject to specified exceptions, Asia Global Crossing, our directors,
officers and shareholders have entered into lock-up agreements in connection
with this offering, which we describe under "Underwriting" on page 107. In
addition, we, Global Crossing, Microsoft, Softbank and The Goldman Sachs Group
have entered into a registration rights agreement which grants demand and
piggy-back registration rights to Global Crossing, Microsoft and Softbank and
piggy-back registration rights to The Goldman Sachs Group with respect to their
shares of our common stock. Each of Global Crossing, Microsoft and Softbank may
exercise its demand right immediately after the date of this prospectus;
however, each has also agreed to be bound by the lock-up agreements referred to
in this paragraph.
In addition, after the effectiveness of this offering we intend to file a
registration statement on Form S-8 under the Securities Act covering all shares
of our common stock reserved for issuance under our stock incentive plan. Shares
registered under that registration statement would be available for sale in the
open market unless these shares are subject to vesting restrictions. Within 180
days of the date of this prospectus, we estimate that approximately shares
of our common stock will become exercisable under outstanding options held by
employees who are not subject to lock-up agreements.
YOU WILL BE IMMEDIATELY AND SUBSTANTIALLY DILUTED BY $11.72 PER SHARE IF YOU
PURCHASE CLASS A COMMON STOCK IN THIS OFFERING BECAUSE THE ASSUMED $15.00 PER
SHARE PRICE OF OUR CLASS A COMMON STOCK IN THIS OFFERING IS SUBSTANTIALLY HIGHER
THAN THE NET TANGIBLE BOOK VALUE PER SHARE OF OUR CLASS A COMMON STOCK.
If you purchase Class A common stock in this offering, you will experience
an immediate and substantial dilution of $11.72 per share, because the per share
price of our Class A common stock in this offering is substantially higher than
the net tangible book value per share of the outstanding Class A common stock
immediately after this offering. In addition, if outstanding options to purchase
Class A common stock are exercised or any shares of our Class B common stock are
converted into shares of Class A common stock, there could be substantial
additional dilution. See "Dilution" on page 26 and "Management -- Executive
Compensation" on page 66 for information regarding outstanding stock options and
additional stock options which we may grant.
YOUR INTEREST IN US MAY BE SUBSTANTIALLY DILUTED SHORTLY AFTER THIS OFFERING,
WHICH WOULD CAUSE THE VALUE OF YOUR INVESTMENT TO DECREASE.
If you purchase Class A common stock in this offering, your interest in us
will be substantially diluted if we issue shares of our Class A common stock
that we are permitted or required to issue in addition to the common stock that
will be outstanding after this offering. The following is a summary of
additional shares of our Class A common stock that we have reserved for issuance
as of the date of our initial public offering, based on an assumed initial
public offering price per share of our Class A common stock of $15.00:
- 20.5 million shares are issuable upon the exercise of options or other
benefits under our stock incentive plan at a weighted average price of
$15.00 per share, of which options covering 3.7 million shares will be
exercisable as of the date of our initial public offering;
- 82.3 million shares are authorized and reserved for issuance under our
stock incentive plan, based on an assumed initial public offering price
per share of our Class A common stock of $15.00;
- 7.95 million shares of Class A common stock that the underwriters have
the option to purchase from us; and
- 481.8 million shares of Class A common stock are issuable upon
conversion of all outstanding shares of our Class B common stock.
21
<PAGE> 23
If your interest in us becomes substantially diluted, the value of your
investment will significantly decrease.
UPON COMPLETION OF THIS OFFERING, CLASS A SHAREHOLDERS WILL NOT BE ABLE TO
INFLUENCE ANY OF OUR MANAGEMENT POLICIES OR BUSINESS DECISIONS, BECAUSE THEY
WILL HAVE SUBSTANTIALLY LESS VOTING POWER THAN HOLDERS OF OUR CLASS B COMMON
STOCK.
Upon completion of this offering, holders of our Class A common stock will
not be able to control any shareholder decisions. As a result, holders of our
Class A common stock will not be able to influence any of our management
policies or business decisions or prevent any business decision from being made.
Our common stock is divided into Class A and Class B shares. Our founding
shareholders, which are the holders of our Class B common stock, have 10 votes
per share on all matters submitted to the general meeting of shareholders, and
holders of our Class A common stock have one vote per share. Accordingly, our
founding shareholders or their permitted successors or transferees collectively
will have the power to elect all, or at least a majority of, our directors and
will determine the outcome of matters submitted to the general meeting of
shareholders or our board of directors, even if their collective economic
ownership of us at any time falls below 50%.
WE ARE INCORPORATED IN BERMUDA, AND, AS A RESULT, IT MAY NOT BE POSSIBLE FOR
SHAREHOLDERS TO ENFORCE CIVIL LIABILITY PROVISIONS OF THE SECURITIES LAWS OF THE
UNITED STATES.
We are organized under the laws of Bermuda. As a result, it may not be
possible for our shareholders to effect service of process within the United
States upon us, or to enforce against us in United States courts judgments based
on the civil liability provisions of the securities laws of the United States.
In addition, there is significant doubt as to whether the courts of Bermuda
would recognize or enforce judgments of United States courts obtained against us
or our directors or officers based on the civil liabilities provisions of the
securities laws of the United States or any state or hear actions brought in
Bermuda against us or those persons based on those laws. We have been advised by
our legal advisor in Bermuda, Appleby, Spurling & Kempe, that the United States
and Bermuda do not currently have a treaty providing for the reciprocal
recognition and enforcement of judgments in civil and commercial matters.
Therefore, a final judgment for the payment of money rendered by any federal or
state court in the United States based on civil liability, whether or not based
on United States federal or state securities laws, would not be automatically
enforceable in Bermuda.
BERMUDA LAW DIFFERS FROM THE LAWS IN EFFECT IN THE UNITED STATES AND MAY AFFORD
LESS PROTECTION TO SHAREHOLDERS.
Our shareholders may have more difficulty in protecting their interests
than would shareholders of a corporation incorporated in a jurisdiction of the
United States. We are a Bermuda company and, accordingly, are governed by The
Companies Act, 1981 of Bermuda. The Companies Act differs in certain material
respects from laws generally applicable to United States corporations and
shareholders, including the provisions relating to interested directors, mergers
and similar arrangements, takeovers, shareholder lawsuits, indemnification of
directors and inspection of corporate records.
22
<PAGE> 24
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have included in this prospectus forward-looking statements that state
our own or our management's intentions, beliefs, expectations or predictions for
the future. Forward-looking statements are subject to a number of risks,
assumptions and uncertainties which could cause our actual results to differ
materially from those projected in the 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 the nature of telecommunications regulation in the United
States, Asian and other countries;
- changes in business strategy;
- the successful integration of newly acquired businesses;
- the spread of Internet usage and other technological developments in
Asian countries and elsewhere;
- the impact of technological change; and
- risks that we mention under "Risk Factors" on page 11 and other risks
referenced from time to time in our filings with the SEC.
In evaluating forward-looking statements, you should specifically consider
the numerous risks, among others, described under the heading "Risk Factors".
23
<PAGE> 25
USE OF PROCEEDS
We estimate that the net proceeds to us from this offering, together with
the net proceeds from our anticipated concurrent debt offering (at an assumed
public offering price of $15.00 per share), will be approximately $1.2 billion,
or $1.3 billion if the underwriters exercise in full their option to purchase
additional shares from us, after deducting assumed underwriting discounts and
estimated offering expenses.
We expect to use the net proceeds of the offerings as follows:
- approximately $500 million to build our network;
- approximately $200 million to make investments in telecommunications and
Internet companies, and related businesses;
- $9.4 million to repay outstanding indebtedness under shareholder loans at
an interest rate of LIBOR plus 2%;
- up to approximately $79 million to purchase from Global Crossing
shareholder loans and future commitments it made to Hutchison Global
Crossing and Global Access Limited. The shareholder loans to Hutchison
Global Crossing bear an interest rate equal to the Hong Kong Dollar
Interbank Offered Rate, or HIBOR. The shareholder loans to Global Access
Limited bear an interest rate equal to 1.5% above the long-term prime
lending rate quoted by the Industrial Bank of Japan; and
- the balance for general corporate purposes, including the funding of
operating losses.
Pending those uses, we intend to invest the net proceeds in direct or
guaranteed obligations of the United States, interest-bearing, investment-grade
instruments or certificates of deposit.
Since we cannot specify with certainty the precise manner in which the net
proceeds will be allocated, our management will have broad discretion in the
application of the net proceeds.
DIVIDEND POLICY
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. The terms of some of our debt instruments place limitations
on our ability to pay dividends. See "Description of Material Indebtedness" on
page 96. These debt instruments provide that, in general, we may not declare or
pay any dividend or make any other cash distribution to our shareholders, unless
we have generated sufficient cash flows from previous years. This provision
limits and, for the foreseeable future, effectively prohibits, our ability to
declare or pay cash dividends. Future dividends on our common stock, if any,
will be at the discretion of our board of directors and will depend on, among
other things, our results of operations, cash requirements and surplus,
financial condition, contractual restrictions and other factors that our board
of directors may deem relevant.
24
<PAGE> 26
CAPITALIZATION
The following table presents our capitalization as of June 30, 2000:
- on an actual basis;
- on a pro forma basis to reflect this offering, at an assumed initial
public offering price of $15.00 per share, the completion of the
transactions described under "Concurrent Transactions" on page 75 and the
completion of the strategic investments described under
"Business -- Recent Developments" on page 47; and
- on a pro forma as adjusted basis to reflect this offering, at an assumed
initial public offering price of $15.00 per share, the completion of the
transactions described under "Concurrent Transactions" on page 75, the
completion of the strategic investments described under
"Business -- Recent Developments" on page 47 and our anticipated debt
offering.
You should read this table together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on page 35
and the consolidated financial statements and the accompanying notes included in
this prospectus beginning on page F-1.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- --------------- ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term debt:
Pacific Crossing-1 credit facility............ $ 750,000 $ 750,000 $ 750,000
% senior notes due 2010.................. -- -- 400,000
---------- ---------- ----------
Total long-term debt....................... 750,000 750,000 1,150,000
Minority interest............................... 141,254 141,254 141,254
---------- ---------- ----------
Shareholders' equity:
Common stock, par value $0.01 per share,
1,200,000 shares authorized, issued and
outstanding................................ 12 -- --
Class A common stock, par value $0.01 per
share (1,200,000,000 shares authorized,
67,017,250 shares issued and outstanding,
pro forma)................................. -- 670 670
Class B common stock, par value $0.01 per
share (1,200,000,000 shares authorized,
481,807,875 shares issued and outstanding,
pro forma)................................. -- 4,818 4,818
Additional paid-in capital...................... 758,173 2,186,706 2,186,706
Accumulated deficit............................. (8,334) (8,334) (8,334)
Cumulative translation adjustment............... 434 434 434
---------- ---------- ----------
Total shareholders' equity............ 750,285 2,184,294 2,184,294
---------- ---------- ----------
Total capitalization............. $1,641,539 $3,075,548 $3,475,548
========== ========== ==========
</TABLE>
The table above does not take into account any shares underlying stock
options granted to directors, officers or employees.
25
<PAGE> 27
DILUTION
For the calculations presented below, the number of shares that will be
outstanding after this offering is based on the number of shares outstanding as
of June 30, 2000, adjusted by a 375 for 1 stock split to be completed prior to
the completion of this offering.
Our pro forma net tangible book value at June 30, 2000 was approximately
$1,047.6 million, or $2.11 per share of common stock after giving effect to the
completion of the transactions described under "Concurrent Transactions" on page
75 and the completion of the strategic investments described under
"Business -- Recent Developments" on page 47. Net tangible book value per share
represents the amount of our tangible assets, meaning:
- total assets less intangible assets;
- reduced by our total liabilities; and
- divided by the number of shares of common stock outstanding.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of our Class A common
stock in this offering and the pro forma net tangible book value per share of
our common stock immediately following this offering.
After giving effect to 53.0 million shares of our Class A common stock
which we are selling under this prospectus at an assumed initial public offering
price of $15.00 per share, the midpoint of the range set forth on the cover page
of this prospectus, and after deducting an assumed underwriting discount and
estimated offering expenses, our adjusted net tangible book value as of June 30,
2000 would have been approximately $1,800.1 million, or $3.28 per share. This
represents an immediate increase in net tangible book value of $1.17 per share
to existing shareholders and strategic investors. This also represents an
immediate dilution of $11.72 per share to new investors purchasing shares of our
Class A common stock under this prospectus. The following table illustrates this
per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per Class A share..... $15.00
Pro forma net tangible book value per share before this
offering............................................... $2.11
Increase per share attributable to investors in this
offering............................................... $1.17
Adjusted pro forma net tangible book value per share after
this offering............................................. $ 3.28
------
Dilution per share to new investors......................... $11.72
======
</TABLE>
The above analysis does not give effect to 7.95 million shares of Class A
common stock which we will issue if the underwriters exercise in full their
option to purchase additional shares from us.
Assuming this offering had occurred on June 30, 2000, the following table
summarizes the differences between the total consideration paid and the average
price per share paid by our current shareholders ,the strategic investors
described under "Business -- Recent Developments" and the investors in this
offering with respect to the number of shares of common stock purchased from us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- --------------------------------------
AVERAGE
PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- -------------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current shareholders............ 486,625,125 88.7% $1,167,909 55.6% $ 2.40
Strategic investors............. 9,200,000 1.7 138,000 6.6% 15.00
Investors in this offering...... 53,000,000 9.6 795,000 37.8 15.00
----------- ----- ---------- ----- ------
Total................. 548,825,125 100.0% $2,100,909 100.0% $ 3.83
=========== ===== ========== ===== ======
</TABLE>
The table above does not take into account any shares underlying stock
options granted to directors, officers or employees.
26
<PAGE> 28
SELECTED HISTORICAL FINANCIAL INFORMATION
ASIA GLOBAL CROSSING SELECTED HISTORICAL FINANCIAL INFORMATION
The table below shows our selected historical financial information
prepared in United States GAAP. This information has been prepared using our
consolidated financial statements as of the dates indicated and for the year
ended December 31, 1999, for the period from April 1, 1998, date of inception,
to December 31, 1998 and for the six months ended June 30, 2000 and 1999. The
consolidated financial information as of December 31, 1999 and 1998 and for the
year ended December 31, 1999 and for the period from April 1, 1998, date of
inception, to December 31, 1998 has been derived from financial statements
audited by Arthur Andersen, independent public accountants. These financial
statements are included in this prospectus beginning on page F-1. We derived the
remaining data from unaudited consolidated financial statements.
In reading the following selected historical financial information, please
note the following:
- On September 24, 1999, we were formed as an indirect wholly owned
subsidiary of Global Crossing. On November 24, 1999, we became a wholly
owned subsidiary of a joint venture among Global Crossing, Softbank and
Microsoft, known as Asia Global Crossing Holdings Ltd.
- On November 24, 1999, Global Crossing contributed to us GCT Pacific. GCT
Pacific owns our interest in Pacific Crossing Ltd. Since we and GCT
Pacific are entities under common control, our consolidated financial
statements include information relating to GCT Pacific as if we were in
existence on April 1, 1998, the date of inception of GCT Pacific, in a
method similar to a pooling of interest.
- On November 24, 1999, Global Crossing contributed all its rights in East
Asia Crossing to us.
- At December 31, 1999, we beneficially owned 57.75% of Pacific Crossing
Ltd. Before January 1, 2000, our investment in Pacific Crossing Ltd. was
accounted for under the equity method because we were not able to
exercise effective control over Pacific Crossing Ltd. In March 2000, we
increased our interest in Pacific Crossing Ltd. to 64.5%, and the Pacific
Crossing Ltd. shareholders agreement was amended to give us effective
control over Pacific Crossing Ltd. As a result, we have consolidated
Pacific Crossing Ltd. as of January 1, 2000.
- The first segment of Pacific Crossing-1 commenced service in December
1999, and we anticipate that the full system will be completed by year
end 2000.
- The financial information as of June 30, 2000 and for the six months
ended June 30, 2000 and 1999, are derived from our unaudited consolidated
financial statements. We have made adjustments, consisting of normal
recurring adjustments to present the consolidated financial position,
which in the opinion of our management are necessary for a fair
presentation. Results of operations for the six months ended June 30,
2000 are not necessarily indicative of the results that may be expected
for the full year or for any future period.
- Cash revenue is defined as revenue plus incremental cash deferred
revenue, which is the incremental change in deferred revenue relating to
cash receipts. We present cash revenue because it is a financial
indicator used by investors and analysts to compare companies on the
basis of cash receipts from sales of capacity and services. You should
not consider this information as an alternative to any measure of
performance as promulgated under GAAP.
- Adjusted EBITDA is defined as operating income (loss), plus goodwill
amortization, depreciation and amortization, non-cash cost of capacity
sold, stock related expenses and incremental cash deferred revenue. We
anticipate that this definition will be consistent with financial
covenants to be contained in our significant financing agreements. We
present Adjusted EBITDA because it is a financial indicator used by
investors and analysts to analyze and compare companies on the basis of
operating performance and because we believe that Adjusted EBITDA is an
additional, meaningful measure of performance and liquidity. We expect to
use Adjusted EBITDA to monitor our compliance with our financial
covenants and to understand the financial indicators investors and
analyst are using to measure our performance. You should not consider
this information as an alternative to any measure of performance as
promulgated under GAAP. Our calculation of Adjusted EBITDA may be
different from the calculation used by other companies and, therefore,
comparability may be limited.
27
<PAGE> 29
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1998
(DATE OF
SIX MONTHS ENDED JUNE 30, YEAR ENDED INCEPTION) TO
------------------------- DECEMBER 31, DECEMBER 31,
2000 1999 1999 1998
------------ ---------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue................................... $ 108,680 $ -- $ -- $ --
Expenses:
Cost of sales........................... 84,850 -- -- --
Operations, administration and
maintenance.......................... 24,198 -- -- --
General and administrative.............. 17,776 -- 1,201 --
Depreciation and amortization........... 8,026 -- -- --
----------- --------- ----------- ---------
Operating income (loss)................... (26,170) -- (1,201) --
Equity in income (loss) of affiliates..... -- (2,395) 9,893 (2,507)
Minority interest......................... (12,118) -- -- --
Other income (expense):
Other expense........................... (306) -- -- --
Interest income......................... 8,191 5,440 11,598 5,374
Interest expense........................ (1,088) -- -- --
----------- --------- ----------- ---------
Income (loss) before provision for
income taxes....................... (31,491) 3,045 20,290 2,867
Provision for income taxes................ -- -- -- --
----------- --------- ----------- ---------
Net income (loss)....................... $ (31,491) $ 3,045 $ 20,290 $ 2,867
=========== ========= =========== =========
Net income (loss) per common share:
Basic and diluted net income (loss) per
common share......................... $ (26.24) $ 2.54 $ 16.91 $ 2.39
=========== ========= =========== =========
Shares used in computing basic and diluted
net income (loss) per common share...... 1,200,000 1,200,000 1,200,000 1,200,000
=========== ========= =========== =========
Pro forma basic and diluted net income
(loss) per common share................. $ (0.07) $ 0.05
=========== ===========
Shares used in computing pro forma basic
and diluted net income (loss) per
share................................... 450,000,000 450,000,000
=========== ===========
OTHER DATA:
Cash revenue.............................. $ 174,793 $ -- $ -- $ --
Adjusted EBITDA........................... 132,819 -- (1,201) --
Cash from operating activities............ 59,404 5,415 22,045 5,366
Cash used for investing activities........ (226,114) -- (90,652) (231,006)
Cash from financing activities............ $ 353,224 $ -- $ 73,013 $ 231,018
CALCULATION OF ADJUSTED EBITDA:
Operating income (loss)................... $ (26,170) $ -- $ (1,201) $ --
Depreciation and amortization............. 8,026 -- -- --
Non-cash cost of sales.................... 84,850 -- -- --
Incremental cash deferred revenue......... 66,113 -- -- --
----------- --------- ----------- ---------
Adjusted EBITDA........................... $ 132,819 $ -- $ (1,201) $ --
=========== ========= =========== =========
</TABLE>
28
<PAGE> 30
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------
2000 1999 1998
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Assets:
Cash and cash equivalents............................ $ 196,732 $ 9,784 $ 5,378
Restricted cash and cash equivalents................. 55,416 -- --
Accounts receivable, net............................. 23,987 -- --
Receivable from affiliates........................... 94,427 89,735 --
Other assets......................................... 8,842 1,170 20
---------- -------- --------
Total current assets......................... 379,404 100,689 5,398
Restricted cash and cash equivalents................... 38,921 138,118 231,000
Property and equipment, net............................ 1,431,888 101,598 --
Deferred finance fees, net............................. 23,105 -- --
Other assets........................................... 40,745 -- --
Investments in affiliate............................... -- 263,438 160,639
---------- -------- --------
Total assets................................. $1,914,063 $603,843 $397,037
========== ======== ========
Liabilities:
Accrued construction costs........................... $ 142,650 $ -- $ --
Accounts payable and accrued liabilities............. 8,612 1,131 --
Deferred revenue..................................... 4,308 -- --
Payable to affiliates................................ 11,250 101,402 --
---------- -------- --------
Total current liabilities.................... 166,820 102,533 --
---------- -------- --------
Long-term debt......................................... 750,000 -- --
Long-term deferred revenue............................. 94,679 -- --
Other long-term liabilities............................ 1,427 -- --
Loan payable to affiliate.............................. 9,598 -- --
---------- -------- --------
Total liabilities............................ 1,022,524 102,533 --
---------- -------- --------
Minority interest...................................... 141,254 -- --
Shareholder's equity:
Common stock......................................... 12 12 12
Additional paid-in capital........................... 758,173 478,141 394,158
Retained earnings (accumulated deficit).............. (8,334) 23,157 2,867
Cumulative translation adjustment.................... 434 -- --
---------- -------- --------
Total shareholder's equity................... 750,285 501,310 397,037
---------- -------- --------
Total liabilities and shareholder's equity... $1,914,063 $603,843 $397,037
========== ======== ========
</TABLE>
29
<PAGE> 31
PACIFIC CROSSING LTD., HUTCHISON GLOBAL CROSSING AND GLOBAL ACCESS LIMITED
SELECTED HISTORICAL FINANCIAL INFORMATION
PACIFIC CROSSING LTD.
The table below shows the selected historical financial information of
Pacific Crossing Ltd. prepared using United States GAAP. This information has
been prepared using the consolidated financial statements of Pacific Crossing
Ltd. as of the dates indicated and for the year ended December 31, 1999, for the
period from May 4, 1998, date of inception, to December 31, 1998 and for the six
months ended June 30, 2000 and 1999. The consolidated statement of operations
data for the year ended December 31, 1999 and for the period from May 4, 1998,
date of inception, to December 31, 1998 and the consolidated balance sheet data
as of December 31, 1999 and 1998 have been derived from financial statements
audited by Arthur Andersen, independent public accountants, which are included
in this prospectus beginning on page F-22. We derived the remaining data from
unaudited consolidated financial statements.
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS ENDED MAY 4, 1998
JUNE 30, YEAR ENDED (DATE OF INCEPTION)
----------------------- DECEMBER 31, TO DECEMBER 31,
2000 1999 1999 1998
---------- --------- ------------ -------------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash revenue..................... $ 127,370 $ 3,122 $ 62,854 $ --
Revenue.......................... 107,550 -- 61,100 --
Income (loss) from continuing
operations..................... 34,116 (3,357) 22,520 (4,341)
Adjusted EBITDA.................. 101,907 1,486 46,685 (1,627)
Cash provided by (used in)
operating activities........... 31,785 (1,644) 6,842 (3,771)
Cash used in investing
activities..................... (173,096) (266,662) (706,285) (157,175)
Cash provided by financing
activities..................... 141,321 $ 268,622 699,616 161,379
Total assets..................... 1,328,087 1,124,138 231,677
Long-term obligations............ $ 800,101 $ 760,636 $ 201,246
CALCULATION OF ADJUSTED EBITDA:
Operating income (loss).......... $ 33,559 $ (1,636) $ 24,209 $ (1,627)
Depreciation and amortization.... 6,976 -- -- --
Non-cash cost of sales........... 41,552 -- 20,722 --
Incremental cash deferred
revenue........................ 19,820 3,122 1,754 --
---------- --------- ---------- ---------
Adjusted EBITDA.................. $ 101,907 $ 1,486 $ 46,685 $ (1,627)
========== ========= ========== =========
</TABLE>
30
<PAGE> 32
HUTCHISON GLOBAL CROSSING
The table below shows selected historical financial information for
Hutchison Global Crossing prepared in Hong Kong dollars based on United States
GAAP reconciled from Hutchison Global Crossing's Hong Kong GAAP combined
financial statements. This information has been prepared using the combined
financial statements as of the dates indicated and for the three years ended
December 31, 1999 and for the six months ended June 30, 2000 and 1999. The
combined statement of operations data for the three years ended December 31,
1999 and the combined balance sheet data as of December 31, 1999, 1998 and 1997
have been derived from financial statements audited by PricewaterhouseCoopers,
certified public accountants, which are included in this prospectus beginning on
page F-36. We derived the remaining data from unaudited combined financial
statements.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
--------------------------- ------------------------------------------
2000 1999 1999 1998 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash revenue......... HK$ 465,200 HK$ 393,136 HK$ 840,512 HK$ 950,120 HK$1,262,106
Revenue.............. 465,200 393,136 840,512 950,120 1,262,106
Income (loss) from
continuing
operations......... (130,853) (113,942) (250,778) (279,526) (356,847)
Adjusted EBITDA...... (47,067) (43,514) (100,348) (162,808) (291,874)
Cash used in
operating
activities......... (21,140) (83,054) (206,149) (31,928) (200,364)
Cash used in
investing
activities......... (438,506) (372,250) (872,281) (756,189) (541,806)
Cash provided by
financing
activities......... 628,380 HK$ 455,178 1,078,358 767,671 761,334
Total assets......... 3,388,127 2,781,175 1,857,539 1,369,610
Long-term
obligations........ HK$ 619,790 HK$3,618,673 HK$2,306,024 HK$1,403,847
CALCULATION OF
ADJUSTED EBITDA:
Operating loss....... HK$ (134,278) HK$ (91,418) HK$ (205,598) HK$ (227,194) HK$ (319,871)
Depreciation and
amortization....... 87,211 47,904 105,250 64,386 27,997
------------ ------------ ------------ ------------ ------------
Adjusted EBITDA...... HK$ (47,067) HK$ (43,514) HK$ (100,348) HK$ (162,808) HK$ (291,874)
============ ============ ============ ============ ============
</TABLE>
31
<PAGE> 33
The unaudited translations of Hutchison Global Crossing's Hong Kong dollar
amounts into United States dollars have been translated using a convenience
translation rate of HK$7.80 = $1.00 as of June 30, 2000 and for the six months
ended June 30, 2000 and as of December 31, 1999 and for the year ended December
31, 1999. The convenience translations should not be construed as
representations that the Hong Kong dollar amounts have been, could have been or
could in the future be converted into United States dollars at this rate or any
rate of exchange.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
-------------------------- ------------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Cash revenue..................................... $ 59,641 $ 107,758
Revenue.......................................... 59,641 107,758
Income (loss) from continuing operations......... (16,776) (32,151)
Adjusted EBITDA.................................. (6,034) (12,865)
Cash used in operating activities................ (2,710) (26,429)
Cash used in investing activities................ (56,219) (111,831)
Cash provided by financing activities............ 80,562 138,251
Total assets..................................... 434,375 356,561
Long-term obligations............................ $ 79,460 $ 463,932
CALCULATION OF ADJUSTED EBITDA:
Operating loss................................... $(17,215) $ (26,359)
Depreciation and amortization.................... 11,181 13,494
-------- ---------
Adjusted EBITDA.................................. $ (6,034) $ (12,865)
======== =========
</TABLE>
32
<PAGE> 34
GLOBAL ACCESS LIMITED
The table below shows selected historical financial information for Global
Access Limited prepared in United States GAAP and Japanese yen. This information
has been prepared using the financial statements of Global Access Limited as of
the dates indicated and for the period from November 4, 1997, date of inception,
to December 31, 1997 and for the fiscal years ended December 31, 1999 and 1998
and for the six months ended June 30, 2000 and 1999. The statement of operations
data for the period from November 4, 1997, date of inception, to December 31,
1997 and for the fiscal years ended December 31, 1999 and 1998 and the balance
sheet data as of December 31, 1999, 1998 and 1997 were derived from financial
statements audited by Arthur Andersen, independent public accountants, which are
included in this prospectus beginning on page F-74. We derived the financial
information below from unaudited financial statements.
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 4,
1997 (DATE
OF INCEPTION)
FOR THE SIX MONTHS ENDED FOR THE YEARS ENDED TO
JUNE 30, DECEMBER 31, DECEMBER 31,
-------------------------- ------------------------- -------------
2000 1999 1999 1998 1997
----------- ----------- ----------- ---------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash revenue......... Y10,203,876 Y -- Y -- Y -- Y --
Revenue.............. 864,666 -- 1,432 -- --
Income (loss) from
continuing
operations......... (869,480) (533,795) (1,363,168) (244,007) (829)
Adjusted EBITDA...... 8,710,291 (534,067) (1,312,257) (244,130) (829)
Cash provided by
(used in) operating
activities......... 8,963,578 (546,557) (1,425,040) (257,736) (834)
Cash used in
investing
activities......... (8,038,830) (1,404,956) (3,870,433) (297,736) --
Cash provided by
financing
activities......... -- Y 3,000,000 9,000,000 1,950,000 50,000
Total assets......... 20,060,292 -- 13,614,452 1,756,801 49,185
Long-term
obligations........ Y 9,881,784 -- Y -- Y -- Y --
CALCULATION OF
ADJUSTED EBITDA:
Operating income
(loss)............. Y (793,832) Y (534,067) Y(1,313,112) Y (244,130) Y (829)
Depreciation and
amortization....... 164,913 -- 1,535 -- --
Non-cash cost of
sales.............. -- -- 752 -- --
Incremental cash
deferred revenue... 9,339,210 -- (1,432) -- --
----------- ----------- ----------- ---------- -------
Adjusted EBITDA...... Y 8,710,291 Y (534,067) Y(1,312,257) Y (244,130) Y (829)
=========== =========== =========== ========== =======
</TABLE>
33
<PAGE> 35
The unaudited translations of Global Access Limited's Japanese yen amounts
into United States dollars have been translated using a convenience translation
rate of (Yen)105.18 = $1.00 as of June 30, 2000 and for the six months ended
June 30, 2000 and as of December 31, 1999 and for the year ended December 31,
1999. The convenience translations should not be construed as representations
that the Japanese yen amounts have been, could have been or could in the future
be converted into United States dollars at this rate or any other rate of
exchange.
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE YEAR ENDED
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Cash revenue............................................... $ 97,013 $ --
Revenue.................................................... 8,221 14
Income (loss) from operations.............................. (8,267) (12,960)
Adjusted EBITDA............................................ 82,813 (12,476)
Cash provided by (used in) operating activities............ 85,221 (13,549)
Cash used in investing activities.......................... (76,429) (36,798)
Cash provided by financing activities...................... -- 85,568
Total assets............................................... 190,723 129,440
Total long-term obligations................................ $ 93,951 $ --
CALCULATION OF ADJUSTED EBITDA:
Operating income (loss).................................... $ (7,547) $(12,484)
Depreciation and amortization.............................. 1,568 15
Non-cash cost of sale...................................... -- 7
Incremental cash deferred revenue.......................... 88,792 (14)
-------- --------
Adjusted EBITDA............................................ $ 82,813 $(12,476)
======== ========
</TABLE>
34
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
We were formed in November 1999 and have a limited operating history. Upon
our formation, Global Crossing contributed GCT Pacific to us, which was then a
wholly-owned subsidiary of Global Crossing and which held Global Crossing's
interest in Pacific Crossing Ltd. GCT Pacific was a holding company and did not
have any operations. Since we and GCT Pacific are entities under common control,
our consolidated financial statements include information relating to GCT
Pacific as if we were in existence on April 1, 1998, the date of inception of
GCT Pacific, in a method similar to a pooling of interest.
In December 1999, the first segment of Pacific Crossing-1 began commercial
service allowing Pacific Crossing Ltd. to recognize revenue on sales of
capacity. Before January 1, 2000, our investment in Pacific Crossing Ltd. was
accounted for under the equity method; consequently, our revenue did not include
Pacific Crossing Ltd. revenue. In March 2000, we increased our interest in
Pacific Crossing Ltd. to 64.5%, and the Pacific Crossing Ltd. shareholders
agreement was amended to give us effective control over Pacific Crossing Ltd. As
a result, we have consolidated Pacific Crossing Ltd. as of January 1, 2000.
Since we did not consolidate Pacific Crossing Ltd. results in 1999, the
comparability of our historical results for the six-month periods ended June 30,
2000 and June 30, 1999 is limited. Before December 1999, Pacific Crossing Ltd.
had no revenues.
The historical results do not include our 50% interest in Hutchison Global
Crossing or our 49% interest in Global Access Limited, which interests were
previously owned by Global Crossing. The selected unaudited pro forma financial
information reflects the contribution to us of Global Crossing's interests in
Hutchison Global Crossing and Global Access Limited, which will occur
simultaneously with the completion of this offering.
Currently, all of our cash revenue is from the sale of wholesale capacity
to carrier customers on Pacific Crossing-1. Once East Asia Crossing and future
systems become operational, additional revenue will be generated from these
systems. The revenue from these systems will be offset by additional costs
including cost of capacity, selling, general and administrative costs and other
operational costs.
We expect that wholesale bandwidth pricing in the trans-Pacific market is
likely to continue to decline in future years as a result of the increasing
supply of trans-Pacific bandwidth capacity. We expect similar price declines in
other markets in which we will operate. Although prices are expected to continue
to decline, we anticipate that the impact to our revenue will be offset by the
increasing demand for bandwidth capacity. Our revenue through the end of year
2000 will be primarily derived from the sale of wholesale bandwidth capacity on
Pacific Crossing-1. In fiscal year 2001, we expect a significant portion of our
revenue growth to be derived from the sale of wholesale bandwidth capacity on
East Asia Crossing and other services, including Internet, data, voice and web
hosting services, to wholesale and business customers.
Cash revenue refers to revenue plus incremental cash deferred revenue,
which is the incremental change in deferred revenue relating to cash receipts.
We present cash revenue because it is a financial indicator used by investors
and analysts to compare companies on the basis of cash receipts from sales of
capacity and services. You should not consider this information as an
alternative to any measure of performance as promulgated under GAAP.
Adjusted EBITDA is defined as operating income (loss), plus goodwill
amortization, depreciation and amortization, non-cash cost of capacity sold,
stock related expenses and incremental cash deferred revenue. We anticipate that
this definition will be consistent with financial covenants to be contained in
our significant financing agreements. We present Adjusted EBITDA because it is a
financial indicator used by investors and analysts to analyze and compare
companies on the basis of
35
<PAGE> 37
operating performance and because we believe that Adjusted EBITDA is an
additional, meaningful measure of performance and liquidity. Our management is
expected to use Adjusted EBITDA to monitor its compliance with its financial
covenants and to understand the financial indicators investors and analysts are
using to measure our performance. You should not consider this information as an
alternative to any measure of performance as promulgated under GAAP. Our
calculation of Adjusted EBITDA may be different from the calculation used by
other companies and, therefore, comparability may be limited.
RECENT FINANCIAL ACCOUNTING DEVELOPMENTS
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, even though typically we
receive the full sales price in cash at the time of activation of these
circuits.
We offer our customers flexible bandwidth products to multiple destinations
and anticipate that many of the contracts for subsea circuits entered into will
be part of a service offering. Therefore, we anticipate that many of these
contracts 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 that revenue over the appropriate term of the
contract. Accordingly, we will treat cash that we have received but not
recognized as deferred revenue. In certain circumstances, should a contract meet
all of the requirements of sales-type lease accounting, we will recognize
revenue without deferral upon payment and activation. None of the accounting
practices described above affect our cash flows.
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 those 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.
As of December 31, 1999, we had an aggregate backlog of approximately $25
million in capacity sales contracts for which revenue will be recognized using
sales-type lease accounting upon activation. For the remaining backlog as of
that date, revenue will be recognized using operating lease accounting and will
be amortized over the life of the contract.
We note that accounting practice and authoritative guidance regarding the
applicability of sales-type lease accounting to the sale of capacity is still
evolving. Based on the accounting practices described above, we believe that
additional changes, if any, in accounting practice or authoritative guidance
affecting sales of capacity would have little or no impact on our results of
operations.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of SFAS No.
133", which deferred SFAS No. 133's effective date to all fiscal quarters of all
fiscal years beginning after June 15, 2000. This statement standardizes the
accounting for derivatives and hedging activities and requires that all
derivatives be recognized in the statement of financial position as either
assets or liabilities at fair value. Changes in the fair value of derivatives
that do not meet the hedge accounting criteria are to be reported in earnings.
The impact of the adoption of this standard has not been quantified.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements", which provides additional
guidance on revenue recognition as well as criteria for when revenue is
generally realized and earned. Our financial statements reflect the accounting
guidance in SAB 101 for all periods presented.
36
<PAGE> 38
ASIA GLOBAL CROSSING
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
Revenue. Revenue for the first half of 2000 was $108.7 million which was
primarily from the sales of Pacific Crossing-1 capacity. Of this amount, $105.3
million in revenue was recognized using sales-type lease accounting, while the
remaining $3.4 million in revenue was accounted for using service accounting.
Cash revenue for the first half of 2000 was $174.8 million. In the first half of
1999, there were no revenue and cash revenue.
Cost of sales. Cost of sales for the first half of 2000 was $84.9 million
which relates primarily to sales of Pacific Crossing-1 capacity and a $38.0
million charge for accrued losses on sales. There was no cost of sales for the
first half of 1999 since there was no revenue.
Operations, administration and maintenance. Operations, administration and
maintenance expense was $24.2 million in the first half of 2000 related to the
costs to provide operating, administration and maintenance functions for Pacific
Crossing-1. There was no operations, administration and maintenance expense in
the first half of 1999 because Pacific Crossing Ltd. was not consolidated.
General and administrative. General and administrative costs for the first
half of 2000 were $17.8 million, which consisted principally of salaries and
employee benefits reflecting our staffing for multiple systems, travel costs,
professional fees and shared corporate service charges allocated from Global
Crossing. There was no general and administrative costs for the first half of
1999 since Asia Global Crossing was not yet formed.
Depreciation and amortization. Depreciation expense was $8.0 million in the
first half of 2000 relating primarily to Pacific Crossing-1. There was no
depreciation expense in the first half of 1999 because Pacific Crossing Ltd. was
not consolidated.
Equity in income (loss) of affiliates. There was no loss from affiliates in
the first half of 2000 due to our consolidation of Pacific Crossing Ltd. as of
January 1, 2000. Loss from affiliates for the first half of 1999 was $2.4
million representing our equity interest in Pacific Crossing Ltd.'s net loss.
Minority interest. Minority interest for the first half of 2000 was $12.1
million which primarily represents our joint venture partners' equity interest
in the earnings of Pacific Crossing Ltd. We did not have any minority interest
until we consolidated Pacific Crossing Ltd. in January 2000.
Interest income. Interest income of $8.2 million for the first half of 2000
relates primarily to returns on invested cash contributed from Microsoft and
Softbank and restricted cash for the construction of Pacific Crossing-1.
Interest income of $5.4 million for the six months ended June 30, 1999 relates
primarily to the returns on invested restricted cash for the construction of
Pacific Crossing-1. The increase of 52% is primarily due to the additional cash
contributed by Microsoft and Softbank.
Interest expense. Interest expense of $1.1 million for the first half of
2000 relates to the Pacific Crossing-1 credit facility described under
"Description of Material Indebtedness" on page 96. There was no interest expense
for the first half of 1999 because Pacific Crossing Ltd. was not consolidated.
Provision for income taxes. Bermuda does not impose a statutory income tax,
and consequently no provision for income taxes was recorded for entities
incorporated in Bermuda. We established a full valuation allowance as of June
30, 2000 for all entities incurring a net loss and operating in taxing
jurisdictions to offset tax benefits recorded by entities without an operating
history. A valuation allowance is necessary until such time as we can quantify
any potential tax attributes related to the operating losses and the
realizability of those potential attributes.
Net income (loss). During the first half of 2000, our net loss was $31.5
million as compared to net income of $3.0 million for the first half of 1999.
The decrease was primarily due to sales of Pacific Crossing-1 capacity, offset
by a $38.0 million charge for accrued losses on sales, and the increase of
37
<PAGE> 39
operations, administration and maintenance expense, general and administrative
expense, depreciation and amortization expense and minority interest.
Adjusted EBITDA. During the first half of 2000, we reported Adjusted EBITDA
of $132.8 million. There was no adjusted EBITDA for the first half of 1999
because there were no operating activities.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM
APRIL 1, 1998 TO DECEMBER 31, 1998
General and administrative. General and administrative costs for the year
ended December 31, 1999 were $1.2 million. These charges consist principally of
salaries and employee benefits, travel costs, professional fees and management
service charges allocated from Global Crossing. There was no general and
administrative expense in 1998. The increase is attributable to costs incurred
after our formation.
Equity in income (loss) of affiliates. Income from affiliates for the year
ended December 31, 1999 was $9.9 million. During the period from April 1, 1998,
date of inception, to December 31, 1998, we reported a $2.5 million loss from
affiliates. The equity income from Pacific Crossing Ltd. was partially offset by
costs attributable to us relating to the amortization of warrants for Global
Crossing common stock granted to Pacific Capital Group, Inc., an affiliate of
Global Crossing. GCT Pacific recorded those costs as an investment in affiliate
Pacific Crossing Ltd. recorded revenues for Pacific Crossing-1 customers in the
fourth quarter of 1999.
Interest income. Interest income for the year ended December 31, 1999 was
$11.6 million. During the period from April 1, 1998, date of inception, to
December 31, 1998, we reported interest income of $5.4 million. The increase of
116% is due to earnings on investments of restricted funds for the construction
of Pacific Crossing-1.
Provision for income taxes. Bermuda does not impose a statutory income
tax, and consequently no provision for income taxes was recorded for entities
incorporated in Bermuda. We established a full valuation allowance as of
December 31, 1999 for all entities incurring a net loss and operating in taxing
jurisdictions to offset tax benefits recorded by entities without an operating
history. A valuation allowance is necessary until we can quantify any potential
tax attributes related to the operating losses and the realizability of those
potential attributes.
Net income. During the year ended December 31, 1999, we reported net
income of $20.3 million. During the period from April 1, 1998, date of
inception, to December 31, 1998, we reported net income of $2.9 million. The
increase of 608% was primarily due to the increase of equity in income (loss) of
affiliates and interest income.
LIQUIDITY AND CAPITAL RESOURCES
We plan to expand our network to key markets in Asia by developing undersea
cables and terrestrial fiber networks on our own or through joint ventures.
Building our network and developing partnerships will require significant
amounts of capital. We estimate the cost of Pacific Crossing-1 to be
approximately $1.1 billion. We have fully financed Pacific Crossing-1 through
shareholder equity investments and the $850 million Pacific Crossing-1 credit
facility, under which $750 million was outstanding at June 30, 2000.
We estimate the cost of the portion of East Asia Crossing connecting Japan,
Hong Kong, Taiwan and Korea to be approximately $750 million with additional
costs to be incurred if and when we expand this network. We entered into a
construction contract with KDD-SCS for East Asia Crossing that provides for
construction costs totaling approximately $587.0 million over the next two
years. As of June 30, 2000, we have made $78.5 million in payments to KDD-SCS,
our contractor for East Asia Crossing. We will use a portion of the net proceeds
of this offering and our anticipated concurrent debt offering to fully fund this
portion of East Asia Crossing.
38
<PAGE> 40
Pacific Crossing Ltd. entered into an operations, administration and
maintenance agreement with Global Crossing Network Center, Ltd. The agreement is
for an initial term of eight years with two renewal periods of five years each
at Pacific Crossing Ltd.'s option. The amounts payable under the agreement are
$43 million, $43 million and $42.2 million for year 2000, 2001 and 2002,
respectively. These fees will increase by 3.0% each year starting in the year
ended December 31, 2003, through the end of the agreement in 2007.
Pacific Crossing Ltd. also has an operations, administration and
maintenance agreement with Global Access Limited with a fee of $5.8 million each
year through 2002, increasing by 3.0% thereafter through 2007.
Upon completion of this offering, we will own 49% of Global Access Limited
and 50% of Hutchison Global Crossing. These joint ventures are actively
expanding their networks. We anticipate that both of these joint ventures will
be funded with shareholder loans until we and our joint venture partners
determine that external financing is desirable. We anticipate these external
sources of financing will be obtained from the issuance of common stock or
preferred stock or through bank financing or other corporate financing.
Our future capital requirements will also include funds for expanding our
network, making investments in telecommunications and Internet companies,
repaying outstanding indebtedness under shareholder loans or third party debt
financing and general corporate purposes. We anticipate these future capital
requirements to be funded partially from the remaining net proceeds from this
offering and our anticipated concurrent debt offering, as well as the issuance
of additional common stock or preferred stock and through bank financing or
other corporate financing. Based upon anticipated levels of operations, we
believe that our future cash flows from operations, together with the net
proceeds of these offerings and our ability to raise capital, will be adequate
to meet these anticipated requirements.
We have extended limited amounts of financing to customers in connection
with certain capacity sales. Our customer financing terms may provide for
installment payments of up to four years. We believe that our extension of
financing to our customers will not have a material effect on our liquidity.
As of June 30, 2000, on a pro forma basis giving effect to this offering,
the contribution to us of Global Crossing's interests in Hutchison Global
Crossing and Global Access Limited and our anticipated concurrent debt offering,
we and our consolidated subsidiaries had a total of $1.15 billion of long-term
debt, of which $750 million was outstanding under the Pacific Crossing-1 credit
facility. The Pacific Crossing-1 credit facility comprised of a $840 million
term loan facility and a $10 million working capital facility. As of June 30,
2000, we have drawn $750 million of borrowings under the term loan facility and
have remaining available borrowings of $90 million under the term loan facility
and $10 million under the working capital facility. On a pro forma basis, our
interest expense for the six months ended June 30, 2000 would have been $24.6
million.
As of June 30, 2000, we had $196.7 million in cash and cash equivalents and
$94.3 million in restricted cash and cash equivalents. For the six months ended
June 30, 2000 and for the year ended December 31, 1999, net cash provided by
operating activities was $59.4 million and $22.0 million, respectively.
INFLATION
We do not believe that our business is impacted by inflation to a
significantly different extent than the general economy.
39
<PAGE> 41
INTEREST RATE RISK
The table below provides information about our market sensitive financial
instruments and constitutes a forward-looking statement. Our major market risk
exposure is changing interest rates. Our policy is to manage interest rates
through use of a combination of fixed and floating rate debt. Interest rate
swaps may be used to adjust interest rate exposures when appropriate, based upon
market conditions, and we do not engage in those transactions for speculative
purposes.
<TABLE>
<CAPTION>
FAIR
EXPECTED MATURITY DATES 2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
----------------------- ------ ------- ------- -------- -------- ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEBT
Pacific Crossing-1 credit
facility.......................... $ -- $83,260 $93,260 $113,260 $118,260 $341,960 $750,000 $750,000
Average interest
rates -- variable............... (1)
DERIVATIVE INSTRUMENTS
Interest rate swap floating for
fixed
Contract notional amount.......... $ -- $ -- $ -- $ -- $500,000 $ -- $500,000 $527,877
Fixed rate paid by counterparty... 5.0%
Floating rate paid by us.......... (2)
</TABLE>
---------------
(1) The interest rate is Eurodollar dollar LIBOR plus 2.25%-2.50%, which was
8.9%-9.2% as of June 30, 2000.
(2) The interest rate is one month United States dollar LIBOR, which was 6.7% as
of June 30, 2000.
A hypothetical 10% change in interest rate would result in an increase or
decrease of approximately $9.4 million to the fair value of financial
instruments with exposures to interest rate risk as of June 30, 2000.
FOREIGN CURRENCY RISK
For those subsidiaries using the United States dollar as their functional
currency, translation adjustments are recorded in the accompanying consolidated
financial statements beginning on page F-4. None of our translation adjustments
were material as of and for the years ended December 31, 1999 and 1998.
For those subsidiaries not using the United States dollar as their
functional currency, assets and liabilities are translated at exchange rates in
effect at the balance sheet date, and income and expense accounts are translated
at average exchange rates during the period. Resulting translation adjustments
are recorded directly to a separate component of shareholders' equity. For the
years ended December 31, 1999 and 1998, the translation adjustments were
immaterial.
HUTCHISON GLOBAL CROSSING
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND THE SIX
MONTHS ENDED JUNE 30, 1999
Revenue. Revenue increased 18.3% from HK$393.1 million in 1999 to HK$465.2
million in 2000. The increase was primarily due to increases in the number of
data leased lines and the number of subscribers to the ISP/portal services.
During the six months ended June 30, 2000 and 1999, respectively, there was no
difference between revenue and cash revenue.
Income (loss) from continuing operations. Loss from continuing operations
increased 14.9% from HK$(113.9) million in 1999 to HK$(130.9) million in 2000.
The increase was primarily due to the increase in depreciation and network
costs. Depreciation expense was higher in 2000 and in line with the increase in
fixed assets.
Adjusted EBITDA. Adjusted EBITDA decreased 8.3% from HK$(43.5) million in
1999 to HK$(47.1) million in 2000, primarily due to the increase in network
costs. Adjusted EBITDA is defined as operating income (loss), plus goodwill
amortization, depreciation and amortization, non-cash cost of capacity sold,
stock related expenses and incremental cash deferred revenue. We anticipate that
this definition will be consistent with financial covenants to be contained in
our significant financing
40
<PAGE> 42
agreements. We present Adjusted EBITDA because it is a financial indicator used
by investors and analysts to analyze and compare companies on the basis of
operating performance and because we believe that Adjusted EBITDA is an
additional, meaningful measure of performance and liquidity. We expect to use
Adjusted EBITDA to monitor our compliance with our financial covenants and to
understand the financial indicators investors and analysts are using to measure
our performance. You should not consider this information as an alternative to
any measure of performance as promulgated under GAAP. Our calculation of
Adjusted EBITDA may be different from the calculation used by other companies
and, therefore, comparability may be limited.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE YEAR ENDED
DECEMBER 31, 1998
Revenue. Revenue decreased 11.5% from HK$950.1 million in 1998 to HK$840.5
million in 1999. The decrease was mainly due to declines in call volume and
reductions in prices resulting from increased competition for international
services. Strong growth in revenue from data and ISP/portal services partially
offsets the lower revenue from international services. Data and ISP/portal
services revenue contributed over 20% of the total revenue in 1999 compared to
4.1% in 1998. During the years ended December 31, 1999 and 1998, there was no
incremental cash deferred revenue.
Income (loss) from continuing operations. Loss from continuing operations
decreased 10.3% from HK$(279.5) million in 1998 to HK$(250.8) million in 1999.
The decrease was primarily due to a decrease of cost of services related to the
lower call volumes and prices, offset in part by an increase in selling, general
and administrative expenses.
Adjusted EBITDA. Adjusted EBITDA improved by 38.4% from HK$(162.8) million
in 1998 to HK$(100.3) million in 1999, primarily due to an improvement in the
overall gross profit margin as a result of an increasing proportion of higher
margin data services business. Adjusted EBITDA is defined as operating income
(loss), plus goodwill amortization, depreciation and amortization, non-cash cost
of capacity sold, stock related expenses and incremental cash deferred revenue.
We anticipate that this definition will be consistent with financial covenants
to be contained in our significant financing agreements. We present Adjusted
EBITDA because it is a financial indicator used by investors and analysts to
analyze and compare companies on the basis of operating performance and because
we believe that Adjusted EBITDA is an additional, meaningful measure of
performance and liquidity. We expect to use Adjusted EBITDA to monitor our
compliance with our financial covenants and to understand the financial
indicators investors and analysts are using to measure our performance. You
should not consider this information as an alternative to any measure of
performance as promulgated under GAAP. Our calculation of Adjusted EBITDA may be
different from the calculation used by other companies and, therefore,
comparability may be limited.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE YEAR ENDED
DECEMBER 31, 1997
Revenue. Revenue decreased 24.7% from HK$1,262.1 million in 1997 to
HK$950.1 million in 1998. In 1997, revenue came primarily from international
services. The decrease was primarily due to the declines in call volume and
reductions in prices resulting from increasing competition. Revenue from
business and carrier data increased significantly in 1998 although it only
represented 4% of revenue. During the years ended December 31, 1998 and 1997,
there was no incremental cash deferred revenue.
Income (loss) from continuing operations. Loss from continuing operations
decreased 21.7% from HK$(356.8) million in 1997 to HK$(279.5) million in 1998.
The decrease was primarily due to a decrease of cost of services related to the
lower call volumes and prices.
Adjusted EBITDA. Adjusted EBITDA improved by 44.2% from a loss of
HK$(291.9) million in 1997 to a loss of HK$(162.8) million in 1998, primarily
due to an improvement in the overall gross profit margin following the reduction
in charges by other carriers for international delivery. Adjusted
41
<PAGE> 43
EBITDA is defined as operating income (loss), plus goodwill amortization,
depreciation and amortization, non-cash cost of capacity sold, stock related
expenses and incremental cash deferred revenue. We anticipate that this
definition will be consistent with financial covenants to be contained in our
significant financing agreements. We present Adjusted EBITDA because it is a
financial indicator used by investors and analysts to analyze and compare
companies on the basis of operating performance and because we believe that
Adjusted EBITDA is an additional, meaningful measure of performance and
liquidity. We expect to use Adjusted EBITDA to monitor our compliance with our
financial covenants and to understand the financial indicators investors and
analysts are using to measure our performance. You should not consider this
information as an alternative to any measure of performance as promulgated under
GAAP. Our calculation of Adjusted EBITDA may be different from the calculation
used by other companies and, therefore, comparability may be limited.
GLOBAL ACCESS LIMITED
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND THE SIX
MONTHS ENDED JUNE 30, 1999
Revenue. In 2000, Global Access Limited recognized revenue of (Yen)864.7
million. Sales from terrestrial capacity in 2000 generated revenue of (Yen)260.8
million. Global Access Limited amortizes revenue from sales of terrestrial
capacity over 15 years on a straight-line basis, with amounts due or received
but not yet recognized, recorded as deferred revenue. In addition, Global Access
Limited recorded revenue of (Yen)477.6 million for operations, administration
and maintenance services. Cash revenue was (Yen)10,203.9 million for the first
half of 2000. Global Access Limited did not record any revenue or cash revenue
in the first half of 1999.
Income (loss) from continuing operations. Loss from continuing operations
increased 62.9% from (Yen)(533.8) million in 1999 to (Yen)(869.5) million in
2000. The increase was primarily due to an increase in operating expense and
partially offset by the increase of recognized revenue. The increase in general
and operating expenses was primarily due to increasing system planning,
development and design activities.
Adjusted EBITDA. Adjusted EBITDA increased from (Yen)(534.1) million in
1999 to (Yen)8,710.3 million in 2000. The increase was principally due to an
increase in incremental cash deferred revenue after the system became
operational. Adjusted EBITDA is defined as operating income (loss), plus
goodwill amortization, depreciation and amortization, non-cash cost of capacity
sold, stock related expenses and incremental cash deferred revenue. We
anticipate that this definition will be consistent with financial covenants to
be contained in our significant financing agreements. We present Adjusted EBITDA
because it is a financial indicator used by investors and analysts to analyze
and compare companies on the basis of operating performance and because we
believe that Adjusted EBITDA is an additional, meaningful measure of performance
and liquidity. We expect to use Adjusted EBITDA to monitor our compliance with
our financial covenants and to understand the financial indicators investors and
analysts are using to measure our performance. You should not consider this
information as an alternative to any measure of performance as promulgated under
GAAP. Our calculation of Adjusted EBITDA may be different from the calculation
used by other companies and, therefore, comparability may be limited.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE YEAR ENDED
DECEMBER 31, 1998
Revenue. In 1998 and 1999, Global Access Limited was constructing the
Global Access Limited network. A portion of the system connecting from Ajigaura
to Tokyo commenced service in December 1999. Before December 1999, Global Access
Limited had no significant operations other than planning and constructing the
network. In December 1999, Global Access Limited generated revenue from sale of
capacity to us. Revenue recognized in 1999 was (Yen)1.4 million. During the
years ended December 31, 1999 and 1998, there was no incremental cash deferred
revenue.
42
<PAGE> 44
Income (loss) from continuing operations. Loss from continuing operations
increased 458.7% from (Yen)(244.0) million in 1998 to (Yen)(1,363.2) million in
1999. The increase was primarily due to an increase in general and
administrative expenses and an increase in start-up expenses. The increase in
general and administrative expenses primarily consist of an increase of payroll
expense of (Yen)301.3 million, rent expense of (Yen)108.7 million and start-up
charges of (Yen)434.1 million. The increase related to the significant increased
planning and construction activities in 1999. Start-up expenses principally
contain various consulting fees and engineering charges paid to outside
companies for the planning, development and design of the Global Access Limited
system.
Adjusted EBITDA. Adjusted EBITDA decreased from (Yen)(244.1) million in
1998 to (Yen)(1,312.3) million in 1999. The decrease was due to an increase in
operating expenses. Adjusted EBITDA is defined as operating income (loss), plus
goodwill amortization, depreciation and amortization, non-cash cost of capacity
sold, stock related expenses and incremental cash deferred revenue. We
anticipate that this definition will be consistent with financial covenants to
be contained in our significant financing agreements. We present Adjusted EBITDA
because it is a financial indicator used by investors and analysts to analyze
and compare companies on the basis of operating performance and because we
believe that Adjusted EBITDA is an additional, meaningful measure of performance
and liquidity. We expect to use Adjusted EBITDA to monitor our compliance with
our financial covenants and to understand the financial indicators investors and
analysts are using to measure our performance. You should not consider this
information as an alternative to any measure of performance as promulgated under
GAAP. Our calculation of Adjusted EBITDA may be different from the calculation
used by other companies and, therefore, comparability may be limited.
43
<PAGE> 45
SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION
We have prepared the following selected unaudited pro forma condensed
combined financial information of us, Pacific Crossing Ltd., Hutchison Global
Crossing and Global Access Limited, which we refer to as "Pro Forma Asia Global
Crossing," to demonstrate how these companies or businesses might have looked if
the following transactions had been completed as of the date or at the beginning
of the period presented:
- the purchase of an additional interest in and the consolidation of
Pacific Crossing Ltd.;
- the contribution to us of the 50% ownership interest in Hutchison Global
Crossing;
- the contribution to us of Global Crossing's 49% ownership interest in
Global Access Limited;
- the completion of the strategic investments in us described under
"Business -- Recent Developments" on page 47; and
- this offering and the concurrent debt offering.
We have prepared the pro forma financial information in a method similar to
the pooling method of accounting, since these entities are entities under common
control. The unaudited pro forma financial information does not include any
potential synergies relating to Pacific Crossing Ltd., Hutchison Global Crossing
and Global Access Limited or increased opportunities to generate additional
revenue in Asia. You should not rely on pro forma financial information as an
indication of the results that would have been achieved if these transactions
had taken place earlier or the future results that we will experience after
completion of these transactions.
You should read these selected unaudited pro forma condensed combined
financial statements in conjunction with our historical financial statements and
the historical financial statements of Pacific Crossing Ltd., Hutchison Global
Crossing and Global Access Limited and the unaudited pro forma condensed
combined financial statements, which are included in this document beginning on
page F-1.
In reading the selected unaudited pro forma condensed combined financial
information, you should note the following:
- Before December 1999, Pacific Crossing-1 and the Global Access Limited
network were not ready for commercial service and had no significant
operations.
- In December 1999, the northern segment of Pacific Crossing-1 and a
segment of the Global Access Limited network connecting Pacific
Crossing-1 to Tokyo became ready for commercial service. We recognized
revenue of $61.1 million from sale of Pacific Crossing-1 capacity during
1999. The revenue from sales of capacity on the Global Access Limited
network was deferred and is being amortized over the contract period.
Revenue for the first half of 2000 was $108.7 million which was primarily
from the sales of Pacific Crossing-1 capacity.
- The equity in loss of affiliate represents our 50% interest of the net
losses of Hutchison Global Crossing, the amortization expense of goodwill
resulting from the formation of Hutchison Global Crossing and our 49%
interest of the net losses of Global Access Limited for the periods
presented.
44
<PAGE> 46
PRO FORMA ASIA GLOBAL CROSSING
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED
---------------------- DECEMBER 31,
2000 1999 1999
--------- --------- ------------
<S> <C> <C> <C>
Revenue.............................................. $ 108,680 $ -- $ 61,100
Expenses:
Cost of sales...................................... 84,850 -- 20,722
Operations, administration and maintenance......... 24,198 -- 8,000
General and administrative......................... 17,776 (1,636) 9,370
Depreciation and amortization...................... 8,026 -- 3,169
--------- --------- ---------
Operating income (loss).............................. (26,170) (1,636) 19,839
Equity in loss of affiliate.......................... (21,588) (20,990) (44,291)
Minority interest.................................... (12,118) 1,473 (7,995)
Other income (expense)............................... (306) -- 459
Interest income...................................... 8,750 6,044 13,180
Interest expense..................................... (24,588) (25,266) (49,612)
--------- --------- ---------
Loss before provision for income taxes............... (76,020) (40,375) (68,420)
Provision for income taxes........................... -- -- --
--------- --------- ---------
Income (loss) from operations...................... $ (76,020) $ (40,375) $ (68,420)
Cumulative effect of change in accounting
principle.......................................... -- (791) --
--------- --------- ---------
Net loss........................................... $ (76,020) $ (41,166) $ (68,420)
========= ========= =========
Net loss per common share:
Basic and diluted net income per common share...... $ (63.35) $ (34.31) $ (57.02)
========= ========= =========
Shares used in computing basic and diluted net loss
per common share................................... 1,200,000 1,200,000 1,200,000
========= ========= =========
</TABLE>
45
<PAGE> 47
BUSINESS
OVERVIEW
We intend to be a leading pan-Asian telecommunications carrier that
provides Internet, data, voice and Web-hosting services to wholesale and
business customers. We are building an end-to-end network across Asia that will
include:
- subsea cables;
- terrestrial connections to our landing sites, commonly known as backhaul;
- national networks;
- city fiber networks;
- space, security and environmental controls for equipment owned by various
carriers, commonly known as telehouses; and
- Web-hosting centers.
We plan to extend our network of undersea cables, national terrestrial
networks, city fiber networks, telehouses and Web-hosting centers to principal
commercial and financial centers in Asia in order to provide our portfolio of
broadband and Internet services on a pan-Asian basis. Our network is planned to
connect Japan, Hong Kong, Taiwan, Korea, Malaysia, Singapore and the Philippines
to the United States. With these countries connected, our network will address a
combined Asian population of approximately 304.3 million with an aggregate 1999
gross domestic product or GDP of approximately $5.4 trillion. As regulations
permit, our network will also connect to China, which has a population of
approximately 1.3 billion and a 1999 GDP of approximately $1.0 trillion. We
intend to expand our network to other Asian countries as customer demand
requires. In addition, we will offer worldwide Internet, data, voice and
Web-hosting services to wholesale and multinational business customers via
Global Crossing's state-of-the-art fiber optic network of global scale and
scope.
In order to establish strong competitive positions in two of Asia's largest
telecommunications markets, we have formed joint ventures in Japan and Hong
Kong. In Japan, we have established Global Access Limited, a joint venture with
Vectant, Inc., formerly Global Bandwidth Solutions, a subsidiary of Marubeni, as
well as GlobalCenter Japan, a joint venture with Internet Research Institute. We
expect that GlobalCenter and Softbank will also become shareholders in
GlobalCenter Japan. In Hong Kong, we have formed Hutchison Global Crossing, a
joint venture with Hutchison Whampoa. We are actively pursuing strategic
alliances in other markets, where we believe that local partners bring
established network infrastructure, sales and marketing capabilities or
beneficial relationships to our business.
Through direct ownership and our interests in joint ventures, we have
constructed and are expanding a state-of-the-art network through which we will
deliver a broad portfolio of communications services to our customers. Our
network consists of the following network elements in the markets indicated:
- Trans-Pacific: We currently operate and have a controlling interest in
Pacific Crossing-1, a subsea cable that connects Japan to the United
States, where it seamlessly connects to the Global Crossing network.
Pacific Crossing-1 is designed to operate initially at 80 Gbps of service
capacity and is upgradeable to a minimum of 640 Gbps using dense
wavelength multiplexing technology.
- East Asia: We are now constructing East Asia Crossing, a subsea cable
that we expect to connect Japan to Hong Kong by the end of 2000. We
expect to extend East Asia Crossing to Taiwan and Korea in the first half
of 2001 and, at a later time, to Malaysia, the Philippines and Singapore
and, if and when regulations permit, China. East Asia Crossing is
designed to operate initially at 80 Gbps of service capacity and is
upgradeable to a minimum of 2.56 Tbps, which would be the highest
capacity introduced to date in Asia.
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<PAGE> 48
- Japan: We currently connect one landing station for Pacific Crossing-1 to
our Tokyo city fiber network, telehouse and regional operating center via
facilities owned and operated by Global Access Limited. Global Access
Limited is expanding its network to Osaka, Nagoya and cable landing
stations for other subsea cables in Japan. In addition, GlobalCenter
Japan became operational in April 2000 and is providing Web-hosting and
Internet infrastructure services to customers.
- Hong Kong: Hutchison Global Crossing owns and operates the largest
fully-fiber optic network in Hong Kong, over which Hutchison Global
Crossing provides Internet, data and voice services. In addition,
Hutchison Global Crossing is developing a GlobalCenter data center, which
we expect to begin operations in the summer of 2000.
We intend to replicate the network and service capabilities that we
currently offer in Japan and Hong Kong in each market to which we extend our
network. In addition, we intend to expand our Web-hosting business and Internet
infrastructure services to our target markets in Asia through joint ventures
with GlobalCenter and local partners.
Through our high-speed Asian network, our portfolio of service offerings
and our connection to the Global Crossing network, we believe we are uniquely
positioned to meet the demands of our customers. We expect our customers will
primarily include new and incumbent telecommunications and Internet companies,
as well as multinational corporations. We believe that, at present, these
customers have a limited choice of independent service providers capable of
offering high-capacity, reliable, secure and cost-effective services within
Asia, which provides us with significant market opportunities. As of June 30,
2000, our customers included AboveNet, Cable & Wireless IDC, Exodus, KDD, Qwest
and Teleglobe. For the six months ended June 30, 2000, Qwest accounted for 53.8%
of our consolidated revenue, KDD accounted for 15.9% of our consolidated
revenue, and AboveNet accounted for 9.9% of our consolidated revenue. Our
revenue for the six months ended June 30, 2000 was $108.7 million.
RECENT DEVELOPMENTS
Strategic investors. On or about September 1, 2000, we entered into
strategic investment term sheets with Hutchison Whampoa Ltd., Singapore
Technologies Telemedia and Microelectronics Technology, Inc. Under the strategic
investment term sheets, Hutchison Whampoa Ltd., Singapore Technologies Telemedia
and Microelectronics Technology, Inc. expressed an interest in purchasing shares
of our Class A common stock in an aggregate amount of $50,000,000, $50,000,000
and $38,000,000, respectively, at the initial public offering price per share.
The purchase would be a private placement exempt from the registration
requirements of the Securities Act. Hutchison Whampoa Ltd., Singapore
Technologies Telemedia and Microelectronics Technology, Inc. would agree not to
dispose of any of the shares, acquired in the private placement, for a period of
6 months following the closing of the purchase. However, for a two-year period
following the closing of the purchase, Hutchison Whampoa Ltd., Singapore
Technologies Telemedia and Microelectronics Technology, Inc. would have
piggy-back registration rights covering up to 25% of the shares purchased. We
would also have a right of first refusal on any shares, acquired in the private
placement, that Hutchison Whampoa Ltd., Singapore Technologies Telemedia or
Microelectronics Technology, Inc. would otherwise wish to sell when the
applicable transfer restrictions terminate. These strategic investment term
sheets are non-binding. We cannot assure you when or even that we will reach
definitive agreements with Hutchison Whampoa Ltd., Singapore Technologies
Telemedia or Microelectronics Technology, Inc. regarding an investment in us or,
if we do reach definitive agreements, what the terms of those agreements will
be.
Hutchison Whampoa owns a 50% interest in Hutchison Global Crossing.
Korea. On June 2, 2000, we entered into a non-binding memorandum of
understanding with DACOM Corporation to build and operate a cable station for
East Asia Crossing, a backhaul network and a telehouse in Korea. Through joint
ventures, we plan to exploit Internet business and
47
<PAGE> 49
e-commerce opportunities in Korea and the Asia-Pacific region. In addition,
under the terms of the memorandum of understanding, DACOM will purchase capacity
on East Asia Crossing and Pacific Crossing-1. This memorandum of understanding
is non-binding and is subject to us reaching definitive agreements with DACOM.
We cannot assure you when or even that we will reach definitive agreements with
DACOM or, if we do reach definitive agreements, what the terms of those
agreements will be.
DACOM is a leading Korean telecommunications company, providing Internet
and other on-line services, as well as wireline phone services, domestic and
international long distance, data and satellite telecommunications services.
DACOM is a publicly traded company in Korea.
Japan. On May 31, 2000, we and GlobalCenter Japan entered into an Internet
data center operations agreement with NTT Data Corporation to develop and
operate a technology park in a special purpose telecom building developed by NTT
Data in central Tokyo. The technology park concept is intended to leverage the
strengths of each party to the agreement; NTT Data's facilities, specialized
applications and systems integration expertise; our fiber optic network and IP
platform and GlobalCenter Japan's expertise in data center operations, to offer
building tenants an integrated data hosting and connectivity solution. The
agreement is subject to our reaching agreement on a number of related terms. We
cannot assure you when or even that we will reach an agreement on those terms
with NTT Data or, if we do reach an agreement, what the terms of that agreement
will be.
NTT Data is Japan's leading systems integrator and is engaged in
constructing systems in a wide array of sectors. These operations range from
large-scale projects in the financial and public administrative sectors,
including government entities, to diverse corporate networks.
Taiwan. On May 23, 2000, we invested $25 million in Digital United
Holdings Limited, or Digital United, in return for a 4% equity interest. In
addition, we and Digital United have agreed to use our reasonable efforts to
explore opportunities for cooperation in the data center business in Taiwan.
Digital United is the second largest provider of Internet access services
in Taiwan, offering dial-up, dedicated Internet access and broadband access
technologies. Digital United also provides intranets and virtual private
networks, e-commerce solutions, Internet services and Chinese language Internet
portals.
Singapore. On May 20, 2000, we entered into a non-binding memorandum of
understanding with Singapore Technologies Telemedia to enter into joint venture
agreements for the purpose of forming two joint ventures, each of which will be
50% owned by each of us and Singapore Technologies Telemedia. The first joint
venture will build and operate backhaul and telehouses in Singapore, providing
us with the necessary components to extend East Asia Crossing into Singapore.
The joint venture's terrestrial network will also link to the Global Crossing
network through East Asia Crossing. The second joint venture will build and
operate a GlobalCenter data center in Singapore, which will adhere to
GlobalCenter technical specifications. In addition, under the terms of the
memorandum of understanding, Singapore Technologies Telemedia has committed to
purchase capacity on our network, subject to our reaching definitive agreements
with Singapore Technologies Telemedia regarding the two joint ventures. We
cannot assure you when or even that we will reach definitive agreements with
Singapore Technologies Telemedia or, if we do reach definitive agreements, what
the terms of those agreements will be.
Singapore Technologies Telemedia is a leading global info-communications
service provider, which offers a wide suite of services through various
subsidiaries and associates. These services include fixed and mobile telephony,
e-commerce solutions and services, paging, mobile data communications and a
digital mobile communications network. Singapore Technologies Telemedia is a
wholly-owned subsidiary of Singapore Technologies Group, a multinational company
headquartered in Singapore.
48
<PAGE> 50
THE OPPORTUNITY FOR BROADBAND INTERNET AND DATA SERVICES IN ASIA
Asia is made up of a number of countries and territories with a wide range
of demographic characteristics and significant variances in the level of
development in their telecommunications infrastructure and differing regulatory
environments. The market opportunity for us to extend our network and offer our
services varies widely by country depending on a combination of these factors.
We intend to expand our network to serve the most important routes for Internet,
data and voice traffic which connect principal commercial and financial centers
in Asia. We have already established operations in Japan and Hong Kong, two of
the largest telecommunications markets in Asia. We also expect to serve six
other key Asian markets: Taiwan, Korea, Singapore, Malaysia, the Philippines
and, if and when regulations permit, China. These initial eight countries
account for a significant portion of the market opportunity for broadband
Internet and data services in Asia.
LARGE, HIGH GROWTH ECONOMIES
As of 1999, Asia had a total population of approximately 3.2 billion and an
aggregate 1999 GDP of $7.3 trillion, compared to the United States, which had a
population of approximately 273 million and a GDP of $9.2 trillion. The seven
countries that we are initially focusing on, together with China, accounted for
approximately $6.4 trillion or 87% of the combined GDP of Asia. Most of the
economies of Asia have experienced significant economic growth over the past
decade and have rebounded from the recent economic downturn. The combined GDP of
Asia, not including Japan, grew 6.0% in 1999. This compares favorably to GDP
growth of 4.0% in the United States during the same period. The International
Monetary Fund forecasts growth of combined GDP for Asia, not including Japan,
growing 6.2% in 2000. Although Japan has experienced prolonged recessionary
conditions, it remains the world's second largest economy, with a GDP of
$4.3 trillion, and is a key financial, commercial and technological center.
The table below presents selected statistical data in our key target
markets in Asia. We derived the information presented in the first and second
columns below from the Economist Intelligence Unit, 1999. We derived the
information presented in the third column below from the World Development
Report, 1999.
<TABLE>
<CAPTION>
GDP
POPULATION US DOLLARS
IN MILLIONS IN BILLIONS TELEDENSITY
(1999) (1999) (1997)
----------- ----------- -----------
<S> <C> <C> <C>
Japan.................................................... 126.7 $4,352 479
Hong Kong................................................ 6.8 149 565
South Korea.............................................. 46.9 395 444
Taiwan................................................... 22.0 289 N/A
Singapore................................................ 3.2 89 543
Malaysia................................................. 21.9 79 195
Philippines.............................................. 76.8 76 29
China.................................................... 1,254.6 976 56
------- ------
Total............................................... 1,558.9 6,405
======= ======
</TABLE>
CONCENTRATION OF TELECOMMUNICATIONS MARKETS AND MULTINATIONAL CORPORATIONS
A significant portion of Asia's economic activity is focused in a
relatively small number of commercial and financial centers. These centers
contain a high concentration of people, multinational corporations and resulting
demand for telecommunications capacity. We believe that this concentration of
potential customers provides an opportunity for new competitive service
providers to enter these markets efficiently. We believe that the cities in Asia
with the highest concentration of multinational corporations are Tokyo, Hong
Kong, Singapore, Osaka and Taipei. According to International Data Corporation,
75% of Internet users in Asia are located in our target markets.
49
<PAGE> 51
MARKETS WITH DEVELOPING TELECOMMUNICATIONS AND INTERNET INFRASTRUCTURE
Many markets in Asia have low levels of telecommunications penetration. For
example, the developed markets of Japan and Hong Kong have teledensities of 479
and 565 main lines per 1,000 people. The less developed markets of China and the
Philippines have teledensities of 56 and 29 main lines per 1,000 people. By
comparison, the United States has a teledensity of 644 main lines per 1,000
people.
The development of Internet access and Internet services in many countries
in Asia is also at an early stage. According to International Data Corporation,
in 1999, there were approximately 29.2 million Internet users in our target
markets, or approximately 20 per 1,000 people, compared to 87.3 million Internet
users in the United States or 320 per 1,000 people. These penetration levels are
low in part because the regulation of domestic markets in favor of incumbent
providers has not promoted and, in certain countries, has impeded investment in
network infrastructure. These penetration levels are also low due to the
relatively higher cost of Internet access in many parts of Asia, where we
believe local access charges are approximately two to four times higher than
comparable charges in the United States.
RAPIDLY DEREGULATING ASIAN TELECOMMUNICATIONS MARKETS
We believe that the ongoing deregulation of Asian telecommunications
markets will create opportunities for new entrants to compete with established
national telecommunications companies. Hong Kong and Korea have partially opened
up their telecommunications markets by awarding licenses to new entrants, some
of whom will, like us, be offering facilities-based services and others who will
be selling services on the facilities of others. Singapore completely opened up
its telecommunications market effective April 1, 2000, two years ahead of
schedule. Taiwan has announced the partial opening of its telecommunications
market to new entrants offering facilities-based services effective August 2000.
We believe that this trend toward deregulation will lead to higher levels of
broadband traffic throughout the region and into and out of the Asian markets.
ATTRACTIVE MARKET FOR INTERNATIONAL CAPACITY IN ASIA
We expect that the same factors that are driving traffic growth in
worldwide Internet, data and voice traffic will drive traffic growth in Asia.
These factors include increasing use of bandwidth-intensive applications;
increase in global commerce; improvements in last-mile access technology, such
as digital subscriber lines and cable modems; a general decline in prices of
telecommunications services; and continuing deregulation of telecommunications
markets. While these factors have already resulted in the proliferation of new
telecommunications service providers and multinational corporations that require
increasing quantities of international bandwidth in the United States and
Europe, they are only beginning to have a similar impact in Asia.
Although there have been several new trans-Atlantic subsea cables completed
in the past few years, there has been a lack of trans-Pacific and intra-Asian
cables. Pacific Crossing-1 is the only significant trans-Pacific cable to begin
operations in the past few years. We believe that any demand and supply
imbalance for international bandwidth in Asia over the next few years will
create an attractive market opportunity for selling our services.
POTENTIAL FOR SIGNIFICANT GROWTH IN DEMAND FOR TELECOMMUNICATIONS AND DATA
SERVICES
We believe that the expected strong economic growth of our target markets,
the relatively underdeveloped infrastructure in those markets and the trend
toward deregulation and increasing competition will result in significant growth
in demand for telecommunications and data services. We also believe that the
introduction of alternative telecommunication technologies, such as mobile
telephony, Internet-based telephony and fixed wireless services, will advance
the penetration of telecommunications services in Asia at a rate which will
surpass those in the United States and European markets.
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While Internet penetration in Asia is behind that of the United States, it
is expected to grow at a faster rate. Factors supporting this growth rate
include a heightened awareness of the Internet, incremental demand for new
sources for information and entertainment, the growing availability of local
language content and an expected decline in the cost of access. The
International Data Corporation anticipates that the number of Internet users in
our target markets will grow from 1999 to 2004 at an annual compounded growth
rate of approximately 33%.
OUR STRATEGY
Our goal is to become a leading pan-Asian telecommunications carrier that
provides Internet, data, voice and data center and Internet infrastructure
services to telecommunications carriers and multinational business customers. We
believe that no one else offers a range of services comparable to ours in scope
or quality. We intend to use our competitive position, including our
connectivity to the Global Crossing network, to exploit the rapidly growing
market for bandwidth, Internet services and other advanced communications
services. To accomplish this goal, we are pursuing a strategy built on the
following initiatives:
PROVIDE SERVICES ON A GLOBAL BASIS THROUGH OUR SEAMLESS CONNECTIVITY WITH
GLOBAL CROSSING'S NETWORK
We believe that our relationship with our parent company, Global Crossing,
and the integration of our network with Global Crossing's network will give us a
distinct advantage over our competitors. In Asia we will offer our customers
seamless connectivity to all cities served by Global Crossing. Thus, our service
offerings will be significantly broader than those of our competitors that have
only regional assets. Furthermore, Global Crossing will be an important sales
channel for our services and we expect its sales force to generate significant
incremental sales.
Key elements of our network will be fully integrated into the Global
Crossing network and Global Crossing's Network Operations Center will have
visibility into key elements of our network. Some of our competitors do not
control their networks on an end-to-end basis as we do. Instead, they lease or
purchase circuits on other carriers' networks. As a result, we believe that we
will be able to offer customers service of scope and quality that some of our
competitors cannot offer.
BUILD THE PREMIER PAN-ASIAN NETWORK FOR PROVIDING INTEGRATED COMMUNICATIONS
SERVICES
Through direct ownership and interests in joint ventures, we plan to build
the premier pan-Asian telecommunications network. Our assets will include subsea
cables, terrestrial networks, city fiber networks, telehouses and, in
conjunction with GlobalCenter, data centers. By integrating and centrally
managing these network and other assets, we expect to provide seamless
city-to-city and business-to-business connectivity to the principal commercial
and financial centers in Asia. In most cases, we intend to maintain a
controlling interest in the key elements of our network, which should give us a
cost advantage over our competitors. We use advanced fiber optic technology,
network structures that eliminate service interruptions by automatically
rerouting traffic, dense wavelength division multiplexing and redundant
facilities to provide state-of-the art, reliable communications services. We
deploy our fiber in network structures which, if there is a break in the fiber,
rapidly reroute telecommunications traffic in the opposite direction thereby
bypassing the break in the fiber. We intend to provision our high quality
services to customers more rapidly than any of our competitors.
CAPITALIZE ON OUR EARLY-MOVER ADVANTAGE -- KEY ELEMENTS OF OUR NETWORK ARE
ALREADY OPERATIONAL
We have an operational network with significant revenue today. In contrast,
many of our competitors have merely announced an intention to build or otherwise
acquire network capacity in Asia. We operate one of the first independently
developed trans-Pacific cables. In addition, our
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network consists of terrestrial fiber networks that are operational and provide
service to customers in both Japan and Hong Kong. Furthermore, by the end of
2000, we expect to connect Japan to Hong Kong and, in the first half of 2001, to
Taiwan and Korea. We expect to extend our connectivity to Malaysia, the
Philippines, Singapore and, if and when regulations permit, China. Moreover, we,
on our own or through our joint ventures, hold licenses to provide
telecommunications services in Japan and Hong Kong.
We believe that this early-mover advantage will allow us to form strong
relationships with telecommunications carriers and leading multinational
companies in Asia, securing a large base of customers and network traffic in
advance of the market entry of our competitors. We also believe that our
early-to-market advantage will allow us to form strategic relationships with
local partners in advance of our competitors.
EXPAND OUR PORTFOLIO OF SERVICES TO MEET OUR CUSTOMER'S NEEDS
In addition to sales of wholesale circuits, we currently offer
international private lines and fiber without any equipment attached, commonly
referred to in the telecommunications industry as dark fiber, on Pacific
Crossing-1 and the Global Access Limited network in Japan, Internet services and
data center and Internet infrastructure services. We anticipate expanding our
portfolio of services to include certain advanced Internet services, data
transport, advanced voice and data services, switched services, voice over
Internet protocol and virtual private networks. We also intend to provide
high-bandwidth applications and emerging broadband technologies. We believe that
our broad range of services will permit us to attract multinational business
customers, as well as wholesale customers, such as network providers. Our
wholesale customers consist of other telecommunications companies which use our
network capacity to provide telecommunications services to their customers in
Asia. These wholesale customers may choose to use our services rather than build
their own network or may use our services to supplement their own network
capacity. Our customers include AboveNet, KDD and Qwest. In addition to
providing services to network providers, we intend to sell aggressively to
multinational business customers. We believe that our focus on network providers
at the wholesale level and multinational business customers maximizes the
potential market for our services and leverages our unique network footprint in
Asia.
LEVERAGE OUR RELATIONSHIPS WITH OUR FOUNDING SHAREHOLDERS
We plan to leverage our relationships with our founding shareholders:
- GLOBAL CROSSING RELATIONSHIP: We intend to leverage our relationship
with Global Crossing to provide a wide range of broadband
telecommunications solutions on a global basis. We will coordinate our
network, sales and marketing strategies with those of Global Crossing to
offer our services to telecommunications and multinational business
customers. We will also benefit from Global Crossing's
telecommunications, sales and marketing expertise. We, together with
GlobalCenter, a Global Crossing subsidiary, intend to offer data center
services in Asia, leveraging the proprietary infrastructure, applications
and operations and management capabilities of GlobalCenter.
- MICROSOFT AND SOFTBANK RELATIONSHIPS: Microsoft is a worldwide leader in
software, services and Internet technologies for personal and business
computing. Softbank is one of the world's Internet leaders, with
ownership positions in more than 300 Internet companies. We believe that
having Microsoft and Softbank as our founding shareholders will allow us
to benefit from the expanding involvement of these companies in
Internet-related businesses and their expertise in that field. Microsoft
and Softbank have each invested $175 million in us and have agreed to
purchase an aggregate of $200 million of capacity on Pacific Crossing-1,
Global Access Limited or the Global Crossing network over a period of
three years following our formation. They have also agreed, subject to a
number of conditions, to use our network to satisfy a portion of their
and some of their affiliates' telecommunications needs in Asia. See
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"Transactions with Related Parties -- Relationships Among Ourselves and
Our Founding Shareholders" on page 78.
FORM STRATEGIC ALLIANCES AND JOINT VENTURES WITH STRONG LOCAL PARTNERS
In order to exploit first-mover advantages, more readily penetrate local
markets, overcome regulatory barriers and develop exclusive relationships with
leading telecommunications providers in given markets, our strategy is to form
strategic alliances or joint ventures in key markets. We intend to select
partners in these markets based on potential partners' existing assets, such as
networks, existing customer relationships, licenses, technical expertise and
market prominence. Our joint ventures with Vectant, Inc., formerly Global
Bandwidth Solutions, and Internet Research Institute in Japan and Hutchison
Whampoa in Hong Kong are examples of the strategic alliances we intend to pursue
in other markets. We also intend to use our network capacity in strategic
partnerships with bandwidth-intensive users in Asia to drive traffic onto our
network.
CAPITALIZE ON EXTENSIVE MANAGEMENT EXPERIENCE
We have assembled and continue to build a strong management team with
communications expertise and extensive experience in international business and
the Asian telecommunications market. Many of our senior executives have held
senior management positions with market leaders, such as Dell Corporation, AT&T
and its affiliates, Teledyne Technologies, ICL PLC, KPN Royal Dutch Telecom and
Global Crossing. In addition, a number of those senior executives have held
senior positions in the Asian operations of those market leaders.
OUR NETWORK AND OPERATIONS
We are designing our network to provide Asia with unprecedented seamless,
broadband, global city-to-city and business-to-business connectivity through a
combination of subsea cables, national networks and city fiber networks with
connections to our telehouses and Web-hosting centers. As currently planned, our
network will extend approximately 45,000 route kilometers from the west coast of
the United States and across the Pacific to eight Asian countries, including
China. In addition, our network provides seamless connectivity to the Global
Crossing network in the Americas and Europe.
The following table contains information regarding the initial ready for
service date and expected completion date of our currently planned systems,
telehouses and Web-hosting centers:
<TABLE>
<CAPTION>
ACTUAL OR EXPECTED
NETWORK ELEMENT/ INITIAL READY FOR SERVICE DATE/ EXPECTED COMPLETION
MARKET OPERATIONS INITIAL LAUNCH DATE DATE
------ ---------------------------------------- ------------------------------- -------------------
<S> <C> <C> <C>
Trans-Pacific Pacific Crossing-1 December 1999 Year end 2000
East Asia East Asia Crossing End of 2000 First half of 2001
Japan Global Access Limited fixed-line network December 1999 Ongoing
Global Access Limited telehouse July 2000 Not applicable
GlobalCenter Japan April 2000 Before year end
Hong Kong Hutchison Global Crossing network December 1996 Ongoing
Data center Summer 2000 Before year end
</TABLE>
We plan to continue to expand both our subsea and terrestrial networks to
address current and future opportunities throughout principal commercial and
financial centers of Asia. Directly and through joint ventures, we intend to
replicate the capabilities that we are currently offering in Japan and Hong Kong
in each market to which we extend our undersea network.
TRANS-PACIFIC
Pacific Crossing-1 is an approximately 21,000 kilometer four-fiber undersea
cable that connects Japan and the United States. Pacific Crossing-1 uses
technology that automatically reroutes
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telecommunications traffic to avoid service interruptions. When completed,
Pacific Crossing-1 will connect Grover Beach, California and Harbour Pointe,
Washington with two landing sites in Ajigaura and Shima, Japan. The landing
points in Washington and Ajigaura were completed in December 1999. The two
remaining landing points are scheduled for completion before year end 2000. We
expect Pacific Crossing-1 to connect directly to:
- Global Access Limited's terrestrial fiber links from a cable landing
station to a point of presence or telehouse, commonly referred to in the
telecommunication industry as backhaul, and Tokyo and Osaka city fiber
rings at the cable stations in Ajigaura and Shima, Japan, as well as
landing stations for other cable systems;
- East Asia Crossing at the cable stations in Ajigaura and Shima, Japan,
providing access to Hutchison Global Crossing's network and other
countries connected to East Asia Crossing in the future;
- Global Crossing's Pan American Crossing at the cable station in Grover
Beach, providing connectivity to Mexico, Central and South America and
the Caribbean; and
- Global Crossing's North American Crossing at the cable stations in Grover
Beach and Harbour Pointe, providing connectivity to North America and
further connectivity to Europe through Atlantic Crossing-1 and Pan
European Crossing.
Pacific Crossing-1 is designed to operate initially at 80 Gbps of service
capacity, upgradeable to a minimum of 640 Gbps, using dense wavelength division
multiplexing technology. Pacific Crossing-1 is one of the first independently
developed, privately owned and operated cable systems to cross the Pacific
Ocean. The first segment of Pacific Crossing-1 commenced service in December
1999 and the full ring is anticipated to be completed before year end 2000.
Effective April 1998, we became party to a supply contract that Global
Crossing had entered into with Tyco Submarine Systems Ltd. for the construction
of Pacific Crossing-1. This contract contemplates that the system will be
completed in December 2000 at an aggregate cost of approximately $1.1 billion,
of which we had paid $964.9 million as of June 30, 2000. In August 2000, we
placed an order with Tycom, an affiliate of Tyco Submarine Systems Ltd., to
increase the capacity on Pacific Crossing-1 from 80 Gbps to 240 Gbps. We expect
that the upgrades will cost approximately $100 million.
We own a 64.5% controlling interest in Pacific Crossing Ltd., the company
that owns Pacific Crossing-1. Vectant, Inc., formerly Global Bandwidth
Solutions, a subsidiary of Marubeni Corporation, owns the remaining interest in
Pacific Crossing Ltd.
EAST ASIA
East Asia Crossing will be a wholly owned, approximately 18,740 kilometer
undersea cable in East Asia. We expect that East Asia Crossing will connect
Pacific Crossing-1 from Japan with landing sites in Hong Kong by the end of 2000
and Taiwan and Korea by the first half of 2001. We also expect East Asia
Crossing to connect Malaysia, the Philippines, Singapore and, if and when
regulations permit, China. We have designed and constructed East Asia Crossing
so that it can be rapidly extended to a landing station in China. East Asia
Crossing will use four fiber pairs and state-of-the-art dense wave division
multiplexing technology. East Asia Crossing will operate initially at 80 Gbps of
service capacity, upgradeable to a minimum of 2.56 Tbps, the highest capacity
introduced to date in Asia. East Asia Crossing will provide internal restoration
capability in the event of a link outage.
In Hong Kong, through a local subsidiary, we have received a letter of
intent from the Hong Kong regulator that we will be awarded an external fixed
telecommunications network services license upon the satisfaction of some
specified conditions. The license will permit us to land East Asia Crossing in
Hong Kong and provide international telecommunications facilities and services.
In addition, Hutchison
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Global Crossing holds a fixed telecommunications network services license that
permits us to construct and operate domestic telecommunications networks in Hong
Kong, including the construction of terrestrial capacity, or backhaul, from the
East Asia Crossing cable landing station, and to provide domestic and
international telecommunications services.
Through a local subsidiary, we hold a Type I telecommunications license in
Japan. This license is necessary to obtain many of the other permits and
licenses needed to land the East Asia Crossing cable, construct and operate
telecommunications facilities, including backhaul, in Japan and provide
facilities-based services. We have obtained or are in the process of obtaining
those other permits and licences. Another local subsidiary has obtained a
Special Type II telecommunications license, which permits us to provide a
variety of telecommunications services on a resale basis.
We expect to apply for similar licenses in the remaining East Asia Crossing
countries. In most countries, we will be required to obtain facilities-based
telecommunications licenses; in some, however, we may need only a license to
land East Asia Crossing and construct a cable landing station.
In December 1999, we awarded KDD-SCS the construction contract for a
portion of East Asia Crossing.
JAPAN
GLOBAL ACCESS LIMITED. The Global Access Limited network will connect the
cable landing stations for Pacific Crossing-1, East Asia Crossing and other
competing cables to Global Access Limited's city fiber rings and telehouses and
our GlobalCenter data center facilities in Japan. Upon completion, Global Access
Limited's network will be an approximately 1,560 route kilometer terrestrial
system in Japan that we expect to connect Pacific Crossing-1 and East Asia
Crossing with Tokyo, Osaka and Nagoya. In December 1999, Global Access Limited
completed the 187 kilometer segment of its backhaul system connecting the
Pacific Crossing-1 landing station in Ajigaura to Tokyo. We expect the rest of
the network to become operational by the end of the year 2000 which will connect
a second Pacific Crossing-1 landing station in Shima with Nagoya and Osaka and,
together with a subsea link between Shima and Ajigaura, will serve as a backup
for the first segment into Tokyo, as well as provide terrestrial capacity into
Osaka and Nagoya metropolitan areas.
Global Access Limited's network will also include a domestic backbone
connected to high capacity city fiber networks in Tokyo and Osaka, to be
operational by April 2001. The Tokyo city network, connecting major buildings in
the Tokyo metropolitan area to Global Access Limited's network, commenced
operations in June 2000 and is currently being expanded. Global Access Limited
is also establishing telehouses to provide carrier collocation and
interconnection services in Tokyo and Osaka. The first of these telehouses in
Tokyo became operational in April 2000.
Global Access Limited has constructed and completely sold out 26,490 square
feet of leased space in its first telehouse in Tokyo. These centers are of
strategic importance because they are integrated with the Global Access Limited
network and have the potential to drive significant traffic onto our network.
As a Type I carrier, Global Access Limited is authorized to operate and
provide services using its own telecommunications facilities. Global Access
Limited provides us with building-to-building, last-mile connectivity and,
through its sales force, is also expected to generate capacity sales on Pacific
Crossing-1 and other Global Crossing systems.
We own a 49% interest in Global Access Limited. Vectant, Inc., formerly
Global Bandwidth Solutions, a subsidiary of Marubeni, owns the remaining
interest in Global Access Limited. See "Concurrent Transactions" on page 75.
GLOBALCENTER JAPAN. In January 2000, we formed a joint venture,
GlobalCenter Japan, with Internet Research Institute in order to build the
leading data center and Internet infrastructure services
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provider in Japan. GlobalCenter Japan launched its advanced Web-hosting
operations in Tokyo in April 2000. In July 2000, GlobalCenter Japan opened a
30,000 square foot data center space leased in a special purpose
telecommunications building owned by NTT Data in central Tokyo and has pre-sold
space at this site. GlobalCenter Japan plans to add a third data center, with up
to 100,000 square feet, by the end of 2001 and is also considering expanding
into Osaka. These data centers will be located on Global Access Limited's
intracity fiber network and interconnect directly with the two public peering
points, JPIX and NXPIXP2, which we believe carry the majority of Japan's
Internet traffic. These peering points are administered by Internet Research
Institute. GlobalCenter Japan expects that each of these data centers will be
connected to the other GlobalCenter facilities worldwide, making them attractive
to customers with other global data connectivity needs. Further, each of these
data centers will have the same specifications and quality standards as the Web-
hosting centers owned solely by GlobalCenter.
We own 89% of GlobalCenter Japan and Internet Research Institute owns the
remaining 11%. We expect that GlobalCenter and Softbank will also become
shareholders in GlobalCenter Japan with a 26% interest and a 38% interest,
respectively. In that case, our percentage ownership in GlobalCenter Japan will
be reduced to 25%.
HONG KONG
Hutchison Global Crossing is a leading provider of a wide range of
telecommunications and Internet services in Hong Kong, including data, voice,
e-commerce and Internet access services. Hutchison Global Crossing's network is
an approximately 795 kilometer terrestrial network that began operating in key
commercial and residential areas of Hong Kong in December 1996 and is the
largest fully-fiber building-to-building network in Hong Kong. Hutchison Global
Crossing's backbone network supports high-speed Internet and data applications
as well as local and international voice services. The network spans Hong Kong
along a number of major fiber routes, including:
- a fiber route inside the tunnels of Hong Kong's Mass Transit Railway;
- fiber routes along major roads and expressways in Hong Kong;
- a fiber link to the new Hong Kong International Airport at Chek Lap Kok;
and
- a fiber ring linking major districts in the New Territories.
Hutchison Global Crossing's backbone network currently provides
transmission speeds of up to 2.5 Gbps and can be upgraded for increased volumes
of traffic.
Since June 1995, Hutchison Global Crossing has laid two-way ducts for cable
routing, installed direct connections to over 700 buildings and has block wired
over 400 buildings. In addition, Hutchison Global Crossing has connected its
network to 13 local exchanges of Cable & Wireless Hong Kong Telecom. Hutchison
Global Crossing has also commenced construction of the backhaul necessary to
connect its network with East Asia Crossing's cable landing station in Hong
Kong, which we expect to be operational by year end 2000.
Hutchison Global Crossing is, through a subsidiary, one of four licensed
fixed telecommunications network services or carriers to provide
telecommunications services in Hong Kong. Hutchison Global Crossing currently
offers three main services:
- local services, including local public switched telephone network and
non-public switched telephone network services, such as high-speed
switched and non-switched data;
- international services, including international direct dial, calling
cards and pre-paid phone cards; and
- Internet-related services, including Internet access to consumers, as
well as other services offered to carrier and corporate customers, such
as leased-line Internet access and Web-hosting.
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In November 1999, Hutchison Global Crossing, through an 85%-owned joint
venture with Compaq Computer, bid for and won a major contract to supply the
Hong Kong Government with its electronic service delivery system to deliver
government and commercial services through a common on-line platform. This
system was the first of its kind in Asia.
Hutchison Global Crossing has developed a GlobalCenter data center, which
commenced operations in June 2000. Hutchison Global Crossing has already leased
and begun constructing approximately 35,000 square feet of space for an
additional data center. Hutchison Global Crossing launched in August 2000
eCyberPay, an Internet payment system for online shopping, which we believe is
the first of its kind in Asia.
We own 50% of Hutchison Global Crossing, and Hutchison Whampoa owns the
remaining interest in Hutchison Global Crossing. See "Concurrent Transactions"
on page 75.
REGIONAL CENTERS
We have two regional offices, one in Tokyo focusing on the Japanese market
and the other in Hong Kong, focusing on the other Asian markets.
JAPAN. We formed our regional office in Tokyo to market capacity on Pacific
Crossing-1 and other Global Crossing systems to multinational corporations. With
the completion of its ring architecture, a network designed as a ring, which is
expected by the end of 2000, Pacific Crossing-1 will have full redundancy. At
that time, we expect to commence sales and marketing of value-added services,
such as Internet protocol transit, international private line, voice-over
Internet protocol and telehousing services on Pacific Crossing-1 and other
Global Crossing systems.
ASIA PACIFIC. We have established our Asia Pacific regional office, based
in Hong Kong, to market capacity on East Asia Crossing and to coordinate
business development activities in Asia. We have established a sales and
marketing office in Korea and are in the process of establishing sales and
marketing offices in Taiwan, Singapore and the Philippines.
OPERATIONS CENTERS
Our systems are monitored 24 hours a day, seven days a week by a
combination of Global Crossing's global network operations center and our
regional operating centers in Japan and Hong Kong. The global network operations
center is located in London, United Kingdom and performs worldwide monitoring
and network management for our network and the Global Crossing network.
Management and control for all subsea cable, including both terrestrial and
subsea maintenance responsibilities, is directed from the global network
operations center. We currently have two regional operating centers which manage
our terrestrial networks. At this time, the Global Access Limited regional
operating center is integrated with Global Crossing's global network operations
center. We intend to integrate our regional operating center in Hong Kong with
Global Crossing's global network operations center at the time when East Asia
Crossing connects Japan and Hong Kong, currently expected to occur by the end of
2000. Network monitoring and management capabilities will be extended to the
global network operations center in order to assure a global quality standard
for both network performance and services management. The operating center
structure combined with a common operating support system provides the
capability for fast and reliable service provisioning and customer care.
Initially, our customer care services will be provided by Global Crossing's
customer care center. The customer care center performs the primary interface
for customer order receipt, order management and billing. This center is the
entry point for launching work orders that result in the activation of customer
service via work centers throughout our network and the Global Crossing network
worldwide. Regional development of similar customer care centers is now underway
and will establish a regional focus for our customer care. We plan to deploy
regional customer care centers in
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Asia that will interface with Global Crossing's global network operations center
and customer care center.
THE GLOBAL CROSSING NETWORK
We provide our customers worldwide services through Global Crossing's
network. The Global Crossing network consists of the following systems which are
currently in service:
- Atlantic Crossing-1, an undersea system connecting the United States and
Europe;
- North American Crossing, formerly part of Frontier Corporation, a
terrestrial system connecting major cities in the United States;
- Pan European Crossing, a primarily terrestrial system connecting major
European cities to Atlantic Crossing-1;
- Racal Telecom Network, a terrestrial network in the United Kingdom to be
operated in conjunction with Pan European Crossing; and
- Mid-Atlantic Crossing, an undersea system connecting the eastern United
States and the Caribbean.
The following systems of the Global Crossing network are in varying stages
of development:
- Atlantic Crossing-2, an additional undersea system to be integrated with
Atlantic Crossing-1 to provide additional capacity that will connect the
United States and Europe;
- Pan American Crossing, a primarily undersea system that will connect the
western United States, Mexico, Panama, Venezuela and the Caribbean; and
- South American Crossing, an undersea and terrestrial system that will
connect the major cities of South America to Mid-Atlantic Crossing, Pan
American Crossing and the rest of the Global Crossing network.
SERVICE OFFERINGS
We provide a variety of telecommunications and Internet-based services
designed to meet the needs of telecommunications and Internet companies and
multinational corporations.
OFFERINGS TO TELECOMMUNICATION AND INTERNET COMPANIES
Currently, our primary offering is managed bandwidth capacity on our
network. To provide this capacity to our customers, we generally enter into
contracts for the sale, lease or grant of indefeasible rights of use. Under
these arrangements, the customer purchases a unit of point-to-point capacity for
the expected economic life of the system, typically in increments of 155
megabits per second, or Mbps, a unit known in the industry as an STM-1. An
indefeasible right of use is a long-term right of use, usually of 25 years which
is generally paid in full in advance of activation. Indefeasible rights of use
sales also typically involve the payment by customers of ongoing maintenance
charges over the term of the indefeasible rights of use.
OFFERINGS TO MULTINATIONAL CORPORATIONS
We target multinational corporations with bandwidth-intensive applications
and demand for global end-to-end solutions. We believe we are well-positioned to
address this market due to the scope of our network.
Directly and through our joint ventures, we currently offer the following
services:
- Internet transit: Dedicated Internet access.
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- Domestic and International private line: We currently provide private
line services within Japan on certain routes and have the ability to
provide international private line services between Japan and major
cities on the Global Crossing network.
- Data center and Internet infrastructure services: A combination of
digital distribution services, server collocation and professional
expertise with plans to include equipment sales, consulting services
aimed at supporting customers' mission critical Internet operations and
other Internet infrastructure services.
We, on our own as well as through our joint ventures, intend to offer the
following services:
- Data transport: Point-to-point data services in a number of products
with plans to provide asynchronous transfer mode and frame relay with
varying bandwidth sizes, from T-1 to OC-192.
- Integrated voice and data services: These services combine traditional
voice or data services with additional features. Products include
multimedia services, such as video conferencing and e-commerce
enablement.
- Voice over Internet protocol: Switched and dedicated outbound voice
services for local, domestic, and international traffic.
- Virtual private network: Customizable network solutions which allow our
customers to create a private network by using our network without
purchasing dedicated facilities. In addition, this allows customers the
flexibility to change capacity requirements between points over time and
reconfigure their virtual private networks to meet changing requirements.
- Advanced Internet services: Products to be provided include Web-based
applications, such as e-mail hosting, unified messaging and storage.
MARKETING AND SALES
We market through a combination of our own dedicated sales force, Global
Crossing's and Global Center's sales forces and the local sales teams of
Hutchison Global Crossing and Global Access Limited. As of June 30, 2000,
Hutchison Global Crossing's local sales team consisted of 108 individuals, and
Global Access Limited's sales team consisted of six individuals. Because our
target customers will generally be new and incumbent telecommunications
carriers, Internet service providers and multinational business customers, we
expect that our sales and marketing departments will be smaller and more focused
than those of our competitors that have a broader retail strategy.
We compensate our sales teams on a competitive basis within the market in
which they operate. We will seek to leverage our existing service platforms to
expand the suite of services we offer, increasing the range and level of
value-added services that we provide to meet the growing bandwidth demands of
our customers. For example, we currently sell international private line
services to our customers and see an opportunity to migrate these customers to
other services, such as voice-over Internet protocol, frame relay, asynchronous
transfer mode and complex Web-hosting.
To support our sales efforts and actively promote the Asia Global Crossing
brand name, we intend to conduct comprehensive marketing programs. Our marketing
strategies include an active public relations campaign, print and electronic
advertisements, online advertisements, trade shows, strategic partnerships and
on-going customer communications programs. We will focus our marketing efforts
on business and trade publications, online media outlets, industry and regional
events and sponsored activities. We will also participate in a variety of
Internet, telecommunications, computer and financial industry conferences and
encourage our officers and employees to pursue speaking engagements at these
conferences.
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PRINCIPAL CUSTOMERS
As of June 30, 2000, our customers included AboveNet, KDD and Qwest. For
the six months ended June 30, 2000, Qwest accounted for 53.8% of our
consolidated revenue, KDD accounted for 15.9% of our consolidated revenue, and
AboveNet accounted for 9.9% of our consolidated revenue. Global Crossing
customers accounted for 69% of our revenue for sales of our capacity on Pacific
Crossing-1.
In addition, since we began offering Internet protocol services in Japan in
April 2000, we have achieved sales to a number of customers, including Fujitsu,
a significant Internet service provider in Japan, and Titus Communications.
In the future, we expect to use the Global Access Limited network as a
sales vehicle for sales of indefeasible rights of use in Japan. For this reason,
in June 2000, Global Access Limited purchased from us $10.4 million worth of
capacity, which Global Access Limited intends to resell to customers in Japan.
PRINCIPAL SUPPLIERS
Our principal suppliers are the companies that are constructing the various
cable systems that comprise our network and design and construct our optical
networking system. Tyco Submarine Systems Ltd. and KDD-SCS are responsible for
the design and construction of Pacific Crossing-1. KDD-SCS is also responsible
for the design and construction of the first phase of East Asia Crossing. Lucent
Technologies is supplying the optical networking system.
COMPETITION
The telecommunications industry is extremely competitive, particularly in
Asia, and our success in Asia will depend on our ability to compete against a
variety of other telecommunications providers, including locally-based operators
as well as global operators. We compete primarily on the basis of price, scope
of operations and quality of services against telecommunications companies that
provide competing network access and Internet connectivity and value-added
services. We believe that none of our competitors has progressed as far as we
have towards becoming a pan-Asian telecommunications carrier providing Internet,
data, voice and Web-hosting services over one global network. In sales of
indefeasible rights of use, we come into competition with customers such as
Qwest, which purchase from us in bulk. Our principal competitors and potential
competitors include:
ESTABLISHED, NATIONAL TELECOMMUNICATIONS COMPANIES. In most Asian countries
where we compete or intend to compete, established, national telecommunications
carriers traditionally had a monopolistic or dominant presence. For instance,
the NTT group of companies, Singapore Telecom and Hong Kong Telecom each have
dominant market shares for services within their respective territories. Such
dominance has typically enabled these companies to be the principal or sole
providers of access to domestic and international telecommunications networks.
TRANS-PACIFIC AND PAN-ASIAN UNDERSEA CABLE OPERATORS. In the wholesale,
longhaul capacity market, we compete or will eventually compete with a number of
undersea cable operators, both consortium-based and independent. These operators
include SEA-ME-WE-3, Tycom, 360networks, Level 3, APCN-2, Flag Europe-Asia Cable
System, China-U.S. Cable Network, Japan-U.S. Cable Network and C2C AsiaPac Pte.
Ltd.
GLOBAL TELECOMMUNICATIONS COMPANIES THAT ARE FOCUSING THEIR BUSINESS
DEVELOPMENT EFFORTS IN ASIA. We also currently compete with various other global
telecommunications companies, including MCI WorldCom, AT&T and British
Telecommunications, each of which have announced plans to construct, have begun
to construct or are currently operating global fiber optic networks. We also
compete or will eventually compete with other telecommunications companies that
provide Web-hosting services, including Exodus, Level 3, PSINet, Genuity and
AboveNet.
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NEW AND DEVELOPING TELECOMMUNICATIONS COMPANIES. We believe that other
companies are planning networks that, if constructed, could employ advanced
technology similar to that of our own network and may compete directly with us
for customers. We also expect that the changing regulatory environment in Asian
telecommunications markets will attract new entrants to these markets and
increase the intensity of competition.
EMPLOYEES
As of June 22, 2000, we had 95 employees. We consider our relations with
our employees to be good.
PROPERTIES
Our principal offices are located in leased premises in Hamilton, Bermuda,
with corporate offices under lease in Beverly Hills, California. We have
regional offices under lease in Tokyo and Hong Kong. In addition, we own 64.5%
of Pacific Crossing-1 and are developing an undersea cable in East Asia, East
Asia Crossing. We also have ownership interests in terrestrial cable systems
through Global Access Limited and Hutchison Global Crossing. We also own or
lease 10 cable landing stations in the United States and East Asia. See
"Concurrent Transactions" on page 75.
We believe that substantially all of our existing properties are in good
condition and are suitable for the conduct of our business. We have granted or
may grant security interests in undersea cables to lenders providing financing
for those cables under non-recourse facilities.
LEGAL PROCEEDINGS
We are not presently subject to any legal claims or proceedings.
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MANAGEMENT
DIRECTORS
The following table presents the names and positions of our directors and
their ages as of December 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gary Winnick................................. 52 Chairman of the board and director
Lodwrick M. Cook............................. 72 Co-Chairman of the board and director
John J. Legere............................... 41 Chief Executive Officer and director
John M. Scanlon.............................. 58 Vice Chairman of the board and director
Thomas J. Casey.............................. 48 Vice Chairman of the board and director
Leo J. Hindery, Jr........................... 52 Director
Joseph P. Clayton............................ 50 Director
Eric Hippeau................................. 48 Director
Thomas U. Koll............................... 44 Director
Norman Brownstein............................ 56 Director
William E. Conway, Jr........................ 50 Director
Geoffrey J.W. Kent........................... 57 Director
</TABLE>
EXECUTIVE OFFICERS
The following table presents the names and positions of our executive
officers and their ages as of December 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gary Winnick................................. 52 Chairman
Lodwrick M. Cook............................. 72 Co-Chairman
John J. Legere............................... 41 Chief Executive Officer
John M. Scanlon.............................. 58 Vice Chairman
Thomas J. Casey.............................. 48 Vice Chairman
Stefan C. Riesenfeld......................... 51 Chief Financial Officer
Darryl E. Green.............................. 39 President -- Japan
David Milroy................................. 36 President -- North Asia/Greater China
Charles F. Carroll........................... 41 Senior Vice President and General
Counsel
Joseph P. Perrone............................ 51 Chief Accounting Officer
Alex Ng...................................... 46 Chief Operating Officer -- North Asia/
Greater China
Anthony Christie............................. 39 Vice President, Strategy and Business
Development
</TABLE>
GARY WINNICK -- Mr. Winnick is the Chairman of our board of directors. He
is also the founder and Chairman of Global Crossing Ltd., which was founded in
March 1997. Mr. Winnick is the founder and has been the Chairman and Chief
Executive Officer of Pacific Capital Group, Inc., a leading merchant bank
specializing in telecommunications, media and technology, which has a
substantial equity investment in Global Crossing Ltd., since 1985. Mr. Winnick
serves on numerous boards, including the Board of Trustees of the Museum of
Modern Art.
LODWRICK M. COOK -- Mr. Cook has been Co-Chairman of our board of directors
since April 2000. Mr. Cook has been the Co-Chairman of the Global Crossing board
of directors since April 1998 and Vice Chairman and Managing Director of Pacific
Capital Group since 1997. Mr. Cook became Chairman of Global Marine Systems, a
wholly-owned subsidiary of Global Crossing, in June 2000. Before joining Pacific
Capital Group, Mr. Cook spent 39 years at Atlantic Richfield Co. He was
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Chairman of its board of directors from 1986 to 1995, when he became Chairman
Emeritus. Mr. Cook is also a member of the board of directors of Castle & Cooke,
Inc., Litex, Inc. and 911Notify.com.
JOHN J. LEGERE -- Mr. Legere has been a member of our board of directors
since April 2000 and our Chief Executive Officer since February 2000. Before
joining us, Mr. Legere had been Senior Vice President of Dell Computer
Corporation and President for Dell's operations in Europe, the Middle East and
Africa and President, Asia-Pacific for Dell from 1998 until April 2000. From
April 1994 to November 1997, Mr. Legere was President and Chief Executive
Officer of AT&T Asia/Pacific and spent time also as head of AT&T Global Strategy
and Business Development. From 1997 to 1998, Mr. Legere was President of
worldwide outsourcing of AT&T Solutions. Mr. Legere received a bachelor's degree
in business administration from the University of Massachusetts, a master of
business administration degree from Fairleigh Dickinson University and a
master's degree in science from the Massachusetts Institute of Technology. Mr.
Legere also attended the Program for Management Development at the Harvard
Graduate School of Business.
JOHN M. SCANLON -- Mr. Scanlon has been Vice Chairman of our board of
directors since November 1999 and was our Chief Executive Officer from November
1999 to February 2000. Mr. Scanlon has been a director of Global Crossing since
April 1998 and was its Chief Executive Officer from April 1998 to February 1999.
Mr. Scanlon was President and General Manager of the Cellular Networks and Space
Sector of Motorola, Inc. and had been affiliated with Motorola since 1990. Mr.
Scanlon was Chief Operating Officer of Cambridge Technology Group from 1988 to
1990 and, before taking this position, had spent 24 years with AT&T Corp. and
Bell Laboratories, becoming Group Vice President at AT&T Corp. Mr. Scanlon has
served on the board of directors of Hutchison Global Crossing since January
2000. Mr. Scanlon received a bachelor's degree in science from the University of
Toronto and a master's degree in electrical engineering from Cornell University.
THOMAS J. CASEY -- Mr. Casey has been Vice Chairman of our board of
directors since May 2000 and director -- strategy and business development since
November 1999. Mr. Casey has been a Vice Chairman of the Global Crossing board
of directors since December 1998. Mr. Casey was co-head of Merrill Lynch & Co.'s
Global Communications Investment Banking Group for three years before joining
Global Crossing. From 1990 to 1995, Mr. Casey was a partner and co-head of the
telecommunications and media group of the law firm of Skadden, Arps, Slate,
Meagher & Flom.
LEO J. HINDERY, JR. -- Mr. Hindery has been a member of our board since
April 2000. In February 2000, Mr. Hindery became Chief Executive Officer and a
director of Global Crossing. Mr. Hindery has also been Chairman and Chief
Executive Officer of GlobalCenter Inc. since December 1999. Before joining
GlobalCenter, Mr. Hindery had been President and Chief Executive Officer of AT&T
Broadband & Internet Services since March 1999. From March 1997 to March 1999,
Mr. Hindery was President of Tele-Communications, Inc., a cable television and
programming company. Before joining Tele-Communications, Inc., Mr. Hindery was
managing general partner of InterMedia Partners, a cable television operator
that he founded in 1988. Mr. Hindery is a director of GT Group Telecom Inc.,
Tanning Technology Corp., TD Waterhouse Group, Inc. and VerticalNet, Inc. Mr.
Hindery is also Vice Chairman of the Museum of Television and Radio and a
director of C-SPAN. Mr. Hindery is a member of the Stanford Business School
Advisory Council and of the Board of Trustees of Hampton University, and a
director of the Daniels Fund.
JOSEPH P. CLAYTON -- Mr. Clayton has been a member of our board of
directors since November 1999. Mr. Clayton has been a member of the Global
Crossing board of directors since September 1999. Mr. Clayton was Chief
Executive Officer of Frontier Corporation from August 1997 to September 1999,
served as Frontier's President from June 1997 to March 1999, as Frontier's Chief
Operating Officer from June 1997 to August 1999 and as a director of Frontier
since 1997. From March 1992 until December 1996, Mr. Clayton was Executive Vice
President, Marketing and Sales -- Americas and Asia at Thomson Consumer
Electronics, a worldwide leader in the consumer electronics industry. Mr.
Clayton is also a member of the board of directors of The Good Guys.
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ERIC HIPPEAU -- Mr. Hippeau has been a member of our board of directors
since November 1999. Mr. Hippeau has been a director of Global Crossing since
September 1999. Mr. Hippeau is the President and Executive Managing Director of
Softbank International Ventures. Mr. Hippeau is also the Chairman and Chief
Executive Officer of Ziff-Davis Inc., a publicly listed company whose majority
shareholder is Softbank. Mr. Hippeau has held this position since 1993. Mr.
Hippeau is also a director of ZDNet, Yahoo!, Inc., Herring Communications, Inc.
and Starwood Hotels and Resorts Worldwide, Inc.
THOMAS U. KOLL -- Mr. Koll has been a member of our board of directors
since April 2000. Mr. Koll is a vice president of Microsoft's Network Solutions
Group. Mr. Koll joined Microsoft in 1988 and has held a number of senior
positions, including general manager of World Wide Business Strategy and general
manager of the Dedicated System Group. Before his transfer to the Microsoft
headquarters, Mr. Koll held a number of senior sales positions at Microsoft.
Before joining Microsoft, Mr. Koll was an assistant professor of International
Politics at the Free University of Berlin for seven years. Mr. Koll received a
master's degree in political science from the Free University of Berlin.
NORMAN BROWNSTEIN -- Mr. Brownstein has been a member of our board of
directors since August 2000. Mr. Brownstein has been a member of the Global
Crossing board of directors since May 2000. Since 1986, Mr. Brownstein has
served as Chairman of the Board of the law firm of Brownstein Hyatt & Farber,
P.C. Mr. Brownstein is a Presidential appointee of the U.S. Holocaust Memorial
Council, a director of the National Jewish Center for Immunology and Respiratory
Medicine, a Trustee of the Simon Wiesenthal Center, and a Vice President of the
American Israel Public Affairs Committee. Mr. Brownstein is also a member of the
board of directors of Wyndham International.
WILLIAM E. CONWAY, JR. -- Mr. Conway has been a member of our board of
directors since August 2000. Mr. Conway has been a member of the Global Crossing
board of directors since April 1998. Mr. Conway has been a managing director of
The Carlyle Group, a global investment firm since 1997. From 1994 to 1997, Mr.
Conway was the Senior Vice President and Chief Financial Officer of MCI
Communications Corporation. Mr. Conway is also a member of the board of
directors of Nextel Communications, Inc.
GEOFFREY J.W. KENT -- Mr. Kent has been a member of our board of directors
since August 2000. Mr. Kent has been a member of the Global Crossing board of
directors since August 1998. Mr. Kent is the Chairman and Chief Executive
Officer of the Abercrombie & Kent group of companies in the travel-related
services industry. Mr. Kent has served in various positions with these companies
since 1967.
STEFAN C. RIESENFELD -- Mr. Riesenfeld has been our Chief Financial Officer
since June 2000. From 1999 to 2000, Mr. Riesenfeld was Executive Vice President
and Chief Financial Officer of Teledyne Technologies. From 1996 to 1999, Mr.
Riesenfeld was the Director of Finance and Business Planning (Chief Financial
Officer) of ICL PLC. From 1983 to 1996, Mr. Riesenfeld served in various
positions at the Unisys Corporation, including Vice President and Corporate
Treasurer and Vice President/Corporate Development. Mr. Riesenfeld received a
master of business administration degree and a master of arts in economics both
from Stanford University and a Bachelor of Science in physics from the
California Institute of Technology.
DARRYL E. GREEN -- Mr. Green has been our President -- Japan since November
1999 and President of our subsidiary, Global Crossing Japan K.K., since August
1999. Mr. Green is Executive Director of Global Access Limited and previously
served on the board of directors of Hutchison Global Crossing. Mr. Green was
President and Chief Executive Officer of AT&T Japan Ltd. from May 1998 and AT&T
Jens from September 1995. Mr. Green is a member of key study committees of the
Ministry of Posts and Telecommunications in Japan. Mr. Green is fluent in
Japanese and writes frequently for major Japanese business publications. Mr.
Green received a master of business administration degree from the Tuck School
at Dartmouth College.
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DAVID MILROY -- Mr. Milroy has been our President -- North Asia/Greater
China since December 1999 and President of our subsidiary, Asia Global
Crossing -- Asia Pacific Ltd., since December 1999. Mr. Milroy has served on the
board of directors of Hutchison Global Crossing since January 2000. Mr. Milroy
was Senior Vice President, Network Development for Global Crossing from April
1999 to December 1999. From December 1997 to April 1999, he was Vice President,
International Network Services for KPN (Royal Dutch Telecom) in the Netherlands,
where he was responsible for all of KPN's international infrastructure
construction. Before KPN, Mr. Milroy was a member of the senior management team
at Unisource Satellite Services based in the Netherlands from April 1993 to
December 1997. Mr. Milroy received a bachelor's degree in commerce and a
master's degree in marketing from the University of New South Wales, Australia.
CHARLES F. CARROLL -- Mr. Carroll has been our Senior Vice President and
General Counsel since March 2000. From 1992 to 2000, Mr. Carroll was a partner
in the New York law firm of Simpson Thacher & Bartlett. Mr. Carroll received a
juris doctor degree from the New York University School of Law.
JOSEPH P. PERRONE -- Mr. Perrone has been our Chief Accounting Officer
since May 2000. Before joining us, Mr. Perrone was a senior partner in Arthur
Andersen's Communications, Media, and Entertainment Practice, having been a
partner at Arthur Andersen since 1981. Mr. Perrone is also the Senior Vice
President -- Finance for Global Crossing.
ALEX NG -- Mr. Ng has been our Chief Operating Officer -- North
Asia/Greater China and Chief Operating Officer of our subsidiary Asia Global
Crossing, Asia Pacific Ltd., since April 2000. Before joining us, Mr. Ng was the
President and Chief Executive Officer of AT&T Asia Pacific Group from August
1999 to April 2000 and, before that, Chief Financial Officer and Vice President
of AT&T in Asia Pacific from February 1992 to August 1999. Since February 1992,
Mr. Ng was also on the board of directors of certain joint ventures in which
AT&T invested. Mr. Ng received a master of business administration degree from
Open University of Hong Kong and is a member of the Hong Kong Society of
Accountants and also member of other accounting bodies in the United Kingdom and
Canada.
ANTHONY D. CHRISTIE -- Mr. Christie has been our Vice President of Strategy
and Business Development since March 2000. From 1984 to 2000, Mr. Christie held
numerous management and executive positions at AT&T in the United States and
Asia. Most recently, Mr. Christie held positions as a Regional Managing Director
in Asia, Global Sales Vice President, Network Vice President and General Manager
at AT&T Solutions. Mr. Christie received a bachelor's degree from Drexel
University, a master's degree of business administration from the University of
New Haven and a master's degree in science from the Massachusetts Institute of
Technology.
BOARD COMMITTEES
Our board of directors has standing audit and compensation committees and
an Office of the Chairman.
Audit Committee. The purpose of the audit committee is to:
- make recommendations concerning the engagement of independent public
accountants;
- review with our management and the independent public accountants the
plans for, and scope of, the audit procedures to be utilized and results
of audits;
- approve the professional services provided by the independent public
accountants;
- review the adequacy and effectiveness of our internal accounting
controls;
- review our insurance program; and
- perform any other duties and functions required by any organization under
which our securities may be listed.
The current members of the audit committee are Mr. Brownstein, Mr. Conway
and Mr. Kent.
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Compensation Committee. The purpose of the compensation committee is to
establish and submit to our board of directors recommendations with respect to:
- compensation of officers and other key employees; and
- awards to be made under the stock incentive plan.
The current members of the compensation committee are Mr. Brownstein, Mr.
Conway and Mr. Kent.
Office of the Chairman. The purpose of the Office of the Chairman is to
facilitate and support our management generally and in our dealings with Global
Crossing and GlobalCenter. The current members of the Office of the Chairman are
Mr. Winnick, Mr. Cook, Mr. Legere, Mr. Scanlon, Mr. Casey and Mr. Hindery.
OUTSIDE DIRECTOR COMPENSATION
We have not yet paid any compensation to non-employee directors. We
anticipate that in the future, non-employee directors may receive annual fees,
meeting fees and periodic option grants.
EXECUTIVE COMPENSATION
We have paid Mr. Scanlon cash compensation of $65,625 during the fiscal
year ended December 31, 1999. Total compensation paid or accrued to our other
executive officers as a group during the fiscal year ended December 31, 1999 was
$43,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM ALL OTHER
NAME AND PRINCIPAL POSITION TIME PERIOD SALARY BONUS COMPENSATION COMPENSATION
--------------------------- ----------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
John M. Scanlon...................... 11/99 to $65,625 -- -- --
Chief Executive Officer 12/99
</TABLE>
In 2000, John Legere, our Chief Executive Officer, will receive minimum
compensation of $1,000,000. This amount does not include a $15 million
interest-free loan which Mr. Legere has received from us. If Mr. Legere is
employed by us for three years, he will not be required to repay the $15 million
loan.
In 2000, John M. Scanlon, our Vice Chairman, will receive minimum
compensation of $1,134,000.
In 2000, Stefan Reisenfeld, our Chief Financial Officer, will receive
minimum compensation of $525,000, plus a signing bonus of $250,000.
In 2000, Charles F. Carroll, our General Counsel, will receive minimum
compensation of $525,000.
In 2000, Darryl Green, our President -- Japan, will receive minimum
compensation of $331,500.
The following table presents certain information regarding stock options
granted under our stock incentive plan to our Chief Executive Officer and the
four other executive officers that we anticipate to be the highest compensated
executive officers in 2000. The information in the following table assumes an
initial public offering price per share for our Class A common stock of $15.00.
The options for Mssrs. Legere, Riesenfeld, Carroll and Green will all be at an
exercise price equal to the initial public offering price.
In reading the information in the table below, please note the following:
- Mr. Legere will receive options to acquire Class A common stock in an
amount to be determined by dividing $175,000,000 by the initial public
offering price per share of our Class A common stock at an exercise price
equal to the initial public offering price, subject to a number of
exceptions.
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- Mr. Scanlon will receive options to acquire Class A common stock in an
amount to be determined by dividing $15,000,000 by the initial public
offering price per share of our Class A common stock at an exercise price
equal to the initial public offering price.
- Mr. Riesenfeld will receive options to acquire Class A common stock in an
amount to be determined by dividing $7,500,000 by the initial public
offering price per share of our Class A common stock at an exercise price
equal to the initial public offering price.
- Mr. Carroll will receive options to acquire Class A common stock in an
amount to be determined by dividing $13,500,000 by the initial public
offering price per share of our Class A common stock at an exercise price
equal to the initial public offering price.
- Mr. Green will receive options to acquire Class A common stock in an
amount to be determined by dividing $15,000,000 by the initial public
offering price per share of our Class A common stock at an exercise price
equal to the initial public offering price. In addition, Mr. Green will
receive options to acquire Class A common stock in an amount to be
determined by dividing the value of Mr. Green's existing options for
Global Crossing common stock from the date of our initial public offering
based on the Black Scholes valuation methodology, by the initial public
offering price per share of our Class A common stock at an exercise price
equal to the initial public offering price.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
---------------------------------------------------------------------- ---------------------------
NUMBER OF
SECURITIES % OF FAIR MARKET
UNDERLYING TOTAL OPTIONS EXERCISE PRICE VALUE ON
OPTIONS GRANTED TO PER SHARE GRANT DATE EXPIRATION
NAME GRANTED EMPLOYEES ($/SH) ($/SH) DATE 5%($) 10%($)
---- ---------- ------------- -------------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
John J. Legere 11,666,667 56.92 $15.00 $15.00 2010 110,056,559 278,904,930
John M. Scanlon 1,000,000 4.88 $15.00 $15.00 2010 9,433,419 23,906,137
Stefan C. Riesenfeld 500,000 2.44 $15.00 $15.00 2010 4,716,709 11,953,068
Charles F. Carroll 900,000 4.39 $15.00 $15.00 2010 8,496,077 21,515,523
Darryl Green 1,189,084 5.80 $15.00 $15.00 2010 11,217,132 28,426,416
</TABLE>
The following table presents certain information as of the date of our
initial public offering concerning exercises of stock options by the named
executive officers for the current year and the value of those individuals'
unexercised options based upon the midpoint of the expected pricing range of the
offering.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS ON THE DATE OF THIS IN-THE-MONEY OPTIONS ON THE
PROSPECTUS (#) DATE OF THIS PROSPECTUS ($)
NUMBER OF --------------------------- ---------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE ($) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John J. Legere -- -- 2,916,667 8,750,000 -- --
John M. Scanlon -- -- 333,334 666,666 -- --
Stefan C. Riesenfeld -- -- -- 500,000 -- --
Charles F. Carroll -- -- 225,000 675,000 -- --
Darryl Green -- -- 63,028 1,126,056 -- --
</TABLE>
EMPLOYMENT CONTRACTS
We have entered into an employment agreement with John Legere, our Chief
Executive Officer. The term of Mr. Legere's employment agreement began on
February 12, 2000 and expires on February 12, 2003. Under his employment
agreement, Mr. Legere is entitled to receive a base salary of not less than
$500,000 and a guaranteed annual bonus in each of 2000 and 2001 of not less than
$500,000.
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Mr. Legere will receive options to acquire Class A common stock in an
amount to be determined by dividing $175,000,000 by the initial public offering
price per share of our Class A common stock at an exercise price equal to the
initial public offering price, subject to a number of exceptions. Of Mr.
Legere's options:
- 25% will vest and become exercisable immediately on the date of the
grant, which is the date of the completion of this offering; and
- an additional 25% will vest and become exercisable on February 12, 2001,
2002 and 2003.
These options could, however, vest and become exercisable under certain
circumstances upon a change of control, as defined in our stock incentive plan,
or upon a termination of Mr. Legere's employment agreement in specified
circumstances.
Under his employment agreement and a promissory note dated February 12,
2000, Mr. Legere also received a $15 million interest-free loan from us. Mr.
Legere has agreed to repay the loan in full on January 31, 2004 or 30 days after
a termination for cause, whichever is earlier. In addition, $5,000,000 or 1/3 of
our loan to Mr. Legere will be forgiven on each of February 12, 2001, February
12, 2002 and February 11, 2003, so long as Mr. Legere is employed by us on that
date.
Under his employment agreement, if Mr. Legere is terminated for cause, he
is entitled to receive accrued but unpaid base salary and bonus and forfeits any
unvested options. In addition, Mr. Legere will be required to repay the
remaining balance of the loan to us. If Mr. Legere's employment is terminated by
us for any reason other than for cause or he resigns under some circumstances,
Mr. Legere is entitled to receive his base salary and a guaranteed minimum
annual bonus for the remainder of the term of the employment contract. In
addition, Mr. Legere's outstanding balance on the loan will be forgiven and all
of his options will vest immediately.
John M. Scanlon serves as our Vice Chairman under an employment contract
with Global Crossing. The contract provides that, if Global Crossing becomes
subject to a change of control, Mr. Scanlon's stock options will vest and become
exercisable consistent with company policy. In addition, the contract provides
that, if Mr. Scanlon is terminated without cause or elects to terminate his
employment under specified circumstances, Mr. Scanlon will receive a severance
payment equal to two years' salary and bonus.
We have also entered into an employment contract with Stefan C. Riesenfeld.
This contract provides that, if we become subject to a change in control or Mr.
Riesenfeld is terminated without cause or resigns under specified circumstances,
Mr. Riesenfeld will receive a severance payment equal to two years' salary and
bonus. In addition, the contract provides that, if we become subject to a change
of control, Mr. Riesenfeld will be granted the same terms and conditions as
other comparable corporate officers.
We have also entered into an employment contract with Charles F. Carroll.
This contract provides that, if we become subject to a change of control, Mr.
Carroll's options will vest and become exercisable. In addition, the contract
provides that, if Mr. Carroll is terminated without cause within one year after
a change of control, he will receive a payment equal to twice his annual salary.
In addition, our Chief Executive Officer, the four other executive officers
that we anticipate to be the highest compensated executive officers in 2000 and
we intend to enter into a change of control agreement. Under the agreement, if
we or Global Crossing become subject to a change of control and any of the
executive officers party to the agreement are terminated under specified
circumstances
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during the 24-month period immediately following the month in which the change
of control occurs, we will agree to make the following payments to that
executive officer:
- an amount equal to (1) in the case of Messrs. Legere and Scanlon, three
times the sum of and (2) in the case of Messrs. Riesenfeld, Carroll and
Green, two times the sum of:
- the higher of the executive officer's annual base salary in effect
immediately before (1) the occurrence of the change of control or (1)
the executive officer's termination in connection with the change of
control; and
- the higher of the executive officer's target annual bonus for (1) the
fiscal year before the fiscal year in which the change of control
occurs or (2) the fiscal year in which the executive officer is
terminated in connection with the change of control;
and reduced by any cash severance benefit otherwise paid to the executive
officer under any applicable severance plan or other severance
arrangement;
- an amount in cash equal to the amount of any incentive compensation that
has been allocated or awarded to the executive officer for a completed
fiscal year preceding the occurrence of the change of control and the
executive officer's termination under any incentive compensation plan but
has not yet been paid to the executive officer; and
- a proportionate bonus equal to the number of calendar days elapsed during
the fiscal year before the date of termination of the executive officer,
divided by the total number of days in that fiscal year and multiplied by
the target bonus payable for that period.
In addition, under the agreement, we will agree to continue to provide
health and life insurance coverage for 12 months from the date the executive
officer is terminated, at the same cost to the executive officer and at the same
coverage level as in effect on the date of termination.
We will gross up payments under the agreement to compensate the executive
officers for specified taxes.
STOCK INCENTIVE PLAN
The 2000 Asia Global Crossing Ltd. Stock Incentive Plan, which we refer to
as our stock incentive plan, is administered by our board of directors, which
may delegate its duties in whole or in part to any subcommittee solely
consisting of at least two individuals who are non-employee directors within the
meaning of Rule 16b-3 under the Exchange Act and outside directors within the
meaning of Section 162(m) of the Internal Revenue Code. Our stock incentive plan
allows the board of directors to make awards of stock options, stock
appreciation rights, which can be granted either in conjunction with, or
independent of, stock options, and other stock based awards to any individual
who is selected by the board of directors to participate in the stock incentive
plan.
The board of directors has the authority to interpret our stock incentive
plan, to establish, amend and rescind any rules and regulations relating to our
stock incentive plan and to make any other determinations that the board of
directors deems necessary or desirable for the administration of our stock
incentive plan. The board of directors may also correct any defect or supply any
omission or reconcile any inconsistency in our stock incentive plan in the
manner and to the extent the board of directors deems necessary or desirable.
Any decision of the board of directors in the interpretation and administration
of our stock incentive plan lies within its sole and absolute discretion and is
final, conclusive and binding on all parties concerned, including participants
in our stock incentive plan and their beneficiaries or successors.
A total of 15% of the total shares outstanding of our common stock as of
the completion of this offering is currently authorized for issuance under our
stock incentive plan. As of the date of our initial public offering, no shares
of our common stock will have been issued under our stock incentive plan,
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20.5 million shares will be subject to outstanding options granted under our
stock incentive plan and 61.8 million shares will be available for additional
stock option grants or other stock-based awards.
The maximum number of shares for which options and stock appreciation
rights may be granted during each calendar year to any participant is 5,000,000
shares. The maximum number of shares for which other stock-based awards may be
granted during each calendar year to any participant is shares. No award
may be granted under our stock incentive plan after the tenth anniversary of its
effective date, but awards granted before that date may extend beyond that date.
Stock options. Stock options granted under our stock incentive plan may be
non-qualified or incentive stock options for federal income tax purposes. The
board of directors will set option exercise prices and terms and will determine
the time at which stock options will be exercisable. However, the term of a
stock option may not exceed 10 years.
Our board of directors may also grant options that are intended to be
incentive stock options, which comply with Section 422 of the Internal Revenue
Code. Fair market value is defined as the closing price of the shares as
reported on that grant date as quoted on the principal national securities
exchange on which the shares are listed. However, for awards granted which will
become effective on our initial public offering the fair market value is equal
to the initial public offering price.
Stock appreciation rights. Stock appreciation rights may be granted by the
board of directors to participants as a right in conjunction with the number of
shares underlying stock options granted to participants under our stock
incentive plan or on a stand-alone basis with respect to a number of shares for
which a stock option has not been granted.
Stock appreciation rights constitute the right to receive payment for each
share of the stock appreciation rights exercised in stock or in cash equal to
the excess of that share's fair market value on the date of exercise over the
exercise price per share, multiplied by the number of shares covered:
- in the case of a stock appreciation right independent of an option, by the
stock appreciation right; and
- in the case of a stock appreciation right granted in conjunction with an
option, by the option.
Our board of directors will determine the exercise price per share of stock
appreciation rights; however, that price may not be less than the greater of:
- the fair market value, in the case of a stock appreciation right independent
of an option, of a share of common stock on the grant date and, in the case of
an applicable stock appreciation right granted in conjunction with an option,
of the price of that option; and
- an amount permitted by applicable laws, rules, bye-laws or policies of
regulatory authorities or stock exchanges. Our board of directors may also
impose, in its discretion, conditions on the exercisability or transferability
of stock appreciation rights.
Our board of directors may also grant limited stock appreciation rights
that are exercisable upon the occurrence of special contingent events. Limited
stock appreciation rights may provide for a different method of determining
appreciation, may specify that payment will be made only in cash and may provide
that any related awards are not exercisable while the limited stock appreciation
rights are exercisable.
Other stock-based awards. Our board of directors has the authority to
grant other stock-based awards, which may consist of awards of common stock,
restricted stock and awards that are valued in whole or in part by reference to,
or are otherwise based on the fair market value of, shares of common stock.
Other stock-based awards may be granted on a stand-alone basis or in addition to
any other awards granted under our stock incentive plan. The board of directors
will determine the form of other stock-based awards and the conditions on which
they may be dependent. The conditions may include the right to receive one or
more shares of common stock or the equivalent value in cash upon the completion
of a specified period of service or the occurrence of an event or
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the attainment of performance objectives. Our board of directors will also
determine the participants to whom other stock-based awards may be made, the
timing of those awards, the number of shares to be awarded, whether those other
stock-based awards will be settled in cash, stock or a combination of cash and
stock and all other terms of those awards.
General. Stock options, stock appreciation rights and restricted stock
awards are not transferable or assignable, except for estate planning purposes.
We may deduct sufficient sums to pay withholding required for federal, state and
local taxes or other taxes as a result of the exercise of a stock award.
In the event of any stock dividend or split, reorganization,
recapitalization, merger, consolidation, spin-off, combination or exchange of
stock or other corporate exchange or any distribution to shareholders other than
regular cash dividends, our board of directors may, in its sole discretion, make
a substitution or adjustment, as the board of directors deems to be equitable,
to the number or kind of stock issued or reserved for issuance under our stock
incentive plan under outstanding awards and the term, including option price, of
those awards.
Except as otherwise provided in a stock award agreement, in the event of
our change in control, our board of directors may, in its sole discretion,
accelerate a stock award, cause us to make a cash payment in exchange for a
stock award or require the issuance of a substitute stock award.
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PRINCIPAL SHAREHOLDERS
OUR BENEFICIAL OWNERSHIP
Before this offering, all our outstanding shares of common stock were held
by Asia Global Crossing Holdings. The shareholders of that entity consisted of
our founding shareholders and The Goldman Sachs Group, Inc. Before this
offering, through Asia Global Crossing Holdings:
- Global Crossing beneficially owned 1,115,978 shares of our common stock,
representing a 93% interest in us;
- each of Microsoft and Softbank beneficially owned 41,999 shares of our
common stock, giving each a 3.5% interest in us; and
- The Goldman Sachs Group beneficially owned 24 shares of our common stock,
representing a 0.002% interest in us. The Goldman Sachs Group received
its ownership interest in us in consideration for its financial advisory
services in connection with the formation of Asia Global Crossing
Holdings and structuring our ownership and the ownership of Asia Global
Crossing Holdings.
We expect that, upon consummation of this offering, Asia Global Crossing
Holdings will distribute to each of Global Crossing, Microsoft and The Goldman
Sachs Group its proportionate share of the total number of shares of common
stock we issue to Asia Global Crossing Holdings and that Asia Global Crossing
Holdings will remain a wholly owned subsidiary of Softbank under a different
name. The columns under the caption "Before this Offering" in the following
table present information regarding beneficial ownership of our common stock
prior to any such distribution.
Our bye-laws as in effect before this offering and the shareholders
agreement among our founding shareholders as in effect before this offering
include a reallocation mechanism for the beneficial ownership of our founding
shareholders and The Goldman Sachs Group. The reallocation mechanism is based on
our fair market value at the time of the reallocation. Our founding shareholders
have agreed to cause the reallocation simultaneously with this offering and
calculate our fair market value based on the initial public offering price of
our Class A common stock in this offering. Assuming that our fair market value
is approximately $7.5 billion, the ownership percentages of our founding
shareholders and The Goldman Sachs Group in us will be reallocated
simultaneously with the completion of this offering as follows:
- Global Crossing will own beneficially 310.8 million shares of our Class B
common stock, representing a 56.6% interest in us;
- each of Microsoft and Softbank will own beneficially 85.5 million shares
of our Class B common stock, representing a 15.6% interest in us; and
- The Goldman Sachs Group will own beneficially 4.8 million shares of our
Class A common stock, representing an approximately 1.0% interest in us.
The ownership percentages of our founding shareholders mentioned above give
effect to the completion of the transactions described under "Concurrent
Transactions" on page 75.
The columns under the caption "After this Offering" in the following table
present information regarding beneficial ownership of our common stock, as of
the date of our initial public offering, as adjusted to reflect:
- the reallocation of the beneficial ownership percentages of our founding
shareholders and The Goldman Sachs Group as described above, assuming a
$15.00 initial public offering price for our Class A common stock;
- the sale of shares of our Class A common stock under this prospectus,
assuming no exercise of the underwriters' option to purchase additional
shares from us;
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- the completion of the transactions described under "Concurrent
Transactions" on page 75; and
- the completion of the strategic investments described under
"Business -- Recent Developments" on page 47,
by:
- each of the individuals listed on the "Summary Compensation Table" on
the next page;
- each of our directors;
- each person, or group of affiliated persons, who is known by us to own
beneficially 5% or more of our common stock; and
- all current directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of the date of our initial public
offering are deemed issued and outstanding. These shares, however, are not
deemed outstanding for purposes of computing percentage ownership of each other
shareholder.
Percentage of ownership is based on 1.2 million shares of common stock
outstanding immediately before this offering and 548.8 million shares assumed to
be outstanding after completion of this offering. The percentage of common stock
outstanding as of the completion of this offering is calculated on the basis of
our assumed initial public offering price of $15.00 and in accordance with the
rules of the Securities and Exchange Commission. Unless otherwise indicated, the
address of each of the individuals named below is: c/o Asia Global Crossing
Ltd., 360 North Crescent Drive, Beverly Hills, California 90210.
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<TABLE>
<CAPTION>
BEFORE THIS OFFERING AFTER THIS OFFERING
-------------------------- ----------------------------
NUMBER OF PERCENTAGE OF NUMBER OF PERCENTAGE OF
SHARES ALL SHARES SHARES ALL SHARES
--------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Global Crossing (Class B common
stock)............................ 1,115,978 93.0% 310,807,875 56.6%
Wessex House,
45 Reid Street,
Hamilton HM12, Bermuda
Microsoft (Class B common stock).... 41,999 3.5 85,500,000 15.6
One Microsoft Way
Redmond, WA 98052
Softbank (Class B common stock)..... 41,999 3.5 85,500,000 15.6
24-1 Nihonbashi-Hakozaki- cho,
Chuo-ku, Tokyo 103 Japan
Gary Winnick(1)..................... 1,115,978 93.0 310,807,875 56.6
Lodwrick M. Cook(2)................. 1,115,978 93.0 310,807,875 56.6
John J. Legere...................... -- -- 2,916,667 *
John M. Scanlon..................... -- -- 333,334 *
Thomas J. Casey(3).................. 1,115,978 93.0 310,807,875 56.6
Leo J. Hindery, Jr.(4) ............. 1,115,978 93.0 310,807,875 56.6
Joseph P. Clayton(5)................ 1,115,978 93.0 310,807,875 56.6
Eric Hippeau(6)..................... 1,157,978 96.5 396,307,875 72.2
Thomas U. Koll(7)................... 41,999 3.5 85,500,000 15.6
Norman Brownstein................... -- -- -- --
William E. Conway, Jr. ............. -- -- -- --
Geoffrey J.W. Kent.................. -- -- -- --
Stefan C. Riesenfeld................ -- -- -- --
Darryl E. Green..................... -- -- 63,028 *
David Milroy........................ -- -- 164,401 *
Charles F. Carroll.................. -- -- 225,000 *
Joseph P. Perrone................... -- -- -- --
Alex Ng............................. -- -- -- --
Anthony D. Christie................. -- -- -- --
Directors and executive officers as
a group (19 persons) (Class A
common stock)..................... 1,199,976 99.9% 485,510,305 88.5%
--------- ----- ----------- -----
Total..................... 1,200,000 100.0% 548,825,125 100.0%
</TABLE>
---------------
* Percentage of shares beneficially owned does not exceed one percent.
(1) Includes all shares of common stock beneficially owned by Global Crossing.
Mr. Winnick is also a director of Global Crossing. Mr. Winnick disclaims
beneficial ownership of these shares.
(2) Includes all shares of common stock beneficially owned by Global Crossing.
Mr. Cook is also a director of Global Crossing. Mr. Cook disclaims
beneficial ownership of these shares.
(3) Includes all shares of common stock beneficially owned by Global Crossing.
Mr. Casey is also a director of Global Crossing. Mr. Casey disclaims
beneficial ownership of these shares.
(4) Includes all shares of common stock beneficially owned by Global Crossing.
Mr. Hindery is also a director of Global Crossing. Mr. Hindery disclaims
beneficial ownership of these shares.
(5) Includes all shares of common stock beneficially owned by Global Crossing.
Mr. Clayton is also a director of Global Crossing. Mr. Clayton disclaims
beneficial ownership of these shares.
(6) Includes all shares of common stock beneficially owned by Global Crossing
and Softbank. Mr. Hippeau is also a director of Global Crossing and
Softbank. Mr. Hippeau disclaims beneficial ownership of these shares.
(7) Includes all shares of common stock beneficially owned by Microsoft. Mr.
Koll is a vice president of Microsoft's Network Solutions Group. Mr. Koll
disclaims beneficial ownership of these shares.
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CONCURRENT TRANSACTIONS
This offering is conditioned upon the contribution to us by Global Crossing
of:
- its interest in Hutchison Global Crossing; and
- its interest in Global Access Limited.
We expect that these contributions will occur simultaneously with the
completion of this offering.
CONTRIBUTION OF GLOBAL CROSSING'S 50% INTEREST IN HUTCHISON GLOBAL CROSSING
We and our founding shareholders intend to enter into an agreement
providing for the contribution by Global Crossing to us of its 50% interest in
Hutchison Global Crossing. Under the agreement, the contribution will be
conditioned upon the completion of this offering. Immediately after the
completion of this offering, under the agreement:
- Global Crossing will sell to each of Microsoft and Softbank 19% of its
50% interest in Hutchison Global Crossing for $153,875,029 in cash or a
short-term note. After this sale, Global Crossing will own 31% of
Hutchison Global Crossing, and each of Microsoft and Softbank will own
9.5% of Hutchison Global Crossing;
- following the sale, each of Global Crossing, Microsoft and Softbank will
contribute its entire interest in Hutchison Global Crossing to us as a
capital contribution and we will then own 50% of Hutchison Global
Crossing; there will be no consideration from us to any of Global
Crossing, Microsoft or Softbank for its contribution;
- we will then purchase Global Crossing's interest in any outstanding
shareholder loans to Hutchison Global Crossing;
- we will assume Global Crossing's rights and obligations under the
shareholders agreement with Hutchison Whampoa. See "Transactions with
Related Parties -- Relationships Among Ourselves and Hutchison Whampoa"
on page 87; and
- we will indemnify Global Crossing against certain losses and taxes
described under "Transactions with Related Parties -- Relationships
Between Ourselves and Global Crossing -- Agreement Relating to the
Contribution of Global Crossing's Interest in Hutchison Global Crossing
to Us" on page 77.
Because Goldman Sachs will not purchase its proportionate interest in
Hutchison Global Crossing from Global Crossing, the interest of Goldman Sachs
and Global Crossing in us are also being adjusted. As a result of its
contribution, Global Crossing will receive an additional number of shares of our
Class B common stock equal to $809,868,574 multiplied by Goldman Sachs'
percentage ownership in us at the time of our initial public offering. Based on
an assumed initial public offering price of $15.00, Global Crossing would
receive 595,500 shares of our Class B common stock and, as a result, the number
of shares of Goldman Sachs' Class A common stock would be reduced by an equal
number of shares.
CONTRIBUTION OF GLOBAL CROSSING'S 49% INTEREST IN GLOBAL ACCESS LIMITED
We and our founding shareholders intend to enter into an agreement
providing for the contribution by Global Crossing to us of its 49% interest in
Global Access Limited. Under the agreement, the contribution will be conditioned
upon the completion of this offering. Immediately after the completion of this
offering, under the agreement:
- Global Crossing will contribute its 49% interest in Global Access Limited
to us;
- in consideration for its contribution, Global Crossing will obtain 36.6
million additional shares of our Class B common stock having an aggregate
value of $549.4 million, based on an assumed initial
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public offering price of $15.00 per share of our Class A common stock,
and the beneficial ownerships of each of Microsoft, Softbank and Goldman
Sachs in us will be diluted proportionately, in the case of Microsoft and
Softbank up to a maximum of 1.43% each, to give effect to those
additional shares that will be issued to Global Crossing; and
- we will then purchase Global Crossing's interest in any outstanding
shareholder loans to Global Access Limited.
TRANSACTIONS WITH RELATED PARTIES
RELATIONSHIPS BETWEEN OURSELVES AND GLOBAL CROSSING
The following description of the terms of the agreement between Global
Crossing and ourselves is materially complete. However, we refer you to the
actual agreement which we intend to file with the SEC at a later time as an
exhibit to the registration statement of which this prospectus is a part.
AGREEMENT WITH GLOBAL CROSSING
Global Crossing and we intend to enter into an agreement that governs the
relationship between the companies and their respective subsidiaries and
affiliates, including provision of network services, coordination and use of
bundled service offerings, marketing, pricing of service offerings and
strategies, branding, rights with respect to intellectual property and other
shared technology and operational, maintenance and administrative services.
However, this agreement does not grant us priority or preemptive rights for the
use of the Global Crossing network. This section summarizes the important
provisions of that agreement.
TERRITORIES
Under the agreement, our territory is the territory in which we are
permitted to conduct business under our corporate governance documents. We list
the countries which comprise our territory on page 78 under "-- Relationships
Among Ourselves and our Founding Shareholders -- Shareholders
Agreement -- Territory".
Under the agreement, as between ourselves and Global Crossing, we have the
exclusive right within Asia to market and sell capacity and specified services
on the Global Crossing network as well as on our network, and Global Crossing
has the exclusive right outside of Asia to market and sell capacity and
specified services on the Global Crossing network as well as on our network. The
specified services comprise our and Global Crossing's current and future service
offerings other than data center services in Asia, which we expect to provide in
connection with GlobalCenter and, in many cases, local partners. The agreement
also governs provision of connectivity and services not available on our network
or the Global Crossing network, as well as the right to pursue new business
opportunities, in our respective territories. We and Global Crossing have
granted each other a right of first refusal to provide connectivity, services
and related items not available on our respective networks.
To ensure maintenance of a seamless global network, Global Crossing will
provide customer care, cable maintenance and related services and network
management on a worldwide basis. The agreement allows us, with the cooperation
of Global Crossing, to establish regional network operations centers to provide
management and support services for our network.
MARKETING AND FUTURE OPPORTUNITIES
The agreement provides that, within our respective territories, we and
Global Crossing will develop and market our products and services, subject to
the obligation to coordinate with one another as provided in the next paragraph.
The agreement also provides that neither we nor Global Crossing may undertake
these activities in each other's territory. Each of us, however, will have the
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obligation to market the other's products and services in our respective
territories to the exclusion of competing products and services offered by
others.
We and Global Crossing have agreed to coordinate our respective network
expansion, acquisition, deployment, procurement, marketing and sales plans. If
an acquisition or investment opportunity involves assets or operations in the
territories of the other company, we and Global Crossing will consider a joint
bid and strategic apportionment of the assets or operations. If we cannot reach
agreement on a joint strategy, then either company may pursue that acquisition
or investment. The company that did not make the acquisition or investment will
have a right of first offer in connection with any sale of the acquired assets
to a third party. See "Shareholders Agreement -- Non-competition Arrangements"
on page 80.
INTELLECTUAL PROPERTY
Under the agreement, we will operate under the Global Crossing service mark
and follow Global Crossing's corporate brand strategies and policies.
Through a royalty-free cross-licensing arrangement, we and Global Crossing
will share use of all technology and intellectual property developed or
possessed by each other, to the extent permitted by third-party contractual
restrictions. However, following joint consultation, we may pursue the
development of intellectual property independently from each other.
PRICING
The agreement provides that, whenever a sale to one of our customers would
involve the provision of services in Global Crossing's territory, we will
purchase those services from Global Crossing. Conversely, whenever a sale to one
of Global Crossing's customers would involve the provision of services in our
territory, Global Crossing will purchase those services from us. We and Global
Crossing will charge each other for such products and services market-based
prices established by a joint pricing committee. We also intend to purchase
certain administrative and corporate services from Global Crossing on a
cost-plus basis.
AGREEMENT RELATING TO THE CONTRIBUTION OF GLOBAL CROSSING'S INTEREST IN
HUTCHISON GLOBAL CROSSING TO US
We and Global Crossing, among others, intend to enter into an agreement
under which Global Crossing will contribute to us its 50% interest in Hutchison
Global Crossing upon completion of this offering. See "Concurrent Transactions"
on page 75. Under the agreement, we will agree to purchase shareholder loans
made by Global Crossing to Hutchison Global Crossing for cash at par plus
accrued and unpaid interest, on the closing date of the transaction.
In addition, under the agreement, we will agree to indemnify Global
Crossing against:
- any losses that Global Crossing or any of its subsidiaries may incur as a
result of its guarantee in favor of the Hong Kong government of the
performance by Hutchison Global Crossing or its subsidiaries under:
- the fixed telecommunications network services license; and
- a contract to supply the Hong Kong Government with government and
commercial services through a common on-line platform;
- any Hong Kong withholding tax that Global Crossing or any of its
subsidiaries may incur in connection with Global Crossing entering into
certain services and license agreements with respect to Hutchison Global
Crossing's data centers; and
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- any taxes or losses that Global Crossing or any of its subsidiaries may
incur in connection with Global Crossing entering into those certain
services and license agreements with respect to Hutchison Global
Crossing's data centers.
RELATIONSHIPS AMONG OURSELVES AND OUR FOUNDING SHAREHOLDERS
The following description of the terms of the shareholders agreement and
related agreements among our founding shareholders is materially complete.
However, we refer you to the actual agreements which we intend to file with the
SEC at a later time as exhibits to the registration statement of which this
prospectus is a part.
Global Crossing, Microsoft and Softbank, our founding shareholders, are
parties to a shareholders agreement, which contains important provisions
relating to, among other things, our governance and our business. In addition,
our founding shareholders and we have entered into a registration rights
agreement regarding sales of our common stock by our founding shareholders. Our
founding shareholders have also entered into a capacity commitment agreement
relating to Pacific Crossing-1.
SHAREHOLDERS AGREEMENT
The shareholders agreement details, among other things:
- the composition of our board of directors;
- actions requiring the approval of our directors appointed by Microsoft
and Softbank;
- the preparation of strategic plans;
- activities in which our founding shareholders are prohibited from
engaging in our territory without each other's consent;
- additional obligations of Microsoft and Softbank toward us;
- our obligation to purchase certain technology from Microsoft; and
- transfer restrictions on our shares of common stock.
TERRITORY. The shareholders agreement provides that we will conduct our
business in a specified territory. That territory consists of Brunei, Burma,
Cambodia, China (including Hong Kong), Fiji, Indonesia, Japan, Kiribati, Laos,
Macau, Malaysia, Marshall Islands, Federated States of Micronesia, Mongolia,
Nauru, North Korea, Palau, Papua New Guinea, the Philippines, Samoa, Singapore,
Solomon Islands, South Korea, Taiwan, Thailand, Tonga, Tuvalu, Vanuatu and
Vietnam. See " -- Relationship Between Ourselves and Hutchison
Whampoa -- Non-competition provisions" regarding restrictions on our ability to
conduct business in China, including Hong Kong.
COMPOSITION OF OUR BOARD OF DIRECTORS. Under the shareholders agreement
and our bye-laws, after the reallocation of our founding shareholders'
beneficial ownership percentages outlined under "Principal Shareholders -- Our
Beneficial Ownership" on page 72, each of Microsoft and Softbank will be
entitled to appoint a number of our directors that is proportionate to its
beneficial interest in us. Microsoft and Softbank will each have the right to
appoint at least one of our directors for so long as each beneficially owns:
- at least 3.5% of our outstanding shares of common stock before the
reallocation of our founding shareholders' beneficial ownership
percentages; and
- 5% of our outstanding shares of common stock after the reallocation.
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ACTIONS REQUIRING THE APPROVAL OF OUR DIRECTORS APPOINTED BY MICROSOFT AND
SOFTBANK. The shareholders agreement and our bye-laws provide that the
following actions require the approval of our directors that have been nominated
by Microsoft and Softbank:
- our amalgamation, merger or consolidation or the amalgamation, merger or
consolidation of any of our majority-owned subsidiaries;
- any acquisition or investment by us or any of our majority-owned
subsidiaries:
- involving aggregate consideration paid by us and our majority-owned
subsidiaries of in excess of $1.0 billion; or
- if the aggregate consideration paid by us or any of our majority-owned
subsidiaries in any fiscal year for acquisitions or investments after
that acquisition or investment exceeds $2.0 billion;
- any sale, transfer or other disposition of our material assets or of the
material assets of our majority-owned subsidiaries in one or more related
transactions, other than an initial public offering by us and other
dispositions of worn-out or obsolete assets in the ordinary course of our
business;
- any material change in our purposes as described in our bye-laws;
- before the reallocation of our founding shareholders' beneficial
ownership percentages, any amendment to our memorandum of association or
our bye-laws;
- after the reallocation of our founding shareholders' ownership
percentages, any amendment to our memorandum of association or bye-laws
that materially affects the right of Microsoft and Softbank to nominate
directors to our board;
- the declaration or payment of any dividends or other distributions by us
before the reallocation of our founding shareholders' ownership
percentages, subject to limited exceptions;
- the adoption of our initial strategic plan;
- the incurrence by us or any of our majority-owned subsidiaries of
indebtedness in excess of $1.0 billion in the aggregate at any one time
outstanding, excluding indebtedness incurred:
- to finance expenditures incurred in accordance with our initial
strategic plan;
- to finance capital expenditures approved by our board of directors
under the bullet point immediately following; or
- under the Pacific Crossing-1 credit facility and certain refinancings
of that credit facility;
- capital expenditures by us or any of our majority-owned subsidiaries in
excess of $1.0 billion on a project by project basis or in excess of $2.0
billion in any fiscal year;
- the issuance of additional equity by us or any of our majority-owned
subsidiaries, other than in connection with stock option plans, benefit
and pension plans, other employee compensation plans or director
compensation plans;
- the commencement of any proceeding for our voluntary bankruptcy or the
voluntary bankruptcy of any of our majority-owned subsidiaries;
- any transaction between Global Crossing or any of its majority-owned
subsidiaries and us or any of our majority-owned subsidiaries for
consideration having a value in excess of $5.0 million and to be entered
into on terms less favorable to us than those that could have been
obtained
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at the time of that transaction in an arms' length transaction with an
unrelated third party, other than:
- transactions between us or any of our majority-owned subsidiaries and
Global Crossing or any of its affiliates entered into on an arms'
length basis involving the provision of services and/or capacity to a
customer in regions both within and outside of our territory; and
- a number of other transactions identified in a schedule to our
shareholders agreement;
- our discontinuance as a Bermuda company; and
- our dissolution upon the occurrence of specified events.
These approval rights will terminate if and when Microsoft and Softbank
lose their right to nominate members to our board of directors. See
"-- Composition of Our Board of Directors" on page 78.
PREPARATION OF STRATEGIC PLANS. Under the shareholders agreement, we are
required to deliver to each of our founding shareholders and any other person or
entity that is a party to the shareholders agreement drafts of a multi-year
strategic plan, or updates of a previous strategic plan, and an annual budget as
soon as practicable before the beginning of each succeeding year.
NON-COMPETITION ARRANGEMENTS. In the shareholders agreement, our founding
shareholders have agreed not to:
- engage in any service or activity within the scope of our business in our
territory;
- form, enter into any agreement or other arrangement with any third party
for an investment in or otherwise invest in any entity engaged or, in the
case of an entity with no significant operations or operating history,
expressly intending to engage, primarily, in any service or activity
within the scope of our business in our territory; and
- develop, construct or invest in any undersea cable system in, into or
within our territory until December 31, 2000.
The following exceptions apply to the foregoing non-competition provisions:
- Global Crossing may invest in Global Access Limited.
- Each of Global Crossing, Microsoft and Softbank may invest in any entity
that competes with us in our territory so long as the consolidated
revenues of that entity from any competing service or activity do not in
the aggregate exceed 33 1/3% of the total consolidated revenues of that
entity.
- Each of Global Crossing, Microsoft and Softbank may invest in up to 15%
of the outstanding capital stock or voting stock of any competing entity
whose consolidated revenues from any competing service or activity exceed
33 1/3% of the total consolidated revenues of that entity.
- Each of Global Crossing, Microsoft and Softbank may maintain any
competing investment it had made up to the date of the shareholders
agreement.
- KOREA. Our founding shareholders may use a different entity to conduct
activities relating to intracity terrestrial networks in Korea. Microsoft
and Softbank will own in the aggregate 62% and Global Crossing will own
38% of the capital stock of that entity that is not owned by local
partners.
- CHINA. Our founding shareholders may pursue business opportunities in
China, including Hong Kong, free from the non-competition provisions
outlined above.
- If we do not engage or invest in a competing service or activity as a
result of our failure to obtain the requisite approval of our directors
appointed by Microsoft and Softbank, Global Crossing would then be able
to engage and invest in that competing service or activity.
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PACIFIC CROSSING-1. If Global Crossing acquires any additional equity in
Pacific Crossing-1, under our shareholders agreement, we will have the option to
purchase that equity from Global Crossing for cash at Global Crossing's
reacquisition cost. The term of that option will extend for one year from the
date of Global Crossing's acquisition.
Our founding shareholders can suspend the operation of or terminate any of
the non-competition arrangements in the shareholders agreement at any time by
mutual agreement. Our consent is not required to suspend or terminate any of
those arrangements. The non-competition obligations of our founding shareholders
terminate on September 8, 2004. However, Microsoft's non-competition obligations
will terminate earlier, if Microsoft ceases to own an interest in us.
ADDITIONAL OBLIGATIONS OF MICROSOFT AND SOFTBANK TOWARD US -- SOFTWARE. In
the shareholders' agreement, Microsoft has agreed to make available to us any
software which it or any of its majority-owned subsidiaries has made available
to any of our competitors on terms, including price, features and functionality,
which are consistent with other strategic partners of Microsoft, recognizing
factors such as the class of customer utilizing the software, the type of
software, volume discounts and distribution channels.
USE OF OUR NETWORK. In the shareholders agreement, Microsoft has agreed to
use our facilities and assets for all of its and its controlled subsidiaries'
Layer 1 transmission systems services in our territory, which is a term not
defined in the shareholders agreement. Layer 1 transmission systems services is
a term used in the telecommunications industry to describe an element of raw
bandwidth requirements. Raw bandwidth is the physical means of sending data over
cable lines. Microsoft has also agreed to use its commercially reasonable
efforts to cause its majority-owned subsidiaries, other than controlled
subsidiaries, to use our facilities and assets for the procurement distribution
of those services in our territory.
In the shareholders agreement, Softbank has agreed to use our facilities
and assets for its and its controlled subsidiaries' capacity and service needs
in our territory. Softbank has also agreed to use its commercially reasonable
efforts to cause its majority-owned subsidiaries, other than controlled
subsidiaries, to use our facilities and assets for their capacity and service
needs in our territory.
The obligations of Microsoft and Softbank outlined in the two paragraphs
immediately above are subject to reasonable availability, compatibility and
quality specifications, cost considerations and the fiduciary obligations of
Microsoft and Softbank.
Our founding shareholders can suspend the operation of or terminate any of
the obligations of Microsoft and Softbank outlined in this section at any time
by mutual agreement. Our consent is not required to suspend or terminate any of
those obligations. These obligations of Microsoft and Softbank terminate on
September 8, 2004. However, Microsoft's obligations will terminate earlier, if
Microsoft ceases to own an interest in us.
OUR OBLIGATION TO PURCHASE CERTAIN TECHNOLOGY FROM MICROSOFT. Under the
shareholders agreement, we are required to use our commercially reasonable
efforts to purchase products and services provided by Microsoft and Microsoft
solution partners. Our obligation applies to products and services used only in
our territory and is subject to specified network operating and maintenance
objectives and pricing considerations.
We have entered into a registration rights agreement with our founding
shareholders to facilitate, at their request, sales of their interests in us
permitted under the shareholders agreement. See "Registration Rights Agreement"
immediately below.
REGISTRATION RIGHTS AGREEMENT
We have entered into a registration rights agreement with our founding
shareholders and with The Goldman Sachs Group. See "Description of Capital
Stock -- Registration Rights Agreement" on page 100. The registration rights
agreement provides for demand registration rights, subject to a number of
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conditions and limitations, to each of our founding shareholders after our
initial public offering. In accordance with these demand registration rights,
our founding shareholders, or their permitted transferees, may require us to
file a registration statement under the Securities Act to register the sale of
shares of our common stock held by them. Each of Microsoft and Softbank may
require us to file up to two registration statements. Global Crossing has
unlimited demand registration rights, and The Goldman Sachs Group has no demand
registration rights. The registration rights agreement also provides, subject to
a number of conditions and limitations, our founding shareholders, The Goldman
Sachs Group and their transferees with so-called piggy-back registration rights,
which allow them to participate in registered offerings of our shares of common
stock which we initiate.
Under the registration rights agreement, we are required to pay all
expenses, other than underwriting discounts and commissions, in connection with
any registered offering covered by the agreement. In addition, we are required
to indemnify our founding shareholders and The Goldman Sachs Group, and they are
in turn required to indemnify us, against certain liabilities in respect of any
registration statement or offering covered by the registration rights agreement.
CAPACITY COMMITMENT AGREEMENT
In connection with their investment in us, Global Crossing through an
affiliate, on the one hand, and Microsoft and Softbank, on the other hand,
entered into a capacity commitment agreement, dated November 24, 1999. Under the
capacity commitment agreement, each of Microsoft and Softbank agreed to purchase
capacity on Pacific Crossing-1, Global Access Limited or any other Japanese
intercity network controlled by Global Crossing or any of its subsidiaries
(including us) in an aggregate amount of $200,000,000 over a three-year period
from the date when Pacific Crossing-1 is able to carry trans-Pacific traffic.
Each of Microsoft and Softbank is severally liable for 50% of the capacity
commitment.
Under the capacity commitment agreement, Microsoft and Softbank agreed to
purchase:
- $20,000,000 of capacity no later than the date when Pacific Crossing-1 is
able to carry trans-Pacific traffic, which has occurred and for which we
have recorded a sale;
- an additional $20,000,000 of capacity during the period from the date
when Pacific Crossing-1 is able to carry trans-Pacific traffic to
December 31, 2000; and
- the balance of the $200,000,000 aggregate commitment, i.e., $160,000,000,
during the three-year period from the date when Pacific Crossing-1 is
able to carry trans-Pacific traffic.
The capacity commitment agreement provides that, except with respect to
their initial $20,000,000 commitment, Microsoft and Softbank may utilize the
remaining $180,000,000 aggregate capacity commitment on other systems of the
Global Crossing network, rather than on Pacific Crossing-1, Global Access
Limited or any other Japanese intercity network, as long as they use
commercially reasonable efforts to use their capacity commitment on Pacific
Crossing-1.
Under the capacity commitment agreement, use by Microsoft and Softbank or
any of their affiliates of our network as provided in the shareholders agreement
among our founding shareholders may be credited against the $200,000,000
aggregate capacity commitment of Microsoft and Softbank.
If at any time Microsoft or Softbank determines that it has not used and
could not reasonably be expected to use any capacity purchased under the
capacity commitment agreement, then Microsoft or Softbank will use Global
Crossing exclusively as a marketing agent to market the unused capacity. In that
case, Global Crossing will use commercially reasonable efforts to market the
unused capacity. In consideration for its marketing services, Global Crossing
will be entitled to receive a fee in an amount equal to 5% of the consideration
received from Global Crossing for the unused capacity. If Global Crossing fails
to sell successfully unused capacity within three months from the written
request by Microsoft or Softbank, Microsoft or Softbank will have the right to
replace Global Crossing as marketing agent.
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Our founding shareholders can amend or terminate the capacity commitment
agreement at any time by mutual agreement without our consent.
RELATIONSHIPS AMONG OURSELVES AND THE OTHER PACIFIC CROSSING LTD. SHAREHOLDER
The following description of the terms of the Pacific Crossing Ltd.
shareholders agreement is materially complete. However, we refer you to the
actual agreement which we have filed with the SEC as an exhibit to the
registration statement of which this prospectus is a part.
We have entered into a shareholders agreement relating to Pacific Crossing
Ltd. with Marubeni. The Pacific Crossing Ltd. shareholders agreement details,
among other things:
- the composition of the Pacific Crossing Ltd. board of directors;
- actions requiring the supermajority consent of the Pacific Crossing Ltd.
board of directors;
- actions requiring the supermajority consent of the Pacific Crossing Ltd.
shareholders;
- shareholder rights to subscribe for new capital;
- restrictions on the transfer of shares of common stock in Pacific
Crossing Ltd.;
- the consequences of a deadlock over the annual budget; and
- exit rights of SCS.
COMPOSITION OF THE PACIFIC CROSSING LTD. BOARD OF DIRECTORS. The Pacific
Crossing Ltd. shareholders agreement provides that each shareholder party to
that agreement will have the right to nominate a number of directors to the
Pacific Crossing Ltd. board that is proportionate to that shareholder's
beneficial interest in Pacific Crossing Ltd. Today, the Pacific Crossing Ltd.
board of directors consists of six members, four of which we nominate and two of
which Marubeni nominates.
Under the first Pacific Crossing Ltd. shareholders agreement, we have the
right to designate the Chairman of the board of directors of Pacific Crossing
Ltd. for so long as we are the largest shareholder in Pacific Crossing Ltd.
Marubeni has the right to designate the Deputy Chairman of the board of
directors of Pacific Crossing Ltd. for so long as Marubeni is the second largest
shareholder in Pacific Crossing Ltd.
ACTIONS REQUIRING THE SUPERMAJORITY VOTE OF THE PACIFIC CROSSING LTD.
DIRECTORS. The Pacific Crossing Ltd. shareholders agreement provides that the
following actions require the approval of 75% of the Pacific Crossing Ltd.
directors:
- the merger or consolidation of Pacific Crossing Ltd., the sale of all or
substantially all of the assets of Pacific Crossing Ltd. or any material
majority-owned subsidiary of Pacific Crossing Ltd., the dissolution,
liquidation, reorganization or recapitalization of Pacific Crossing Ltd.
or any similar extraordinary corporate action or transaction involving
Pacific Crossing Ltd., subject to limited exceptions;
- the incurrence of indebtedness by Pacific Crossing Ltd. or any of its
majority-owned subsidiaries in excess of $100 million in aggregate
principal amount, other than indebtedness incurred in connection with
specified third party construction financing;
- refinancing of any indebtedness of Pacific Crossing Ltd. or any of its
majority-owned subsidiaries in excess of $100 million in outstanding
principal amount;
- approval of a fundamental change to the Pacific Crossing Ltd. business
plan or construction budget or a change in the Pacific Crossing Ltd.
marketing plan if the change would result in a plan that is not a
market-based, arm's length pricing plan;
- approval of any operating budget for any operating year in which the
aggregate amount of costs budgeted to be incurred by Pacific Crossing
Ltd. is greater than 30% or more than the
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aggregate amount of costs budgeted to be incurred by Pacific Crossing
Ltd. in the operating budget for the preceding operating year;
- the execution, material amendment or termination of any material system
contract, other than a capacity purchase agreement, or any other
agreement or agreements involving more than $50 million, which is not an
intercompany agreement or a capacity purchase agreement, or the material
amendment or material extension of those agreements before the end of
their stated terms;
- sales of assets by Pacific Crossing Ltd. and its majority-owned
subsidiaries, other than in the ordinary course of business or under the
Pacific Crossing-1 construction budget or then current operating budget,
with a purchase price or fair market value in excess of $25 million per
year in the aggregate or which are otherwise material to the business of
Pacific Crossing Ltd. and its majority-owned subsidiaries;
- the execution of any intercompany agreement, or the amendment or
extension of any intercompany agreement, or the approval of any
transaction or series of related transactions between Pacific Crossing
Ltd. or any of its majority-owned subsidiaries and a shareholder,
affiliate of a shareholder or related party, subject to limited
exceptions;
- the making of capital expenditures in excess of the current construction
budget or operating budget to the extent those capital expenditures are
not permitted to be made under the construction financing, as amended,
supplemented or otherwise modified from time to time;
- the issuance of a notice soliciting new capital or the incurrence of any
indebtedness to any shareholder or any affiliate of a shareholder or any
related party;
- with respect to any intercompany agreement that by its terms allows
Pacific Crossing Ltd. to elect to renew or terminate that agreement upon
the occurrence of some specified event or circumstance, any election by
Pacific Crossing Ltd. to terminate or not renew that intercompany
agreement and any determination of whether a default has occurred and
whether and what actions should be taken in respect of that default;
- the transfer of any ownership interest in a majority-owned subsidiary of
Pacific Crossing Ltd. to any person other than a wholly-owned subsidiary
of Pacific Crossing Ltd.;
- the undertaking of any system upgrade to enhance the system beyond its
current design capability of 640 Gbps;
- the adoption of or change in Pacific Crossing Ltd.'s dividend policy;
- any amendment or other modification of the memorandum of association and
bye-laws of Pacific Crossing Ltd., subject to limited exceptions;
- the expansion of the Pacific Crossing-1 system by means of a material
geographical addition to the configuration of the system or a material
geographical reconfiguration of the system, if that reconfiguration would
cost in excess of $100 million; and
- a fundamental change in the business of Pacific Crossing Ltd.
ACTIONS REQUIRING SHAREHOLDER VOTE. The Pacific Crossing Ltd. shareholders
agreement provides that the following actions require the approval of
shareholders holding at least 75% of the outstanding shares of common stock of
Pacific Crossing Ltd.:
- any action which results in the dilution of a shareholder's ownership
percentage;
- any issuance, purchase or redemption by Pacific Crossing Ltd. of any
securities of Pacific Crossing Ltd. or any change, increase or reduction
in the capitalization of Pacific Crossing Ltd.;
- any merger or consolidation of Pacific Crossing Ltd. or any material
majority-owned subsidiary of Pacific Crossing Ltd., or acquisition of all
or substantially all of the assets or capital stock of
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Pacific Crossing Ltd. or any material majority-owned subsidiary of
Pacific Crossing Ltd. by another entity or other business combination or
any dissolution, liquidation or winding up of Pacific Crossing Ltd. or
any material majority-owned subsidiary of Pacific Crossing Ltd.;
- any amendment to the memorandum of association of Pacific Crossing Ltd.;
and
- any filing of a voluntary petition in bankruptcy or for reorganization or
for the adoption of an arrangement or an admission seeking the relief in
bankruptcy or reorganization provided under any existing or future law of
any jurisdiction.
In addition, the approval of shareholders holding 100% of the outstanding
shares of common stock of Pacific Crossing Ltd. is required to approve any
material change in the business of Pacific Crossing Ltd.
SHAREHOLDER RIGHTS TO SUBSCRIBE FOR NEW CAPITAL. The Pacific Crossing Ltd.
shareholders agreement provides that each shareholder party to that agreement
will have the preferential right to subscribe for any new capital raised for
Pacific Crossing Ltd. in proportion to that shareholder's beneficial interest in
Pacific Crossing Ltd. This provision applies whether the new capital takes the
form of debt or equity.
RESTRICTIONS ON THE TRANSFER OF SHARES OF COMMON STOCK IN PACIFIC CROSSING
LTD.. The Pacific Crossing Ltd. shareholders agreement prohibits all transfers
of shares of Pacific Crossing Ltd. common stock before construction of Pacific
Crossing-1 is complete and Pacific Crossing-1 is ready for use. At all other
times, Pacific Crossing Ltd. shareholders may transfer their shares in Pacific
Crossing Ltd. to:
- affiliates; or
- third parties subject to the other shareholders' rights of first refusal.
However, Pacific Crossing Ltd. shareholders are not allowed to transfer their
shares to common carriers or persons or entities whose creditworthiness is not
reasonably satisfactory to a majority of the other shareholders.
The Pacific Crossing Ltd. shareholders agreement includes tag-along and
drag-along provisions. If a shareholder agrees to sell its interest in Pacific
Crossing Ltd., the tag-along provisions allow the other shareholders to
participate in that sale by selling their interests on the same terms. If
shareholders holding 75% or more of the outstanding shares of common stock of
Pacific Crossing Ltd. agree to sell those shares to a non-affiliated party, the
drag-along provisions allow those shareholders to cause any remaining
shareholders to sell their interests in Pacific Crossing Ltd. on the same terms.
CONSEQUENCES OF A DEADLOCK OVER THE ANNUAL BUDGET. If the Pacific Crossing
Ltd. board of directors fails to agree on an annual budget for three consecutive
operating years and the shareholders fail to solve that deadlock after using
their reasonable efforts, then any shareholder may initiate a sale of Pacific
Crossing-1.
RELATIONSHIPS AMONG GLOBAL CROSSING SUBSIDIARIES AND PACIFIC CROSSING LTD.
MAINTENANCE AGREEMENTS
Pacific Crossing Ltd. has entered into operations, administration and
maintenance agreements with Global Access Limited and Global Crossing Network
Center Ltd., a Global Crossing subsidiary. Under those agreements, Global Access
Limited and Global Crossing Network Center are obligated to provide operating,
administration and maintenance services for Pacific Crossing-1. The term of the
agreement with Global Crossing Network Center is for an initial term of eight
years with two renewal periods of five years each at our option. The agreement
with Global Access Limited is for an initial term of eight years with two
renewal periods of eight and one-half years each at our option. Pacific Crossing
Ltd. recorded expenses of $3.0 million and $21.5 million for the six months
ended June 30,
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2000 under the agreement with Global Access Limited and Global Crossing Network
Center, respectively.
We believe that the fees between Pacific Crossing Ltd., on the one hand,
and Global Access Limited and Global Crossing Network Center, on the other hand,
are on terms no less favorable to Pacific Crossing Ltd. than the terms that
would be available to Pacific Crossing Ltd. in transactions with a
non-affiliated third party.
FINANCIAL SERVICES AGREEMENT
In 1998, Pacific Crossing Ltd. entered into a financial services agreement
with Global Crossing Development Corporation, a subsidiary of Global Access
Limited, to arrange the Pacific Crossing-1 credit facility. In consideration for
its services, Global Crossing Development received a fee in the amount of 1.5%
of the $850 million credit facility, equal to $12.8 million. In a further
agreement between Global Crossing Development and Marubeni Pacific Cable
Limited, Vectant, Inc., formerly Global Bandwidth Solutions, a subsidiary of
Marubeni, Marubeni Pacific Cable received from Global Crossing Development 33.3%
of the $12.8 million, equal to $4.3 million, in consideration for its
participation in arranging the credit facility.
We believe that the fees between Pacific Crossing Ltd. and Global Crossing
Development are on terms no less favorable to Pacific Crossing Ltd. than the
terms that would be available to Pacific Crossing Ltd. in transactions with a
non-affiliated third party.
MANAGEMENT SERVICES
A number of indirect wholly owned subsidiaries of Global Crossing provide
Pacific Crossing Ltd. with marketing, management and administrative services in
respect of the development, implementation and operations of Pacific Crossing
Ltd. For the year ended December 31, 1999, Global Crossing charged Pacific
Crossing Ltd. approximately $4 million in marketing, management and
administrative services fees and $2.5 million in professional fees pertaining to
legal and advocacy issued before governmental authorities. For the six months
ended June 30, 2000, Global Crossing charged Pacific Crossing Ltd. $318,000 for
general corporate services. In addition, for the six months ended June 30, 2000,
we charged Pacific Crossing Ltd. $500,000 for general corporate services.
We believe that the fees between Pacific Crossing Ltd. and the Global
Crossing subsidiaries are on terms no less favorable to Pacific Crossing Ltd.
than the terms that would be available to Pacific Crossing Ltd. in transactions
with a non-affiliated third party.
LOAN FACILITY
During 1999, Pacific Crossing Ltd. entered into a loan facility with Global
Crossing Holdings Ltd., a wholly owned subsidiary of Global Crossing, for
approximately $9 million. The interest rate of the loan is LIBOR plus 2%. The
outstanding principal plus accrued interest is due one year after the Pacific
Crossing-1 credit facility is paid in full.
We believe that the fees among Global Crossing subsidiaries and Pacific
Crossing Ltd. are on terms no less favorable to us than the terms that would be
available to us in transactions with a non-affiliated third party.
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RELATIONSHIPS BETWEEN OURSELVES AND HUTCHISON WHAMPOA
The following description of the terms of the shareholders agreement
between Hutchison Whampoa and ourselves is materially complete. However, we
refer you to the actual shareholders agreement which we have filed with the SEC
as an exhibit to the registration statement of which this prospectus is a part.
Global Crossing and Hutchison Whampoa have entered into a shareholders
agreement relating to Hutchison Global Crossing. Upon completion of this
offering and Global Crossing's contribution to us of its 50% interest in
Hutchison Global Crossing, we will become party to that shareholders agreement
and assume Global Crossing's obligations under that agreement. The following
sections summarize the important provisions of the shareholders agreement as if
we were party to it.
AGREEMENT TO USE EACH OTHER'S SERVICES. Hutchison Whampoa has agreed,
subject to some limitations, and has agreed to cause, and in some cases to use
its reasonable commercial efforts to cause, its subsidiaries located outside
Hong Kong and China to use capacity, services and telehouse and media center
services from Global Crossing and its subsidiaries. This agreement is subject to
Global Crossing's services being reasonably competitive as to price,
availability, quality and other terms material to the competitiveness of
Hutchison Whampoa. In addition, Hutchison Whampoa will not be obligated to
comply with these provisions if the services sought are otherwise provided by
Hutchison Whampoa or any of its subsidiaries.
Hutchison Global Crossing has agreed, on behalf of itself and its
subsidiaries, to substantially similar provisions regarding the use of Global
Crossing's capacity and services as the ones outlined in the paragraph
immediately above. Global Crossing has agreed, and has agreed to cause its
subsidiaries, to provide capacity on the Global Crossing network to Hutchison
Global Crossing at a price equal to the lowest price of any sale on the
applicable Global Crossing network during the preceding calendar quarter to a
non-affiliated entity activating a similar amount of capacity on the applicable
system, excluding discounts given in respect of future commitments and past
purchases unless comparable circumstances apply in the case of the proposed
purchaser and having regard to timing of commitments, purchase and activation,
less 5%. However, this price may not be below Global Crossing's cost.
We have agreed, and agreed to cause our subsidiaries, to use Hutchison
Whampoa's and its subsidiaries' networks for paging, mobile and call center
services. Our obligation to do so is subject to those services being reasonably
competitive as to price, availability, quality and other terms material to its
competitiveness and that those services are not being provided by Global
Crossing or any of its subsidiaries or Hutchison Global Crossing or any of its
subsidiaries.
PRICE OF HUTCHISON GLOBAL CROSSING SERVICES TO US AND HUTCHISON
WHAMPOA. Hutchison Global Crossing has agreed to provide capacity to us and
Hutchison Whampoa and each of our subsidiaries at a price equal to the lowest
price of any sale on the Hutchison Global Crossing network during the preceding
calendar quarter to a non-affiliated entity activating similar amount and type
of capacity, excluding discounts given in respect of future commitments and past
purchases unless comparable circumstances apply in the case of the proposed
purchaser and having regard to timing of commitments, purchases and activation,
less 5%. However, the price of the services may not be below Hutchison Global
Crossing's cost.
NON-COMPETITION PROVISIONS. Each of Global Crossing, Hutchison Whampoa and
us has agreed not to pursue any opportunity in fixed services and Internet
access and transport services in China other than through Hutchison Global
Crossing and its subsidiaries. If any of us, Global Crossing, Hutchison Whampoa
or us wishes to pursue such an opportunity, that party will give prompt notice
to the board of directors of Hutchison Global Crossing, specifying the
opportunity in reasonable detail. If Hutchison Global Crossing is not permitted
by law or published policy, regulation or decree to pursue the opportunity, then
that party will be permitted to pursue the opportunity, subject to some
limitations.
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In addition, each of Global Crossing, Hutchison Whampoa and us has agreed
not to, and has agreed to cause our subsidiaries not to, engage in the business
of Hutchison Global Crossing or form, enter into an agreement or other
arrangement with any third party for an investment in or otherwise make any
investment in any entity engaged in or intending to engage in the business of
Hutchison Global Crossing in:
- China, with respect to fixed services;
- Hong Kong and China, with respect to Internet access and transport
services; and
- Hong Kong, with respect to fixed services and Internet enablement
services.
The agreements provides exceptions to these non-competition provisions,
including:
- investments in a competing business is permitted so long as the
consolidated revenues of our business do not exceed 15% of the total
consolidated revenues of our business at the date of the investment and
that business will not use the names "Hutchison", "Whampoa" or "Global
Crossing" as part of its name;
- ownership for investment purposes of the shares or other securities of
any corporation which carries on a competing business, subject to some
conditions;
- provision of Internet enablement services solely within our, the Global
Crossing or Hutchison Whampoa's group of subsidiaries to meet the needs
of a business that is not a competing business and provision of those
services if they are incidental to a business solution which, but for
these Internet enablement services, would not be within the scope of
Internet enablement services;
- engagement or investment in any competing service or activity if the
Hutchison Global Crossing board of directors considered and rejected that
service, activity or investment, subject to some conditions;
- development, construction, ownership, operation, maintenance and use by
us, Global Crossing or our subsidiaries of cable landing stations and the
sale of capacity on those stations, subject to some limitations; and
- development, construction, operation, maintenance, ownership, lease or
other provision by us, Global Crossing or our subsidiaries of backhaul
facilities in Hong Kong and China to connect cable stations owned and
operated by us, Global Crossing or any of our subsidiaries in Hong Kong
and China with related point-of-presence in Hong Kong and China, subject
to some limitations.
INTELLECTUAL PROPERTY. The agreement provides that any license for
intellectual property by Hutchison Global Crossing to us, Global Crossing or
Hutchison Whampoa must be first approved by the Hutchison Global Crossing board
of directors.
CABLE LANDING STATIONS. The agreement provides that neither Hutchison
Global Crossing nor any of its subsidiaries will make any capital expenditure or
equity contribution in relation to a submarine landing station in Hong Kong or
China or own cable stations or submarine cable systems which land in Hong Kong
or China or participate in consortia or similar arrangements. However, Hutchison
Global Crossing and its subsidiaries may facilitate the establishment of cable
landing stations to the extent desirable to enable the group to compete as a
provider of backhaul facilities and domestic services in Hong Kong and China.
BOARD OF DIRECTORS. The agreement provides that the board of directors of
Hutchison Global Crossing will consist of six members and that we and Hutchison
Whampoa will each nominate three directors. We will have the exclusive right to
remove the directors we nominated. The agreement provides that the Chairman of
the Hutchison Global Crossing board of directors will initially be nominated by
Hutchison Whampoa and will serve for 18 months. We will then have the right to
nominate the Chairman for the next 18 months, and that right will continue
alternating between us and Hutchison Whampoa.
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Under the agreement, each matter submitted to the board of directors must
be approved by a simple majority of the members, including at least one director
nominated by each of us and Hutchison Global Crossing for so long as the
transfer restrictions described below are in place. A number of action matters
may not be undertaken without the approval of the board of directors, including:
- any amendment to the articles of association of Hutchison Global Crossing
or any of its subsidiaries;
- the creation, allotment or issue of any shares of capital stock of
Hutchison Global Crossing or any of its subsidiaries or the grant or
agreement to grant any option over shares or the issue of any obligations
convertible into shares of Hutchison Global Crossing or any of its
subsidiaries;
- the redemption or purchase of any shares of Hutchison Global Crossing or
any of its subsidiaries;
- any change in the nature or scope of the business of Hutchison Global
Crossing or any modification to its business plan or operation budget;
- the giving of any guarantee, indemnity or other security to any person by
Hutchison Global Crossing or any of its subsidiaries or the borrowing by
Hutchison Global Crossing or any of its subsidiaries in excess of limits
from time to time contained in the business plan or otherwise not in
excess of HK$7,500,000 or any refinancing of or material amendments to
that borrowing;
- the acquisition or the disposal by Hutchison Global Crossing or any of
its subsidiaries of any shares or other interests in any other entity,
any business or assets formerly used in the conduct of any business or
any assets, other than in the ordinary course of business;
- the approval of the business plan;
- the amalgamation or merger of Hutchison Global Crossing or any of its
subsidiaries;
- any change in the name of Hutchison Global Crossing or any of its
subsidiaries;
- the declaration or payment of dividends;
- the commencement of the defense or conduct of litigation by Hutchison
Global Crossing or any of its subsidiaries concerning a material claim by
a third party against Hutchison Global Crossing or any of its
subsidiaries;
- any changes in the accounting policies of Hutchison Global Crossing or
any of its subsidiaries;
- the commencement of a winding up or similar proceeding, or the sale of
all or substantially all of the assets, of Hutchison Global Crossing or
any of its subsidiaries;
- the purchase of any freehold property by, or the grant or assignment of
any leasehold property to, Hutchison Global Crossing or any of its
subsidiaries;
- the provision by Hutchison Global Crossing of backhaul services at other
than market rates if not expressly permitted by the agreement;
- the disposition of capacity on the Hutchison Global Crossing network for
non-cash consideration;
- any transaction or agreement between Hutchison Global Crossing or any of
its subsidiaries and us or Hutchison Whampoa or our affiliates, or any
amendment to those agreements;
- capital expenditures in excess of HK$7,500,000, unless specifically
contemplated by the operating budget;
- execution or material amendment or termination of material contracts;
- election, appointment or removal of senior management;
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- creation, grant or issue of, or agreement to create, grant or issue, any
mortgage, charge or other lien on any assets or shares of Hutchison
Global Crossing;
- execution of any individual contract or commitment which is outside the
ordinary course of business or has a value in excess of HK$7,500,000 or
has a duration of greater than 18 months;
- disposition of any asset having a net book value in excess of
HK$7,500,000;
- changing the independent accountants of Hutchison Global Crossing and its
subsidiaries;
- a number of matters relating to the taxation of Hutchison Global Crossing
and its subsidiaries;
- the acquisition of or investment in any company;
- any reorganization, recapitalization or similar extraordinary corporate
action or transaction involving Hutchison Global Crossing or any of its
subsidiaries; and
- establishment of any new subsidiary.
RESTRICTIONS ON TRANSFER OF SHARES. In general, neither we nor Hutchison
Whampoa may transfer our interest in Hutchison Global Crossing without the
other's consent, except to our wholly owned subsidiaries.
INITIAL PUBLIC OFFERING. The agreement provides that each of ourselves and
Hutchison Whampoa may cause the initial public offering of Hutchison Global
Crossing's shares of common stock and the listing of those shares on an
internationally recognized securities exchange.
TERMINATION OF SHAREHOLDERS AGREEMENT. The agreement automatically
terminates 180 days from the date when Global Crossing will cease to own,
directly or indirectly, at least 35% of our outstanding voting stock and in
other circumstances described in the agreement.
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REGULATION
In the ordinary course of the development, construction and operation of
our telecommunications networks, including East Asia Crossing, and the provision
by us of telecommunications services, we will be required to obtain various
telecommunications and other permits, licenses and authorizations in the
ordinary course of business and will become subject to regulatory oversight and
control by various government authorities. In particular, in many countries, we
will be required to obtain licenses to construct, land and operate East Asia
Crossing.
The regulation of the telecommunications sectors of the countries in which
we currently plan to operate is developing rapidly and varies widely. Some
countries, like Hong Kong, allow full competition in the telecommunications
sector, while others, like the People's Republic of China, currently limit
competition for most services. All of the countries in which we currently plan
to have operations, with the exception of China and Taiwan, are signatories to
the World Trade Organization, Agreement on Basic Telecommunications and, as a
result, have committed to liberalizing their telecommunications regimes and
opening their telecommunications markets to foreign investment. Taiwan also has
begun to liberalize its telecommunications market, and China has committed to
opening its telecommunications markets to additional competition if it is
admitted to the World Trade Organization. We cannot be certain whether this
regional liberalizing trend will continue or accurately predict the pace and
scope of future liberalization.
UNITED STATES
Our ownership and operation of Pacific Crossing-1, which connects the
United States and Japan, subjects us to regulation by the Federal Communications
Commission. Our subsidiary, PC Landing Corp., has obtained a cable landing
license from the Federal Communications Commission, which permits us to land
Pacific Crossing-1 in Harbour Pointe, Washington, and Grover Beach, California,
and to operate Pacific Crossing-1 in the United States. This landing license
allows us to operate Pacific Crossing-1 on a non-common carrier basis. The
license is valid for 25 years from the date it was granted, but it is revocable
earlier if we fail to comply with the terms and conditions of the license. Our
operation of Pacific Crossing-1 is subject to regulatory oversight by the
Federal Communications Commission and requires us to file periodic regulatory
reports and pay regulatory fees.
WE DO NOT HOLD AUTHORITY TO PROVIDE INTERNATIONAL TELECOMMUNICATIONS
SERVICES IN THE UNITED STATES; HOWEVER, WE MAY OBTAIN THE AUTHORITY TO DO SO IN
THE FUTURE. IF WE OBTAIN THAT AUTHORITY, WE WILL BECOME SUBJECT TO ADDITIONAL
REGULATION IN THE UNITED STATES.
JAPAN
The Japanese government has incrementally liberalized the
telecommunications sector over the past several years. All facilities-based
telecommunications services are open to competition. However, new entrants face
practical problems, including complex and non-transparent licensing
requirements, difficulty in obtaining interconnection on fair and
non-discriminatory terms and conditions and obtaining access to rights of way
and the continuing dominance of the NTT group of companies. The
telecommunications sector is regulated primarily by the Ministry of Post and
Telecommunications. Japan does not impose foreign ownership restrictions on
competitive providers of telecommunications services.
Facilities-based carriers in Japan must obtain a Type I telecommunications
license from the Ministry of Post and Telecommunications. Service providers who
do not own or control transmission facilities must obtain a General Type II or
Special Type II telecommunications license depending on the specific services
they intend to provide. Our wholly-owned subsidiary, Global Crossing Japan K.K.,
holds a Special Type II license granted by the Ministry of Post and
Telecommunications on February 18, 2000, which permits us to provide a variety
of services on a resale basis. GlobalCenter Japan holds a General Type II
license. We applied for and were granted on June 1, 2000 a Type I
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license through another wholly-owned subsidiary, Asia Global Crossing Japan
Corporation. Global Access Limited also holds a Type I license that enables it
to be the landing party for Pacific Crossing-1 in Japan and to operate its
backhaul network and to provide facilities-based telecommunications services.
Our current and proposed operations in Japan make us subject to oversight
by the Ministry of Post and Telecommunications and other Japanese governmental
agencies and impose various regulatory obligations on us. For example, as
licensed carriers in Japan, our subsidiaries are required to file regulatory
reports, pay regulatory fees and seek amendments to their existing licenses,
perform notifications, obtain approvals and comply with other procedures in
connection with changes to their network configuration, offered services,
tariffs and other aspects of their businesses. A failure to file required
reports or make required regulatory payments may result in the imposition of
sanctions on us, up to and including the revocation of our licenses.
HONG KONG
The Hong Kong telecommunications market is one of the most liberalized in
Asia and is open to competition for all domestic and international services. The
Office of the Telecommunications Authority is an independent agency of the Hong
Kong government. Hong Kong does not impose foreign ownership restrictions on
telecommunications carriers, although all providers must be incorporated or
registered in Hong Kong.
On February 1, 2000, we, through our subsidiary, Asia Global Crossing Hong
Kong Ltd., were advised by a letter of intent from The Office of the
Telecommunications Authority that we will be issued an external fixed
telecommunications network services license upon the satisfaction of certain
specified conditions. The external fixed telecommunications network services
licence will permit us to land East Asia Crossing in Hong Kong and to provide
international telecommunications facilities and services in Hong Kong. In
addition, Hutchison Global Crossing holds one of four fixed telecommunications
network services licenses which permits Hutchison Global Crossing to construct
and operate domestic and international telecommunications networks in Hong Kong
and to provide all internal and external telecommunications services, including
providing backhaul transmission capacity from the East Asia Crossing cable
landing station. As the range of services that we provide in Hong Kong expands,
we may be required to obtain additional telecommunications licenses. In
addition, in connection with the construction and operation of East Asia
Crossing in Hong Kong, we may be required to obtain various
non-telecommunications governmental permits and authorizations in the ordinary
course of business, including zoning approvals and construction permits.
As a result of our current and proposed operations in Hong Kong, we are
subject to regulation by The Office of the Telecommunications Authority and
other governmental agencies. The Office of the Telecommunications Authority is
currently conducting public proceedings on various issues related to the
implementation of competition. We cannot be certain of the results of these
proceedings or the effect that they may have on our operations in Hong Kong. In
addition, we are required to file regulatory reports and pay regulatory fees in
connection with our existing licenses. The failure to file required reports or
make required regulatory payments may result in the imposition of sanctions on
us, which could include the revocation of our licenses.
TAIWAN
The Taiwanese telecommunications sector is in the process of being
liberalized. Basic voice telephony services, including local, domestic and
international services, are open to competition on a resale basis. In addition,
data transmission services, closed user group services and value-added services
may be provided competitively. Taiwan at this time continues to impose foreign
ownership limitations on facilities-based providers.
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Taiwan's telecommunications law divides telecommunications service
providers into two categories: Type I and Type II enterprises. Type I
enterprises are businesses that install telecommunications switching equipment
and line facilities of any kind (including wireless and wireless networks) and
provide basic telecommunications services such as local, long distance and
international voice telephony services. Type II enterprises provide
telecommunications services other than those provided by Type I enterprises,
such as value-added network services, data transmission, Internet access,
information storage, retrieval and processing and closed user group services.
The Directorate General Telecommunications is responsible for issuing licenses
and supervising the telecommunications sector.
The Directorate General Telecommunications recently issued three integrated
fixed-line services Type I licenses, a subcategory of the broader Type I
license. These licenses will permit holders to construct and operate domestic
and international wireline telecommunications networks in Taiwan and offer a
full range of domestic and international telecommunications services. The
licenses allow holders to begin offering services in competition with the
incumbent, Chunghwa Telecom, in July 2001. These licenses are subject to
substantial capitalization and build-out requirements. In addition, in early
April, the Directorate General Telecommunications issued draft regulations
proposing a new Type I license called the international ocean cable circuit
leasing license. The proposed license will allow holders to construct, land and
operate international submarine cables in Taiwan's territorial waters and to
construct landing stations and a telehouse in Taiwan. Licensees will be required
to obtain backhaul transmission facilities from integrated fixed-line services
licensees or Chunghwa Telecom. If backhaul cannot be obtained on a commercially
reasonable basis within three months of a request, licensees may request
authority to construct their own backhaul facilities. Licensees will be
permitted to sell or lease transmission capacity on their cables to the three
integrated fixed-line service licensees and Chunghwa Telecom, as well as
international facilities-based carriers who acquire at least 5 Gbps of capacity
and have a correspondent relationship with Chunghwa Telecom or one of the
integrated fixed-line services licensees. The Directorate General
Telecommunications is expected to issue final regulations incorporating these
provisions by the end of July 2000.
On January 31, 2000, Taiwan raised the foreign ownership limits imposed on
Type I enterprises. Currently, Type I carriers may have a maximum of 20% foreign
direct investment and a total of 60% combined direct and indirect foreign
investment. The proposed international ocean cable circuit leasing license will
be subject to these limits. There are currently no foreign ownership
restrictions on Type II enterprises.
KOREA
The Korean telecommunications market, which is supervised by the Ministry
of Information Communications has been substantially liberalized. All
facilities-based or resale telecommunications services are open to competition.
However, Korea continues to impose foreign ownership restrictions on most
providers of telecommunications services.
Under Korean law, facilities-based carriers, including operators of
submarine cable systems, must obtain a Network Service Provider license. Network
Service Provider licensees may provide local long-distance and international
voice services, paging services, leased lines and wireless services, as well as
sell transmission capacity to other carriers. To provide services on a resale
basis or to lease transmission facilities, providers must obtain a Specific
Service Provider license. Specific Service Provider licensees may provide the
same services as an Network Service Provider licensee, but they may offer
services only to end-users. Most other services provided over leased lines,
including data transmission and Internet access services, are considered
value-added network services, which can be provided upon notification to the
regulator.
Currently, Network Service Provider licensees are limited to a maximum of
49% direct foreign ownership, although foreign investors can obtain management
control and have indirect ownership interests. The Korean government did not
make any commitment to lift the limit on Network Service Provider licensees
under the terms of its World Trade Organization commitment; however, it has
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stated that the limit nevertheless may be relaxed. It is unclear whether or when
the existing limit will be raised. Switch-based resellers also are limited to
49% foreign ownership until January 2001, at which time we expect that 100%
foreign ownership will be permitted. There are no foreign ownership restrictions
on switchless resellers or value-added network service providers.
SINGAPORE
On January 21, 2000, the Government of Singapore announced that the full
liberalization of Singapore's telecommunications market would be effective April
1, 2000, two years earlier than previously announced. As a result of this
announcement, all telecommunications networks and services are open to
competition in Singapore. Moreover, Singapore does not impose foreign ownership
limits on competitive telecommunications providers.
The Info-Communication Development Authority of Singapore is responsible
for issuing telecommunications licenses and overseeing the telecommunications
sector. In connection with its liberalization of the market, Singapore
instituted a new licensing regime which differentiates between facilities-based
operators and service-based operators. Providers intending to deploy any form of
telecommunications network, system or facility, including submarine cables, for
the provision of telecommunication services to other licensed telecommunications
operators or end-users must obtain a facilities-based operator license. A
service-based operator license is required to provide services that do not
require the installation of transmission facilities. Two types of service-based
operator licenses are available: individual and class licenses. An individual
service-based operator license allows holders to provide a variety of services,
including international simple resale, resale of leased circuit services, public
Internet access services, Internet exchange services, store-and-forward
value-added network services and virtual private network services. A
service-based operator class license authorizes the provision of Internet-based
voice and data services, resale of public switched telecommunications services
and store-and-retrieve value-added network services, among others.
The Singapore regulator also is currently conducting a number of public
consultations on various issues related to the implementation of a competitive
telecommunications market. We cannot accurately predict the outcome of these
proceedings or their effect on our planned operations.
CHINA
At present, competition in the Chinese telecommunications market is
limited. Provision of most telecommunications services, including basic voice
telephony, data transmission, mobile services and Internet services, is limited
to several state-owned telecommunications carriers. Some services, including
value-added services and paging, are open to limited competition. Moreover,
China does not have a published national telecommunications law or regulations.
As a result, many governmental and regulatory decisions that may have an impact
on our business are made on an ad hoc basis and without public proceedings or
scrutiny. The telecommunications sector is supervised by the Ministry of
Information Industry which is an independent agency of the Chinese government.
China currently prohibits foreign ownership of telecommunications
providers. That policy is likely to change if China is permitted to join the
World Trade Organization, which may occur as early as this year. In November
1999, the United States and China signed an Agreement on Market Access, which
outlined the terms by which the United States will support China's bid for
admission to the World Trade Organization. As part of the agreement, China
agreed to be bound by the World Trade Organization's Reference Paper for
Telecommunications when it is admitted to the World Trade Organization.
Specifically, China committed to establishing an independent telecommunications
regulator, requiring cost-based interconnection, implementing a transparent
regulatory regime and establishing safeguards against anti-competitive behavior
by dominant providers of telecommunications services. In addition, China agreed
to permit foreign ownership of certain telecommunications providers.
Specifically, China agreed to allow up to 50% foreign ownership in providers of
value-added services and paging within two years of China's accession to the
World Trade Organization. China
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also agreed to permit 49% foreign ownership of mobile services providers within
five years of accession, and 25% after one year, and 49% foreign ownership of
resellers of domestic and international wireline services within six years of
accession, and 25% after two years. Ownership of telecommunications facilities,
including submarine cables and landing station equipment, is not addressed in
the U.S.-China agreement, and it is unclear at present whether China will permit
foreign ownership of facilities-based carriers.
On May 22, 2000, the U.S. House of Representatives passed bill H.R. 4444
that will grant permanent normal trade relations to China upon China's accession
to the World Trade Organization. Once passed by the Senate and signed by the
President, this bill will eliminate the need of the United States to grant China
normal trade relations on an annual basis and clarify the longer term trade
relationship between the United States and China. This bill, together with the
Agreement on Market Access, makes it appear more likely that the United States
will support China's accession to the World Trade Organization.
China also has concluded bilateral agreements for World Trade Organization
admission with Japan, Canada, Malaysia and, most recently, with the European
Union. The China European Union agreement accelerated by two years the timetable
established in the United States-China agreement for opening the mobile
telephony market to foreign investment. Specifically, China agreed to allow
foreign ownership of mobile operators of up to 25% upon accession to the World
Trade Organization, 35% after one year and 49% after three years. China also
agreed to allow foreign-owned companies, within three years of World Trade
Organization accession, to lease capacity from Chinese network operators and
resell it for the provision of domestic and international private leased circuit
and closed user group services. In addition, competitive providers, including
those with foreign investors, will be able to provide inter-city and local
services in China. Under the World Trade Organization, the improved terms of the
European Union-China agreement will apply to United States and other foreign
investors.
While we cannot accurately predict when China will be permitted to join the
World Trade Organization, the United States and European Union agreements make
it more likely that accession will occur by the end of 2000 or in early 2001.
Should China not accede to the World Trade Organization, it is unclear whether
it will implement the provisions of the U.S.-China or China-European Union
agreements. The failure of China to open its telecommunications market to
additional competition or to allow foreign ownership of telecommunications
providers or telecommunications facilities, including international submarine
cables, may limit or prevent us from conducting our business in China as
currently planned and may have a material adverse effect on our operations.
We have agreed with Hutchison Whampoa that any fixed-line
telecommunications business and any Internet access and transport business
undertaken by us in China will be carried out through Hutchison Global Crossing.
At present, China treats Hong Kong-based telecommunications companies like other
foreign investors. As a result, they may not invest in Chinese
telecommunications companies or operate telecommunications businesses in China.
We cannot accurately predict whether Hong Kong companies will be permitted to
invest in Chinese telecommunications providers before other foreign investors or
at all.
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DESCRIPTION OF MATERIAL INDEBTEDNESS
OUR SENIOR NOTES
Concurrently with this offering, we are offering our % senior notes due
2010 in an approximate aggregate principal amount of $400 million in a private
transaction not subject to the registration requirements under the Securities
Act. We will pay interest on the notes semi-annually on and ,
beginning on , 2001. The notes are redeemable at our option, in whole or
in part, at any time on or after , 2005, at % of their principal
amount, plus accrued and unpaid interest, declining to 100% of their principal
amount, plus accrued and unpaid interest, on or after , 2008. The notes
will also be redeemable at any time before , 2005 at our option, in whole
but not in part, upon a change of control at a redemption price equal to the
aggregate principal amount of the notes, plus accrued and unpaid interest, plus
the applicable premium to the date fixed by us for redemption.
The notes will also be redeemable at our option, in whole but not in part,
at any time at a redemption price equal to the aggregate principal amount of the
notes, plus accrued and unpaid interest, if any, to the date fixed by us for
redemption, and all additional amounts, if any, then due and which will become
due as a result of the redemption or otherwise, if, as a result of a change in
the laws or the application of the laws of Bermuda or some other jurisdictions,
we are required to pay additional amounts on the notes, and we determine that we
cannot avoid the payment of additional amounts by taking reasonable steps. The
notes will rank equal in payment to all of our other senior indebtedness and
will be senior in right of payment to any of our future subordinated
indebtedness.
Under specified circumstances, we will be required to offer to purchase the
notes at a price equal to 100% of the principal amount of the notes, plus
accrued and unpaid interest to the date of purchase, with the excess proceeds of
certain asset sales. In addition, if we become subject to a change in control
and do not exercise our change of control call right, holders of our notes will
have the right to require us to purchase all of their notes at a price equal to
101% of the aggregate principal amount of the notes, plus accrued and unpaid
interest.
The indenture for the notes contains covenants that, among other things,
limit our ability and the ability of some of our subsidiaries to:
- incur additional indebtedness and issue preferred stock;
- pay dividends or make other distributions;
- repurchase capital stock or subordinated indebtedness;
- create liens;
- enter into some transactions with affiliates;
- sell our assets and the assets of our subsidiaries;
- issue or sell capital stock of some of our subsidiaries; and
- enter into some mergers and acquisitions.
The indenture will also provide for events of default which, if any of them
occurs, would permit or require the principal of, premium, if any, interest and
any other monetary obligations on the notes to become or to be declared to be
immediately due and payable. Holders of notes may under specified circumstances
be entitled to receive additional payments in respect of taxes and similar
charges. The terms of those covenants, required offers to purchase, events of
default and their consequences and additional payments, as well as related
definitions, are included in the indenture that will govern the notes. The
indenture also contains an optional redemption provision, under which we may,
for the first three years after the notes offering, redeem up to 35% of the
notes with the net proceeds of some of our equity offerings.
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PACIFIC CROSSING-1 CREDIT FACILITY
Pacific Crossing Ltd. is the borrower under the $850.0 million senior
secured Pacific Crossing-1 credit facility, comprised of a $840.0 million term
loan facility and a $10.0 million working capital facility, with a number of
commercial lending institutions and Deutsche Bank AG, New York Branch, an
affiliate of Deutsche Bank, CIBC Inc. and Goldman, Sachs Credit Partners L.P.,
as lead agents for the lenders. The Pacific Crossing-1 credit facility is
secured by pledges of the stock of Pacific Crossing Ltd. and its subsidiaries
and security interests in some of the assets and revenues of Pacific Crossing
Ltd. and its subsidiaries and is being used to provide financing for a portion
of Pacific Crossing-1. The subsidiaries of Pacific Crossing Ltd. also guaranteed
Pacific Crossing Ltd.'s obligations under the Pacific Crossing-1 credit
facility. A portion of the Pacific Crossing-1 credit facility is available only
to pay interest on the loans before the Pacific Crossing-1 ready for service
date. The term loans under the Pacific Crossing-1 credit facility will amortize
over 10 semi-annual installments, scheduled to commence approximately 165 days
after the commercial operation date. Borrowings bear interest at an adjustable
rate based on the adjusted base rate or LIBOR plus an applicable margin. The
facility also requires mandatory repayments to be made from, among other things,
50% of excess cash flow, 50% of the net cash proceeds of any equity offering of
Pacific Crossing Ltd. and 100% of net cash proceeds of any permitted debt
offering of Pacific Crossing Ltd., permitted asset sale and insurance proceeds.
As of June 30, 2000, a total of $750 million was outstanding under the Pacific
Crossing-1 credit facility.
The Pacific Crossing-1 credit facility contains covenants that, among other
things, restrict Pacific Crossing Ltd.'s ability to incur indebtedness, make
investments, guarantees or acquisitions and make dividends or distributions. The
facility generally only permits dividends or distributions by Pacific Crossing
Ltd. out of a portion of excess cash flow and securely restricts the payment of
other dividends or other distributions. The Pacific Crossing-1 credit facility
contains certain financial covenants relating to revenues and the ratio of
system revenues to interest expense, the failure to comply with which would
cause all excess cash flow to be applied to the lenders under the Pacific
Crossing-1 credit facility. The Pacific Crossing-1 credit facility contains
events of default, including among other things, failure to pay amounts when
due, failure to comply with certain covenants and insolvency. An event of
default will also occur upon the occurrence of certain failures in connection
with Pacific Crossing-1. Upon the occurrence of an event of default, the Pacific
Crossing-1 credit facility permits the lenders to:
- declare the loans then outstanding to be immediately due and payable;
- demand that any equity commitments not funded be immediately funded; and
- proceed against the collateral.
In addition, the Pacific Crossing-1 credit facility prescribes the order by
which proceeds from the sale of Pacific Crossing-1 capacity will be applied,
both before and after the commencement of commercial operation and requires
Pacific Crossing Ltd. to maintain certain reserve warrants. As a result of the
above, the ability of Pacific Crossing Ltd. to use and distribute revenue is
severely restricted so long as the Pacific Crossing-1 credit facility remains in
existence.
SHAREHOLDER LOANS
Upon completion of this offering, we will purchase from Global Crossing the
following shareholder loans:
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HUTCHISON GLOBAL CROSSING SHAREHOLDER LOAN
On May 4, 2000, Global Crossing Holdings Ltd., a wholly owned subsidiary of
Global Crossing, entered into a loan agreement with Hutchison Global Crossing to
provide a loan of up to HK$305,000,000 to be made available in disbursements as
follows:
- HK$80,000,000 on May 10, 2000;
- HK$50,000,000 on June 1, 2000; and
- up to HK$175,000,000 in the aggregate on August 1, 2000, September 1,
2000 and/or October 1, 2000.
In each case, the interest rate will be reset monthly and will be equal to
the Hong Kong Dollar Interbank Offered Rate, or HIBOR, on the second business
day before the applicable disbursement or reset date. Under the terms of the
loan agreement, interest payments accrue on a monthly basis and are paid to
Global Crossing Holdings on the repayment date of the loan. The loan agreement
further provides that the loan repayment date will be determined by the board of
directors of Hutchison Global Crossing. However, Hutchison Global Crossing is
obligated to repay the loan with 50% of the amount by which any proceeds
received by Hutchison Global Crossing from third party financings or from a
public offering exceed Hutchison Global Crossing's then current capital and
operating expenditure requirements. Currently, HK$165,000,000 is outstanding
under the loan agreement.
GLOBAL ACCESS LIMITED SHAREHOLDER LOAN
On September 20, 1999, Global Crossing Services Europe, Ltd., a wholly
owned subsidiary of Global Crossing, entered into a loan agreement with Global
Access Limited to provide a loan of up to Y4,214,000,000.
The interest rate will be reset quarterly and will be equal to 1.5% above
the long-term prime lending rate quoted by the Industrial Bank of Japan on the
first disbursement date or the reset date, as applicable. Under the terms of the
loan agreement, interest payments will be made quarterly until the loan
repayment date of August 31, 2001. Currently, Y2,940,000,000 is outstanding
under the loan agreement.
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DESCRIPTION OF CAPITAL STOCK
The following summary is a description of the material terms of our capital
stock. We have filed our memorandum of association and bye-laws as exhibits to
the registration statement of which this prospectus is a part.
GENERAL
Immediately before this offering, we will amend our memorandum of
association to increase our authorized share capital, which will then be divided
into:
- 1,200,000,000 shares of Class A common stock, par value $0.01 per share;
- 1,200,000,000 shares of Class B common stock, par value $0.01 per share;
and
- 120,000,000 shares of preferred stock, par value $0.01 per share.
COMMON STOCK
As of the date of this prospectus, we had 1,200,000 shares of our common
stock outstanding. After giving effect to the sale of shares of our Class A
common stock under this prospectus, the transactions described under "Concurrent
Transactions" and the strategic investments described under "Business -- Recent
Developments", we will have 548.8 million shares of our common stock
outstanding.
VOTING. Holders of our Class A common stock are entitled to one vote per
share held of record on all matters submitted to a vote of shareholders. Holders
of our Class B common stock are entitled to 10 votes per share held of record in
all matters submitted to a vote of shareholders. All shares of our common stock
vote together on all matters presented at a shareholders meeting.
CONVERSION. Each share of our Class B common stock is convertible at any
time at the option of the holder into one share of our Class A common stock.
Shares of our Class B common stock will be mandatorily convertible into shares
of our Class A common stock if they are transferred to any person other than
Global Crossing and its affiliates, Microsoft and its affiliates or Softbank and
its affiliates.
OTHER RIGHTS. Except with respect to voting and conversion rights, shares
of our Class A common stock and Class B common stock are identical in all other
respects. For example:
- DIVIDENDS. Each share of our common stock is entitled to the same amount
of dividend if one is declared. Accordingly, we may not pay a dividend to
holders of our Class B common stock without paying the same per share
dividend to holders of our Class A common stock.
- LIQUIDATION RIGHTS. Each share of our common stock is entitled to be paid
the same amount upon liquidation. Accordingly, we may not make a payment
upon liquidation to holders of our Class B common stock without paying
the same per share amount to holders of our Class A common stock.
ELECTION OF DIRECTORS. The election of our directors is determined by a
simple majority of votes cast, except as otherwise required by law. Our
shareholders do not have cumulative voting rights. Accordingly, holders of a
majority of the shares of common stock entitled to vote in any election of
directors may elect all directors. After this offering, our founding
shareholders will collectively control approximately 98.8% of our outstanding
voting power and will have the power to elect all of our directors.
RIGHTS OF DIRECTORS NOMINATED BY MICROSOFT AND SOFTBANK. Under our
bye-laws, there are a number of actions that we may not undertake without the
approval of our directors that have been nominated by Microsoft and Softbank. We
describe those actions under "Transactions with Related Parties -- Relationships
Among Ourselves and Our Founding Shareholders -- Shareholders
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Agreement -- Actions requiring the approval of our directors appointed by
Microsoft and Softbank" on page 79.
NO PRE-EMPTIVE RIGHTS. Holders of our common stock have no preemptive
rights.
REGISTRATION RIGHTS AGREEMENT. Global Crossing, Microsoft, Softbank, The
Goldman Sachs Group, Inc. and ourselves have entered into a registration rights
agreement, dated November 24, 1999. Under the registration rights agreement,
each of Global Crossing, Microsoft and Softbank and a number of their
transferees have demand and piggy-back registration rights with respect to
shares of our common stock. In addition, under the registration rights
agreement, The Goldman Sachs Group and a number of its transferees have
piggy-back registration rights with respect to shares of our common stock.
Global Crossing, Microsoft, Softbank and The Goldman Sachs Group receive under
the registration rights agreement indemnification and, in some circumstances,
reimbursement from us of expenses in connection with an applicable registration.
PREFERRED STOCK
Authorized shares of our preferred stock may be issued at the discretion of
our board of directors without any further action by the shareholders, except as
required by applicable law or regulation. Our board of directors is authorized,
from time to time, to divide the preferred stock into classes or series, to
designate each class or series and to determine for each class or series its
respective rights and preferences, including, without limitation, any of the
following:
- the rate of dividends and whether dividends were cumulative or had a
preference over the common stock in right of payment;
- the terms and conditions upon which shares may be redeemed and the
redemption price;
- sinking fund provisions for the redemption of shares;
- the amount payable in respect of each share upon a voluntary or
involuntary liquidation of us;
- the terms and conditions upon which shares may be converted into other
securities of ours, including common stock;
- limitations and restrictions on payment of dividends or other
distributions on, or redemptions of, other classes of our capital stock
junior to that series, including the common stock;
- conditions and restrictions on the creation of indebtedness or issuance
of other senior classes of capital stock;
- the terms on which shares may be redeemed, if any; and
- voting rights.
Any series or class of preferred stock could, as determined by our board of
directors at the time of issuance, rank senior to our common stock with respect
to dividends, voting rights, redemption and liquidation rights. The preferred
stock to be authorized is of the type commonly known as blank-check preferred
stock.
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CERTAIN INCOME TAX CONSEQUENCES
TAXATION OF ASIA GLOBAL CROSSING
We believe that a significant portion of the income derived from our subsea
systems will not be subject to tax in Bermuda, which currently has no corporate
income tax, or other countries in which we or our affiliates conduct activities
or in which our customers are located, including the United States. However,
this belief is based upon the anticipated nature and conduct of our business,
which may change, and upon our understanding of our position under the tax laws
of the various countries in which we have assets or conduct activities, which
position is subject to review and possible challenge by taxing authorities and
to possible changes in law, which may have retroactive effect. The extent to
which certain taxing jurisdictions may require us to pay tax or to make payments
in lieu of tax cannot be determined in advance. In addition, our operations and
payments due to us may be affected by changes in taxation, including retroactive
tax claims or assessments of withholding on amounts payable to us or other taxes
assessed at the source, in excess of the taxation we anticipate based on
business contacts and practices and the current tax regimes. We cannot assure
you that these factors will not have a material adverse effect on us.
BERMUDA TAX CONSIDERATIONS
Under current Bermuda law, we are not subject to tax on income or capital
gains. Furthermore, we have obtained from the Minister of Finance of Bermuda
under the Exempted Undertakings Tax Protection Act 1966, an undertaking that, in
the event that Bermuda enacts any legislation imposing tax computed on profits,
income, any capital asset, gain or appreciation, then the imposition of that tax
will not be applicable to us or to any of our operations, neither will that tax,
or any tax in the nature of estate duty or inheritance tax, become applicable to
our stock, until March 28, 2016. This undertaking does not, however, prevent the
imposition of any tax or duty on persons ordinarily resident in Bermuda or any
property tax on any company, including ourselves, owning real property or
leasehold interests in Bermuda.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
We and our non-United States subsidiaries will be subject to United States
federal income tax at regular corporate rates, and to United States branch
profits tax, on our income, if any, that is effectively connected with the
conduct of a trade or business within the United States, and will be required to
file federal income tax returns reflecting that income. We intend to conduct our
operations so as to reduce the amount of our effectively connected income.
However, we cannot assure you that the Internal Revenue Service will agree with
the positions we take in this regard. Moreover, our United States subsidiaries
will be subject to United States federal income tax on their worldwide income
regardless of its source, subject to reduction by allowable foreign tax credits,
and distributions by our United States subsidiaries to us or to our non-United
States subsidiaries generally will be subject to United States withholding tax.
TAXATION OF HOLDERS
BERMUDA TAX CONSIDERATIONS
Under current Bermuda law, no income, withholding or other taxes or stamp
or other duties are imposed upon the issue, transfer or sale of the shares of
common stock or on any payments thereunder. See "Taxation of Global
Crossing -- Bermuda Tax Considerations" above for a description of the
undertaking on taxes obtained by us from the Minister of Finance of Bermuda.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
consequences, as of the date of this document, of the ownership of shares of
common stock by beneficial owners that purchase the shares in connection with
their initial issuance, that hold the shares as capital assets
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and that are United States persons under the Internal Revenue Code. Under the
Internal Revenue Code, you are a United States person if you are:
- a citizen or resident of the United States;
- a corporation or partnership created or organized in or under the laws of
the United States or any political subdivision thereof;
- an estate the income of which is subject to United States federal income
taxation regardless of its source;
- a trust that is subject to the supervision of a court within the United
States and the control of one or more United States persons; or
- a trust that has a valid election in effect under applicable United
States Treasury regulations to be treated as a United States person.
This summary is based on current law, which is subject to change, perhaps
retroactively, is for general purposes only and should not be considered tax
advice. This summary does not represent a detailed description of the United
States federal income tax consequences to you in light of your particular
circumstances. In addition, it does not present a description of the United
States federal income tax consequences applicable to you if you are subject to
special treatment under the United States federal income tax laws, including if
you are:
- a dealer in securities or currencies;
- a trader in securities if you elect to use a mark-to-market method of
accounting for your securities holdings;
- a financial institution;
- an insurance company;
- a tax-exempt organization;
- a person liable for alternative minimum tax;
- a person holding shares of common stock as part of a hedging, integrated
or conversion transaction, constructive sale or straddle;
- a person owning, actually or constructively, 10% or more of our voting
stock or 10% or more of the voting stock of any of our non-United States
subsidiaries; or
- a United States person whose functional currency is not the United States
dollar.
We cannot assure you that a later change in law will not alter
significantly the tax considerations that we describe in this summary.
If a partnership holds our shares of common stock, the tax treatment of a
partner will generally depend upon the status of the partner and the activities
of the partnership. If you are a partner of a partnership holding our shares of
common stock you should consult your tax advisor.
You should consult your own tax advisor concerning the particular United
States federal income tax consequences to you of the ownership and disposition
of the shares of common stock, as well as the consequences to you arising under
the laws of any other taxing jurisdiction.
TAXATION OF DIVIDENDS
Subject to the passive foreign investment company rules discussed below,
the gross amount of distributions you receive on your shares of common stock
will generally be treated as dividend income to you if the distributions are
made from our current and accumulated earnings and profits, calculated according
to United States federal income tax principles. Such income will be includible
in your gross income as ordinary income on the day you receive it actually or
constructively. You will not be entitled to claim a dividends received
deduction, generally allowed to United States corporations in respect of
dividends received from other United States corporations with respect to
distributions you receive from us. To the extent that the amount of any
distribution exceeds our current and accumulated
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earnings and profits for a taxable year, the distribution will first be treated
as a tax-free return of capital, causing a reduction in your adjusted basis in
the shares of common stock, thereby increasing the amount of gain, or decreasing
the amount of loss, you will recognize on a subsequent disposition of the
shares, and the balance in excess of adjusted basis will be taxed as capital
gain recognized on a sale or exchange.
If, for United States federal income tax purposes, we are classified as a
United States-owned foreign corporation, distributions made to you with respect
to your shares of common stock that are taxable as dividends generally will be
treated for United States foreign tax credit purposes as:
- foreign source passive income or, in the case of some holders, foreign
source financial services income; and
- United States source income,
in proportion to our earnings and profits in the year of such distribution
allocable to foreign and United States sources, respectively. For this purpose,
we will be treated as a United States-owned foreign corporation so long as stock
representing 50% or more of the voting power or value of our stock is owned,
directly or indirectly, by United States persons.
DISPOSITION OF THE SHARES OF COMMON STOCK
Subject to the passive foreign investment company rules discussed below,
when you sell or otherwise dispose of your shares of common stock you will
recognize capital gain or loss in an amount equal to the difference between the
amount you realize for the shares and your adjusted tax basis in them. In
general, your adjusted tax basis in the shares of common stock will be your cost
of obtaining the shares reduced by any previous distributions that are not
characterized as dividends. For foreign tax credit limitation purposes, such
gain or loss will generally be treated as United States source. If you are an
individual, and the shares of common stock being sold or otherwise disposed of
have been held by you for more than one year, your gain recognized will be taxed
at a maximum tax rate of 20%. Your ability to deduct capital losses is subject
to limitations.
PASSIVE FOREIGN INVESTMENT COMPANY
We do not believe that we are a passive foreign investment company for
United States federal income tax purposes and do not expect to become one in the
future, although we can provide no assurance in this regard. This conclusion is
based, in part, on interpretations of existing law that we believe are
reasonable, but which have not been approved by any taxing authority. A company
is considered a passive foreign investment company for any taxable year if
either:
- at least 75% of its gross income is passive income; or
- at least 50% of the value of its assets is attributable to assets that
produce or are held for the production of passive income.
The 50% of value test will be based on the average of the value of our
assets for each quarter during the taxable year. If we own at least 25% by value
of another company's stock, we will be treated as owning our proportionate share
of the assets and earning our proportionate share of the income of that company.
The determination of whether we are a passive foreign investment company is made
annually. Accordingly, it is possible that we may become a passive foreign
investment company in the current or any future taxable year due to changes in
our asset or income composition.
If we are a passive foreign investment company for any taxable year during
which you hold shares of common stock, unless you make a QEF election or a mark
to market election as described below, you will be subject to special tax rules
with respect to any excess distribution that you receive and any gain you
realize from a sale or other disposition, including a pledge, of those shares.
Distributions you receive in a taxable year that are greater than 125% of the
average annual distributions you received during the shorter of the three
preceding taxable years or your holding period for the shares will be treated as
excess distributions. Under these special tax rules:
- the excess distribution or gain will be allocated ratably over your
holding period for the shares;
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- the amount allocated to the current taxable year, and any taxable year
prior to the first taxable year in which we were a passive foreign
investment company, will be treated as ordinary income; and
- the amount allocated to each other year will be subject to tax at the
highest tax rate in effect for that year and the interest charge
generally applicable to underpayments of tax will be imposed on the
resulting tax attributable to each such year.
The special passive foreign investment company tax rules described above
will not apply to you if you elect to have us treated as a qualified electing
fund, which we will refer to as the QEF election, and we provide certain
information to you. If we are treated as a passive foreign investment company,
we intend to notify you and to provide to you such information as may be
required for you to make the QEF election effective.
If you make a QEF election, you will be taxable currently on your
proportionate share of our ordinary earnings and net capital gain, at ordinary
income and capital gain rates, respectively, for each taxable year during which
we are treated as a passive foreign investment company, regardless of whether or
not you receive distributions, so that you may recognize taxable income without
the corresponding receipt of cash from us with which to pay your resulting tax
obligation. Your basis in the shares of common stock will be increased to
reflect taxed but undistributed income. Distributions of income that had
previously been taxed will result in a corresponding reduction of basis in the
shares and will not be taxed again as a distribution to you.
Alternatively, if you own shares of common stock and such stock is treated
as marketable stock, you may make a mark to market election. If you make such an
election, you will not be subject to the passive foreign investment company
rules described above. Instead, in general, you will include in income each year
as ordinary income the excess, if any, of the fair market value of your
marketable stock at the end of the taxable year over its adjusted basis and will
be permitted an ordinary loss in respect of the excess, if any, of the adjusted
basis of such stock over its fair market value at the end of the taxable year,
but only to the extent of the net amount previously included in income as a
result of the mark to market election. Your basis in the marketable stock will
be adjusted to reflect any such income or loss amounts. Any gain or loss on the
sale of the marketable stock will be ordinary income or loss, except that that
loss will be ordinary loss only to the extent of the previously included net
mark to market gain. The mark to market election is only available with respect
to stock that is regularly traded on certain United States exchanges and other
exchanges as indicated in the appropriate Treasury Regulations. It is intended
that the shares of common stock will be listed on the Nasdaq National Market,
which is a qualified securities exchange for purposes of the mark to market
election, although we cannot assure you that the shares of our common stock will
be regularly traded for these purposes.
If you hold shares of common stock in any year in which we are a passive
foreign investment company, you are required to file Internal Revenue Service
Form 8621.
You should consult your own tax advisors concerning the United States
federal income tax consequences of holding shares of common stock if we are
considered a passive foreign investment company in any taxable year, including
the advisability and availability of making any of the foregoing elections.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, unless you are an exempt recipient such as a corporation,
information reporting will apply to dividends in respect of the shares of common
stock or the proceeds received on the sale, exchange, or redemption of those
shares of common stock paid to you within the United States and, in some cases,
outside of the United States. Additionally, if you fail to provide your taxpayer
identification number, or fail either to report in full dividend and interest
income or to make certain certifications, you will be subject to backup
withholding at the rate of 31%. Any amounts withheld under the backup
withholding rules will be allowed as a refund or a credit against your United
States federal income tax liability, provided you furnish the required
information to the United States Internal Revenue Service.
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SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no market for our shares of Class A
common stock, and we cannot assure you that a significant public market for our
shares will develop or be substantial after this offering. Future sales of
substantial amounts of shares of our Class A common stock, including shares
issued upon the exercise of outstanding options and warrants or upon conversion
of shares of our Class B common stock, in the public market following this
offering could adversely affect market prices prevailing from time to time and
could impair our ability to raise capital through sale of our equity securities.
The shareholders agreement among our founding shareholders includes restrictions
on the transfer of our shares of capital stock by our founding shareholders.
However, those transfer restrictions will terminate upon completion of this
offering.
Upon completion of this offering, we will have outstanding 67.0 million
shares of our Class A common stock and 481.8 million shares of our Class B
common stock, based on an assumed initial public offering price per share of
$15.00, without taking into account:
- 7.95 million shares that we will issue if the underwriters exercise their
option to purchase additional shares;
- 20.5 million shares of our Class A Common Stock that may be issued upon
exercise of options outstanding as of the date of our initial public
offering; and
- 481.8 million shares of Class A common stock into which shares of our
Class B common stock may be converted.
Of these shares, the 53.0 million shares of our Class A common stock we are
selling in this offering will be freely tradeable without restriction under the
Securities Act, except for any shares purchased by our affiliates, as that term
is defined in Rule 144 under the Securities Act. All of the shares of our Class
B common stock held by our founding shareholders will be restricted securities
within the meaning of Rule 144 and may be sold in the public market only if
registered or sold under an exemption from registration under the Securities
Act, including the exemption provided by Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person, or persons whose shares are aggregated,
who has beneficially owned restricted shares for at least one year, including a
person who may be deemed an affiliate of ours, would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of:
- 1% of the number of the shares then outstanding, which will be
approximately 5.5 million shares immediately after this offering,
assuming no exercise of the underwriters' over-allotment option, no
exercise of outstanding options and no conversion of shares of Class B
common stock; or
- the average weekly trading volume of the shares of Class A common stock
on the Nasdaq National Market during the four calendar weeks before the
filing of a Form 144 with respect to that sale.
Sales under Rule 144 are also subject to requirements relating to manner of
sale, notice and availability of current public information about us. Under Rule
144(k), a person who is not deemed to have been an affiliate of ours at any time
during the three months preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any previous owner except an affiliate, is entitled to sell those shares
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144.
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The number of shares we will have outstanding after this offering indicated
in the second paragraph above assumes the issuance of:
- 36.6 million additional shares of our Class B common stock to Global
Crossing, at an assumed initial public offering price of $15,00 per
share, in connection with its contribution to us of its 49% interest in
Global Access Limited;
- 9.2 million shares of our Class A common stock to strategic investors in
the amounts indicated in "Business -- Recent Developments" on page 47;
and
- 5.4 million shares of our Class A common stock and 444.6 million Class B
common stock to Asia Global Crossing Holdings for distribution to its
shareholders, other than Softbank, in the amounts indicated in "Principal
Shareholders" beginning on page 72.
The number of shares we will have outstanding after this offering indicated
in the second paragraph above also assumes that Global Crossing will receive an
additional 595,500 shares of Class B common stock at an assumed initial public
offering price of $15.00 per share, which will reduce Goldman Sachs' interest in
us by an equal number of shares, in connection with Global Crossing's
contribution to us of its 50% interest in Hutchison Global Crossing.
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UNDERWRITING
Asia Global Crossing and the underwriters named below have entered into an
underwriting agreement with respect to the shares of Class A common stock being
offered. Subject to some conditions, each underwriter has severally agreed to
purchase the number of shares indicated in the following table. Goldman, Sachs &
Co. and Salomon Smith Barney Inc. are acting as joint book-running managers and,
together with Merrill Lynch, Pierce, Fenner & Smith Incorporated, are acting as
representatives for the underwriters named below.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. .......................................
Salomon Smith Barney Inc. ..................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
ABN AMRO Incorporated.......................................
Chase Securities Inc........................................
CIBC World Markets Corp.....................................
Credit Suisse First Boston Corporation......................
Deutsche Bank Securities Inc................................
Lehman Brothers Inc.........................................
----------
Total............................................. 53,000,000
==========
</TABLE>
If the underwriters sell more shares than the total number included in the
table above, the underwriters have an option to buy up to an additional
7,950,000 shares from Asia Global Crossing to cover those sales. They may
exercise that option for 30 days. If any shares are purchased under this option,
the underwriters will severally purchase shares in approximately the same
proportion as the shares indicated in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by Asia Global Crossing. Amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase 7,950,000 additional shares.
<TABLE>
<CAPTION>
Paid by Asia Global Crossing No Exercise Full Exercise
---------------------------- ----------- -------------
<S> <C> <C>
Per Share.................................................. $ $
Total............................................ $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price indicated on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Those
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share
from the initial public offering price. If all of the shares are not sold at the
initial public offering price, the representatives may change the offering price
and the other selling terms.
Subject to specified exceptions, Asia Global Crossing, its directors,
officers and shareholders have agreed with the underwriters not to dispose of or
hedge any of their common stock or securities convertible into or exchangeable
for shares of common stock during the period from the date of this
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prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of Goldman, Sachs & Co. and
Salomon Smith Barney Inc.
At the request of Asia Global Crossing, the underwriters are reserving up
to 2,650,000 shares of Class A common stock for sale at the initial public
offering price to directors, officers, employees and friends through a directed
share program. The number of shares of Class A common stock available for sale
to the general public in the public offering will be reduced to the extent these
persons purchase these reserved shares. Any shares not so purchased will be
offered by the underwriters to the general public on the same basis as the other
shares offered under this prospectus.
Prior to the offering, there has been no public market for the shares. The
initial public offering price will be negotiated among Asia Global Crossing and
the representatives. Among the factors to be considered in determining the
initial public offering price of the shares, in addition to prevailing market
conditions, will be Asia Global Crossing's historical performance, estimates of
the business potential and earnings prospects of Asia Global Crossing, an
assessment of Asia Global Crossing's management and the consideration of the
above factors in relation to market valuation of companies in related
businesses.
Asia Global Crossing will apply for quotation of the Class A common stock
on the Nasdaq National Market under the symbol "AGCX".
In connection with the offering, the underwriters may purchase and sell
shares of Class A common stock in the open market. These transactions may
include short sales, stabilizing transactions and purchases to cover positions
created by short sales. Short sales involve the sale by the underwriters of a
greater number of shares of Class A common stock than they are required to
purchase in the offering. Short sales by the underwriters will either be covered
or naked. Covered short sales involve sales by the underwriters of an amount not
greater than the underwriters' option to purchase additional shares in the
offering, and the underwriters may close out any covered short position by
either exercising their option to purchase additional shares in the offering or
purchasing shares in the open market. When deciding which method to use to close
out covered short positions, the underwriters will consider, among other things,
the price of shares available for purchase in the open market compared to the
price at which they may purchase shares by exercising their option to purchase
additional shares in the offering. Naked short sales are sales by the
underwriters in excess of the shares they may purchase if they exercise their
option to purchase additional shares in the offering, and the underwriters will
close out naked short sales by purchasing shares in the open market. A naked
short position is more likely to be created if the underwriters are concerned
that there may be downward pressure on the price of the shares in the open
market that could adversely affect investors who purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the Class A
common stock while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares of
Class A common stock sold by or for the account of that underwriter in
stabilizing or short covering transactions.
Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of Asia
Global Crossing's common stock, and together with the imposition of the penalty
bid, may stabilize, maintain or otherwise affect the market price of the common
stock. As a result, the price of the Class A common stock may be higher than the
price that otherwise might exist in the open market. If these activities are
commenced, they may be discontinued by the underwriters at any time. These
transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
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The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
A prospectus in electronic format may be made available on the web sites
maintained by one or more underwriters. The underwriters may agree to allocate a
number of shares to underwriters for sale to their online brokerage account
holders. Shares will be allocated by the lead managers to underwriters that may
make Internet distributions on the same basis as other allocations.
Asia Global Crossing estimates that its share of the total expenses of the
offering, excluding underwriting discounts and commissions, will be
approximately $3.1 million.
Asia Global Crossing has agreed to indemnify the several underwriters
against certain liabilities, including liabilities under the Securities Act.
Goldman, Sachs & Co. will own an approximate 1.0% interest in us after this
offering is completed, assuming an initial public offering price of $15.00 per
share. See "Principal Shareholders -- Our Beneficial Ownership" on page 72,
"Transactions with Related Parties -- Relationship Among Ourselves and Our
Founding Shareholders -- Registration Rights Agreement" on page 81 and
"Description of Capital Stock -- Common Stock -- Registration Rights Agreement"
on page 100. In addition, the underwriters and their affiliates have from time
to time in the past or may in the future perform certain investment banking
advisory and financial services for Asia Global Crossing and its affiliates, for
which they have received or will receive customary fees and expenses. Chase
Securities, Inc. is an affiliate of Chase Manhattan Bank, N.A., Merrill Lynch
Capital Corporation is an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated and CitiCorp USA, Inc., an affiliate of Salomon Smith Barney Inc.,
Salomon Smith Barney Inc., Goldman Sachs Credit Partners L.P., an affiliate of
Goldman, Sachs & Co., Merrill Lynch Capital Corporation and Merrill Lynch & Co.,
affiliates of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Chase
Securities Inc., CIBC World Markets Corp. and Deutsche Bank Securities Inc. are
lenders to Global Crossing under its existing credit facility. Salomon Smith
Barney Inc., Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated were initial purchasers of Global Crossing's 6 3/4% cumulative
convertible preferred stock and 7% cumulative convertible preferred stock and
underwriters of Global Crossing's common stock offering completed on April 14,
2000 and Global Crossing's 6 3/4% cumulative convertible preferred stock, for
which they received customary fees.
VALIDITY OF COMMON STOCK
Appleby, Spurling & Kempe, Bermuda, will pass upon the validity of the
issuance of the shares of our Class A common stock offered by this prospectus.
Conyers, Dill & Pearman, Bermuda, will pass upon the validity of the issuance of
the shares of our Class A common stock for the underwriters. Certain legal
matters will be passed upon for us by Simpson Thacher & Bartlett as to matters
of United States and New York law. The underwriters are being represented as to
United States legal matters by Sullivan & Cromwell, Los Angeles, California.
EXPERTS
We have included in this prospectus our audited financial statements as of
December 31, 1999 and 1998, and for the year ended December 31, 1999 and for the
period from April 1, 1998, date of inception, to December 31, 1998 along with
Arthur Andersen's audit report on these financial statements. Arthur Andersen
issued the report as independent accountants as experts in auditing and
accounting.
We have included in this prospectus the audited financial statements of
Pacific Crossing Ltd. and its subsidiaries as of December 31, 1999 and 1998, and
for the year ended December 31, 1999 and
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for the period from May 4, 1998, date of inception, to December 31, 1998 along
with Arthur Andersen's audit report on these financial statements. Arthur
Andersen issued the report as independent accountants as experts in auditing and
accounting.
The combined financial statements of Hutchison Global Crossing Holdings
Limited and subsidiaries as of December 31, 1999, 1998 and 1997 and for the
years ended December 31, 1999, 1998 and 1997 have been included in this
prospectus in reliance on the report of PricewaterhouseCoopers, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
We have included in this prospectus the audited financial statements of
Global Access Limited as of December 31, 1999 and 1998 and for the years ended
December 31, 1999 and 1998 and for the period from November 4, 1997, date of
inception, to December 31, 1997 along with Arthur Andersen's audit report on
these financial statements. Arthur Andersen issued the report as independent
accountants as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act about the securities we offer under this prospectus. This
prospectus is materially complete, but does not contain all of the information
included in the registration and the exhibits and schedules to the registration
statement. For further information with respect to us and the shares of our
Class A common stock, please refer to the registration statement, including its
exhibits and schedules, which you may inspect and obtain copies at prescribed
rates at the public reference facilities of the SEC at the addresses provided
below.
As a result of the effectiveness of the registration statement under the
Securities Act, we are subject to the informational reporting requirements of
the Securities Exchange Act of 1934 and, under that Act, we file reports, proxy
statements and other information with the SEC. You may inspect those reports,
proxy statements and other information and the registration statement and its
exhibits and schedules, without charge, and you may make copies of them at
prescribed rates at the public reference facilities of the SEC's principal
office at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's
regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and 7 World Trade Center, Suite 1300, New York, New York 10048. The public may
obtain information on the operation of the SEC's public reference facilities by
calling the SEC in the United States at 1-800-SEC-0330. The SEC also maintains a
web site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC.
110
<PAGE> 112
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
Report of Independent Public Accountants.................... F-3
Consolidated Balance Sheets as of June 30, 2000 (unaudited)
and December 31, 1999 and 1998............................ F-4
Consolidated Statements of Operations for the six months
ended June 30, 2000 and 1999 (unaudited) and the year
ended December 31, 1999 and for the period from April 1,
1998 (Date of Inception) to December 31, 1998............. F-5
Consolidated Statements of Shareholders' Equity for the six
months ended June 30, 2000 (unaudited) and for the year
ended December 31, 1999 and for the period from April 1,
1998 (Date of Inception) to December 31, 1998............. F-6
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999 (unaudited) and the year
ended December 31, 1999 and for the period from April 1,
1998 (Date of Inception) to December 31, 1998............. F-7
Consolidated Statements of Comprehensive Income for the six
months ended June 30, 2000 and 1999 (unaudited) and for
the year ended December 31, 1999 and for the period from
April 1, 1998 (Date of Inception) to December 31, 1998.... F-8
Notes to Consolidated Financial Statements.................. F-9
PACIFIC CROSSING LTD. AND SUBSIDIARIES
Report of Independent Public Accountants.................... F-22
Consolidated Balance Sheets as of June 30, 2000 (unaudited)
and December 31, 1999 and 1998............................ F-23
Consolidated Statements of Operations for the six months
ended June 30, 2000 and 1999 (unaudited), the year ended
December 31, 1999 and for the period from May 4, 1998
(Date of Inception) to December 31, 1998.................. F-24
Consolidated Statements of Shareholders' Equity for the six
months ended June 30, 2000 (unaudited), for the year ended
December 31, 1999 and for the period from May 4, 1998
(Date of Inception) to December 31, 1998.................. F-25
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999 (unaudited), for the year
ended December 31, 1999 and for the period from May 4,
1998 (Date of Inception) to December 31, 1998............. F-26
Notes to Consolidated Financial Statements.................. F-27
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
Combined Balance Sheet as of June 30, 2000 (unaudited) and
December 31, 1999......................................... F-36
Combined Statements of Operations for the six months ended
June 30, 2000 and 1999 (unaudited)........................ F-37
Combined Statement of Cash Flows for the six months ended
June 30, 2000 and 1999 (unaudited)........................ F-38
Notes to Condensed Combined Financial Statements............ F-40
Independent Auditors' Report................................ F-51
Combined Balance Sheets as of December 31, 1999, 1998 and
1997...................................................... F-52
Combined Statements of Operations for the three years ended
December 31, 1999, 1998 and 1997.......................... F-53
Combined Statement of Changes in Owner's Equity/(Deficit)
for the three years ended December 31, 1999, 1998 and
1997...................................................... F-54
Combined Statement of Cash Flows for the three years ended
December 31, 1999, 1998 and 1997.......................... F-55
Notes to Combined Financial Statements...................... F-57
</TABLE>
F-1
<PAGE> 113
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GLOBAL ACCESS LIMITED
Balance Sheets as of June 30, 2000 (unaudited) and December
31, 1999.................................................. F-74
Statements of Operations and Accumulated Deficits for the
six month periods ended June 30, 2000 and 1999
(unaudited)............................................... F-75
Statements of Cash Flows for the six months periods ended
June 30, 2000 and 1999 (unaudited)........................ F-76
Notes to Financial Statements............................... F-77
Report of Independent Public Accountants.................... F-81
Balance Sheets as of December 31, 1999 and 1998............. F-82
Statements of Operations for the years ended December 31,
1999 and 1998, and for the period from November 4, 1997
(date of inception) to December 31, 1997.................. F-83
Statements of Stockholders' Equity for the years ended
December 31, 1999 and 1998, and for the period from
November 4, 1997 (date of inception) to December 31,
1999...................................................... F-84
Statements of Cash Flows for the years ended December 31,
1999 and 1998, and for the period from November 4, 1997
(date of inception) to December 31, 1999.................. F-85
Notes to Financial Statements............................... F-86
INDEX TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Combined Balance Sheet as of
June 30, 2000............................................. F-91
Unaudited Pro Forma Condensed Combined Statement of
Operations for the six months ended June 30, 2000......... F-92
Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1999........... F-93
</TABLE>
F-2
<PAGE> 114
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Asia Global Crossing Ltd.:
We have audited the accompanying consolidated balance sheets of Asia Global
Crossing Ltd. (a Bermuda company) and its subsidiaries as of December 31, 1999
and 1998 and the related consolidated statements of operations, shareholder's
equity, cash flows and comprehensive income for the year ended December 31, 1999
and for the period from April 1, 1998 (Date of Inception) to December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Asia Global Crossing Ltd.
and subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for the year ended December 31, 1999 and for the
period from April 1, 1998 (Date of Inception) to December 31, 1998, in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen
Hamilton, Bermuda
February 23, 2000
(except the matter discussed in Note 12,
as to which the date is March 24, 2000)
F-3
<PAGE> 115
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
2000 1999 1998
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 196,732 $ 9,784 $ 5,378
Restricted cash and cash equivalents...................... 55,416 -- --
Accounts receivable, net.................................. 23,987 -- --
Receivable from affiliates................................ 94,427 89,735 --
Other assets.............................................. 8,842 1,170 20
---------- -------- --------
Total current assets............................... 379,404 100,689 5,398
---------- -------- --------
Restricted cash and cash equivalents........................ 38,921 138,118 231,000
Property and equipment, net................................. 1,431,888 101,598 --
Deferred finance fees, net.................................. 23,105 -- --
Other assets................................................ 40,745 -- --
Investments in affiliate.................................... -- 263,438 160,639
---------- -------- --------
Total assets....................................... $1,914,063 $603,843 $397,037
========== ======== ========
LIABILITIES:
Current liabilities:
Accrued construction costs................................ $ 142,650 $ -- $ --
Accounts payable and accrued liabilities.................. 8,612 1,131 --
Deferred revenue.......................................... 4,308 -- --
Payable to affiliates..................................... 11,250 101,402 --
---------- -------- --------
Total current liabilities.......................... 166,820 102,533 --
---------- -------- --------
Long-term debt.............................................. 750,000 -- --
Long-term deferred revenue.................................. 94,679 -- --
Other long-term liabilities................................. 1,427 -- --
Loan payable to affiliate................................... 9,598 -- --
---------- -------- --------
Total liabilities.................................. 1,022,524 102,533 --
---------- -------- --------
Minority interest........................................... 141,254 -- --
SHAREHOLDER'S EQUITY:
Common stock 1,200,000 shares authorized, par value $.01,
1,200,000 shares issued and outstanding as of June 30,
2000, December 31, 1999 and 1998.......................... 12 12 12
Additional paid-in capital.................................. 758,173 478,141 394,158
Retained earnings (accumulated deficit)..................... (8,334) 23,157 2,867
Cumulative translation adjustment........................... 434 -- --
---------- -------- --------
750,285 501,310 397,037
---------- -------- --------
Total liabilities and shareholder's equity......... $1,914,063 $603,843 $397,037
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 116
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1998
SIX MONTHS ENDED (DATE OF
JUNE 30, YEAR ENDED INCEPTION) TO
------------------------- DECEMBER 31, DECEMBER 31,
2000 1999 1999 1998
------------ ---------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue............................ $ 108,680 $ -- $ -- $ --
Expenses:
Cost of sales.................... 84,850 -- -- --
Operations, administration and
maintenance................... 24,198 -- -- --
General and administrative....... 17,776 -- 1,201 --
Depreciation and amortization.... 8,026 -- -- --
------------ ---------- ------------ ----------
Operating income (loss)....... (26,170) -- (1,201) --
Equity in income (loss) of
affiliate........................ -- (2,395) 9,893 (2,507)
Minority interest.................. (12,118) -- -- --
Other income (expense):
Other expense.................... (306) -- -- --
Interest income.................. 8,191 5,440 11,598 5,374
Interest expense................. (1,088) -- -- --
------------ ---------- ------------ ----------
Income (loss) before provision
for income taxes............ (31,491) 3,045 20,290 2,867
Provision for income taxes......... -- -- -- --
------------ ---------- ------------ ----------
Net income (loss)............. $ (31,491) $ 3,045 $ 20,290 $ 2,867
============ ========== ============ ==========
Net income per common share:
Basic and diluted net income
(loss) per common share....... $ (26.24) $ 2.54 $ 16.91 $ 2.39
============ ========== ============ ==========
Shares used in computing basic and
diluted net income (loss) per
common share..................... 1,200,000 1,200,000 1,200,000 1,200,000
============ ========== ============ ==========
Pro forma basic and diluted net
income (loss) per common share
(Note 12)........................ $ (0.07) $ 0.05
============ ============
Shares used in computing pro forma
basic and diluted net income
(loss) per common share (Note
12).............................. 450,000,000 450,000,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 117
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL CUMULATIVE EARNINGS TOTAL
------------------ PAID-IN TRANSLATION (ACCUMULATED SHAREHOLDER'S
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT) EQUITY
--------- ------ ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Contribution of assets by Global
Crossing Ltd. for common stock
on April 1, 1998 (Date of
Inception)..................... 1,200,000 $12 $394,158 $ -- $ -- $394,170
Net income for the period April 1,
1998 (Date of Inception) to
December 31, 1998.............. -- -- -- -- 2,867 2,867
--------- --- -------- ------ ------- --------
BALANCE, December 31, 1998.......... 1,200,000 12 394,158 -- 2,867 397,037
Contribution of East Asia Crossing
development rights from Global
Crossing Ltd................... -- -- 10,970 -- -- 10,970
Cash contribution from Asia Global
Crossing Holdings Ltd.......... -- -- 73,013 -- -- 73,013
Net income for the year ended
December 31, 1999.............. -- -- -- -- 20,290 20,290
--------- --- -------- ------ ------- --------
BALANCE, December 31, 1999.......... 1,200,000 12 478,141 -- 23,157 501,310
Foreign currency translation
adjustment..................... -- -- -- 434 -- 434
Cash contribution from Asia Global
Crossing Holdings Ltd.......... -- -- 280,032 -- -- 280,032
Net loss for the six months ended
June 30, 2000.................. -- -- -- -- (31,491) (31,491)
--------- --- -------- ------ ------- --------
BALANCE, June 30, 2000 (unaudited).. 1,200,000 $12 $758,173 $ 434 $(8,334) $750,285
========= === ======== ====== ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 118
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1998
SIX MONTHS ENDED (DATE OF
JUNE 30, YEAR ENDED INCEPTION) TO
--------------------- DECEMBER 31, DECEMBER 31,
2000 1999 1999 1998
---------- -------- ------------ ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (31,491) $ 3,045 $ 20,290 $ 2,867
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 8,026 -- -- --
Provision for doubtful accounts......................... 791 -- -- --
Non-cash cost of sales.................................. 84,850 -- -- --
Equity in (income) loss of affiliate.................... -- 2,371 (9,893) 2,507
Minority interest....................................... 11,944 -- -- --
Changes in operating assets and liabilities:
Accounts receivable................................... (18,379) -- -- --
Receivable from affiliates............................ 56,408 -- (89,735) --
Other assets.......................................... (45,000) (1) (1,150) (8)
Deferred revenue...................................... 89,133 -- -- --
Accounts payable and accrued liabilities.............. 1,035 -- 1,131 --
Payable to affiliates................................. (97,913) -- 101,402 --
---------- -------- --------- ---------
Net cash provided by operating activities............. 59,404 5,415 22,045 5,366
---------- -------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from consolidating Pacific Crossing Ltd. ... 606 -- -- --
Change in restricted cash and cash equivalents............ 61,695 -- 92,882 (231,000)
Purchase of property and equipment........................ (267,830) -- (90,628) --
Acquisition of minority share in affiliate................ (20,585) -- -- --
Investments in affiliates................................. -- -- (92,906) (6)
---------- -------- --------- ---------
Net cash used in investing activities................. (226,114) -- (90,652) (231,006)
---------- -------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from capital contribution........................ 280,032 -- 73,013 231,018
Minority interest investment in affiliates................ 73,192 -- -- --
---------- -------- --------- ---------
Net cash provided by financing activities............. 353,224 -- 73,013 231,018
EXCHANGE RATE EFFECT ON CASH AND CASH EQUIVALENTS........... 434 -- -- --
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 186,948 5,415 4,406 5,378
CASH AND CASH EQUIVALENTS, beginning of period.............. 9,784 5,378 5,378 --
---------- -------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period.................... $ 196,732 $ 10,793 $ 9,784 $ 5,378
========== ======== ========= =========
SUPPLEMENTAL INFORMATION ON NONCASH INVESTING AND FINANCING
ACTIVITIES:
Decrease in accrued construction costs.................... 18,167 -- -- --
Contribution of East Asia Crossing development rights..... -- -- (10,970) --
Amortization of deferred finance costs.................... (2,273) -- -- --
Costs incurred for property and equipment................. 251,936 -- 101,598 --
---------- -------- --------- ---------
Cash for property and equipment........................... $ 267,830 $ -- $ 90,628 $ --
========== ======== ========= =========
Non-cash capital contribution............................. $ -- $ -- $ -- $ 163,152
========== ======== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest and income taxes
Interest paid and capitalized........................... $ 34,077 $ -- $ -- $ --
========== ======== ========= =========
Interest paid (net of capitalized interest)............. $ 892 $ -- $ -- $ --
========== ======== ========= =========
Cash paid for taxes..................................... $ -- $ -- $ -- $ --
========== ======== ========= =========
Details of consolidating Pacific Crossing Ltd.:
Assets consolidated..................................... $1,124,138 $ -- $ -- $ --
Liabilities consolidated................................ (945,903) -- -- --
---------- -------- --------- ---------
$ 178,235 $ -- $ -- $ --
========== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 119
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1998
SIX MONTHS ENDED (DATE OF
JUNE 30, YEAR ENDED INCEPTION) TO
------------------ DECEMBER 31, DECEMBER 31,
2000 1999 1999 1998
-------- ------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET INCOME (LOSS)......................... $(31,491) $3,045 $20,290 $2,867
Foreign currency translation
adjustment........................... 434 -- -- --
-------- ------ ------- ------
COMPREHENSIVE INCOME (LOSS)............... $(31,057) $3,045 $20,290 $2,867
======== ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE> 120
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THROUGHOUT THESE CONSOLIDATED FINANCIAL STATEMENTS, REFERENCES TO "DOLLARS" AND
"$" ARE TO UNITED STATES DOLLARS.
1. BACKGROUND AND ORGANIZATION
Formation of the Joint Venture
On September 24, 1999, Asia Global Crossing Ltd. (the "Company" or "Asia
Global Crossing") was formed as an indirect wholly owned subsidiary of Global
Crossing Ltd. Asia Global Crossing is a wholly owned subsidiary of Asia Global
Crossing Holdings Ltd. On November 24, 1999, Asia Global Crossing Holdings Ltd.
became a joint venture owned by Global Crossing Ltd., Softbank Corp.
("Softbank") and Microsoft Corporation ("Microsoft") (collectively the
"Partners") who own 93.0%, 3.5% and 3.5% of Asia Global Crossing Holdings Ltd.,
respectively.
Upon the formation of the joint venture, Microsoft and Softbank were each
issued 1,750,000 shares of Class B common stock of Asia Global Crossing Holdings
Ltd. for $175.0 million in cash paid by each of Microsoft and Softbank. Global
Crossing Ltd. received 46,500,000 shares of Class A common stock and 1,000
shares of Class C common stock of Asia Global Crossing Holdings Ltd. in
consideration for, among other things, (1) its entire interest in Pacific
Crossing Ltd. and (2) its development rights with respect to East Asia Crossing.
The 1,000 shares of Class C common stock were subsequently transferred to The
Goldman Sachs Group, Inc.
Also upon the formation of the joint venture, Microsoft and Softbank
entered into a capacity commitment agreement to purchase capacity on the Global
Crossing systems in an aggregate amount of $200 million over a three-year period
from the date when Pacific Crossing-1 is able to carry trans-Pacific traffic.
On April 1, 1998, GCT Pacific Holdings Ltd. ("GCT Pacific") was formed as a
wholly-owned subsidiary of Global Crossing Ltd., to hold Global Crossing Ltd.'s
interest in Pacific Crossing-1, a 21,000 km undersea fiber optic cable
connecting mainland United States to Japan. Global Crossing Ltd. contributed GCT
Pacific to the Company upon formation of the joint venture. Since Asia Global
Crossing and GCT Pacific are entities under the common control of Global
Crossing Ltd., Asia Global Crossing's consolidated financial statements are
presented as if it were in existence on April 1, 1998, the date of inception of
GCT Pacific, similar to a pooling of interest.
On September 28, 1999, Asia Global Crossing completed a 100 for 1 stock
split. All the shares and per share information have been adjusted to reflect
the split retroactively.
Nature of Business
Asia Global Crossing intends to be the first pan-Asian telecommunications
carrier to provide telecommunications services, including Internet, data, voice
and Web-hosting services to wholesale and business customers.
Asia Global Crossing owns 64.5% of Pacific Crossing-1 and is constructing
East Asia Crossing, a 17,000 km undersea fiber optic cable in the East Asian
region. The first segment of East Asia Crossing is expected to be ready for
service in 2000. Both of these systems will be seamlessly connected to the
Global Crossing network, which, including Pacific Crossing-1 and East Asia
Crossing, consists of 101,000 announced route miles and serves five continents,
27 countries and more than 200 major cities.
Pacific Crossing-1
At December 31, 1999, Pacific Crossing-1 was owned by Pacific Crossing
Ltd., a joint venture among GCT Pacific, SCS (Bermuda) Ltd. and Marubeni Pacific
Cable Limited, all Bermuda companies
F-9
<PAGE> 121
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(collectively the "Pacific Crossing-1 Partners") who owned 50.0%, 14.5% and
35.5% of Pacific Crossing Ltd., respectively. In addition to owning 50.0% of
Pacific Crossing-1 through GCT Pacific, before January 1, 2000, the Company's
investment in Pacific Crossing Ltd. was accounted for as interest in affiliates
under the equity method because it 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% by acquiring the remaining interest in SCS
Bermuda Ltd., and the Pacific Crossing-1 Shareholder Agreement was amended,
which enabled Company to exercise effective control over Pacific Crossing Ltd.
As a result, Pacific Crossing Ltd. has been consolidated as of January 1, 2000.
East Asia Crossing
On December 17, 1999, Asia Global Crossing awarded KDD Submarine Cable
Systems Inc. a construction contract to build East Asia Crossing, the first
phase of which is an 11,000 kilometer subsea cable that Asia Global Crossing
expects will connect Japan, Hong Kong, Taiwan, Korea and will have the potential
to connect into China, if and when regulations permit. The initial service for
the link between Japan and Hong Kong is scheduled for year-end 2000.
2. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. The
significant accounting policies are summarized as follows:
a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated.
b) Interim Financial Information
The consolidated financial statements of the Company as of June 30, 2000
and for the six months ended June 30, 2000 and 1999 are unaudited. Adjustments,
consisting of normal recurring adjustments to present the consolidated financial
position of the Company, have been made, which in the opinion of management are
necessary for a fair presentation. Results of operations for the six months
ended June 30, 2000 are not necessarily indicative of the results that may be
expected for the full year or for any future period.
c) Use of Estimates
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 revenue and expenses during the
reporting period. Actual amounts and results could differ from those estimates.
The Company's operations and ability to grow may be affected by numerous
factors, including its limited operating history, its significant indebtedness,
the delay in constructing its network, dependence on Global Crossing Ltd. and
others for capacity and services, the ability to establish customer
relationships, the growth of the Internet and other comparable markets, the
ability to integrate acquisitions, retaining key personnel, political conditions
in Asia, foreign currency exchange fluctuations, changes in tax regulations,
changes in customer requirements, new laws and governmental regulations and
policies, technological advances, entry of new competitors and changes in the
willingness of financial institutions and other lenders to finance acquisitions
and operations. The
F-10
<PAGE> 122
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company cannot predict which, if any, of these or other factors might have a
significant impact on the telecommunications industry in the future, nor can it
predict what impact, if any, the occurrence of these or other events might have
on the Company's operations.
d) Development Stage Company
The Company was in its development stage until December 1999 when the first
segment of Pacific Crossing-1 became ready for commercial service, and Pacific
Crossing Ltd. began generating revenue.
e) Revenue Recognition
Services
Revenue from sales of capacity under operating-type leases are recognized
over the period the service is provided, net of an estimate for uncollectible
accounts. Payments received from customers before the relevant criteria for
revenue recognition is satisfied are included in deferred revenue.
Sales-Type Leases
Revenue from Capacity Purchase Agreements ("CPAs") that meet the criteria
of sales-type lease accounting are recognized in the period that the rights and
obligations of ownership transfer to the purchaser, which occurs when (1) 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, (2) the purchaser is obligated to pay Operations, Administration
and Maintenance ("OA&M") costs and (3) 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. The Company follows the criteria set forth in Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS 66")
for contracts which qualify for sales-type lease accounting.
The Company offers customers flexible bandwidth products to multiple
destinations and anticipates that many of the contracts for subsea circuits
entered into will be part of a service offering. Therefore, the Company
anticipates that many of these contracts will not meet the criteria of
sales-type lease accounting and will be accounted for as operating leases.
Consequently, the Company will defer revenue related to those circuits and
amortize that revenue over the appropriate term of the contract. Accordingly,
the Company will treat cash received, but not recognized, as deferred revenue.
In certain circumstances, should a contract meet all of the requirements of
sales-type lease accounting, the Company will recognize revenue without deferral
upon payment and activation.
The principal effect of the change in the type of contracts offered to the
Company's customers beginning on January 1, 2000 is that an increasing
percentage of capacity sales will be accounted for as operating leases rather
than sales-type leases, resulting in more revenue from such sales being deferred
into future periods than was previously the case. Accordingly, this change in
contract terms will reduce revenue recognized upon activation of circuits in
earlier periods and increase revenue recognized in later periods.
As of December 31, 1999, the Company had an aggregate backlog of
approximately $25 million in capacity sales contracts for which revenue will be
recognized using sales-type lease accounting upon activation. For the remaining
backlog as of that date, revenue will be recognized using operating lease
accounting, that is amortized over the life of the contract.
F-11
<PAGE> 123
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the six months ended June 30, 2000, sales-type lease revenue was $105.3
million and services revenue was $3.4 million. There was no revenue for the year
ended December 31, 1999.
f) Cost of Sales
Services
Costs relating to capacity contracts accounted for as operating leases are
treated as fixed assets and, accordingly, are depreciated over the estimated
useful life of the capacity.
Sales-Type Leases
At the date each segment of a system becomes operational, the related
amounts included in construction in progress are reclassified (see note 2h), and
depreciation commences. For contracts that meet the criteria for sales-type
lease accounting, the Company's policy provides for recording cost of sales in
the period in which the related revenue is recognized in addition to the
depreciation charge described below. The amount charged to cost of sales is
determined by calculating the estimated net book value of the specific capacity
at the time of the sale, which includes total expected cost of the System and
the cost of the additional capacity that the Company has the intent and ability
to add through upgrades, provided the need for such upgrades is supported by a
third-party consultant's revenue forecast.
g) Cash and Cash Equivalents, Restricted Cash and Cash Equivalents
The Company considers cash in banks and short term highly liquid
investments with an original maturity of three months or less at the date of
purchase to be cash equivalents. At June 30, 2000, December 31, 1999 and 1998,
$94.3 million, $138.1 million and $231.0 million, respectively, were restricted
for the construction of Pacific Crossing-1.
h) Property and Equipment
Property and equipment is stated at cost, net of depreciation and
amortization. Major enhancements are capitalized, while expenditures for repairs
and maintenance are expensed when incurred. Costs incurred prior to a segment's
completion are reflected as construction in progress in the accompanying
consolidated balance sheets and recorded as property and equipment at the date
each segment of the system becomes operational. Construction in progress
includes direct expenditures for construction of the systems and is stated at
cost. Capitalized costs include costs incurred under the construction contract;
advisory, consulting and legal fees. Once it is probable that a cable system
will be constructed, costs directly identifiable with the cable system under
development are capitalized. Costs relating to the evaluation of new projects
incurred prior to the date the development of the network system becomes
probable are expensed as incurred.
Interest incurred, which includes the amortization of deferred finance
fees, is capitalized in accordance with Statement of Financial Accounting
Standards No. 34 "Capitalization of Interest Costs".
Total interest cost incurred and interest capitalized to construction in
progress during the periods presented were:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 2000
-------------
(UNAUDITED)
<S> <C>
Interest cost incurred...................................... $32,712
=======
Interest cost capitalized to construction in progress....... $31,630
=======
</TABLE>
F-12
<PAGE> 124
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is provided on a straight-line basis over the estimated useful
lives of the related property and equipment, with the exception of leasehold
improvements and assets acquired through capital leases, which are depreciated
over the lesser of the estimated useful lives or the term of the lease.
Estimated useful lives are as follows:
<TABLE>
<S> <C>
Buildings................................................... 10-40 years
Leasehold improvements...................................... 2-25 years
Furniture, fixtures and equipment........................... 2-30 years
Transmission equipment...................................... 3-25 years
</TABLE>
The Company reviews the carrying value of property and equipment for
impairment whenever events and circumstances indicate that the carrying value of
an asset may not be recoverable from the estimated future cash flows expected to
result from its use and eventual disposition. In cases where undiscounted
expected future cash flows are less than the carrying value, an impairment loss
would be recognized equal to an amount by which the carrying value exceeds the
fair value of the assets. For the six months ended June 30, 2000, the Company
wrote down $38 million of transmission equipment related to accrued losses on
sales.
i) Deferred Finance Costs
Costs incurred to obtain financing through the issuance of long term debt
have been reflected as an asset in the accompanying consolidated balance sheets.
The financing costs relating to the long term debt are amortized over the lesser
of the term of the related debt agreements or the expected payment date of the
debt obligation. During the construction period, the amortized portion of
deferred financing costs relating to the long term debt are included in
construction in progress as a component of interest capitalized or recorded as
interest expense in accordance with Statement of Financial Accounting Standards
(SFAS) No. 34 "Capitalization of Interest Cost".
j) Financial Instruments
The Company uses derivative financial instruments for the purpose of
reducing its exposure to adverse fluctuations in interest rates. The
counterparties to the derivative financial instruments in effect as of June 30,
2000 are Canadian Imperial Bank of Commerce ("CIBC"), a related party to Global
Crossing Ltd., and Deutsche Bank AG. The Company is exposed to credit loss in
the event of nonperformance by these counterparties. As of June 30, 2000, the
Company did not utilize derivative financial instruments for trading or other
speculative purposes.
As discussed in Note 10, Pacific Crossing Ltd. has entered into an interest
rate swap agreement to hedge its exposure to interest rates on its long-term
debt. Hedge accounting was applied in respect of these instruments; accordingly,
the net cash amounts paid or received on the agreement are accrued and
recognized as an adjustment to interest expense on the related debt.
k) Translation of Foreign Currencies
Transactions in foreign currencies are translated into United States
dollars at the rate of exchange prevailing at the date of each transaction.
Monetary assets and liabilities denominated in foreign currencies at year end
are translated into United States dollars at the rate of exchange at that date.
For all periods prior to June 30, 2000, the effect of foreign currency
transactions were immaterial.
F-13
<PAGE> 125
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
l) Income Taxes
The Company recognizes current and deferred income tax assets and
liabilities as applicable based upon all events that have been recognized in the
consolidated financial statements as measured by the enacted tax laws.
m) Investments
Investments in which the Company does not have significant influence or in
which the Company holds an ownership interest of less than 20% are recorded
using the cost method of accounting. The equity method of accounting is applied
for investments in affiliates, if the Company owns an aggregate of 20% to 50% of
the affiliate and if the Company exercises significant influence over the
affiliate. The equity method is also applied for entities in which the Company's
ownership is in excess of 50% but over which the Company is unable to exercise
effective control, due to minority shareholders participating in significant
decisions in the ordinary course of business. If the Company holds more than 50%
of the ownership and is able to exercise effective control, the owned entity's
financial statements and the appropriate deductions for minority interest are
included in the accompanying consolidated financial statements.
n) Concentration of Credit Risk
The Company has some concentration of credit risk among its customer base.
The Company performs ongoing credit evaluations of its larger customer's
financial condition. As of June 30, 2000, the Company's receivables were with
three customers and were net of an allowance for doubtful accounts of $0.8
million.
o) Segment Reporting
The Company is a single segment operating company providing
telecommunications services. For all periods prior to June 30, 2000, the
Company's revenues have been derived from sales of wholesale capacity to
telecommunications carriers and business customers.
p) Recent Accounting Standards
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of SFAS No.
133", which deferred SFAS No. 133's effective date to fiscal quarters beginning
after June 15, 2000. This statement standardizes the accounting for derivatives
and hedging activities and requires that all derivatives be recognized in the
statement of financial position as either assets or liabilities at fair value.
Changes in the fair value of derivatives that do not meet the hedge accounting
criteria are to be reported in earnings. The impact of the adoption of this
standard has not been quantified.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which provides additional
guidance on revenue recognition as well as criteria for when revenue is
generally realized and earned. Our financial statements reflect the accounting
guidance in SAB 101 for all periods presented.
F-14
<PAGE> 126
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------
2000 1999 1998
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Terrestrial capacity........................... $ 53,770 $ 10,795 $ --
Deposits on subsea capacity.................... -- 48,000 --
Construction in progress....................... 1,142,831 42,803 --
Subsea transmission equipment.................. 235,725 -- --
Leasehold improvements......................... 2,062 -- --
Furniture, fixtures and equipment.............. 5,370 -- --
---------- -------- --------
Total property and equipment.............. 1,439,758 101,598 --
Less: accumulated depreciation............ (7,870) -- --
---------- -------- --------
Total property and equipment, net......... $1,431,888 $101,598 $ --
========== ======== ========
</TABLE>
No depreciation and amortization expense was incurred for property and
equipment for all periods prior to December 31, 1999. Depreciation and
amortization expense for the six months ended June 30, 2000 was $7.9 million.
4. INVESTMENTS IN AFFILIATE
The Company's investments in affiliate consist of the following at December
31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Investment in (advances from) Pacific Crossing
Ltd. .............................................. $102,954 $ (2,502)
Pacific Crossing-1 development costs................. 160,484 163,141
-------- --------
Total investments in affiliate.................. $263,438 $160,639
======== ========
</TABLE>
Prior to January 21, 1998, Pacific Capital Group, Inc. and its affiliates,
a significant shareholder of Global Crossing Ltd., began development of Pacific
Crossing-1 and other fiber optic cables. Through January 21, 1998, such
development included assembling a management team, negotiating with potential
suppliers, partners, financing sources, obtaining preliminary market and
feasibility studies and developing technical requirements. During January 1998,
Global Crossing Ltd.'s Board determined that it was in its best interests to
pursue these new systems, obtain the results of the work and the employees then
within the scope of activity of Pacific Capital Group, Inc. and broaden the
goals, objectives and business plan of Global Crossing Ltd. In consideration of
Pacific Capital Group, Inc. transferring the results of its activities and
becoming limited in its future activities in fiber optic telecommunications
other than through Global Crossing Ltd., Global Crossing Ltd.'s Board approved
and the shareholders subsequently ratified a transaction whereby Pacific Capital
Group, Inc. received certain cash reimbursements and entered into a warrant
agreement ("PCG Warrants") under which Pacific Capital Group, Inc. was granted
warrants for Global Crossing Ltd.'s common stock in exchange for the rights to
continue the development of Pacific Crossing-1 and the other fiber optic cables.
The PCG Warrants were accounted for pursuant to the Emerging Issues Task
Force 96-18, "Accounting for Equity Instruments with Variable Terms that are
Issued for Consideration other than Employee Services under FASB Statement No.
123" ("EITF 96-18"). Under EITF 96-18, the fair value of equity instruments
issued for consideration other than employee services should be measured using
the stock price or other measurement assumptions as of the date at which a firm
commitment for
F-15
<PAGE> 127
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
performance level has been reached. At the date of the initial public offering
of Global Crossing Ltd., the Pacific Capital Group, Inc. Warrants attributable
to Pacific Crossing-1 were valued at approximately $163.0 million and allocated
to GCT Pacific.
As of January 1, 2000, Pacific Crossing Ltd. was consolidated into the
Company. As a result, the Pacific Crossing-1 development costs were reclassified
into property and equipment in the accompanying consolidated balance sheet as of
June 30, 2000, which were for the balance sheet as of December 31, 2000 included
in investing in affiliates.
The summarized consolidated financial statements of Pacific Crossing Ltd.
are as follows as of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998
------------ ---------------
<S> <C> <C>
Current assets............................... $ 88,030 $ 8,551
Total assets................................. 1,124,138 231,677
Current liabilities.......................... 185,267 25,626
Total shareholders' equity (deficit)......... $ 178,235 $ (4,329)
</TABLE>
<TABLE>
<CAPTION>
MAY 4, 1998
(DATE OF
YEAR ENDED INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ---------------
<S> <C> <C>
Revenues..................................... $61,100 $ --
Operating income (loss)...................... 24,209 (1,627)
Net income (loss)............................ $21,729 $(4,341)
</TABLE>
5. TAXES
The Company accounts for income taxes in accordance with Statement of
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
Bermuda does not impose a statutory income tax and consequently no
provision for income taxes was recorded for any entities incorporated in
Bermuda. Income tax provision benefits recorded for losses incurred by certain
subsidiaries of the Company which are located in jurisdictions which impose
income taxes were offset by the establishment of valuation allowances in
accordance with SFAS 109.
6. LONG-TERM DEBT
The Company's subsidiary, Pacific Crossing Ltd. has an $850.0 million
aggregate senior secured non-recourse loan facility (the "Pacific Crossing-1
Credit Facility") with a group of banks led by CIBC, a related party of Global
Crossing Ltd., and Deutsche Bank AG, for the construction and financing costs of
Pacific Crossing-1. The Pacific Crossing-1 credit facility is comprised of an
$840.0 million multiple draw down term loan facility (the "Pacific Crossing-1
Term Facility") and a $10.0 million working capital facility (the "Pacific
Crossing-1 Working Capital Facility"). Of the $840.0 million Pacific Crossing-1
Term Facility, $50.0 million is restricted to fund the first System upgrade. The
Pacific Crossing-1 Credit Facility is secured by pledges of the stock of Pacific
Crossing Ltd. and its subsidiaries and by a security interest in its assets and
revenues. As of June 30, 2000, Pacific Crossing-1 had an outstanding balance of
$750.0 million under the Pacific Crossing-1 Credit Facility. No amounts have
been repaid to the lenders.
Under the Pacific Crossing-1 Credit Facility, Pacific Crossing Ltd. may
select loan arrangements as either a Eurodollar loan or an Alternative Base Rate
("ABR") loan. The Eurodollar interest rate is LIBOR plus 2.25-2.50% and the ABR
interest rate is the greater of (a) the Prime Rate and (b) the Federal Funds
Effective Rate plus 0.5%, plus 1.25-1.50%. As of June 30, 2000, all outstanding
loans
F-16
<PAGE> 128
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were Eurodollar loans. The Pacific Crossing-1 Credit Facility contains various
covenants that (1) limit further indebtedness by Pacific Crossing Ltd. and its
subsidiaries, (2) limit the ability of Pacific Crossing Ltd. to pay dividends,
(3) require Pacific Crossing Ltd. to meet certain minimum capacity sales levels
and (4) require Pacific Crossing Ltd. to meet a minimum interest coverage ratio
for the years 2001 through to the maturity of the Pacific Crossing-1 Credit
Facility. The Pacific Crossing-1 Credit Facility is repayable in ten semi-annual
installments ("Mandatory Repayments"), commencing 135 days after the System is
ready for service.
Pacific Crossing Ltd. has entered into two interest rate swap transactions
based on one month LIBOR to minimize its exposure to increases in interest rates
on its borrowings. The swap transactions fix Pacific Crossing Ltd.'s floating
interest rate at 4.985% on a notional amount of borrowings ranging between
$200.0 million and $500.0 million until January 31, 2004.
The expected maturities of long term debt are as follows:
<TABLE>
<S> <C>
Year Ending December 31, (IN THOUSANDS)
2000...................................................... $ --
2001...................................................... 83,260
2002...................................................... 93,260
2003...................................................... 113,260
2004...................................................... 118,260
Thereafter................................................ 341,960
--------
Total.............................................. $750,000
========
</TABLE>
7. RELATED PARTY TRANSACTIONS
Shareholders Agreement
The Partners are parties to a shareholders agreement, which contains
important provisions relating to, among other things, the governance of Asia
Global Crossing Holdings Ltd.'s business. The shareholders agreement details,
among other things, the composition of Asia Global Crossing Holdings Ltd.'s
board of directors; actions requiring the approval of directors appointed by
Microsoft and Softbank; the preparation of strategic plans; activities in which
the Partners are prohibited from engaging in Asia without each other's consent;
additional obligations of Microsoft and Softbank to Asia Global Crossing
Holdings Ltd.; Asia Global Crossing Holdings Ltd.'s obligation to purchase
certain technology from Microsoft; and restrictions on the transfer of Asia
Global Crossing Holdings Ltd.'s common stock.
Global Crossing Ltd. and the Company are discussing an agreement that will
govern the relationship between the companies and their respective subsidiaries
and affiliates, including provision of network services, coordination and use of
bundled service offerings, marketing, pricing of service offerings and
strategies, branding, rights with respect to intellectual property and other
shared technology and operational, maintenance and administrative services.
Affiliate Transactions for Network Capacities
During its normal course of business, Asia Global Crossing and its
subsidiaries purchase and sell network capacity from and to affiliates. The
Company purchases terrestrial network capacity in Japan from Global Access Ltd.,
a 49.0%-owned affiliate of Global Crossing Ltd., and Pacific Crossing-1 network
capacity from Pacific Crossing Ltd., a 64.5% owned affiliate of the Company. The
prices of Global Access Ltd. capacity were determined by Asia Global Crossing
and Global Access Ltd., and the prices of Pacific Crossing-1 capacity were
determined by Asia Global Crossing and Pacific Crossing Ltd. Prices are reviewed
and adjusted periodically based on market conditions. The Company and its
subsidiaries sell network capacity directly, or indirectly through Global
Crossing Ltd. and its affiliates to third-party customers. Receivables and
payables from/to affiliates are related to these transactions.
F-17
<PAGE> 129
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue from the sales of capacity to Global Crossing Ltd. for the six
months ended June 30, 2000 was $74.6 million and none for the year ended
December 31, 1999. The Company purchased approximately $53.8 million of capacity
from Global Crossing Ltd. and Global Access Ltd. during the six months ended
June 30, 2000 and purchased approximately $10.8 million of capacity from Global
Crossing Ltd. and Global Access Ltd. during the year ended December 31, 1999.
Corporate Services
Certain affiliated companies, which are indirect wholly-owned subsidiaries
of Global Crossing Ltd., provide Asia Global Crossing with general corporate
services, including accounting, legal, human resources, information systems
services and other office functions. The related charges are allocated to the
Company based on estimated usage of the common resources. The estimated usage
factors are agreed upon on a periodic basis. Management believes that the
allocation methodology is reasonable. From November 24, 1999 (inception date of
the joint venture) to December 31, 1999, the related shared service charges to
the Company were $0.5 million. For the six months ended June 30, 2000, the
related charges totaled $2.3 million. Had the Company provided these management
services on a stand alone basis, there could be no assurance that these fees
would be the same.
Maintenance Agreements
Pacific Crossing Ltd. has entered into OA&M agreements with Global Access
Ltd. and with Global Crossing Network Center, Ltd., a subsidiary of Global
Crossing Ltd., whereby Global Access Ltd. and Global Crossing Network Center are
obligated to provide operating, administration and maintenance functions for
Pacific Crossing-1. The OA&M agreement with GCNC is for an initial term of eight
years with two renewal periods of five years each at the Company's option. The
OA&M agreement with Global Access Ltd. is for an initial term of eight years
with two renewal periods of eight and one-half years each at the Company's
option. The OA&M costs related to this agreement are expensed as incurred.
Pacific Crossing Ltd. recorded expense of $3.0 million and $21.5 million for the
six months ended June 30, 2000 under the agreement with Global Access Ltd. and
Global Crossing Network Center, respectively.
Notes Receivable from Employees
Certain key employees of Asia Global Crossing had interest-free loans from
the Company. On the first, second, and third anniversary of the employee's start
date, a third of the original loan will be forgiven. The Company amortizes these
notes receivable to salary and benefit expense over three years on a
straight-line basis. At June 30, 2000, the unamortized outstanding balance was
$14.3 million and is included in other assets in the accompanying consolidated
balance sheet.
East Asia Crossing
A direct wholly-owned subsidiary of Global Crossing Ltd. developed East
Asia Crossing. These development rights were contributed directly to the
Company. The value of these development rights totaling $11.0 million was based
on the estimated total system costs including upgrades of East Asia Crossing and
included in property and equipment.
F-18
<PAGE> 130
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. GEOGRAPHIC SEGMENTATION
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30, 2000 DECEMBER 31, 1999
----------------------- -----------------------
LONG-LIVED LONG-LIVED
REVENUE(1) ASSETS(2) REVENUE(1) ASSETS(2)
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
United States................. $ 76,735 $ 159,809 $ -- $ --
Japan......................... 24,738 217,036 -- 19,240
United Kingdom................ 7,207 -- -- --
International Waters.......... -- 1,055,043 -- 82,358
-------- ---------- -------- --------
Consolidated.................. $108,680 $1,431,888 $ -- $101,598
======== ========== ======== ========
</TABLE>
---------------
(1) Revenue is classified according to the primary point of presence of the end
customer. During the six months ended June 30, 2000, there were five
customers located in the United States that accounted for 70.6% of
consolidated revenue and four customers located in Japan that accounted for
22.8% of consolidated revenue.
(2) Long-lived assets include capacity available for sale and construction in
progress as of June 30, 2000 and December 31, 1999.
9. COMMITMENTS
At December 31, 1999, Asia Global Crossing was committed under its
contracts with KDD-SCS for future East Asia Crossing construction cost totaling
approximately $587.0 million, over the next two years. At June 30, 2000, the
remaining committed construction cost was $494.0 million.
At June 30, 2000, Pacific Crossing Ltd. was committed under contracts with
TSSL for remaining construction costs of Pacific Crossing-1 totaling
approximately $4.9 million.
At December 31, 1999, the Company had various noncancelable operating
leases for office buildings and network operation centers. The following is a
schedule of future minimum lease payments for operating leases that had initial
or remaining noncancelable lease terms in excess of one year as of December 31,
1999 (in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 984
2001........................................................ 853
------
$1,837
======
</TABLE>
The following amounts are payable to GCNC under an OA&M agreement (see note
7):
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Year Ending December 31,
2000................................................ $43,000
2001................................................ 43,000
2002................................................ 42,200
</TABLE>
These fees will increase by 3.0% each year starting in the year ended
December 31, 2003, through the end of the agreement in 2007.
Under an additional OA&M agreement, Pacific Crossing Ltd. is committed to
paying Global Access Ltd. $5.8 million each year through 2002, increasing by
3.0% thereafter through 2007 (see note 7).
F-19
<PAGE> 131
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, restricted cash and
cash equivalents, accounts receivable, accrued construction costs, accounts
payable and accrued liabilities, accrued interest, obligations under capital
leases and long term debt approximate their fair value due to their short-term
or variable interest nature. At June 30, 2000, the fair value of the interest
rate swap entered into by Pacific Crossing Ltd. is $27.9 million and is based on
market quotes.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's unaudited quarterly results are as follows (in thousands):
<TABLE>
<CAPTION>
1998 QUARTER ENDED
--------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31
------- ------------ -----------
<S> <C> <C> <C>
Revenue...................................... $ -- $ -- $ --
Operating loss............................... $ -- $ -- $ --
Net income................................... $ -- $2,207 $ 660
</TABLE>
<TABLE>
<CAPTION>
1999 QUARTER ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue............................. $ -- $ -- $ -- $ --
Operating loss...................... $ -- $ -- $ (66) $(1,135)
Net income.......................... $1,349 $1,696 $2,435 $14,810
</TABLE>
12. SUBSEQUENT EVENTS
On January 26, 2000, the Company announced an agreement to create
GlobalCenter Japan, a joint venture with Japan's Internet Research Institute,
Inc. ("Internet Research Institute"). GlobalCenter Japan will design, develop
and construct a data center in Japan providing connectivity worldwide through
the Global Crossing network. The joint venture will also develop and provide
complex Web-hosting services, e-commerce support and applications hosting
solutions. The Company will own 89.0% of GlobalCenter Japan, with Internet
Research Institute owning the remaining 11.0%.
On March 17, 2000, GCT Pacific entered into Stock Purchase Agreements with
the other shareholders of SCS (Bermuda) Ltd. to purchase their interests for
cash. Upon completion of the transactions, GCT Pacific will own 100% interest of
SCS (Bermuda) Ltd., and as a result will increase the Company's ownership
interest in Pacific Crossing Ltd. to 64.5%. In connection with this transaction,
Asia Global Crossing granted an option to Marubeni, a joint venture partner in
Pacific Crossing Ltd. to purchase $7.0 million of Asia Global Crossing's Class A
common stock at the initial public offering price.
On March 24, 2000 the Pacific Crossing Ltd. Shareholder Agreement was
amended to allow the Company to exercise effective control over Pacific Crossing
Ltd. Accordingly, the Company will consolidate the operations of Pacific
Crossing Ltd. as of January 1, 2000.
Concurrently with the completion of the pending initial public offering of
the Company, the Company will reorganize its share capital as follows:
(1) the authorized share capital of the Company will increase from $12,000
to $25.2 million, consisting of (a) 1,200,000,000 shares of Class A common
stock, (b) 1,200,000,000 shares of Class B common stock and (c) 120,000,000
shares of preferred stock;
F-20
<PAGE> 132
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) the Company will issue a specified number of shares of Class B common
stock to Asia Global Crossing Holdings; Asia Global Crossing Holdings will pay a
dividend consisting of those shares to each of Global Crossing and Microsoft;
(3) the Company will issue a specified number of shares of Class A common
stock to Asia Global Crossing Holdings; Asia Global Crossing Holdings will pay a
dividend consisting of those shares to The Goldman Sachs Group, Inc.;
(4) Class A common stock holders will have one vote per share, while
holders of Class B common stock have 10 votes per share;
(5) Asia Global Crossing Holdings will then become a wholly owned
subsidiary of Softbank; and
(6) The Company will have a 375 for 1 stock split.
Also, concurrently with the completion of the pending initial public
offering of the Company, the Partners' will each contribute their respective
interests in Hutchison Global Crossing and Global Access Ltd. The Company will
indemnify Global Crossing Ltd. for certain contingent liabilities that may arise
relating to Hutchison Global Crossing. Additionally, the Company will purchase
from Global Crossing Ltd. any outstanding shareholder loans it made to Hutchison
Global Crossing and Global Access Ltd. A stock incentive plan will be approved
which will allow 15% of the total shares outstanding of the Company's common
stock as of the completion of the pending initial public offering for issuance.
F-21
<PAGE> 133
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pacific Crossing Ltd.:
We have audited the accompanying consolidated balance sheets of Pacific
Crossing Ltd. (a Bermuda company) and its subsidiaries as of December 31, 1999
and 1998 and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for the year ended December 31, 1999 and for the
period from May 4, 1998 (Date of Inception) to December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pacific Crossing Ltd. and
its subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for the year ended December 31, 1999 and for the
period from May 4, 1998 (Date of Inception) to December 31, 1998, in conformity
with accounting principles generally accepted in the United States.
As explained in the Notes to the consolidated financial statements,
effective January 1, 1999, the Company changed its method of accounting for
start-up costs.
/s/ Arthur Andersen
Hamilton, Bermuda
February 23, 2000
F-22
<PAGE> 134
PACIFIC CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------
2000 1999 1998
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents....................... $ 616 $ 606 $ 433
Restricted cash and cash equivalents............ 55,416 17,914 6,695
Receivable from affiliate....................... 170,731 61,100 --
Accounts receivable............................. -- 6,399 --
Other assets and prepaid costs.................. 1,437 2,011 1,423
---------- ---------- --------
Total current assets......................... 228,200 88,030 8,551
Property and equipment, net....................... 1,076,781 1,010,730 193,214
Deferred finance costs, net of accumulated
amortization of $8,832, $6,560 and $2,026 as of
June 30, 2000, December 31, 1999 and 1998,
respectively.................................... 23,106 25,378 29,912
---------- ---------- --------
Total assets................................. $1,328,087 $1,124,138 $231,677
========== ========== ========
LIABILITIES:
Current liabilities:
Accrued construction costs...................... $ 100,029 $ 160,817 $ 23,473
Accounts payable and accrued liabilities........ 1,057 1,219 619
Deferred revenue................................ 4,078 9,854 333
Payable to affiliate............................ 31,528 8,124 1,041
Other current liabilities....................... 120 5,253 160
---------- ---------- --------
Total current liabilities.................... 136,812 185,267 25,626
Long term debt.................................... 750,000 750,000 200,000
Long term deferred revenue........................ 39,196 -- --
Long term accrued construction costs.............. -- -- 9,134
Other long term liabilities....................... 1,308 1,401 1,246
Loan payable to affiliate......................... 9,597 9,235 --
---------- ---------- --------
Total liabilities............................ 936,913 945,903 236,006
---------- ---------- --------
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, 1,200,000 shares authorized, par
value $0.01, 1,200,000 shares issued and
outstanding at June 30, 2000 and December 31,
1999 and 1998, respectively.................. 12 12 12
Additional paid in capital...................... 339,658 160,835 --
Retained earnings (deficit)..................... 51,504 17,388 (4,341)
---------- ---------- --------
391,174 178,235 (4,329)
---------- ---------- --------
Total liabilities and shareholders' equity
(deficit).................................. $1,328,087 $1,124,138 $231,677
========== ========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE> 135
PACIFIC CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
MAY 4, 1998
SIX MONTHS ENDED (DATE OF
JUNE 30, YEAR ENDED INCEPTION) TO
--------------------------- DECEMBER 31, DECEMBER 31,
2000 1999 1999 1998
------------ ------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue............................... $107,550 $ -- $61,100 $ --
Expenses:
Cost of sales....................... 41,552 -- 20,722 --
Operations, administration and
maintenance...................... 23,886 -- 8,000 --
Selling, general and
administrative................... 1,577 1,636 8,169 1,627
Depreciation and amortization....... 6,976 -- -- --
-------- ------- ------- -------
73,991 1,636 36,891 1,627
-------- ------- ------- -------
Operating income (loss).......... 33,559 (1,636) 24,209 (1,627)
-------- ------- ------- -------
Other income (expense):
Interest income..................... 1,676 45 464 1,032
Interest expense.................... (1,071) (1,766) (2,612) (3,746)
Other (expense) income.............. (48) -- 459 --
-------- ------- ------- -------
Income (loss) from operations
before provision for income
taxes.......................... 34,116 (3,357) 22,520 (4,341)
Provision for income taxes............ -- -- -- --
-------- ------- ------- -------
Income (loss) from operations.... 34,116 (3,357) 22,520 (4,341)
Cumulative effect of change in
accounting principle................ -- (791) (791) --
-------- ------- ------- -------
Net income (loss)................ $ 34,116 $(4,148) $21,729 $(4,341)
======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE> 136
PACIFIC CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL RETAINED SHAREHOLDERS'
------------------ PAID IN EARNINGS EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
--------- ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock for cash on
May 4, 1998 (Date of Inception) at
$0.01 per share..................... 1,200,000 $12 $ -- $ -- $ 12
Net loss for the period from May 4,
1998 (Date of Inception) to December
31, 1998............................ -- -- -- (4,341) (4,341)
--------- --- -------- ------- --------
BALANCE, December 31, 1998............... 1,200,000 12 -- (4,341) (4,329)
Capital contributions.................. -- -- 160,835 -- 160,835
Net income for the year ended December
31, 1999............................ -- -- -- 21,729 21,729
--------- --- -------- ------- --------
BALANCE, December 31, 1999............... 1,200,000 12 160,835 17,388 178,235
Capital contributions.................. -- -- 178,823 -- 178,823
Net income for the six months ended
June 30, 2000....................... -- -- -- 34,116 34,116
--------- --- -------- ------- --------
BALANCE, June 30, 2000 (unaudited)....... 1,200,000 $12 $339,658 $51,504 $391,174
========= === ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE> 137
PACIFIC CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
MAY 4, 1998
SIX MONTHS ENDED (DATE OF
JUNE 30, YEAR ENDED INCEPTION)
--------------------- DECEMBER 31, TO DECEMBER 31,
2000 1999 1999 1998
--------- --------- ------------ ------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $ 34,116 $ (4,148) $ 21,729 $ (4,341)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization..................... 6,976 18
Non-cash cost of sales............................ 41,552 -- 20,722 --
Cumulative effect of change in accounting
principle...................................... -- 791 791 --
Changes in operating assets and liabilities:
Other assets and prepaid costs................. 575 (1,554) (588) (1,423)
Receivable from affiliate...................... (109,631) 323 (61,100) --
Accounts receivable............................ 6,399 -- (6,399) --
Deferred revenue............................... 33,420 3,122 9,521 333
Accounts payable & accrued liabilities......... (162) (196) 600 619
Payable to affiliate........................... 23,766 -- 16,318 1,041
Other liabilities.............................. (5,226) -- 5,248 --
--------- --------- --------- ---------
Net cash provided by (used in) operating
activities................................. 31,785 (1,644) 6,842 (3,771)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for property and equipment................ (173,096) (266,662) (706,285) (157,175)
--------- --------- --------- ---------
Net cash used in investing activities........ (173,096) (266,662) (706,285) (157,175)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.............. -- -- -- 12
Proceeds from long term debt........................ -- 267,960 550,000 304,000
Repayment of long term debt......................... -- -- -- (104,000)
Finance costs incurred.............................. -- -- -- (31,938)
Capital contributions............................... 178,823 -- 160,835 --
Change in restricted cash and cash equivalents...... (37,502) 662 (11,219) (6,695)
--------- --------- --------- ---------
Net cash provided by financing activities.... 141,321 268,622 699,616 161,379
--------- --------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS............. 10 316 173 433
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, beginning of period........ 606 433 433 --
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period.............. $ 616 $ 749 $ 606 $ 433
========= ========= ========= =========
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING
ACTIVITIES:
Costs incurred for property and equipment........... $ 114,580 $ 332,519 $ 839,029 $ 193,214
Decrease (increase) in accrued construction costs... 60,788 (63,759) (128,210) (32,607)
Amortization of deferred finance costs.............. (2,272) (2,262) (4,534) (2,026)
Change in other liabilities......................... -- 164 -- (1,406)
--------- --------- --------- ---------
Cash paid for property and equipment................ $ 173,096 $ 266,662 $ 706,285 $ 157,175
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid and capitalized....................... $ 34,077 $ 10,498 $ 29,514 $ 6,548
========= ========= ========= =========
Interest paid (net of capitalized interest)......... $ 892 $ 1,928 $ 2,655 $ 3,414
========= ========= ========= =========
Cash paid for taxes................................. $ -- $ -- $ -- $ --
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE> 138
PACIFIC CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Throughout these consolidated financial statements, references to "dollars" and
"$" are to United States dollars.
1. BACKGROUND AND ORGANIZATION
On May 4, 1998, Pacific Crossing Ltd. (the "Company") was incorporated in
Bermuda. Pacific Crossing Ltd. is a joint venture owned by GCT Pacific Holdings
Ltd., ("GCT Pacific"), SCS (Bermuda) Ltd. ("SCS (Bermuda)") and Marubeni Pacific
Cable Limited, all Bermuda companies (collectively the "Partners") who own
50.0%, 14.5% and 35.5% of Pacific Crossing Ltd., respectively. Pacific Crossing
Ltd. was incorporated to construct and operate an undersea fiber optic cable
ring with landing stations in the United States and Japan (Pacific Crossing
Ltd.'s fiber optic cable ring is referred to as "Pacific Crossing-1" or the
"System"). Pacific Crossing Ltd. has incorporated wholly-owned subsidiaries in
each of these countries in order to own the portion of the cable system located
in each country and the related territorial waters. Pacific Crossing-1 consists
of two segments joined to form a ring configuration. At December 31, 1999, the
first segment, from Harbour Pointe, Washington to Ajigaura, Japan, was completed
and placed into service.
GCT Pacific is a wholly-owned subsidiary of Asia Global Crossing Holdings
Ltd. and owns a further economic interest in Pacific Crossing Ltd. through its
100% ownership interest in SCS (Bermuda). During the periods presented in these
financial statements, Asia Global Crossing Holdings Ltd. was 93.0% owned by
Global Crossing Ltd. Global Crossing Ltd. is a provider of global broadband
telecommunications services for both wholesale and retail customers. Global
Crossing Ltd. is building a state-of-the-art fiber optic network (the "Global
Crossing Network") which includes Pacific Crossing-1.
During April 1998, Pacific Crossing Ltd. entered into a fixed price
contract with Tyco Submarine Systems Ltd. ("TSSL") to construct Pacific
Crossing-1. The estimated cost of the System is $1,100.0 million (including
capitalized interest), which is being financed through a $400.0 million equity
contribution by the Partners and an $850.0 million credit facility. The $400.0
million equity contribution by the Partners will be pro-rated according to their
respective percentage ownership of Pacific Crossing Ltd. Through either cash
collateral, letter of credit, or an equity contribution guarantee, the equity
contributions have been guaranteed by the Partners. In July 1998, the $850.0
million aggregate senior secured non-recourse loan facility (the "Pacific
Crossing-1 Credit Facility") was executed for the construction and financing
costs of Pacific Crossing-1.
2. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. The
significant accounting policies are summarized as follows:
a) Principles of Consolidation
The consolidated financial statements include the accounts of Pacific
Crossing Ltd. and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated.
b) Interim Financial Information
The consolidated financial statements of the Company as of June 30, 2000
and for the six months ended June 30, 2000 and June 30, 1999 are unaudited.
Adjustments, consisting of normal recurring adjustments to present the
consolidated financial position of the Company, have been made which in the
opinion of management are necessary for a fair presentation. Results of
operations for the six months ended June 30, 2000 are not necessarily indicative
of the results that may be expected for the full year or for any future period.
F-27
<PAGE> 139
PACIFIC CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company's operations and ability to grow may be affected by numerous
factors, including changes in customer requirements, new laws and governmental
regulations and policies, technological advances, entry of new competitors and
changes in the willingness of financial institutions and other lenders to
finance operations. The Company cannot predict which, if any, of these or other
factors might have a significant impact on the telecommunications industry in
the future, nor can it predict what impact, if any, the occurrence of these or
other events might have on the Company's operations.
d) Development Stage Company
The Company was in its development stage until December 31, 1999, when the
first segment of Pacific Crossing-1 was placed into service.
e) Revenue Recognition
Services
Revenue from sales of capacity under operating-type leases are recognized
over the period the service is provided, net of an estimate for uncollectible
accounts. Payments received from customers before the relevant criteria for
revenue recognition is satisfied are included in deferred revenue.
Sales-Type Leases
Revenue from Capacity Purchase Agreements ("CPAs") that meet the criteria
of sales-type lease accounting are recognized in the period that the rights and
obligations of ownership transfer to the purchaser, which occurs when (i) the
purchaser obtains 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 and the related capacity is
activated. 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. The Company follows the
criteria set forth in Statement of Financial Accounting Standards No. 66,
"Accounting for Sales of Real Estate" ("SFAS 66") for contracts which qualify
for sales-type lease accounting.
The Company offers customers flexible bandwidth products to multiple
destinations and anticipates that many of the contracts for subsea circuits
entered into will be part of a service offering. Therefore, the Company
anticipates that many of these contracts will not meet the criteria of
sales-type lease accounting and will be accounted for as operating leases.
Consequently, the Company will defer revenue related to those circuits and
amortize that revenue over the appropriate term of the contract. Accordingly,
the Company will treat cash received, but not recognized, as deferred revenue.
In certain circumstances, should a contract meet all of the requirements of
sales-type lease accounting, the Company will recognize revenue without deferral
upon payment and activation.
The principal effect of the change in the type of contracts offered to the
Company's customers beginning on January 1, 2000 is that an increasing
percentage of capacity sales will be accounted for
F-28
<PAGE> 140
PACIFIC CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
For the six months ended June 30, 2000, sales-type leases revenue was
$104.5 million and services revenue was $3.1 million. For the year ended
December 31, 1999, all revenue was from sales-type leases.
f) Cost of Sales
Services
Costs of sales relating to capacity contracts accounted for as operating
leases are treated as fixed assets and, accordingly, are depreciated over the
estimated useful life of the capacity.
Sales-Type Leases
At the date each segment of the System becomes operational, the related
amounts included in construction in progress are reclassified (see Note 2h), and
depreciation commences. For contracts that meet the criteria for sales-type
lease accounting, the Company's policy provides for recording cost of sales in
the period in which the related revenue is recognized in addition to the
depreciation charge described below. The amount charged to cost of sales is
determined by calculating the estimated net book value of the specific capacity
at the time of the sale, which includes total expected cost of the System and
the cost of the additional capacity that the Company has the intent and ability
to add through upgrades, provided the need for such upgrades is supported by a
third-party consultant's revenue forecast.
g) Cash and Cash Equivalents and Restricted Cash and Cash Equivalents
The Company considers cash in banks and short term highly liquid
investments with an original maturity of three months or less at the date of
purchase to be cash equivalents. The Company's restricted cash is restricted for
the payments of construction costs of Pacific Crossing-1.
h) Property and Equipment
Property and equipment, which includes transmission equipment and
construction in progress, is stated at cost, net of depreciation and
amortization. Major enhancements are capitalized, while expenditures for repairs
and maintenance are expensed when incurred. Construction in progress includes
direct expenditures for construction of the System and is stated at cost.
Capitalized costs include costs incurred under the construction contract;
advisory, consulting and legal fees; interest; and amortized finance costs
incurred during the construction phase. On the date a segment or upgrade becomes
operational, the related cost is recorded as transmission equipment and
depreciation commences.
Interest incurred, which includes the amortization of deferred finance
fees, is capitalized in accordance with Statement of Financial Accounting
Standards No. 34, "Capitalization of Interest
F-29
<PAGE> 141
PACIFIC CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cost." Total interest cost incurred and interest capitalized to construction in
progress during the periods presented were (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
MAY 4, 1998
SIX MONTHS (DATE OF
ENDED YEAR ENDED INCEPTION) TO
JUNE 30, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Interest cost incurred........................ $32,712 $41,625 $11,841
======= ======= =======
Interest cost capitalized to construction in
progress.................................... $31,630 $39,013 $ 8,095
======= ======= =======
</TABLE>
Depreciation is provided on a straight-line basis over the estimated useful
lives of the related property and equipment, with the exception of leasehold
improvements and assets acquired through capital leases, which are depreciated
over the lesser of the estimated useful lives or the term of the lease.
Estimated useful lives for transmission equipment are 3 to 25 years.
The Company reviews the carrying value of property and equipment for
impairment whenever events and circumstances indicate that the carrying value of
an asset may not be recoverable from the estimated future cash flows expected to
result from its use and eventual disposition. In cases where undiscounted
expected future cash flows are less than the carrying value, an impairment loss
is recognized equal to an amount by which the carrying value exceeds the fair
value of the assets.
i) Deferred Finance Costs
Costs incurred to obtain financing through the issuance of long-term debt
have been reflected as an asset in the accompanying consolidated balance sheets.
The financing costs relating to the long-term debt are amortized over the lesser
of the term of the related debt agreements or the expected payment date of the
debt obligation. During the construction period, the amortized portion of
deferred financing costs relating to the long term debt are included in
construction in progress as a component of interest capitalized or recorded as
interest expense in accordance with Statement of Financial Accounting Standards
No. 34, "Capitalization of Interest Cost."
j) Financial Instruments
The Company uses derivative financial instruments to reduce its exposure to
adverse fluctuations in interest rates. The Company has established policies and
procedures for risk assessment and the approval, reporting and monitoring of
derivative financial instrument activities. The Company does not enter into
financial instruments for trading or speculative purposes. Accordingly, they are
presented on the accompanying consolidated balance sheets at their carrying
values, which approximates their fair values. Fair values are based on market
quotes, current interest rates or management estimates, as appropriate.
As discussed in Note 7, the Company has entered into an interest rate swap
agreement to hedge its exposure to interest rates on its long-term debt. Hedge
accounting was applied in respect of these instruments; accordingly, the net
cash amounts paid or received on the agreement are accrued and recognized as an
adjustment to interest expense on the related debt.
The counterparties to the derivative financial instruments in effect as of
December 31, 1999 are Canadian Imperial Bank of Commerce ("CIBC") and Deutsche
Bank AG. The Company is exposed to credit loss in the event of nonperformance by
these counterparties.
F-30
<PAGE> 142
PACIFIC CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
k) Income Taxes
The Company recognizes current and deferred income tax assets and
liabilities as applicable based upon all events that have been recognized in the
consolidated financial statements as measured by the provision of the enacted
tax laws.
l) Translation of Foreign Currencies
The functional currency of the Company's subsidiaries is the United States
dollar. Transactions in foreign currencies are translated into United States
dollars at the rate of exchange prevailing at the date of each transaction.
Monetary assets and liabilities denominated in foreign currencies at year end
are translated into United States dollars at the rate of exchange at that date.
For the six months ended June 30, 2000 and the year ended December 31, 1999,
Pacific Crossing Ltd. recognized a $0.1 million foreign transaction loss and
$0.5 million foreign transaction gain, respectively, included in other income in
the accompanying consolidated statement of operations. The effect of foreign
currency transactions for the period from May 4, 1998 (Date of Inception) to
December 31, 1998 was not material.
m) Change in Accounting Policy
The Company adopted Statement of Position 98-5, "Reporting on the Cost of
Start-Up Activities" in the first quarter of 1999. Accordingly, a one-time
charge of $0.8 million, representing start-up costs incurred and capitalized
during previous periods, was charged against net income.
n) Segment Reporting
The Company is a provider of Internet and long distance telecommunications
facilities and related services. The Company determined that it was a single
segment operating company.
o) Pending Accounting Standards
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of SFAS No.
133" which deferred SFAS No. 133's effective date to fiscal quarters beginning
after June 15, 2000. This statement standardizes the accounting for derivatives
and hedging activities and requires that all derivatives be recognized in the
statement of financial position as either assets or liabilities at fair value.
Changes in the fair value of derivatives that do not meet the hedge accounting
criteria are to be reported in earnings. The impact of the adoption of this
standard has not been quantified.
p) Reclassifications
Certain prior year amounts have been reclassified in the consolidated
financial statements to conform to current year presentation.
F-31
<PAGE> 143
PACIFIC CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------
2000 1999 1998
----------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C>
Transmission equipment............... $ 197,178 $ 227,531 $ --
Construction in progress............. 886,547 783,199 193,214
---------- ---------- --------
Total property and equipment......... $1,083,725 $1,010,730 $193,214
Less: accumulated depreciation....... (6,944) -- --
---------- ---------- --------
Total property and equipment......... $1,076,781 $1,010,730 $193,214
========== ========== ========
</TABLE>
Depreciation expense was not recorded in 1999 or 1998 as the Northern
segment of Pacific Crossing-1 was placed into service on December 31, 1999.
Depreciation expense for the six months ended June 30, 2000 was $6.9 million.
4. LONG TERM DEBT
Pacific Crossing-1 Credit Facility
During 1998, Pacific Crossing Ltd. entered into an $850.0 million aggregate
senior secured non-recourse loan facility (the "Pacific Crossing-1 Credit
Facility") with a group of banks led by CIBC and Deutsche Bank AG, for the
construction and financing costs of Pacific Crossing-1. The Pacific Crossing-1
credit facility is comprised of an $840.0 million multiple draw down term loan
facility (the "Pacific Crossing-1 Term Facility") and a $10.0 million working
capital facility (the "Pacific Crossing-1 Working Capital Facility"). Of the
$840.0 million Pacific Crossing-1 Term Facility, $50.0 million is restricted to
fund the first system upgrade. The Pacific Crossing-1 Credit Facility is secured
by pledges of the stock of Pacific Crossing Ltd. and its subsidiaries and by a
security interest in its assets. As of June 30, 2000 and December 31, 1999,
Pacific Crossing Ltd. had an outstanding balance of $750.0 million under the
Credit Facility ($200.0 million at December 31, 1998). No amounts have been
repaid to the lenders.
Pacific Crossing Ltd. obtained a $104.0 million loan from CIBC to fund
construction before the Pacific Crossing-1 Credit Facility was in place. This
loan was repaid during 1998 with funds borrowed under the Pacific Crossing-1
Credit Facility.
Under the Pacific Crossing-1 Credit Facility, Pacific Crossing Ltd. may
select loan arrangements as either a Eurodollar loan or an Alternative Base Rate
("ABR") loan. The Eurodollar interest rate is LIBOR plus 2.25-2.50% and the ABR
interest rate is the greater of (a) the Prime Rate and (b) the Federal Funds
Effective Rate plus 0.5%, plus 1.25-1.50%. As of June 30, 2000 and December 31,
1999 and 1998 all outstanding loans were Eurodollar loans. The Pacific
Crossing-1 Credit Facility contains various covenants that (i) limit further
indebtedness by Pacific Crossing Ltd. and its subsidiaries, (ii) limit the
ability of Pacific Crossing Ltd. to pay dividends, (iii) require Pacific
Crossing Ltd. to meet certain minimum capacity sales levels and (iv) require
Pacific Crossing Ltd. to meet a minimum interest coverage ratio for the years
2001 through to the maturity of the Pacific Crossing-1 Credit Facility. The
Pacific Crossing-1 Credit Facility is repayable in ten semi-annual installments
("Mandatory Repayments"), commencing 135 days after the System is ready for
service.
Effective October 30, 1998, Pacific Crossing Ltd. entered into two interest
rate swap transactions based on one month LIBOR to minimize its exposure to
increases in interest rates on its borrowings. The swap transactions fix Pacific
Crossing Ltd.'s floating interest rate at 4.985% on a notional amount of
borrowings ranging between $200.0 million and $500.0 million until January 31,
2004.
F-32
<PAGE> 144
PACIFIC CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The expected maturities of long term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------ (IN THOUSANDS)
<S> <C>
2000................................................ $ --
2001................................................ 83,260
2002................................................ 93,260
2003................................................ 113,260
2004................................................ 118,260
Thereafter.......................................... 341,960
--------
Total............................................ $750,000
========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
As of December 31, 1999, Pacific Crossing Ltd. was committed under
contracts with TSSL for remaining construction costs of Pacific Crossing-1
totaling approximately $240.0 million. At June 30, 2000, the remaining
commitment amount was $4.9 million.
The following amounts are payable to Global Crossing Network Center, Ltd.
("GCNC") under an OA&M agreement (see Note 8):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------ (IN THOUSANDS)
<S> <C>
2000................................................ $ 43,000
2001................................................ 43,000
2002................................................ 42,200
</TABLE>
These fees will increase by 3.0% each year starting in the year ended
December 31, 2003, through the end of the agreement in 2007.
Under an additional OA&M agreement, Pacific Crossing Ltd. is committed to
paying Global Access Ltd. $5.8 million each year through 2002, increasing by
3.0% thereafter through 2007 (see Note 8).
6. TAXES
The Company accounts for income taxes in accordance with Statement of
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
Bermuda does not impose a statutory income tax and consequently no
provision for income taxes was recorded for any entities incorporated in
Bermuda. Income tax provision benefits recorded for losses incurred by certain
subsidiaries of the Company which are located in jurisdictions which impose
income taxes were offset by the establishment of valuation allowances in
accordance with SFAS 109.
7. FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, restricted cash and
cash equivalents, accounts receivable, accrued construction costs, accounts
payable and accrued liabilities, accrued interest, obligations under capital
leases and long term debt approximate their fair value. At June 30, 2000, the
fair value of the interest rate swap is $27.9 million and is based on market
quotes.
8. RELATED PARTY TRANSACTIONS
Shareholders Agreement
The Partners have entered into a shareholders agreement that details, among
other things the composition of the Company's board of directors; actions
requiring the supermajority consent of the board of directors; actions requiring
the supermajority consent of the Company's shareholders; shareholder rights to
subscribe for new capital; restrictions on the transfer of shares of the
Company's common stock; the consequences of a deadlock over the annual budget;
and exit rights of SCS (Bermuda).
F-33
<PAGE> 145
PACIFIC CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue
All sales of capacity and related OA&M revenue on Pacific Crossing-1 are
with affiliates at prices determined by the respective joint venture owners.
Prices are reviewed and adjusted periodically based on market conditions.
Financial Services Agreement
During 1998, Pacific Crossing Ltd. entered into a Financial Services
Agreement with Global Crossing Development Corporation, an indirect wholly owned
subsidiary of Global Access Ltd., to arrange the Pacific Crossing-1 Credit
Facility. As consideration, Global Crossing Development Corporation received a
fee in the amount of 1.5% of the $850.0 million Pacific Crossing-1 Credit
Facility or $12.8 million. This amount has been recorded as deferred finance
costs and is being amortized over the term of the Pacific Crossing-1 Credit
Facility. In a further agreement between Global Crossing Development Corporation
and Marubeni Pacific Cable Limited, Marubeni Pacific Cable Limited received from
Global Crossing Development Corporation 33.3% of the $12.8 million or $4.3
million for their participation in arranging the Pacific Crossing-1 Credit
Facility.
Contribution of Pacific Crossing-1
Prior to January 21, 1998, Pacific Capital Group, Inc. and its affiliates,
a significant shareholder of Global Access Ltd., began development of Pacific
Crossing-1 and two other fiber optic cable systems. Through January 21, 1998,
such development included assembling a management team, negotiating with
potential suppliers, partners, financing sources, obtaining preliminary market
and feasibility studies and developing technical requirements. During January
1998, Global Access Ltd.'s Board determined that it was in its best interests to
pursue these new systems, obtain the results of the work and the employees then
within the scope of activity of Pacific Capital Group, Inc. and broaden the
goals, objectives and business plan of Global Crossing Ltd. In consideration of
Pacific Capital Group, Inc. transferring the results of its activities and
becoming limited in its future activities in fiber optic telecommunications
other than through Global Access Ltd., Global Access Ltd.'s Board approved and
their shareholders subsequently ratified a transaction whereby Pacific Capital
Group, Inc. received certain cash reimbursements and entered into a warrant
agreement ("Pacific Capital Group, Inc. Warrants") under which Pacific Capital
Group, Inc. was granted warrants for Global Access Ltd.'s common stock in
exchange for the rights to continue the development of Pacific Crossing-1 and
the two other fiber optic cable systems. Global Crossing Ltd. subsequently
contributed these development rights applicable to Pacific Crossing-1 to GCT
Pacific Holdings Ltd. Such costs have not been reflected in the financial
statements of Pacific Crossing Ltd. The value attributed to Pacific Crossing-1
was determined by allocating the value of the Pacific Capital Group, Inc.
Warrants on a pro rata basis based on the estimated cost of each system.
Management Services
Certain affiliated companies, which are indirect wholly-owned subsidiaries
of Global Crossing Ltd., provide Pacific Crossing Ltd. with marketing,
management and administrative services in respect of the development,
implementation and operations of Pacific Crossing Ltd. For the year ended
December 31, 1999 approximately $4.0 million of marketing, management and
administrative services fees were recorded as an expense by Pacific Crossing
Ltd. In addition, $2.5 million was charged by Global Crossing Ltd. and recorded
by as expense by Pacific Crossing Ltd. related to legal and professional fees
pertaining to legal and advocacy issues before governmental authorities. For the
six months ended June 30, 2000, $318,000 and $500,000 were charged by Global
Crossing Ltd. and Asia Global Crossing Holdings Ltd. respectively, for general
corporate services. Had the company provided these management services on a
stand alone basis, there could be no assurance that these fees would be the
same.
F-34
<PAGE> 146
PACIFIC CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maintenance Agreements
The Company has entered into OA&M agreements with GCNC (a subsidiary of
Global Crossing Ltd.) and Global Access Ltd. (an affiliate of Global Crossing
Ltd.) whereby GCNC and Global Access Ltd. are obligated to provide operating,
administration and maintenance functions for Pacific Crossing-1. The OA&M
agreement with GCNC is for an initial term of eight years with two renewal
periods of five years each at the Company's option. The OA&M agreement with
Global Access Ltd. is for an initial term of eight years with two renewal
periods of eight and one-half years each at the Company's option. The OA&M costs
related to this agreement are expensed as incurred. Pacific Crossing Ltd.
recorded expense of $3.0 million for the six months ended June 30, 2000 under
the agreement with Global Access Ltd. No expense was incurred under the
agreement with Global Access Ltd. in 1999 or 1998. Pacific Crossing Ltd.
incurred and recorded expense of $21.5 million and $8.0 million in connection
with the GCNC agreement for the six months ended June 30, 2000 and for the year
ended December 31, 1999, respectively. No expense was incurred under this
agreement in 1998.
Loan Facility
During 1999, the Company entered into a loan facility with Global Crossing
Holdings Ltd. for approximately $9.0 million. The interest rate of the loan is
LIBOR plus 2.0%. The principal plus the accrued interest is included in loan
payable to affiliate in the consolidated balance sheet. The outstanding
principal plus accrued interest is due one year after the Pacific Crossing-1
Credit Facility is paid in full.
Other Transactions
In 1998, an affiliate of CIBC, a major shareholder of Global Crossing Ltd.,
was a member of the Pacific Crossing-1 Credit Facility syndicate and was paid
$5.8 million in fees during the period from May 4, 1998 (Date of Inception) to
December 31, 1998 relating to the Pacific Crossing-1 Credit Facility. This
amount is included in deferred finance costs in the accompanying consolidated
balance sheet.
9. GEOGRAPHIC SEGMENTATION
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30, 2000(2) DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------- ------------------------- -------------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUE(1) ASSETS(2) REVENUE(1) ASSETS(2) REVENUE ASSETS(2)
----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
United States.......... $ 77,450 $ 139,744 $61,100 $ 115,620 $ -- $ 29,367
Japan.................. 23,300 128,203 -- 127,990 -- 22,007
United Kingdom......... 6,800 -- -- -- -- --
International Waters... -- 808,834 -- 767,120 -- 141,840
-------- ---------- ------- ---------- ------- ----------
Consolidated........... $107,550 $1,076,781 $61,100 $1,010,730 $ -- $ 193,214
======== ========== ======= ========== ======= ==========
</TABLE>
---------------
(1) Revenue is classified according to the primary point of presence of the end
customer.
(2) Long-lived assets include capacity available for sale and construction in
progress.
F-35
<PAGE> 147
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
COMBINED BALANCE SHEET
(IN THOUSANDS OF HONG KONG DOLLARS)
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Current assets:
Cash at bank............................................. $ 168,990 $ 256
Trade accounts receivable................................ 40,398 34,464
Due from affiliates...................................... 85,700 59,155
Other assets and prepaid costs........................... 60,490 38,343
---------- ----------
Total current assets............................. 355,578 132,218
Deferred expenditure....................................... -- 567,199
Prepaid capacity and services.............................. 2,746,928 --
Property, plant and equipment.............................. 2,867,500 2,478,444
---------- ----------
Total assets..................................... $5,970,006 $3,177,861
========== ==========
LIABILITIES:
Current liabilities:
Bank overdrafts.......................................... $ 4,576 2,483
Accounts payable and accrued liabilities................. 386,264 $ 315,049
Deferred income.......................................... 37,823 44,311
Due to affiliates........................................ 21,806 4,860
---------- ----------
Total current liabilities........................ 450,469 366,703
Long term loans from shareholders.......................... 262,279 3,377,949
Long term loans from external parties...................... 27,428 --
---------- ----------
Total liabilities................................ 740,176 3,744,652
---------- ----------
OWNERS' SURPLUS:
Share capital, 320 shares of US$1, authorized, issued and
fully paid............................................... 2 --
Share premium.............................................. 6,436,827 --
Accumulated deficit........................................ (1,206,999) (566,791)
---------- ----------
Total owners' surplus............................ 5,299,830 (566,791)
---------- ----------
Total liabilities and owners' surplus............ $5,970,006 $3,177,861
========== ==========
</TABLE>
See accompanying notes to condensed combined financial statements
which are an integral part of these statements.
F-36
<PAGE> 148
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF HONG KONG DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
2000 1999
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues.................................................... $465,200 $393,136
Operating expenses:
Cost of services, exclusive of depreciation shown below... 403,495 329,859
Sales, general and administrative......................... 88,925 102,391
Depreciation of property, plant and equipment............. 40,538 27,864
Provision for doubtful accounts........................... 8,002 5,231
-------- --------
Total operating expenses............................... 540,960 465,345
-------- --------
Operating loss.............................................. (75,760) (72,209)
Interest income............................................. 4,858 221
Interest expense............................................ (2,105) (23,437)
-------- --------
Net loss before tax.................................... (73,007) (95,425)
Provision for tax........................................... -- --
-------- --------
Net loss............................................... $(73,007) $(95,425)
======== ========
</TABLE>
See accompanying notes to condensed combined financial statements
which are an integral part of these statements.
F-37
<PAGE> 149
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF HONG KONG DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
NOTES 2000 1999
----- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net cash outflow from operating activities................ (a) $ (23,893) $ (59,838)
--- --------- ---------
Returns on investments and servicing of finance
Interest received....................................... 4,858 221
Interest paid........................................... (2,105) (23,437)
--------- ---------
Net cash inflow/(outflow) from returns on investments and
servicing of finance.................................... 2,753 (23,216)
--------- ---------
Investing activities
Purchase of fixed assets................................ (413,878) (372,548)
Purchase of prepaid capacity............................ (24,628) --
Proceeds on disposals of fixed assets................... -- 298
--------- ---------
Net cash outflow from investing activities................ (438,506) (372,250)
--------- ---------
Net cash outflow before financing activities.............. (459,646) (455,304)
Financing activities (b)
Long term loans borrowed from shareholders/affiliates... 262,105 454,756
Repayment of long term loans to a shareholder........... (52,146) --
Consideration received for issuance of 10 shares........ 388,900 --
Long term loans borrowed from external parties.......... 27,428 --
--------- ---------
Net cash inflow from financing activities................. 626,287 454,756
--------- ---------
Increase/(decrease) in cash and cash equivalents.......... 166,641 (548)
Cash and cash equivalents at beginning of period.......... (2,227) 328
--------- ---------
Cash and cash equivalents at end of period................ $ 164,414 $ (220)
========= =========
Analysis of the balances of cash and cash equivalents:
Bank balances........................................... $ 168,990 $ 202
Bank overdrafts......................................... (4,576) (422)
--------- ---------
$ 164,414 $ (220)
========= =========
</TABLE>
See accompanying notes to condensed combined financial statements
which are an integral part of these statements.
F-38
<PAGE> 150
HUTCHISON GLOBAL CROSSING 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 loss before tax to net cash outflow from operating
activities.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
2000 1999
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net loss before tax......................................... $(73,007) $(95,425)
Depreciation of property, plant and equipment............... 40,538 27,864
Loss on disposal of property, plant and equipment........... -- 3
Interest income............................................. (4,858) (221)
Interest expense............................................ 2,105 23,437
(Increase)/decrease in trade accounts receivable............ (5,934) 3,245
Increase in due from affiliates............................. (26,545) (13,013)
Increase in other assets and prepaid costs.................. (22,147) (41,358)
Increase in accounts payable and accrued liabilities........ 55,497 1,709
(Decrease)/Increase in deferred income...................... (6,488) 31,895
Increase in due to affiliates............................... 16,946 2,026
-------- --------
Net cash outflow from operating activities.................. $(23,893) $(59,838)
======== ========
</TABLE>
(b) Analysis of changes in financing during the period
<TABLE>
<CAPTION>
LONG TERM LOANS LONG TERM LOANS
FROM SHAREHOLDERS/ FROM EXTERNAL SHARE
AFFILIATES PARTIES PREMIUM
------------------ --------------- ----------
<S> <C> <C> <C>
At January 1, 2000...........................
Cash inflow/(outflow) from financing....... $ 3,377,949 $ -- $ --
Raising of new loans....................... 262,105 27,428 388,900
Repayment of loans......................... (52,146) -- --
Non-cash transactions:
Issue of 239 shares in consideration for
the capitalization of long term loan.... (3,325,629) -- 3,325,627
Issue of 70 shares in return for prepaid
capacity and services................... -- -- 2,722,300
----------- -------- ----------
At June 30, 2000............................. $ 262,279 $ 27,428 $6,436,827
=========== ======== ==========
At January 1, 1999........................... $ 2,302,074 $ -- $ --
Cash inflow from financing................. 454,756 -- --
----------- -------- ----------
At June 30, 1999............................. $ 2,756,830 $ -- $ --
=========== ======== ==========
</TABLE>
F-39
<PAGE> 151
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(THROUGHOUT THESE NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS, REFERENCES
TO "$"
ARE TO THOUSANDS OF HONG KONG DOLLARS UNLESS OTHERWISE SPECIFIED)
1. BUSINESS, ORGANIZATION AND BASIS OF PREPARATION
Hutchison Global Crossing Holdings Limited (a company incorporated in BVI
on September 12, 1992) 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"). At December 31, 1999, the
Company was a wholly owned subsidiary of, and was controlled by, Hutchison
Whampoa Limited, a company incorporated in Hong Kong and listed on The Stock
Exchange of Hong Kong Limited. Pursuant to an agreement entered into on November
15, 1999 ("the Agreement"), which closed on January 12, 2000 between the
Company, its holding company Hutchison Telecommunications Limited, Hutchison
Whampoa Limited, and Global Crossing Ltd. ("Global Crossing"), a company
incorporated in Bermuda and listed on NASDAQ, from January 12, 2000 onwards the
Company is a 50:50 joint venture between Hutchison Whampoa Limited and Global
Crossing.
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 indicated to the HKSAR Government that it will invest a
total of not less than $2 billion capital expenditures 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 the Agreement, 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) With effect from November 1, 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 the Company, 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 $1,705,220
which corresponded to the net liabilities of the Excluded Business. The
operations, assets and liabilities of the Excluded Business have not
been included in these condensed combined financial statements on the
basis that this business was operated as a separate division with
dedicated management.
F-40
<PAGE> 152
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(2) On November 24, 1999, 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 $2,195,361 consideration. This
consideration was satisfied by the transfer of capital and assumption of
a loan payable by HCLNP to its former partners, which are companies
under the common control of Hutchison Whampoa Limited, and has been
capitalized as described in note 1(b) below.
The operations, assets and liabilities of HCLNP have been included
in the condensed combined financial statements in a manner similar to a
pooling of interests. For the period up to November 24, 1999, the
taxable losses of HCLNP were utilized by its former partners for nil
consideration and are not available for use by the Company.
(b) In connection with the Reorganization, the Company's long term
loan from the immediate holding company amounting to $3,325,629 was
capitalized on January 12, 2000 through the issue of 239 new shares in the
Company with a par value of US$1 each, to Hutchison Telecommunications
Limited. The share premium arising on this share issue was $3,325,627.
(c) Upon closure of the Agreement on January 12, 2000, Global Crossing
acquired 80 shares in the Company from Hutchison Telecommunications Limited
and directly provided to Hutchison Whampoa Limited US$400 million in Global
Crossing convertible preferred stock. Additionally the Company has issued
80 shares with a par value of US$1 each, to Global Crossing in return for
consideration of $3,111,200 (US$400 million), which was settled by cash of
$388,900 (US$50 million) and $2,722,300 (US$350 million) worth of rights to
use Global Crossing's international capacity and technology and commercial
expertise in relation to the connection, operation and marketing of a media
distribution centre in Hong Kong. The share premium arising on this share
issue was $3,111,200.
The Company had a net loss of $73,007 and $95,425 for the six months ended
June 30, 2000 and 1999 respectively and at June 30, 2000, the Company had net
current liabilities of $94,891 and significant capital expenditure commitments
as set out in note 4(a). The Company has entered into loan agreement with the
Company's shareholders to obtain loan facilities amounting to $610,000 of which
at 30 June 2000 the Company has drawn down amounts totalling $260,000. The
Company will continue to review the availability of alternative sources of
finance so as to enable it to meet its liabilities as they fall due and to
continue in business for a period of at least twelve months from June 30, 2000.
The Company is reviewing alternative sources such as an Initial Public Offering
of equity, raising debt either by way of the capital markets and syndicated
loans or from the Company's bankers. Based on informal valuations of the Company
received from the Company's financial advisers and the Company's shareholders'
history of raising finance, the Company expects a successful outcome will result
from this review and, on that basis, the Company will be able to continue in
business for a period of at least twelve months from June 30, 2000. Consequently
the condensed combined financial statements have been prepared on a going
concern basis.
2. SIGNIFICANT ACCOUNTING POLICIES
The condensed combined financial statements included herein were prepared
by management and reflect all adjustments (consisting solely of normal recurring
items) which are, in the opinion of management, necessary to present a fair
view. The results for the six months ended June 30, 2000 are not necessarily
indicative of the results expected for the year.
F-41
<PAGE> 153
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
These condensed combined 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. These
significant accounting policies are consistent with those set out in the
Company's combined financial statements for the year ended December 31, 1999
except that the Company has changed its accounting policy for deferred
expenditures as set out in note 2(b) below. The significant accounting policies
are summarized as follows.
(a) Basis of combination
The condensed combined financial statements include the accounts of
Hutchison Global Crossing Holdings 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
Effective January 1, 2000, the Company has changed its accounting policy
for deferred expenditures representing the pre-operating expenses, including
interest costs, of international services, local fixed network services and
multimedia services. Prior to January 1, 2000 pre-operating expenses were
capitalized and amortized over 10 years from the date of full commercial
operations of each business line. Effective January 1, 2000, pre-operating
expenditures are treated as having been expensed as incurred. As all of the
Company's businesses had commenced full commercial operations on or before
January 1, 1999, no deferred expenditures were capitalized for the six months
ended June 30, 2000 and 1999. The adjustment has been recorded retrospectively
and the expenditures previously deferred have been eliminated retrospectively
with the statement of operations for the three months ended June 30, 1999 being
adjusted.
(c) 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.
(d) Prepaid capacity and services
Prepaid capacity and services totalling $2,722,300 have been recorded at
the valuation based on the amounts agreed between the parties to the Agreement
as set out in note 1. The Company has not begun to charge these prepaid capacity
and services to the profit and loss account as they have not yet been
contributed by the shareholder.
(e) 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 expenditures 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
F-42
<PAGE> 154
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Customer access network is depreciated at rates of 4% to 15% per annum on
either a straight-line basis, or a proportionate straight-line basis taking into
account the number of subscribers compared to the forecasted number of
subscribers.
Exchange equipment is depreciated at rates of 6.67% per annum on either a
straight-line basis, or a proportionate straight-line basis taking into account
the number of subscribers compared to the forecasted number of subscribers.
Transmission, plant and site equipment is depreciated at rates of 4% to 20%
per annum on either a straight-line basis, or a proportionate straight-line
basis taking into account the number of subscribers compared to the forecast
number of subscribers.
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:
<TABLE>
<S> <C>
Computer equipment.......................................... 20%
Motor vehicles.............................................. 25%
Office furniture and equipment.............................. 15%
</TABLE>
Maintenance costs are expensed as incurred.
(f) Cash and cash equivalents
The Company considers cash at bank and bank overdrafts to be cash
equivalents.
(g) 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.
(h) Interest costs
Interest costs 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 are capitalized. Other interest costs are expensed in the statement
of operations as incurred.
(i) Advertising and promotion costs
Advertising and promotion costs are expensed as incurred. Advertising and
promotion costs amounted to $43,936 and $35,413 for each of the six months ended
June 30, 2000 and 1999 respectively.
(j) 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
F-43
<PAGE> 155
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 $5,848
and $4,750 for each of the six months ended June 30, 2000 and 1999 respectively.
(k) 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.
(l) Deferred income
Subscription income and income billed in advance are deferred and credited
to the statement of operations on a straight-line basis over the related period.
(m) 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.
(n) 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.
(o) Incentive payments
Incentive payments to customers in respect of operating leases are deferred
and amortized based on the terms of the respective lease agreements.
3. RELATED PARTY TRANSACTIONS
The Company undertook the following transactions with related parties:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
------- --------
<S> <C> <C>
Fees to affiliates for the provision of management and
treasury services (Note a)................................ $10,842 $ 17,212
------- --------
Fees to an affiliate for the provision of operating
facilities (Note b)....................................... 31,412 134,363
------- --------
Interest payable to affiliates ............................. 2,105 23,437
------- --------
Interest income receivable from a related company........... -- 172
------- --------
Shareholders loans (Note d)
Facilities................................................ 610,000 --
Amounts drawn down........................................ 260,000 --
</TABLE>
F-44
<PAGE> 156
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(a) Certain operating expenses of the Company are charged by affiliates for
providing management and treasury services on a cost reimbursement basis.
Following the Reorganisation, a similar arrangement is in place for a period of
time under a service agreement.
(b) Certain operating expenses of the Company are charged by an affiliate
for providing operating facilities on a cost reimbursement basis. Following the
Reorganisation, a similar arrangement is in place for a period of time under a
service agreement.
(c) An affiliate under the common control of Hutchison Whampoa Limited has
issued guarantees and counter indemnities in respect of facilities amounting to
$100,000 extended to the Company. The guarantee line facilities utilized by the
Company as of June 30, 2000 were $36,816. The Company is not charged for these
guarantees.
(d) In May 2000, the Company obtained loan facilities with shareholders or
affiliates under the common control of the shareholders. The shareholder loans
bear interest at Hongkong Interbank Offer Rate ("HIBOR"), the average rate of
which was approximately 6.8% during the period ended June 30, 2000 and the
Company is obligated to repay the loans with the amount by which any proceeds
received by the Company from third party financings or from a public offering
exceed the Company's then current capital and operating expenditure
requirements. These facilities and the amounts drawn down are pro-rata to the
respective shareholding of Hutchison Whampoa Limited and Global Crossing in the
Company.
During the period ended 30 June 1999, the Company had long term loans
payable to affiliates under the common control of Hutchison Whampoa Limited.
These loans, $2,577,161 of which was capitalised on January 12, 2000 comprised
balances of $711,282 and $179,669 bearing interest at HIBOR and HIBOR less 0.25%
respectively and a balance of $1,865,879 which was interest-free.
4. COMMITMENTS AND CONTINGENCIES
(a) The Company is committed under its contracts to purchase property plant
and equipment amounting to approximately $1,282,728 and $818,624 as of June 30,
2000 and 1999, respectively.
(b) 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 totalling
approximately $19,000 as of June 30, 2000.
(ii) Third party network operators in relation to the construction of
exchanges for approximately $5,496 as of June 30, 2000.
(iii) The Government of the HKSAR in respect of installation of the ESD
system amounting to approximately $12,320 of which 15% will be
counter-indemnified by Compaq Computer Limited.
5. SUMMARY OF DIFFERENCES BETWEEN HKGAAP AND USGAAP
(a) The Company's condensed 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
F-45
<PAGE> 157
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
differences in accounting principles as they pertain to the accompanying
condensed combined financial statements were immaterial except as described
below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
NOTE 2000 1999
---- ------------ ----------
<S> <C> <C> <C>
Net loss under HKGAAP.................................... $ (73,007) $ (95,425)
USGAAP adjustments:
Capitalized interest................................... (i) 692 692
General provisions..................................... (ii) (22,845) 831
Depreciation........................................... (iii) (35,673) (20,040)
----------- ---------
Net loss under USGAAP.................................... $ (130,833) $(113,942)
=========== =========
Total owners' surplus under HKGAAP....................... $ 5,229,830
USGAAP adjustments:
Capitalized interest................................... (i) (11,765)
General provisions..................................... (ii) 19,990
Depreciation........................................... (iii) (124,659)
Prepaid capacity and services.......................... (iv) (2,722,300)
Deferred tax asset under USGAAP........................ (v) 330,083
Deferred tax liability under USGAAP.................... (v) (276,845)
Valuation allowance.................................... (v) (53,328)
-----------
Total owners' surplus under USGAAP....................... $ 2,391,096
===========
</TABLE>
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 part of 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>
SIX MONTHS ENDED JUNE 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net cash (used)/provided by:
Operating activities..................................... $ (21,140) $ (83,054)
Investing activities..................................... (438,506) (372,250)
Financing activities..................................... 628,380 455,178
--------- ---------
Increase/(decrease) in cash and cash equivalents......... 168,734 (126)
Cash and cash equivalents at beginning of period......... 256 328
--------- ---------
Cash and cash equivalents at end of period............... $ 168,990 $ 202
========= =========
</TABLE>
F-46
<PAGE> 158
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(i) Capitalized interest
Under HKGAAP, the Company has capitalized certain interest costs incurred
during the period from the date the assets were available for use until the date
of full commercial operations.
Under USGAAP, the interest would not qualify for capitalization in
property, plant and equipment.
(ii) 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.
(iii) 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.
(iv) Prepaid capacity and services
Prepaid capacity and services of $2,722,300 is to be contributed by one of
the Company's shareholders in return for shares issued by the Company on January
12, 2000. Under HKGAAP this non-cash consideration contributed in return for
shares issued has been recorded based on the valuation with reference to the
Agreement, and is recognised immediately on the issue of the shares. Under
USGAAP this non-cash consideration will be recorded when received and the
prepaid capacity and services will be capitalized and amortized or expensed to
the statement of Operations, depending on the assets or services received and
the requirements of USGAAP. Accordingly since the Company did not have the use
of the prepaid capacity and services, prior to March 31, 2000 no capital
contribution has been recorded in the condensed combined financial statements as
of June 30, 2000.
(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 assets
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 control of Hutchison Whampoa Limited. Financial liabilities of the Company
include bank overdrafts, accounts payable, accrued expenses,
F-47
<PAGE> 159
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
amounts due to affiliates under the control of Hutchison Whampoa Limited and
long term loans from shareholders as described in note 3(d). The fair value of
all other financial instruments approximate their carrying amounts due to the
nature or short maturity of these instruments.
(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 Hong Kong.
Deposits, prepayments and other receivable -- these are spread among
numerous third parties.
(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 expenditures are 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 is provided for each of the three
operating segments. Depreciation 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.
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. Accordingly, the
information presented below is prepared in accordance with HKGAAP.
F-48
<PAGE> 160
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information by business segment is as follows:
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
OPERATING
REVENUES INCOME/(LOSS) DEPRECIATION
-------- ------------- -------------
<S> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 2000
International services...................... $240,337 26,737 13,438
Local fixed network services................ 193,119 (36,652) 23,239
Multimedia services......................... 31,744 (51,066) 3,736
ESD services................................ -- (14,779) 125
-------- -------- -------
$465,200 $(75,760) $40,538
======== ======== =======
SIX MONTHS ENDED JUNE 30, 1999
International services...................... $285,119 36,276 13,500
Local fixed network services................ 98,776 (70,794) 13,372
Multimedia services......................... 9,241 (37,691) 992
-------- -------- -------
$393,136 $(72,209) $27,864
======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
IDENTIFIABLE CAPITAL
ASSETS EXPENDITURE
------------ -----------
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 2000
International services and local fixed network services.... $5,892,333 $391,138
Multimedia services........................................ 60,331 21,049
ESD Services............................................... 17,342 17,048
---------- --------
$5,970,006 $429,595
========== ========
SIX MONTHS ENDED JUNE 30, 1999
International services and local fixed network services.... $333,297
Multimedia services........................................ 6,129
--------
$339,426
========
</TABLE>
Reconciliation of segment operating loss to net loss before tax
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Operating loss............................................. $ (75,760) $ (72,209)
Interest income............................................ 4,858 221
Interest expense........................................... (2,105) (23,437)
--------- ---------
Net loss before tax under HKGAAP........................... (73,007) (95,425)
Effect of USGAAP adjustments:.............................. (57,826) (18,517)
--------- ---------
Net loss under USGAAP...................................... $(130,833) $(113,942)
========= =========
</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.
F-49
<PAGE> 161
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Recently adopted and new accounting standard in USGAAP.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 137 "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of SFAS No. 133", 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 the condensed combined financial statements.
(e) Operating lease commitments
Under HKGAAP, commitments under operating leases represent payments in the
next twelve months under non cancellable 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-cancellable operating leases with lease terms in excess of one
year as follows:-
<TABLE>
<S> <C>
For the six months ending December 31, 2000.............. $ 13,223
2001..................................................... 28,383
2002..................................................... 15,007
2003..................................................... 7,946
2004..................................................... 6,788
Thereafter............................................... 35,361
--------
$106,708
========
</TABLE>
F-50
<PAGE> 162
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Hutchison Global Crossing Holdings Limited
(formerly known as HCL Holdings Limited)
We have audited the accompanying combined balance sheets of Hutchison
Global Crossing Holdings Limited and its subsidiaries (the "Company") as of
December 31, 1999, 1998 and 1997 and the related combined statement of
operations, owner's deficit and cash flows for each of the three years ended
December 31, 1999, 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, 1999, 1998 and 1997 and the combined results of their
operations, owner's deficit and cash flows for each of the three years ended
December 31, 1999 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, 1999, 1998 and 1997 and the determination of owner's deficit and combined
financial position also expressed in Hong Kong Dollars at December 31, 1999,
1998 and 1997 to the extent summarized in Note 19 to the combined financial
statements.
PRICEWATERHOUSECOOPERS
Certified Public Accountants
Hong Kong
April 15, 2000
F-51
<PAGE> 163
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
COMBINED BALANCE SHEETS
(IN THOUSANDS OF HONG KONG DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
NOTE 1999 1998 1997
---- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash at bank................................ $ 256 $ 328 $ 20,774
Trade accounts receivable................. 6 34,464 40,379 96,182
Due from affiliates....................... 7 59,155 14,724 188,217
Other assets and prepaid costs............ 38,343 15,296 16,257
---------- ---------- ----------
Total current assets.............. 132,218 70,727 321,430
Deferred expenditure........................ 4 567,199 632,849 398,801
Property, plant and equipment............... 5 2,478,444 1,678,015 889,740
---------- ---------- ----------
Total assets...................... $3,177,861 $2,381,591 $1,609,971
========== ========== ==========
LIABILITIES:
Current liabilities:
Bank overdraft............................ $ 2,483 $ -- $ 1,556
Accounts payable and accrued
liabilities............................ 8 315,049 294,568 365,788
Deferred income........................... 44,311 7,340 6,387
Short term loan from the Excluded
Business............................... 9 -- 154,567 220,538
Due to affiliates......................... 10 4,860 68,088 100
---------- ---------- ----------
Total current liabilities......... 366,703 524,563 594,369
Long term loan from an affiliate............ 11 -- 629,682 471,482
Long term loan from HCLNP's former
partners.................................. 12 174 1,517,825 840,827
Long term loan from immediate holding
company................................... 13 3,377,775 -- --
---------- ---------- ----------
Total liabilities................. $3,744,652 $2,672,070 $1,906,678
========== ========== ==========
OWNER'S DEFICIT:
Share capital, one share of US$1,
authorized, issued and fully paid......... 14 $ -- $ -- $ --
Accumulated deficit......................... (566,791) (290,479) (296,707)
---------- ---------- ----------
Total owner's deficit............. (566,791) (290,479) (296,707)
---------- ---------- ----------
Total liabilities and owner's
deficit......................... $3,177,861 $2,381,591 $1,609,971
========== ========== ==========
</TABLE>
See accompanying notes to the combined financial statements
which are an integral part of these statements.
F-52
<PAGE> 164
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF HONG KONG DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues......................................... $ 840,512 $ 950,120 $1,262,106
Operating expenses:
Cost of services, exclusive of depreciation and
amortization shown below.................... 726,948 937,639 1,377,444
Sales, general and administrative.............. 210,678 163,216 169,205
Amortization of deferred expenditure........... 65,650 7,884 7,884
Depreciation of property, plant and
equipment................................... 59,369 27,018 22,260
Provision for doubtful accounts................ 12,808 8,478 14,017
---------- ---------- ----------
Total operating expenses......................... 1,075,453 1,144,235 1,590,810
---------- ---------- ----------
Operating loss......................... (234,941) (194,115) (328,704)
Other income (expense):
Interest income................................ 779 504 658
Interest expense............................... (47,343) (52,837) (37,634)
Expenditure deferred during the year........... -- 241,932 199,278
Interest expense capitalized in property, plant
and equipment............................... -- 10,744 3,098
Long term loan waived by immediate holding
company..................................... 5,193 -- --
---------- ---------- ----------
Net (loss)/profit before tax........... (276,312) 6,228 (163,304)
Provision for tax................................ -- -- --
---------- ---------- ----------
Net (loss)/profit...................... $ (276,312) $ 6,228 $ (163,304)
========== ========== ==========
</TABLE>
See accompanying notes to the combined financial statements
which are an integral part of these statements.
F-53
<PAGE> 165
HUTCHISON GLOBAL CROSSING 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, 1997....................... $(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)
Net loss from combined statement of operations............ (276,312)
---------
Owner's deficit as of December 31, 1999..................... $(566,791)
=========
</TABLE>
See accompanying notes to the combined financial statements
which are an integral part of these statements.
F-54
<PAGE> 166
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF HONG KONG DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
NOTE 1999 1998 1997
---- ----------- --------- ---------
<S> <C> <C> <C> <C>
Net cash (outflow)/inflow from operating
activities................................ (a) $ (159,585) $ 244,952 $ 24,527
----------- --------- ---------
Returns on investments and servicing of
finance
Interest received......................... 779 504 658
Interest paid (including amounts
capitalized)........................... (47,343) (52,837) (37,634)
----------- --------- ---------
Net cash outflow from returns on investments
and servicing of finance.................. (46,564) (52,333) (36,976)
----------- --------- ---------
Investing activities
Payment for deferred expenditure.......... -- (224,549) (187,915)
Purchase of fixed assets.................. (887,738) (759,401) (541,878)
Proceeds on disposals of fixed assets..... 15,457 3,214 72
----------- --------- ---------
Net cash outflow from investing
activities................................ (872,281) (980,736) (729,721)
----------- --------- ---------
Net cash outflow before financing........... (1,078,430) (788,117) (742,170)
----------- --------- ---------
Financing................................... (b)
(Repayment of)/proceeds from short term
loans from the Excluded Business....... (154,567) (65,971) 113,899
Long term loan (repaid to)/borrowed from
an affiliate........................... (629,682) 158,200 56,733
Long term loan (repaid to)/borrowed from
HCLNP's former partners................ (1,517,651) 676,998 589,146
Long term loan borrowed from immediate
holding company........................ 3,377,775 -- --
----------- --------- ---------
Net cash inflow from financing.............. 1,075,875 769,227 759,778
----------- --------- ---------
(Decrease)/increase in cash and cash
equivalents............................... (2,555) (18,890) 17,608
Cash and cash equivalents at beginning of
year...................................... 328 19,218 1,610
----------- --------- ---------
Cash and cash equivalents at end of year.... $ (2,227) $ 328 $ 19,218
=========== ========= =========
Analysis of the balances of cash and cash
equivalents:
Bank balances............................. $ 256 $ 328 $ 20,774
Bank overdraft............................ (2,483) -- (1,556)
----------- --------- ---------
$ (2,227) $ 328 $ 19,218
=========== ========= =========
</TABLE>
See accompanying notes to the combined financial statements
which are an integral part of these statements.
F-55
<PAGE> 167
HUTCHISON GLOBAL CROSSING 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
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net (loss)/profit before tax......................... $(276,312) $ 6,228 $(163,304)
Amortization of deferred expenditure................. 65,650 7,884 7,884
Depreciation of property, plant and equipment........ 59,369 27,018 22,260
Loss/(gain) on disposals of property, plant and
equipment.......................................... 710 (549) (40)
Interest income...................................... (779) (504) (658)
Interest expense..................................... 47,343 24,710 23,173
Decrease in trade accounts receivable........... 5,915 55,803 12,388
(Increase)/decrease in due from affiliates...... (44,431) 173,493 (38,365)
(Increase)/decrease in other assets and prepaid
costs......................................... (23,047) 961 (6,956)
Increase/(decrease) in accounts payable and
accrued liabilities........................... 32,254 (119,033) 161,658
Increase/(decrease) in deferred income.......... 36,971 953 6,387
(Decrease) increase in due to affiliates........ (63,228) 67,988 100
--------- --------- ---------
Net cash (outflow)/inflow from operating
activities............................... $(159,585) $ 244,952 $ 24,527
========= ========= =========
</TABLE>
(b) Analysis of changes in financing during the year
<TABLE>
<CAPTION>
LONG TERM LONG TERM
SHORT TERM LOAN FROM LOAN FROM
LOAN FROM THE LONG TERM HCLNP'S IMMEDIATE
EXCLUDED LOAN FROM AN FORMER HOLDING
BUSINESS AFFILIATE PARTNERS COMPANY
------------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
At January 1, 1997................... $ 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 inflows/(outflows) from
financing.......................... (65,971) 158,200 676,998 --
--------- --------- ----------- ----------
At December 31, 1998................. 154,567 629,682 1,517,825 --
Cash inflows/(outflows) from
financing.......................... (154,567) (629,682) (1,517,651) 3,377,775
--------- --------- ----------- ----------
At December 31, 1999................. $ -- $ -- $ 174 $3,377,775
========= ========= =========== ==========
</TABLE>
F-56
<PAGE> 168
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(THROUGHOUT THESE NOTES TO COMBINED FINANCIAL STATEMENTS, REFERENCES TO "$" ARE
TO THOUSANDS OF HONG KONG DOLLARS UNLESS OTHERWISE SPECIFIED)
1. BUSINESS, ORGANIZATION AND BASIS OF PREPARATION
Hutchison Global Crossing Holdings Limited (a company incorporated in BVI
on September 12, 1992) 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"). At December 31, 1999, the
Company was a wholly owned subsidiary of, and was controlled by, Hutchison
Whampoa Limited, a company incorporated in Hong Kong and listed on The Stock
Exchange of Hong Kong Limited. Pursuant to an agreement entered into on November
15, 1999 ("the Agreement"), which closed on January 12, 2000 between the
Company, its holding company Hutchison Telecommunications Limited, Hutchison
Whampoa Limited, and Global Crossing Ltd. ("Global Crossing"), a company
incorporated in Bermuda and listed on NASDAQ, from January 12, 2000 onwards the
Company is a 50:50 joint venture between Hutchison Whampoa Limited and Global
Crossing.
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 indicated to the HKSAR Government that it will invest a
total of not less than $2 billion capital expenditures 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.
Under the Agreement, 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:
(i) With effect from November 1, 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 the Company, 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 $1,705,220
which corresponded to the net liabilities of the Excluded Business. The
operation, assets and liabilities of the Excluded Business, have not
been included in these combined financial statements on the basis that
this business was operated as a separate division with dedicated
management.
F-57
<PAGE> 169
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(ii) On November 24, 1999, 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 $2,195,361
consideration. This consideration was satisfied by the transfer of
capital and assumption of a loan payable by HCLNP to its former
partners, which are companies under the common control of Hutchison
Whampoa Limited, and has been 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 the periods up to November 24, 1999, the taxable losses of
HCLNP were utilized by its former partners for nil consideration and are
not available for use by the Company.
(b) In connection with the Reorganization, the Company's long term
loan from immediate holding company amounting to $3,325,629 was capitalized
on January 12, 2000 through the issue of 239 new shares in the Company to
Hutchison Telecommunications Limited.
(c) Upon closure of the Agreement on January 12, 2000, Global Crossing
acquired 80 shares in the Company from Hutchison Telecommunications Limited
and directly provided to Hutchison Whampoa Limited US$400 million in Global
Crossing convertible preferred stock. Additionally the Company has issued
80 shares to Global Crossing in return for consideration of $3,111,200
(US$400 million), which was settled by cash of $388,900 (US$50 million) and
$2,722,300 (US$350 million) worth of rights to use Global Crossing's
international capacity and technology and commercial expertise in relation
to the connection, operation and marketing of a media distribution center
in Hong Kong.
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 ($276,312), $6,228 and ($163,304)
for the three years ended December 31, 1999, 1998 and 1997 respectively and at
December 31, 1999, the Company had an owner's deficit of $566,791. The Company
was financed by way of intercompany loans from companies under the common
control of Hutchison Whampoa Limited. As set out in note 1(b) the loan from
immediate holding company amounting to $3,325,629 was capitalized through the
issue of new shares on January 12, 2000. The Company is reviewing the
availability of alternative sources of finance so as to enable it to meet its
liabilities as they fall due and to continue in business for a period of at
least twelve months from December 31, 1999. The Company is reviewing alternative
sources such as an Initial Public Offering of equity, raising debt either by way
of the capital markets, syndicated loans or from the Company's bankers, and
access to finance from the Company's shareholders. Based on informal valuations
of the Company received from the Company's financial advisers and the Company's
shareholders' history of raising finance, the Company expects a successful
outcome will result from this review and, on that basis, the Company will be
able to continue in business for a period of at least twelve months from
December 31, 1999. Consequently the Combined Financial Statements have been
prepared on a going concern basis.
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
F-58
<PAGE> 170
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 Hutchison Global
Crossing Holdings 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 expenditures
Deferred expenditures represent 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 expenditures 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.
Customer access network is depreciated at rates of 4% to 15% per annum on
either a straight-line basis, or a proportionate straight-line basis taking into
account the number of subscribers compared to the forecast number of
subscribers.
Exchange equipment is depreciated at rates of 6.67% per annum on either a
straight-line basis, or a proportionate straight line basis taking into account
the number of subscribers compared to the forecast number of subscribers.
Transmission, plant and site equipment is depreciated at rates of 4% to 20%
per annum on either a straight-line basis, or a proportionate straight line
basis taking into account the number of subscribers compared to the forecast
number of subscribers.
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:
<TABLE>
<S> <C>
Computer equipment.......................................... 20%
Motor vehicles.............................................. 25%
Office furniture and equipment.............................. 15%
</TABLE>
Maintenance costs are expensed as incurred.
F-59
<PAGE> 171
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Cash and cash equivalents
The Company considers cash at bank and bank overdrafts 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 costs
Interest costs 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 are capitalized. Other interest costs are 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 $70,256, $36,642 and $33,276 for each of the three
years ended December 31, 1999, 1998 and 1997 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 $8,980,
$12,407 and $7,226 for each of the three years ended December 31, 1999, 1998 and
1997 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.
(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
F-60
<PAGE> 172
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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
NAME OF PARTNERSHIP ----------------------
PARTNERSHIP ESTABLISHED PRINCIPAL ACTIVITIES DIRECTLY INDIRECTLY
----------- --------------- -------------------- -------- ----------
<S> <C> <C> <C> <C>
HCL Network Partnership Hong Kong Ownership of fixed line network -- 99.99
equipment
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF
ORDINARY SHARES HELD
PLACE OF ----------------------
NAME OF COMPANY INCORPORATION PRINCIPAL ACTIVITIES DIRECTLY INDIRECTLY
--------------- ------------- -------------------- -------- ----------
<S> <C> <C> <C> <C>
Hutchison Global Crossing Hong Kong Provision of fixed network and 100 --
Limited (formerly known as international services
Hutchison Communications
Limited)
Hutchison Multimedia Services Hong Kong Provision of multimedia services -- 100
Limited
ESD Services Limited (formerly Hong Kong Implementation of the operation -- 100
known as Timbo Star of the HKSAR's Electronic
Investment Limited) Service Delivery system
</TABLE>
4. DEFERRED EXPENDITURE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
As of January 1................................. $632,849 $398,801 $207,407
Additions....................................... -- 241,932 199,278
Amortization.................................... (65,650) (7,884) (7,884)
-------- -------- --------
As of December 31............................... $567,199 $632,849 $398,801
======== ======== ========
</TABLE>
F-61
<PAGE> 173
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
OFFICE TRANSMISSION
LEASEHOLD FURNITURE AND MOTOR COMPUTER CUSTOMER EXCHANGE PLANT AND SITE
IMPROVEMENTS EQUIPMENT VEHICLES EQUIPMENT ACCESS NETWORK EQUIPMENT EQUIPMENT
------------ ------------- -------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
COST
As of January 1, 1997.......... $ 1,512 $ 1,990 $ 355 $ 3,428 $ 65,879 $ 484 $ 185,966
Additions...................... 3,958 -- 2,082 36,929 130,409 125,938 80,526
Disposals...................... -- -- (81) -- -- -- --
Reclassification............... 13,377 -- -- 29,374 (64,769) 133,993 (177,854)
Transfer from construction in
progress..................... 180 -- -- 284 1,429 22,683 56,412
------- ------- ------ -------- -------- -------- ---------
As of December 31, 1997........ $19,027 $ 1,990 $2,356 $ 70,015 $132,948 $283,098 $ 145,050
======= ======= ====== ======== ======== ======== =========
As of December 31, 1997........ $19,027 $ 1,990 $2,356 $ 70,015 $132,948 $283,098 $ 145,050
Additions...................... 7,535 -- -- 16,982 164,066 127,020 122,821
Disposals...................... -- (28) -- (3,387) -- -- --
Transfer from construction in
progress..................... 1,062 -- -- 814 31,836 36,465 18,469
------- ------- ------ -------- -------- -------- ---------
As of December 31, 1998........ $27,624 $ 1,962 $2,356 $ 84,424 $328,850 $446,583 $ 286,340
======= ======= ====== ======== ======== ======== =========
As of December 31, 1998........ $27,624 $ 1,962 $2,356 $ 84,424 $328,850 $446,583 $ 286,340
Additions...................... 5,026 -- 863 33,681 140,988 150,188 80,360
Transfer from construction in
progress..................... -- -- -- 1,083 252,389 37,266 222,791
Disposals...................... (1,991) (1,962) (274) (24,177) (681) (2,676) (2)
------- ------- ------ -------- -------- -------- ---------
As of December 31, 1999........ $30,659 $ -- $2,945 $ 95,011 $721,546 $631,361 $ 589,489
======= ======= ====== ======== ======== ======== =========
ACCUMULATED DEPRECIATION
As of January 1, 1997.......... $ 39 $ 592 $ 178 $ 1,340 $ -- $ 41 $ 18,212
Depreciation for the year...... 2,188 301 75 10,463 -- 8,994 239
Disposals...................... -- -- (49) -- -- -- --
Reclassification............... 2,272 -- -- 5,654 -- 10,046 (17,972)
------- ------- ------ -------- -------- -------- ---------
As of December 31, 1997........ $ 4,499 $ 893 $ 204 $ 17,457 $ -- $ 19,081 $ 479
======= ======= ====== ======== ======== ======== =========
As of December 31, 1997........ $ 4,499 $ 893 $ 204 $ 17,457 $ -- $ 19,081 $ 479
Depreciation for the year...... 3,429 293 49 13,105 -- 9,862 280
Disposals...................... -- (21) -- (761) -- -- --
------- ------- ------ -------- -------- -------- ---------
As of December 31, 1998........ $ 7,928 $ 1,165 $ 253 $ 29,801 $ -- $ 28,943 $ 759
======= ======= ====== ======== ======== ======== =========
As of December 31, 1998........ $ 7,928 $ 1,165 $ 253 $ 29,801 $ -- $ 28,943 $ 759
Depreciation for the year...... 4,745 243 571 18,379 9,479 18,431 7,038
Disposals...................... (1,945) (1,408) (275) (12,020) -- (246) --
------- ------- ------ -------- -------- -------- ---------
As of December 31, 1999........ $10,728 $ -- $ 549 $ 36,160 $ 9,479 $ 47,128 $ 7,797
======= ======= ====== ======== ======== ======== =========
<CAPTION>
LAND & CONSTRUCTION
BUILDING IN PROGRESS TOTAL
-------- ------------ ----------
<S> <C> <C> <C>
COST
As of January 1, 1997.......... $ -- $ 88,346 $ 347,960
Additions...................... -- 204,632 584,474
Disposals...................... -- -- (81)
Reclassification............... -- 65,879 --
Transfer from construction in
progress..................... -- (80,988) --
------- --------- ----------
As of December 31, 1997........ $ -- $ 277,869 $ 932,353
======= ========= ==========
As of December 31, 1997........ $ -- $ 277,869 $ 932,353
Additions...................... -- 379,534 817,958
Disposals...................... -- (32) (3,447)
Transfer from construction in
progress..................... -- (88,646) --
------- --------- ----------
As of December 31, 1998........ $ -- $ 568,725 $1,746,864
======= ========= ==========
As of December 31, 1998........ $ -- $ 568,725 $1,746,864
Additions...................... 2,182 462,677 875,965
Transfer from construction in
progress..................... 36,766 (550,295) --
Disposals...................... -- (298) (32,061)
------- --------- ----------
As of December 31, 1999........ $38,948 $ 480,809 $2,590,768
======= ========= ==========
ACCUMULATED DEPRECIATION
As of January 1, 1997.......... $ -- $ -- $ 20,402
Depreciation for the year...... -- -- 22,260
Disposals...................... -- -- (49)
Reclassification............... -- -- --
------- --------- ----------
As of December 31, 1997........ $ -- $ -- $ 42,613
======= ========= ==========
As of December 31, 1997........ $ -- $ -- $ 42,613
Depreciation for the year...... -- -- 27,018
Disposals...................... -- -- (782)
------- --------- ----------
As of December 31, 1998........ $ -- $ -- $ 68,849
======= ========= ==========
As of December 31, 1998........ $ -- $ -- $ 68,849
Depreciation for the year...... 483 -- 59,369
Disposals...................... -- -- (15,894)
------- --------- ----------
As of December 31, 1999........ $ 483 $ -- $ 112,324
======= ========= ==========
</TABLE>
F-62
<PAGE> 174
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OFFICE TRANSMISSION
LEASEHOLD FURNITURE AND MOTOR COMPUTER CUSTOMER EXCHANGE PLANT AND SITE
IMPROVEMENTS EQUIPMENT VEHICLES EQUIPMENT ACCESS NETWORK EQUIPMENT EQUIPMENT
------------ ------------- -------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET BOOK VALUE
As of December 31, 1997........ $14,528 $ 1,097 $2,152 $ 52,558 $132,948 $264,017 $ 144,571
======= ======= ====== ======== ======== ======== =========
As of December 31, 1998........ $19,696 $ 797 $2,103 $ 54,623 $328,850 $417,640 $ 285,581
======= ======= ====== ======== ======== ======== =========
As of December 31, 1999........ $19,931 $ -- $2,396 $ 58,851 $712,067 $584,233 $ 581,692
======= ======= ====== ======== ======== ======== =========
<CAPTION>
LAND & CONSTRUCTION
BUILDING IN PROGRESS TOTAL
-------- ------------ ----------
<S> <C> <C> <C>
NET BOOK VALUE
As of December 31, 1997........ $ -- $ 277,869 $ 889,740
======= ========= ==========
As of December 31, 1998........ $ -- $ 568,725 $1,678,015
======= ========= ==========
As of December 31, 1999........ $38,465 $ 480,809 $2,478,444
======= ========= ==========
</TABLE>
F-63
<PAGE> 175
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. TRADE ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Trade accounts receivable....................... $ 60,123 $ 68,084 $115,439
Less: allowance for doubtful accounts........... (25,659) (27,705) (19,257)
-------- -------- --------
$ 34,464 $ 40,379 $ 96,182
======== ======== ========
</TABLE>
Allowance for doubtful accounts is analyzed as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
As of January 1.................................... $ 27,705 $19,257 $ 5,713
Provision for the year............................. 11,361 8,478 14,017
Amounts written off................................ (13,407) (30) (473)
-------- ------- -------
As of December 31.................................. $ 25,659 $27,705 $19,257
======== ======= =======
</TABLE>
7. DUE FROM AFFILIATES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Interest bearing................................... $59,155 $14,677 $ 3,100
Non-interest bearing............................... -- 47 185,117
------- ------- --------
$59,155 $14,724 $188,217
======= ======= ========
</TABLE>
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%.
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Payables for acquisition of property plant and
equipment............................................. $ 96,485 $108,258 $ 60,445
Other creditors......................................... 9,309 3,319 35,471
Deposits from other carriers............................ 29,418 28,080 22,702
Accrual for interconnection charges..................... 48,199 71,243 134,350
Accrual for regulation fees............................. 19,141 2,564 94,509
Accrual for professional fees........................... 38,344 34,945 --
Accrual for advertising and promotion expenses.......... 18,088 18,861 --
Other provisions........................................ 56,065 27,298 18,311
-------- -------- --------
$315,049 $294,568 $365,788
======== ======== ========
</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 and after October 31, 1999, the loan was interest free. From May 1, 1997
till October 31, 1999 the loan bore interest at HIBOR less 0.25%. The average
balance during the interest free period in 1999 was nil.
F-64
<PAGE> 176
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 and after November 30, 1999, the amount due
to affiliates were interest free. From May 1, 1998 till November 30, 1999, the
amounts bore interest at HIBOR less 0.25%. The average balance during the
interest free period in 1999 was HK$106,526.
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 two years ended December 31, 1999 this loan bore interest at
HIBOR.
12. LONG TERM LOAN FROM HCL NETWORK PARTNERSHIP'S FORMER PARTNERS
Prior to November 24, 1999 the funding for HCLNP has been by way of long
term loans from HCLNP's former partners. The amount is unsecured, interest free
and has no fixed repayment terms.
13. LONG TERM LOAN FROM AN IMMEDIATE HOLDING COMPANY
The long term loan from an immediate holding company is unsecured and
interest free. In connection with the Reorganization, as set out in note 1(b)
above, HK$3,325,629 of the long term loan from an immediate holding company loan
was capitalised through the issue of new shares on January 12, 2000. The average
balance during the year was HK$1,688,888.
14. SHARE CAPITAL
The share capital of the company comprises 1 share of US$1 which is fully
paid.
15. RELATED PARTY TRANSACTIONS
The Company undertook the following transactions with related parties:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Fees to affiliates for the provision of
management and treasury services (Note a)..... $ 34,582 $ 40,272 $ 31,000
-------- -------- --------
Share of common costs allocated from an
affiliate (Note a)............................ 263,996 269,268 249,377
-------- -------- --------
Interest payable to:
-- affiliates................................. 40,451 42,751 30,095
-- the Excluded Business...................... 6,892 10,084 7,532
-------- -------- --------
Interest income receivable from a related
company....................................... 684 431 543
-------- -------- --------
</TABLE>
(a) Certain operating expenses of the Company, along with certain other
affiliates under the control of Hutchison Whampoa Limited, are incurred by a
company under the control of Hutchison Whampoa Limited which provides services
and facilities to the Company and the said other affiliates. These expenses
relate to a number of different cost centers. 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.
F-65
<PAGE> 177
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(b) An affiliate under the common control of Hutchison Whampoa Limited has
issued guarantees and counter indemnities in respect of guarantee line
facilities amounting to $100,000 extended to the Company. The guarantee line
facilities utilized by the Company as of December 31, 1999 was HK$36,816. The
Company is not charged for these guarantees.
16. TAXES
The company had no taxable income for each of the three years ended
December 31, 1999. 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,
1999, 1998 and 1997 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,
------------------------------
1999 1998 1997
-------- ------ --------
<S> <C> <C> <C>
Income tax credit/(charge) at the Hong Kong
statutory rate................................... $ 44,210 $ (996) $ 26,129
Effect of (expenses not deductible for) and income
not chargeable to income tax..................... 1,097 (29) (1,466)
Net deferred tax (asset)/liability not accounted
for.............................................. (45,307) 1,025 (24,663)
-------- ------ --------
Combined statement of operations................... $ -- $ -- $ --
======== ====== ========
</TABLE>
The deferred tax assets and liabilities of the Company at December 31,
1999, 1998 and 1997 were affected by certain intercompany tax sharing
arrangements as follows:
(a) tax losses of HCLNP on or before November 24, 1999 were utilized
by affiliates under the 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.
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>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Tax losses................... $271,389 $ -- $165,744 $ -- $130,520 $ --
Accelerated depreciation
allowances................. -- 251,382 -- 164,155 -- 88,894
Deferred expenditure and
other temporary
differences................ 567 90,751 -- 100,688 -- 63,249
-------- -------- -------- -------- -------- --------
271,956 342,133 165,744 264,843 130,520 152,143
Amount not required to be
provided under HKGAAP...... -- (70,177) -- (99,099) -- (21,623)
-------- -------- -------- -------- -------- --------
Provided..................... $271,956 $271,956 $165,744 $165,744 $130,520 $130,520
======== ======== ======== ======== ======== ========
</TABLE>
F-66
<PAGE> 178
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
17. COMMITMENTS AND CONTINGENCIES
(a) The Company is committed under its contracts to purchase property plant
and equipment amounting to approximately $985,350, $906,790 and $711,768 as of
December 31, 1999, 1998 and 1997 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 $54,281, $34,430 and $27,865 for each of the three years ended
December 31, 1999, 1998 and 1997 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>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Land and buildings
Within one year................................... $ -- $ 459 $ 459
In the second to fifth years inclusive............ 4,176 2,065 2,065
After the fifth year.............................. -- -- --
------- ------- -------
$ 4,176 $ 2,524 $ 2,524
======= ======= =======
Leased lines
Within one year................................... $ 9,983 $14,973 $ 1,549
In the second to fifth years inclusive............ 12,621 21,060 18,708
After the fifth year.............................. 263 -- --
------- ------- -------
$22,867 $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 totalling approximately
$19,000 as of December 31, 1999.
(ii) Third party network operators in relation to the construction of
exchanges for approximately $5,496 as of December 31, 1999.
(iii) The Government of the HKSAR in respect of installation of the
ESD system amounting to approximately $12,320 of which 15% will be
counter-indemnitied by Compaq Computer Limited.
18. SUBSEQUENT EVENTS
(a) In connection with the Reorganisation set out in note 1(a) above, the
Company's long term loan from immediate holding company amounting to $3,325,629
was capitalized through the issue of 239 new shares issued on January 12, 2000.
As set out in note 1(c) above, upon closure of the Agreement on January 12,
2000, Global Crossing acquired 80 shares in the Company from Hutchison
Telecommunications Limited and directly provided to Hutchison Whampoa Limited
US$400 million in Global Crossing convertible preferred stock. Additionally the
Company has issued 80 shares to Global Crossing in return for consideration of
$3,111,200 (US$400 million), which was settled by cash of $388,900 (US$50
million) and $2,722,300 (US$350 million) worth of rights to use Global
Crossing's international capacity and technology and commercial expertise in
relation to the connection, operation and marketing of a media distribution
center in Hong Kong.
F-67
<PAGE> 179
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Following the completion of the above transactions, the Company is a 50:50
joint venture between Global Crossing Limited and Hutchison Whampoa Limited.
(b) ESD Services Limited, a subsidiary of Hutchison Global Crossing
Holdings has proposed to incur capital expenditure on the ESD system amounting
to approximately $80,000 and Compaq Computer Limited is obliged to acquire 15%
of the ordinary share capital of ESD Services Limited.
19. 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,
-------------------------------------
NOTE 1999 1998 1997
---- ----------- --------- ---------
<S> <C> <C> <C> <C>
Net (loss) profit under HKGAAP............. $ (276,312) $ 6,228 $(163,304)
USGAAP adjustments:
Deferred expenditure..................... (i) 65,650 (234,048) (191,394)
Capitalized interest..................... (ii) 1,384 (10,743) (3,098)
General provisions....................... (iii) 9,574 (3,595) 6,686
Depreciation............................. (iv) (45,881) (37,368) (5,737)
Long term loan waived by immediate
holding company....................... (v) (5,193) -- --
----------- --------- ---------
Net loss under USGAAP...................... $ (250,778) $(279,526) $(356,847)
=========== ========= =========
Net loss per share under USGAAP............ $ (250,778) $(279,526) $(356,847)
=========== ========= =========
Total owner's deficit under HKGAAP......... $ (566,791) $(290,479) $(296,707)
USGAAP adjustments:
Deferred expenditure..................... (i) (656,501) (656,501) (414,569)
Accumulated amortization of deferred
Expenditure........................... (i) 89,302 23,652 15,768
Capitalized interest..................... (ii) (12,457) (13,841) (3,098)
General provisions....................... (iii) 42,835 33,261 36,856
Depreciation............................. (iv) (88,986) (43,105) (5,737)
Deferred tax liability not required to be
provided under HKGAAP................. (vi) (70,177) (99,099) (21,623)
Deferred tax effect of USGAAP adjustments
-- reduction in deferred tax liability... 101,409 106,325 60,604
-- valuation allowance................... (31,232) -- --
----------- --------- ---------
Total owner's deficit under USGAAP......... $(1,192,598) $(939,787) $(628,506)
=========== ========= =========
</TABLE>
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
F-68
<PAGE> 180
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 part of 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,
------------------------------------
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Net cash (used)/provided by:
Operating activities....................... $ (206,149) $ (31,928) $(200,364)
Investing activities....................... (872,281) (756,189) (541,806)
Financing activities....................... 1,078,358 767,671 761,334
---------- --------- ---------
(Decrease)/increase in cash and cash
equivalents............................. (72) (20,446) 19,164
Cash and cash equivalents at beginning of
year.................................... 328 20,774 1,610
---------- --------- ---------
Cash and cash equivalents at end of year... $ 256 $ 328 $ 20,774
========== ========= =========
</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 interest would not qualify for capitalization 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.
(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.
F-69
<PAGE> 181
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Under USGAAP depreciation must commence from the date the asset is
available for use and be calculated on a straight line basis.
(v) Long term loan waived by immediate holding company
Under HKGAAP the long term loan waived by immediate holding company has
been recorded as a credit in the income statement.
Under USGAAP the waiver of a long term loan by a shareholder is required to
be recorded as paid in capital.
(vi) 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 control of Hutchison Whampoa Limited. Financial liabilities of the Company
include bank overdrafts, accounts payable, accrued expenses, amounts due to
affiliates under the control of Hutchison Whampoa Limited, long term loan from
an affiliate under the control of Hutchison Whampoa Limited, long term loan from
HCL Network Partnership's former partners and loan from the Excluded Business.
The fair value of all other financial instruments approximate their carrying
amounts due to the nature or short maturity of these instruments.
(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 Hong Kong.
Deposits, prepayments and other receivable -- these are spread among
numerous third parties.
(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
F-70
<PAGE> 182
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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
expenditures are 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 and multimedia services for 1997 and 1998 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. Accordingly, the
information presented below is prepared in accordance with HKGAAP.
Summarized financial information by business segment is as follows:
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
OPERATING
REVENUES INCOME (LOSS) DEPRECIATION
---------- ------------- ------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
International services..................... $ 561,498 $ 44,884 $25,508
Local fixed network services............... 251,526 (183,097) 31,075
Multimedia services........................ 27,488 (96,728) 2,786
---------- --------- -------
$ 840,512 $(234,941) $59,369
========== ========= =======
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
========== ========= =======
</TABLE>
F-71
<PAGE> 183
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
IDENTIFIABLE CAPITAL
ASSETS EXPENDITURE
------------ -----------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1999
International services and local fixed network services.... $3,120,496 $854,091
Multimedia services........................................ 57,365 21,874
---------- --------
$3,177,861 $875,965
========== ========
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 fixed network services.... $1,609,971 $584,474
Multimedia services........................................ -- --
---------- --------
$1,609,971 $584,474
========== ========
</TABLE>
Reconciliation of segment operating loss to net (loss)/profit before tax
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating loss............................... $(234,941) $(194,115) $(328,704)
Interest income.............................. 779 504 658
Interest expense............................. (47,343) (52,837) (37,634)
Expenditure deferred during the year......... -- 241,932 199,278
Interest expense capitalized in property,
plant and equipment........................ -- 10,744 3,098
Long term loan waived........................ 5,193 -- --
--------- --------- ---------
Net (loss) profit before tax under HKGAAP.... (276,312) 6,228 (163,304)
Effect of USGAAP adjustments................. 25,534 (285,754) (193,543)
--------- --------- ---------
Net loss under USGAAP........................ $(250,778) $(279,526) $(356,847)
========= ========= =========
</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.
(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 19(a) above for each of the three years ended
December 31, 1999.
The Financial Accounting Standards Board ("FASB") has issued certain
pronouncements which are not effective with respect to the fiscal years
presented in note 19(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.
F-72
<PAGE> 184
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 cancellable 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-cancellable operating leases with lease terms in excess of one
year as follows:
<TABLE>
<S> <C>
For the year ending December 31, 2000..................... $27,043
2001...................................................... 17,283
2002...................................................... 5,519
2003...................................................... 661
2004...................................................... 330
Thereafter................................................ $ 1,447
-------
$52,283
=======
</TABLE>
(f) Net loss per share
Under USGAAP, historical net loss per share would be $250,778, $279,526 and
$356,847 for each of the three years ended 1999, 1998 and 1997 respectively.
This is calculated based on one ordinary share in issue throughout the three
years ended December 31, 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.
As set out in note 1 b and c the Company has issued 319 shares on January
12, 2000. Had this capital structure been in place throughout the three years
ended December 31, 1999 historical net loss per share would have been $784,
$873, and $1,115 for each of the three year ended December 31, 1999.
20. APPROVAL OF COMBINED FINANCIAL STATEMENTS
The combined financial statements were approved on March 23, 2000.
F-73
<PAGE> 185
GLOBAL ACCESS LIMITED
BALANCE SHEET
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999
(THOUSANDS OF JAPANESE YEN)
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, 2000 1999
------------- ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash...................................................... Y 6,072,769 Y5,148,021
Accounts receivable....................................... 22,135 160
Due from affiliates....................................... 1,327,952 4,116,000
Prepaid expenses.......................................... 89,865 61,286
Refundable consumption taxes.............................. 491,274 103,515
Other current assets...................................... 15,746 18,836
----------- -----------
Total current assets................................... 8,019,741 9,447,818
----------- -----------
Property and equipment...................................... 10,316,631 3,854,110
Indefeasible Right of Use purchased......................... 1,101,915 --
Security deposits and other assets.......................... 622,005 312,524
----------- -----------
Total assets........................................... Y20,060,292 Y13,614,452
=========== ===========
LIABILITIES:
Current liabilities:
Short-term loans payable.................................. Y 6,000,000 Y6,000,000
Accounts payable.......................................... 199,747 59,422
Accrued expenses.......................................... 139,193 38,264
Deferred revenue.......................................... 759,172 261,333
Other current liabilities................................. 557,880 206,202
----------- -----------
Total current liabilities.............................. 7,655,992 6,565,221
----------- -----------
Deferred revenue............................................ 9,743,111 3,657,235
Deposits received for lease................................. 138,673 --
----------- -----------
Total liabilities...................................... 17,537,776 10,222,456
----------- -----------
Commitments
STOCKHOLDERS' EQUITY:
Common stock; par value Y50,000, authorized -- 160,000
shares outstanding -- 100,000 shares................... 5,000,000 5,000,000
Accumulated deficits...................................... (2,477,484) (1,608,004)
----------- -----------
Total stockholders' equity............................. 2,522,516 3,391,996
----------- -----------
Total liabilities and stockholders' equity............. Y20,060,292 Y13,614,452
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-74
<PAGE> 186
GLOBAL ACCESS LIMITED
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICITS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
(THOUSANDS OF JAPANESE YEN)
<TABLE>
<CAPTION>
2000 1999
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Revenue:
Lease of capacity......................................... Y 260,790 Y --
Operations and maintenance................................ 477,581 --
Other..................................................... 126,295 --
----------- ---------
Total revenue.......................................... 864,666 --
=========== =========
Expenses:
Depreciation and amortization............................. 164,913 --
Payroll................................................... 280,538 134,289
Rent...................................................... 112,906 54,854
Service Fees.............................................. 581,680 18,553
Usage charge for facilities............................... 337,715 --
Start-up charges.......................................... -- 250,172
Miscellaneous............................................. 180,746 76,199
----------- ---------
Total cost and operating expenses...................... 1,658,498 534,067
----------- ---------
Other income (expense):
Interest income........................................... 1,080 837
Interest expense.......................................... (116,866) --
Miscellaneous -- net...................................... 40,613 240
----------- ---------
Total other (expenses) income..................... (75,173) 1,077
----------- ---------
Loss before provision for income taxes............ (869,005) (532,990)
Income taxes................................................ 475 805
----------- ---------
Net loss.......................................... (869,480) (533,795)
Accumulated loss at the beginning of the period............. (1,608,004) (244,836)
----------- ---------
Accumulated loss at the end of the period................... Y(2,477,484) Y(778,631)
=========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-75
<PAGE> 187
GLOBAL ACCESS LIMITED
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS OF JAPANESE YEN)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. Y (869,480) Y (533,795)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 164,913 --
Increase (decrease) in accounts receivable........... 2,780,979 (29,042)
Increase in prepaid expenses......................... (28,579) (9,348)
Increase in refundable consumption taxes............. (387,759) 2,977
Decrease (increase) in other current assets.......... 3,090 (12,354)
Increase in accounts payable......................... 140,325 9,000
Increase in accrued expenses......................... 100,929 25,514
Increase in income taxes payable..................... (475) (123)
Increase in deferred revenue......................... 6,568,809 --
Increase in other current liabilities................ 490,826 614
----------- ----------
Net cash provided by (used in) operating
activities...................................... 8,963,578 (546,557)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (6,627,434) (1,337,151)
Purchase of Indefeasible Right of Use..................... (1,101,915) --
Security deposit and other assets......................... (309,481) (67,805)
----------- ----------
Net cash used in investing activities............. (8,038,830) (1,404,956)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issued......................... -- 3,000,000
----------- ----------
Net cash provided by financing activities......... -- 3,000,000
----------- ----------
NET INCREASE IN CASH........................................ 924,748 1,048,487
CASH, beginning of period................................... 5,148,021 1,443,494
----------- ----------
CASH, end of period......................................... Y 6,072,769 Y2,491,981
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................. Y 81,460 Y --
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-76
<PAGE> 188
GLOBAL ACCESS LIMITED
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999 AND DECEMBER 31, 1999
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(1) Summary of Business
Global Access Limited (the "Company") is a Japanese corporation established
on November 4, 1997 to provide global communications network services utilizing
a network of terrestrial digital fiber optic cable systems (the "Systems"). The
Company is owned by Vectant, Inc., formerly Global Bandwidth Solutions, Inc.
(51.0%), a wholly owned subsidiary of Marubeni Corporation, and by Global
Crossing (49.0%). The Company has been involved in the planning, marketing,
organization, development, design and construction of the Systems between
Pacific Crossing-1 cable landing stations and major third party communications
hubs in Japan. Pacific Crossing-1 is an undersea fiber optic cable system
connecting California, Washington and two landing sites in Japan and is owned
and operated by a joint venture, Pacific Crossing Ltd., in which Asia Global
Crossing, a subsidiary of Global Crossing, owns a 64.5% economic interest. The
first segment of Pacific Crossing-1, constructed by Pacific Crossing Ltd.,
became ready for service in December 1999. The remaining portion is scheduled to
become ready for service in 2000. The Company's Systems from Pacific Crossing-1
to Tokyo were ready for service in December 1999. The Systems are sold or leased
to the customers of Pacific Crossing-1 and others. Successful future operations
of the Company are subject to several risks, including the ability of the
Company to ensure a successful, timely and cost effective completion of the
Systems to successfully market and generate adequate revenue from the sale of
capacity of the Systems. In addition, the Company derives all of its revenues
from companies in the internet and long distance telecommunications industry and
as a result, has concentration of credit risk in this industry. The Company was
licensed to operate the facility-based carrier services in Japan from Ministry
of Posts and Telecommunications in April 1998.
(2) Accounting Policies
(a) Basis of financial statements
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America ("U.S.
GAAP"). The Company maintains its records and prepares its statutory financial
statements in accordance with the Japanese Commercial Code by applying
accounting principles generally accepted in Japan. The accompanying financial
statements incorporate certain adjustments relating to the tax effects of
temporary differences and start-up expenses, and certain reclassifications and
other items to conform with U.S. GAAP. These adjustments were not recorded in
the statutory books of account. The statutory fiscal year-end is March 31.
The interim financial information included herein has been prepared by the
Company without audit. The financial information presented herein, while not
necessary indicative of results to be expected for the full year, reflect all
adjustments, consisting of normal recurring adjustments, which in the opinion of
the Company are necessary for a fair presentation of the results for the periods
indicated.
(b) Inland Capacity Purchase Agreement (the "Agreement")
Effective December 28, 1999, the Company entered into the Agreement with
Global Crossing Japan Corporation, a subsidiary of Asia Global Crossing, to
grant an Indefeasible Right of Use on units of capacity on the Systems between
Pacific Crossing-1 cable landing stations and major third party communications
hubs in Japan. The total selling price for capacity on the Systems is payable 30
days from the activation date and non-refundable once the applicable segment
purchased is available. The Indefeasible Right of Use granted entitles Global
Crossing Japan Corporation to all rights and obligations of the capacity for a
period of fifteen years from the date the System was put in service. The Company
also agrees to perform all operation, administration and maintenance with
F-77
<PAGE> 189
GLOBAL ACCESS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
respect to such granted capacity. In exchange for such services, GCJ is
obligated for the term of the Indefeasible Right of Use to pay for its allocable
share of the costs for operating and maintaining the System. Maintenance cost
payments are due and payable quarterly.
The Company amortizes Indefeasible Right of Use revenues from the Agreement
over fifteen years, with amounts due or received but not yet recognized as
operating revenue, recorded in the accompanying balance sheet as deferred
revenue. Construction costs relating to such revenues are classified as a
depreciable asset and depreciated over the estimated life of the property.
In connection with the Agreement, the Company granted Indefeasible Right of
Use on the Systems between Tokyo Network Operation Center and Pacific Crossing-1
cable landing station in Ajigaura for total selling price of Y10,720,000
thousand. Revenue recognized relating to these transactions during the six month
period ended June 30, 2000 was Y260,790 thousand. Due from affiliates, including
5% consumption tax, and deferred revenue as of June 30, 2000 were Y1,176,000
thousand and Y10,457,778 thousand, respectively.
Operating and maintaining revenues recognized in connection with the
Agreement was Y177,581 thousand during the six month period ended June 30, 2000
and due from affiliates as of June 30, 2000 includes the receivable of Y116,110
thousand, including 5.0% consumption tax, relating to this revenue.
(c) Use of Estimates
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, and the reported revenues and expenses during the reported period.
Actual results could differ from those estimates.
2. CASH
Cash comprises of cash on hand and bank deposits, which approximate fair
value.
3. PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 2000 are as follows:
<TABLE>
<CAPTION>
THOUSANDS OF
JAPANESE YEN
-----------------------------------
JUNE 30, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
Property and equipment, at cost
Buildings.................................. Y 1,632,078 Y 108,442
Fiber optical cable systems................ 3,530,095 1,249,133
Furniture and equipment.................... 14,350 1,139
Land....................................... 1,070,482 1,037,070
Construction in progress................... 4,219,969 1,459,381
----------- ----------
Total................................. 10,466,974 3,855,165
----------- ----------
Accumulated depreciation
Buildings.................................. 128,676 133
Fiber optical cable systems................ 20,236 733
Furniture and equipment.................... 1,431 189
----------- ----------
Total................................. 150,343 1,055
----------- ----------
Net property and equipment................. Y10,316,631 Y3,854,110
=========== ==========
</TABLE>
F-78
<PAGE> 190
GLOBAL ACCESS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has purchased land for the cable station. Construction in
progress includes direct expenditures for the construction of the Systems,
including the costs incurred under the advisory and consulting contracts.
Depreciation is computed over the estimated lives of assets on the
straight-line basis, with useful lives primarily as follows:
<TABLE>
<S> <C>
Buildings........................................... 38 years
Fiber optical cable system.......................... 6 - 27 years
Furniture and equipment............................. 5 years
</TABLE>
4. SHORT-TERM LOANS PAYABLE
In September and October, 1999, the Company entered into short-term loan
agreements to borrow Y2,940,000 thousand from Global Crossing and Y3,060,000
thousand from Marubeni Corporation, respectively. Those loans are due on August
31, 2000 with the interest rate based on the long term prime rate plus 1.5%.
Interest expense for the six month period ended June 30, 2000 was approximately
Y116,866 thousand. The due date of these loans will be extended to August 31,
2001.
5. INCOME TAXES
Income taxes are provided based on income (loss) recognized for financial
statement purposes and include the effects of temporary differences between such
income (loss) that was recognized for tax purposes. Current income tax for the
six months ended June 30, 2000 and 1999 represents inhabitant tax. Statuary
income tax rate was 42.0% and 47.0% for the six month periods ended June 30,
2000 and 1999, respectively. The asset and liability approach is used to
recognize deferred income taxes for the expected future tax consequence of
temporary differences between the carrying amounts and the tax basis of assets
and liabilities.
Significant components of the deferred income tax assets as of June 30,
2000 are as follows:
<TABLE>
<CAPTION>
THOUSANDS OF
JAPANESE YEN
---------------------------------
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
(UNAUDITED)
<S> <C> <C>
Start-up charges.............................. Y -- Y 274,022
Net operating loss carryforwards.............. 1,022,279 395,275
----------- ---------
Total deferred income tax assets.............. 1,022,279 669,297
Less valuation allowance...................... (1,022,279) (669,297)
----------- ---------
Y -- Y --
=========== =========
</TABLE>
Valuation allowance is fully provided for deferred income tax assets due to
the uncertainty of future income estimates. The amount of the valuation
allowance is reviewed periodically.
The Company has available net operating loss carryforwards of approximately
Y2,433,997 thousand as of June 30, 2000 to offset future taxable income, which
expire at various dates through 2006.
6. CONSUMPTION TAXES
The tax credit for the consumption taxes incurred (which are excluded in
the cost of goods and services) is available against consumption taxes
attributable to revenue in the same tax period.
F-79
<PAGE> 191
GLOBAL ACCESS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. OTHER RELATED PARTY TRANSACTIONS
The Company paid service fees for the conceptual consultation and research
services of Y300,000 thousand to Marubeni Corporation during the six month
period ended June 30, 2000.
The Company has entered into a Japanese Cable Station Operations and
Maintenance agreement with Pacific Crossing Ltd. to provide the operations and
maintenance services for the cable stations at the Japanese landing sites of the
Pacific Crossing-1 where Pacific Crossing-1 interconnects to a terrestrial cable
system. The initial term of this agreement is eight years unless terminated
earlier. Annual fees shall be due and payable quarterly. Operations and
maintenance service revenue recognized during the six month period ended June
30, 2000 was Y300,000 thousand.
Effective June 29, 2000, the Company entered into Capacity Purchase
agreement with Asia Global Crossing, Asia Pacific Limited to purchase and
Indefeasible Right of Use on capacity on the Global Crossing Network between the
system interfaces at the applicable points of presence. The Indefeasible Right
of Use granted entitles the Company to all rights and obligations of the
capacity for a period of twenty-five years from the date the System was put in
service. One June 30, 2000, the Company paid total purchase price of Y1,101,915
thousand for the capacity on the Global Crossing Network and recorded them as
intangible assets on the balance sheet as of June 30, 2000. The Company intends
to sell this Indefeasible Right of Use on the Global Crossing Network capacity
to its customers.
The Company has recorded operating lease revenue for Telehouse space of
Y21,130 thousand from affiliates of Marubeni Corporation for the six months
ended June 30, 2000, which is included in other revenue in the accompanying
statements of operations and accumulated deficits.
8. COMMITMENTS
The Company has lease commitments under the non-cancelable operating lease
for the office space and network facilities. Future minimum lease payments under
such leases as of June 30, 2000 are as follows:
<TABLE>
<CAPTION>
THOUSANDS OF
JAPANESE
YEARS ENDING JUNE 30 YEN
-------------------- ------------
<S> <C>
2001...................................................... Y255,376
2002...................................................... 17,670
2003...................................................... 12,861
2004...................................................... 4,140
2005...................................................... 4,140
2006 and thereafter....................................... 41,400
</TABLE>
Rent expenses and usage charges for facilities for six month periods ended
June 30, 2000 and 1999 were approximately Y450,621 thousand, and Y54,854
thousand, respectively.
9. FORWARD CURRENCY EXCHANGE CONTRACT
On June 30, 2000, the Company has entered into forward currency exchange
contract to sell U.S. dollar of $10,470,000, from July 3, 2000 through July 31,
2000, in order to hedge future expected sales of Indefeasible Right of Use on
the Global Crossing Network capacity. The Company has extended the entire
forward currency exchange contract until August 31, 2000. The market value of
the contract as of June 30, 2000, was immaterial.
F-80
<PAGE> 192
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Global Access Limited:
We have audited the accompanying balance sheets of Global Access Limited (a
Japanese corporation) as of December 31, 1999 and 1998 and the related
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1999 and 1998, and for the period from November 4, 1997 (date
of inception) to December 31, 1997, expressed in Japanese yen. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Global Access Limited as of
December 31, 1999 and 1998 and the results of its operations and its cash flows
for the years ended December 31, 1999 and 1998, and for the period from November
4, 1997 (date of inception) to December 31, 1997 in conformity with accounting
principles generally accepted in the United States of America.
/s/ ARTHUR ANDERSEN
Tokyo, Japan
March 3, 2000
F-81
<PAGE> 193
GLOBAL ACCESS LIMITED
BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
(THOUSANDS OF JAPANESE YEN)
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
ASSETS:
Current assets:
Cash...................................................... Y 5,148,021 Y1,443,494
Accounts receivable....................................... 160 63
Due from Global Crossing Japan............................ 4,116,000 --
Prepaid expenses.......................................... 61,286 5,331
Refundable consumption taxes.............................. 103,515 10,177
Other current assets...................................... 18,836 --
----------- ----------
Total current assets................................... 9,447,818 1,459,065
----------- ----------
Property and equipment...................................... 3,854,110 215,460
Security deposits and other assets.......................... 312,524 82,276
----------- ----------
Total assets........................................... Y13,614,452 Y1,756,801
=========== ==========
LIABILITIES:
Current liabilities:
Short-term loans payable.................................. Y 6,000,000 Y --
Accounts payable.......................................... 59,422 --
Accrued expenses.......................................... 38,264 --
Deferred revenue.......................................... 261,333 --
Income tax payable........................................ 475 145
Other current liabilities................................. 205,727 1,492
----------- ----------
Total current liabilities.............................. 6,565,221 1,637
----------- ----------
Deferred revenue............................................ 3,657,235 --
----------- ----------
Commitments
Total liabilities...................................... 10,222,456 1,637
----------- ----------
STOCKHOLDERS' EQUITY:
Common stock; par value Y50,000 authorized -- 160,000
shares issued and outstanding -- 100,000 shares in 1999
and 40,000 shares in 1998.............................. 5,000,000 2,000,000
Accumulated deficit....................................... (1,608,004) (244,836)
----------- ----------
Total stockholders' equity............................. 3,391,996 1,755,164
----------- ----------
Total liabilities and stockholders' equity............. Y13,614,452 Y1,756,801
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-82
<PAGE> 194
GLOBAL ACCESS LIMITED
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998,
THE PERIOD FROM NOVEMBER 4, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
(THOUSANDS OF JAPANESE YEN)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 4,
1997 (DATE
OF INCEPTION)
YEAR ENDED YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
Revenue.............................................. Y 1,432 Y -- Y --
Expenses:
Cost of capacity leased............................ 752 -- --
Payroll............................................ 339,705 38,369 --
Rent............................................... 143,732 35,021 --
Travelling......................................... 65,672 9,625 --
Duty & permits..................................... 65,630 14,669 451
Advertising expense................................ 21,428 2,946 --
Start-up charges................................... 543,268 109,165 --
Miscellaneous...................................... 134,357 34,335 378
----------- --------- -----
Operating loss.................................. (1,313,112) (244,130) (829)
----------- --------- -----
Other income (expense):
Interest income.................................... 1,639 328 --
Interest expense................................... (50,889) -- --
Miscellaneous -- net............................... 394 -- --
----------- --------- -----
Loss before provision for income taxes.......... (1,361,968) (243,802) (829)
Provision for income taxes........................... 1,200 205 --
----------- --------- -----
Net loss........................................ Y(1,363,168) Y(244,007) Y(829)
=========== ========= =====
</TABLE>
The accompanying notes are an integral part of these statements.
F-83
<PAGE> 195
GLOBAL ACCESS LIMITED
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998, AND FOR
THE PERIOD FROM NOVEMBER 4, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
(THOUSANDS OF JAPANESE YEN)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK DEFICIT TOTAL
------------ ----------- -----------
<S> <C> <C> <C>
Common stock issued on November 4, 1997 (Date
of Inception).............................. Y 50,000 Y -- Y 50,000
Net loss for the period from November 4, 1997
(Date of Inception) to December 31, 1997... -- (829) (829)
---------- ----------- -----------
December 31, 1997............................... 50,000 (829) 49,171
Common stock issued........................... 1,950,000 -- 1,950,000
Net loss for the year ended December 31,
1998....................................... -- (244,007) (244,007)
---------- ----------- -----------
December 31, 1998............................... 2,000,000 (244,836) 1,755,164
Common stock issued........................... 3,000,000 -- 3,000,000
Net loss for the year ended December 31,
1999....................................... -- (1,363,168) (1,363,168)
---------- ----------- -----------
December 31, 1999............................... Y5,000,000 Y(1,608,004) Y 3,391,996
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-84
<PAGE> 196
GLOBAL ACCESS LIMITED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998,
AND FOR THE PERIOD FROM NOVEMBER 4, 1997 (DATE OF INCEPTION) TO DECEMBER 31,
1997
(THOUSANDS OF JAPANESE YEN)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 4, 1997
(DATE OF INCEPTION)
YEAR ENDED YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. Y(1,363,168) Y (244,007) Y (829)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 1,535 -- --
Changes in operating assets and liabilities:
Increase in accounts receivable....................... (4,116,097) (63) --
Increase in prepaid expenses.......................... (55,955) (5,331) --
Increase in refundable consumption taxes.............. (93,338) (10,158) (19)
Increase in other current assets...................... (18,836) -- --
Increase in accounts payable.......................... 59,422 -- --
Increase in accrued expenses.......................... 38,264 -- --
Increase in income taxes payable...................... 330 145 --
Increase in deferred revenue.......................... 3,918,568 -- --
Increase in other current liabilities................. 204,235 1,478 14
----------- ---------- -------
Net cash used in operating activities.............. (1,425,040) (257,936) (834)
----------- ---------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (3,640,185) (215,460) --
Security deposit and other assets......................... (230,248) (82,276) --
----------- ---------- -------
Net cash used in investing activities.............. (3,870,433) (297,736) --
----------- ---------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term loans............................ 6,000,000 -- --
Proceeds from common stock issued......................... 3,000,000 1,950,000 50,000
----------- ---------- -------
Net cash provided by financing activities.......... 9,000,000 1,950,000 50,000
----------- ---------- -------
NET INCREASE IN CASH........................................ 3,704,527 1,394,328 49,166
CASH, beginning of period................................... 1,443,494 49,166 --
----------- ---------- -------
CASH, end of period......................................... Y 5,148,021 Y1,443,494 Y49,166
=========== ========== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................. Y 47,166 Y -- Y --
=========== ========== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-85
<PAGE> 197
GLOBAL ACCESS LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(1) Summary of Business
Global Access Limited (the "Company") is a Japanese corporation established
on November 4, 1997 to provide communications network services utilizing a
network of terrestrial digital fiber optic cable systems (the "Systems"). The
Company is owned by Vectant, Inc., formerly Global Bandwidth Solutions, Inc.
(51.0%), a wholly owned subsidiary of Marubeni Corporation, and by Global
Crossing (49.0%). The Company has been involved in the planning, marketing,
organization, development, design and construction of the Systems between
Pacific Crossing-1 cable landing stations and major third party communications
hubs in Japan. Pacific Crossing-1 is an undersea fiber optic cable system
connecting California, Washington and two landing sites in Japan and is owned
and operated by a joint venture, Pacific Crossing Ltd., in which GC owns a 57.8%
economic interest. The first segment of Pacific Crossing-1, constructed by
Pacific Crossing Ltd., became ready for service in December 1999. The remaining
portion is scheduled to become ready for service in 2000. The Company's Systems
from Pacific Crossing-1 to Tokyo was ready for service in December 1999 and will
be sold or leased to the customers of Pacific Crossing-1 and others. Successful
future operations of the Company are subject to the several risks, including the
ability of the Company to ensure the successful, timely and cost effective
completion of the Systems to successfully market and generate adequate revenue
from the sale of capacity of the Systems. In addition, the Company will derive
all of its revenues from companies in the Internet and long distance
telecommunications industry and as a result, has concentration of credit risk in
this industry. The Company was licensed to operate the facility-based carrier
services in Japan from the Ministry of Post and Telecommunications ("MPT") in
April 1998.
(2) Accounting Policies
(a) Basis of Financial Statements
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("USGAAP"). The Company maintains its records and prepares its statutory
financial statements in accordance with the Japanese Commercial Code by applying
accounting principles generally accepted in Japan. The accompanying financial
statements incorporated certain adjustments relating to the tax effects of
temporary differences and start-up expenses, and certain reclassifications and
other items to conform with USGAAP. These adjustments were not recorded in the
statutory books of account. The statutory fiscal year-end is March 31.
(b) Development Stage Company
The Company was in its development stage until December 1999 when the
Systems were partially placed in service. Start-up charges in the statements of
operations principally contain various consulting fees or engineering charges
paid outside for the planning, development and design of the Systems before
commencing its service.
(c) Inland Capacity Purchase Agreement (the "Agreement")
Effective December 28, 1999, the Company entered into the Agreement with
Global Crossing Japan Corporation, a subsidiary of Asia Global Crossing, to
grant an Indefeasible Right of Use in units of capacity on the Systems between
Pacific Crossing-1 cable landing stations and major third party communications
hubs in Japan. The total selling price for capacity on the Systems is payable 30
days from the activation date and is non-refundable once the applicable purchase
segment is available. The
F-86
<PAGE> 198
GLOBAL ACCESS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Indefeasible Right of Use granted entitles Global Crossing Japan Corporation to
all rights and obligations of the capacity for a period of fifteen years after
the System activation date. The Company also agrees to perform all operation,
administration and maintenance with respect to such granted capacity. In
exchange for such services, Global Crossing Japan Corporation is obligated for
the term of the Indefeasible Right of Use to pay for its allocable share of the
costs for operating and maintaining the System. Maintenance cost payments are
due and payable quarterly.
The Company amortizes Indefeasible Right of Use revenues from the Agreement
over fifteen years, with amounts due or received but not yet recognized as
operating revenue, recorded in the accompanying balance sheet as deferred
revenue. Costs relating to such revenues are classified as a depreciable asset
and depreciated over the estimated life of the property.
On December 30, in connection with the Agreement, the Company granted its
first Indefeasible Rights of Use on the Systems between Tokyo Network Operation
Center and the Pacific Crossing-1 cable landing station in Ajigaura for total
selling price of (Yen)3,920,000 thousand. Revenue recognized relating to this
transaction during 1999 was (Yen)1,432 thousand, and due from GCJ of
(Yen)4,116,000 thousand, including 5.0% consumption tax, and deferred revenue of
(Yen)3,918,568 thousand was recorded on the balance sheet as of December 31,
1999. On March 1, 2000, the entire amount from Global Crossing Japan Corporation
of (Yen)4,116,000 thousand was paid.
On January 31, 2000, the Company has also granted additional Indefeasible
Rights of Use on the Systems between Tokyo Network Operation Center and the
Pacific Crossing-1 cable landing station in Ajigaura for a total selling price
of (Yen)2,160,000 thousand in connection with the Agreement.
(d) Use of Estimates
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, and the reported revenues and expenses during the reported period.
Actual results could differ from those estimates.
2. CASH
Cash is comprised of cash on hand and bank deposits, which approximate fair
value.
F-87
<PAGE> 199
GLOBAL ACCESS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
THOUSANDS OF JAPANESE YEN
--------------------------
1999 1998
------------ ----------
<S> <C> <C>
Property and equipment, at cost
Buildings.................................................. Y 108,442 Y --
Fiber optical cable systems................................ 1,249,133 --
Furniture and office equipment............................. 1,139 --
Land....................................................... 1,037,070 206,572
Construction in progress................................... 1,459,381 8,888
---------- --------
Total................................................. 3,855,165 215,460
---------- --------
Accumulated depreciation
Buildings.................................................. 133 --
Fiber optical cable systems................................ 733 --
Furniture and office equipment............................. 189 --
---------- --------
Total................................................. 1,055 --
---------- --------
Net property and equipment................................. Y3,854,110 Y215,460
========== ========
</TABLE>
The Company has purchased land for the landing station and the
telecommunications house. Construction in progress includes direct expenditures
for the construction of the Systems, including the costs incurred under the
advisory and consulting contracts.
Depreciation is computed over the estimated lives of assets on the
straight-line basis.
4. SHORT-TERM LOANS PAYABLE
In September and October 1999, the Company entered into short-term loan
agreements to borrow (Yen)2,940,000 thousand from GC and (Yen)3,060,000 thousand
from Marubeni Corporation, respectively. Those loans are due on August 31, 2000
with the interest rate based on the long-term prime rate plus 1.5%. Interest
expense for the year ended December 31, 1999 was approximately (Yen)50,889
thousand.
5. INCOME TAXES
Income taxes are provided based on income (loss) recognized for financial
statement purposes and include the effects of temporary differences between such
income (loss) that was recognized for tax purposes. Current income tax for the
years ended December 31, 1999 and 1998 represented inhabitant tax. The statutory
income tax rate was 42.0% for the year ended December 31, 1999, 47.0% for the
year ended December 31, 1998 and 51.0% for the period from November 4, 1997
(Date of Inception) to December 31, 1997, respectively. The asset and liability
approach is used to recognize deferred income taxes for the expected future tax
consequence of temporary differences between the carrying amounts and the tax
basis of assets and liabilities.
F-88
<PAGE> 200
GLOBAL ACCESS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the deferred income tax assets as of December 31,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
THOUSANDS OF JAPANESE YEN
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Start-up charges........................................... Y 274,022 Y 51,308
Net operating loss carry forward........................... 395,275 61,846
--------- ---------
Total deferred income tax asset............................ 669,297 113,154
Less valuation allowance................................... (669,297) (113,154)
--------- ---------
Y -- Y --
========= =========
</TABLE>
A valuation allowance is fully provided for deferred income tax assets due
to the uncertainty of future income estimates. The amount of the valuation
allowance is reviewed periodically.
The Company has available net operating loss carryforwards of approximately
(Yen)941,132 thousand as of December 31, 1999 to offset future taxable income,
which expire at various dates through 2005.
6. CONSUMPTION TAXES
The tax credit for the consumption taxes incurred (which are excluded in
the cost of goods and services) is available against consumption taxes
attributable to revenue in the same tax period.
7. OTHER RELATED PARTY TRANSACTIONS
The Company paid service fees for the conceptual consultation and research
services of the Company's business start up of (Yen)72,241 thousand to Marubeni
Corporation during the year ended December 31, 1999. Such service fees to
Marubeni Corporation were not incurred for the year ended December 31, 1998 and
the period from November 4, 1997 (Date of Inception) to December 31, 1997.
8. COMMITMENTS
The Company has lease commitments under the non-cancelable operating lease
for the office space and network facilities. Future minimum lease payments under
such leases as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
THOUSANDS OF
JAPANESE
YEARS ENDING DECEMBER 31 YEN
------------------------ ------------
<S> <C>
2000........................................................ Y74,480
2001........................................................ 13,530
2002........................................................ 9,617
</TABLE>
Rent expense for the years ended December 31, 1999 and 1998 were
approximately (Yen)143,732 thousand, (Yen)35,021 thousand, respectively. There
was no rent expense for the period from November 4, 1997 (Date of Inception) to
December 31, 1997.
F-89
<PAGE> 201
UNAUDITED PRO FORMA FINANCIAL INFORMATION
We have prepared the following unaudited pro forma condensed combined
financial information of us, Pacific Crossing Ltd., Hutchison Global Crossing
and Global Access Ltd., which we refer to as "Pro Forma Asia Global Crossing",
to demonstrate how these companies or businesses might have looked if (1) the
purchase of additional interest and the related consolidation of Pacific
Crossing Ltd., (2) the transfer of the 50% ownership interest in Hutchison
Global Crossing and (3) the transfer to us of Global Crossing's 49% ownership
interest in Global Access Ltd. had been completed as of the date or at the
beginning of the period presented. This pro forma information also gives effect
to this offering, the concurrent strategic investments in us and the concurrent
debt offering.
We have prepared the pro forma financial information similar to the pooling
method of accounting, since these entities are entities under common control.
The unaudited pro forma information does not include any potential synergies
relating to Pacific Crossing Ltd., Hutchison Global Crossing and Global Access
Ltd. or increased opportunities to generate additional revenues in Asia. You
should not rely on pro forma financial information as an indication of the
results that would have been achieved if these transactions had taken place
earlier or the future results that we will experience after the completion of
these transactions.
You should read these unaudited pro forma condensed combined financial
statements in conjunction with the more detailed historical financial
information which is included in this document beginning on page F-1.
F-90
<PAGE> 202
PRO FORMA ASIA GLOBAL CROSSING
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONCURRENT
HUTCHISON GLOBAL DEBT
ASIA GLOBAL GLOBAL CROSSING ACCESS LTD. EQUITY OFFERING OFFERING
CROSSING(1) ADJUSTMENTS(2) ADJUSTMENTS(3) ADJUSTMENTS(9) ADJUSTMENTS
----------- --------------- -------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents....................... $ 196,732 $(16,802) $(27,952) $752,550 $389,000(10)
Restricted cash and cash equivalents............ 55,416 -- -- -- --
Accounts receivable............................. 23,987 -- -- -- --
Receivable from affiliates...................... 94,427 16,802 27,952 -- --
Other assets.................................... 8,842 -- -- -- --
---------- -------- ------- -------- --------
Total current assets.......................... 379,404 -- -- 752,550 389,000
---------- -------- ------- -------- --------
Restricted cash and cash equivalents............. 38,921 -- -- -- --
Property and equipment, net...................... 1,431,888 -- -- -- --
Deferred finance fees, net....................... 23,105 -- -- -- 11,000(10)
Other assets..................................... 40,745 -- -- -- --
Investments in affiliate......................... -- 524,029 19,430
---------- -------- ------- -------- --------
Total assets.................................. $1,914,063 $524,029 $19,430 $752,550 $400,000
========== ======== ======= ======== ========
LIABILITIES:
Current liabilities:
Accrued construction costs...................... $ 142,650 $ -- $ -- -- --
Accounts payable and accrued liabilities........ 8,612 -- -- -- --
Deferred revenue................................ 4,308 -- -- -- --
Payable to affiliates........................... 11,250 -- -- -- --
---------- -------- ------- -------- --------
Total current liabilities..................... 166,820 -- -- -- --
---------- -------- ------- -------- --------
Long-term debt................................... 750,000 -- -- -- 400,000(10)
Long-term deferred revenue....................... 94,679 -- -- -- --
Other long-term liabilities...................... 1,427 -- -- -- --
Loan payable to affiliate........................ 9,598 -- -- -- --
---------- -------- ------- -------- --------
Total liabilities............................. 1,022,524 -- -- -- 400,000
---------- -------- ------- -------- --------
Minority interest................................ 141,254 -- -- -- --
---------- -------- ------- -------- --------
SHAREHOLDERS' EQUITY:
Common stock..................................... 12 -- -- (12) --
Class A common stock............................. 578 --
Class B common stock............................. 4,818 --
Additional paid-in capital....................... 758,173 524,029 19,430 747,166 --
Cumulative translation adjustment................ 434 -- -- -- --
Retained earnings (accumulated deficit).......... (8,334) -- -- -- --
---------- -------- ------- -------- --------
750,285 524,029 19,430 752,550 --
---------- -------- ------- -------- --------
Total liabilities and shareholders' equity.... $1,914,063 $524,029 $19,430 $752,550 $400,000
========== ======== ======= ======== ========
<CAPTION>
STRATEGIC PRO FORMA
INVESTMENTS ASIA GLOBAL
ADJUSTMENTS(12) CROSSING
--------------- -----------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents....................... $138,000 $1,431,528
Restricted cash and cash equivalents............ -- 55,416
Accounts receivable............................. -- 23,987
Receivable from affiliates...................... -- 139,181
Other assets.................................... -- 8,842
-------- ----------
Total current assets.......................... 138,000 1,658,954
-------- ----------
Restricted cash and cash equivalents............. -- 38,921
Property and equipment, net...................... -- 1,431,888
Deferred finance fees, net....................... -- 34,105
Other assets..................................... -- 40,745
Investments in affiliate......................... -- 543,459
-------- ----------
Total assets.................................. $138,000 $3,748,072
======== ==========
LIABILITIES:
Current liabilities:
Accrued construction costs...................... -- 142,650
Accounts payable and accrued liabilities........ -- 8,612
Deferred revenue................................ -- 4,308
Payable to affiliates........................... -- 11,250
-------- ----------
Total current liabilities..................... -- 166,820
-------- ----------
Long-term debt................................... -- 1,150,000
Long-term deferred revenue....................... -- 94,679
Other long-term liabilities...................... -- 1,427
Loan payable to affiliate........................ -- 9,598
-------- ----------
Total liabilities............................. -- 1,422,524
-------- ----------
Minority interest................................ -- 141,254
-------- ----------
SHAREHOLDERS' EQUITY:
Common stock..................................... -- --
Class A common stock............................. 92 670
Class B common stock............................. -- 4,818
Additional paid-in capital....................... 137,908 2,186,706
Cumulative translation adjustment................ -- 434
Retained earnings (accumulated deficit).......... -- (8,334)
-------- ----------
138,000 2,184,294
-------- ----------
Total liabilities and shareholders' equity.... $138,000 $3,748,072
======== ==========
</TABLE>
F-91
<PAGE> 203
PRO FORMA ASIA GLOBAL CROSSING
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
HUTCHISON CONCURRENT PRO FORMA
ASIA GLOBAL GLOBAL CROSSING GLOBAL ACCESS LTD. DEBT OFFERING ASIA GLOBAL
CROSSING(1) ADJUSTMENTS(2) ADJUSTMENTS(3) ADJUSTMENTS(11) CROSSING
----------- --------------- ------------------ --------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues....................... $ 108,680 $ -- $ -- $ 108,680
Expenses:
Cost of sales................ 84,850 -- -- 84,850
Operations, administration
and maintenance............ 24,198 -- -- 24,198
General and administrative... 17,776 -- -- 17,776
Depreciation and
amortization............... 8,026 -- -- 8,026
---------- -------- ------- -------- ---------
Operating income (loss)........ (26,170) -- -- (26,170)
Equity in loss of affiliate.... -- (18,325) (3,263) (21,588)
Minority interest.............. (12,118) -- -- (12,118)
Other income (expense):
Other income (expense)....... (306) -- -- (306)
Interest income.............. 8,191 -- 559 -- 8,750
Interest expense............. (1,088) -- -- (23,500) (24,588)
---------- -------- ------- -------- ---------
Income (loss) before provision
for income taxes............. (31,491) (18,325) (2,704) (23,500) (76,020)
PROVISION FOR INCOME TAXES..... -- -- -- -- --
---------- -------- ------- -------- ---------
Net income (loss).............. $ (31,491) $(18,325) (2,704) (23,500) (76,020)
========== ======== ======= ======== =========
Net income (loss) per common share:
Basic and diluted earning per
common share............... $ (26.24) $ (63.35)
========== =========
Shares used in computing
basic and diluted net
income (loss) per common
share...................... 1,200,000 1,200,000
========== =========
</TABLE>
F-92
<PAGE> 204
PRO FORMA ASIA GLOBAL CROSSING
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
ASIA GLOBAL PACIFIC PACIFIC HUTCHISON GLOBAL CONCURRENT
CROSSING CROSSING LTD. CROSSING LTD. GLOBAL CROSSING ACCESS LTD. DEBT OFFERING
HISTORICAL(1) HISTORICAL(4) ADJUSTMENTS ADJUSTMENTS(2) ADJUSTMENTS(3) ADJUSTMENTS(11)
------------- ------------- ------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $ -- $61,100 $ -- $ -- $ --
Expenses:
Cost of sales............... -- 20,722 -- -- --
Operations, administration
and maintenance........... -- 8,000 -- -- --
General and
administrative............ 1,201 8,169 -- -- --
Depreciation and
amortization.............. -- -- 3,112(7) -- --
57(5)
--------- ------- -------- -------- ------- --------
Operating income (loss)....... (1,201) 24,209 (3,169) -- --
Equity in income (loss) of
affiliate................... 9,893 -- (13,005)(6) (37,960) (6,331)
3,112(7)
Minority interest............. -- -- (7,995)(8) -- --
Other income (expense):
Other income (expense)...... -- 459 -- -- --
Interest income............. 11,598 464 -- -- 1,118 --
Interest expense............ -- (2,612) -- -- -- (47,000)
--------- ------- -------- -------- ------- --------
Income (loss) before provision
for income taxes............ 20,290 22,520 (21,057) (37,960) (5,213) (47,000)
Provision for income taxes.... -- -- -- -- -- --
--------- ------- -------- -------- ------- --------
Net income (loss)............. $ 20,290 $22,520 $(21,057) $(37,960) $(5,213) $(47,000)
========= ======= ======== ======== ======= ========
Net income per common share:
Basic and diluted earning
per common share.......... $ 16.91
=========
Shares used in computing
basic and diluted net
income per common share... 1,200,000
=========
<CAPTION>
PRO FORMA
ASIA GLOBAL
CROSSING
-----------
<S> <C>
Revenues...................... $ 61,100
Expenses:
Cost of sales............... 20,722
Operations, administration
and maintenance........... 8,000
General and
administrative............ 9,370
Depreciation and
amortization.............. 3,169
----------
Operating income (loss)....... 19,839
Equity in income (loss) of
affiliate................... (44,291)
Minority interest............. (7,995)
Other income (expense):
Other income (expense)...... 459
Interest income............. 13,180
Interest expense............ (49.612)
----------
Income (loss) before provision
for income taxes............ (68,420)
Provision for income taxes.... --
----------
Net income (loss)............. $ (68,420)
==========
Net income per common share:
Basic and diluted earning
per common share.......... $ (57.02)
==========
Shares used in computing
basic and diluted net
income per common share... 1,200,000
==========
</TABLE>
F-93
<PAGE> 205
PRO FORMA ASIA GLOBAL CROSSING
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. These columns represent our historical financial position and results of
operations.
2. On January 12, 2000, Global Crossing and Hutchison Whampoa formed a joint
venture called Hutchison Global Crossing. This joint venture is owned in
equal parts by Global Crossing and Hutchison Whampoa. In exchange for its
50% interest, Hutchison Whampoa contributed to the joint venture its
existing building-to-building fixed-line telecommunications network in Hong
Kong and certain Internet-related assets previously held by Hutchison
Telecommunications Ltd. In exchange for Global Crossing's 50% interest,
Global Crossing contributed to the joint venture international
telecommunications capacity rights on the Global Crossing network, know-how
related to Internet data centers and cash, and to Hutchison Whampoa 6 3/8%
cumulative convertible preferred stock.
Concurrent to this offering, Softbank and Microsoft will purchase 19% and
19% of Global Crossing's interest in Hutchison Global Crossing,
respectively. Also, concurrent with this offering, Softbank, Microsoft and
Global Crossing will contribute to us all of their respective interests in
Hutchison Global Crossing, and we will purchase Global Crossing's interest
in any outstanding shareholder loans to Hutchison Global Crossing, as
described under "Concurrent Transactions". The contribution to us of the
respective ownership interests of Global Crossing in Hutchison Global
Crossing will be accounted by us similar to the pooling method of
accounting.
Global Crossing 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. The purchase price
allocation in connection with the establishment of the HGC joint venture is
preliminary and further refinements are likely to be made based on the
completion of a final valuation study. Global Crossing does not believe the
final purchase price allocation will be materially different than the
preliminary allocation. Global Crossing currently anticipates that goodwill
associated with the transaction 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 year ended December 31,
1999 and the six months ended June 30, 2000.
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, 2000 DECEMBER 31, 1999
-------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Equity in earnings of Hutchison Global
Crossing................................... $ (9,500) $(16,096)
Amortization of goodwill..................... (8,825) (21,864)
-------- --------
Total...................................... $(18,325) $(37,960)
======== ========
</TABLE>
At June 30, 2000 Global Crossing had loans receivable from Hutchison Global
Crossing totaling HK$131.1 million (US$16.8 million based on a convenience
translation rate of HK7.80=$1.00). These adjustments assume Asia Global
Crossing will purchase the outstanding loans from Global Crossing.
3. In December 1998, Global Crossing entered into a joint venture, Global
Access Ltd., to construct and operate Global Access Ltd. Global Crossing
has a 49% interest in Global Access Ltd. Concurrent to this offering,
Global Crossing will contribute to us all of its interest in Global Access
Ltd. In consideration for Global Crossing's contribution, we will issue
additional 36.6 million shares of our class B common stock to Global
Crossing. We will also purchase Global Crossing's interest in any
outstanding shareholder loans to Global Access Ltd. as described under
"Concurrent Transactions". The contribution of Global Access Ltd. to us
will be accounted by us similar to the pooling method of accounting because
Global Access Ltd. and us are entities under common control of Global
Crossing. Global Access Ltd. is anticipated to be accounted for as an
unconsolidated joint venture under the equity method of accounting.
F-94
<PAGE> 206
At June 30, 2000, Global Crossing had a loan receivable of (Yen)2,940
million (US$28.0 million based on a convenience translation rate of
(Yen)105.18=$1.00) from Global Access Ltd., bearing an interest rate of
long term prime rate in Japan plus 1.5% (estimated to be 4%). These
adjustments assume Asia Global Crossing will purchase the loan from Global
Crossing.
These adjustments also include the assumed equity in the results of
operations of Global Access Ltd. for the year ended December 31, 1999 and
the six months ended June 30, 2000.
4. This column represents the historical results of operations of Pacific
Crossing Ltd. for the year ended December 31, 1999.
5. This adjustment reflects the amortization expense of the excess
consideration over the net assets acquired (goodwill) in connection with
the purchase of additional ownership interest in Pacific Crossing Ltd.,
which we have estimated to be approximately $1.4 million. We are amortizing
goodwill on the straight-line method over 25 years. The purchase price
allocation is based on current estimates.
6. This adjustment represents the reversal of historical equity in income of
affiliates for the year ended December 31, 1999.
7. These adjustments represent the reclassification of the amortization
expense associated with the PCG warrants included in the historical equity
in loss of affiliates for the year ended December 31, 1999 to depreciation
and amortization as the carrying value of the PCG warrants was reclassified
into property and equipment as of January 1, 2000.
8. This adjustment represents the 35.5% minority interest expense, as a result
of consolidating and the purchase of an additional 7.5% interest in Pacific
Crossing Ltd.
9. This column reflects this offering at an assumed initial public offering
price of $15.00 per share.
10. These adjustments represent the concurrent debt offering of $400 million,
net of deferred finance fees of $11 million.
11. This column represents the interest expense resulted from the concurrent
debt offering at an assumed interest rate of 11.75%.
12. In September 2000, we entered into strategic investment term sheets with
Hutchison Whampoa Ltd., Singapore Technologies Telemedia and
Microelectronics Technology, Inc. to purchase shares of our Class A common
stock in an aggregate amount of $50,000,000, $50,000,000 and $38,000,000,
respectively, at the initial public offering price per share. This column
reflects these investments.
F-95
<PAGE> 207
------------------------------------------------------
------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares being offered, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................... 4
Risk Factors.......................... 11
Special Note Regarding Forward-Looking
Statements.......................... 23
Use of Proceeds....................... 24
Dividend Policy....................... 24
Capitalization........................ 25
Dilution.............................. 26
Selected Historical Financial
Information......................... 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 35
Selected Unaudited Pro Forma Financial
Information......................... 44
Business.............................. 46
Management............................ 62
Principal Shareholders................ 72
Concurrent Transactions............... 75
Transactions with Related Parties..... 76
Regulation............................ 91
Description of Material
Indebtedness........................ 96
Description of Capital Stock.......... 99
Certain Income Tax Consequences....... 101
Shares Eligible for Future Sale....... 105
Underwriting.......................... 107
Validity of Common Stock.............. 109
Experts............................... 109
Where You Can Find More Information... 110
Index to Consolidated Financial
Statements.......................... F-1
Unaudited Pro Forma Financial
Information......................... F-90
</TABLE>
------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or
subscription.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
53,000,000 Shares
[ASIA GLOBAL CROSSING LOGO]
Class A Common Stock
------------------------
PROSPECTUS
------------------------
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
MERRILL LYNCH & CO.
CHASE H&Q
CIBC WORLD MARKETS
CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEX. BROWN
LEHMAN BROTHERS
ABN AMRO ROTHSCHILD
A DIVISION OF ABN AMRO INCORPORATED
Representatives of the Underwriters
------------------------------------------------------
------------------------------------------------------
<PAGE> 208
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts, payable by the Registrant in connection with the offer
and sale of the common stock being registered. All amounts are estimates except
the registration fee, the NASD filing fee and the Nasdaq National Market entry
fee.
<TABLE>
<S> <C>
Registration fee............................................ $ 257,453
NASD filing fee............................................. 30,500
Blue Sky fees and expenses (including legal fees)........... 5,000
Nasdaq National Market fee.................................. 95,000
Accounting fees and expenses................................ 800,000
Other legal fees and expenses............................... 1,100,000
Transfer agent and registrar fee............................ 15,000
Printing and engraving...................................... 800,000
Miscellaneous............................................... 97,047
-----------
Total............................................. $ 3,200,000
===========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Bye-laws of the Registrant provide for indemnification of the
Registrant's officers and directors against all liabilities, loss, damage or
expense incurred or suffered by such party as an officer or director of the
Registrant; provided that such indemnification shall not extend to any matter
which would render it void pursuant to the Companies Act of 1981 as in effect
from time to time in Bermuda.
The Companies Act provides that a Bermuda company may indemnify its
directors in respect of any loss arising or liability attaching to them as a
result of any negligence, default, breach of trust of which they may be guilty.
However, the Companies Act also provides that any provision, whether contained
in the company's bye-laws or in a contract or arrangement between the company
and the director, indemnifying a director against any liability which would
attach to him in respect of his fraud or dishonesty will be void.
The directors and officers of the Registrant are covered by directors' and
officers' insurance policies maintained by the Registrant.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of the transactions by the Registrant during the
past three years involving sales of the Registrant's securities that were not
registered under the Securities Act of 1933:
- the issuance, upon formation of the registrant, of 12,000 common shares
to Asia Global Crossing Holdings Ltd., its sole shareholder, in
consideration for $12,000;
- a 1 to 100 stock split completed on September 28, 1999;
- the issuance, on the closing date of the initial public offering
contemplated by this Registration Statement of 36.6 million shares of
Class B common stock to Global Crossing Ltd. in consideration for the
contribution by Global Crossing of its 49% interest in Global Access
Limited valued at $753,000,000; and
- the issuance, on the closing date of the initial public offering
contemplated by this Registration Statement, of (1) 444.0 million Class B
common shares and (2) 5.4 million Class A common
II-1
<PAGE> 209
shares to Asia Global Crossing Holdings Ltd. in exchange for the common
shares it held in the Registrant prior to such initial public offering.
Such issuances were made in reliance upon an exemption from the
registration provisions of the Securities Act set forth in Section 4(2) thereof
or the rules and regulations thereunder. Such issuances were made to the
Registrant's sole shareholder or Global Crossing Ltd., a sophisticated investor
and the controlling shareholder of Asia Global Crossing Holdings Ltd., in
transactions not involving any public offering. All of such common shares are
deemed restricted securities within the meaning of Rule 144 under the Securities
Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. EXHIBITS. The following is a complete list of exhibits filed as part of
this Registration Statement, which are incorporated herein:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
1.1 Form of Underwriting Agreement (filed herewith).
3.1 Memorandum of Association of the Registrant, dated September
24, 1998 (previously filed).
3.2 Registrant's Bye-laws (to be filed by amendment).
3.3 Memorandum of Increase in the Share Capital of the
Registrant (to be filed by amendment).
4.1 Form of Specimen Certificate for Registrant's Class A Common
Stock (previously filed).
4.2 Form of Indenture relating to the Registrant's % senior
notes due 2010 (to be filed by amendment).
5.1 Opinion of Simpson Thacher & Bartlett (previously filed).
5.2 Opinion of Appleby, Spurling & Kempe (previously filed).
10.1 Shareholders Agreement, dated as of , 2000, among
Global Crossing Ltd., Softbank Corp., Microsoft Corporation
and Asia Global Crossing Ltd. (to be filed by amendment).
10.2 Second Amended and Restated Shareholders Agreement, dated as
of March 24, 2000, among GCT Pacific Holdings, Ltd., SCS
(Bermuda) Ltd., Marubeni Pacific Cable Limited and Pacific
Crossing Ltd. (previously filed).
10.3 Shareholders Agreement, dated January 12, 2000, among Global
Crossing Ltd., Hutchison Telecommunications Ltd., Hutchison
Whampoa Limited, Global Crossing Holdings Ltd. and HCL
Holdings Ltd. (previously filed).
10.4 East Asia Crossing-Construction Contract, dated as of
December 17, 1999, among Asia Global Crossing Ltd. and KDD
Submarine Cable Systems Inc. (previously filed) (portions
have been omitted pursuant to a request for confidential
treatment).
10.5 Project Development and Construction Contract, dated as of
April 21, 1998, among Tyco Submarine Systems Ltd. and
Pacific Crossing Ltd. (previously filed) (portions have been
omitted pursuant to a request for confidential treatment).
10.6 Capacity Commitment Agreement, dated as of November 24,
1999, among Global Crossing USA Inc., Softbank Corp. and
Microsoft Corporation (previously filed).
10.7 Registration Rights Agreement, dated as of November 24,
1999, among Global Crossing Ltd., Softbank Corp., Microsoft
Corporation, Asia Global Crossing Ltd., and The Goldman
Sachs Group, Inc. (previously filed).
10.8 Employment Agreement, dated as of February 12, 2000, between
John J. Legere and the Registrant (previously filed).
</TABLE>
II-2
<PAGE> 210
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
10.9 Employment Agreement, dated as of April 1, 1998, between
John M. Scanlon and Global Crossing Ltd. (previously filed).
10.10 First Amendment to Employment Agreement, dated September 27,
1999, between John M. Scanlon and Global Crossing Ltd.
(previously filed).
10.11 Employment Agreement, dated as of May 30, 2000, between
Stefan C. Riesenfeld and Global Crossing Development Company
(previously filed).
10.12 Employment Agreement, dated as of March 2, 2000, between
Charles F. Carroll and Global Crossing Development Company
(previously filed).
10.13 International Assignment to Japan, dated June 22, 1999,
between Darryl Green and Global Crossing Employee Services,
Inc. (previously filed).
10.14 Asia Global Crossing 2000 Stock Incentive Plan, dated as of
(to be filed by amendment).
10.15 Form of Change in Control Agreement between the Registrant
and the named executive officers (previously filed).
21.1 Subsidiaries of the Registrant (to be filed by amendment).
23.1 Consent of Arthur Andersen (filed herewith).
23.2 Consent of Arthur Andersen (filed herewith).
23.3 Consent of PricewaterhouseCoopers (filed herewith).
23.4 Consent of Arthur Andersen (filed herewith).
23.5 Consent of Simpson Thacher & Bartlett (included in Exhibit
5.1).
23.6 Consent of Appleby, Spurling & Kempe (included in Exhibit
5.2).
24.1 Power of Attorney (previously filed).
24.2 Power of Attorney for Stefan C. Riesenfeld (previously
filed).
24.3 Power of Attorney for Leo J. Hindery, Jr. (previously
filed).
24.4 Power of Attorney for Thomas J. Casey (to be filed by
amendment).
24.5 Power of Attorney for Norman Brownstein (to be filed by
amendment).
24.6 Power of Attorney for William E. Conway, Jr. (to be filed by
amendment).
24.7 Power of Attorney for Geoffrey J.W. Kent (to be filed by
amendment).
27.1 Financial Data Schedules (filed herewith).
</TABLE>
B. FINANCIAL STATEMENT SCHEDULES
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-3
<PAGE> 211
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 212
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on September 5, 2000.
ASIA GLOBAL CROSSING LTD.
By: /s/ JOHN J. LEGERE
------------------------------------
Name: John J. Legere
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/*/ Chairman of the Board September 5, 2000
-------------------------------------------------------- and Director
Gary Winnick
/*/ Co-Chairman of the September 5, 2000
-------------------------------------------------------- Board and Director
Lodwrick M. Cook
/s/ JOHN J. LEGERE Chief Executive Officer September 5, 2000
-------------------------------------------------------- and Director
John J. Legere
/*/ Vice Chairman of the September 5, 2000
-------------------------------------------------------- Board and Director
John M. Scanlon
Vice Chairman of the September , 2000
-------------------------------------------------------- Board and Director
Thomas J. Casey
/*/ Director September 5, 2000
--------------------------------------------------------
Leo J. Hindery, Jr.
/*/ Director September 5, 2000
--------------------------------------------------------
Joseph P. Clayton
/*/ Director September 5, 2000
--------------------------------------------------------
Eric Hippeau
/*/ Director September 5, 2000
--------------------------------------------------------
Thomas U. Koll
Director September , 2000
--------------------------------------------------------
Norman Brownstein
Director September , 2000
--------------------------------------------------------
William E. Conway, Jr.
</TABLE>
II-5
<PAGE> 213
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Director September , 2000
--------------------------------------------------------
Geoffrey J.W. Kent
/*/ Chief Financial Officer September 5, 2000
--------------------------------------------------------
Stefan C. Riesenfeld
*By Power of Attorney
/s/ JOHN J. LEGERE Attorney-in-Fact
--------------------------------------------------------
John J. Legere
</TABLE>
II-6
<PAGE> 214
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
1.1 Form of Underwriting Agreement (filed herewith).
3.1 Memorandum of Association of the Registrant, dated September
24, 1998 (previously filed).
3.2 Registrant's Bye-laws (to be filed by amendment).
3.3 Memorandum of Increase in the Share Capital of the
Registrant (to be filed by amendment).
4.1 Form of Specimen Certificate for Registrant's Class A Common
Stock (previously filed).
4.2 Form of Indenture relating to the Registrant's % senior
notes due 2010 (to be filed by amendment).
5.1 Opinion of Simpson Thacher & Bartlett (previously filed).
5.2 Opinion of Appleby, Spurling & Kempe (previously filed).
10.1 Shareholders Agreement, dated as of , 2000,
among Global Crossing Ltd., Softbank Corp., Microsoft
Corporation and Asia Global Crossing Ltd. (to be filed by
amendment).
10.2 Second Amended and Restated Shareholders Agreement, dated as
of March 24, 2000, among GCT Pacific Holdings, Ltd., SCS
(Bermuda) Ltd., Marubeni Pacific Cable Limited and Pacific
Crossing Ltd. (previously filed).
10.3 Shareholders Agreement, dated January 12, 2000, among Global
Crossing Ltd., Hutchison Telecommunications Ltd., Hutchison
Whampoa Limited, Global Crossing Holdings Ltd. and HCL
Holdings Ltd. (previously filed).
10.4 East Asia Crossing-Construction Contract, dated as of
December 17, 1999, among Asia Global Crossing Ltd. and KDD
Submarine Cable Systems Inc. (previously filed) (portions
have been omitted pursuant to a request for confidential
treatment).
10.5 Project Development and Construction Contract, dated as of
April 21, 1998, among Tyco Submarine Systems Ltd. and
Pacific Crossing Ltd. (previously filed) (portions have been
omitted pursuant to a request for confidential treatment).
10.6 Capacity Commitment Agreement, dated as of November 24,
1999, among Global Crossing USA Inc., Softbank Corp. and
Microsoft Corporation (previously filed).
10.7 Registration Rights Agreement, dated as of November 24,
1999, among Global Crossing Ltd., Softbank Corp., Microsoft
Corporation, Asia Global Crossing Ltd., and The Goldman
Sachs Group, Inc. (previously filed).
10.8 Employment Agreement, dated as of February 12, 2000, between
John J. Legere and the Registrant (previously filed).
10.9 Employment Agreement, dated as of April 1, 1998, between
John M. Scanlon and Global Crossing Ltd. (previously filed).
10.10 First Amendment to Employment Agreement, dated September 27,
1999, between John M. Scanlon and Global Crossing Ltd.
(previously filed).
10.11 Employment Agreement, dated as of May 30, 2000, between
Stefan C. Riesenfeld and Global Crossing Development Company
(previously filed).
10.12 Employment Agreement, dated as of March 2, 2000, between
Charles F. Carroll and Global Crossing Development Company
(previously filed).
</TABLE>
<PAGE> 215
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
10.13 International Assignment to Japan, dated June 22, 1999,
between Darryl Green and Global Crossing Employee Services,
Inc. (previously filed).
10.14 Asia Global Crossing 2000 Stock Incentive Plan, dated as of
(to be filed by amendment).
10.15 Form of Change in Control Agreement between the Registrant
and the named executive officers (previously filed).
21.1 Subsidiaries of the Registrant (to be filed by amendment).
23.1 Consent of Arthur Andersen (filed herewith).
23.2 Consent of Arthur Andersen (filed herewith).
23.3 Consent of PricewaterhouseCoopers (filed herewith).
23.4 Consent of Arthur Andersen (filed herewith).
23.5 Consent of Simpson Thacher & Bartlett (included in Exhibit
5.1).
23.6 Consent of Appleby, Spurling & Kempe (included in Exhibit
5.2).
24.1 Power of Attorney (previously filed).
24.2 Power of Attorney for Stefan C. Riesenfeld (previously
filed).
24.3 Power of Attorney for Leo J. Hindery, Jr. (previously
filed).
24.4 Power of Attorney for Thomas J. Casey (to be filed by
amendment).
24.5 Power of Attorney for Norman Brownstein (to be filed by
amendment).
24.6 Power of Attorney for William E. Conway, Jr. (to be filed by
amendment).
24.7 Power of Attorney for Geoffrey J.W. Kent (to be filed by
amendment).
27.1 Financial Data Schedules (filed herewith).
</TABLE>
