<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 23, 2000
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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:
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<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 pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to 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 pursuant to 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 pursuant to 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 pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED(1) REGISTERED OFFERING PRICE(2) REGISTRATION FEE
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<S> <C> <C> <C>
Class A Common Stock, par value $0.01 per share...... shares $100,000,000 $26,400
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</TABLE>
(1) Includes an aggregate of shares which the Underwriters have the
option to purchase from the Registrant solely to cover over-allotments.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933,
as amended.
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 PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<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 , 2000.
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.
Following this offering, Asia Global Crossing will have Class A common
stock and Class B common stock outstanding. The Class B common stock will
represent approximately % of the total combined voting power of Asia Global
Crossing's outstanding common stock.
Prior to 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 $ and $ .
Asia Global Crossing will apply for quotation of the Class A common stock on
under the symbol " ".
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.
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<TABLE>
<CAPTION>
Per Share Total
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<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 shares of Class A
common stock, the underwriters have the option to purchase up to an additional
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 against payment in New York,
New York on , 2000.
Joint Book-Running Managers
GOLDMAN, SACHS & CO. SALOMON SMITH BARNEY
Joint Lead Manager
MERRILL LYNCH & CO.
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Prospectus dated , 2000.
<PAGE> 3
[Map of Asia and the western United States marked to indicate location of our
cable systems]
<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 received 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.
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.
The information in this prospectus assumes (1) the completion, concurrently
with this offering, of the transactions described under "Concurrent
Transactions" on page 64 and (2) the reallocation of our founding shareholders'
percentage interests in us as described under "Principal Shareholders -- Our
Beneficial Ownership" on page 64.
ASIA GLOBAL CROSSING
We intend to be the first pan-Asian telecommunications carrier to provide
integrated 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, backhaul connections to our landing sites, national
networks, city fiber rings, telehouses and Web-hosting centers. 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 rings in Tokyo and Osaka;
- two telehouses providing collocation space in Tokyo; 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 IP-based 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.
Global Crossing is building and operating a state-of-the-art fiber optic
network of global scale and scope to serve as the backbone for providing
worldwide Internet, data, voice and Web-hosting services to wholesale and
multinational business customers. We will offer these services in Asia with the
aim of becoming the first pan-Asian telecommunications carrier to offer
worldwide communications solutions.
In November 1999, we were formed as a joint venture among Global Crossing
Ltd., Microsoft Corporation and Softbank Corp. to market global, integrated
Internet, data, voice and Web-hosting services to customers in Asia. Our growing
fiber optic network, integrated with Global Crossing's worldwide fiber optic
network, comprise a single technologically advanced platform from which we will
offer these services to capitalize on the anticipated significant growth in
Asian Internet and telecommunications traffic and the increasingly favorable
regulatory environment. 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.
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
intend to select partners in these markets based on their existing networks and
other assets, existing customer relationships, licenses, technical expertise and
market prominence. Our joint
4
<PAGE> 6
ventures with Global Bandwidth Solutions, or GBS, a subsidiary of Marubeni
Corporation, and Internet Research Institute, or IRI, in Japan and Hutchison
Whampoa Limited in Hong Kong are examples of the strategic alliances that 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. In addition, we intend to expand our Web-hosting services in
Asia through joint ventures with local partners and GlobalCenter Inc., a Global
Crossing subsidiary.
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
PC-1, a subsea cable which connects Japan to the United States, where it
seamlessly connects to the Global Crossing network. PC-1 is designed to
operate initially at 80 gigabits per second, or Gbps, of service
capacity, upgradeable to a minimum of 640 Gbps.
- East Asia: We are now constructing East Asia Crossing, or EAC, our subsea
cable through which we expect to connect Japan to Hong Kong by the end of
2000. We expect to extend EAC 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. EAC is designed to operate
initially at 80 Gbps of service capacity, upgradeable to a minimum of
2.56 terabits per second, or Tbps, which will be the highest capacity
introduced to date in Asia.
- Japan: We currently connect one landing station for PC-1 to our Tokyo
city fiber ring, telehouse and regional operating center via facilities
owned and operated by our joint venture in Japan, Global Access Limited,
or GAL. GAL 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 already offers Web-hosting and
Internet infrastructure services to customers.
- Hong Kong: Our joint venture in Hong Kong, Hutchison Global Crossing, or
HGC, owns and operates the largest fully-fiber optic network in Hong
Kong, over which HGC provides Internet, data and voice services. In
addition, HGC is developing a GlobalCenter data center, which we expect
to begin operations in the summer of 2000.
We currently offer the following services:
- structured bandwidth services to telecommunications carriers and Internet
companies via indefeasible rights of use, or IRUs;
- Internet protocol, or IP, transit services, including dedicated Internet
access;
- 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, including asynchronous transfer mode, or ATM,
and frame relay;
- advanced voice and data services, including multimedia services such as
video conferencing and e-commerce enablement; and
- switched services for long distance carriers.
We intend to replicate those network and service capabilities in each
market to which we extend our network. We also intend to leverage our
relationship with Global Crossing to benefit from its telecommunications, sales
and marketing expertise. As of March 31, 2000, our customers included
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<PAGE> 7
AboveNet, Cable & Wireless IDC, Exodus, KDD, Qwest and Teleglobe. Our revenue
for the quarter ended March 31, 2000 was $75.8 million.
RECENT DEVELOPMENTS
On May 20, 2000, we agreed with Singapore Technologies Telemedia, or STT,
to enter into joint venture agreements for the purpose of forming two joint
ventures, which will be 50% owned by each of us and STT. The first joint venture
will build and operate backhaul and telehouses in Singapore, providing us with
the necessary components to extend EAC into Singapore. The joint venture's
terrestrial fiber optic system will also link to the Global Crossing network
through EAC. We will establish the second joint venture to build and operate a
GlobalCenter data center in Singapore, which will adhere to GlobalCenter
technical specifications. In addition, under the terms of the agreement, STT has
committed to purchase capacity on our network, subject to our reaching
definitive agreements with STT regarding the two joint ventures.
STT is a leading global info-communications service provider, which offers
a wide suite of services through various subsidiaries and associates, including
fixed and mobile telephony, e-commerce solutions and services, paging, mobile
data communications and a digital mobile communications network.
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 all outstanding shares issued to Asia Global Crossing Holdings will be
distributed to our founding shareholders. See "Principal Shareholders" beginning
on page 64.
As used in this prospectus, the terms we, us, our and Asia Global Crossing
refer to Asia Global Crossing Ltd. and its subsidiaries unless the context
indicates another meaning.
The Asia Global Crossing name, the AGC name and the logo are our
trademarks. We have filed trademark applications for these marks in the United
States and in a number of countries in Asia.
Information contained on Global Crossing's website is not intended to be
part of this prospectus.
6
<PAGE> 8
THE OFFERING
Class A common stock
offered....................... shares
Common stock to be outstanding
after this offering......... shares of Class A common stock
shares of Class B common stock
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 % 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.................... Holders of our Class B common stock will have
the option at any time to convert each of their
shares into one share of Class A common stock.
Holders 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 or third party debt
financing;
- to purchase from Global Crossing shareholder
loans it made to HGC and GAL; 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 symbol...............
The information above assumes the issuance of (1) additional
shares of our Class B common stock to Global Crossing, at the assumed initial
public offering price of $ per share, in connection with its
contribution to us of its 49% interest in GAL and (2) shares of our Class A
common stock and Class B common stock to Asia Global Crossing Holdings for
distribution to its shareholders in the amounts indicated in "Principal
Shareholders" beginning on page 64.
- shares of Class A common stock and shares of Class B
common stock issuable upon the exercise of outstanding stock options,
of which will then be exercisable;
- shares of Class A common stock authorized and reserved for
issuance under our stock incentive plan;
- additional shares of Class A common stock that the underwriters
have the option to purchase from us; and
- 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 before this offering of shares of our Class A common stock and
that the aggregate gross proceeds of our debt offering will be approximately
$ . Neither offering is conditioned on the other, and 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
and 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.
[DIAGRAM -- OUR CORPORATE STRUCTURE]
- ---------------
* Ownership percentages are determined based on an assumed initial public
offering price per share of our Class A common stock of $ .
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 three months ended March 31,
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 PCL. 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 EAC
to us.
- At December 31, 1999, we beneficially owned 57.75% of PCL. Before January
1, 2000, our investment in PCL was accounted for under the equity method
because we were not able to exercise effective control over PCL. In March
2000, we increased our interest in PCL to 64.5%, and the PCL shareholders
agreement was amended to give us effective control over PCL. As a result,
we have consolidated PCL as of January 1, 2000.
- The first segment of PC-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 March 31, 2000 and for the three months
ended March 31, 2000 and 1999 are derived from our unaudited consolidated
financial statements. We have made adjustments, consisting of normal
recurring adjustments and adjustments necessary to present the
consolidated financial position, which in the opinion of our management
are necessary for a fair presentation. Results of operations for the
three months ended March 31, 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. 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 depreciation
and amortization, non-cash cost of capacity sold, stock related
compensation 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. 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
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ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1998
THREE MONTHS ENDED (DATE OF
MARCH 31, YEAR ENDED INCEPTION) TO
---------------------- DECEMBER 31, DECEMBER 31,
2000 1999 1999 1998
---------- --------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue................................... $ 75,804 $ -- $ -- $ --
Expenses.................................. 53,531 -- 1,201 --
---------- --------- ---------- ----------
Operating income (loss)................... 22,273 -- (1,201) --
Equity in income (loss) of affiliates..... -- (1,509) 9,893 (2,507)
Minority interest......................... (10,661) -- -- --
Other income, net......................... 2,724 2,858 11,598 5,374
---------- --------- ---------- ----------
Income before provision for income
taxes.............................. 14,336 1,349 20,290 2,867
Provision for income taxes................ -- -- -- --
---------- --------- ---------- ----------
Net income.............................. $ 14,336 $ 1,349 $ 20,290 $ 2,867
========== ========= ========== ==========
Net income per common share:
Basic and diluted net income per common
share................................ $ 11.95 $ 1.12 $ 16.91 $ 2.39
========== ========= ========== ==========
Shares used in computing basic and diluted
net income per common share............. 1,200,000 1,200,000 1,200,000 1,200,000
========== ========= ========== ==========
Pro forma basic and diluted net income per
common share............................ $ $
========== ==========
Shares used in computing pro forma basic
and diluted net income per common
share...................................
========== ==========
OTHER DATA:
Cash revenue.............................. $ 95,984 $ -- $ -- $ --
Adjusted EBITDA........................... 77,300 -- (1,201) --
Cash from (used for) operating
activities.............................. 38,936 2,858 22,045 5,366
Cash used for investing activities........ (177,218) (24) (90,652) (231,006)
Cash from financing activities............ $ 334,615 $ -- $ 73,013 $ 231,018
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------
2000 1999 1998
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 207,514 $ 9,784 $ 5,378
Restricted cash and cash equivalents................... 136,279 138,118 231,000
Property and equipment, net............................ 1,367,512 101,598 --
Total assets........................................... 1,863,220 603,843 397,037
Long-term debt......................................... 750,000 -- --
Total liabilities...................................... 944,532 102,533 --
Minority interest...................................... 121,613 -- --
Shareholder's equity................................... $ 797,075 $501,310 $397,037
</TABLE>
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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.
Investing in our Class A common stock involves a high degree of risk. If any of
the following risks actually occurs, our business could be seriously harmed and
the trading price of our common stock could decline. In those circumstances, you
may lose part or all of your investment.
RISK FACTORS RELATING TO OUR BUSINESS
IT MAY BE DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS BECAUSE WE HAVE A LIMITED
OPERATING HISTORY.
We were formed in November 1999, and we have a limited operating history.
Our financial information before January 2000 relates principally to a period in
which we were constructing and developing PC-1 and, until January 2000, we had
no revenues and minimal operating costs. Because of this limited history, it may
be difficult for potential investors to evaluate the performance of our
operations.
WE HAVE SIGNIFICANT INDEBTEDNESS WHICH MAY LIMIT OUR ABILITY TO COMPLY WITH THE
TERMS OF OUR INDEBTEDNESS AND MAY RESTRICT OUR ABILITY TO OPERATE.
We have substantial debt and debt service requirements, and after the
completion of our anticipated debt offering we will add to this indebtedness.
Our substantial indebtedness could have important consequences to you. For
example, it could:
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to fund future capital expenditures, working capital
and other general corporate requirements;
- require us to dedicate a substantial portion of our cash flow from
operations to make interest and principal payments on our indebtedness,
reducing the availability of our cash flow to fund capital expenditures,
working capital and other general corporate purposes;
- make it more difficult for us to make interest and principal payments on
our other indebtedness, which would be a default under our credit
facility and indenture;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate; and
- place us at a competitive disadvantage compared to our competitors that
may have less debt.
As of March 31, 2000, on a pro forma basis giving effect to (1) the
contribution to us by our founding shareholders of a 50% interest in HGC and a
49% interest in GAL of Global Crossing's interests in HGC and GAL and our
anticipated concurrent debt offering, we and our consolidated subsidiaries had a
total of $ of liabilities, including approximately $ in senior
indebtedness, of which $ was secured. In addition, as of March 31, 2000, GAL
had a total of Y6 billion of short-term loans from affiliates, and HGC had a
long-term loan from an affiliate of HK$174 thousand. Since March 31, 2000, HGC
has incurred additional indebtedness in the form of shareholder loans from each
of Global Crossing and a subsidiary of Hutchison Whampoa, and we anticipate that
GAL and HGC will incur additional indebtedness, as described in "Description of
Material Indebtedness -- Shareholder Loans" on page 85.
Our ability to repay our debt depends upon a number of factors, many of
which are beyond our control. In addition, we rely on dividends, loan repayments
and other intercompany cash flows from our subsidiaries and affiliates to repay
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.
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In addition, if we are unable to generate sufficient cash flow to meet our
debt service requirements, we may have to renegotiate the terms of our long-term
debt. We cannot assure you that we will be able to renegotiate successfully
those terms or refinance our indebtedness if required or that satisfactory terms
of any refinancing would be available. If we are not able to refinance our
indebtedness or obtain new financing under these circumstances, we would have to
consider other options, such as:
- sales of assets;
- public or private sales of equity;
- negotiations with our lenders to restructure applicable indebtedness; or
- other options available to us under applicable law.
WE MAY HAVE DIFFICULTY IN OBTAINING THE ADDITIONAL FINANCING REQUIRED TO DEVELOP
OUR BUSINESS.
To implement further our business strategy, we anticipate that we will
require substantial additional equity and debt financing. Under our business
plan, we expect to require significant additional financing to continue building
out our network and provide additional services to our customers. Obtaining
additional financing will be subject to a number of factors, including:
- the state of operations of our company and our joint ventures;
- our actual or anticipated results of operations, financial condition and
cash flows;
- investor sentiment towards companies with substantial international
operations, and in particular towards companies with Asian operations,
and companies in the telecommunications business, particularly in Asia;
and
- generally prevailing market conditions.
If we raise additional funds through the issuance of equity securities, the
percentage ownership of our then current shareholders will be reduced, and the
new equity securities may have rights, preferences or privileges senior to those
of the holders of our common stock. If we raise additional funds through the
issuance of debt securities, these securities would have rights, preferences and
privileges senior to those of the holders of our common stock, and the terms of
this debt could impose additional restrictions on our operations and ability to
pay dividends and result in significant interest expense to us. 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.
CONSTRUCTION OF OUR NETWORK IS A COMPLEX, EXPENSIVE AND DIFFICULT PROCESS AND
DELAYS OR OTHER PROBLEMS IN ITS COMPLETION, INCLUDING THE INABILITY TO RAISE
ADDITIONAL FINANCING, IF NECESSARY, COULD HAVE A SERIOUS IMPACT ON OUR STRATEGY
AND BUSINESS.
Our ability to achieve our strategic objectives will depend in large part
upon the successful, timely and cost-effective completion of our subsea cables,
terrestrial networks and related infrastructure currently under development or
that we plan to develop in the future, either independently or through joint
ventures or other arrangements. Our success also depends on achieving
substantial capacity sales on these systems and market acceptance of products
and services which utilize them. The construction of our systems and related
infrastructure will be affected by a variety of factors, uncertainties and
contingencies, many of which are beyond our control including:
- our ability to manage their construction effectively;
- our ability to obtain all construction and operating permits and
licenses;
- third-party contractors performing their obligations on schedule;
- our ability to enter into favorable construction contracts with a limited
number of suppliers; and
- the ability of GAL and HGC to do all of the foregoing.
These factors may significantly delay or prevent completion of one or more
of our systems and related infrastructure, which could have a material adverse
effect on our business, financial condition and results of operations.
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The construction of undersea cables and terrestrial networks is a time
consuming process requiring significant capital investment and we have incurred
significant indebtedness to develop existing systems and expect to incur
additional indebtedness to develop future systems. PC-1 is being developed 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.
Construction of PC-1 was commenced in April 1998, and we expect the full ring to
be completed by year end 2000. We are also currently developing EAC, and we
expect that the portion of EAC connecting Japan, Hong Kong, Taiwan and Korea
will have a total projected cost of approximately $750 million and will not be
completed until the first half of 2001. If we are unable to sell capacity and
services on these networks as expected, we will not be able to recoup the cost
of their development and our business and financial condition could be adversely
affected.
We cannot assure you that each of our systems and related infrastructure or
those of our partners will be completed at the estimated cost and on schedule,
or even at all. Although we award contracts for construction of our systems to
suppliers who in most cases are expected to be bound by a fixed-price
construction cost schedule and to provide guarantees in respect of completion
dates and system design specifications, we cannot assure you that the actual
construction costs or the time required to complete these systems will not
exceed our current estimates. These circumstances could have a material adverse
effect on our business, financial condition and results of operations.
WE DEPEND ON GLOBAL CROSSING FOR THE PROVISION OF WORLDWIDE CAPACITY AND
SERVICES TO OUR CUSTOMERS.
Our ability to provide worldwide capacity and services to our customers
depends on the availability of the Global Crossing network. We and Global
Crossing have entered into an agreement which governs our rights to use the
Global Crossing network. However, that agreement does not grant us priority or
preemptive rights for the use of the Global Crossing network. Consequently, we
will not be able to sell capacity or services on the Global Crossing network if
there is no available capacity. In addition, under the terms of the agreement,
each of us and Global Crossing may terminate the agreement if Global Crossing is
no longer entitled under GAAP to consolidate our financial information with its
own financial information for financial reporting purposes.
WE DEPEND ON GLOBAL CROSSING FOR THE PROVISION OF ADMINISTRATIVE, MARKETING AND
SALES SERVICES.
We currently use Global Crossing's customer care center and network
operating center for billing, support and other customer services as well as
network services. Although we expect that the quality of those services will be
high, it may not be sufficient to meet the demands of our customers. In
addition, we and Global Crossing have agreed that Global Crossing will market
our services outside Asia. We cannot assure you that Global Crossing's marketing
efforts outside Asia will be as successful as if we were marketing our services
in those territories.
WE CONFRONT SEVERAL SYSTEM RISKS THAT COULD AFFECT OUR OPERATIONS.
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 assure
you of the actual useful life of any of these systems. A number of factors will
affect the useful life of each of our systems and the Global Crossing systems,
including:
- quality of construction;
- unexpected damage or deterioration; and
- technological or economic obsolescence.
Failure of any of our systems or the Global Crossing systems to operate for
its full design life could have a material adverse effect on our business,
financial condition and results of operations.
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WE DEPEND ON THIRD PARTIES FOR MANY FUNCTIONS. IF THE SERVICES OF THOSE THIRD
PARTIES ARE NOT AVAILABLE TO US, WE MAY NOT BE ABLE TO CONDUCT OUR BUSINESS.
We depend and will continue to depend upon third parties to:
- construct our systems and provide equipment and maintenance;
- provide access to a number of origination and termination points of our
systems in various jurisdictions;
- construct and operate landing stations in a number of those
jurisdictions;
- acquire permits and rights of way;
- provide terrestrial capacity to our customers through contractual
arrangements; and
- act as joint venture participants with regard to some of our current and
potential future systems.
We cannot assure you that third parties will perform their contractual
obligations or that they will not be subject to political or economic events
which may have a material adverse effect on our business, financial condition
and results of operations. If they fail to perform their obligations, we may not
be able to conduct our business.
WE MUST EXPAND OUR MARKETING AND SALES OPERATIONS SUBSTANTIALLY TO INCREASE
MARKET AWARENESS AND SALES OF OUR SERVICES.
Our products and services require a sophisticated sales effort that targets
key people within our prospective clients' organizations. This sales effort
requires the efforts of select personnel as well as specialized system and
consulting engineers within our organization. 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. Competition for these individuals is intense, and
we may not be able to hire the number of qualified sales personnel and system
and consulting engineers we need. In addition, we may substantially increase our
budget as part of our marketing program. If we are unable to expand our
marketing and sales operations, we may not be able to increase market awareness
or sales of our products and services, which may prevent us from achieving and
maintaining profitability.
IF WE DO NOT ESTABLISH AND MAINTAIN KEY CUSTOMER RELATIONSHIPS, OUR REVENUE MAY
DECLINE.
Our success will depend upon our ability to develop new client
relationships and manage existing client relationships. Our ability to develop
and manage our client relationships depends on, among other things:
- our ability to offer additional value-added services utilizing our
system, such as Internet access, IP transit, voice, collocation services
and international private line leases;
- our ability to expand our customer support organization with additional,
qualified personnel;
- our ability to provide local-loop solutions through collocation, joint
venture arrangements or third party providers; and
- performance by third parties with whom we contract to provide other
ancillary services to our customers.
If we fail to establish and maintain these client relationships, our
revenues may fail to grow or may decline.
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OUR REVENUE GROWTH PLAN DEPENDS ON PRODUCT AND SERVICE EXPANSION.
We intend to grow revenues and profits by:
- increasing capacity on our planned systems;
- developing and acquiring additional undersea cable projects;
- developing and acquiring additional terrestrial fiber or capacity; and
- introducing new services and products, which leverage the capabilities of
existing and planned systems.
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. If we are unable to
effect these objectives, our business, financial condition and results of
operations could be adversely affected.
COMPETITION IN OUR INDUSTRY IS INTENSE AND GROWING, AND WE MAY BE UNABLE TO
COMPETE EFFECTIVELY.
The international telecommunications industry is highly competitive and is
particularly competitive in Japan and Hong Kong, two of the key Asian
telecommunications markets in which we operate. We compete primarily on the
basis of price, availability, service quality and reliability, customer service
and the location of our systems and services. The ability of our competitors to
provide comparable products and services at similar prices could have a material
adverse effect on demand for our services. See "Business -- Competition" on page
54.
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
REVENUES.
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. 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, managed bandwidth services and our value-added services, will be lower
than we currently anticipate and our ability to generate revenue will be
adversely affected. We cannot assure you that demand for our services will grow
as we expect. Reduced demand for services will have a negative effect on our
business, financial condition and results of operations.
PRICE DECLINES AND LACK OF COMPETITIVE PRICING MAY UNDERMINE OUR PROFITABILITY.
Advances in fiber optic technology have resulted in significant price
declines in the fiber optic cable transmission industry. Prices for capacity on
our subsea cables are also subject to downward pressures due to the actual or
expected completion of competing systems. If there is less demand than we
project or a larger decrease in prices than we project, there could be a
material adverse effect on our business, financial condition and results of
operations. In addition, our agreement with Global Crossing provides that a
joint pricing committee will determine the pricing of our services outside Asia.
We cannot assure you that the pricing committee will set our prices at a
competitive level. Moreover, under our agreement with Global Crossing, we are
obligated to use exclusively Global Crossing's network and services outside
Asia, even if Global Crossing's network and services are not priced
competitively. In that case, we may not be able to offer our services at
competitive prices. Lack of competitive pricing for our services would undermine
our profitability.
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IF WE FAIL TO MANAGE EXPANSION EFFECTIVELY, OUR ABILITY TO INCREASE OUR SERVICES
AND CUSTOMER BASE COULD SUFFER.
We are experiencing rapid expansion and expect this expansion to continue
for the foreseeable future. This growth has increased our operating complexity,
which is exacerbated by the rapid changes in the telecommunications industry in
Asia. Our ability to successfully offer our services and implement our business
plan in a rapidly evolving industry requires an effective planning and
management process. This growth has placed, and will continue to place, a
significant strain on our management systems and resources. 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. Furthermore, we expect that we will continue to need to
manage multiple relationships with joint venture partners, customers, service
providers and other third parties. We cannot be sure that we will be able to
manage our expansion effectively.
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.
Each of our systems will be subject to the risks inherent in a large-scale,
complex fiber optic telecommunications system, as will the systems of Global
Crossing. The operation, administration, maintenance and repair of these systems
requires the coordination and integration of sophisticated and highly
specialized hardware and software technologies and equipment located throughout
the world. We cannot assure you 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 ring architecture used in our systems is
intended to eliminate service interruptions by automatically rerouting traffic,
we cannot assure you that rerouting will always be successful. Furthermore,
systems which are under construction are unable to reroute until both loops of
the ring are complete. 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.
WE RELY ON JOINT VENTURES WITH THIRD PARTIES FOR TERRESTRIAL CONNECTIVITY IN KEY
MARKETS.
In Japan, GAL provides backhaul connectivity between our cable landing
stations and our target market in Tokyo and is expanding to Osaka and Nagoya. In
Hong Kong, HGC provides terrestrial connectivity and, by the end of 2000, we
expect HGC to provide backhaul connectivity to EAC. GBS, a subsidiary of
Marubeni, owns 51% of GAL, and Hutchison Whampoa owns 50% of HGC. These
arrangements subject us to a number of risks, including:
- our ability to control the planning and operations of these joint
ventures is subject to numerous restrictions imposed by the joint venture
arrangements;
- these arrangements may prevent us from pursuing alternative arrangements
under more favorable terms;
- our joint venture partners may have interests which conflict with ours or
may engage in activities which are directly competitive with us; and
- it may be difficult to recoup our investment in these ventures in the
event of irreconcilable differences between ourselves and our joint
venture partners or to obtain access to alternative terrestrial networks
on comparable terms.
WE MAY NOT BE SUCCESSFUL IN COMPLETING THE TRANSITION TO AN OPERATING COMPANY.
The transition from a development stage company to an operating company
places significant demands on our management and operations. We are in the
process of expanding the management and operational capabilities necessary for
this transition.
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Our ability to manage this transition successfully will depend on, among
other things:
- expanding, training and managing our employee base, including attracting,
retaining and motivating highly-skilled personnel;
- taking over or outsourcing our customer interface and operations,
administrative and maintenance systems;
- procuring terrestrial capacity to provide connectivity to inland cities;
and
- controlling expenses.
We cannot assure you that we will succeed in developing all or any of these
capabilities, and any failure to do so could have a material adverse effect on
our business, financial condition and results of operations.
WE CANNOT ASSURE YOU OF THE SUCCESSFUL INTEGRATION OF NEWLY ACQUIRED BUSINESSES
OR THE BUSINESSES OF NEW STRATEGIC ALLIANCES. WE CANNOT ASSURE YOU THAT WE WILL
ACHIEVE THE EXPECTED BENEFITS OF ACQUISITIONS OR STRATEGIC ALLIANCES.
Part of our growth strategy is to make selective strategic acquisitions of
businesses operated by others and enter into strategic alliances. Achieving the
benefits of these acquisitions and strategic alliances will depend in part on
the integration of those businesses with our business in an efficient manner. We
cannot assure you that this will happen or that it will happen in a timely
manner. The consolidation of operations following these acquisitions will often
require substantial attention from management. The diversion of management
attention and any difficulties encountered in the transition and integration
process could have a material adverse effect on our business, financial
condition and results of operations. We cannot assure you that we will realize
any of the anticipated benefits of any acquisition or strategic alliance.
WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND OUR ABILITY TO GENERATE REVENUE WILL SUFFER IF WE ARE
UNABLE TO RETAIN OUR KEY PERSONNEL AND HIRE ADDITIONAL PERSONNEL.
Our future success depends on the skills, experience and efforts of our
officers and key technical and sales employees. In particular, our senior
management has significant experience in the Asian telecommunications and
Internet industries, and the loss of any of them could negatively affect our
ability to execute our business strategy. In addition, we cannot assure you that
we will be able to integrate new management into our existing operations.
Competition for these individuals is intense, and we may not be able to attract,
motivate and retain highly-skilled qualified personnel. We do not have "key
person" life insurance policies covering any of our employees.
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 are shareholders, directors
and officers of Global Crossing, which will own approximately % of our
voting stock after this offering is completed. As of , our
directors and executive officers as a group collectively beneficially owned
% of the outstanding common stock of Global Crossing and had vested and
unvested options to purchase an additional % 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 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. These conflicts of interest could
have a materially negative impact on our business, results of operations and
financial condition.
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WE FACE RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS, WHICH MAY NEGATIVELY
IMPACT OUR BUSINESS.
Because we will derive substantial revenue from international operations
and intend to have substantial physical assets in several jurisdictions along
our routes, our business is subject to risks inherent in international
operations, including:
- political and economic conditions, including the possibility of civil
unrest, terrorism or armed conflict;
- unexpected changes in regulatory environments and trade barriers;
- exposure to different legal and regulatory standards; and
- difficulties in staffing and managing operations consistently throughout
our operating area.
Finally, managing operations in multiple jurisdictions may further strain
our ability to manage our overall growth.
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 adversely 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, which 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.
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.
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
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our operations in the United States. Our failure or inability to comply with
these obligations 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 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 some countries, the range of services that we
are legally permitted to provide may be limited. In other countries,
telecommunications legislation may be applied in an unequal or
discriminatory fashion. Our ability to construct our networks and provide
our services may be limited by these circumstances. In addition, our
inability or failure to comply with the telecommunications laws and
regulations of one or more of the countries in which we operate could
result in the temporary or permanent suspension of operations, including
of our cable stations or other systems which are key links in our
network, in one or more countries. We also may be prohibited from
entering some countries at all, from providing all of our services in one
or more countries or from owning a controlling interest in local
operating companies we would expect to establish. In addition, many of
the countries in which we operate are conducting proceedings that will
affect the implementation of their telecommunications legislation. We
cannot be certain of 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 material adverse
effect on our operations.
- 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. Our failure to
obtain or maintain necessary licenses and authorizations or to comply
with the obligations imposed upon license holders in one or more
countries may result in sanctions, including the revocation of authority
to provide facilities or services in one or more countries. We cannot
assure you that we will 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 material adverse effect on our
operations. See "Regulation" on page 80.
- 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 subject
us to a number of risks, including loss of autonomy and flexibility in
our business planning and operations and the loss of control over
regulatory compliance.
WE CANNOT PREDICT OUR FUTURE TAX LIABILITIES.
We believe that a significant portion of the income derived from our
undersea systems will not be subject to tax by either of (1) Bermuda, which
currently does not have a corporate income tax, or
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(2) some other countries in which we conduct activities or in which our
customers are located. However, 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.
We cannot predict the amount of tax to which we may become subject and
cannot be certain that any of these factors would not have a material adverse
effect on our business, financial condition and results of operations.
YOU MAY BE SUBJECT TO THE PASSIVE FOREIGN INVESTMENT COMPANY RULES.
We believe that we are not a passive foreign investment company and do not
expect to become a passive foreign investment company in the future. However, we
cannot assure you in this regard. In addition, our expectations are based, in
part, on interpretations of existing law that we believe are reasonable but
which have not been approved by any taxing authority. If we were a passive
foreign investment company, then any of our shareholders that is a United States
person could be liable to pay tax at the then prevailing rates on ordinary
income plus an interest charge upon some distributions by us or when that
shareholder sold our capital stock at a gain.
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,
described in more detail under "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 69. 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
70, 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. While we expect that some of the
businesses in which our founding shareholders engage or own an interest will
become our customers, the existence of competing activities and services may
cause our founding shareholders to resist expansions of our business that would
otherwise present an attractive business opportunity for us. In addition,
although the shareholders agreement among our founding shareholders includes a
number of competitive activities in which our founding shareholders are not
permitted to engage in the future, our founding shareholders can, by mutual
consent, suspend and terminate their obligation not to engage in those
activities, and our consent for them to do so is not required.
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OUR FOUNDING SHAREHOLDERS MAY ENGAGE IN OPPORTUNITIES IN OUR TERRITORY IF
THEY ARE OFFERED TO US AND WE DECLINE TO PURSUE THEM. As described under
"Transactions with Related Parties -- Relationships Among Ourselves and our
Founding Shareholders -- Non-competition arrangements" on page 70, 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. In addition, our founding shareholders may, by mutual consent,
suspend or terminate their obligation to present corporate opportunities to us,
and our consent for them to do so is not required.
RISK FACTORS RELATING TO OUR CLASS A COMMON STOCK
AN ACTIVE MARKET FOR OUR CLASS A COMMON STOCK MAY NOT DEVELOP, MAKING IT
DIFFICULT FOR YOU TO SELL YOUR STOCK.
This is our initial public offering, which means that there is no current
market for our Class A common stock. Although we expect that shares of our Class
A common stock will be approved for quotation on , an
active public market for our Class A common stock might not develop or be
sustained after this offering. An illiquid market for our stock may result in
price volatility, and you may not be able to sell your shares of Class A common
stock at or above the initial public offering price, or at all.
WE EXPECT THAT THE PRICE OF OUR STOCK MAY FLUCTUATE SUBSTANTIALLY.
Historically, the market prices of securities of emerging 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. A number of factors, many of which are beyond our
control, could cause the market price of our common stock to fluctuate
substantially, including:
- actual or anticipated variations in our operating results;
- competition;
- announcements by us or our competitors of technological innovations, new
products, acquisitions, strategic partnerships, joint ventures or capital
commitments;
- our entry into significant new business relationships with third parties
or changes in, or the termination of, existing joint ventures or other
relationships;
- introduction of technologies or product or service enhancements by us or
our competitors that reduce the need for our products and services;
- regulatory changes;
- economic and political conditions affecting investors' perceptions of the
attractiveness of Asian markets;
- any differences in actual results and results expected by investors and
analysts, changes in recommendations or financial estimates by securities
analysts or our failure to perform in line with these estimates;
- changes in market valuations of other telecommunications companies;
- the operating and stock price performances of other comparable companies;
and
- departures of key personnel.
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. These broad
market fluctuations may adversely affect the market price of our common stock.
21
<PAGE> 23
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, we will have outstanding shares of
Class A common stock and shares of Class B common stock. These numbers
assume the issuance of (1) additional shares of our Class B
common stock to Global Crossing, at the assumed initial public offering price of
$ per share, in connection with its contribution to us of its 49%
interest in GAL and (2) shares of our Class A common stock and Class B common
stock to Asia Global Crossing Holdings for distribution to its shareholders in
the amounts indicated in "Principal Shareholders" beginning on page 64. Of these
shares, the 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", as that term is defined in Rule 144 under the
Securities Act. In general, affiliates include officers, directors or 10%
shareholders.
The remaining shares outstanding, including all of the shares of Class
B common stock, are "restricted securities" within the meaning of Rule 144.
These restricted securities may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144, 144(k) or
701 under the Securities Act. These rules are summarized under "Shares Eligible
for Future Sale" on page 92. Sales of restricted securities in the public
market, or the availability of these shares for sale, could adversely affect the
market price of the common stock.
Subject to specified exceptions, Asia Global Crossing, our directors,
officers, employees and shareholders have entered into lock-up agreements in
connection with this offering generally providing that they will not offer,
sell, contract to sell or grant any option to purchase or otherwise dispose of
our common stock or any securities exercisable for or convertible into our
common stock owned by them for a period of days after the date of this
prospectus without the prior written consent of Goldman, Sachs & Co. and Salomon
Smith Barney Inc.
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 described in the preceding 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 EXPERIENCE AN IMMEDIATE AND SUBSTANTIAL DILUTION IF YOU PURCHASE CLASS
A COMMON STOCK IN THIS OFFERING 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 OUR CLASS A COMMON STOCK.
If you purchase Class A common stock in this offering, you will experience
an immediate and substantial dilution of $ 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
22
<PAGE> 24
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 60 for information regarding outstanding stock options and
additional stock options which we may grant.
YOU WILL ALSO EXPERIENCE DILUTION WHEN WE ISSUE ADDITIONAL SHARES OF OUR CLASS A
COMMON STOCK THAT WE ARE PERMITTED OR REQUIRED TO ISSUE UNDER OPTIONS, OUR STOCK
INCENTIVE PLAN AND UPON CONVERSION OF SHARES OF OUR CLASS B COMMON STOCK.
You should be aware that we are permitted, and in some cases obligated, to
issue shares of our Class A common stock in addition to the common stock that
will be outstanding after this offering. If and when we issue those shares, the
percentage of our common stock you own will be diluted. The following is a
summary of additional shares of our Class A common stock that we have reserved
for issuance as of , 2000:
- shares are issuable upon the exercise of options or other
benefits under our stock incentive plan at a weighted average price of
$ per share, of which options covering shares were
exercisable as of , 2000;
- shares are authorized and reserved for issuance under our
stock incentive plan;
- shares that the underwriters have the option to purchase from
us; and
- shares are issuable upon conversion of all outstanding shares
of our Class B common stock.
HOLDERS OF OUR CLASS A COMMON STOCK WILL HAVE SUBSTANTIALLY LESS VOTING POWER
THAN HOLDERS OF OUR CLASS B COMMON STOCK, AND, UPON COMPLETION OF THIS OFFERING,
CLASS B SHAREHOLDERS WILL CONTROL ALL SHAREHOLDER DECISIONS.
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 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,
23
<PAGE> 25
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.
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".
24
<PAGE> 26
USE OF PROCEEDS
We estimate that the net proceeds to us from the offering, together with
the net proceeds from our anticipated concurrent debt offering, will be
approximately $ million, or $ million if the underwriters exercise
in full their option to purchase additional shares from us at an assumed public
offering price of $ per share and after deducting an assumed underwriting
discount and estimated offering expenses.
We expect to use the net proceeds of the offerings:
- to build our network;
- to make investments in telecommunications and Internet companies, and
related businesses;
- to repay outstanding indebtedness under shareholder loans or third party
debt financing;
- to purchase from Global Crossing shareholder loans it made to HGC and
GAL; and
- for general corporate purposes.
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 84. 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.
25
<PAGE> 27
CAPITALIZATION
The following table presents our capitalization as of , 2000:
- on an actual basis;
- on a pro forma basis to reflect this offering, at an assumed initial
public offering price of $
per share, and the completion of the transactions described under
"Concurrent Transactions" on page 66; and
- on a pro forma as adjusted basis to reflect this offering, at an assumed
initial public offering price of $ per share, the completion of the
transactions described under "Concurrent Transactions" on page 66 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 34
and the consolidated financial statements and the accompanying notes included in
this prospectus beginning on page F-1.
<TABLE>
<CAPTION>
AS OF , 2000
------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- --------------- ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term debt:
PC-1 credit facility.......................... $ 750,000
% senior notes due 2010.................. --
---------- ---------- --------
Shareholders' equity:
Class A common stock, par value $0.01 per
share ( shares authorized,
shares issued and outstanding, actual;
shares authorized, shares
issued and outstanding, pro forma)......... --
Class B common stock, par value $0.01 per
share ( shares authorized,
shares issued and outstanding, actual;
shares authorized, shares
issued and outstanding, pro forma)......... --
Additional paid-in capital...................... 758,185...
Retained earnings............................... 37,493
Cumulative translation adjustment............... 1,397
---------- ---------- --------
Total shareholders' equity............ 797,075
---------- ---------- --------
Total capitalization............. $1,547,075 $ $
========== ========== ========
</TABLE>
26
<PAGE> 28
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 , 2000.
Our net tangible book value at , 2000 was approximately
$ , or $ per share of common stock. Net tangible book value per
share represents the amount of our tangible assets, meaning (1) total assets
less intangible assets, (2) reduced by our total liabilities and (3) divided by
the number of shares of common stock outstanding. Dilution in 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 net tangible
book value per share of our common stock immediately following this offering.
After giving effect to shares of our Class A common stock which
we are selling under this prospectus at an assumed initial public offering price
of $ per share, and after deducting an assumed underwriting discount and
estimated offering expenses, our adjusted net tangible book value as of
, 2000 would have been approximately $ , or $ per
share. This represents an immediate increase in net tangible book value of
$ per share to existing shareholders and an immediate dilution of $ 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..... $
Net tangible book value per share before this offering.... $
Increase per share attributable to new investors.......... $
Adjusted net tangible book value per share after this
offering.................................................. $
------
Dilution per share to new investors......................... $
======
</TABLE>
The above analysis does not give effect to 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 , 2000, the following
table summarizes the differences between the total consideration paid and the
average price per share paid by our current shareholders and the new investors
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
---------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Current shareholders.............. % $ % $
Investors in this offering........
---------- ------ ---------- ------ ------
Total...................
========== ====== ========== ====== ======
</TABLE>
27
<PAGE> 29
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 three months ended March 31, 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 PCL. 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 EAC
to us.
- At December 31, 1999, we beneficially owned 57.75% of PCL. Before January
1, 2000, our investment in PCL was accounted for under the equity method
because we were not able to exercise effective control over PCL. In March
2000, we increased our interest in PCL to 64.5%, and the PCL shareholders
agreement was amended to give us effective control over PCL. As a result,
we have consolidated PCL as of January 1, 2000.
- The first segment of PC-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 March 31, 2000 and for the three months
ended March 31, 2000 and 1999, are derived from our unaudited
consolidated financial statements. We have made adjustments, consisting
of normal recurring adjustments and adjustments necessary to present the
consolidated financial position, which in the opinion of our management
are necessary for a fair presentation. Results of operations for the
three months ended March 31, 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. 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 depreciation
and amortization, non-cash cost of capacity sold, stock related
compensation 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. 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.
28
<PAGE> 30
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1998
THREE MONTHS ENDED (DATE OF
MARCH 31, YEAR ENDED INCEPTION) TO
--------------------- DECEMBER 31, DECEMBER 31,
2000 1999 1999 1998
--------- --------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue...................................... $ 75,804 $ -- $ -- $ --
Expenses:
Cost of sales.............................. 30,785 -- -- --
Operations, administration and
maintenance............................. 12,484 -- -- --
General and administrative................. 6,200 -- 1,201 --
Depreciation and amortization.............. 4,062 -- -- --
--------- --------- --------- ---------
Operating income (loss)...................... 22,273 -- (1,201) --
Equity in income (loss) of affiliates........ -- (1,509) 9,893 (2,507)
Minority interest............................ (10,661) -- -- --
Other income (expense):
Other expense.............................. (259) -- -- --
Interest income............................ 3,999 2,858 11,598 5,374
Interest expense........................... (1,016) -- -- --
--------- --------- --------- ---------
Income before provision for income
taxes................................. 14,336 1,349 20,290 2,867
Provision for income taxes................... -- -- -- --
--------- --------- --------- ---------
Net income................................. $ 14,336 $ 1,349 $ 20,290 $ 2,867
========= ========= ========= =========
Net income per common share:
Basic and diluted net income per common
share................................... $ 11.95 $ 1.12 $ 16.91 $ 2.39
========= ========= ========= =========
Shares used in computing basic and diluted
net income per common share................ 1,200,000 1,200,000 1,200,000 1,200,000
========= ========= ========= =========
Pro forma basic and diluted net income per
common share............................... $ $
========= =========
Shares used in computing pro forma basic and
diluted net income per share...............
========= =========
OTHER DATA:
Cash revenue................................. $ 95,984 $ -- $ -- $ --
Adjusted EBITDA.............................. 77,300 -- (1,201) --
Cash from (used for) operating activities.... 38,936 2,858 22,045 5,366
Cash used for investing activities........... (177,218) (24) (90,652) (231,006)
Cash from financing activities............... $ 334,615 $ -- $ 73,013 $ 231,018
</TABLE>
29
<PAGE> 31
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------
2000 1999 1998
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Assets:
Cash and cash equivalents............................ $ 207,514 $ 9,784 $ 5,378
Restricted cash and cash equivalents................. 66,734 -- --
Accounts receivable, net............................. 23,987 -- --
Receivable from affiliates........................... 81,781 89,735 --
Other assets......................................... 4,809 1,170 20
---------- -------- --------
Total current assets......................... 384,825 100,689 5,398
Restricted cash and cash equivalents................... 69,545 138,118 231,000
Property and equipment, net............................ 1,367,512 101,598 --
Deferred finance fees, net............................. 24,241 -- --
Other assets........................................... 17,097 -- --
Investments in affiliate............................... -- 263,438 160,639
---------- -------- --------
Total assets................................. $1,863,220 $603,843 $397,037
========== ======== ========
Liabilities:
Accrued construction costs........................... $ 112,235 $ -- $ --
Accounts payable and accrued liabilities............. 5,309 1,131 --
Deferred revenue..................................... 5,300 -- --
Payable to affiliates................................ 13,142 101,402 --
---------- -------- --------
Total current liabilities.................... 135,986 102,533 --
---------- -------- --------
Long-term debt......................................... 750,000 -- --
Long-term deferred revenue............................. 47,714 -- --
Other long-term liabilities............................ 1,415 -- --
Loan payable to affiliate.............................. 9,417 -- --
---------- -------- --------
Total liabilities............................ 944,532 102,533 --
---------- -------- --------
Minority interest...................................... 121,613 -- --
Shareholder's equity:
Common stock......................................... 12 12 12
Additional paid-in capital........................... 758,173 478,141 394,158
Retained earnings.................................... 37,493 23,157 2,867
Cumulative translation adjustment.................... 1,397 -- --
---------- -------- --------
Total shareholder's equity................... 797,075 501,310 397,037
---------- -------- --------
Total liabilities and shareholder's equity... $1,863,220 $603,843 $397,037
========== ======== ========
</TABLE>
30
<PAGE> 32
PCL, HGC AND GAL SELECTED HISTORICAL FINANCIAL INFORMATION
PCL
The table below shows the selected historical financial information of PCL
prepared using United States GAAP. This information has been prepared using the
consolidated financial statements of PCL 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 three months ended March 31, 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-20. We derived the remaining data from unaudited
consolidated financial statements.
<TABLE>
<CAPTION>
AS OF PERIOD FROM
THREE MONTHS ENDED MAY 4, 1998
MARCH 31, YEAR ENDED (DATE OF INCEPTION)
----------------------- DECEMBER 31, TO DECEMBER 31,
2000 1999 1999 1998
---------- --------- ------------ -------------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash revenue..................... $ 79,722 $ 1,422 $ 62,854 $ --
Revenue.......................... 74,234 -- 61,100 --
Income (loss) for operations..... 29,829 (1,822) 22,520 (4,341)
Adjusted EBITDA.................. 66,533 $ 554 46,685 (1,627)
Total assets..................... 1,263,475 1,124,138 231,677
Long-term obligations............ $ 760,638 $ 760,636 $ 201,246
</TABLE>
HGC
The table below shows selected historical financial information for HGC
prepared in Hong Kong dollars based on United States GAAP reconciled from HGC'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 three months ended March 31,
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-33. We derived the remaining data from unaudited
combined financial statements.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
--------------------------- ------------------------------------------
2000 1999 1999 1998 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash revenue......... HK$ 225,718 HK$ 179,545 HK$ 840,512 HK$ 950,120 HK$1,262,106
Revenue.............. 225,718 179,545 840,512 950,120 1,262,106
Income (loss) from
operations......... (65,089) (76,142) (250,778) (279,526) (356,847)
Adjusted EBITDA...... (26,550) HK$ (42,313) (100,348) (162,808) (291,874)
Total assets......... 3,112,927 2,781,175 1,857,539 1,369,610
Long-term
obligations........ HK$ 253,068 HK$3,618,673 HK$2,306,024 HK$1,403,847
</TABLE>
31
<PAGE> 33
The unaudited translations of HGC's Hong Kong dollar amounts into United
States dollars have been translated using a convenience translation rate of
HK$7.79 = $1.00 as of March 31, 2000 and for the three months ended March 31,
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 THREE MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, 2000 DECEMBER 31, 1999
-------------------------- ------------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Cash revenue..................................... $ 28,975 $107,896
Revenue.......................................... 28,975 107,896
Income (loss) from continuing operations......... (8,355) (32,193)
Adjusted EBITDA.................................. (3,408) (12,882)
Total assets..................................... 399,606 357,019
Long-term obligations............................ $ 32,486 $464,528
</TABLE>
32
<PAGE> 34
GAL
The table below shows selected historical financial information for GAL
prepared in United States GAAP and Japanese yen. This information has been
prepared using the financial statements of GAL 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 three months
ended March 31, 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-71. We derived the financial information below
from unaudited financial statements.
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 4,
1997 (DATE
OF INCEPTION)
FOR THE THREE MONTHS ENDED FOR THE YEARS ENDED TO
MARCH 31, DECEMBER 31, DECEMBER 31,
-------------------------- ------------------------- -------------
2000 1999 1999 1998 1997
------------ ---------- ----------- ---------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash revenue......... Y 6,295,567 Y -- Y 1,432 Y -- Y --
Revenue.............. 324,012 -- 1,432 -- --
Income (loss) from
continuing
operations......... (581,194) (355,597) (1,363,168) (244,007) (829)
Adjusted EBITDA...... 5,483,423 (355,869) (1,310,825) (244,130) (829)
Total assets......... 16,857,614 -- 13,614,452 1,756,801 49,185
Long-term
obligations........ Y -- Y -- Y -- Y -- Y --
</TABLE>
The unaudited translations of GAL's Japanese yen amounts into United States
dollars have been translated using a convenience translation rate of
Y105.51 = $1.00 as of March 31, 2000 and for the three months ended March 31,
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 THREE
MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31,
2000 1999
------------- ------------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Cash revenue............................................... $ 59,668 $ 14
Revenue.................................................... 3,071 14
Income (loss) from operations.............................. (5,508) (12,920)
Adjusted EBITDA............................................ 51,971 (12,424)
Total assets............................................... 159,773 129,035
Total long-term obligations................................ $ -- $ --
</TABLE>
33
<PAGE> 35
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 PCL. 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 PC-1 began commercial service
allowing PCL to recognize revenue on sales of capacity. Before January 1, 2000,
our investment in PCL was accounted for under the equity method; consequently,
our revenue did not include PCL revenue. In March 2000, we increased our
interest in PCL to 64.5%, and the PCL shareholders agreement was amended to give
us effective control over PCL. As a result, we have consolidated PCL as of
January 1, 2000. Since we did not consolidate PCL results in 1999, the
comparability of our historical results for the quarters ended March 31, 2000
and March 31, 1999 is limited. Before December 1999, PCL had no revenues.
The historical results do not include our 50% interest in HGC or our 49%
interest in GAL, 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 HGC and GAL, which will occur
simultaneously with the completion of this offering.
To date most of the capacity sales on our network have been in the form of
capacity purchase agreements under which our customers obtain indefeasible
rights of use, or IRUs, for a specified number of circuits. Each IRU entitles
the customer to the use of the related capacity for a period of up to 25 years
after the ready-for-service date for the related system.
We calculate undersea cost of capacity sold based on the estimated net book
value of the specific subsea capacity at the time of the sale. The estimated net
book value includes expected costs of capacity that we have the intent and
ability to add through upgrades of that system, so long as the need for those
upgrades is supported by a third-party consultant's revenue forecast.
Cash revenue refers to revenue plus incremental cash deferred revenue. 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 depreciation
and amortization, non-cash cost of capacity sold, stock related compensation
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. 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.
ASIA GLOBAL CROSSING
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 2000 AND MARCH 31, 1999
Revenue. Revenue for the first quarter of 2000 was $75.8 million which was
primarily from the sales of PC-1 capacity. Cash revenue for the first quarter of
2000 was $96.0 million.
34
<PAGE> 36
Cost of sales. Cost of sales for the first quarter of 2000 was $30.8
million. This amount was recorded against sales revenue for the circuits
activated during the period under contracts that qualified for up-front revenue
recognition.
Operations, administration and maintenance or OA&M. OA&M expense was $12.5
million in the first quarter of 2000 related to the costs to provide operating,
administration and maintenance functions for PC-1.
General and administrative. General and administrative costs for the first
quarter of 2000 were $6.2 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.
Depreciation and amortization. Depreciation expense was $4.1 million in the
first quarter of 2000 relating to PC-1.
Equity loss in affiliate. There was no loss from affiliates in the first
quarter of 2000 due to our consolidation of PCL as of January 1, 2000. Loss from
affiliates for the quarter of 1999 was $1.5 million representing our equity
interest in PCL's net loss.
Minority interest. Minority interest for the first quarter of 2000 was
$10.7 million which represents our joint venture partners' equity interest in
the earnings of PCL. We did not have any minority interest until we consolidated
PCL.
Interest income. Interest income of $4.0 million for the first quarter of
2000 relates primarily to returns on invested cash contributed from Global
Crossing and restricted cash for the construction of PC-1. Interest income of
$2.9 million for the quarter ended March 31, 1999 relates primarily to the
returns on invested restricted cash for the construction of PC-1.
Interest expense. Interest expense of $1.0 million for the first quarter of
2000 relates to the PC-1 credit facility described under "Description of
Material Indebtedness" on page 84.
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 March
31, 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. During the first quarter of 2000 we reported net income of
$14.3 million compared to net income of $1.3 million for the first quarter of
1999.
Adjusted EBITDA. During the first quarter of 2000, we reported Adjusted
EBITDA of $77.3 million.
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. The increase is attributable to
costs incurred after our formation.
Equity in income (loss) of affiliate. 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 PCL 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 PCL
recorded revenues for PC-1 customers in the fourth quarter of 1999.
35
<PAGE> 37
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 is
due to earnings on investments of restricted funds for the construction of PC-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.
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 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 receive but do not recognize as deferred
revenue. In certain circumstances relating primarily to contracts we entered
into before January 1, 2000, 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.
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 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.
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 PC-1 to be approximately $1.1
billion. We have fully financed PC-1 through shareholder equity investments and
the $850 million PC-1 credit facility, under which $750 million was outstanding
at March 31, 2000.
We estimate the cost of the portion of EAC connecting Japan, Hong Kong,
Taiwan and Korea to be approximately $750 million. As of March 31, 2000, we have
made $74 million in payments to KDD-
36
<PAGE> 38
SCS, our contractor for EAC. We will use a portion of the net proceeds of this
offering and our anticipated concurrent debt offering to fully fund this portion
of EAC.
Upon completion of this offering, we will own 49% of GAL and 50% of HGC.
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 March 31, 2000, we had $207.5 million in cash and cash equivalents
and $136.3 million in restricted cash and cash equivalents.
INFLATION
We do not believe that our business is impacted by inflation to a
significantly different extent than the general economy.
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
PC-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 $529,892
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
8.4%--8.7% as of March 31, 2000.
(2) The interest rate is one month United States dollar LIBOR, which was 6.3% as
of March 31, 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-3. None of our translation adjustments
were material as of and for the years ended December 31, 1999 and 1998.
37
<PAGE> 39
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.
HGC
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND THE THREE
MONTHS ENDED MARCH 31, 1999
Revenue. Revenue increased from HK$179.5 million in 1999 to HK$225.7
million in 2000. The increase was primarily due to increases in number of data
leased lines and number of subscribers to the ISP/portal services. During the
three months ended March 31, 2000 and 1999, respectively, there was no
difference between revenue and cash revenue.
Income (loss) from continuing operations. Loss from continuing operations
decreased from HK$(76.1) million in 1999 to HK$(65.1) million in 2000. The
decrease was primarily due to the improvement in revenues as noted above.
Depreciation expense was higher in 2000 and in line with the increase in fixed
assets.
Adjusted EBITDA. Adjusted EBITDA improved by 37.4% from HK$(42.3) million
in 1999 to HK$(26.5) million in 2000, primarily due to increase in revenues and
cost of services.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE YEAR ENDED
DECEMBER 31, 1998
Revenue. Revenue decreased from HK$950.1 million in 1998 to HK$840.5
million in 1999. The decrease was mainly due to declines in call volume and
reductions in prices resulting from increased competition for international
services. Strong growth in revenue from data and ISP/portal services partially
offsets the lower revenue from international services. Data and ISP/portal
services revenue contributed over 20% of the total revenue in 1999 compared to
4.1% in 1998. During the years ended December 31, 1999 and 1998, there was no
incremental cash deferred revenue.
Income (loss) from continuing operations. Loss from continuing operations
decreased from HK$(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.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE YEAR ENDED
DECEMBER 31, 1997
Revenue. Revenue decreased from HK$1,262.1 million in 1997 to HK$950.1
million in 1998. In 1997, revenue came primarily from international services.
The decrease was primarily due to the declines in call volume and reductions in
prices resulting from increasing competition. Revenue from business and carrier
data increased significantly in 1998 although it only represented 4% of revenue.
During the years ended December 31, 1998 and 1997, there was no incremental cash
deferred revenue.
Income (loss) from continuing operations. Loss from continuing operations
decreased from HK$(356.8) million in 1997 to HK$(279.5) million in 1998. The
decrease was primarily due to a decrease of cost of services related to the
lower call volumes and prices, partially offset by an increase in selling,
general and administrative expenses.
38
<PAGE> 40
Adjusted EBITDA. Adjusted EBITDA improved by 44.2% from a loss of
HK$(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.
GAL
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND THE THREE
MONTHS ENDED MARCH 31, 1999
Revenue. In 2000, GAL recognized revenue of Y324.0 million. Sales from
terrestrial capacity in 2000 generated revenue of Y107.0 million. GAL 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, GAL recorded revenue of Y217.0 million for operations,
administration and maintenance services. Cash revenue was Y6,295.6 million for
the first quarter of 2000. GAL did not record any revenue or cash revenue in the
first quarter of 1999.
Income (loss) from continuing operations. Loss from continuing operations
increased from Y(355.6) million in 1999 to Y(581.2) 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 Y(355.9) million in 1999 to
Y5,483.4 million in 2000. The increase was principally due to an increase in
incremental cash deferred revenue after the system became operational.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE YEAR ENDED
DECEMBER 31, 1998
Revenue. In 1998 and 1999, GAL was constructing the GAL network. A portion
of the system connecting from Ajigaura to Tokyo commenced service in December
1999. Before December 1999, GAL had no significant operations other than
planning and constructing the network. In December 1999, GAL generated revenue
from sale of capacity to us. Revenue recognized in 1999 was Y1.4 million. 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
increased from Y(244.0) million in 1998 to Y(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 Y301.3 million,
rent expense of Y108.7 million and start-up charges of Y434.1 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 GAL system.
Adjusted EBITDA. Adjusted EBITDA decreased from Y(244.1) million in 1998 to
Y(1,310.8) million in 1999. The decrease was due to an increase in operating
expenses.
39
<PAGE> 41
SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION
We have prepared the following selected unaudited pro forma condensed
combined financial information of us, PCL, HGC and GAL, 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 an additional interest in
and the consolidation of PCL, (2) the contribution to us of the 50% ownership
interest in HGC and (3) the contribution to us of Global Crossing's 49%
ownership interest in GAL had been completed as of the date or at the beginning
of the period presented. This pro forma information does not give effect to this
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 PCL, HGC and GAL 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 PCL, HGC and GAL 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, PC-1 and the GAL network were not ready for
commercial service and had no significant operations.
- In December 1999, the northern segment of PC-1 and a segment of the GAL
network connecting PC-1 to Tokyo became ready for commercial service. We
recognized revenue of $61.1 million from sale of PC-1 capacity during
1999. The revenue from sales of capacity on the GAL network was deferred
and is being amortized over the contract period. Revenue for the first
quarter of 2000 was $75.8 million which was primarily from the sales of
PC-1 capacity.
- The equity in loss of affiliate represents our 50% interest of the net
losses of HGC, the amortization expense of goodwill resulting from the
formation of HGC and our 49% interest of the net losses of GAL for the
period presented.
40
<PAGE> 42
PRO FORMA ASIA GLOBAL CROSSING
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1998
THREE MONTHS ENDED (DATE OF
MARCH 31, YEAR ENDED INCEPTION) TO
--------------------- DECEMBER 31, DECEMBER 31,
2000 1999 1999 1998
--------- --------- ------------ -------------
<S> <C> <C> <C> <C>
Revenue...................................... $ 75,804 $ -- $ 61,100 $ --
Expenses:
Cost of sales.............................. 30,785 -- 20,722 --
Operations, administration and
maintenance............................. 12,484 -- 8,000 --
General and administrative................. 6,200 775 9,370 1,631
Depreciation and amortization.............. 4,062 15 3,169 57
--------- --------- ------------ ------------
Operating income (loss)...................... 22,273 (790) 19,839 (1,688)
Equity in loss of affiliate.................. (12,342) (11,825) (44,291) (40,938)
Minority interest............................ (10,661) 928 (7,995) 1,541
Other income (expense)....................... (259) (96) 459 --
Interest income, net......................... 2,983 1,904 9,450 2,664
--------- --------- ------------ ------------
Income (loss) before provision for income
taxes...................................... 1,994 (9,879) (22,538) (38,421)
Provision for income taxes................... -- -- -- --
--------- --------- ------------ ------------
Net income (loss).......................... $ 1,994 $ (9,879) $ (22,538) $ (38,421)
========= ========= ============ ============
Net income (loss) per common share:
Basic and diluted net income per common
share................................... $ 1.66 $ (8.23) $ (18,78) $ (32.02)
========= ========= ============ ============
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
========= ========= ============ ============
Cash revenue................................. $ 95,984 $ 1,422 $ 62,854 $ --
========= ========= ============ ============
Adjusted EBITDA.............................. $ 77,300 $ (775) $ 45,484 $ (1,631)
========= ========= ============ ============
</TABLE>
41
<PAGE> 43
BUSINESS
OVERVIEW
We intend to be the first pan-Asian telecommunications carrier to provide
integrated 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, backhaul connections to our landing sites, national
networks, city fiber rings, telehouses and Web-hosting centers. 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 rings in Tokyo and Osaka;
- two telehouses providing collocation space in Tokyo; 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 IP-based 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.
We intend to extend our network of undersea cables, national terrestrial
networks, city fiber rings, 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 dollars.
We intend to expand our network to other Asian countries as customer demand
requires.
Global Crossing is building and operating a state-of-the-art fiber optic
network of global scale and scope to serve as the backbone for providing
worldwide Internet, data, voice and Web-hosting services to wholesale and
multinational business customers. We will offer these services in Asia with the
aim of becoming the first pan-Asian telecommunications carrier to offer
worldwide communications solutions.
In November 1999, we were formed as a joint venture among Global Crossing,
Microsoft and Softbank to market global telecommunications solutions to
customers in Asia. Our growing fiber optic network, integrated with Global
Crossing's worldwide fiber optic network, comprise a single technologically
advanced platform from which we will offer these services to capitalize on the
anticipated significant growth in Internet and telecommunications traffic and
the increasingly favorable regulatory environment. 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. In order to establish strong
competitive positions in two of Asia's largest telecommunications markets, we
have already formed joint ventures in Japan and Hong Kong. In Japan, we have
established GAL, a joint venture with GBS, a subsidiary of Marubeni, as well as
GlobalCenter Japan, a joint venture with IRI. In Hong Kong, we have formed HGC,
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.
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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
PC-1, a subsea cable which connects Japan to the United States, where it
seamlessly connects to the Global Crossing network. PC-1 is designed to
operate initially at 80 Gbps of service capacity, upgradeable to a
minimum of 640 Gbps, using dense wavelength multiplexing technology.
- East Asia: We are now constructing EAC, our subsea cable which we expect
to connect Japan to Hong Kong by the end of 2000. We expect to extend EAC
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. EAC is designed to operate initially at 80 Gbps of service
capacity, upgradeable to a minimum of 2.56 Tbps, which will be the
highest capacity introduced to date in Asia.
- Japan: We currently connect one landing station for PC-1 to our Tokyo
city fiber ring, telehouse and regional operating center via facilities
owned and operated by GAL. GAL 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 already offers
Web-hosting and Internet infrastructure services to customers.
- Hong Kong: HGC owns and operates the largest fully-fiber optic network in
Hong Kong, over which HGC provides Internet, data and voice services. In
addition, HGC 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 are
currently offering 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 March 31,
2000, our customers included AboveNet, Cable & Wireless IDC, Exodus, KDD, Qwest
and Teleglobe. Our revenue for the quarter ended March 31, 2000 was $75.8
million.
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.
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LARGE, HIGH GROWTH ECONOMIES
As of 1999, Asia had a 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 $9.3 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 4.2% 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 key markets:
<TABLE>
<CAPTION>
GDP
POPULATION US DOLLARS
IN MILLIONS IN BILLIONS TELEDENSITY
(1999) (1999) (1997)
(A) (A) (B)
----------- ----------- -----------
<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>
- ---------------
(a) Economist Intelligence Unit, 1999.
(b) World Development Report, 1999.
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. These five cities account for % of the
multinational headquarters located in Asia. According to International Data
Corporation, 75% of Internet users in Asia are located in our target markets.
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
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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. Japan, Hong Kong and Korea have
liberalized their telecommunications markets on a facilities basis, as well as
on a resale basis. Singapore announced full liberalization effective April 1,
2000, two years earlier than previously announced, while China will remain bound
by agreements which outline phased liberalization should it join the World Trade
Organization. We believe that lower regulatory hurdles in terms of foreign
participation, competitive technologies to fixed line, including mobile
transmission, cable television and satellites, in addition to the broad
convergence in telecommunication, Internet and media providers in a deregulating
market will give rise to higher levels of broadband traffic throughout the
region and into and out of the Asian markets.
ATTRACTIVE MARKET FOR INTERNATIONAL CAPACITY IN ASIA
The same factors that are driving 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. PC-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.
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%.
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OUR STRATEGY
Our goal is to become the leading pan-Asian telecommunications carrier to
provide integrated Internet, data, voice and data center and Internet
infrastructure services to telecommunications carriers and multinational
business customers. We intend to use our competitive position, including our
connectivity to the Global Crossing network, to exploit the rapidly growing
market for bandwidth, IP 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
offering will be significantly broader than other competitors that have only
regional assets. Furthermore, Global Crossing will be an important sales channel
for our services. We expect the Global Crossing sales force to generate
significant incremental sales for our services.
Key elements of our network will be fully integrated into the Global
Crossing network since our network was designed as part of the Global Crossing
network. In addition, 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 levels of quality and services 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 communications network. Our assets will include subsea
cables, terrestrial networks, city fiber rings, 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, self-healing ring
structures, dense wavelength division multiplexing and redundant facilities to
provide state-of-the art, reliable communications services. 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 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
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<PAGE> 48
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 dark fiber on the GAL network in Japan, IP
transit, 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 IP 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, Cable & Wireless IDC, Exodus, KDD,
Qwest and Teleglobe. 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 PC-1, GAL 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 "Transactions with
Related Parties -- Relationships Among Ourselves and Our Founding
Shareholders" on page 67.
FORM STRATEGIC ALLIANCES AND JOINT VENTURES WITH STRONG LOCAL PARTNERS
In order to exploit first-mover advantage, 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 GBS, a subsidiary of Marubeni, and
IRI in Japan and Hutchison Whampoa in Hong Kong are examples of the strategic
alliances we intend to pursue in other markets.
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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. John Legere, our chief executive officer,
held senior management positions with Dell Corporation, running operations in
Europe, Middle East, Africa and Asia Pacific, and was president and chief
executive officer of AT&T Asia/Pacific and head of AT&T's Global Strategy and
Business Development. Mr. Legere was also president of worldwide outsourcing at
AT&T Solutions. Darryl Green, our president for Japan was president and chief
executive officer of AT&T Japan Ltd. and AT&T Jens. David Milroy, our president
for Asia Pacific was senior vice president for network development for Global
Crossing and vice president, international network services for KPN Royal Dutch
Telecom in the Netherlands. Alex Ng, our chief operating officer, was president
and chief executive officer of AT&T Asia Pacific Group and chief financial
officer and vice president of AT&T in Asia Pacific. Anthony Christie, our vice
president of strategy and business development, held senior positions with AT&T
in Hong Kong and Korea and was global sales vice president and network vice
president at AT&T Solutions.
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 rings 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 PC-1 December 1999 Year end 2000
East Asia EAC End of 2000 First half of 2001
Japan GAL fixed-line network December 1999 Ongoing
GAL telehouses July 2000 Not applicable
GlobalCenter Japan April 2000 Before year end
Hong Kong HGC 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
PC-1 is an approximately 21,000 kilometer undersea cable built in a four
fiber self-healing ring configuration that connects Japan and the United States.
When completed, PC-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
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<PAGE> 50
remaining landing points are scheduled for completion before year end 2000. We
expect PC-1 to connect directly to:
- GAL's 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;
- EAC at the cable stations in Ajigaura and Shima, Japan, providing access
to HGC's network and other countries connected to EAC in the future;
- Global Crossing's Pan American Crossing, or PAC, 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, or NAC, at the cable stations
in Grover Beach and Harbour Pointe, providing connectivity to North
America and further connectivity to Europe through Atlantic Crossing-1 or
AC-1 and Pan-European Crossing or PEC.
PC-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. PC-1 is one of the first independently developed,
privately owned and operated cable systems to cross the Pacific Ocean. The first
segment of PC-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., or TSSL, for the
construction of PC-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 $935.5 million as of March 31, 2000.
We own a 64.5% controlling interest in PCL, the company that owns PC-1.
Marubeni owns the remaining interest in PCL.
EAST ASIA
EAC will be a wholly owned, approximately 18,740 kilometer undersea cable
in East Asia. We expect that EAC will connect PC-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 EAC to connect Malaysia, the Philippines, Singapore and, if and
when regulations permit, China. We have designed and constructed EAC with stub
spurs and branching units that can be rapidly extended to landing stations in
China. EAC will use four fiber pairs and state-of-the-art dense wave division
multiplexing technology. EAC 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. EAC will form a self-healing ring, providing 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 FTNS
licence upon the satisfaction of some specified conditions. The license will
permit us to land EAC in Hong Kong and provide international telecommunications
facilities and services. In addition, HGC holds an FTNS license that permits us
to construct and operate domestic telecommunications networks in Hong Kong,
including the construction of backhaul from the EAC cable landing station, and
to provide domestic and international telecommunications services.
Through a local subsidiary, we have applied for a Type I telecommunications
license in Japan. That license will permit us to land the EAC cable, construct
and operate telecommunications facilities, including backhaul, in Japan and
provide facilities-based services. 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.
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<PAGE> 51
We expect to apply for similar licenses in the remaining EAC 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 EAC and construct a cable landing station.
In December 1999, we awarded KDD-SCS the construction contract for EAC.
JAPAN
GAL. The GAL network will connect the cable landing stations for PC-1, EAC
and other competing cables to GAL's city fiber rings and telehouses and our
GlobalCenter data center facilities in Japan. Upon completion, GAL's network
will be an approximately 1,560 route kilometer terrestrial system in Japan that
we expect to connect PC-1 and EAC with Tokyo, Osaka and Nagoya. In December
1999, GAL completed the 187 kilometer segment of its backhaul system connecting
the PC-1 landing station in Ajigaura to Tokyo. The rest of the network, which
will connect a second PC-1 landing station in Shima with Osaka and will serve as
a backup for the first segment into Tokyo, is expected to become operational by
July 2000.
GAL's network will also include a domestic backbone connected to high
capacity city rings in Tokyo and Osaka, to be operational by April 2001. We
expect that the Tokyo city ring, connecting major buildings in the Tokyo
metropolitan area to GAL's network, will be ready for operation in June 2000.
GAL 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.
GAL 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 GAL network and have the potential to drive
significant traffic onto our network. Given the scarcity of available real
estate in central Tokyo, especially for suitable telehouse space, we believe
these centers provide us with a distinct competitive advantage.
As a Type I carrier, GAL is authorized to operate and provide services
using its own telecommunications facilities. GAL provides us with
building-to-building, last-mile connectivity and, through its sales force, is
also expected to generate capacity sales on PC-1 and other Global Crossing
systems.
We own a 49% interest in GAL. GBS, a subsidiary of Marubeni, owns the
remaining interest in GAL. See "Concurrent Transactions" on page 66.
GLOBALCENTER JAPAN. In January 2000, we formed a joint venture,
GlobalCenter Japan, with IRI in order to build the leading data center and
Internet infrastructure services provider in Japan. GlobalCenter Japan launched
its advanced Web-hosting operations in Tokyo in April 2000. In July 2000,
GlobalCenter Japan plans to expand into part of 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 GAL's intracity fiber ring 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 IRI. 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 IRI owns 11% of GlobalCenter Japan.
HONG KONG
HGC 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. HGC's network is an
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approximately 735 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. HGC'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.
HGC'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, HGC has laid two-way ducts for cable routing, installed
direct connections to over 600 buildings and has block wired over 300 buildings.
In addition, HGC has connected its network to 13 local exchanges of Cable &
Wireless Hong Kong Telecom. HGC has also commenced construction of the backhaul
necessary to connect its network with EAC's cable landing station in Hong Kong,
which we expect to be operational by year end 2000.
HGC is, through a subsidiary, one of four licensed fixed telecommunications
network services, or FTNS, carriers to provide telecommunications services in
Hong Kong. HGC currently offers three main services:
- local services, including local public switched telephone network or PSTN
services and non-PSTN services, such as high-speed switched and
non-switched data;
- international services, including international direct dial or IDD,
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.
In November 1999, HGC, 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.
HGC is in the process of developing a GlobalCenter data center, which we
expect to be operational in the summer of 2000. HGC has already leased and begun
constructing approximately 39,000 square feet of space for this data center. HGC
has also announced that it will launch eCyberPay, an Internet payment system for
online shopping, which we believe is the first of its kind in Asia.
We own 50% of HGC, and Hutchison Whampoa owns the remaining interest in
HGC. See "Concurrent Transactions" on page 66.
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 PC-1
and other Global Crossing systems to multinational corporations. With the
completion of its ring architecture, which is expected by the end of 2000, PC- 1
will have full redundancy. At that time, we expect to commence sales and
marketing of value-added services, such as IP transit, international private
line, voice-over IP and telehousing services on PC-1 and other Global Crossing
systems.
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ASIA PACIFIC. We have established our Asia Pacific regional office, based
in Hong Kong, to market capacity on EAC and to coordinate business development
activities in Asian markets other than Japan. 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 GAL 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 EAC 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 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 or AC-1, an undersea system connecting the United
States and Europe;
- North American Crossing or NAC, formerly part of Frontier Corporation, a
terrestrial system connecting major cities in the United States;
- Pan European Crossing or PEC, a primarily terrestrial system connecting
major European cities to AC-1;
- Racal Telecom Network, a terrestrial network in the United Kingdom to be
operated in conjunction with PEC; and
- Mid-Atlantic Crossing or MAC, 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 or AC-2, an additional undersea system to be
integrated with AC-1 to provide additional capacity that will connect the
United States and Europe;
- Pan American Crossing or PAC, a primarily undersea system that will
connect the western United States, Mexico, Panama, Venezuela and the
Caribbean; and
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- South American Crossing or SAC, an undersea and terrestrial system that
will connect the major cities of South America to MAC, PAC 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 structured 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, or IRU,
pursuant to which 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 IRU
is a long-term right of use, usually of 25 years which is generally paid in full
in advance of activation. IRU sales also typically involve the payment by
customers of ongoing maintenance charges over the term of the IRU.
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:
- IP transit: Dedicated Internet access.
- 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, or ATM, and frame relay
with varying bandwidth sizes, from T-1 to OC-192.
- Advanced 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.
- Switched services: Originating and switched terminating services to long
distance carriers over our switched services network. These services are
expected to be offered on a month-to-month basis.
- Voice over IP: Switched and dedicated outbound voice services for local,
domestic, and international traffic.
- Virtual private network or VPN: 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 VPNs to meet changing requirements.
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- 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 HGC and
GAL. As of March 31, 2000, HGC's local sales team consisted of 108 individuals,
and GAL'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 IP, frame relay, ATM 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.
PRINCIPAL CUSTOMERS
As of March 31, 2000, our customers included AboveNet, Cable & Wireless
IDC, Exodus, KDD, Qwest and Teleglobe. For the quarter ended March 31, 2000,
Global Crossing customers accounted for 60% of our revenue for sales of our
capacity on PC-1.
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. TSSL and KDD-SCS are responsible for the design and
construction of PC-1. KDD-SCS is also responsible for the design and
construction of the first phase of EAC. 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
integrated Internet, data, voice and Web-hosting services over one global
network. 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
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<PAGE> 56
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 and Japan-U.S. Cable Network.
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.
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 May 4, 2000, we had 69 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 PC-1 and are developing an undersea cable in East Asia, EAC. We also have
ownership interests in terrestrial cable systems through GAL and HGC. We also
own or lease 10 cable landing stations in the United States and East Asia. See
"Concurrent Transactions" on page 64.
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 ages of our directors, 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
</TABLE>
EXECUTIVE OFFICERS
The following table presents the names, ages and positions of our executive
officers, 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
Dan J. Cohrs................................. 47 Senior Vice President and Chief Financial
Officer
Darryl E. Green.............................. 39 President -- Japan
David Milroy................................. 36 President -- North Asia
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
Anthony Christie............................. 39 Vice President, Strategy and Business
Development
</TABLE>
GARY WINNICK -- Mr. Winnick has been Chairman of our board of directors
since November 1999 and Chairman since May 2000. Mr. Winnick is the founder of
Global Crossing and is the Chairman of its board of directors. Mr. Winnick has
served as Chairman or Co-Chairman of the Global Crossing board of directors
since its inception in March 1997. Mr. Winnick is also the founder and has been
the Chairman and Chief Executive Officer of Pacific Capital Group, Inc., an
affiliate of Global Crossing, since its inception. Mr. Winnick received a
bachelor's degree from C.W. Post College and has been in the principal equity
investment and merchant banking business since 1985.
LODWRICK M. COOK -- Mr. Cook has been Co-Chairman of our board of directors
since April 2000 and Co-Chairman since May 2000. Mr. Cook has been the
Co-Chairman of the Global Crossing board of directors since September 1997 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 1999. Before joining Pacific Capital Group, Mr. Cook spent
39 years at Atlantic Richfield Co. He was Chairman of its board of directors
from 1986 to 1999, 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,
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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 our Vice Chairman since May 2000 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 since November 1999 and our Vice Chairman
since May 2000. 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.
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 1998 and
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has held a number of senior positions, including general manager of WW Business
Development 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. Mr. Koll
received a master's degree in political science from the Free University of
Berlin.
DAN J. COHRS -- Mr. Cohrs has been our Senior Vice President and Chief
Financial Officer since December 1999. Mr. Cohrs has been a Senior Vice
President and the Chief Financial Officer of Global Crossing since May 1998.
From 1993 to 1998, Mr. Cohrs was affiliated with GTE Corporation, where he
became Vice President and Chief Planning and Development Officer in 1997. From
1990 to 1993, Mr. Cohrs was at Northwest Airlines and served as Vice President
of International Finance. From 1986 to 1990, Mr. Cohrs served in various
positions at the Marriott Corporation, including Vice President of Financial
Planning and Acquisitions and Vice President of Project Finance. From 1983 to
1986, Mr. Cohrs was a Strategy and Financial Consultant at Marakon Associates.
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 HGC. Mr. Green was President and Chief
Executive Officer of AT&T Japan Ltd. and AT&T Jens. 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.
DAVID MILROY -- Mr. Milroy has been our President -- North Asia 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 HGC since January 2000. Mr. Milroy was Senior Vice President,
Network Development for Global Crossing from April 1999 to December 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. 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 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 and, before that, Chief Financial
Officer and Vice President of AT&T in Asia Pacific. 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 and Network Vice President and
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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: (1) make
recommendations concerning the engagement of independent public accountants; (2)
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; (3)
approve the professional services provided by the independent public
accountants; (4) review the adequacy and effectiveness of our internal
accounting controls; (5) review our insurance program; and (6) perform any other
duties and functions required by any organization under which our securities may
be listed. Following this offering, we will form the Audit Committee so that it
will be comprised of three independent members of our board of directors.
Compensation Committee. The purpose of the Compensation Committee is to
establish and submit to our Board of Directors recommendations with respect to
(1) compensation of officers and other key employees and (2) awards to be made
under the stock incentive plan. Following the offering, we will form the
Compensation Committee so that it will be comprised of three members of our
board of directors.
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 $298,997 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
$364,521.
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The following table presents certain information regarding stock options
granted under our stock incentive plan to our chief executive officer and the
four other executive officers that we anticipate to be the highest compensated
executive officers in 2000.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------------
NUMBER OF
SECURITIES % OF FAIR MARKET
UNDERLYING TOTAL OPTIONS EXERCISE PRICE VALUE ON
OPTIONS GRANTED TO PER SHARE GRANT DATE EXPIRATION
NAME GRANTED(1) EMPLOYEES ($/SH) ($/SH) DATE
---- ---------- ------------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
John J. Legere(1)
Charles F. Carroll(2)
Joseph P. Perrone(3)
<CAPTION>
POTENTIAL REALIZABLE VALUE AT ASSUMED
ANNUAL RATES OF STOCK PRICE
APPRECIATION
FOR OPTION TERM
---------------------------------------
NAME 0%($) 5%($) 10%($)
---- ----------- ----------- -----------
<S> <C> <C> <C>
John J. Legere(1)
Charles F. Carroll(2)
Joseph P. Perrone(3)
</TABLE>
- ---------------
(1) Mr. Legere will receive options to acquire Class A common stock representing
1.75% of our common shares outstanding determined as of the commencement of
this initial public offering at an exercise price equal to the initial
public offering price, subject to a number of exceptions.
(2) Mr. Carroll will receive options to acquire Class A common stock in an
amount to be determined by dividing $13.5 million by the initial public
offering price per share of our Class A common stock at an exercise price
equal to the initial public offering price.
(3) Mr. Perrone will receive options to acquire Class A common stock in an
amount that will be determined and that will be commensurate to our other
executive officers at an exercise price to be determined by the compensation
committee of our board of directors.
The following table presents certain information as of ,
2000 concerning exercises of stock options by the named executive officers for
the current year and the value of those individuals' unexercised options based
upon the midpoint of the expected pricing range of the offering.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR-END (#) FISCAL YEAR-END ($)
NUMBER OF --------------------------- ---------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE ($) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John J. Legere
Charles F. Carroll
Joseph P. Perrone
</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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Under his employment agreement, Mr. Legere will receive options to acquire
Class A common stock representing 1.75% of our outstanding shares of common
stock determined as of the commencement of this initial public offering at an
exercise price equal to the initial public offering price, subject to a number
of exceptions. Of Mr. Legere's options, (1) 25% will vest and become exercisable
immediately on the date of the grant, which is the date of the completion of
this offering; and (2) 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.
We have also entered into an employment contract with Joseph P. Perrone.
This contract provides that, if we become subject to a change of control, Mr.
Perrone's options will vest and become exercisable. In addition, the contract
provides that, if Mr. Perrone is terminated without cause within one year after
a change of control, he will receive a payment equal to three years' salary and
bonus.
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.
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.
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<PAGE> 63
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 , 2000, shares of our common stock
had been issued under our stock incentive plan, shares were subject to
outstanding options granted under our stock incentive plan and shares
were 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 (1) in the
case of a stock appreciation right independent of an option, by the stock
appreciation right and (2) 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 (1) 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 (2) 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, such as 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 the attainment of performance
objectives. Our board of directors will also determine the participants to whom
other
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<PAGE> 64
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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<PAGE> 65
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, all outstanding shares
issued to Asia Global Crossing Holdings will be distributed to our founding
shareholders and The Goldman Sachs Group.
Our bye-laws and the shareholders agreement among our founding shareholders
include a reallocation mechanism for the beneficial ownership of our founding
shareholders and The Goldman Sachs Group. The reallocation mechanism is based on
our total enterprise value at the time of the reallocation. Our founding
shareholders have agreed to cause the reallocation simultaneously with this
offering and calculate our total enterprise based on the initial public offering
price of $ per share of our Class A common stock in this offering. On that
basis, our total enterprise value is approximately $ , and the
ownership percentages of our founding shareholders and The Goldman Sachs Group
in us will be reallocated simultaneously with the completion of this offering
this offering as follows:
- Global Crossing will own beneficially shares of our Class B
common stock, representing a % interest in us;
- each of Microsoft and Softbank will own beneficially shares of our
Class B common stock, representing a % interest in us; and
- The Goldman Sachs Group will own beneficially shares of our
Class A common stock, representing a % 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 64.
The following table presents information regarding beneficial ownership of
our common stock as of , 2000, as adjusted to reflect (1) the
reallocation of the beneficial ownership percentages of our founding
shareholders and The Goldman Sachs Group as described above, (2) 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 and (3) the
completion of the transactions described under "Concurrent Transactions" on page
66, by:
- each of the individuals listed on the "Summary Compensation Table" above;
- 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.
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<PAGE> 66
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 , 2000, 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 shares of common stock
outstanding on , 2000 and shares of common stock
outstanding after completion of this offering. The percentage of common stock
outstanding as of , 2000 is calculated 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.
<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).............. % %
Microsoft (Class B common
stock).....................
One Microsoft Way, Redmond,
WA 98052
Softbank (Class B common
stock).....................
24-1 Nihonbashi-Hakozaki-
cho, Chuo-ku, Tokyo 103
Japan
Gary Winnick.................
Lodwrick M. Cook.............
John J. Legere...............
John M. Scanlon..............
Thomas J. Casey..............
Leo J. Hindery, Jr. .........
Joseph P. Clayton............
Eric Hippeau.................
Thomas U. Koll...............
Dan J. Cohrs.................
Darryl E. Green..............
David Milroy.................
Charles F. Carroll...........
Joseph P. Perrone............
Alex Ng......................
Anthony Christie.............
Directors and executive
officers as a group (16
persons) (Class A common
stock)..................... % %
-------- -------- -------- --------
Total.............. % %
</TABLE>
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<PAGE> 67
CONCURRENT TRANSACTIONS
This offering is conditioned upon the contribution to us by Global Crossing
of (1) its 50% interest in HGC and (2) its 49% interest in GAL. We expect that
these contributions will occur simultaneously with the completion of this
offering.
CONTRIBUTION OF GLOBAL CROSSING'S 50% INTEREST IN HGC
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
HGC. 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 HGC for $153,875,029 in cash. After this sale, Global
Crossing will own 31% of HGC, and each of Microsoft and Softbank will own
9.5% of HGC;
- following the sale, each of Global Crossing, Microsoft and Softbank will
contribute its entire interest in HGC to us as a capital contribution;
- we will then purchase Global Crossing's interest in any outstanding
shareholder loans to HGC;
- 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 76; 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 HGC to Us" on page 68.
CONTRIBUTION OF GLOBAL CROSSING'S 49% INTEREST IN GAL
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
GAL. 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 GAL to us;
- in consideration for its contribution, Global Crossing will obtain
additional shares of common stock having an aggregate value of
$ , based on an assumed initial public offering price of
$ per share of our Class A common stock, and the beneficial
ownerships of each of Microsoft and Softbank in us will be diluted pro
rata, up to a maximum of 1.43% each, to give effect to those additional
shares that will be issued to Global Crossing;
- we will then purchase Global Crossing's interest in any outstanding
shareholder loans to GAL; and
- we will assume Global Crossing's rights and obligations under the
shareholders agreement, dated as of December 2, 1998, among Marubeni, an
affiliate of Global Crossing and other named parties.
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<PAGE> 68
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 not complete, and 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. This
section summarizes the important provisions of that agreement.
TERRITORIES
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. In the case of connectivity,
services and related items not available on our network or the Global Crossing
network, or through the respective companies, each of us and Global Crossing has
granted each other a right of first refusal to provide such connectivity or
service.
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
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 both companies, we and Global Crossing will consider a joint bid
and strategic apportionment of the assets or operations. See "Shareholders
Agreement -- Non-competition Arrangements" on page 70.
INTELLECTUAL PROPERTY
Under the agreement, we will operate under the Global Crossing service mark
and follow Global Crossing's corporate brand strategies and policies.
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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 HGC 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 HGC upon
completion of this offering. See "Concurrent Transactions" on page 66. Under the
agreement, we will agree to purchase shareholder loans made by Global Crossing
to HGC 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 HGC or its subsidiaries under (1) the FTNS license and (2)
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 HGC's data
centers; and
- 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 HGC'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 not complete, and 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.
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 PC-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;
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<PAGE> 70
- 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 62, 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 (1)
at least 3.5% of our outstanding shares of common stock before the reallocation
of our founding shareholders' beneficial ownership percentages and (2) 5% of our
outstanding shares of common stock after the reallocation.
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 (1) involving aggregate consideration paid by us and our
majority-owned subsidiaries of in excess of $1.0 billion or (2) 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;
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<PAGE> 71
- 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 (1) to finance expenditures
incurred in accordance with our initial strategic plan, (2) to finance
capital expenditures approved by our board of directors under the bullet
point immediately following or (3) under the PC-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 at the time of that transaction in an arms' length transaction
with an unrelated third party, other than (1) 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 (2) 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 69.
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 GAL.
- 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.
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- 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.
PC-1. If Global Crossing acquires any additional equity in PC-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 the procurement distribution of all of its and
its controlled subsidiaries' Layer 1 transmission systems services in our
territory. 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.
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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.
TRANSFER RESTRICTIONS ON OUR COMMON STOCK. The shareholders agreement
restricts the transfer by our founding shareholders of shares of our common
stock to any third person, other than to some of their affiliates, (1) until
September 8, 2000 and (2) after September 8, 2000, if we have not had our
initial public offering. Transfers of shares to other shareholders are permitted
during this period subject to the other shareholders' right of first offer.
These transfer restrictions terminate if our board of directors has not voted to
undertake our initial public offering within 30 months after September 8, 1999
or if we fail to consummate our initial public offering within six months of
that vote.
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 87. The registration rights
agreement provides for demand registration rights, subject to a number of
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 PC-1, GAL or any other Japanese intercity network controlled by
Global Crossing or any other Global Crossing system in an aggregate amount of
$200,000,000 over a three-year period from the date when PC-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 PC-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 PC-1 is able to carry trans-Pacific traffic to December 31, 2000;
and
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- the balance of the $200,000,000 aggregate commitment, i.e., $160,000,000,
during the three-year period from the date when PC-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 PC-1, GAL or any other Japanese
intercity network, as long as they use commercially reasonable efforts to use
their capacity commitment on PC-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.
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 PCL SHAREHOLDER
The following description of the terms of the PCL shareholders agreement is
not complete, and 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.
We have entered into a shareholders agreement relating to PCL with
Marubeni. The PCL shareholders agreement details, among other things:
- the composition of the PCL board of directors;
- actions requiring the supermajority consent of the PCL board of
directors;
- actions requiring the supermajority consent of the PCL shareholders;
- shareholder rights to subscribe for new capital;
- restrictions on the transfer of shares of common stock in PCL;
- the consequences of a deadlock over the annual budget; and
- exit rights of SCS.
COMPOSITION OF THE PCL BOARD OF DIRECTORS. The PCL shareholders agreement
provides that each shareholder party to that agreement will have the right to
nominate a number of directors to the PCL board that is proportionate to that
shareholder's beneficial interest in PCL. Today, the PCL board of directors
consists of six members, four of which we nominate and two of which Marubeni
nominates.
Under the first PCL shareholders agreement, we have the right to designate
the Chairman of the board of directors of PCL for so long as we are the largest
shareholder in PCL. Marubeni has the right to designate the Deputy Chairman of
the board of directors of PCL for so long as Marubeni is the second largest
shareholder in PCL.
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ACTIONS REQUIRING THE SUPERMAJORITY VOTE OF THE PCL DIRECTORS. The PCL
shareholders agreement provides that the following actions require the approval
of 75% of the PCL directors:
- the merger or consolidation of PCL, the sale of all or substantially all
of the assets of PCL or any material majority-owned subsidiary of PCL,
the dissolution, liquidation, reorganization or recapitalization of PCL
or any similar extraordinary corporate action or transaction involving
PCL, subject to limited exceptions;
- the incurrence of indebtedness by PCL 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 PCL or any of its majority-owned
subsidiaries in excess of $100 million in outstanding principal amount;
- approval of a fundamental change to the PCL business plan or construction
budget or a change in the PCL 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 PCL is greater than
30% or more than the aggregate amount of costs budgeted to be incurred by
PCL 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 PCL and its majority-owned subsidiaries, other than in
the ordinary course of business or under the PC-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 PCL 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 PCL 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 PCL
to elect to renew or terminate that agreement upon the occurrence of some
specified event or circumstance, any election by PCL 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
PCL to any person other than a wholly-owned subsidiary of PCL;
- the undertaking of any system upgrade to enhance the system beyond its
current design capability of 640 Gbps;
- the adoption of or change in PCL's dividend policy;
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- any amendment or other modification of the memorandum of association and
bye-laws of PCL, subject to limited exceptions;
- the expansion of the PC-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 PCL.
ACTIONS REQUIRING SHAREHOLDER VOTE. The PCL shareholders agreement
provides that the following actions require the approval of shareholders holding
at least 75% of the outstanding shares of common stock of PCL:
- any action which results in the dilution of a shareholder's ownership
percentage;
- any issuance, purchase or redemption by PCL of any securities of PCL or
any change, increase or reduction in the capitalization of PCL;
- any merger or consolidation of PCL or any material majority-owned
subsidiary of PCL, or acquisition of all or substantially all of the
assets or capital stock of PCL or any material majority-owned subsidiary
of PCL by another entity or other business combination or any
dissolution, liquidation or winding up of PCL or any material
majority-owned subsidiary of PCL;
- any amendment to the memorandum of association of PCL; 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 PCL is required to approve any material change in the
business of PCL.
SHAREHOLDER RIGHTS TO SUBSCRIBE FOR NEW CAPITAL. The PCL shareholders agreement
provides that each shareholder party to that agreement will have the
preferential right to subscribe for any new capital raised for PCL in proportion
to that shareholder's beneficial interest in PCL. This provision applies whether
the new capital takes the form of debt or equity.
RESTRICTIONS ON THE TRANSFER OF SHARES OF COMMON STOCK IN PCL. The PCL
shareholders agreement prohibits all transfers of shares of PCL common stock
before construction of PC-1 is complete and PC-1 is ready for use. At all other
times, PCL shareholders may transfer their shares in PCL to (1) affiliates or
(2) third parties subject to the other shareholders' rights of first refusal.
However, PCL 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 PCL shareholders agreement includes tag-along and drag-along
provisions. If a shareholder agrees to sell its interest in PCL, 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 PCL 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 PCL on the same
terms.
CONSEQUENCES OF A DEADLOCK OVER THE ANNUAL BUDGET. If the PCL 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 PC-1.
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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 not complete, and we refer you to the
actual shareholders 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.
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 (1) China, with respect to fixed services, (2) Hong
Kong and China, with respect to Internet access and transport services and (3)
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 EAC, 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 EAC.
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, or "WTO", 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 WTO. We cannot be certain whether this regional
liberalizing trend will continue or accurately predict the pace and scope of
future liberalization. It is possible that one or more of the countries in which
we operate will slow, halt or reverse the liberalization of its
telecommunications market. We cannot accurately predict the effect of such an
action on us, but such an action may have a material adverse effect on our
business, financial condition and results of operations.
UNITED STATES
Our ownership and operation of PC-1, which connects the United States and
Japan, subjects us to regulation by the Federal Communications Commission, or
"FCC". Our subsidiary, PC Landing Corp., has obtained a cable landing license
from the FCC, which permits us to land PC-1 in Harbour Pointe, Washington, and
Grover Beach, California, and to operate PC-1 in the United States. This landing
license allows us to operate PC-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
PC-1 is subject to regulatory oversight by the FCC 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, or "MPT". 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 MPT. 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 MPT 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 have applied for and expect to obtain a
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Type I license through another wholly-owned subsidiary, Asia Global Crossing
Japan K.K. GAL also holds a Type I license that enables it to be the landing
party for PC-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 MPT 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, or "OFTA", 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 OFTA that we will be issued
an external FTNS license upon the satisfaction of certain specified conditions.
The external FTNS licence will permit us to land EAC in Hong Kong and to provide
international telecommunications facilities and services in Hong Kong. In
addition, HGC holds one of four FTNS licenses which permits HGC 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 EAC 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 EAC 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 OFTA and other governmental agencies. OFTA 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.
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 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
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group services. The Directorate General Telecommunications, or "DGT", is
responsible for issuing licenses and supervising the telecommunications sector.
The DGT recently issued three new "integrated" fixed-line services Type I
licenses. These licenses will permit holders to construct and operate domestic
and international 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 DGT 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
service 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. Similarly,
licensees will be permitted to sell or lease transmission capacity on their
cables only to the three integrated fixed-line service licensees and Chunghwa
Telecom.
The DGT requested written comments from interested parties regarding the
draft regulations and has held a public hearing on this issue. We have submitted
written comments to the DGT and expect to participate in any future proceedings.
However, we cannot accurately predict when the DGT will issue a decision, what
the substance of its decision will be or the decision's potential effect on our
business.
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. We expect that 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, or "MIC", 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, or "NSP",
license. NSP 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, or "SSP", license. SSP licensees may provide the same services as an
NSP 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, NSP 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 NSP licensees under the terms of its WTO commitment;
however, it has 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.
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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 may change if China is permitted to join the WTO. 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 WTO. As part of the agreement, China agreed to be bound by the
WTO's Reference Paper for Telecommunications at such time as it is admitted to
the WTO. 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 plans to allow up to 50%
foreign ownership in providers of value-added services and paging within two
years of China's accession to the WTO. China 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.
China also has concluded bilateral agreements for WTO admission with Japan,
Canada, and Malaysia. Accession negotiations with the European Union, however,
have been suspended, and it is unclear when they will resume. Without the
agreement of the European Union, it is unlikely that China will be permitted to
accede to the WTO. Therefore, we cannot accurately predict whether or when China
will be permitted to join the WTO. It is not clear whether China will implement
any of the provisions of the U.S.-China agreement if China is not permitted to
join the WTO. 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 HGC. 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 the aggregate principal amount of $ in a private transaction not
subject to the registration requirements under the Securities Act. If we
complete that offering, our notes will be guaranteed by . 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.
In addition, 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, 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.
PC-1 CREDIT FACILITY
PCL is the borrower under the $850.0 million senior secured PC-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 PC-1
credit facility is secured by pledges of the stock of PCL and its subsidiaries
and security interests in some of the assets and revenues of PCL and its
subsidiaries and is being used to provide financing for a portion of PC-1. The
subsidiaries of PCL also guaranteed PCL's obligations under the PC-1 credit
facility. A portion of the PC-1 credit facility is available only to pay
interest on the loans before the PC-1 ready for service date. The term loans
under the PC-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 PCL and 100% of net cash
proceeds of any permitted debt offering of PCL, permitted asset sale and
insurance proceeds. As of March 31, 2000, a total of $750 million was
outstanding under the PC-1 credit facility.
The PC-1 credit facility contains covenants that, among other things,
restrict PCL's ability to incur indebtedness, make investments, guarantees or
acquisitions and make dividends or distributions. The facility generally only
permits dividends or distributions by PCL out of a portion of excess cash flow
and securely restricts the payment of other dividends or other distributions.
The PC-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 PC-1 credit facility. The PC-1 credit facility contains events of
default, including among other things, failure to pay amounts when due, failure
to comply with certain covenants and
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insolvency. An event of default will also occur upon the occurrence of certain
failures in connection with PC-1. Upon the occurrence of an event of default,
the PC-1 credit facility permits the lenders to (1) declare the loans then
outstanding to be immediately due and payable, (2) demand that an equity
commitments not funded to be immediately funded and (3) proceed against the
collateral. In addition, the PC-1 credit facility prescribes the order by which
proceeds from the sale of PC-1 capacity will be applied, both before and after
the commencement of commercial operation and requires PCL to maintain certain
reserve warrants. As a result of the above, the ability of PCL to use and
distribute revenue is severely restricted so long as the PC-1 credit facility
remains in existence.
SHAREHOLDER LOANS
Upon completion of this offering, we will purchase from Global Crossing the
following shareholder loans:
HGC SHAREHOLDER LOAN
On May 4, 2000, Global Crossing Holdings Ltd., a wholly owned subsidiary of
Global Crossing, entered into a loan agreement with HGC to provide a loan of up
to HK$305,000,000 to be made available in four separate disbursements as
follows:
- HK$80,000,000 on May 10, 2000;
- HK$50,000,000 on June 1, 2000;
- up to HK$107,000,000 on July 1, 2000; and
- up to HK$68,000,000 on August 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 HGC. However, HGC is obligated to repay the loan with 50% of the
amount by which any proceeds received by HGC from third party financings or from
a public offering exceed HGC's then current capital and operating expenditure
requirements. Currently, HK$80,000,000 is outstanding under the loan agreement.
GAL SHAREHOLDER LOAN
On September 20, 1999, Global Crossing Services Europe, Ltd., a wholly
owned subsidiary of Global Crossing, entered into a loan agreement with GAL to
provide a loan of up to Y4,214,000,000 to be made available in three separate
disbursements as follows:
- Y1,470,000,000 on or about September 20, 1999;
- Y1,470,000,000 on October 31, 1999; and
- Y1,274,000,000 on December 31, 1999.
In each case, 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, 2000. 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, does not purport to be complete and is subject in all respects to the
applicable provisions of Bermuda law and of our constituent documents and of the
constituent documents of our subsidiaries. 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 them 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 and the transactions described under
"Concurrent Transactions", we will have 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 % 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
Agreement -- Actions requiring the approval of our directors appointed by
Microsoft and Softbank" on page 69.
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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 piggyback 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 piggyback 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, expect 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 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
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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 (1) foreign
source "passive income" or, in the case of some holders, foreign source
"financial services income" and (2) 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;
- 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.
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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 pro rata
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.
91
<PAGE> 93
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 shares
of our Class A common stock and shares of our Class B common stock,
based on the number of shares outstanding on , without taking
into account (1) shares that we will issue if the underwriters exercise their
over-allotment option, (2) shares of our Class A Common Stock that may
be issued upon exercise of options outstanding as of and (3) any
shares of Class A common stock into which shares of our Class B common stock may
be converted. Of these shares, the 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) 1% of the number of the shares then outstanding, which will be approximately
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 (2) the average weekly trading
volume of the shares of Class A common stock on 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.
The number of shares we will have outstanding after this offering indicated
in the second paragraph above assumes the issuance of (1)
additional shares of our Class B common stock to Global Crossing,
at the assumed initial public offering price of $ per share, in
connection with its contribution to us of its 49% interest in GAL and (2) shares
of our Class A common stock and Class B common stock to Asia Global Crossing
Holdings for distribution to its shareholders in the amounts indicated in
"Principal Shareholders" beginning in Page 64.
92
<PAGE> 94
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., Salomon Smith Barney Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated are representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. .......................................
Salomon Smith Barney, Inc. .................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated...
--------
Total.............................................
========
</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 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 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, employees 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
prospectus continuing through the date 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 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.
93
<PAGE> 95
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
under the symbol " ".
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. 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.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the shares of Class A 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.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
Asia Global Crossing estimates that its share of the total expenses of the
offering, excluding underwriting discounts and commissions, will be
approximately $ .
Asia Global Crossing has agreed to indemnify the several underwriters
against certain liabilities, including liabilities under the Securities Act.
Goldman, Sachs & Co. will own a % interest in us after this offering
is completed, assuming an initial public offering price of $ per share. See
"Principal Shareholders -- Our Beneficial Ownership" on page 64, "Transactions
with Related Parties -- Relationship Among Ourselves and Our Founding
Shareholders -- Registration Rights Agreement" on page 67 and "Description of
Capital Stock -- Common Stock -- Registration Rights Agreement" on page 87. 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. Citibank, N.A., an
affiliate of Salomon Smith Barney Inc., is a lender 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.
94
<PAGE> 96
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 our audited financial statements of PCL
and its affiliates as of December 31, 1999 and 1998, and for the year ended
December 31, 1999 and 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 HGC and subsidiaries have been
included in this prospectus in reliance on the reports 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 GAL
and its affiliates 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 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. When the shares of our Class A common stock begin trading on the
Nasdaq National Market, copies of reports, proxy statements and other
information may be inspected at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
95
<PAGE> 97
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 March 31, 2000 (unaudited)
and December 31, 1999 and 1998............................ F-4
Consolidated Statements of Operations for the three months
ended March 31, 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
three months ended March 31, 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 three months
ended March 31, 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
three months ended March 31, 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-20
Consolidated Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999 and 1998............................ F-21
Consolidated Statements of Operations for the three months
ended March 31, 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-22
Consolidated Statements of Shareholders' Equity for the
three months ended March 31, 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-23
Consolidated Statements of Cash Flows for the three months
ended March 31, 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-24
Notes to Consolidated Financial Statements.................. F-25
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
Condensed Combined Balance Sheet as of March 31, 2000
(unaudited) and December 31, 1999......................... F-33
Condensed Combined Statements of Operations for the three
months ended March 31, 2000 and 1999 (unaudited).......... F-34
Condensed Combined Statement of Cash Flows for the three
months ended March 31, 2000 and 1999 (unaudited).......... F-35
Notes to Condensed Combined Financial Statements............ F-37
Independent Auditors' Report................................ F-48
Combined Balance Sheets as of December 31, 1999, 1998 and
1997...................................................... F-49
Combined Statements of Operations for the three years ended
December 31, 1999, 1998 and 1997.......................... F-50
Combined Statement of Changes in Owner's Equity/(Deficit)
for the three years ended December 31, 1999, 1998 and
1997...................................................... F-51
Combined Statement of Cash Flows for the three years ended
December 31, 1999, 1998 and 1997.......................... F-52
Notes to Combined Financial Statements...................... F-54
</TABLE>
F-1
<PAGE> 98
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GLOBAL ACCESS LIMITED
Balance Sheet as of March 31, 2000 (unaudited) and December
31, 1999.................................................. F-71
Statements of Operations and Accumulated Deficits for the
three month periods ended March 31, 2000 and 1999
(unaudited)............................................... F-72
Statements of Cash Flows for the three months periods ended
March 31, 2000 and 1999 (unaudited)....................... F-73
Notes to Financial Statements............................... F-74
Report of Independent Public Accountants.................... F-78
Balance Sheets as of December 31, 1999 and 1998............. F-79
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-80
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-81
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-82
Notes to Financial Statements............................... F-83
INDEX TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Combined Balance Sheet as of
March 31, 2000............................................ F-88
Unaudited Pro Forma Condensed Combined Statement of
Operations for the three months ended March 31, 2000...... F-89
Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1999........... F-90
</TABLE>
F-2
<PAGE> 99
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> 100
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------
2000 1999 1998
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 207,514 $ 9,784 $ 5,378
Restricted cash and cash equivalents...................... 66,734 -- --
Accounts receivable, net.................................. 23,987 -- --
Receivable from affiliates................................ 81,781 89,735 --
Other assets.............................................. 4,809 1,170 20
---------- -------- --------
Total current assets............................... 384,825 100,689 5,398
---------- -------- --------
Restricted cash and cash equivalents........................ 69,545 138,118 231,000
Property and equipment, net................................. 1,367,512 101,598 --
Deferred finance fees, net.................................. 24,241 -- --
Other assets................................................ 17,097 -- --
Investments in affiliate.................................... -- 263,438 160,639
---------- -------- --------
Total assets....................................... $1,863,220 $603,843 $397,037
========== ======== ========
LIABILITIES:
Current liabilities:
Accrued construction costs................................ $ 112,235 $ -- $ --
Accounts payable and accrued liabilities.................. 5,309 1,131 --
Deferred revenue.......................................... 5,300 -- --
Payable to affiliates..................................... 13,142 101,402 --
---------- -------- --------
Total current liabilities.......................... 135,986 102,533 --
---------- -------- --------
Long-term debt.............................................. 750,000 -- --
Long-term deferred revenue.................................. 47,714 -- --
Other long-term liabilities................................. 1,415 -- --
Loan payable to affiliate................................... 9,417 -- --
---------- -------- --------
Total liabilities.................................. 944,532 102,533 --
---------- -------- --------
Minority interest........................................... 121,613 -- --
SHAREHOLDER'S EQUITY:
Common stock 1,200,000 shares authorized, par value $.01,
1,200,000 shares issued and outstanding as of March 31,
2000, December 31, 1999 and 1998.......................... 12 12 12
Additional paid-in capital.................................. 758,173 478,141 394,158
Retained earnings........................................... 37,493 23,157 2,867
Cumulative translation adjustment........................... 1,397 -- --
---------- -------- --------
797,075 501,310 397,037
---------- -------- --------
Total liabilities and shareholder's equity......... $1,863,220 $603,843 $397,037
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 101
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
THREE MONTHS ENDED (DATE OF
MARCH 31, YEAR ENDED INCEPTION) TO
----------------------- DECEMBER 31, DECEMBER 31,
2000 1999 1999 1998
---------- ---------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue................................ $ 75,804 $ -- $ -- $ --
Expenses:
Cost of sales........................ 30,785 -- -- --
Operations, administration and
maintenance....................... 12,484 -- -- --
General and administrative........... 6,200 -- 1,201 --
Depreciation and amortization........ 4,062 -- -- --
---------- ---------- ---------- ----------
Operating income (loss)........... 22,273 -- (1,201) --
Equity in income (loss) of affiliate... -- (1,509) 9,893 (2,507)
Minority interest...................... (10,661) -- -- --
Other income (expense):
Other expense........................ (259) -- -- --
Interest income...................... 3,999 2,858 11,598 5,374
Interest expense..................... (1,016) -- -- --
---------- ---------- ---------- ----------
Income before provision for income
taxes........................... 14,336 1,349 20,290 2,867
Provision for income taxes............. -- -- -- --
---------- ---------- ---------- ----------
Net income........................ $ 14,336 $ 1,349 $ 20,290 $ 2,867
========== ========== ========== ==========
Net income per common share:
Basic and diluted net income per
common share...................... $ 11.95 $ 1.12 $ 16.91 $ 2.39
========== ========== ========== ==========
Shares used in computing basic and
diluted net income per common
share................................ 1,200,000 1,200,000 1,200,000 1,200,000
========== ========== ========== ==========
Pro forma basic and diluted pro forma
net income per common share (Note
12).................................. $ $
========== ==========
Shares used in computing pro forma
basic and diluted net income per
common share (Note 12)...............
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 102
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
------------------ PAID-IN TRANSLATION RETAINED SHAREHOLDER'S
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS 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 EAC 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......................... -- -- -- 1,397 -- 1,397
Cash contribution from Asia Global
Crossing Holdings Ltd.............. -- -- 280,032 -- -- 280,032
Net income for the three months ended
March 31, 2000..................... -- -- -- -- 14,336 14,336
--------- --- -------- ------ ------- --------
BALANCE, March 31, 2000 (unaudited)..... 1,200,000 $12 $758,173 $1,397 $37,493 $797,075
========= === ======== ====== ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 103
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1998
THREE MONTHS ENDED (DATE OF
MARCH 31, 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................................... $ 14,336 $ 1,349 $ 20,290 $ 2,867
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 4,062 -- -- --
Provision for doubtful accounts............ 763 -- -- --
Non-cash cost of sales..................... 30,785 -- -- --
Equity in (income) loss of affiliate....... -- 1,509 (9,893) 2,507
Minority interest.......................... 10,912 -- -- --
Changes in operating assets and
liabilities:
Accounts receivable...................... (18,351) -- -- --
Receivable from affiliates............... 69,054 -- (89,735) --
Other current assets..................... (17,303) -- (1,150) (8)
Deferred revenue......................... 43,160 -- -- --
Accounts payable and accrued
liabilities........................... (2,280) -- 1,131 --
Payable to affiliates.................... (96,202) -- 101,402 --
---------- -------- --------- ---------
Net cash provided by operating
activities............................ 38,936 2,858 22,045 5,366
---------- -------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from consolidating PCL......... 606 -- -- --
Change in restricted cash and cash
equivalents................................ 19,753 -- 92,882 (231,000)
Purchase of property and equipment........... (176,992) -- (90,628) --
Acquisition of minority share in affiliate... (20,585) -- -- --
Investments in affiliates.................... -- (24) (92,906) (6)
---------- -------- --------- ---------
Net cash used in investing activities.... (177,218) (24) (90,652) (231,006)
---------- -------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from capital contribution........... 280,032 -- 73,013 231,018
Minority interest investment in affiliates... 54,583 -- -- --
---------- -------- --------- ---------
Net cash provided by financing
activities............................ 334,615 -- 73,013 231,018
EXCHANGE RATE EFFECT ON CASH AND CASH
EQUIVALENTS.................................. 1,397 -- -- --
NET INCREASE IN CASH AND CASH EQUIVALENTS...... 197,730 2,834 4,406 5,378
CASH AND CASH EQUIVALENTS, beginning of
period....................................... 9,784 5,378 5,378 --
---------- -------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period....... $ 207,514 $ 8,212 $ 9,784 $ 5,378
========== ======== ========= =========
SUPPLEMENTAL INFORMATION ON NONCASH INVESTING
AND FINANCING ACTIVITIES:
Decrease in accrued construction costs....... 48,582 -- -- --
Contribution of development rights to EAC.... -- -- (10,970) --
Amortization of deferred finance costs....... (1,137) -- -- --
Costs incurred for property and equipment.... 129,547 -- 101,598 --
---------- -------- --------- ---------
Cash for property and equipment.............. $ 176,992 $ -- $ 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.............. $ 19,152 $ -- $ -- $ --
========== ======== ========= =========
Interest paid (net of capitalized
interest)................................ $ 891 $ -- $ -- $ --
========== ======== ========= =========
Cash paid for taxes........................ $ -- $ -- $ -- $ --
========== ======== ========= =========
Details of consolidating PCL:
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> 104
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1998
THREE MONTHS ENDED (DATE OF
MARCH 31, YEAR ENDED INCEPTION) TO
------------------ DECEMBER 31, DECEMBER 31,
2000 1999 1999 1998
-------- ------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET INCOME................................ $ 14,336 $1,349 $20,290 $2,867
Foreign currency translation
adjustment........................... 1,397 -- -- --
-------- ------ ------- ------
COMPREHENSIVE INCOME...................... $ 15,733 $1,349 $20,290 $2,867
======== ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE> 105
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THROUGHOUT THESE CONSOLIDATED FINANCIAL STATEMENTS, REFERENCES TO "DOLLARS" AND
"$" 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 "AGC")
was formed as an indirect wholly owned subsidiary of Global Crossing Ltd.
("GCL"). AGC is a wholly owned subsidiary of Asta Global Crossing Holdings Ltd.
("AGCH"). On November 24, 1999, AGCH 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
AGCH, respectively.
Upon the formation of the joint venture, Microsoft and Softbank were each
issued 1,750,000 shares of Class B common stock of AGCH for $175.0 million in
cash paid by each of Microsoft and Softbank. GCL received 46,500,000 shares of
Class A common stock and 1,000 shares of Class C common stock of AGCH in
consideration for, among other things, (1) its entire interest in Pacific
Crossing Ltd. and (2) its development rights with respect to EAC. 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 PC-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 GCL, to hold GCL's interest in Pacific Crossing-1
("PC-1"), a 21,000 km undersea fiber optic cable connecting mainland United
States to Japan. GCL contributed GCT Pacific to the Company upon formation of
the joint venture. Since AGC and GCT Pacific are entities under the common
control of GCL, AGC'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, AGC 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
AGC intends to be the first pan-Asian telecommunications carrier to provide
integrated Internet, data, voice and Web-hosting services to wholesale and
business customers.
AGC owns 64.5% of PC-1 and is constructing EAC, a 17,000 km undersea fiber
optic cable in the East Asian region. The first segment of EAC is expected to be
ready for service in 2000. Both of these systems will be seamlessly connected to
the Global Crossing network, which, including PC-1 and EAC, 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, PC-1 was owned by Pacific Crossing Ltd. ("PCL"), a
joint venture among GCT Pacific, SCS (Bermuda) Ltd. and Marubeni Pacific Cable
Limited, all Bermuda companies (collectively the "PC-1 Partners") who owned
50.0%, 14.5% and 35.5% of PCL, respectively. In addition to owning 50.0% of PC-1
through GCT Pacific, before January 1, 2000, the Company's investment in PCL was
accounted for as interest in affiliates under the equity method because it was
not able to exercise effective control over PCL. In March 2000, the Company
increased its interest in
F-9
<PAGE> 106
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PCL to 64.5% by acquiring the remaining interest in SCS Bermuda Ltd., and the
PC-1 Shareholder Agreement was amended, which enabled Company to exercise
effective control over PCL. As a result, PCL has been consolidated as of January
1, 2000.
East Asia Crossing (EAC)
On December 17, 1999, AGC awarded KDD Submarine Cable Systems Inc. a
construction contract to build EAC, the first phase of which is an 11,000
kilometer subsea cable that AGC 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 March 31, 2000
and for the three months ended March 31, 2000 and 1999 are unaudited.
Adjustments, consisting of normal recurring adjustments and adjustments
necessary 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 quarter ended March 31, 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 GCL 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 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.
F-10
<PAGE> 107
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
d) Development Stage Company
The Company was in its development stage until December 1999 when the first
segment of PC-1 became ready for commercial service, and PCL 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.
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 March 31, 2000, December 31, 1999 and 1998,
$136.3 million, $138.1 million and $231.0 million, respectively, were restricted
for the construction of PC-1.
F-11
<PAGE> 108
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
THREE MONTHS
ENDED
MARCH 31, 2000
--------------
(UNAUDITED)
<S> <C>
Interest cost incurred...................................... $16,404
=======
Interest cost capitalized to construction in progress....... $15,388
=======
</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 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.
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".
F-12
<PAGE> 109
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 March 31,
2000 are Canadian Imperial Bank of Commerce ("CIBC"), a related party to GCL,
and Deutsche Bank AG. The Company is exposed to credit loss in the event of
nonperformance by these counterparties. As of March 31, 2000, the Company did
not utilize derivative financial instruments for trading or other speculative
purposes.
As discussed in Note 10, PCL 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 March 31, 2000, the effect of foreign currency
transactions were immaterial.
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. 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 March 31, 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
For all periods prior to March 31, 2000, the Company was a provider of
Internet and long distance telecommunications facilities and related services.
The Company has determined that it is a single segment operating company.
F-13
<PAGE> 110
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
p) 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.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------
2000 1999 1998
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Terrestrial capacity........................... $ 21,135 $ 10,795 $ --
Deposits on subsea capacity.................... 48,000 48,000 --
Construction in progress....................... 1,066,177 42,803 --
Subsea transmission equipment.................. 230,665 -- --
Leasehold improvements......................... 2,669 -- --
Furniture, fixtures and equipment.............. 2,897 -- --
---------- -------- --------
Total property and equipment.............. 1,371,543 101,598 --
Less: accumulated depreciation............ (4,031) -- --
---------- -------- --------
Total property and equipment, net......... $1,367,512 $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 three months ended March 31, 2000 was $4.0 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) PCL.................... $102,954 $ (2,502)
PC-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. ("PCG") and its
affiliates, a significant shareholder of GCL, began development of PC-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, GCL'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 PCG
and broaden the goals, objectives and business plan of GCL. In consideration of
PCG transferring the results of its activities and becoming limited in its
future activities in fiber optic telecommunications other than through GCL,
GCL's Board approved and the shareholders subsequently ratified a transaction
whereby PCG received certain cash reimbursements and entered into a warrant
agreement ("PCG Warrants") under which PCG was granted warrants for GCL's common
stock in exchange for the rights to continue the development of PC-1 and the
other fiber optic cables.
F-14
<PAGE> 111
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 performance level has been reached. At the date of the initial
public offering of GCL, the PCG Warrants attributable to PC-1 were valued at
approximately $163.0 million and contributed to GCT Pacific.
As of January 1, 2000, PCL was consolidated into the Company. As a result,
the PC-1 development costs were reclassified into property and equipment in the
accompanying consolidated balance sheet as of March 31, 2000, which were for the
balance sheet as of December 31, 2000 included in investing in affiliates.
The summarized consolidated financial statements of PCL 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, PCL has an $850.0 million aggregate senior
secured non-recourse loan facility (the "PC-1 Credit Facility") with a group of
banks led by CIBC, a related party of GCL, and Deutsche Bank AG, for the
construction and financing costs of PC-1. The PC-1 credit facility is comprised
of an $840.0 million multiple draw down term loan facility (the "PC-1 Term
Facility") and a $10.0 million working capital facility (the "PC-1 Working
Capital Facility"). Of the $840.0 million PC-1 Term Facility, $50.0 million is
restricted to fund the first System upgrade. The PC-1 Credit Facility is secured
by pledges of the stock of PCL and its subsidiaries and by a security interest
in its assets and revenues. As of March 31, 2000, PC-1 had an outstanding
balance of $750.0 million under the PC-1 Credit Facility. No amounts have been
repaid to the lenders.
Under the PC-1 Credit Facility, PCL 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
F-15
<PAGE> 112
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plus 0.5%, plus 1.25-1.50%. As of March 31, 2000, all outstanding loans were
Eurodollar loans. The PC-1 Credit Facility contains various covenants that (1)
limit further indebtedness by PCL and its subsidiaries, (2) limit the ability of
PCL to pay dividends, (3) require PCL to meet certain minimum capacity sales
levels and (4) require PCL to meet a minimum interest coverage ratio for the
years 2001 through to the maturity of the PC-1 Credit Facility. The PC-1 Credit
Facility is repayable in ten semi-annual installments ("Mandatory Repayments"),
commencing 135 days after the System is ready for service.
PCL 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 PCL'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 AGCH's
business. The shareholders agreement details, among other things, the
composition of AGCH'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 AGCH; AGCH's obligation to purchase certain technology from Microsoft; and
restrictions on the transfer of AGCH's common stock.
GCL 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, AGC and its subsidiaries purchase and
sell network capacity from and to affiliates. The Company purchases terrestrial
network capacity in Japan from Global Access Ltd. ("GAL"), a 49.0%-owned
affiliate of GCL, and PC-1 network capacity from PCL, a 64.5% owned affiliate of
the Company. The prices of GAL capacity were determined by AGC and GAL, and the
prices of PC-1 capacities were determined by AGC and PCL. Prices are reviewed
and adjusted periodically based on market conditions. The Company sells this
capacity directly, or indirectly through GCL and its affiliates to third-party
customers. Receivables and payables from/to affiliates are related to these
transactions.
Revenue from the sales of capacity to GCL for the three months ended March
31, 2000 was $45.8 million and none for the year ended December 31, 1999. The
Company purchased approximately $40 million of capacity from GCL and GAL during
the three months ended March 31, 2000 and purchased approximately $41 million of
capacity from GCL and GAL during the year ended December 31, 1999.
F-16
<PAGE> 113
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain affiliated companies, which are indirect wholly-owned subsidiaries
of GCL, provide AGC with general corporate services, including accounting,
legal, human resources, information systems services and other office functions.
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 three months ended March 31, 2000, the related charges totaled $1.3 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
PCL has entered into OA&M agreements with GAL and with Global Crossing
Network Center, Ltd. ("GCNC"), a subsidiary of GCL, whereby GAL and GCNC are
obligated to provide operating, administration and maintenance functions for
PC-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 GAL 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. PCL recorded expense of $1.5
million and $10.8 million for the three months ended March 31, 2000 under the
agreement with GAL and GCNC, respectively.
Notes Receivable from Employees
Certain key employees of AGC 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 March 31, 2000, the unamortized outstanding balance was $15.7 million
and is included in other assets in the accompanying consolidated balance sheet.
EAC
A direct wholly-owned subsidiary of GCL developed East Asia Crossing (EAC).
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 EAC and included in property and equipment.
8. GEOGRAPHIC SEGMENTATION
<TABLE>
<CAPTION>
(IN THOUSANDS)
MARCH 31, 2000 DECEMBER 31, 1999
----------------------- -----------------------
LONG-LIVED LONG-LIVED
REVENUE(1) ASSETS(2) REVENUE(1) ASSETS(2)
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
United States................. $46,624 $ 134,268 $ -- $ --
Japan......................... 24,410 173,245 -- 19,240
United Kingdom................ 4,770 -- -- --
International Waters.......... -- 1,059,999 -- 82,358
------- ---------- ---- --------
Consolidated.................. $75,804 $1,367,512 $ -- $101,598
======= ========== ==== ========
</TABLE>
- ---------------
(1) Revenue is classified according to the primary point of presence of the end
customer. During the three months ended March 31, 2000, there were two
customers located in the United States that accounted for 39.2% and 14.2% of
consolidated revenue and one customer 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 March 31, 2000 and December 31, 1999.
F-17
<PAGE> 114
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS
At December 31, 1999, AGC was committed under its contracts with KDD-SCS
for future EAC construction cost totaling approximately $587.0 million, over the
next two years. At March 31, 2000, the remaining committed construction cost was
$543.5 million.
At March 31, 2000, PCL was committed under contracts with TSSL for
remaining construction costs of PC-1 totaling approximately $131.7 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, PCL is committed to paying GAL $5.8
million each year through 2002, increasing by 3.0% thereafter through 2007 (see
note 7).
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 March 31, 2000, the fair value of the interest
rate swap entered into by PCL is $29.9 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>
F-18
<PAGE> 115
ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<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 $1,695 $2,436 $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. ("IRI"). 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 IRI 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 PCL to 64.5%. In connection with this transaction, AGC granted an
option to Marubeni, a joint venture partner in PCL to purchase $7.0 million of
AGC's Class A common stock at the initial public offering price.
On March 24, 2000 the PCL Shareholder Agreement was amended to allow the
Company to exercise effective control over PCL. Accordingly, the Company will
consolidate the operations of PCL 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;
(2) the Company will issue a specified number of shares of Class B common
stock to AGCH; AGCH will pay a dividend consisting of those shares to each of
Global Crossing, Microsoft and Softbank;
(3) the Company will issue a specified number of shares of Class A common
stock to AGCH; AGCH will pay a dividend consisting of those shares to The
Goldman Sachs Group, Inc.; and
(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) AGCH will then be dissolved.
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 ("HGC") and GAL. The Company will
indemnify GCL for certain contingent liabilities that may arise relating to HGC.
Additionally, the Company will purchase from GCL any outstanding shareholder
loans it made to HGC and GAL. 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-19
<PAGE> 116
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-20
<PAGE> 117
PACIFIC CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------------------
2000 1999 1998
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents....................... $ 528 $ 606 $ 433
Restricted cash and cash equivalents............ 66,734 17,914 6,695
Receivable from affiliate....................... 122,418 61,100 --
Accounts receivable............................. -- 6,399 --
Other assets and prepaid costs.................. 1,633 2,011 1,423
---------- ---------- --------
Total current assets......................... 191,313 88,030 8,551
Property and equipment, net....................... 1,047,921 1,010,730 193,214
Deferred finance costs, net of accumulated
amortization of $7,697, $6,560 and $2,026 as of
March 31, 2000, December 31, 1999 and 1998,
respectively.................................... 24,241 25,378 29,912
---------- ---------- --------
Total assets................................. $1,263,475 $1,124,138 $231,677
========== ========== ========
LIABILITIES:
Current liabilities:
Accrued construction costs...................... $ 107,993 $ 160,817 $ 23,473
Accounts payable and accrued liabilities........ 1,083 1,219 619
Deferred revenue................................ 4,503 9,854 333
Payable to affiliate............................ 29,039 8,124 1,041
Other current liabilities....................... 120 5,253 160
---------- ---------- --------
Total current liabilities.................... 142,738 185,267 25,626
Long term debt.................................... 750,000 750,000 200,000
Long term deferred revenue........................ 24,439 -- --
Long term accrued construction costs.............. -- -- 9,134
Other long term liabilities....................... 1,221 1,401 1,246
Loan payable to affiliate......................... 9,417 9,235 --
---------- ---------- --------
Total liabilities............................ 927,815 945,903 236,006
---------- ---------- --------
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, 1,200,000 shares authorized, par
value $0.01, 1,200,000 shares issued and
outstanding at March 31, 2000 and December
31, 1999 and 1998, respectively.............. 12 12 12
Additional paid in capital...................... 288,431 160,835 --
Retained earnings (deficit)..................... 47,217 17,388 (4,341)
---------- ---------- --------
335,660 178,235 (4,329)
---------- ---------- --------
Total liabilities and shareholders' equity
(deficit).................................. $1,263,475 $1,124,138 $231,677
========== ========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE> 118
PACIFIC CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
MAY 4, 1998
THREE MONTHS ENDED (DATE OF
MARCH 31, YEAR ENDED INCEPTION) TO
--------------------------- DECEMBER 31, DECEMBER 31,
2000 1999 1999 1998
------------ ------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue............................... $ 74,234 $ -- $61,100 $ --
Expenses:
Cost of sales....................... 27,286 -- 20,722 --
Operations, administration and
maintenance...................... 12,311 -- 8,000 --
Selling, general and
administrative................... 878 868 8,169 1,627
Depreciation and amortization....... 3,692 -- -- --
-------- ------- ------- -------
44,167 868 36,891 1,627
-------- ------- ------- -------
Operating income (loss).......... 30,067 (868) 24,209 (1,627)
-------- ------- ------- -------
Other income (expense):
Interest income..................... 694 37 464 1,032
Interest expense.................... (1,010) (991) (2,612) (3,746)
Other income........................ 78 -- 459 --
-------- ------- ------- -------
Income (loss) from operations
before provision for income
taxes.......................... 29,829 (1,822) 22,520 (4,341)
Provision for income taxes............ -- -- -- --
-------- ------- ------- -------
Income (loss) from operations.... 29,829 (1,822) 22,520 (4,341)
Cumulative effect of change in
accounting principle................ -- (791) (791) --
-------- ------- ------- -------
Net income (loss)................ $ 29,829 $(2,613) $21,729 $(4,341)
======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE> 119
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.................. -- -- 127,596 -- 127,596
Net income for the three months ended
March 31, 2000...................... -- -- -- 29,829 29,829
--------- --- -------- ------- --------
BALANCE, March 31, 2000 (unaudited)...... 1,200,000 $12 $288,431 $47,217 $335,660
========= === ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE> 120
PACIFIC CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
MAY 4, 1998
THREE MONTHS ENDED (DATE OF
MARCH 31, 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)................................... $ 29,829 $ (2,613) $ 21,729 $ (4,341)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization..................... 3,692 18
Cumulative effect of change in accounting
principle...................................... -- 791 791 --
Changes in operating assets and liabilities:
Other assets and prepaid costs................. 378 282 (588) (1,423)
Receivable from affiliate...................... (61,318) (2,439) (61,100) --
Accounts receivable............................ 6,399 -- (6,399) --
Deferred revenue............................... 19,088 1,700 9,521 333
Accounts payable & accrued liabilities......... (136) (27) 600 619
Payable to affiliate........................... 21,097 -- 16,318 1,041
Other liabilities.............................. (5,313) -- 5,248 --
--------- --------- --------- ---------
Net cash provided by (used in) operating
activities................................. 13,716 (2,288) (13,880) (3,771)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for property and equipment................ (92,570) (111,282) (685,563) (157,175)
--------- --------- --------- ---------
Net cash used in investing activities........ (92,570) (111,282) (685,563) (157,175)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.............. -- -- -- 12
Proceeds from long term debt........................ -- 112,070 550,000 304,000
Repayment of long term debt......................... -- -- -- (104,000)
Finance costs incurred.............................. -- -- -- (31,938)
Capital contributions............................... 127,596 -- 160,835 --
Change in restricted cash and cash equivalents...... (48,820) 1,887 (11,219) (6,695)
--------- --------- --------- ---------
Net cash provided by financing activities.... 78,776 113,957 699,616 161,379
--------- --------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS......................................... (78) 387 173 433
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, beginning of period........ 606 433 433 --
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period.............. $ 528 $ 820 $ 606 $ 433
========= ========= ========= =========
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING
ACTIVITIES:
Costs incurred for property and equipment........... $ 40,882 $ 123,131 $ 818,307 $ 193,214
Decrease (increase) in accrued construction costs... 52,825 (10,683) (128,210) (32,607)
Amortization of deferred finance costs.............. (1,137) (1,128) (4,534) (2,026)
Increase in other liabilities....................... -- (38) -- (1,406)
--------- --------- --------- ---------
Cash paid for property and equipment................ $ 92,570 $ 111,282 $ 685,563 $ 157,175
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid and capitalized....................... $ 19,152 $ 4,594 $ 29,514 $ 6,548
========= ========= ========= =========
Interest paid (net of capitalized interest)......... $ 891 $ 1,741 $ 2,655 $ 3,414
========= ========= ========= =========
Cash paid for taxes................................. $ -- $ -- $ -- $ --
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE> 121
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. ("PCL" or the "Company") was
incorporated in Bermuda. PCL 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 PCL, respectively. PCL was incorporated to construct
and operate an undersea fiber optic cable ring with landing stations in the
United States and Japan (PCL's fiber optic cable ring is referred to as "PC-1"
or the "System"). PCL 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. PC-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., ("AGCH") and owns a further economic interest in PCL through its 100%
ownership interest in SCS (Bermuda). During the periods presented in these
financial statements, AGCH was 93.0% owned by Global Crossing Ltd. ("GCL"). GCL
is a provider of global broadband telecommunications services for both wholesale
and retail customers. GCL is building a state-of-the-art fiber optic network
(the "Global Crossing Network") which includes PC-1.
During April 1998, PCL entered into a fixed price contract with Tyco
Submarine Systems Ltd. ("TSSL") to construct PC-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
PCL. 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 "PC-1 Credit Facility") was executed for the construction and
financing costs of PC-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 March 31, 2000
and for the three months ended March 31, 2000 and March 31, 1999 are unaudited.
Adjustments, consisting of normal recurring adjustments and adjustments
necessary 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 quarter ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the full year or
for any future period.
F-25
<PAGE> 122
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 PC-1 was placed into service.
e) Revenue Recognition
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. At March 31, 2000 and December
31, 1999, PCL had deferred revenue of $2.0 million and $9.9 million,
respectively, relating to sales-type lease revenues.
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.
Services
Revenue from sales of capacity under operating -- type leases are
recognized over the period the service is provided, net of an estimate for
uncollectable accounts. Payments received from customers before the relevant
criteria for revenue recognition are satisfied are included in deferred revenue.
At March 31, 2000, PCL had deferred revenue of $27.0 million relating to
operating-type leases and at December 31, 1999, PCL did not have any deferred
revenue relating to operating-type leases.
f) Cost of Sales
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
F-26
<PAGE> 123
PACIFIC CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
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 PC-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 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
THREE MONTHS (DATE OF
ENDED YEAR ENDED INCEPTION) TO
MARCH 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Interest cost incurred........................ $16,398 $41,625 $11,841
======= ======= =======
Interest cost capitalized to construction in
progress.................................... $15,388 $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
F-27
<PAGE> 124
PACIFIC CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 three months ended March 31, 2000 and the year ended December 31, 1999,
PCL recognized a $0.1 million and $0.5 million, respectively, foreign
transaction gain 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.
F-28
<PAGE> 125
PACIFIC CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------------
2000 1999 1998
----------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C>
Transmission equipment............... $ 200,245 $ 227,531 $ --
Construction in progress............. 851,368 783,199 193,214
---------- ---------- --------
Total property and equipment......... $1,051,613 $1,010,730 $193,214
Less: accumulated depreciation....... (3,692) -- --
---------- ---------- --------
Total property and equipment......... $1,047,921 $1,010,730 $193,214
========== ========== ========
</TABLE>
Depreciation expense was not recorded in 1999 or 1998 as the Northern
segment of PC-1 was placed into service on December 31, 1999. Depreciation
expense for the three months ended March 31, 2000 was $3.7 million.
4. LONG TERM DEBT
PC-1 Credit Facility
During 1998, PCL entered into an $850.0 million aggregate senior secured
non-recourse loan facility (the "PC-1 Credit Facility") with a group of banks
led by CIBC and Deutsche Bank AG, for the construction and financing costs of
PC-1. The PC-1 credit facility is comprised of an $840.0 million multiple draw
down term loan facility (the "PC-1 Term Facility") and a $10.0 million working
capital facility (the "PC-1 Working Capital Facility"). Of the $840.0 million
PC-1 Term Facility, $50.0 million is restricted to fund the first system
upgrade. The PC-1 Credit Facility is secured by pledges of the stock of PCL and
its subsidiaries and by a security interest in its assets. As of March 31, 2000
and December 31, 1999, PCL had an outstanding balance of $750.0 million
F-29
<PAGE> 126
PACIFIC CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
under the Credit Facility ($200.0 million at December 31, 1998). No amounts have
been repaid to the lenders.
PCL obtained a $104.0 million loan from CIBC to fund construction before
the PC-1 Credit Facility was in place. This loan was repaid during 1998 with
funds borrowed under the PC-1 Credit Facility.
Under the PC-1 Credit Facility, PCL 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 March 31, 2000 and December 31, 1999 and 1998 all outstanding
loans were Eurodollar loans. The PC-1 Credit Facility contains various covenants
that (i) limit further indebtedness by PCL and its subsidiaries, (ii) limit the
ability of PCL to pay dividends, (iii) require PCL to meet certain minimum
capacity sales levels and (iv) require PCL to meet a minimum interest coverage
ratio for the years 2001 through to the maturity of the PC-1 Credit Facility.
The PC-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, PCL 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 PCL'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>
<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, PCL was committed under contracts with TSSL for
remaining construction costs of PC-1 totaling approximately $240.0 million. At
March 31, 2000, the remaining commitment amount was $131.7 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, PCL is committed to paying Global
Access Ltd. ("GAL") $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").
F-30
<PAGE> 127
PACIFIC CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 March 31, 2000, the
fair value of the interest rate swap is $29.9 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).
Revenue
All sales of capacity and related OA&M revenue on PC-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 ("FSA")
During 1998, PCL entered into a FSA with Global Crossing Development
Corporation ("GCDC"), an indirect wholly owned subsidiary of GCL, to arrange the
PC-1 Credit Facility. As consideration, GCDC received a fee in the amount of
1.5% of the $850.0 million PC-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 PC-1 Credit Facility. In a further agreement between GCDC and Marubeni
Pacific Cable Limited, Marubeni Pacific Cable Limited received from GCDC 33.3%
of the $12.8 million or $4.3 million for their participation in arranging the
PC-1 Credit Facility.
Contribution of PC-1
Prior to January 21, 1998, Pacific Capital Group, Inc. ("PCG") and its
affiliates, a significant shareholder of GCL, began development of PC-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, GCL'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
PCG and broaden the goals, objectives and business plan of GCL. In consideration
of PCG transferring the results of its activities and becoming limited in its
future activities in fiber optic telecommunications other than through GCL,
GCL's Board approved and their shareholders subsequently ratified a transaction
whereby PCG received certain cash reimbursements and entered into a warrant
agreement ("PCG Warrants") under which PCG was granted warrants for GCL's common
stock in exchange for the rights to continue the development of PC-1 and the two
other fiber optic cable systems. GCL subsequently contributed these development
rights applicable to PC-1 to GCT Pacific Holdings Ltd. Such costs have not been
reflected in the financial statements of PCL. The value attributed to PC-1 was
determined by allocating the value of the PCG Warrants on a pro rata basis based
on the estimated cost of each system.
F-31
<PAGE> 128
PACIFIC CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management Services
Certain affiliated companies, which are indirect wholly-owned subsidiaries
of GCL, provide PCL with marketing, management and administrative services in
respect of the development, implementation and operations of PCL. For the year
ended December 31, 1999 approximately $4.0 million of marketing, management and
administrative services fees were recorded as an expense by PCL. In addition,
$2.5 million was charged by GCL and recorded by as expense by PCL related to
legal and professional fees pertaining to legal and advocacy issues before
governmental authorities. For the three months ended March 31, 2000, $318,000
and $250,000 were charged by GCL and AGCH 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.
Maintenance Agreements
The Company has entered into OA&M agreements with GCNC (a subsidiary of
GCL) and GAL (an affiliate of GCL) whereby GCNC and GAL are obligated to provide
operating, administration and maintenance functions for PC-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 GAL 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. PCL recorded expense of $1.5 million for the three months
ended March 31, 2000 under the agreement with GAL. No expense was incurred under
the agreement with GAL in 1999 or 1998. PCL incurred and recorded expense of
$10.8 million and $8.0 million in connection with the GCNC agreement for the
three months ended March 31, 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 an affiliate 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 PC-1 Credit Facility is paid in full.
Other Transactions
In 1998, an affiliate of CIBC, a major shareholder of GCL, was a member of
the PC-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
PC-1 Credit Facility. This amount is included in deferred finance costs in the
accompanying consolidated balance sheet.
9. GEOGRAPHIC SEGMENTATION
<TABLE>
<CAPTION>
(IN THOUSANDS)
MARCH 31, 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.......... $47,210 $ 127,847 $61,100 $ 115,620 $ -- $ 29,367
Japan.................. 24,178 125,994 -- 127,990 -- 22,007
United Kingdom......... 3,302 -- -- -- -- --
International Waters... -- 794,080 -- 767,120 -- 141,840
------- ---------- ------- ---------- ------- ----------
Consolidated........... $74,690 $1,047,921 $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-32
<PAGE> 129
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS OF HONG KONG DOLLARS)
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Current assets:
Cash at bank............................................. $ 132,505 $ 256
Trade accounts receivable................................ 31,582 34,464
Due from affiliates...................................... 57,223 59,155
Other assets and prepaid costs........................... 48,438 38,343
----------- ----------
Total current assets............................. 269,748 132,218
Deferred expenditure....................................... -- 567,199
Prepaid capacity and services.............................. 2,722,300 --
Property, plant and equipment.............................. 2,664,497 2,478,444
----------- ----------
Total assets..................................... $ 5,656,545 $3,177,861
=========== ==========
LIABILITIES:
Current liabilities:
Accounts payable, bank overdrafts and accrued
liabilities........................................... $ 315,940 $ 317,532
Deferred income.......................................... 40,422 44,311
Due to affiliates........................................ 24,243 4,860
----------- ----------
Total current liabilities........................ 380,605 366,703
Long term loan from affiliates............................. 174 3,377,949
----------- ----------
Total liabilities................................ 380,779 3,744,652
----------- ----------
OWNER'S SURPLUS/(DEFICIT):
Share capital, 320 shares of US$1, authorized, issued and
fully paid............................................... 2 --
Share premium.............................................. 6,436,827 --
Accumulated deficit........................................ (1,161,063) (566,791)
----------- ----------
Total owner's surplus/(deficit).................. 5,275,766 (566,791)
----------- ----------
Total liabilities and owner's
surplus/(deficit).............................. $ 5,656,545 $3,177,861
=========== ==========
</TABLE>
See accompanying notes to the combined financial statements
which are an integral part of these statements.
F-33
<PAGE> 130
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF HONG KONG DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues.................................................... $225,718 $179,545
Operating expenses:
Cost of services, exclusive of depreciation shown below... 204,837 173,400
Sales, general and administrative......................... 27,551 46,386
Depreciation of property, plant and equipment............. 19,087 13,482
Provision for doubtful accounts........................... 3,953 2,578
-------- --------
Total operating expenses............................... 255,428 235,846
-------- --------
Operating loss.............................................. (29,710) (56,301)
Interest income............................................. 2,637 97
Interest expense............................................ -- (11,467)
-------- --------
Net loss before tax.................................... (27,073) (67,671)
Provision for tax........................................... -- --
-------- --------
Net loss............................................... $(27,073) $(67,671)
======== ========
</TABLE>
See accompanying notes to the combined financial statements
which are an integral part of these statements.
F-34
<PAGE> 131
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF HONG KONG DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
NOTES 2000 1999
----- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net cash outflow from operating activities................ (a) $ (5,091) $ (44,944)
--- --------- ---------
Returns on investments and servicing of finance
Interest received....................................... 2,637 97
Interest paid........................................... -- (11,467)
--------- ---------
Net cash inflow/(outflow) from returns on investments and
servicing of finance.................................... 2,637 (11,370)
--------- ---------
Investing activities
Purchase of fixed assets................................ (199,568) (217,607)
Proceeds on disposals of fixed assets................... -- 11
--------- ---------
Net cash outflow from investing activities................ (199,568) (217,596)
--------- ---------
Net cash outflow before financing activities.............. (202,022) (273,910)
Financing activities (b)
Loan borrowed from affiliates........................... -- 273,778
Long term loan repaid to immediate holding company...... (52,146) --
Consideration received for issuance of 10 shares........ 388,900 --
--------- ---------
Net cash inflow from financing activities................. 336,754 273,778
--------- ---------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS.......... 134,732 (132)
CASH AND CASH EQUIVALENTS at beginning of period.......... (2,227) 328
--------- ---------
CASH AND CASH EQUIVALENTS at end of period................ $ 132,505 $ 196
========= =========
Analysis of the balances of cash and cash equivalents:
Bank balances........................................... $ 132,505 $ 260
Bank overdraft.......................................... -- (64)
--------- ---------
$ 132,505 $ 196
========= =========
</TABLE>
See accompanying notes to the combined financial statements
which are an integral part of these statements.
F-35
<PAGE> 132
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
CONDENSED 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>
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net loss before tax......................................... $(27,073) $(67,671)
Depreciation of property, plant and equipment............... 19,087 13,482
Interest income............................................. (2,637) (97)
Interest expense............................................ -- 11,467
Decrease in trade accounts receivable....................... 2,882 3,832
Decrease (increase) in due from affiliates.................. 1,932 (5,031)
Increase in other assets and prepaid costs.................. (10,095) (2,082)
Decrease in accounts payable and accrued liabilities........ (4,681) (27,189)
(Decrease) increase in deferred income...................... (3,889) 346
Increase in due to affiliates............................... 19,383 27,999
-------- --------
Net cash outflow from operating activities.................. $ (5,091) $(44,944)
======== ========
</TABLE>
(b) Analysis of changes in financing during the year
<TABLE>
<CAPTION>
LONG TERM LOAN FROM
LONG TERM LOAN FROM IMMEDIATE HOLDING SHARE
AFFILIATES COMPANY PREMIUM
------------------- ------------------- ----------
<S> <C> <C> <C>
At January 1, 2000....................... $ 174 $ 3,377,775 $ --
Cash inflow/(outflow) from financing..... -- (52,146) 388,900
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 March 31, 2000........................ $ 174 $ -- $6,436,827
========== =========== ==========
At January 1, 1999....................... $2,302,074 $ -- $ --
Cash inflow from financing............... 273,778 -- --
---------- ----------- ----------
At March 31, 1999........................ $2,575,852 $ -- $ --
========== =========== ==========
</TABLE>
F-36
<PAGE> 133
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED 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 the Nasdaq National Market, 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 expenditure for the purpose of
developing, establishing and maintaining the network for the provision of the
service from January 1, 1999 up to December 31, 2002.
Pursuant to 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-37
<PAGE> 134
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 $27,073 and $67,671 for the three months
ended March 31, 2000 and 1999 respectively and at March 31, 2000, the Company
had net current liabilities of $110,857 and significant capital expenditure
commitments as set out in note 4(a). 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 March 31, 2000. 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 March 31, 2000.
Consequently the 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 true and
fair view. The results for the three months ended March 31, 2000 are not
necessarily indicative of the results expected for the year.
These condensed combined financial statements have been prepared in
accordance with accounting principles generally accepted in Hong Kong
("HKGAAP"). The preparation of financial
F-38
<PAGE> 135
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 HGCH
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
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 3 months
ended March 31, 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 March 31, 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 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 transferred to property, plant and equipment. No
depreciation is provided in respect of construction in progress.
F-39
<PAGE> 136
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 overdraft 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 cost is 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 $17,922 and $12,566 for each of the three months
ended March 31, 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 to these schemes based upon notification of
charges from the administering company. The contributions are charged
immediately to the statement of operations.
F-40
<PAGE> 137
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The retirement contributions incurred and borne by the Company were $2,881
and $2,223 for each of the three months ended March 31, 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>
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
------- -------
<S> <C> <C>
Fees to affiliates
For the provision of management and treasury services
(Note a)............................................... $ 5,810 $ 8,780
------- -------
Fees to affiliate for the provision of operating facilities
(Note b).................................................. 22,159 65,557
------- -------
Interest payable to:
-- affiliates (Note c).................................... -- 11,467
------- -------
Interest income receivable from a related company........... 2,637 48
------- -------
</TABLE>
(a) Certain operating expenses of the Company are charged by an affiliate
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.
F-41
<PAGE> 138
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(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 utilized by the Company. The guarantee line facilities utilized by the
Company as of March 31, 2000 were $36,816. The Company is not charged for these
guarantees.
4. COMMITMENTS AND CONTINGENCIES
(a) The Company is committed under its contracts to purchase property plant
and equipment amounting to approximately $1,099,195 and $805,736 as of March 31,
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 March 31, 2000.
(ii) Third party network operators in relation to the construction of
exchanges for approximately $5,496 as of March 31, 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-indemnitied by Compaq Computer Limited.
5. 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>
THREE MONTHS ENDED
MARCH 31,
-----------------------
NOTE 2000 1999
---- ----------- --------
<S> <C> <C> <C>
Net loss under HKGAAP..................................... $ (27,073) $(67,671)
USGAAP adjustments:
Capitalized interest.................................... (i) 346 346
General provisions...................................... (ii) (21,427) 506
Depreciation............................................ (iii) (16,935) (9,323)
----------- --------
Net loss under USGAAP..................................... $ (65,089) $(76,142)
=========== ========
Total owner's surplus under HKGAAP........................ $ 5,275,766
USGAAP adjustments:
Capitalized interest.................................... (i) (12,111)
General provisions...................................... (ii) 21,408
Depreciation............................................ (iii) (105,921)
Prepaid capacity and services........................... (iv) (2,722,300)
Deferred tax asset under USGAAP......................... (v) 296,714
Deferred tax liability under USGAAP..................... (v) (252,894)
Valuation allowance..................................... (v) (43,820)
-----------
Total owner's surplus under USGAAP........................ $ 2,456,842
===========
</TABLE>
F-42
<PAGE> 139
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Under HKGAAP, the statement of cash flows should be presented under the
following five standard headings: (a) operating activities; (b) returns on
investments and servicing of finance; (c) taxation; (d) investing activities;
and (e) financing. Under USGAAP, only three categories of cash flow activities
are presented: (a) operating; (b) investing; and (c) financing. Cash flows from
returns on investments and servicing of finance and taxation would be classified
under USGAAP as either operating, investing or financing activities based on the
nature of the specific items. For example, under USGAAP, operating activities
would include interest received, dividends received from associated companies
and operating interest and profits tax paid, while investing activities would
include capitalized interest paid, and financing activities would include
ordinary and special interim dividends paid. Additionally, HKGAAP includes bank
overdrafts within the definition of cash and cash equivalents, whereas USGAAP
classifies bank overdrafts as 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>
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Net cash (used)/provided by:
Operating activities..................................... $ (2,454) $ (56,314)
Investing activities..................................... (199,568) (217,596)
Financing activities..................................... 334,271 273,842
--------- ---------
Increase/(decrease) in cash and cash equivalents......... 132,249 (68)
Cash and cash equivalents at beginning of year........... 256 328
--------- ---------
Cash and cash equivalents at end of year................. $ 132,505 $ 260
========= =========
</TABLE>
(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.
F-43
<PAGE> 140
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(iv) Prepaid capacity and services
The prepaid capacity and services 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 March 31, 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 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 and long term loan
from an affiliate under the control of Hutchison Whampoa Limited. 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.
F-44
<PAGE> 141
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Business segmental information
The Company conducts its business in one territory, Hong Kong and has
derived its revenue principally from the provision of international services,
local fixed network services and multimedia services to customers. These are its
three operating segments. For management purposes the results of these three
operating segments are analyzed separately. Certain of the assets and
liabilities of the international services and local fixed network services
segments are shared and grouped together for management purposes. The segmental
information for identifiable assets and capital 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. 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>
THREE MONTHS ENDED MARCH 31, 2000
International services...................... $122,790 $ 10,350 $ 6,809
Local fixed network services................ 90,092 (9,033) 10,727
Multimedia services......................... 12,836 (28,240) 1,551
ESD services................................ -- (2,787) --
-------- -------- -------
$225,718 $(29,710) $19,087
======== ======== =======
THREE MONTHS ENDED MARCH 31, 1999
International services...................... $138,805 $ 4,448 $ 6,736
Local fixed network services................ 36,713 (47,275) 6,343
Multimedia services......................... 4,027 (13,474) 403
-------- -------- -------
$179,545 $(56,301) $13,482
======== ======== =======
</TABLE>
F-45
<PAGE> 142
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
IDENTIFIABLE CAPITAL
ASSETS EXPENDITURE
------------ -----------
<S> <C> <C>
THREE MONTHS ENDED MARCH 31, 2000
International services and local fixed network services.... $5,593,271 $187,777
Multimedia services........................................ 57,987 12,071
ESD Services............................................... 5,287 5,292
---------- --------
$5,656,545 $205,140
========== ========
THREE MONTHS ENDED MARCH 31, 1999
International services and local fixed network services.... $173,916
Multimedia services........................................ 3,962
--------
$177,878
========
</TABLE>
Reconciliation of segment operating loss to net loss before tax
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Operating loss.............................................. $(29,710) $(56,301)
Interest income............................................. 2,637 97
Interest expense............................................ -- (11,467)
-------- --------
Net loss before tax under HKGAAP............................ (27,073) (67,671)
Effect of USGAAP adjustments:............................... (38,016) (8,471)
-------- --------
Net loss under USGAAP....................................... $(65,089) $(76,142)
======== ========
</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 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 year 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.
F-46
<PAGE> 143
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(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 nine months ending December 31, 2000.............. $20,714
2001...................................................... 23,476
2002...................................................... 11,485
2003...................................................... 4,289
2004...................................................... 3,231
Thereafter................................................ 17,359
-------
$80,554
=======
</TABLE>
F-47
<PAGE> 144
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-48
<PAGE> 145
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-49
<PAGE> 146
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-50
<PAGE> 147
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-51
<PAGE> 148
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-52
<PAGE> 149
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 $3,377,775
========= ========= =========== ==========
</TABLE>
F-53
<PAGE> 150
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(THROUGHOUT THESE NOTES TO COMBINED FINANCIAL STATEMENTS, REFERENCES TO "$" 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 among 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:
(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-54
<PAGE> 151
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-55
<PAGE> 152
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 HGCH and its
wholly owned subsidiaries excluding the Excluded Business and including HCLNP as
a result of the Reorganization described in note 1. All significant transactions
within the Company have been eliminated.
(b) Deferred expenditure
Deferred 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-56
<PAGE> 153
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-57
<PAGE> 154
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-58
<PAGE> 155
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-59
<PAGE> 156
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-60
<PAGE> 157
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-61
<PAGE> 158
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 HCLNP'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 b)............................ 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-62
<PAGE> 159
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-63
<PAGE> 160
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 $5,946 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-64
<PAGE> 161
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 HGCH 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-65
<PAGE> 162
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-66
<PAGE> 163
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
HCLNP'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 services to customers. These are its
three operating segments. For management purposes the results
F-67
<PAGE> 164
HUTCHISON GLOBAL CROSSING HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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-68
<PAGE> 165
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-69
<PAGE> 166
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-70
<PAGE> 167
GLOBAL ACCESS LIMITED
BALANCE SHEETS
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
(THOUSANDS OF JAPANESE YEN)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Current assets:
Cash...................................................... Y 7,267,645 Y5,148,021
Accounts receivable....................................... 4,482 160
Due from Global Crossing Japan............................ 1,414,350 4,116,000
Prepaid expenses.......................................... 71,472 61,286
Refundable consumption taxes.............................. 334,057 103,515
Other current assets...................................... 2,732 18,836
----------- -----------
Total current assets................................... 9,094,738 9,447,818
----------- -----------
Property and equipment...................................... 7,207,915 3,854,110
Security deposits and other assets.......................... 554,961 312,524
----------- -----------
Total assets........................................... Y16,857,614 Y13,614,452
=========== ===========
LIABILITIES:
Current liabilities:
Short-term loans payable.................................. Y 6,000,000 Y6,000,000
Accounts payable.......................................... 370,566 59,422
Accrued expenses.......................................... 56,559 38,264
Deferred revenue.......................................... 490,667 261,333
Income tax payable........................................ 856 475
Other current liabilities................................. 367,276 205,727
----------- -----------
Total current liabilities.............................. 7,285,924 6,565,221
----------- -----------
Deferred revenue............................................ 6,760,888 3,657,235
----------- -----------
Commitments
Total liabilities...................................... 14,046,812 10,222,456
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock; par value Y50,000, authorized -- 160,000
shares issued and outstanding -- 100,000 shares........ 5,000,000 5,000,000
Accumulated deficit....................................... (2,189,198) (1,608,004)
----------- -----------
Total stockholders' equity............................. 2,810,802 3,391,996
----------- -----------
Total liabilities and stockholders' equity............. Y16,857,614 Y13,614,452
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-71
<PAGE> 168
GLOBAL ACCESS LIMITED
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICITS
FOR THE THREE MONTHS ENDED MARCH 31,
(THOUSANDS OF JAPANESE YEN)
<TABLE>
<CAPTION>
2000 1999
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Revenue..................................................... Y 324,012 Y --
Expenses:
Depreciation and amortization............................. 70,062 --
Payroll................................................... 148,206 77,676
Rent...................................................... 57,669 16,700
Service Fees.............................................. 490,530 10,204
Usage charge for facilities............................... 68,549 --
Start-up charges.......................................... -- 196,976
Miscellaneous............................................. 47,190 54,313
----------- ---------
Operating loss......................................... (558,194) (355,869)
----------- ---------
Other income (expense):
Interest income........................................... 1,080 837
Interest expense.......................................... (58,361) --
Miscellaneous -- net...................................... 34,756 240
----------- ---------
Loss before provision for income taxes............ (580,719) (354,792)
Provision for income taxes.................................. 475 805
----------- ---------
Net loss.......................................... (581,194) (355,597)
Accumulated loss at the beginning of the period............. (1,608,004) (244,836)
----------- ---------
Accumulated loss at the end of the period................... Y(2,189,198) Y(600,433)
=========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-72
<PAGE> 169
GLOBAL ACCESS LIMITED
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(THOUSANDS OF JAPANESE YEN)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. Y (581,194) Y (355,597)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 70,062 --
Change in operating assets and liabilities:
Decrease in accounts receivable...................... 2,697,328 (24,252)
Increase in prepaid expenses......................... (10,186) (6,422)
Increase in refundable consumption taxes............. (230,542) (18,755)
Decrease (increase) in other current assets.......... 16,104 (14)
Increase in accounts payable......................... 311,144 82,756
Increase in accrued expenses......................... 18,295 16,514
Increase in income taxes payable..................... 381 805
Increase in deferred revenue......................... 3,332,987 --
Increase in other current liabilities................ 161,549 (591)
---------- ----------
Net cash provided by (used in) operating
activities..................................... 5,785,928 (305,556)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (3,423,867) (903,560)
Security deposit and other assets......................... (242,437) (48,613)
---------- ----------
Net cash used in investing activities............. (3,666,304) (952,173)
---------- ----------
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........................................ 2,119,624 1,742,271
CASH, beginning of period................................... 5,148,021 1,443,494
---------- ----------
CASH, end of period......................................... Y7,267,645 Y3,185,765
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................. Y 58,030 Y --
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-73
<PAGE> 170
GLOBAL ACCESS LIMITED
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 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 Global Bandwidth Solutions, Inc. (51.0%), a wholly owned
subsidiary of Marubeni Corporation, and by Global Crossing ("GC") (49.0%). The
Company has been involved in the planning, marketing, organization, development,
design and construction of the Systems between PC-1 cable landing stations and
major third party communications hubs in Japan. PC-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. ("PCL"), in
which Asia Global Crossing ("AGC"), a subsidiary of GC, owns a 64.5% economic
interest. The first segment of PC-1, constructed by PCL, became ready for
service in December 1999. The remaining portion is scheduled to become ready for
service in 2000. The Company's Systems from PC-1 to Tokyo were ready for service
in December 1999. The Systems are sold or leased to the customers of PC-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 ("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 ("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 ("GCJ"), a subsidiary of AGC, to grant an
Indefeasible Right of Use ("IRU") on units ("STM") of capacity on the Systems
between PC-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 IRU granted entitles GCJ 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, GCJ is obligated
F-74
<PAGE> 171
GLOBAL ACCESS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
for the term of the IRU 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 IRU 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, 1999, January 31, 2000 and March 28, 2000 in connection
with the Agreement, the Company granted IRUs representing three 16 STMs and two
8 STMs on the Systems between Tokyo Network Operation Center and PC-1 cable
landing station in Ajigaura for total selling price of Y7,360,000 thousand.
Revenue recognized relating to these transactions during the three month period
ended March 31, 2000 was Y107,012 thousand, and due from GCJ of Y1,344,000
thousand, including, 5.0% consumption tax, and deferred revenue of Y7,251,555
thousand was recorded on the balance sheet as of March 31, 2000.
Operating and maintaining revenues recognized in connection with the
Agreement was Y67,000 thousand during the three month period ended March 31,
2000 and due from GCJ as of March 31, 2000 includes the receivable of Y70,350
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 is comprised of cash on hand and bank deposits, which approximate fair
value.
3. PROPERTY AND EQUIPMENT
Property and equipment are as follows:
<TABLE>
<CAPTION>
THOUSANDS OF
JAPANESE YEN
-----------------------------------
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
Property and equipment, at cost
Buildings.................................. Y1,596,452 Y108,442
Fiber optical cable systems................ 3,481,761 1,249,133
Furniture and equipment.................... 14,139 1,139
Land....................................... 1,070,482 1,037,070
Construction in progress................... 1,108,973 1,459,381
---------- ----------
Total................................. 7,271,807 3,855,165
---------- ----------
Accumulated depreciation
Buildings.................................. 2,813 133
Fiber optical cable systems................ 60,252 733
Furniture and equipment.................... 827 189
---------- ----------
Total................................. 63,892 1,055
---------- ----------
Net property and equipment................. Y7,207,915 Y3,854,110
========== ==========
</TABLE>
F-75
<PAGE> 172
GLOBAL ACCESS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has purchased land for the cable stations. 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 Y2,940,000 thousand from GC 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 three months ended March 31, 2000 was approximately Y58,361 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
three months ended March 31, 2000 and 1999 represents inhabitant tax. The
statuary income tax rate was 42.0% and 47.0% for the three months ended March
31, 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 are as follows:
<TABLE>
<CAPTION>
THOUSANDS OF
JAPANESE YEN
----------------------------------
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
Start-up charges............................. Y -- Y 274,022
Net operating loss carryforwards............. 916,415 395,275
--------- ---------
Total deferred income tax assets............. 916,415 669,297
Less valuation allowance..................... (916,415) (669,297)
--------- ---------
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
Y2,181,941 thousand as of March 31, 2000 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 Y300,000 thousand and Y72,241 thousand to Marubeni Corporation
during the three months ended March 31, 2000 and 1999, respectively.
F-76
<PAGE> 173
GLOBAL ACCESS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has entered into a Japanese Cable Station Operations and
Maintenance agreement with PCL to provide the operations and maintenance
services for the cable stations at the Japanese landing sites of the PC-1 where
PC-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 three months ended March 31, 2000 was Y150,000 thousand.
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 are as follows:
<TABLE>
<CAPTION>
THOUSANDS OF
JAPANESE
YEARS ENDING MARCH 31 YEN
--------------------- ------------
(UNAUDITED)
<S> <C>
2001...................................................... Y81,936
2002...................................................... 13,530
2003...................................................... 9,617
</TABLE>
Rent expense and usage charges for facilities for the three months ended
March 31, 2000 and 1999 were approximately Y126,218 thousand, and Y16,700
thousand, respectively.
F-77
<PAGE> 174
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-78
<PAGE> 175
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-79
<PAGE> 176
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-80
<PAGE> 177
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-81
<PAGE> 178
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-82
<PAGE> 179
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 Global Bandwidth Solutions, Inc. (51.0%), a wholly owned
subsidiary of Marubeni Corporation, and by Global Crossing ("GC") (49.0%). The
Company has been involved in the planning, marketing, organization, development,
design and construction of the Systems between PC-1 cable landing stations and
major third party communications hubs in Japan. PC-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. ("PCL"), in
which GC owns a 57.8% economic interest. The first segment of PC-1, constructed
by PCL, became ready for service in December 1999. The remaining portion is
scheduled to become ready for service in 2000. The Company's Systems from PC-1
to Tokyo was ready for service in December 1999 and will be sold or leased to
the customers of PC-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 ("GCJ"), a subsidiary of GC, to grant an
Indefeasible Right of Use ("IRU") in units ("STM") of capacity on the Systems
between PC-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 IRU granted entitles GCJ 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, GCJ is
obligated
F-83
<PAGE> 180
GLOBAL ACCESS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
for the term of the IRU 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 IRU 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 IRUs representing two 16 STMs on the Systems between Tokyo Network
Operation Center and the PC-1 cable landing station in Ajigaura for total
selling price of Y3,920,000 thousand. Revenue recognized relating to this
transaction during 1999 was Y1,432 thousand, and due from GCJ of Y4,116,000
thousand, including 5.0% consumption tax, and deferred revenue of Y3,918,568
thousand was recorded on the balance sheet as of December 31, 1999. On March 1,
2000, the entire amount from GCJ of Y4,116,000 thousand was paid.
On January 31, 2000, the Company has also granted additional IRUs
representing a sixteen STMs on the Systems between Tokyo Network Operation
Center and the PC-1 cable landing station in Ajigaura for a total selling price
of Y2,160,000 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.
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>
F-84
<PAGE> 181
GLOBAL ACCESS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 Y2,940,000 thousand from GC 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 year ended December 31, 1999 was approximately Y50,889 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.
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
Y941,132 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 Y72,241 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.
F-85
<PAGE> 182
GLOBAL ACCESS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 Y143,732 thousand, Y35,021 thousand, respectively. There was no
rent expense for the period from November 4, 1997 (Date of Inception) to
December 31, 1997.
F-86
<PAGE> 183
UNAUDITED PRO FORMA FINANCIAL INFORMATION
We have prepared the following unaudited pro forma condensed combined
financial information of us, PCL, HGC and GAL, 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 PCL, (2) the transfer of the 50% ownership interest in HGC and
(3) the transfer to us of Global Crossing's 49% ownership interest in GAL had
been completed as of the date or at the beginning of the period presented. This
pro forma information does not give effect to this offering and the concurrent
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 PCL, HGC and GAL 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-87
<PAGE> 184
PRO FORMA ASIA GLOBAL CROSSING
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ASIA GLOBAL HGC GAL ASIA
CROSSING ADJUSTMENTS ADJUSTMENTS GLOBAL
(1) (2) (3) CROSSING
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................ $ 207,514 $ -- $ -- $ 207,514
Restricted cash and cash equivalents..................... 66,734 -- -- 66,734
Accounts receivable...................................... 23,987 -- -- 23,987
Receivable from affiliates............................... 81,781 -- -- 81,781
Other assets............................................. 4,809 -- -- 4,809
---------- -------- ------- ----------
Total current assets................................... 384,825 -- -- 384,825
---------- -------- ------- ----------
Restricted cash and cash equivalents....................... 69,545 -- -- 69,545
Property and equipment, net................................ 1,367,512 -- -- 1,367,512
Deferred finance fees, net................................. 24,241 -- -- 24,241
Other assets............................................... 17,097 -- -- 17,097
Investments in affiliate................................... -- 538,800 22,693 561,493
---------- -------- ------- ----------
Total assets........................................... $1,863,220 $538,800 $22,693 $2,424,713
========== ======== ======= ==========
LIABILITIES:
Current liabilities:
Accrued construction costs............................... $ 112,235 $ -- $ -- 112,235
Accounts payable and accrued liabilities................. 5,309 -- -- 5,309
Deferred revenue......................................... 5,300 -- -- 5,300
Payable to affiliates.................................... 13,142 -- -- 13,142
---------- -------- ------- ----------
Total current liabilities.............................. 135,986 -- -- 135,986
---------- -------- ------- ----------
Long-term debt............................................. 750,000 -- -- 750,000
Long-term deferred revenue................................. 47,714 -- -- 47,714
Other long-term liabilities................................ 1,415 -- -- 1,415
Loan payable to affiliate.................................. 9,417 -- -- 9,417
---------- -------- ------- ----------
Total liabilities...................................... 944,532 -- -- 944,532
---------- -------- ------- ----------
Minority interest.......................................... 121,613 -- -- 121,613
---------- -------- ------- ----------
SHAREHOLDERS' EQUITY:
Common stock............................................... 12 -- -- 12
Additional paid-in capital................................. 758,173 538,800 22,693 1,319,666
Cumulative translation adjustment.......................... 1,397 -- -- 1,397
Retained earnings.......................................... 37,493 -- -- 37,493
---------- -------- ------- ----------
797,075 538,800 22,693 1,358,568
---------- -------- ------- ----------
Total liabilities and shareholders' equity............. $1,863,220 $538,800 $22,693 $2,424,713
========== ======== ======= ==========
</TABLE>
F-88
<PAGE> 185
PRO FORMA ASIA GLOBAL CROSSING
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PRO FORMA
ASIA GLOBAL HGC GAL ASIA GLOBAL
CROSSING(1) ADJUSTMENTS(2) ADJUSTMENTS(3) CROSSING
----------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Revenues............................................. $ 75,804 $ -- $ -- $ 75,804
Expenses:
Cost of sales...................................... 30,785 -- -- 30,785
Operations, administration and maintenance......... 12,484 -- -- 12,484
General and administrative......................... 6,200 -- -- 6,200
Depreciation and amortization...................... 4,062 -- -- 4,062
--------- --------------- --------------- ---------
Operating income..................................... 22,273 -- -- 22,273
Equity in loss of affiliate.......................... -- (9,643) (2,699) (12,342)
Minority interest.................................... (10,661) -- -- (10,661)
Other income (expense):
Other income (expense)............................. (259) -- -- (259)
Interest income, net............................... 2,983 -- -- 2,983
--------- --------------- --------------- ---------
Income before provision for income taxes............. 14,336 (9,643) (2,699) 1,994
PROVISION FOR INCOME TAXES........................... -- -- -- --
--------- --------------- --------------- ---------
Net income (loss).................................... $ 14,336 $ (9,643) $ (2,699) $ 1,994
========= =============== =============== =========
Net income per common share:
Basic and diluted earning per common share......... $ 11.95 $ 1.66
========= =========
Shares used in computing basic and diluted net
income per common share.......................... 1,200,000 1,200,000
========= =========
</TABLE>
F-89
<PAGE> 186
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 PRO FORMA
CROSSING PCL PCL HGC GAL ASIA GLOBAL
HISTORICAL(1) HISTORICAL(4) ADJUSTMENTS ADJUSTMENTS(2) ADJUSTMENTS(3) CROSSING
------------- ------------- ----------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................ $ -- $61,100 $ -- $ -- $ -- $ 61,100
Expenses:
Cost of sales..................... -- 20,722 -- -- -- 20,722
Operations, administration and
maintenance..................... -- 8,000 -- -- -- 8,000
General and administrative........ 1,201 8,169 -- -- -- 9,370
Depreciation and amortization..... -- -- 3,112(7) -- -- 3,169
57(5)
--------- ------- -------- -------- ------- ----------
Operating income (loss)............. (1,201) 24,209 (3,169) -- -- 19,839
Equity in income (loss) of
affiliate......................... 9,893 -- (13,005)(6) (37,960) (6,331) (44,291)
3,112(7)
Minority interest................... -- -- (7,995)(8) -- -- (7,995)
Other income (expense):
Other income (expense)............ -- 459 -- -- -- 459
Interest income, net.............. 11,598 (2,148) -- -- -- 9,450
--------- ------- -------- -------- ------- ----------
Income (loss) before provision for
income taxes...................... 20,290 22,520 (21,057) (37,960) (6,331) (22,538)
Provision for income taxes.......... -- -- -- -- -- --
--------- ------- -------- -------- ------- ----------
Net income (loss)................... $ 20,290 $22,520 $(21,057) $(37,960) $(6,331) $ (22,538)
========= ======= ======== ======== ======= ==========
Net income per common share:
Basic and diluted earning per
common share.................... $ 16.91 $ (18.78)
========= ==========
Shares used in computing basic and
diluted net income per common
share........................... 1,200,000 1,200,000
========= ==========
</TABLE>
F-90
<PAGE> 187
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 as of and for the three months ended March 31, 2000, including
the consolidation of PCL for the year ended December 31, 1999.
2. On January 12, 2000, Global Crossing and Hutchison Whampoa formed a joint
venture called Hutchison Global Crossing or "HGC." 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, cash, and its 6 3/8% cumulative
convertible preferred stock.
Concurrent to this offering, Softbank and Microsoft each will purchase 19%
of Global Crossing's interest in HGC. Also, concurrent with this offering,
Softbank, Microsoft and Global Crossing will contribute to us all of their
respective interests in HGC, as described under "Concurrent Transactions".
The contribution to us of the respective ownership interests of Global
Crossing in HGC will be accounted by us similar to the pooling method of
accounting.
We have 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. We have estimated the goodwill to be
approximately $547 million. We are in the process of fully evaluating the
assets acquired and, as a result, the purchase price allocation among the
tangible and intangible assets acquired and their useful lives may change.
We currently anticipate that goodwill associated with the acquisition will
be amortized over a 25-year life. These adjustments also include the
assumed equity in the results of operations of HGC for the year ended
December 31, 1999 and the three months ended March 31, 2000.
<TABLE>
<CAPTION>
FOR THE THREE FOR THE YEAR
MONTHS ENDED ENDED
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Equity in earnings of HGC.................... $ (4,177) $(16,096)
Amortization of goodwill..................... (5,466) (21,864)
-------- --------
Total...................................... $ (9,643) $(37,960)
======== ========
</TABLE>
3. In December 1998, Global Crossing entered into a joint venture, Global
Access Ltd., to construct and operate GAL. 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 GAL, as described under
"Concurrent Transactions". The contribution of GAL to us will be accounted
by us similar to the pooling method of accounting because GAL and us are
entities under common control of Global Crossing. GAL is anticipated to be
accounted for as an unconsolidated joint venture under the equity method of
accounting.
These adjustments also include the assumed equity in the results of
operations of GAL for the year ended December 31, 1999 and the three months
ended March 31, 2000.
F-91
<PAGE> 188
4. This column represents the historical results of operations of PCL 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 PCL, 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 PCL.
F-92
<PAGE> 189
------------------------------------------------------
------------------------------------------------------
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......... 24
Use of Proceeds...................... 25
Dividend Policy...................... 25
Capitalization....................... 26
Dilution............................. 27
Selected Historical Financial
Information........................ 28
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 34
Selected Unaudited Pro Forma
Financial Information.............. 40
Business............................. 42
Management........................... 56
Principal Shareholders............... 64
Concurrent Transactions.............. 66
Transactions with Related Parties.... 67
Regulation........................... 80
Description of Material
Indebtedness....................... 84
Description of Capital Stock......... 86
Certain Income Tax Consequences...... 88
Shares Eligible for Future Sale...... 92
Underwriting......................... 93
Validity of Common Stock............. 95
Experts.............................. 95
Where You Can Find More
Information........................ 95
Index to Consolidated Financial
Statements......................... F-1
Unaudited Pro Forma Financial
Information........................ F-87
</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.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
Shares
Asia Global Crossing Logo
Class A Common Stock
------------------------
PROSPECTUS
------------------------
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
MERRILL LYNCH & CO.
Representatives of the Underwriters
------------------------------------------------------
------------------------------------------------------
<PAGE> 190
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*........................................... $
NASD filing fee*............................................
Blue Sky fees and expenses (including legal fees)*..........
Nasdaq National Market entry fee*...........................
Accounting fees and expenses*...............................
Other legal fees and expenses*..............................
Transfer agent and registrar fee*...........................
Printing and engraving*.....................................
Miscellaneous*..............................................
Total*............................................
</TABLE>
- ---------------
* To be filed by amendment.
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 its sole shareholder;
- 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 (1) Class
B common shares to an affiliate of Global Crossing Ltd., (2)
Class B common shares to an affiliate of Microsoft
Corporation and (3) Class B common shares to an affiliate
of Softbank Corp.; and
- shares of Class A common stock to an affiliate of Goldman,
Sachs & Co. in consideration for advisory services performed by such
affiliate in connection with our formation.
II-1
<PAGE> 191
Such issuances were made in reliance upon an exemption from the
registration provisions of the Securities Act set forth in Section 4(2) thereof
relative to transactions by an issuer not involving any public offering or the
rules and regulations thereunder. All of such 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 (to be filed by amendment).
3.1 Memorandum of Association of the Registrant, dated September
24, 1998 (to be filed by amendment).
3.2 Registrant's Bye-laws (to be filed by amendment).
3.3 Memorandum of Increase in the Share Capital of the
Registrant, dated (to be filed by amendment).
4.1 Form of Specimen Certificate for Registrant's Common Stock
(to be filed by amendment).
4.2 Indenture relating to the Registrant's % senior notes due
2010 (to be filed by amendment).
5.1 Opinion of Simpson Thacher & Bartlett (to be filed by
amendment).
5.2 Opinion of Appleby, Spurling & Kempe (to be filed by
amendment).
10.1 Subscription and Shareholders Agreement, dated as of
September 8, 1999, among Global Crossing Ltd., Softbank
Corp., Microsoft Corporation, The Goldman Sachs Group, Inc.
and Asia Global Crossing Holdings 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. (to be filed by amendment).
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. (to be filed by amendment).
10.4 East Asia Crossing-Construction Contract, dated
, among Asia Global Crossing Ltd. and KDD
Submarine Cable Systems Inc. (to be filed by amendment).
10.5 Project Development and Construction Contract, dated as of
April 21, 1998, among Tyco Submarine Systems Ltd. and
Pacific Crossing Ltd. (to be filed by amendment).
10.6 Capacity Commitment Agreement, dated as of November 24,
1999, among Global Crossing USA Inc., Softbank Corp. and
Microsoft Corporation (to be filed by amendment).
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. (to be filed by amendment).
10.8 Employment Agreement, dated as of February 12, 2000 between
John J. Legere and Asia Global Crossing Ltd. (to be filed by
amendment).
10.9 Asia Global Crossing 2000 Stock Incentive Plan, dated as of
(to be filed by amendment).
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).
</TABLE>
II-2
<PAGE> 192
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
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 (included on page II-4).
27.1 Financial Data Schedule (to be filed by amendment).
</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.
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-3
<PAGE> 193
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 May 23, 2000.
ASIA GLOBAL CROSSING LTD.
By: /s/ JOHN J. LEGERE
------------------------------------
Name: John J. Legere
Title: Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears above hereby constitutes and appoints John J. Legere and Charles F.
Carroll and each of them, as his true and lawful attorneys-in-fact and agents,
with full power of substitution and re-substitution, for him in his name, place
and stead, in any and all capacity, in connection with this Registration
Statement, including to sign and file in the name and on behalf of the
undersigned as director or officer of the Registrant (i) any and all amendments
or supplements (including any and all stickers and post-effective amendments) to
this Registration Statement, with all exhibits thereto, and other documents in
connection therewith, and (ii) any and all additional registration statements,
and any and all amendments thereto, relating to the same offering of securities
as those that are covered by this Registration Statement that are filed pursuant
to Rule 462(b) promulgated under the Securities Act of 1933, as amended, with
the Securities and Exchange Commission and any applicable securities exchange or
securities self-regulatory body, granting unto said attorney-in-fact and agents,
and each of them full power and authority to do and perform each and every act
and things requisite or necessary to be done in and about the premises, as fully
to all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or any of them, or their substitutes, may lawfully do or cause to be done
by virtue hereof.
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>
/s/ GARY WINNICK Chairman of the Board and May 23, 2000
- -------------------------------------------------------- Director
Gary Winnick
/s/ LODWRICK M. COOK Co-Chairman of the Board and May 23, 2000
- -------------------------------------------------------- Director
Lodwrick M. Cook
/s/ JOHN J. LEGERE Chief Executive Officer and May 23, 2000
- -------------------------------------------------------- Director
John J. Legere
/s/ JOHN M. SCANLON Vice Chairman of the Board May 23, 2000
- -------------------------------------------------------- and Director
John M. Scanlon
</TABLE>
II-4
<PAGE> 194
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Vice Chairman of the Board May , 2000
- -------------------------------------------------------- and Director
Thomas J. Casey
Director May , 2000
- --------------------------------------------------------
Leo J. Hindery, Jr.
/s/ JOSEPH P. CLAYTON Director May 23, 2000
- --------------------------------------------------------
Joseph P. Clayton
/s/ ERIC HIPPEAU Director May 23, 2000
- --------------------------------------------------------
Eric Hippeau
/s/ THOMAS U. KOLL Director May 23, 2000
- --------------------------------------------------------
Thomas U. Koll
/s/ DAN J. COHRS Senior Vice President and May 23, 2000
- -------------------------------------------------------- Chief Financial Officer
Dan J. Cohrs
</TABLE>
II-5
<PAGE> 195
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 10
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................................. 33
Selected Unaudited Pro Forma Financial Information.......... 39
Business.................................................... 41
Management.................................................. 55
Principal Shareholders...................................... 62
Concurrent Transactions..................................... 64
Transactions with Related Parties........................... 65
Regulation.................................................. 78
Description of Material Indebtedness........................ 82
Description of Capital Stock................................ 84
Certain Income Tax Consequences............................. 86
Shares Eligible for Future Sale............................. 91
Underwriting................................................ 92
Validity of Common Stock.................................... 93
Experts..................................................... 94
Where You Can Find More Information......................... 94
Index to Consolidated Financial Statements.................. F-1
Unaudited Pro Forma Financial Information................... F-87
</TABLE>
<PAGE> 196
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<S> <C> <C>
1.1 Form of Underwriting Agreement (to be filed by amendment).
3.1 Memorandum of Association of the Registrant, dated September
24, 1998 (to be filed by amendment).
3.2 Registrant's Bye-laws (to be filed by amendment).
3.3 Memorandum of Increase in the Share Capital of the
Registrant, dated (to be filed by amendment).
4.1 Form of Specimen Certificate for Registrant's Common Stock
(to be filed by amendment).
4.2 Indenture relating to the Registrant's % senior notes due
2010 (to be filed by amendment).
5.1 Opinion of Simpson Thacher & Bartlett (to be filed by
amendment).
5.2 Opinion of Appleby, Spurling & Kempe (to be filed by
amendment).
10.1 Subscription and Shareholders Agreement, dated as of
September 8, 1999, among Global Crossing Ltd., Softbank
Corp., Microsoft Corporation, The Goldman Sachs Group, Inc.
and Asia Global Crossing Holdings 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. (to be filed by amendment).
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. (to be filed by amendment).
10.4 East Asia Crossing-Construction Contract, dated
, among Asia Global Crossing Ltd. and KDD
Submarine Cable Systems Inc. (to be filed by amendment).
10.5 Project Development and Construction Contract, dated as of
April 21, 1998, among Tyco Submarine Systems Ltd. and
Pacific Crossing Ltd. (to be filed by amendment).
10.6 Capacity Commitment Agreement, dated as of November 24,
1999, among Global Crossing USA Inc., Softbank Corp. and
Microsoft Corporation (to be filed by amendment).
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. (to be filed by amendment).
10.8 Employment Agreement, dated as of February 12, 2000 between
John J. Legere and Asia Global Crossing Ltd. (to be filed by
amendment).
10.9 Asia Global Crossing 2000 Stock Incentive Plan, dated as of
(to be filed by amendment).
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).
</TABLE>
<PAGE> 197
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<S> <C> <C>
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 (included on page II-4).
27.1 Financial Data Schedule (to be filed by amendment).
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated February 23, 2000 related to the financial statements of Asia
Global Crossing Ltd. (and to all reference to our Firm) included in or
incorporated by reference in this Registration Statement on Form S-1.
/s/ Arthur Andersen
May 23, 2000
Hamilton, Bermuda
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated February 23, 2000 relating to the financial statements of Pacific
Crossing Ltd. (and to all references to our Firm) included in or incorporated by
reference in this Registration Statement on Form S-1.
/s/ Arthur Andersen
May 23, 2000
Hamilton, Bermuda
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Registration Statement on Form S-1 of
Asia Global Crossing Ltd. of our report dated April 15, 2000 relating to the
financial statements of Hutchison Global Crossing Holdings Limited for each of
the three years ended December 31, 1999. We also consent to the references to us
under the heading "Experts" and "PCL, HGC and GAL Selected Historical Financial
Information" in such registration statement.
/s/ PRICEWATERHOUSECOOPERS
PricewaterhouseCoopers
Hong Kong
May 23, 2000
<PAGE> 1
EXHIBIT 23.4
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our report
dated March 3, 2000 related to the financial statements of Global Access Limited
(and to all references to our Firm) included in or incorporated by reference in
this Registration Statement on Form S-1.
/s/ ARTHUR ANDERSEN
May 23, 2000
Tokyo, Japan
