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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 000-24565
GLOBAL CROSSING LTD.
(Exact name of registrant as specified in its charter)
BERMUDA 98-0189783
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
WESSEX HOUSE
45 REID STREET
HAMILTON HM12, BERMUDA
(Address of principal executive offices)
(441) 296-8600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The number of shares, $0.01 par value each, of the registrant's common stock
outstanding as of April 24, 2000: 839,687,652 shares, including 22,033,758
treasury shares.
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GLOBAL CROSSING LTD. AND SUBSIDIARIES
For the quarter ended March 31, 2000
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations................. 3
Condensed Consolidated Balance Sheets........................... 4
Condensed Consolidated Statements of Cash Flows................. 5
Condensed Consolidated Statements of Comprehensive Income....... 7
Business Segment Information.................................... 8
Notes to Condensed Consolidated Financial Statements............ 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of
Operations..................................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 19
Item 2. Changes in Securities and Use of Proceeds....................... 19
Item 3. Defaults Upon Senior Securities................................. 19
Item 4. Submission of Matters to A Vote of Security Holders............. 19
Item 5. Other Information............................................... 19
Item 6. Exhibits and Reports on Form 8-K................................ 20
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
For the
Three Months Ended
------------------------
March 31, March 31,
2000 1999
----------- -----------
REVENUE.............................................. $ 1,119,516 $ 176,319
----------- -----------
EXPENSES:
Cost of sales....................................... 579,907 69,387
Operations, administration and maintenance.......... 144,283 11,861
Sales and marketing................................. 103,719 9,758
Network development................................. 17,645 4,905
General and administrative.......................... 150,359 22,414
Stock related expense............................... 18,850 16,716
Depreciation and amortization....................... 140,943 211
Goodwill and intangibles amortization............... 131,634 --
----------- -----------
1,287,340 135,252
----------- -----------
OPERATING (LOSS) INCOME.............................. (167,824) 41,067
EQUITY IN LOSS OF AFFILIATES......................... (5,140) (2,736)
MINORITY INTEREST.................................... (15,731) --
OTHER INCOME (EXPENSE):
Interest income..................................... 22,798 14,392
Interest expense.................................... (85,676) (23,779)
Other expense, net.................................. (5,628) --
----------- -----------
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE........................................... (257,201) 28,944
Provision for income taxes.......................... (5,000) (16,142)
----------- -----------
(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE................................ (262,201) 12,802
Cumulative effect of change in accounting
principle, net of income tax benefit............... -- (14,710)
----------- -----------
NET LOSS............................................. (262,201) (1,908)
Preferred stock dividends........................... (45,258) (13,044)
----------- -----------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS........... $ (307,459) $ (14,952)
=========== ===========
NET LOSS PER COMMON SHARE:
Loss applicable to common shareholders before
cumulative effect of change in accounting
principle
Basic and diluted................................. $ (0.39) $ (0.00)
=========== ===========
Cumulative effect of change in accounting principle
Basic and diluted................................. $ -- $ (0.04)
=========== ===========
Net loss applicable to common shareholders
Basic and diluted................................. $ (0.39) $ (0.04)
=========== ===========
Shares used in computing income (loss) per share
Basic and diluted................................. 778,780,323 410,797,073
=========== ===========
See accompanying notes to these unaudited condensed consolidated financial
statements.
3
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
March 31, December 31,
2000 1999
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents......................... $ 1,250,953 $ 1,633,499
Restricted cash and cash equivalents.............. 133,016 93,294
Accounts receivable, net.......................... 912,072 966,973
Other assets and prepaid costs.................... 319,562 252,767
----------- -----------
Total current assets............................. 2,615,602 2,946,533
Restricted cash and cash equivalents................ 69,545 138,118
Accounts receivable, net............................ 42,419 52,052
Property and equipment, net......................... 7,985,651 6,026,053
Goodwill and intangibles, net....................... 9,436,715 9,557,422
Investment in and advances to/from affiliates, net.. 604,291 323,960
Other assets........................................ 735,746 661,442
----------- -----------
Total assets..................................... $21,489,970 $19,705,580
=========== ===========
LIABILITIES
Current liabilities:
Accrued construction costs........................ $ 570,461 $ 275,361
Accounts payable and accrued liabilities.......... 919,910 980,131
Accrued interest and preferred dividends.......... 162,260 66,745
Deferred revenue.................................. 216,234 127,367
Income taxes payable.............................. 88,325 140,034
Current portion of long term debt................. 11,649 5,496
Other current liabilities......................... 264,314 257,459
----------- -----------
Total current liabilities........................ 2,233,153 1,852,593
Long-term debt...................................... 6,031,662 5,018,544
Deferred revenue.................................... 489,331 383,287
Deferred credits and other.......................... 819,485 796,606
----------- -----------
Total liabilities................................ 9,573,631 8,051,030
Minority interest................................... 478,030 351,338
----------- -----------
Mandatorily redeemable and cumulative convertible
preferred stock:
10 1/2% mandatorily Redeemable Preferred Stock,
5,000,000 shares issued and outstanding, $100
liquidation preference per share................. 486,517 485,947
----------- -----------
6 3/8% Cumulative Convertible Preferred Stock,
10,000,000 shares issued and outstanding, $100
liquidation preference per share................. 969,000 969,000
----------- -----------
6 3/8% Cumulative Convertible Preferred Stock,
Series B, 400,000 shares issued and outstanding,
$1000 liquidation preference per share........... 400,000 --
----------- -----------
7% Cumulative Convertible Preferred Stock,
2,600,000 shares issued and outstanding, $250
liquidation preference per share................. 629,750 629,750
----------- -----------
SHAREHOLDERS' EQUITY
Common stock, 3,000,000,000 shares authorized, par
value $.01 per share, 803,604,237 and 799,137,142
shares issued as of March 31, 2000 and December 31,
1999, respectively................................. 8,030 7,992
Treasury stock, 22,033,758 shares................... (209,415) (209,415)
Additional paid-in capital and other shareholders'
equity............................................. 9,575,617 9,578,927
Accumulated deficit................................. (421,190) (158,989)
----------- -----------
Total stockholders' equity....................... 8,953,042 9,218,515
----------- -----------
Total liabilities and shareholders' equity....... $21,489,970 $19,705,580
=========== ===========
See accompanying notes to these unaudited condensed consolidated balance
sheets.
4
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2000 and 1999
(In thousands)
(Unaudited)
For the
Three Months Ended
---------------------
March 31, March 31,
2000 1999
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................... $ (262,201) $ (1,908)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Cumulative effect of change in accounting principle.. -- 14,710
Equity in loss of affiliates......................... 5,140 2,736
Depreciation and amortization........................ 272,577 211
Provision for doubtful accounts...................... 13,483 1,864
Stock related expense................................ 18,850 16,716
Deferred income taxes................................ (9,210) 22,125
Capacity available for sale.......................... -- 58,539
Non-cash cost of sales............................... 99,056 --
Minority Interest.................................... 15,731 --
Other................................................ 2,596 (4,831)
Changes in operating assets and liabilities.......... 84,136 (129,603)
---------- ---------
Net cash provided by (used in) operating
activities........................................ 240,158 (19,441)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for construction in progress and capacity
available for sale.................................... (501,622) (143,337)
Investment in and advances to affiliates............... (68,851) (12,860)
Effect of the consolidation of PC-1, net of cash
acquired.............................................. (19,979) --
Purchase of marketable securities...................... (81,200) --
Purchases of property and equipment.................... (358,924) (1,811)
---------- ---------
Net cash used in investing activities.............. (1,030,576) (158,008)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net............ 40,867 834
Proceeds from long term debt........................... 300,703 9,083
Repayment of long term debt............................ (12,094) (26,825)
Preferred dividends.................................... (22,535)
Finance costs incurred................................. 694 (77)
Minority interest investment in subsidiary............. 53,472 --
Change in restricted cash and cash equivalents......... 46,765 (47,811)
---------- ---------
Net cash provided by (used in) financing
activities........................................ 407,872 (64,796)
---------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS.............. (382,546) (242,245)
CASH AND CASH EQUIVALENTS, beginning of period......... 1,633,499 806,593
---------- ---------
CASH AND CASH EQUIVALENTS, end of period............... $1,250,953 $ 564,348
========== =========
See accompanying notes to these unaudited condensed consolidated financial
statements.
5
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
For the Three Months Ended March 31, 2000 and 1999
(In thousands)
(Unaudited)
For the
Three Months Ended
--------------------
March 31, March 31,
2000 1999
--------- ---------
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Costs incurred for construction in progress and capacity
available for sale..................................... $(637,996) $(180,119)
Accrued construction costs.............................. 134,284 14,282
Accrued interest........................................ -- 19,448
Amortization of deferred finance costs and other........ 2,090 3,052
--------- ---------
Cash paid for construction in progress and capacity
available for sale..................................... $(501,622) $(143,337)
========= =========
Non-cash purchases of property and equipment............ $ -- $ (38,300)
========= =========
Investments in affiliates:
Costs of investments in affiliates.................... $(468,851) $ --
Preferred stock issued for investment in joint
venture.............................................. 400,000 --
--------- ---------
$ 68,851 $ --
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid and capitalized........................... $ 39,858 $ 6,132
========= =========
Interest paid (net of capitalized interest)............. $ 39,567 $ 772
========= =========
Cash paid for taxes..................................... $ 35,792 $ 1,788
========= =========
See accompanying notes to these unaudited condensed consolidated financial
statements.
6
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2000 and 1999
(In thousands)
(Unaudited)
For the
Three Months Ended
-----------------------------
March 31, 2000 March 31, 1999
-------------- --------------
Net loss.......................................... $(262,201) $(1,908)
Unrealized gain on securities..................... 157 --
Foreign currency translation adjustment........... (22,792) (4,930)
--------- -------
Comprehensive loss................................ $(284,836) $(6,838)
========= =======
See accompanying notes to these unaudited condensed consolidated financial
statements.
7
GLOBAL CROSSING LTD. AND SUBSIDIARIES
BUSINESS SEGMENT INFORMATION
As of and For the Three Months Ended March 31, 2000 and 1999
(In thousands)
(Unaudited)
March 31, March 31,
2000 1999
----------- ----------
Telecommunications Services:
Revenue:
Commercial........................................... $ 327,020 $ --
Consumer............................................. 43,644 --
Carrier.............................................. 489,764 176,319
----------- ----------
Total revenue.......................................... $ 860,428 $ 176,319
=========== ==========
Operating (loss) income................................ $ (208,255) $ 41,607
=========== ==========
Adjusted EBITDA*....................................... $ 286,514 $ 128,208
=========== ==========
Cash paid for capital expenditures..................... $ 779,291 $ 145,148
=========== ==========
Total assets........................................... $18,389,031 $2,689,797
=========== ==========
Installation and Maintenance:
Revenue................................................ $ 72,266 $ --
=========== ==========
Operating loss......................................... $ (879) $ --
=========== ==========
Adjusted EBITDA*....................................... $ 20,733 $ --
=========== ==========
Cash paid for capital expenditures..................... $ 30,315 $ --
=========== ==========
Total assets........................................... $ 1,741,712 $ --
=========== ==========
Incumbent Local Exchange Carrier:
Revenue................................................ $ 186,822 $ --
=========== ==========
Operating income....................................... $ 53,895 $ --
=========== ==========
Adjusted EBITDA*....................................... $ 93,929 $ --
=========== ==========
Cash paid for capital expenditures..................... $ 50,940 $ --
=========== ==========
Total assets........................................... $ 1,359,227 $ --
=========== ==========
Corporate Operations and Other:
Operating loss......................................... $ (12,585) $ --
=========== ==========
Adjusted EBITDA*....................................... $ (12,585) $ --
=========== ==========
Consolidated:
Revenues............................................... $ 1,119,516 $ 176,319
=========== ==========
Operating (loss) income................................ $ (167,824) $ 41,067
=========== ==========
Adjusted EBITDA*....................................... $ 388,591 $ 128,208
=========== ==========
Cash paid for capital expenditures..................... $ 860,546 $ 145,148
=========== ==========
Total assets........................................... $21,489,970 $2,689,797
=========== ==========
- --------
* Adjusted Earnings before Interest, Taxes, Depreciation and Amortization
(adjusted EBITDA) is calculated as operating (loss) income plus
depreciation and amortization, goodwill and intangibles amortization, stock
related expense and the cash portion of the change in deferred revenue.
8
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(In thousands, except share and per share amounts)
(Unaudited)
(1) Organization and Background
Global Crossing Ltd. (a Bermuda company, together with its consolidated
subsidiaries, ("GCL" or the "Company") is building and offering services over
the world's first independent global fiber optic network, consisting of
101,000 announced route miles serving five continents, 27 countries and more
than 200 major cities. Upon completion of our currently announced systems, our
network and our telecommunications and Internet product offerings will be
available in markets constituting over 80% of the world's international
communications traffic.
The Company's strategy is to be the premier provider of global broadband
Internet Protocol ("IP") and data services for both wholesale and retail
customers. The Company is building a state-of-the-art fiber optic network that
management believes to be of unprecedented global scope and scale to serve as
the backbone for this strategy. Management believes that the Company's network
will enable it to be the low cost service provider in most of its addressable
markets.
Global Crossing Ltd. serves as a holding company for its subsidiaries'
operations, including the operations of the following acquired entities:
Global Marine Systems (acquired July 2, 1999), Frontier Corporation (acquired
September 28, 1999), Racal Telecom (acquired November 24, 1999) and a 50%
interest in the Hutchison Global Crossing joint venture (completed January 12,
2000). The acquisition of these entities is hereinafter referred to as the
"Acquisitions." In addition the Company has a significant ownership interest
in Asia Global Crossing.
Asia Global Crossing, a joint venture with Softbank Corp. and Microsoft
Corporation, intends to become the first truly pan-Asian carrier to offer
worldwide bandwidth and data communications. The Asia Global Crossing joint
venture was established on November 24, 1999.
GlobalCenter, a wholly-owned subsidiary of GCL, will expand its product set
to become a single-source e-commerce service solution that will provide web-
centric businesses with the high availability, flexibility and scalability
necessary to compete in the rapidly expanding digital economy.
(2) Basis of Presentation
The accompanying unaudited interim condensed consolidated financial
statements as of March 31, 2000 and for the three months ended March 31, 2000
and 1999, include the accounts of Global Crossing Ltd. and its consolidated
subsidiaries. All material inter-company balances and transactions have been
eliminated. The unaudited interim condensed consolidated financial statements
reflect all adjustments, consisting of normal recurring items, which are, in
the opinion of management, necessary to present a fair statement of the
results of the interim period presented. The results of operations for any
interim period are not necessarily indicative of results for the full year.
These condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States.
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 accompanying unaudited condensed consolidated financial statements do
not include all footnotes and certain financial presentations normally
required under generally accepted accounting principles. Therefore, these
9
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
(3) Net Loss Applicable to Common Shareholders
Basic Earnings Per Share (EPS) is computed by dividing net loss available
to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted. The dilutive effect of the assumed exercise of stock
options and convertible securities were anti-dilutive for the three months
ended March 31, 2000 and 1999, respectively. The impact of dilutive options,
warrants and convertible securities increases the weighted average shares
outstanding to 841,992,988 used in calculating Diluted EPS for the three
months ended March 31, 2000.
(4) Acquisitions
The Acquisitions, are being accounted for under the purchase method of
accounting for business combinations. The initial purchase price of the
Acquisition, was allocated based on the estimated fair value of acquired
assets and liabilities at the date of acquisition. The Company will make final
purchase price allocations based upon final values for certain assets and
liabilities. As a result, the final purchase price allocation may differ from
the presented estimate. Following is the unaudited pro forma results of the
Company, assuming the Acquisitions had been completed at the beginning of the
period presented:
Three Months
Ended
March 31, 1999
--------------
Revenue..................................................... $ 1,031,474
===========
Loss applicable to common shareholders before cumulative
effect of change in accounting principle................... $ (121,782)
===========
Loss applicable to common shareholders...................... $ (136,492)
===========
Loss per common share:
Loss applicable to common shareholders before cumulative
effect of change in accounting principle, basic and
diluted.................................................. $ (0.16)
===========
Loss applicable to common shareholders, basic and
diluted.................................................. $ (0.18)
===========
Shares used in computing loss per share, basic and
diluted.................................................. 762,470,473
===========
10
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Property and Equipment
Property and equipment consist of the following:
March 31, December 31,
2000 1999
---------- ------------
Land................................................ $ 25,045 $ 14,886
Buildings........................................... 230,841 184,827
Leasehold improvements.............................. 32,571 29,096
Furniture, fixtures and equipment................... 927,764 771,585
Transmission equipment.............................. 3,324,643 2,544,903
---------- ----------
4,540,864 3,545,297
Accumulated depreciation............................ (265,817) (124,874)
---------- ----------
4,275,047 3,420,423
Construction in progress............................ 3,710,604 2,605,630
---------- ----------
Total property and equipment........................ $7,985,651 $6,026,053
========== ==========
(6) Shareholders' Equity
Stock Option Plan. During the three months ended March 31, 2000, the
Company granted stock options for an aggregate of 6,212,890 shares of common
stock under the Company's 1998 Stock Incentive Plan. On March 31, 2000, stock
options covering 79,528,469 shares of common stock were outstanding. Details
of the Company's 1998 Stock Incentive Plan are included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
(7) Segment Information
The Company is a worldwide provider of Internet and long distance
telecommunications facilities and related services supplying its customers
with global "point to point" connectivity and, through its Global Marine
Systems subsidiary, providing cable installation and maintenance services. The
Company's reportable segments include telecommunications services,
installation and maintenance services, and incumbent local exchange carrier
services. There are other corporate related charges not attributable to a
specific segment. As a result, there are many shared expenses generated by the
various revenue streams and management believes that any allocation of the
expenses incurred to multiple revenue streams would be impractical and
arbitrary. The Company's chief decision maker monitors the revenue streams of
the various products and geographic locations and operations are managed and
financial performance, Adjusted EBITDA, is evaluated based on the delivery of
multiple, integrated services to customers over a single network.
(8) Reclassifications
Certain prior year amounts have been reclassified in the condensed
consolidated financial statements for consistent presentation to current year
amounts.
(9) Significant Events
On January 12, 2000, the Company established a joint venture, called
Hutchison Global Crossing, with Hutchison Whampoa Limited ("Hutchison") to
pursue fixed-line telecommunications and Internet opportunities in Hong Kong.
For its 50% share, Hutchison contributed to the joint venture its building-to-
building fixed-line telecommunications network in Hong Kong and a number of
Internet-related assets. In addition, Hutchison has
11
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
agreed that any fixed-line telecommunications activities it pursues in China
will be carried out by the joint venture. For its 50% share, the Company
provided to Hutchison $400 million in Global Crossing convertible preferred
stock (convertible into shares of Global Crossing common stock at a rate of
$45 per share) and committed to contribute to the joint venture international
telecommunications capacity rights on our network and global media
distribution center capabilities which together are valued at $350 million, as
well as $50 million in cash. The Company intends to integrate its interest in
Hutchison Global Crossing into the Company's Asia Global Crossing joint
venture ("AGC").
On January 26, 2000, AGC 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 media distribution
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. AGC will own
89 percent of GlobalCenter Japan, with IRI owning the remaining 11 percent.
On February 22, 2000, we announced a definitive agreement to acquire IXnet,
Inc., a leading provider of specialized IP-based network services to the
global financial services community, and its parent company,
IPC Communications, Inc., in exchange for shares of our common stock valued at
approximately $3.8 billion. Under the terms of the definitive merger
agreement, 1.184 of our shares will be exchanged for each IXnet share not
owned by IPC, and 5.417 of our shares will be exchanged for each share of IPC.
We expect to complete the acquisition in the second quarter of 2000. That
acquisition is subject to regulatory approval and customary closing
conditions.
On March 2, 2000, we announced plans to create a new class of Global
Crossing common stock that would track the performance of the complex web
hosting business operated by our wholly-owned subsidiary, GlobalCenter, Inc.
The creation of this new class of stock will be subject to shareholder
approval.
On March 24, 2000, the Company increased its interest in the PC-1 cable
system to 65% by acquiring the remaining ownership of another partner in PC-1
and the PC-1 Shareholder Agreement was amended, which enabled the Company to
exercise effective control over PC-1.
On March 31, 2000, AGC announced its intention to effectuate an initial
public offering of its common stock and to file a registration statement under
the Securities Act of 1933 in respect of the proposed offering.
(10) Subsequent Events
In April 2000, we issued 21,673,706 shares of our common stock for net
proceeds of approximately $694 million. In connection with this issuance and
sale by the Company of common stock, certain existing shareholders sold an
aggregate of 21,326,294 shares of common stock, for which the Company received
no proceeds.
In April 2000, we issued 4,000,000 shares of 6 3/4% cumulative convertible
preferred stock at a liquidation preference of $250 for net proceeds of
approximately $970 million. Each share of preferred stock is convertible into
6.3131 shares of common stock, based on a conversion price of $39.60.
Dividends on the preferred stock are cumulative from the date of issue and
will be payable on January 15, April 15, July 15 and October 15 of each year
beginning on July 15, 2000, at the annual rate of 6 3/4%. In May 2000,
pursuant to an over-allotment option held by the underwriters of the preferred
stock, the Company issued an additional 600,000 shares of 6 3/4% cumulative
convertible preferred stock for net proceeds of approximately $146 million.
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
During the second half of 1999, the Company completed its merger with
Frontier and its acquisitions of Global Marine Systems and Racal Telecom. The
increase in revenue and expenses for the three months ended March 31, 2000
compared to the three months ended March 31, 1999 is primarily due to these
transactions. As the Acquisitions occurred subsequent to March 31, 1999, the
comparability of the results of operations for the three months ended March
31, 2000 and 1999 is limited.
Results of Operations for the Three Months Ended March 31, 2000 and March 31,
1999
Revenue. Revenue for the three months ended March 31, 2000 increased 535%
to $1,120 million as compared to $176 million for the three months ended March
31, 1999. Cash revenue (revenue plus the cash portion of the change in
deferred revenue) for the three months ended March 31, 2000 increased 511% to
$1,285 million compared to $200 million for the three months ended March 31,
1999. The increase is due to the Acquisitions, which are included in the
results of the first quarter of 2000, partially off-set by the Company's
business practice of selling capacity under terms that require amortization of
revenue over the contract life rather than terms that qualify for immediate
revenue recognition.
On a pro forma basis, giving effect to the Acquisitions as of December 31,
1998, revenues for the three months ended March 31, 2000 increased 9% to
$1,120 as compared to $1,031 million for the three months ended March 31,
1999. The increase in pro forma revenue is primarily due to an increase in
revenue from data products.
Cost of sales. Cost of sales for the three months ended March 31, 2000 was
$580 million, or 52% of revenue, compared to $69 million, or 39% of revenue,
for the three months ended March 31, 1999. The increase is primarily
attributable to the increase in revenue. Reduced margins for the three months
ended March 31, 2000 compared to the three months ended March 31, 1999 was due
to lower margins in the businesses acquired and lower prices of subsea
capacity sold to customers.
Non-cash cost of undersea capacity sold was $99 million and $54 million
during the three months ended March 31, 2000 and 1999, respectively.
Operations, administration and maintenance (OA&M). OA&M costs for the three
months ended March 31, 2000 were $144 million, or 13% of revenue, compared to
$12 million, or 7% of revenue, for the three months ended March 31, 1999. The
increase is primarily a result of the costs incurred in connection with the
development of the Global Network Operations Center, the expansion of the
Global Crossing Network and the expenses of the 1999 acquired companies.
Sales and marketing. Sales and marketing expenses for the three months
ended March 31, 2000 were $104 million, or 9% of revenue, compared to $10
million, or 6% of revenue, for the three months ended March 31, 1999. The
increase from 1999 was due to the additional expenses attributable to the 1999
acquired companies, expenses related to additions in headcount, plus occupancy
costs, marketing costs and other promotional expenses.
Network development. Network development costs for the three months ended
March 31, 2000 were $18 million, or 2% of revenue, compared to $5 million, or
3% of revenue, for the three months ended March 31, 1999. The increase is due
to the additional expenses attributable to the 1999 acquired companies,
additional salaries, employee benefits and professional fees associated with
the expansion of the Global Crossing Network.
General and administrative. General and administrative expenses for the
three months ended March 31, 2000 were $150 million, or 13% of revenue,
compared to $22 million, or 13% of revenue, for the three months ended March
31, 1999. The increase was comprised principally of salaries, employee
benefits and recruiting for the Company's need for increased staffing for
multiple fiber optic systems, travel, professional fees, insurance costs and
occupancy costs. The increase in general and administrative expenses is
primarily attributable to the additional expenses of the 1999 acquired
companies.
13
Stock related expense. Stock related expense for the three months ended
March 31, 2000 was $19 million compared to $17 million for the three months
ended March 31, 1999. The increase is primarily due to a $9 million charge in
the three months period ended March 31, 2000 related to accelerated vesting of
an executive's stock options.
Depreciation and amortization. Depreciation and amortization for the three
months ended March 31, 2000 was $141 million, or 13% of revenue, compared to
$0.2 million for the three months ended March 31, 1999. The increase is due to
the Acquisitions and depreciation of subsea systems placed in service.
Goodwill and intangibles amortization. Goodwill and intangibles
amortization for the three months ended March 31, 2000 was $132 million
resulting from the Acquisitions, which occurred after March 31, 1999.
Minority interest. Minority interest for the three months ended March 31,
2000 was $16 million and relates to minority interest in net income of PC-1
and AGC.
Interest income and interest expense. Interest income for the three months
ended March 31, 2000 was $23 million, compared to $14 million for the three
months ended March 31, 1999. The increase is due to interest earned on cash
raised from financings and on CPA deposits. Interest expense for the three
months ended March 31, 2000 was $86 million, compared to $24 million for the
three months ended March 31, 1999. The increase is due to higher levels of
debt outstanding resulting from the Acquisitions and capital spending on the
expansion of the Global Crossing Network.
Provision for income taxes. Provision for income taxes of $5 million and
$16 million for the three months ended March 31, 2000 and 1999, respectively,
provide for taxes on profits earned from telecommunications services,
installation and maintenance and other income where subsidiaries of the
Company have a presence in taxable jurisdictions.
Cumulative effect of change in accounting principle. The Company adopted
Statement of Position 98-5 (SOP 98-5), "Reporting on the Cost of Start-Up
Activities," issued by the American Institute of Certified Public Accountants,
on January 1, 1999. SOP 98-5 requires that certain start-up expenditures
previously capitalized during system development must now be expensed. The
Company incurred a one-time charge during the three months ended March 31,
1999 of $15 million (net of tax benefit of $1,400) that represents start-up
costs incurred and capitalized during previous periods.
Net loss. Net loss for the three months ended March 31, 2000 was $262
million compared to $2 million for the three months ended March 31, 1999.
Preferred stock dividends. Preferred stock dividends for the three months
ended March 31, 2000 were $45 million compared to $13 million for the three
months ended March 31, 1999. The increase is due to the additional issuances
of preferred stock, the proceeds of which are used to fund acquisitions and
capital spending.
Net loss applicable to common shareholders. During the three months ended
March 31, 2000, the Company reported net loss applicable to common
shareholders of $307 million compared to $15 million for the three months
ended March 31, 1999.
Adjusted EBITDA. Our operating (loss) income plus depreciation and
amortization, goodwill and intangibles amortization, stock related expense and
the cash portion of the change in deferred revenue ("Adjusted EBITDA") was
$389 million for the three months ended March 31, 2000 compared to $128
million for the three months ended March 31, 1999. The increase in Adjusted
EBITDA is due to the Acquisitions and the increase in the cash portion of the
change in deferred revenue for the three months ended March 31, 2000 compared
to the three months ended March 31, 1999. The definition of Adjusted EBITDA is
consistent with financial covenants contained in the Company's major financial
agreements. Although Adjusted EBITDA should not be used as an alternative to
operating (loss) income or net cash provided by (used in) operating
activities, investing activities
14
or financing activities, each as measured under generally accepted accounting
principles, management believes that Adjusted EBITDA is an additional
meaningful measure of performance and liquidity. Our calculation of Adjusted
EBITDA may be different from the calculation used by other companies and,
therefore, comparability may be limited.
Liquidity and Capital Resources
Global Crossing estimates the total remaining cost of developing and
deploying the announced systems on the Global Crossing Network to be
approximately $4 billion, excluding costs of potential future upgrades. The
remaining financing needed to complete the Global Crossing Network and to fund
working capital requirements is expected to be obtained from issuances of
common or preferred stock, bank financing or through other corporate
financing. Some of this financing is expected to be incurred by wholly-owned
subsidiaries or joint venture companies as well as by GCL.
In April 2000, we issued 21,673,706 shares of our common stock for net
proceeds of approximately $694 million and 4,000,000 shares of 6 3/4%
cumulative convertible preferred stock at a liquidation preference of $250 for
net proceeds of approximately $970 million. In May 2000, pursuant to an over-
allotment option held by the underwriters of the preferred stock, the Company
issued an additional 600,000 shares of 6 3/4% cumulative convertible preferred
stock for net proceeds of approximately $146 million.
The Company has extended limited amounts of financing to customers in
connection with certain capacity sales. The financing terms provide for
installment payments of up to four years. The Company believes that its
extension of financing to its customers will not have a material effect on the
Company's liquidity.
Cash provided by (used in) operating activities was $240 million and
$(19) million for the three months ended March 31, 2000 and 1999,
respectively. The balances principally represent cash received from capacity
sales and interest income received, less sales and marketing, network
development and general and administrative expenses paid.
Cash used in investing activities was $1,031 million and $158 million for
the three months ended March 31, 2000 and 1999, respectively. The balances
represent cash paid for construction in progress, purchases of property and
equipment and investments in affiliates.
Cash provided by financing activities was $408 million for the three months
ended March 31, 2000 and primarily represents borrowings under the senior
secured corporate facility, proceeds from the issuance of common stock and a
decrease in restricted cash and cash equivalents, partially offset by
repayments of borrowings under long term debt and payment of dividends on
preferred stock. Cash used in financing activities was $65 million for the
three months ended March 31, 1999 and primarily relates to repayments of
borrowings under the AC-1 credit facility and the increase in restricted cash
and cash equivalents.
Global Crossing has a substantial amount of indebtedness. Based upon the
current level of operations, management believes that the Company's cash flows
from operations, together with available borrowings under its credit facility,
and its continued ability to raise capital, will be adequate to meet the
Company's anticipated requirements for working capital, capital expenditures,
acquisitions and other discretionary investments, interest payments and
scheduled principal payments for the foreseeable future. There can be no
assurance, however, that the Company's business will continue to generate cash
flow at or above current levels or that currently anticipated improvements
will be achieved. If the Company is unable to generate sufficient cash flow
and raise capital to service the Company's debt, the Company may be required
to reduce capital expenditures, refinance all or a portion of its existing
debt or obtain additional financing.
15
Inflation
Management does not believe that its business is impacted by inflation to a
significantly different extent than the general economy.
Euro Conversion
On January 1, 1999, a single currency called the Euro was introduced in
Europe. Eleven of the fifteen member countries of the European Union agreed to
adopt the Euro as their common legal currency on that date. Fixed conversion
rates between these countries' existing currencies (legacy currencies) and the
Euro were established as of that date. The legacy currencies are scheduled to
remain legal tender in these participating countries between January 1, 1999
and January 1, 2002 (not later than July 1, 2002). During this transition
period, parties may settle transactions using either the Euro or a
participating country's legacy currency.
As most of the Company's sales and expenditures are denominated in United
States dollars, management does not believe that the Euro conversion will have
a material adverse impact on its the business or financial condition. The
Company does not expect the cost of system modifications to be material and
the Company will continue to evaluate the impact of the Euro conversion.
Information Regarding Forward-Looking Statements
The Company has included "forward-looking statements" throughout this
quarterly report filed on Form 10-Q. These forward-looking statements describe
management's intentions, beliefs, expectations or predictions for the future.
The Company uses the words "believe," "anticipate," "expect," "intend" and
similar expressions to identify forward-looking statements. Such forward-
looking statements are subject to a number of risks, assumptions and
uncertainties that could cause the Company's actual results to differ
materially from those projected in such forward-looking statements. These
risks, assumptions and uncertainties include:
. the ability to complete systems within the currently estimated time
frames and budgets;
. the ability to compete effectively in a rapidly evolving and price
competitive marketplace;
. changes in business strategy;
. changes in the nature of telecommunications regulation in the United
States and other countries;
. the successful integration of newly-acquired businesses; and
. the impact of technological change.
This list is only an example of some of the risks, uncertainties and
assumptions that may affect the Company's forward-looking statements. The
Company undertakes no obligation to update any forward-looking statements made
by it.
16
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The table below provides information about the Company's market sensitive
financial instruments and constitutes a "forward-looking statement." The
Company's major market risk exposure is changing interest rates. The Company's
policy is to manage interest rates through use of a combination of fixed and
floating rate debt. Interest rate swaps may be used to adjust interest rate
exposures when appropriate, based upon market conditions.
Fair Value
Expected maturity dates 2000 2001 2002 2003 2004 Thereafter Total March 31, 2000
- ------------------------ ------- ------- ------- -------- -------- ---------- ---------- --------------
(in thousands)
DEBT
Non Current--US$
denominated
9 1/2% Senior Notes due
2009................... -- -- -- -- -- $1,100,000 $1,100,000 $1,057,375
Average interest
rates--fixed.......... 9.5%
9 1/8% Senior Notes due
2006................... -- -- -- -- -- 900,000 900,000 852,750
Average interest
rates--fixed.......... 9.1%
9 5/8% Senior Notes due
2008................... -- -- -- -- -- 800,000 800,000 772,000
Average interest
rates--fixed.......... 9.6%
Senior Secured Revolving
Credit Facility........ -- -- -- -- $884,597 -- 884,597 884,597
Average interest
rates--variable....... (1)
Racal Term Loan A....... -- -- -- -- -- 636,639 636,639 636,639
Average interest
rates--variable....... (2)
Medium Term Notes,
7.51%-9.3%
Due 2000 to 2021....... $87,500 $71,500 $40,000 -- 20,000 100,000 319,000 303,649
Average interest
rates--fixed.......... 9.0%
7% Senior Notes due
2004................... -- -- -- -- 300,000 -- 300,000 274,605
Average interest
rates--fixed.......... 7.3%
Pacific Crossing Term
Loan A-1............... -- 80,000 90,000 $110,000 115,000 30,000 425,000 425,000
Average interest
rates--variable....... (5)
Pacific Crossing Term
Loan B................. -- 3,260 3,260 3,260 3,260 311,960 325,000 325,000
Average interest
rates--variable....... (6)
6% Dealer Remarketable
Securities (DRS) due
2013................... -- -- -- -- -- 200,000 200,000 178,423
Average interest
rates--fixed.......... (4)
Other................... $ 2,565 $ 3,522 $ 3,618 $ 38,336 2,962 39,963 90,966 89,644
Average interest
rates--fixed.......... (7)
DERIVATIVE INSTRUMENTS
Interest rate swap
floating for fixed--
Contract notional
amount................. -- -- -- -- -- 200,000 200,000 210,984
Fixed rate assumed by
GCL................... (8)
Variable rate assumed
by Counterparty....... 7.3%
Interest rate swap fixed
for floating--Contract
notional amount........ -- -- -- -- $698,888 $ 198,888 $ 897,776 $ 872,775
Average floating rate
assumed by GCL........ (9)
Average fixed rate
assumed by
Counterparty.......... 5.6% 6.9%
- --------
(1) The interest rate is 3 month US dollar LIBOR + 2.25% which was 8.5% as of
March 31, 2000.
(2) The interest rate is British pound LIBOR + 2.50%. The effective interest
rate was 8.7% as of March 31, 2000.
(3) The interest rate on Term Loan B and the Ancillary Facility is British
pound LIBOR + 2.50%. The weighted-average interest rate was 8.6% as of
March 31, 2000.
(4) The interest rate is fixed at 6.0% until October 2003. At that time, the
remarketing dealer (J.P. Morgan) has the option to remarket the notes at
prevailing interest rates or tender the notes for redemption.
(5) The interest rate is 1 month US dollar LIBOR + 2.25%, which was 8.4% as of
March 31, 2000.
17
(6) The interest rate is 1 month US dollar LIBOR + 2.50%, which was 8.7% as of
March 31, 2000.
(7) Includes $81,512 of fixed rate debt with interest rates ranging from 2.0%
to 9.0%.
(8) The interest rate is 6 month US dollar LIBOR + 1.26%, which is set in
arrears.
(9) There are two fixed for floating interest rate swaps denominated in
British pounds. GCL receives interest rates based on 3 month British pound
LIBOR, which was 6.3% on March 31, 2000. GCL also has two US dollar
denominated swaps. The interest rate is 1 month US dollar LIBOR, which was
6.3% as of March 31, 2000.
Foreign Currency Risk
For those subsidiaries using the U.S. dollar as their functional currency,
translation adjustments are recorded in the accompanying condensed
consolidated statements of operations.
For those subsidiaries not using the U.S. dollar as their functional
currency, assets and liabilities are translated at exchange rates in effect at
the balance sheet date and income and expense accounts at average exchange
rates during the period. Resulting translation adjustments are recorded
directly to a separate component of shareholders' equity. As of and for the
three months ended March 31, 2000 and 1999, the Company incurred a foreign
currency translation loss of $23 million and $5 million, respectively. Foreign
currency transaction gains and losses are included in the statement of
operations as incurred.
18
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On June 25, 1999, Frontier Corporation, a wholly-owned subsidiary of Global
Crossing Ltd., was served with a summons and complaint in a lawsuit commenced
in the New York State Supreme Court, Monroe County by a Frontier shareholder
alleging that Frontier and its Board of Directors had breached their fiduciary
duties to shareholders by endorsing a definitive merger agreement with the
Company without having adequately considered an alternative merger proposal
made by Qwest Communications International, Inc. The lawsuit was framed as a
purported class action brought on behalf of all shareholders of Frontier and
sought unstated compensatory damages and injunctive relief compelling
Frontier's board to evaluate Frontier's suitability as a merger partner, to
enhance Frontier's value as a merger candidate, to engage in discussions with
Qwest about possible business combinations, to act independently to protect
the interests of Frontier shareholders, and to ensure that no conflicts of
interest exist which would prevent maximizing value to shareholders. In July
1999, three additional lawsuits were also commenced against Frontier in the
New York State Supreme Court on behalf of a number of individual shareholders
seeking essentially identical relief. All four lawsuits were consolidated into
a single proceeding pending in Rochester New York. In February 2000, all four
lawsuits were voluntarily withdrawn.
On July 12, 1999, Frontier was served with a summons and complaint in a
lawsuit commenced in New York State Supreme Court, New York County by a
Frontier shareholder alleging that Frontier and its board breached their
fiduciary duties by failing to obtain the highest possible acquisition price
for Frontier in the definitive merger agreement with the Company. The action
has been framed as a purported class action and seeks compensatory damages and
injunctive relief. The claims against Frontier are asserted in the same action
as similar but separate claims against US West, Inc. However, the claims
against Frontier have been severed from the US West claims. In February 2000,
the Court granted the Company's motion to transfer the action to Monroe
County. The Company believes the asserted claims are without merit and is
defending itself vigorously.
Item 2. Changes in Securities and Use of Proceeds
In January 2000, the Company issued to Hutchison Whampoa Ltd. in a private
transaction 400,000 shares of its 6 3/8% cumulative convertible preferred
stock, Series B, for an aggregate liquidation preference of $400 million, in
connection with an equity investment by the Company in a joint venture. The
preferred stock is convertible into shares of Global Crossing common stock at
a rate of $45 per share. The Company received no cash proceeds from the
issuance of the convertible preferred stock.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Designations of 6 3/4% Cumulative Convertible Preferred
Stock of the Registrant dated April 14, 2000 (filed herewith).
10.1 Termination of Stockholders Agreement dated as of February 22, 2000 among
the Registrant and the investors named therein (filed herewith).
10.2 1998 Global Crossing Ltd. Stock Incentive Plan as amended and restated as
of May 1, 2000 (incorporated by reference to Annex A to the Registrant's
definitive proxy statement on Schedule 14A filed on May 8, 2000).
10.3 Global Crossing Senior Executive Incentive Compensation Plan
(incorporated by reference to Annex B to the Registrant's definitive
proxy statement on Schedule 14A filed on May 8, 2000).
10.4 Letter agreement dated March 2, 2000 relating to the termination of the
Employment Agreement dated as of February 9, 1999 between the Registrant
and Robert Annunziata (filed herewith).
10.5 Clarification letter dated April 17, 2000, relating to the Employment
Agreement dated as of December 5, 1999 between the Registrant and Leo J.
Hindery, Jr. (filed herewith)
10.6 Employment Term Sheet dated as of April 26, 2000 between the Registrant
and Gary A. Cohen (filed herewith).
10.7 Employment Term Sheet dated as of May 1, 2000 between the Registrant and
Joseph P. Perrone (filed herewith).
27.1 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K.
During the quarter ended March 31, 2000, Global Crossing Ltd. filed the
following Current Reports on Form 8-K:
1. Current Report on Form 8-K dated November 15, 1999 (date of earliest
event reported), filed on January 11, 2000, for the purpose of reporting,
under Items 2, 5 and 7, the acquisition of Racal Telecom, the execution of an
agreement to establish a joint venture called Hutchison Global Crossing with
Hutchison Whampoa Ltd. and providing certain historical and pro forma
financial information relating thereto.
2. Current Report on Form 8-K/A dated November 15, 1999 (date of earliest
event reported), filed on January 19, 2000, for the purpose of reporting,
under Items 2 and 5, to amend the Current Report on Form 8-K dated November
15, 1999 specified above.
3. Current Report on Form 8-K dated February 18, 2000 (date of earliest
event reported), filed on February 18, 2000, for the purpose of reporting,
under Item 5, Global Crossing's results of operations for the fourth quarter
and fiscal year ended December 31, 1999.
4. Current Report on Form 8-K dated February 22, 2000 (date of earliest
event reported), filed on March 2, 2000, for the purpose of reporting, under
Item 5, the execution of an agreement and plan of merger with IPC Information
Systems, Inc. and IXnet, Inc.
5. Current Report on Form 8-K dated March 2, 2000 (date of earliest event
reported), filed on March 3, 2000, for the purpose of reporting, under Item 5,
the appointment of Leo Hindery as the new Chief Executive Officer of Global
Crossing Ltd.
20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBAL CROSSING LTD.,
a Bermuda corporation
/s/ Dan J. Cohrs
By: _________________________________
Dan J. Cohrs
Senior Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
May 15, 2000
21