SCHEDULE 14A
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INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
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GLOBAL CROSSING LTD.
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[LOGO OF GLOBAL CROSSING LTD.]
, 2000
Dear Shareholder,
The board of directors cordially invites you to attend a special meeting of
Global Crossing shareholders, which we will hold at , local time, on ,
2000, at .
As part of our strategic plan to facilitate growth of GlobalCenter, our
complex Web hosting and related Internet infrastructure services business, and
increase value for shareholders of Global Crossing, our board of directors
requests your approval to create a tracking stock that is intended to reflect
the separate economic performance of our existing GlobalCenter business, which
we will designate as GlobalCenter group stock.
We currently plan to offer shares of GlobalCenter group stock that represent
a portion of the equity value of the GlobalCenter group in a public offering.
Upon the completion of the offering, each outstanding share of our existing
Global Crossing common stock will be designated as Global Crossing group stock.
Global Crossing group stock is intended to reflect the separate performance of
our Global Crossing group, consisting of all of our other businesses and the
Global Crossing group's ownership of the unsold portion of the GlobalCenter
group.
We intend to dispose of the shares representing the Global Crossing group's
remaining interest in the earnings and losses of the GlobalCenter group
following the proposed offering. This disposition is expected to include a
distribution in the form of a dividend to the holders of Global Crossing group
stock. The decision to make such a disposition and the precise method and
timing will depend on market conditions and other factors. After this intended
disposition of the GlobalCenter group stock, your ownership in Global Crossing
will then be represented by two stocks: GlobalCenter group stock--which will
reflect the performance of our GlobalCenter business--and Global Crossing group
stock--which will reflect the performance of all of our non-GlobalCenter
businesses.
Before we can proceed with the creation and issuance of GlobalCenter group
stock, the majority of all votes cast by the holders of Global Crossing common
stock must vote in favor of the proposals to increase our authorized share
capital and to allow our board of directors to designate our authorized shares
of common stock capital into two or more separate classes of common stock, to
approve the terms of the Global Crossing group stock and GlobalCenter group
stock and to redesignate our outstanding common stock as Global Crossing group
stock. The special meeting of shareholders has been called specifically for
this purpose. We describe the terms of the Global Crossing group stock and
GlobalCenter group stock in detail in this proxy statement.
At the special meeting, we will also ask you to consider and approve
companion proposals to approve the adoption of two GlobalCenter stock incentive
plans.
The board of directors of Global Crossing unanimously recommends that you
vote FOR the tracking stock proposals and the proposals to adopt the
GlobalCenter stock incentive plans.
This proxy statement provides you with detailed information about each of the
proposals. We encourage you to read this entire document carefully.
Thank you for your continued support.
GARY WINNICK
Chairman of the Board
See "Risk Factors" beginning on page 23 for some of the matters you should
consider.
This document is dated , 2000 and is being mailed to shareholders on or
about , 2000.
[LOGO OF GLOBAL CROSSING LTD.]
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Notice of Special Meeting of Shareholders
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We will hold a Special General Meeting of Shareholders (the "special
meeting") of Global Crossing Ltd. at , on , 2000 at , local time,
for the following purposes:
To vote on the following:
1. To consider and act upon a proposal to increase our authorized share
capital to $45,250,000 by the creation of an additional 1,500,000,000
shares of common stock, par value $0.01 per share, and 5,000,000 shares
of preferred stock, par value $0.01 per share;
2. To consider and act upon a proposal to allow our board of directors to
designate our authorized shares of common stock into two or more
classes of common stock, to approve the terms of the Global Crossing
group stock and the GlobalCenter group stock and to redesignate our
outstanding common stock as Global Crossing group stock;
3. To consider and act upon a proposal to approve the adoption of the
GlobalCenter Management Stock Plan; and
4. To consider and act upon a proposal to approve the adoption of the
GlobalCenter 2000 Stock Plan.
Only shareholders of record at the close of business on , 2000, which has
been fixed as the record date for notice of the meeting, are entitled to vote
at the meeting.
We urge you to attend the meeting in person or by proxy. If you do not expect
to attend the meeting, please vote by completing, signing and dating the
enclosed proxy card and returning it promptly in the reply envelope provided.
By order of the Board of Directors,
MITCHELL C. SUSSIS
Secretary
, 2000
Important: Please sign, date and return the enclosed proxy card as soon as
possible. The proxy is revocable and will not be used if you give written
notice of revocation to the Secretary of Global Crossing not less than one hour
before the time fixed for the beginning of the meeting, if you lodge a later
dated proxy or if you attend and vote at the meeting.
TABLE OF CONTENTS
Page
----
Questions & Answers About the Proposals.................................. 1
Summary.................................................................. 4
Risk Factors............................................................. 23
Cautionary Statement Concerning Forward-Looking Statements............... 43
The Special Meeting...................................................... 44
General................................................................ 44
Date, time and place................................................... 44
Proposals to be considered at the special meeting...................... 44
Record date; votes per share........................................... 44
Quorum................................................................. 45
Votes required......................................................... 45
How shares will be voted at the special meeting........................ 46
How to revoke a proxy.................................................. 46
Solicitation of proxies................................................ 46
The Tracking Stock Proposals............................................. 47
General................................................................ 47
Authorized and outstanding shares...................................... 47
The proposed public offering........................................... 48
The intended disposition............................................... 49
Reasons for the tracking stock proposals............................... 49
Recommendation of our board of directors............................... 53
Dividend policy........................................................ 53
Description of Global Crossing group stock and GlobalCenter group
stock................................................................. 54
Additional classes of common stock..................................... 70
Certain anti-takeover provisions of Bermuda law and our bye-laws....... 70
United States federal income tax consequences.......................... 72
Stock exchange listings................................................ 73
Stock transfer agent and registrar..................................... 73
Effect on existing awards and convertible preferred stock.............. 73
No dissenters' rights.................................................. 74
Business of the GlobalCenter Group....................................... 75
Selected Historical Combined Financial Data of the GlobalCenter Group.... 87
Management's Discussion and Analysis of Financial Condition and Results
of Operations of the GlobalCenter Group................................. 89
Selected Historical Financial Data of Global Crossing Ltd................ 99
Management's Discussion and Analysis of Financial Condition and Results
of Operations of Global Crossing Ltd.................................... 104
Relationship Between the Global Crossing Group and the GlobalCenter
Group................................................................... 117
General policy......................................................... 117
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TABLE OF CONTENTS--(Continued)
Page
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Amendment and modification of policy.................................... 117
Role of capital stock committee......................................... 117
Corporate opportunities................................................. 117
Relationships between groups............................................ 118
Dividend policy......................................................... 120
Financial reporting; allocation matters................................. 120
GlobalCenter Inc. board of directors.................................... 121
Tax sharing agreement................................................... 121
The GlobalCenter Stock Incentive Plan Proposals........................... 123
Management Stock Plan................................................... 123
2000 Stock Plan......................................................... 124
Global Crossing Executive Compensation.................................... 126
Summary compensation table.............................................. 128
Certain compensation arrangements....................................... 128
Compensation of outside directors....................................... 131
Option grants in last fiscal year....................................... 131
Aggregated option exercises in last fiscal year and fiscal year-end
option values.......................................................... 132
Compensation committee interlocks and insider participation............. 132
Comparison of cumulative total returns.................................. 133
Stock Ownership of Management, Directors and 5% Shareholders of Global
Crossing................................................................. 134
Submission of Future Shareholder Proposals................................ 136
Where You Can Find More Information....................................... 136
Information Incorporated by Reference..................................... 137
Index to Financial Statements............................................. F-1
GlobalCenter Group--Report of Independent Accountants and Combined
Financial Statements................................................... F-3
Global Crossing Group--Unaudited Pro Forma Condensed Combined Financial
Statements............................................................. F-73
Annex I Proposed Resolutions of Global Crossing's Shareholders in Connection
with the Special Meeting
Annex II Certificate of Designations of Global Crossing Group Stock and
GlobalCenter Group Stock
Annex III Policy Statement Regarding Global Crossing Group Stock and
GlobalCenter Group Stock Matters
Annex IV GlobalCenter Management Stock Plan
Annex V GlobalCenter 2000 Stock Plan
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QUESTIONS & ANSWERS ABOUT THE PROPOSALS
At the special meeting, we will ask you to consider and vote upon the
proposals to increase our authorized share capital and to allow our board of
directors to designate our authorized shares of common stock into two or more
separate classes of common stock, to approve the terms of the Global Crossing
group stock and GlobalCenter group stock and to redesignate our outstanding
common stock as Global Crossing group stock. Here are some questions and
answers relating to the tracking stock proposals and the companion proposals
for the approval of the adoption of the GlobalCenter stock incentive plans.
Q: What am I being asked to vote on?
A: We are asking you to approve the tracking stock proposals and companion
proposals approving the adoption of two GlobalCenter stock incentive plans.
Q: Please briefly describe the tracking stock proposals.
A: The tracking stock proposals consist of two proposals: one to increase our
authorized share capital, and one to allow our board of directors to
designate our authorized shares of common stock capital into two or more
separate classes of common stock, to approve the terms of the Global
Crossing group stock and GlobalCenter group stock and to redesignate our
outstanding common stock as Global Crossing group stock. If the proposed
offering of GlobalCenter group stock is completed, our board of directors
will designate 3,000,000,000 of our authorized shares of common stock as
Global Crossing group stock and 1,000,000,000 of our authorized shares of
common stock as GlobalCenter group stock, and redesignate our outstanding
common stock as Global Crossing group stock.
Q: What is a tracking stock and how does it work?
A: A tracking stock is a separate class of a company's common stock that is
designed to reflect the separate performance of a group of assets or
specific business units, divisions, subsidiaries or equity investments of
the company. The holders of Global Crossing group stock and the holders of
GlobalCenter group stock will be shareholders of Global Crossing and will
not be shareholders of their respective groups.
Q: What will happen to my shares of Global Crossing common stock?
A: Following the public offering of GlobalCenter group stock, all of your
shares of Global Crossing common stock will be redesignated as Global
Crossing group stock, which will reflect the interest in all of the assets
and businesses of Global Crossing, including its inter-group interest in
the GlobalCenter group. Following the intended distribution of the Global
Crossing group's inter-group interest in the portion of the GlobalCenter
group not sold in this offering, your shares of Global Crossing group stock
will reflect the interest in all of the assets and businesses of Global
Crossing, other than the GlobalCenter business.
Q: Why are we proposing to create two classes of common stock?
A: We believe that the creation of GlobalCenter group stock will assist the
GlobalCenter group in meeting its capital requirements by creating an
additional publicly traded equity security that it can use to raise capital
and issue for acquisitions and investments. We further believe that
separating the performance of the Global Crossing group and the
GlobalCenter group and reflecting separately the operating results and
growth prospects of each group will permit greater market recognition and
more efficient valuation of the Global Crossing group and the GlobalCenter
group. At the same time, we believe that the tracking stock proposal allows
us to continue to benefit from synergies between the Global Crossing group
and the GlobalCenter group and other advantages of doing business under
common ownership. We describe these and other reasons for the tracking
stock proposals starting on page 49.
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Q: How will my interest in Global Crossing be affected if the tracking stock
proposals are approved and implemented?
A: If the tracking stock proposals are approved and GlobalCenter group stock
is sold to the public, the economic interest retained by you, as the
holders of Global Crossing group stock, in the GlobalCenter group will be
proportionately reduced. Because the total assets of the GlobalCenter group
will increase by the amount of the net proceeds of the proposed public
offering, however, the economic value of your holdings in Global Crossing
group stock should remain the same, assuming the price we receive for the
shares of GlobalCenter group stock we sell reflects their inherent value.
Nonetheless, we cannot guarantee that the market price of your Global
Crossing group stock will reflect the full value of the Global Crossing
group's inter-group interest in the GlobalCenter group, and that the market
value of your shares of Global Crossing common stock will not decrease as a
result of the implementation of the tracking stock proposals and the
proposed offering of GlobalCenter group stock.
In addition, because the holders of Global Crossing group stock and
GlobalCenter group stock will generally vote together as a single class on
matters brought to a vote of Global Crossing shareholders, your vote will be
diluted after the offering of GlobalCenter group stock because we will have
issued more shares with voting rights.
Q: Do the tracking stock proposals involve a spin-off?
A: No. The tracking stock proposals do not contemplate a distribution or spin-
off of any assets or liabilities of Global Crossing or its subsidiaries.
Tracking stocks are more complex than traditional common stock and are not
directly comparable to common stock of companies that have been spun off by
their parent companies. The holders of Global Crossing group stock and the
holders of GlobalCenter group stock will continue to be shareholders of
Global Crossing and, as such, will be subject to the benefits and risks
associated with an investment in Global Crossing and all of our businesses,
assets and liabilities.
Q: Why are you issuing a tracking stock instead of spinning off the
GlobalCenter group?
A: Issuing a tracking stock will retain for us the advantages of doing
business as a single company and allow each group to capitalize on
relationships with the other group, such as the ability of the GlobalCenter
group to take advantage of the Global Crossing group's high capacity fiber
optic network. Issuing a tracking stock will also allow both groups to
continue to benefit from common ownership by saving costs in corporate
overhead expenses and sharing synergies relating to strategy. However, we
cannot assure you that the market price of either GlobalCenter group stock
or Global Crossing group stock will accurately reflect the performance of
the assets contained in these groups as we intend.
Q: How will the tracking stock proposals affect future financial statement
presentation of Global Crossing?
A: We include in this proxy statement the consolidated financial statements of
Global Crossing, the combined financial statements of the GlobalCenter
group and the pro forma combined financial statements of the Global
Crossing group. In addition, financial statements of companies we have
recently acquired are incorporated by reference in this proxy statement.
Following the issuance of GlobalCenter group stock, we will issue
periodically combined financial statements for the GlobalCenter group,
combined financial statements for the Global Crossing group and
consolidated financial statements for Global Crossing. Presentation of the
separate group financial statements of the GlobalCenter group and the
Global Crossing group will provide current and potential investors in each
group with financial information regarding the underlying businesses of the
GlobalCenter group and the Global Crossing group.
Q: Why are the number of authorized shares of common stock and preferred stock
being increased?
A: We need to increase the number of authorized shares of common stock for the
proposed offering of GlobalCenter group stock and the proposed
distribution, to grant awards of
2
GlobalCenter group stock under its stock incentive plans and to issue in
transactions consistent with our business strategy GlobalCenter group stock,
Global Crossing group stock or any additional class of group stock. We need
to increase the number of authorized shares of preferred stock in order to
retain the flexibility to issue those shares in possible financing and
acquisition transactions in the future.
Q: Why are we adopting the GlobalCenter stock incentive plans?
A: We are adopting the GlobalCenter stock incentive plans to allow us to grant
awards based on shares of GlobalCenter group stock.
Q: Should I vote "FOR" the proposals?
A: Yes. Our directors unanimously recommend that you vote "FOR" each of the
proposals. We are soliciting your vote "FOR" both proposals with this proxy
statement.
Q: What do I need to do now?
A: After you carefully read this document, please indicate on the enclosed
proxy card how you
want to vote. Sign and mail the proxy card in the enclosed return envelope
as soon as possible, so that your shares may be represented at the Global
Crossing special meeting. You may also vote by attending the meeting in
person, which will be held at on , 2000.
Q: If my broker holds my shares in "street name," will my broker vote my
shares?
A: Your broker will not vote your shares unless you follow the directions your
broker provides to you regarding how to vote your shares.
Q: What do I do if I want to change my vote?
A: You can change your vote by sending in a notice of revocation or a later-
dated, signed proxy card to Global Crossing's Secretary before the special
meeting or by attending the special meeting in person and voting.
Q: Should I send in my stock certificates?
A: No. If the tracking stock proposals are adopted, each of your shares of
existing common stock will be automatically redesignated as one share of
Global Crossing group stock if and when we complete the proposed public
offering of GlobalCenter group stock. The stock certificate representing
your shares of existing common stock will represent ownership of the same
number of shares of Global Crossing group stock.
Q: Who should I call with questions?
A: If you have any questions about the tracking stock proposals, please call
our Investor Relations department at (310) 385-5200.
If you would like copies of any of the documents we refer to or that we
incorporate by reference in this proxy statement, you should call us at
(310) 385-5200.
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Summary
This summary, together with the "Questions and Answers About the Proposals"
on the preceding pages, highlights important selected information from this
proxy statement. To understand the proposals fully and for a more complete
description of the legal terms of the proposals, you should read carefully this
entire document and the documents we have referred you to.
In this proxy statement, "we," "us," "our," "ours" and "Global Crossing"
refers to Global Crossing Ltd. and its subsidiaries.
Global Crossing and GlobalCenter
For the purpose of establishing a tracking stock, we intend to separate our
complex Web hosting and related Internet infrastructure services business--
which we call the GlobalCenter group--from the rest of our businesses--which we
call the Global Crossing group. We intend that our GlobalCenter group stock
will track the performance of the GlobalCenter group, and intend that our
Global Crossing group stock will track the performance of the Global Crossing
group. Holders of GlobalCenter group stock and Global Crossing group stock will
not have an exclusive claim on the assets of the GlobalCenter group and the
Global Crossing group, respectively. Instead, holders of both classes of common
stock remain stockholders of Global Crossing and will have a claim on the
assets of Global Crossing as a whole.
Tracking stocks, like GlobalCenter group stock and Global Crossing group
stock, are more complex than traditional common stock and are not directly
comparable to common stock of companies that have been spun off by their parent
companies. Because of:
. the ability of our board of directors or capital stock committee to
reallocate assets and modify policies without shareholder approval;
. the complex nature of the terms of tracking stocks; and
. some terms that are not intended to link the market value of the
tracking stock with the performance of the related group's assets;
we cannot assure you that the market price of GlobalCenter group stock and
Global Crossing group stock will reflect the performance of the assets
contained in these groups as we intend.
The GlobalCenter Group
The GlobalCenter group is a leading provider of Internet infrastructure
services incorporating:
. complex Web hosting;
. IP network service, using primarily the Global Crossing network;
. hardware and software procurement and installation;
. content distribution, integration and management services;
. systems applications; and
. professional services.
The GlobalCenter group delivers its services primarily to customers seeking
rapid, cost-effective services for their mission-critical Internet-related
operations. As of March 31, 2000, the GlobalCenter group provided solutions to
over 500 customers, including large, well-established enterprises and newer
Internet companies, including NBCi, Viacom, Yahoo! and ZDNet. Due largely to
rapid growth in both the size of its customer base and demand for outsourced
Internet infrastructure services, its annual revenues have grown from $7.7
million in 1997 to $70.9 million in 1999. The GlobalCenter group's net losses
were $2.8 million for 1997, $16.8 million for the nine months ended September
30, 1999 and $42.7 million for the three months ended December 31, 1999.
The GlobalCenter group currently operates ten data centers strategically
located near major business centers in northern and southern California; New
York City; northern Virginia; London; and Melbourne. Six of these data centers
have been commercially operational for more than 12 months and are currently
operating at or near full capacity. In addition, it currently has in
development 10 data centers in the United States, Europe and the Asia-Pacific
region, nine of which it plans to open by the end of this year, bringing the
total gross square footage of its data centers to over one million. The
GlobalCenter group's data centers incorporate many advanced design features
including multi-layer physical security, redundant environmental control and
power systems
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and 24x7x365 monitoring, maintenance and support systems. Highly trained
technical support and network operating staff are located on-site at the
GlobalCenter group's data centers to provide its customers with installation,
support and professional services.
Each of the GlobalCenter group's data centers other than its Melbourne data
center is located directly on the Global Crossing IP-based, fiber optic
network. This network is expected to span 101,000 route miles and connect five
continents and more than 200 cities in 27 countries by the middle of 2001. The
GlobalCenter group believes that its special access to this network will enable
it to enjoy significant connectivity advantages over other providers of
Internet infrastructure services, including higher availability of network
capacity and enhanced, integrated network monitoring and problem resolution. In
addition, the extensive geographic reach of the Global Crossing group's IP
network and the Global Crossing group's numerous peering and transit
relationships with other major Internet service providers, or ISPs, enable the
Global Crossing group to avoid many of the congested Internet public exchange
points and deliver IP traffic directly to its destination network or intended
IP address. A peering relationship is an interconnection between two IP
networks that allows either network and its customers to deliver IP traffic to
the other's network and its customers without a fee if traffic levels are
comparable. A transit relationship is a similar relationship that involves the
transport of IP traffic to third party networks for a fee. Each of the
GlobalCenter group's data centers also has access to the communications
networks of other major carriers.
The GlobalCenter group's objective is to become the leading global total
services provider for its customers' mission-critical Internet infrastructure
requirements. To achieve this objective, the GlobalCenter group is implementing
a business strategy focused on the following key elements:
. enhance and expand its portfolio of value-added applications and
professional services;
. expand its global footprint by opening new data centers;
. develop and market services tailored to the needs of selected
information-intensive industries, including media and entertainment,
financial services, retail and business-to-business exchanges;
. continue to take advantage of its unique relationship with the Global
Crossing group, including the Global Crossing group's extensive customer
base and partnering relationships;
. expand its direct sales force and develop new channels of distribution;
. develop and strengthen relationships with industry leading technology
vendors; and
. through GlobalCenter Inc., enter into strategic partnerships or make
targeted acquisitions to complement its internal development efforts.
The GlobalCenter group's management team is led by Leo J. Hindery, Jr.,
Chairman and Chief Executive Officer of GlobalCenter Inc., Chief Executive
Officer of Global Crossing Ltd. and the former President and CEO at AT&T
Broadband & Internet Services. As part of Mr. Hindery's employment agreement,
Mr. Hindery has the right to nominate 5 of the 11 directors of the GlobalCenter
Inc. board of directors, including himself. Under this arrangement, Kurt
Baumann, Chase Carey, Frank M. Drendel, Mr. Hindery and Marc B. Nathanson serve
as directors of GlobalCenter Inc. We believe that this board of directors will
enhance the GlobalCenter group's ability to grow and expand its business and
develop and benefit from strategic relationships.
The Global Crossing Group
The principal activities of the Global Crossing group include offering a
variety of integrated telecommunications products and services to customers
through its IP-based fiber optic network, including domestic and international
voice services, data products, structured bandwidth services and other
communications products. In addition, through its installation and maintenance
services business conducted through its Global Marine Systems subsidiary, the
Global Crossing group installs and maintains undersea fiber optic cable systems
for carrier customers worldwide. Finally, the Global Crossing group's incumbent
local exchange carrier
5
services segment provides local communications services through local exchange
service providers in 13 states, serving over one million access lines. On May
1, 2000, we announced that we were examining our strategic options concerning
this incumbent local exchange carrier segment.
The Global Crossing group will also have an inter-group interest in the
GlobalCenter group, representing that portion of the equity value of the
GlobalCenter group that is not sold to the public in the proposed offering.
Following the proposed public offering of GlobalCenter group stock, we intend
to dispose of the Global Crossing group's remaining inter-group interest in the
GlobalCenter group in the form of additional GlobalCenter group stock. This
disposition is intended to include a distribution in the form of a dividend to
holders of Global Crossing group stock for at least a portion of such interest,
but may include an exchange offer, a further sale of GlobalCenter group stock,
or a combination thereof. There is no guarantee, however, that any disposition
will follow the proposed public offering.
The Special Meeting
Proposals to be Considered at the Meeting
The tracking stock proposals
At the Global Crossing special meeting, you will be asked to consider and
vote to approve proposals:
. to increase our authorized share capital to $45,250,000 by the creation
of an additional 1,500,000,000 shares of common stock and 5,000,000
shares of preferred stock;
. to allow our board of directors to redesignate our authorized shares of
common stock into two or more separate classes of common stock, to
approve the terms of the Global Crossing group stock and GlobalCenter
group stock and to redesignate our outstanding common stock as Global
Crossing group stock.
If the proposed public offering of GlobalCenter group stock is completed, our
board of directors will designate 3,000,000,000 of our authorized shares of
common stock as Global Crossing group stock and 1,000,000,000 of our authorized
shares of common stock as GlobalCenter group stock.
By voting in favor of the tracking stock proposals, you may be forfeiting
your rights to challenge these proposals in the future.
The GlobalCenter stock incentive plan proposals
In addition, at the Global Crossing special meeting, you will be asked to
consider and vote to approve the adoption of two GlobalCenter stock incentive
plans: the GlobalCenter Management Stock Plan and the GlobalCenter 2000 Stock
Plan.
If the tracking stock proposals are approved, we intend to implement them
whether or not the GlobalCenter stock incentive plan proposals are approved. If
the tracking stock proposals are not approved, we will not implement the
GlobalCenter stock incentive plan proposals.
Votes Required to Approve the Proposals
The favorable vote of a majority of all votes cast by the holders of Global
Crossing common stock is required for approval of each proposal.
Our directors and executive officers beneficially owned approximately 20.84%
of the outstanding shares of our existing common stock as of April 24, 2000.
The Proposed Public Offering
If you approve the tracking stock proposals, we expect to issue in a public
offering shares of GlobalCenter group stock representing a portion of the
equity value of the GlobalCenter group. After the special meeting, we will
determine the amount to be issued based on the capital requirements of the
GlobalCenter group, market conditions at the time of the public offering and
other factors. The proceeds of the public offering will be allocated to the
GlobalCenter group.
If the tracking stock proposals are approved and implemented, your shares of
Global Crossing common stock will be redesignated as shares of Global Crossing
group stock and, prior to any disposition of the Global Crossing group's inter-
group interest as discussed below, you will only hold shares of GlobalCenter
group stock to the extent you participate in the proposed offering.
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Timing of the Proposed Public Offering
We currently expect to complete the proposed public offering shortly
following shareholder approval of the tracking stock proposals.
If subsequent considerations arise, our board of directors could decide not
to create Global Crossing group stock and GlobalCenter group stock and abandon
plans for the implementation of the tracking stock proposals and the proposed
offering, even if our shareholders have approved the tracking stock proposals.
Inter-Group Interest and the Intended Disposition
Prior to the completion of the proposed offering of GlobalCenter group stock,
the Global Crossing group will hold a 100% interest in the earnings and losses
of the GlobalCenter group and, therefore, a 100% inter-group interest in the
GlobalCenter group. Prior to the completion of the proposed offering, but after
the special meeting, our board of directors will determine the number of shares
of GlobalCenter group stock that, if issued, would represent 100% of the Global
Crossing group's inter-group interest in the GlobalCenter group.
Immediately following the proposed offering, the portion of the GlobalCenter
group not represented by GlobalCenter group stock sold in the offering will
continue to be held by the Global Crossing group and will be reflected in the
combined financial statements of the Global Crossing group as an "inter-group
interest" in the GlobalCenter group. The inter-group interest will have no
voting rights.
Following the proposed offering we intend to dispose of the Global Crossing
group's remaining inter-group interest in the GlobalCenter group in the form of
additional GlobalCenter group stock. This disposition is intended to include a
distribution in the form of a dividend to holders of Global Crossing group
stock for at least a portion of such interest, but may include an exchange
offer, a further sale of GlobalCenter group stock, or a combination thereof. We
currently intend to dispose of all of the Global Crossing group's current
inter-group interest at some time after the proposed offering and the
expiration of any lock-up period; however, we have not yet determined the exact
method and timing of this disposition. There is no guarantee, however, that any
disposition will follow the proposed offering.
We will base our decision with regard to the method and timing of the
disposition on market conditions and the target of maximizing value for all of
Global Crossing's shareholders. The disposition may occur in several stages,
following which we expect that all of the Global Crossing group's current
inter-group interest in the GlobalCenter group would be represented by newly
issued shares of GlobalCenter group stock.
Even after this distribution, however,
. all of the assets of the GlobalCenter group and the Global Crossing
group will still remain part of, and under control of, Global Crossing,
and
. in the event of a liquidation of Global Crossing, holders of
GlobalCenter group stock and Global Crossing group stock would not have
an exclusive claim on the assets of the GlobalCenter group or the Global
Crossing group, respectively, but rather a claim on the assets of Global
Crossing as a whole.
Differences Between Tracking Stocks and Traditional Common Stock
Tracking stock is a type of common stock that is intended to reflect or
"track" the separate performance of a particular business or group of
businesses and does not reflect direct ownership of the tracked assets.
Tracking stocks, like GlobalCenter group stock and Global Crossing group stock,
are more complex than traditional common stock and are not directly comparable
to common stock of companies that have been spun off by their parent companies.
Tracking stocks contain complicated terms, some of which are not intended to
link the market value of the tracking stock with the performance of the tracked
assets. In addition, tracking stocks are implemented by a company's board of
directors or capital stock committee, typically in a manner that permits
reallocation of assets and modification of policies. Finally, in the event of
liquidation, holders of tracking stock do not have a direct claim on the
tracked assets but rather a general claim on the assets of the company as
whole.
As a result, we cannot assure you that the market price of GlobalCenter group
stock and Global
7
Crossing group stock will reflect the performance of the assets contained in
these groups as we intend.
Reasons for the Tracking Stock Proposals
We expect the tracking stock proposals to:
. assist the GlobalCenter group in meeting its capital needs by creating
an additional publicly traded equity security that it can use to raise
capital and can issue for acquisitions and investments;
. maintain the benefits of doing business under common ownership;
. increase market awareness of the performance and value of our
GlobalCenter business. We expect this will provide greater market
recognition and realization of the value, individually and collectively,
of Global Crossing and its distinct lines of business represented by
each of the GlobalCenter group and the Global Crossing group; and
. permit the creation of more effective management incentive and retention
programs, with the ability to direct business-specific options and
securities to employees of each group.
For additional reasons for the tracking stock proposals, see "The Tracking
Stock Proposals--Reasons for the tracking stock proposals."
Comparison of Existing Common Stock with Global Crossing Group Stock and
GlobalCenter Group Stock
We have compared below our existing common stock with the proposed Global
Crossing group stock and GlobalCenter group stock. You should keep in mind that
holders of Global Crossing group stock and GlobalCenter group stock will remain
shareholders of a single company. The Global Crossing group and the
GlobalCenter group will not be separate legal entities. As a result, you will
continue to be subject to benefits and risks associated with an investment in
Global Crossing and its businesses, assets and liabilities. Financial effects
from one group that affect our consolidated results of operations or financial
condition could, if significant, affect the results of operations or financial
condition of the other group.
Dividends
Existing common stock. Historically, we have not paid dividends on our
existing common stock. Dividends are declared at the discretion of our board of
directors.
Tracking stocks. We presently do not anticipate paying dividends on either
tracking stock. Dividends, if any, will be declared at the discretion of our
board of directors.
Voting rights
Existing common stock. Holders of existing common stock have one vote per
share, subject to certain restrictions described on page 61.
Tracking stocks. Holders of Global Crossing group stock will have one vote
per share. Holders of GlobalCenter group stock will have more than, less than
or exactly one vote per share depending on the relative average market values
of the two classes of stock over a specified period prior to the record date
for the vote, subject to a limitation on the voting power of holders of
GlobalCenter group stock to 25% of the total voting power of all outstanding
shares of Global Crossing common stock and to certain other restrictions
described on page 61.
The holders of the two classes of stock will vote together as a single class
on each matter on which holders of common stock are generally entitled to vote,
except in the case of any proposal to increase or decrease the authorized
shares of the relevant class or amend the terms of that class, and except for
the limited single class voting rights provided under Bermuda law, Nasdaq
listing rules or stock exchange rules or as otherwise determined by our board
of directors.
Conversion at option of Global Crossing
Existing common stock. We do not have the option of converting shares of our
existing common stock into any other security of Global Crossing.
Tracking stocks. We may, at any time and without shareholder approval,
convert either tracking stock into the other tracking stock at our option:
. at a 20% premium during the first year following the completion of the
proposed public offering of GlobalCenter group stock;
8
. at a 15% premium during the second year following the implementation of
the tracking stock proposals; and
. at a 10% premium thereafter.
Any optional conversion as described above can only be effected if, as of
close of business on the last day of the 20-trading day period, the market
capitalization of the class of common stock being issued in the conversion
exceeds the market capitalization of the class of common stock being converted.
The premiums described above are intended for the protection of holders of
GlobalCenter group stock and Global Crossing group stock since a decision by
our board of directors to convert one class of stock into the other may be made
without shareholder approval. The decrease in the premium from 20% to 10% over
the first two years the GlobalCenter group stock is outstanding is intended to
allow greater flexibility to us in using these provisions over time. Provisions
similar to these, with comparable declining premiums, are included in the terms
of tracking stocks of other public companies that have issued tracking stock.
If we exercise our conversion right as a result of a "tax event," as that
term is defined under "The Tracking Stock Proposals--Description of Global
Crossing group stock and GlobalCenter group stock--Conversion and repurchase--
Conversion of common stock at option of Global Crossing at any time," we will
convert your shares without any premium.
In addition, if our board of directors determines to issue one or more
additional classes of common stock, shares of that class or those classes could
be converted into Global Crossing group stock or GlobalCenter group stock on
terms determined by our board of directors at the time of issuance.
Repurchase for stock of subsidiary
Existing common stock. We do not have the option of requiring the repurchase
of shares of our existing common stock.
Tracking stocks. We will have the right at any time and without shareholder
approval to require the repurchase of shares of Global Crossing group stock for
stock of one or more of our subsidiaries that holds all of the assets and
liabilities of the Global Crossing group. Similarly, we will have the right at
any time and without shareholder approval to require the repurchase of
GlobalCenter group stock for stock of one or more of our subsidiaries that
holds all of the assets and liabilities of the GlobalCenter group.
In addition, if our board of directors determines to issue one or more
additional classes of common stock, we will have the right at any time and
without shareholder approval to require the repurchase of shares of that class
or those classes of common stock for stock of one or more of our subsidiaries
that holds all of the assets and liabilities of the related group or groups.
Rights on sale of all or substantially all assets of a group
Existing common stock. Holders of existing common stock have no special
rights triggered by a sale of all or substantially all of the assets of a
group.
Tracking stocks. If we sell all or substantially all--that is, at least 80%--
of the assets attributed to either group, subject to a limited number of
exceptions and without shareholder approval, we must either:
. distribute an amount equal to the net proceeds of the sale through a
special dividend or repurchase, or
. convert each share of that group's tracking stock into a number of
shares of the other group's tracking stock at the premiums discussed
above under "Conversion at option of Global Crossing".
We may elect to pay the special dividend or repurchase price either in the
same form in which the proceeds of the disposition were received or in any
other combination of cash, securities or other property that our board of
directors determines in good faith will have an aggregate market value of not
less than the fair value of the net proceeds. Our board of directors will not
be required to obtain a third party fairness opinion in connection with this
determination.
If we sell substantially all--but not all--of the assets attributed to a
group and we distribute the net proceeds by special dividend or partial
repurchase, then at any time within two years after completing the distribution
we will have the right to convert the
9
remaining outstanding shares of that group's stock into shares of the other
group's stock at a premium of 10%.
We will not be required to effect a distribution or conversion if we receive
in the sale primarily equity securities of the acquiror or its parent, and the
acquiror or its parent is or will be primarily engaged in one or more
businesses similar or complementary to the group whose assets are sold.
A spin-off to shareholders one or more of our subsidiaries holding all of the
assets and liabilities of either the GlobalCenter group or the Global Crossing
group would result in a repurchase of shares of the related group stock for
shares of common stock of the subsidiary to be spun off and would not be
considered a disposition of all or substantially all of the assets of the
applicable group under the provisions discussed above.
If we create additional classes of common stock, we can convert the class of
stock of the group whose assets are disposed of into one of those classes. Any
conversion of Global Crossing group stock or GlobalCenter group stock into an
additional class of common stock would be subject to the same premium
provisions that would apply to a conversion of Global Crossing group stock into
GlobalCenter group stock or GlobalCenter group stock into Global Crossing group
stock.
Winding up
Existing common stock. If Global Crossing is wound up, holders of existing
common stock would share assets remaining for distribution to holders of common
stock in equal amounts per share of existing common stock.
Tracking stocks. Holders of Global Crossing group stock and GlobalCenter
group stock would
share assets remaining for distribution to holders of common stock on a per
share basis in proportion to the liquidation units per share. Each share of
Global Crossing group stock will have one liquidation unit. Each share of
GlobalCenter group stock will have a number of liquidation units based upon the
relative market values of GlobalCenter group stock and Global Crossing group
stock over the 20-trading day period ending on the 40th trading day after the
initial issuance of the GlobalCenter group stock.
If we create one or more additional classes of common stock, each share of
such class will have such number of liquidation units as our board of directors
will determine. Except for anti-dilution adjustments, we will not change the
number of liquidation units per share of GlobalCenter group stock or any
additional class of common stock without the approval of the holders of each
class of stock voting separately.
Policy Statement of Global Crossing's Board of Directors
Our board of directors may amend, modify or rescind our policy statement, or
may adopt additional or other policies or may make exceptions with respect to
the application of these policies, in its sole discretion and without
shareholder approval. However, our board of directors will only make such
changes or exceptions consistent with its fiduciary duty to Global Crossing and
all of its shareholders.
Our policy statement provides that we will resolve all material matters as to
which the holders of Global Crossing group stock and the holders of
GlobalCenter group stock may have potentially divergent interests in a manner
that our board of directors or capital stock committee determines to be in the
best interests of Global Crossing and all of its shareholders.
Our policy statement also provides that Global Crossing will seek to manage
the Global Crossing group and the GlobalCenter group in a manner designed to
maximize the operations, unique assets and value of both groups, and with
complementary deployments of personnel, capital and facilities, with the
continuing goal of positioning Global Crossing as a premier provider of global
IP and data services for both wholesale and retail customers.
Our policy statement establishes guidelines to help us allocate debt,
corporate overhead, interest and taxes on an objective basis. Our policy
statement also provides for:
. favorable access by the GlobalCenter group to the Global Crossing
group's IP-based high capacity fiber optic network;
. the centralized management of most financial activities;
10
. the transfer of assets resulting from commercial transactions that our
board of directors determines to be in the ordinary course of business
between the groups on arm's-length terms;
. the transfer of assets between groups at fair value;
. the allocation of corporate opportunities in the best interests of
Global Crossing; and
. access by the groups to Global Crossing's intellectual property.
Our policy statement provides that a capital stock committee, comprised of
three independent directors, will exercise certain delegated powers with
respect to the GlobalCenter group and the Global Crossing group. These powers
initially will include the power to interpret, make determinations under, and
oversee the implementation of the policy statement and adopt additional general
policies governing the relationship between the GlobalCenter group and the
Global Crossing group.
For more information regarding the policy statement, see "Relationship
Between the Global Crossing Group and the GlobalCenter Group."
Risk Factors
When evaluating the tracking stock proposals, you should be aware of the risk
factors we describe under "Risk Factors" starting on page 23.
United States Federal Income Tax Considerations
We have been advised by our counsel that the receipt of Global Crossing group
stock will not be taxable to you. However, the United States Internal Revenue
Service could disagree. There are no court decisions or other authorities
bearing directly on the effect of the features of Global Crossing group stock
and GlobalCenter group stock. The Internal Revenue Service has also announced
that it will not issue rulings on the characterization of stock with
characteristics similar to Global Crossing group stock and GlobalCenter group
stock. Therefore, the tax treatment of the tracking stock proposals are subject
to some uncertainty.
In addition, the Clinton Administration proposed legislation in February 2000
that, if enacted, would impose a tax on shareholders that receive stock similar
to Global Crossing group stock or GlobalCenter group stock in exchange for
other stock in the company or in a distribution by the company. If this
proposal is enacted, you could be subject to tax on your receipt of Global
Crossing group stock or GlobalCenter group stock. If our shareholders approve
tracking stock proposals, our board of directors will evaluate legislative
developments relating to this tax proposal prior to creating any class of
tracking stock. For more information regarding the tax consequences of the
tracking stock proposals, see "The Tracking Stock Proposals--United States
federal income tax consequences."
Listing
We expect to list Global Crossing group stock under the trading symbol "GBLX"
and GlobalCenter group stock under the trading symbol "GCTR" on the Nasdaq
National Stock Market and the Bermuda Stock Exchange.
The GlobalCenter Stock Incentive Plan Proposals
We are also asking you to vote on related proposals to approve the adoption
of two GlobalCenter stock incentive plans: the GlobalCenter Management Stock
Plan and the GlobalCenter 2000 Stock Plan. These plans would, among other
things, reflect the tracking stock proposal by authorizing us to grant to our
employees, officers and directors awards based on shares of GlobalCenter group
stock. We intend to grant awards to employees based primarily on the group for
which our employees work.
Recommendation of the Board of Directors
Our board of directors has carefully considered each of these proposals and
believes that the approval of these proposals by the shareholders is advisable
and in the best interests of Global Crossing. Our board of directors
unanimously recommends that you vote "FOR" each of these proposals.
11
SELECTED HISTORICAL FINANCIAL DATA OF GLOBAL CROSSING LTD.
Selected Historical Financial Data
The table below shows selected historical financial data for Global Crossing
Ltd. This data has been prepared using our consolidated financial statements as
of the dates indicated and for each of the years ended December 31, 1999 and
1998, for the period from March 19, 1997, the date of our inception, to
December 31, 1997 and for the three months ended March 31, 1999 and 2000.
In reading the following selected historical financial data, please note the
following:
. The financial data as of March 31, 2000 and for the three months ended
March 31, 1999 and 2000 are derived from our unaudited consolidated
financial statements included elsewhere in this proxy statement. We have
made adjustments, consisting of normal recurring adjustments necessary to
present our financial position as of March 31, 2000 and the results of
operations for the three months ended March 31, 1999 and 2000, which in
the opinion of our management are necessary for a fair presentation.
Results of operations for the three months ended March 31, 1999 and 2000
are not necessarily indicative of the results that we expect for the full
year or for any future period.
. The statement of operations data for the year ended December 31, 1999
includes the results of Global Marine Systems for the period from July 2,
1999, date of acquisition, through December 31, 1999; the results of
Frontier Corporation for the period from September 30, 1999, date of
acquisition, through December 31,1999; and the results of Racal Telecom
for the period from November 24, 1999, date of acquisition, through
December 31, 1999. The Consolidated Balance Sheet as of December 31, 1999
includes amounts related to Global Marine Systems, Frontier Corporation
and Racal Telecom. This information should be read in conjunction with
pro forma financial information of Global Crossing Ltd. and notes
incorporated by reference into this proxy statement.
. During the year ended December 31, 1999, we recorded a $15 million
expense, net of tax benefit, due to the adoption of Statement of Position
98-5, "Reporting on the Cost of Start-Up Activities". See the "Cumulative
effect of change in accounting principles" item in the Statement of
Operations Data.
. On March 24, 2000, we increased our interest in the PC-1 cable system
from 57.75% to 64.50% for approximately $21 million by acquiring the
remaining ownership of another partner in PC-1 and the PC-1 shareholder
agreement was amended, which enabled us to exercise effective control
over PC-1. As a result of these changes, we have, effective January 1,
2000, consolidated PC-1's operating results.
. On January 12, 2000, we established a joint venture, called Hutchison
Global Crossing, with Hutchison Whampoa Limited to pursue fixed-line
telecommunications and Internet opportunities in Hong Kong. For its 50%
share, Hutchison Whampoa Limited 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 Whampoa
Limited has agreed that any fixed-line telecommunications activities it
pursues in China will be carried out by the joint venture. For our 50%
share, we provided to Hutchison Whampoa Limited $400 million in Global
Crossing Ltd. convertible preferred stock, convertible into shares of
Global Crossing group stock at a rate of $45 per share, and committed to
contribute to the joint venture international telecommunications capacity
rights on Global Crossing's network and global media distribution center
capabilities which together are valued at $350 million, as well as $50
million in cash. We intend to integrate our interest in Hutchison Global
Crossing into our Asia Global Crossing joint venture.
. On December 15, 1999, we issued 2,600,000 shares of 7% cumulative
convertible preferred stock at a liquidation preference of $250.00 for
net proceeds of $630 million. Each share of preferred stock is
convertible into 4.6948 shares of Global Crossing group stock based on a
conversion price of $53.25. Dividends on the preferred stock are
cumulative from the date of issue and will be payable on February 1, May
1, August 1 and November 1 of each year, beginning on February 1, 2000,
at the annual rate of 7%.
12
. On November 24, 1999, we completed our acquisition of Racal Telecom, a
group of wholly owned subsidiaries of Racal Electronics plc, for
approximately $1.6 billion in cash. Racal Telecom owns one of the most
extensive fiber telecommunications networks in the United Kingdom,
consisting of approximately 4,650 route miles of fiber and reaching more
than 2,000 cities and towns.
. On November 12, 1999, Global Crossing Holdings Ltd., our wholly-owned
subsidiary, issued two series of senior unsecured notes. The 9 1/8%
senior notes are due November 15, 2006 with a face value of $900 million
and the 9 1/2% senior notes are due November 15, 2009 with a face value
of $1,100 million. The New Senior Notes are guaranteed by Global Crossing
Ltd. Interest will be paid on the notes on May 15 and November 15 of each
year, beginning on May 15, 2000.
. On November 5, 1999, we issued 10,000,000 shares of 6 3/8% cumulative
convertible preferred stock at a liquidation preference of $100.00 for
net proceeds of approximately $969 million. Each share of preferred stock
is convertible into 2.2222 shares of Global Crossing group stock, based
on a conversion price of $45.00. Dividends on the preferred stock are
cumulative from the date of issue and will be payable on February 1, May
1, August 1 and November 1 of each year, beginning on February 1, 2000,
at the annual rate of 6 3/8%.
. On September 28, 1999, we completed the acquisition of Frontier
Corporation in a merger transaction valued at over $10 billion, with
Frontier shareholders receiving 2.05 shares of Global Crossing common
stock for each share of Frontier common stock held. Frontier is one of
the largest long distance telecommunications companies in the United
States and one of the leading providers of facilities-based integrated
communications and Internet services.
. On July 2, 1999, we completed our acquisition of the Global Marine
Systems division of Cable & Wireless Plc for approximately $908 million
in cash and assumed liabilities. Global Marine Systems owns the largest
fleet of cable laying and maintenance vessels in the world and currently
services more than a third of the world's undersea cable miles.
. On May 16, 1999, we entered into a definitive agreement to merge with U S
WEST, Inc. On July 18, 1999, we and U S WEST agreed to terminate our
merger agreement, and U S WEST agreed to merge with Qwest Communications
International Inc. As a result, U S WEST paid us a termination fee of
$140 million in cash and returned 2,231,076 shares of Global Crossing
common stock purchased in a related tender offer, and Qwest committed to
purchase capacity on the Global Crossing network at established market
unit prices for delivery over the next four years and committed to make
purchase price payments to us for this capacity of $140 million over the
next two years. During the year ended December 31, 1999, we recognized
$210 million, net of merger related expenses, of other income in
connection with the termination of the U S WEST merger agreement.
. The "Termination of advisory services agreement" item in the Statements
of Operations Data includes a charge for the termination of the advisory
services agreement as of June 30, 1998. We acquired the rights from those
entitled to fees payable under the advisory services agreement in
consideration from the issuance of common stock having an aggregate value
of $135 million and the cancellation of approximately $3 million owed to
us under a related advance agreement. As a result of this transaction, we
recorded a non-recurring charge in the approximate amount of $138 million
during the year ended December 31, 1998. In addition, we recognized as an
expense approximately $2 million of advisory fees incurred prior to
termination of the contract.
. We granted warrants to Pacific Capital Group, Inc., a shareholder, and
some of our affiliates for the Pacific Crossing, Mid-Atlantic Crossing
and Pan American Crossing systems and related rights. The $275 million
value of the common stock was originally allocated to "Construction in
progress" in the amount of $112 million and as "Investment in and
advances to/from affiliates" in the amount of $163 million. See the
"property and equipment" item in the Balance Sheet Data. The "Investment
in and advance to/from affiliates" item in the balance sheet data
includes $163 million as of December 31, 1999 and 1998, respectively,
representing the value of the warrants described in the bullet point
immediately above applicable to the Pacific Crossing system.
13
. Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization,
or EBITDA, is calculated as operating income (loss), plus goodwill
amortization, depreciation and amortization, non-cash cost of capacity
sold, stock related expenses, incremental cash deferred revenue and
amounts relating to the termination of the advisory services agreement.
This definition is consistent with financial covenants contained in our
major financial agreements. We present Adjusted EBITDA because it is a
financial indicator used by investors and analysts to analyze and compare
companies on the basis of operating performance and because we believe
that Adjusted EBITDA is an additional, meaningful measure of performance
and liquidity. This information should not be considered 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.
14
The selected consolidated financial data as of December 31, 1997, 1998 and
1999, for the period from March 19, 1997, the date of our inception, to
December 31, 1997, and for the years ended December 31, 1998 and 1999,
respectively, are derived from our audited consolidated financial statements
and should be read in conjunction with our audited consolidated financial
statements and notes included elsewhere in this proxy statement.
Period from
March 19, 1997 Three Months Ended
(Date of Inception) to Year Ended Year Ended March 31,
December 31, December 31, December 31, ------------------------
1997 1998 1999 1999 2000
---------------------- ------------ ------------ ----------- -----------
(in thousands, except share and per share information)
(Unaudited)
Statement of Operations
Data:
Revenue................. $ -- $ 419,866 $ 1,664,824 $ 176,319 $ 1,119,516
----------- ----------- ----------- ----------- -----------
Expenses:
Cost of sales........... -- 178,492 850,483 69,387 579,907
Operations,
administration and
maintenance............ -- 18,140 134,266 12,026 144,578
Sales and marketing..... 1,366 31,748 152,115 10,437 104,318
Network development..... 78 14,204 33,304 7,376 19,209
General and
administrative......... 1,618 56,797 250,202 35,815 166,751
Depreciation and
amortization........... 39 541 124,294 211 140,943
Goodwill and intangibles
amortization........... -- -- 127,621 -- 131,634
Termination of advisory
services agreement..... -- 139,669 -- -- --
----------- ----------- ----------- ----------- -----------
3,101 439,591 1,672,285 135,252 1,287,340
----------- ----------- ----------- ----------- -----------
Operating (loss)
income................. (3,101) (19,725) (7,461) 41,067 (167,824)
Equity in income (loss)
of affiliates.......... -- (2,508) 15,708 (2,736) (5,140)
Minority interest....... -- -- (1,338) -- (15,731)
Other income (expense):
Interest income........ 2,941 29,986 67,407 14,392 22,798
Interest expense....... -- (42,880) (139,077) (23,779) (85,676)
Other expense, net..... -- -- 180,765 -- (5,628)
Provision for income
taxes.................. -- (33,067) (126,539) (16,142) (5,000)
----------- ----------- ----------- ----------- -----------
(Loss) income before
extraordinary item and
cumulative effect of
change in accounting
principle............. (160) (68,194) (10,535) 12,802 (262,201)
Extraordinary loss on
retirement of debt..... -- (19,709) (45,681) -- --
----------- ----------- ----------- ----------- -----------
(Loss) income before
cumulative effect of
change in accounting
principle.............. (160) (87,903) (56,216) 12,802 (262,201)
Cumulative effect of
change in accounting
principle, net of
income tax benefit of
$1,400................. -- -- (14,710) (14,710) --
----------- ----------- ----------- ----------- -----------
Net loss................ (160) (87,903) (70,926) (1,908) (262,201)
Preferred stock
dividends.............. (12,690) (12,681) (66,642) (13,044) (45,258)
Repurchase of preferred
stock.................. -- (34,140) -- -- --
----------- ----------- ----------- ----------- -----------
Net loss applicable to
common shareholders.... $ (12,850) $ (134,724) $ (137,568) $ (14,952) $ (307,459)
=========== =========== =========== =========== ===========
Net Loss per Common
Share:
Loss applicable to
common shareholders
before extraordinary
item and cumulative
effect of change in
accounting principle
Basic and diluted...... $ (0.04) $ (0.32) $ (0.15) $ (0.00) $ (0.39)
=========== =========== =========== =========== ===========
Extraordinary item
Basic and diluted...... $ -- $ (0.06) $ (0.09) $ -- $ --
=========== =========== =========== =========== ===========
Cumulative effect of
change in accounting
principle
Basic and diluted...... $ -- $ -- $ (0.03) $ (0.04) $ --
=========== =========== =========== =========== ===========
Net loss applicable to
common shareholders
Basic and diluted...... $ (0.04) $ (0.38) $ (0.27) $ (0.04) $ (0.39)
=========== =========== =========== =========== ===========
Shares used in computing
basic and diluted loss
per share.............. 325,773,934 358,735,340 502,400,851 410,797,073 778,780,323
=========== =========== =========== =========== ===========
Operating Data:
Cash from operating
activities............. $ 5,121 $ 208,727 $ 506,084 $ (19,441) $ 240,158
Cash from investing
activities............. (428,743) (430,697) (4,009,977) (158,008) (1,030,576)
Cash from financing
activities............. 425,075 1,027,110 4,330,799 (64,796) 407,872
Adjusted EBITDA......... $ 2,263 $ 364,948 $ 708,181 $ 128,208 $ 388,591
15
December 31,
--------------------------------- March 31,
1997 1998 1999 2000
-------- ---------- ----------- -----------
(in thousands) (Unaudited)
Balance Sheet Data:
Current assets including cash and cash equivalents
and restricted cash and cash equivalents............ $ 27,744 $ 976,615 $ 2,946,533 $ 2,615,603
Long term restricted cash and cash equivalents....... -- 367,600 138,118 69,545
Long term accounts receivable........................ -- 43,315 52,052 42,419
Capacity available for sale.......................... -- 574,849 -- --
Property and equipment, net.......................... 518,519 433,707 6,026,053 7,985,651
Other assets......................................... 25,934 65,757 661,442 735,746
Investments in and advances to/from affiliates, net.. -- 177,334 323,960 604,291
Goodwill and intangibles, net........................ -- -- 9,557,422 9,436,715
-------- ---------- ----------- -----------
Total assets....................................... $572,197 $2,639,177 $19,705,580 $21,489,970
======== ========== =========== ===========
Current liabilities.................................. $ 90,817 $ 256,265 $ 1,852,593 $ 2,233,153
Long term debt....................................... 312,325 1,066,093 5,018,544 6,031,662
Deferred revenue..................................... -- 25,325 383,287 489,331
Deferred credits and other........................... 3,009 34,174 796,606 819,485
-------- ---------- ----------- -----------
Total liabilities.................................... 406,151 1,381,857 8,051,030 9,573,631
Minority interest.................................... -- -- 351,338 478,030
Mandatorily redeemable and cumulative convertible
preferred stock..................................... 91,925 483,000 2,084,697 2,485,267
Shareholders' equity:
Common stock....................................... 3,258 4,328 7,992 8,030
Treasury stock..................................... -- (209,415) (209,415) (209,415)
Other shareholders' equity......................... 71,023 1,067,470 9,578,927 9,575,617
Accumulated deficit................................ (160) (88,063) (158,989) (421,190)
-------- ---------- ----------- -----------
Total shareholders' equity........................... 74,121 774,320 9,218,515 8,953,042
-------- ---------- ----------- -----------
Total liabilities and shareholders' equity........... $572,197 $2,639,177 $19,705,580 $21,489,970
======== ========== =========== ===========
16
SELECTED HISTORICAL COMBINED FINANCIAL DATA
OF THE GLOBALCENTER GROUP
The table below provides selected historical combined financial data of the
GlobalCenter group, an integrated business of Global Crossing Ltd. We prepared
this information using the historical combined financial data from the
GlobalCenter group's combined financial statements at and for the three-month
periods ended March 31, 1999 and 2000, the three-month period ended December
31, 1999, the nine-month period ended September 30, 1999, and each of the years
in the two-year period ending December 31, 1998 included elsewhere in this
proxy statement. The statement of operations data for the year ended December
31, 1997 and balance sheet data as of December 31, 1997 are derived from the
audited combined financial statements included elsewhere in this proxy
statement. We derived the combined statement of operations and the assets and
liabilities data below for the three-month period ended December 31, 1999, the
nine month period ended September 30, 1999 and the year ended December 31, 1998
from combined financial statements audited by Arthur Andersen LLP, independent
public accountants. The financial data as of March 31, 2000 and for the three
months ended March 31, 1999 and 2000 are derived from the GlobalCenter group's
unaudited combined financial statements. The GlobalCenter group has made
adjustments, consisting of normal recurring adjustments necessary to present
its financial position as of March 31, 2000 and the results of operations for
the three months ended March 31, 1999 and 2000, which in the opinion of the
GlobalCenter group's management are necessary for a fair presentation. Results
of operations for the three months ended March 31, 1999 and 2000 are not
necessarily indicative of the results that may be expected for the full year or
for any future period.
GlobalCenter Inc. was acquired by Frontier Corporation in February 1998 in a
pooling-of-interests transaction. On September 28, 1999, we acquired Frontier
Corporation in a merger transaction. A subsidiary of Frontier Corporation was
the owner of substantially all of the assets of the GlobalCenter group. For
financial reporting purposes, our merger with Frontier Corporation was deemed
to have occurred on September 30, 1999. In connection with the merger, the
assets and liabilities of the GlobalCenter group were adjusted to their
respective fair values under the purchase method of accounting. We have
included the assets and liabilities of the GlobalCenter group and the related
consolidated results of operations for periods prior to October 1, 1999 under
the heading "Old GlobalCenter," and for periods subsequent to September 30,
1999 under the heading "New GlobalCenter." The fair value adjustments to the
GlobalCenter group's assets and liabilities from the merger, including goodwill
and other intangibles and the associated amortization, are shown in the New
GlobalCenter Statement of Operations Data and Balance Sheet and Other Data.
The presentation in the "Pro Forma GlobalCenter Group" column provides
prospective purchasers of GlobalCenter group stock with a basis for comparing
the year ended December 31, 1999 to the year ended December 31, 1998, in the
table we have also combined the operating results of the Old GlobalCenter for
the nine months ended September 30, 1999 with the operating results of New
GlobalCenter for the three months ended December 31, 1999. This combination
includes adjustments for depreciation of property and equipment and pro forma
amortization of goodwill and intangibles for the nine months ended September
30, 1999 resulting from our merger with Frontier Corporation. Depreciation,
amortization and certain other line items included in the operating results,
and property, equipment and goodwill balances included in the balance sheet of
the GlobalCenter group are not directly comparable between periods because the
three-month New GlobalCenter period ended December 31, 1999 includes the
effects of purchase accounting adjustments related to our merger with Frontier
Corporation, while prior periods do not. For this and other reasons, the
selected combined historical financial data provided below should be read in
conjunction with the Combined Financial Statements of the GlobalCenter Group
and related notes and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the GlobalCenter Group," each of which
appears elsewhere in this proxy statement.
17
Pro Forma
New GlobalCenter Old New
Old GlobalCenter GlobalCenter Group GlobalCenter GlobalCenter
-------------------------------- ------------ ------------ ------------ ------------
Unaudited
Year Ended Nine Months Three Months Unaudited Three Months Ended
December 31, Ended Ended Year Ended March 31,
----------------- September 30, December 31, December 31, -------------------------
1997 1998 1999 1999 1999 1999 2000
------- -------- ------------- ------------ ------------ ------------ ------------
(in thousands)
Statement of Operations
Data:
Revenues:
Service revenues...... $ 6,511 $ 19,600 $ 29,951 $ 17,753 $ 47,704 $ 6,451 $ 24,562
Equipment revenues.... 1,228 3,640 17,228 5,971 23,199 4,496 13,747
------- -------- -------- -------- --------- ------- --------
Total revenues...... 7,739 23,240 47,179 23,724 70,903 10,947 38,309
Costs and expenses:
Cost of service
revenues............. 5,257 14,804 36,451 17,328 53,779 9,363 21,442
Cost of equipment
revenues............. 995 3,208 15,573 5,365 20,938 4,057 13,089
Sales and marketing... 1,966 8,948 9,531 6,088 15,619 2,110 6,455
General and
administrative....... 2,044 4,694 6,897 3,067 9,964 1,216 5,835
Depreciation and
amortization......... 912 4,023 4,242 1,913 6,428 1,103 3,155
Goodwill and
intangibles
amortization......... 325 1,294 974 37,135 148,540 324 37,135
Merger costs.......... -- 2,060 -- -- -- -- --
------- -------- -------- -------- --------- ------- --------
Total costs and
expenses........... 11,499 39,031 73,668 70,896 255,268 18,173 87,111
------- -------- -------- -------- --------- ------- --------
Loss from operations.... (3,760) (15,791) (26,489) (47,172) (184,365) (7,226) (48,802)
Other income (expense),
net.................... 45 55 (44) 114 70 (18) (211)
------- -------- -------- -------- --------- ------- --------
Loss before income
taxes.................. (3,715) (15,736) (26,533) (47,058) (184,295) (7,244) (49,013)
Income tax benefit...... 941 4,911 9,742 4,333 14,075 2,660 7,933
------- -------- -------- -------- --------- ------- --------
Net loss................ $(2,774) $(10,825) $(16,791) $(42,725) $(170,220) $(4,584) (41,080)
======= ======== ======== ======== ========= ======= ========
Operating Data:
Cash (used in) provided
by operating
activities............. $(3,147) $ (5,752) $(10,057) $ (1,543) $ (11,600) $(4,020) $ 6,517
Cash used in investing
activities............. 1,285 28,978 20,871 69,399 90,270 4,891 59,084
Cash from financing
activities............. $ 1,847 $ 34,238 $ 30,928 $ 70,942 $ 101,870 $ 8,911 $ 52,490
Old GlobalCenter New GlobalCenter
----------------- ---------------------
As of December 31, Unaudited
---------------------------- March 31,
1997 1998 1999 2000
-------- -------- ---------- ----------
(dollars in thousands)
Balance Sheet and Other Data:
Goodwill and intangibles, net.......... $ 8,764 $ 7,470 $1,488,265 $1,411,130
Total assets........................... 18,172 48,021 1,596,083 1,628,628
Total liabilities...................... 8,221 12,084 65,938 87,070
Group equity........................... 9,951 35,937 1,530,145 1,541,558
Total liabilities and group equity..... $ 18,172 $ 48,021 $1,596,083 $1,628,628
Number of data centers................. 2 6 8 10
Data center gross square footage....... 23,000 72,000 238,000 314,000
18
Selected Pro Forma Financial and Operating Data of the Global Crossing Group
The following unaudited pro forma condensed combined financial information of
the Global Crossing group has been prepared to demonstrate how this group might
have looked if (1) the Global Marine Systems acquisition and related financing,
(2) the Frontier acquisition, (3) the Racal Telecom acquisition and related
financing, (4) the Hutchison Global Crossing joint venture, including the
related issuance of the 6 3/8% cumulative convertible preferred stock, series
B, of Global Crossing, (5) the IPC and IXnet acquisitions, (6) the offering of
our 6 3/8% cumulative convertible preferred stock completed on November 5,
1999, (7) the offering of the 9 1/8% senior notes due 2006 and 9 1/2% senior
notes due 2009 of Global Crossing Holdings completed on November 19, 1999, (8)
the offering of our 7% cumulative convertible preferred stock completed on
December 15, 1999, (9) the offering of our 6 3/4% cumulative convertible
preferred stock and 21,673,706 shares of our common stock completed on April
14, 2000 and (10) the tracking stock proposals had been completed as of the
date or at the beginning of the period presented. This pro forma information
does not give effect to the $350 million cash received in connection with the
formation of the Asia Global Crossing joint venture.
The pro forma information illustrates the allocation of assets, liabilities
and operations between the Global Crossing group and GlobalCenter group
following the approval and implementation of the tracking stock proposals.
Holders of GlobalCenter group stock and Global Crossing group stock will not
have an exclusive claim on the assets of the GlobalCenter group and the Global
Crossing group, respectively. Instead, holders of both classes of common stock
remain stockholders of Global Crossing and will have a claim on the assets of
Global Crossing as a whole. Legal ownership of the assets comprising the Global
Crossing group and GlobalCenter group will remain held by Global Crossing Ltd.
The pro forma information, while helpful in illustrating the financial
characteristics of the Global Crossing group, does not attempt to predict or
suggest future results. You should not rely on pro forma financial information
as an indication of the future results that the Global Crossing group will
experience after approval and implementation of the tracking stock proposals.
You should read these unaudited pro forma condensed combined financial
statements in conjunction with the historical financial statements of Global
Crossing Ltd., Global Marine Systems, Frontier Corporation, Racal Telecom, HCL
Holdings IPC and IXnet, and related Global Crossing pro forma information, each
of which is incorporated by reference in this proxy statement.
19
Pro Forma Global Crossing Group
Unaudited Pro Forma Condensed Combined Balance Sheet
as of March 31, 2000
(in thousands)
Global
Crossing
Group
Pro Forma
-----------
ASSETS
Current Assets:
Cash, restricted cash and investments........................... $ 3,220,590
Accounts receivable, net........................................ 965,362
Other assets and prepaid costs.................................. 368,815
-----------
Total Current Assets.......................................... 4,554,767
Restricted cash and cash equivalents............................. 69,545
Accounts receivable.............................................. 42,419
Property and equipment, net...................................... 7,940,792
Goodwill and other intangibles, net.............................. 11,238,142
Investment in and advances to/from affiliates, net............... 604,291
Other assets, net................................................ 885,635
-----------
Total Assets.................................................. $25,335,591
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accrued construction costs...................................... $ 570,461
Accounts payable and accrued liabilities........................ 997,198
Accrued interest and preferred dividends........................ 162,260
Deferred revenue................................................ 257,602
Income taxes payable............................................ 88,325
Current portion of long term debt............................... 61,965
Other current liabilities....................................... 258,337
-----------
Total Current Liabilities..................................... 2,396,148
Long term debt.................................................. 6,257,812
Deferred revenue................................................ 489,331
Deferred credits and other...................................... 812,460
-----------
Total Liabilities............................................. 9,955,751
-----------
MINORITY INTEREST................................................ 478,030
-----------
MANDATORILY REDEEMABLE AND CUMULATIVE CONVERTIBLE PREFERRED
STOCK........................................................... 3,598,267
-----------
SHAREHOLDERS' EQUITY:
Common stock.................................................... 8,821
Treasury stock.................................................. (209,415)
Other shareholders' equity...................................... 11,925,327
Accumulated deficit............................................. (421,190)
-----------
11,303,543
-----------
Total Liabilities and Shareholders' Equity.................... $25,335,591
===========
20
Pro Forma Global Crossing Group
Unaudited Pro Forma Condensed Combined Statements of Operations
For the Three Months Ended March 31, 2000
(in thousands, except share and per share amounts)
Global Crossing Group
Pro Forma
---------------------
Operating Revenues....................................... $ 1,168,947
-----------
Operating Expenses:
Operating, selling, general and administrative......... 1,061,459
Merger Expenses........................................ 23,288
Depreciation and amortization.......................... 146,414
Goodwill and intangibles amortization.................. 174,813
-----------
1,405,974
-----------
Operating loss........................................... (237,027)
Equity in loss of affiliates............................. (5,140)
Minority interest........................................ (15,731)
Other income (expense):
Interest expense....................................... (93,123)
Interest income........................................ 22,798
Other income (expense)................................. (6,185)
-----------
Loss before provision for income taxes, ................. (334,408)
(Provision) benefit for income taxes................... (14,152)
-----------
Net loss ................................................ (348,560)
Preferred stock dividends............................... (64,664)
-----------
Net loss applicable to common shareholders .............. $ (413,224)
===========
Loss per common share:
Loss applicable to common shareholders
Basic and diluted..................................... $ (0.48)
===========
Shares used in computing information applicable to
common shareholders
Basic and diluted..................................... 857,864,029
===========
21
Pro Forma Global Crossing Group
Unaudited Pro Forma Condensed Combined Statements of Operations
For the Year Ended December 31, 1999
(in thousands, except share and per share amounts)
Global Crossing Group
Pro Forma
---------------------
Operating Revenues....................................... $ 4,423,916
-----------
Operating Expenses:
Operating, selling, general and administrative......... 3,629,658
Merger Expenses........................................ 99,119
Depreciation and amortization.......................... 380,362
Goodwill and intangibles amortization.................. 681,777
-----------
4,790,946
-----------
Operating income (loss).................................. (367,030)
Equity in income (loss) of affiliates.................... (143)
Minority interest........................................ (1,338)
Other income (expense):
Interest expense....................................... (523,558)
Interest income........................................ 76,528
Other income (expenses)................................ 179,430
-----------
Income (loss) before provision for income taxes,
extraordinary item and cumulative effect of change in
accounting principle.................................... (636,111)
(Provision) benefit for income taxes................... (184,728)
-----------
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle................ (820,839)
Preferred stock dividends............................... (278,732)
-----------
Income (loss) applicable to common shareholders before
extraordinary item and cumulative effect of change in
accounting principle.................................... (820,839)
Diluted earnings adjustment............................. --
-----------
Income (loss) applicable to common shareholders before
extraordinary item and cumulative effect of change in
accounting principle ................................... $ (820,839)
===========
Income (loss) per common share:
Income (loss) applicable to common shareholders before
extraordinary item and cumulative effect of change in
accounting principle
Basic and diluted..................................... $ (1.29)
===========
Shares used in computing information applicable to
common shareholders
Basic and diluted..................................... 849,438,857
===========
22
RISK FACTORS
You should carefully consider the following risks and other information
contained in this proxy statement before deciding to vote in favor of the
proposals.
You currently own shares of Global Crossing common stock and, as a
shareholder of Global Crossing, are subject to risks arising from all of our
operations. Upon completion of the public offering of GlobalCenter group stock
or issuance of GlobalCenter group stock in another manner, each share of Global
Crossing common stock you currently own will be redesignated as one share of
Global Crossing group stock. Upon the intended disposition to holders of Global
Crossing group stock of shares of GlobalCenter group stock, holders of Global
Crossing group stock will also own GlobalCenter group stock, and will have the
opportunity to decide whether to retain or sell either or both classes of
common stock, depending on their investment objectives. For these reasons, the
risk factors below emphasize:
. risks relating to our new and more complex capital structure, which are
the key risks of the tracking stock proposals that are applicable to you
as a holder of Global Crossing group stock and, after the intended
disposition of GlobalCenter group stock, will also be applicable to you
as a holder of that stock, and
. risks related to the business of the GlobalCenter group, to which you
are currently subject as a holder of Global Crossing common stock, but
which are more material to you as a holder of GlobalCenter group stock
if the disposition is implemented as intended.
Risks Relating to a Capital Structure with Two or More Separate Classes of
Common Stock
You will remain shareholders of one company and, therefore, financial effects
from one group could adversely affect the other.
The holders of Global Crossing group stock and the holders of GlobalCenter
group stock will be shareholders of a single company, Global Crossing. The
Global Crossing group and the GlobalCenter group will not be separate legal
entities. As a result, shareholders will be subject to all of the risks of an
investment in Global Crossing and all of our businesses, assets and
liabilities. The issuance of Global Crossing group stock and GlobalCenter group
stock and the allocation of assets and liabilities and shareholders' equity
between the Global Crossing group and the GlobalCenter group will not result in
a distribution or spin-off to shareholders of any of our assets or liabilities
and will not affect ownership of our assets or responsibility for our
liabilities or those of our subsidiaries. The assets we attribute to one group
could be subject to the liabilities of the other group, even if those
liabilities arise from lawsuits, contracts or indebtedness that we attribute to
the other group. If we are unable to satisfy one group's liabilities out of the
assets we attribute to it, we may be required to satisfy those liabilities with
assets we have attributed to the other group. For example, pursuant to a tax
sharing agreement, subsidiaries that are part of the GlobalCenter group could
be liable for United States federal income tax liability incurred by
subsidiaries that are part of the Global Crossing group, and vice versa.
Financial effects arising from one group that affect our consolidated results
of operations or financial condition could, if significant, affect the results
of operations or financial condition of the other group or the market price of
the stock relating to the other group. In addition, if we or any of our
subsidiaries were to incur significant indebtedness on behalf of one group,
including indebtedness incurred or assumed in connection with an acquisition or
investment, it could affect our ability to incur debt on behalf of the other
group or increase our costs of borrowing. Net losses of either the Global
Crossing group or the GlobalCenter group and dividends and distributions on
shares of Global Crossing group stock or GlobalCenter group stock will reduce
the funds available to pay dividends or other distributions on each class of
stock under Bermuda law. For these reasons, you should read our consolidated
financial information included in this proxy statement with the combined
financial information we provide for each group included in this proxy
statement.
23
We cannot assure you that the market prices of Global Crossing group stock and
GlobalCenter group stock will reflect the separate performance of the Global
Crossing group and the GlobalCenter group, as we intend.
Tracking stocks, like Global Crossing group stock and GlobalCenter group
stock, are more complex than traditional common stocks and are not directly
comparable to common stock of companies that have been spun off by their parent
companies. For the following reasons and the other risks and uncertainties
relating to this capital structure, we cannot assure you that the market prices
of Global Crossing group stock and GlobalCenter group stock will reflect the
separate performance of the Global Crossing group and the GlobalCenter group,
as we intend.
Our board of directors may change or make exceptions to our policy statement
without shareholder approval to the detriment of one group.
Our board of directors intends to adopt the policy statement that we describe
in this proxy statement under "Relationship Between the Global Crossing Group
and the GlobalCenter Group" to govern the relationship between the Global
Crossing group and the GlobalCenter group. Our board of directors may, at any
time and without shareholder approval, amend, modify or rescind the policies
set forth in the policy statement with respect to the allocation of corporate
opportunities, financing arrangements, corporate overhead, taxes, debt,
interest and other matters, or may adopt additional policies. It could also
make exceptions with respect to their application depending on particular facts
and circumstances. It is likely that our board of directors would amend these
policies or adopt new policies if it decides to issue additional classes of
common stock. A decision to amend, modify or rescind these policies, or adopt
additional policies, could have different effects on the holders of Global
Crossing group stock and the holders of GlobalCenter group stock or could
adversely affect the holders of one class of stock relative to the holders of
the other classes of stock.
The complex nature of the terms of the two classes of stock may adversely
affect the market prices of the two classes of stock.
The complex nature of the terms of the Global Crossing group stock and the
GlobalCenter group stock and the potential difficulties investors may have in
understanding these terms may adversely affect the market prices of the two
classes of stock. Examples include:
. the rights of our board of directors to convert GlobalCenter group stock
into Global Crossing group stock or vice versa; and
. the discretion of our board of directors to make determinations relating
to a variety of matters affecting the rights of the holders of Global
Crossing group stock and GlobalCenter group stock, such as dividends and
cash management and allocation matters.
In addition, investors may discount the value of Global Crossing group stock
and GlobalCenter group stock because they are part of a common enterprise
rather than stand-alone entities.
The terms of the Global Crossing group stock and the GlobalCenter group stock
as a whole may not effectively link the market values of Global Crossing group
stock and GlobalCenter group stock with the separate performance of the groups.
Some of the terms of the Global Crossing group stock and the GlobalCenter
group stock are not intended to link the market values of the Global Crossing
group stock and the GlobalCenter group stock with the separate performance of
the groups. For example, the liquidation rights of the Global Crossing group
stock and the GlobalCenter group stock are fixed soon after the time of
issuance of GlobalCenter group stock and may not bear any relationship to the
respective market values of the Global Crossing group and the GlobalCenter
group at the time of any liquidation of Global Crossing. The absence of other
terms, such as the lack of a formula requiring the payment of dividends based
on performance, could make it less likely that Global
24
Crossing group stock and GlobalCenter group stock will have market value
effectively linked to the separate performance of the Global Crossing group and
the GlobalCenter group.
The market price of Global Crossing group stock may not reflect the value of
the Global Crossing group's inter-group interest in the GlobalCenter group
prior to the intended disposition.
The market price of Global Crossing group stock should reflect the value of
the Global Crossing group's inter-group interest in the GlobalCenter group. If
the market price of GlobalCenter group stock increases, the value of the Global
Crossing group's inter-group interest in the GlobalCenter group should
increase. However, investors may not fully value the Global Crossing group's
inter-group interest in the GlobalCenter group. As a result, we cannot assure
you that the market price of Global Crossing group stock will increase if the
market price of GlobalCenter group stock increases prior to the intended
disposition of the Global Crossing group's inter-group interest in the
GlobalCenter group.
Holders of Global Crossing group stock and GlobalCenter group stock will have
shareholder rights specific to their group only in limited circumstances.
The holders of Global Crossing group stock and the holders of GlobalCenter
group stock generally will not have shareholder rights specific to their
corresponding groups. Instead, holders will have customary shareholder rights
relating to Global Crossing as a whole. For example, the holders of Global
Crossing group stock and the holders GlobalCenter group stock will vote
together as a single class to elect the board of directors of Global Crossing
and to approve a sale of all or substantially all of the assets of Global
Crossing. The holders of Global Crossing group stock and the holders of
GlobalCenter group stock will only have the following rights with respect to
their particular group:
. a right to a dividend, repurchase or conversion if the sale of all or
substantially all of the assets of their group occurs; and
. a right to vote on matters as a separate class in the circumstances
described under "The Tracking Stock Proposals--Description of Global
Crossing group stock and GlobalCenter group stock--Voting rights."
Our board of directors owes a fiduciary duty to Global Crossing as a whole
and its shareholders and will not have not owe separate fiduciary duties to the
holders of Global Crossing group stock and the holders of GlobalCenter group
stock. In addition, holders of GlobalCenter group stock will not have any
voting rights with respect to the election of the board of directors of
GlobalCenter Inc.
Limits exist on the voting power of Global Crossing group stock and
GlobalCenter group stock.
. In circumstances where the two classes of stock vote together as a
single voting group, holders of GlobalCenter group stock will not be
able to control the outcome of shareholder voting.
The holders of Global Crossing group stock, to the extent they vote in a
similar manner, could control the outcome of a vote--even if the matter
involves a divergence or conflict of the interests of the holders of Global
Crossing group stock and the holders of GlobalCenter group stock. These matters
may include mergers and other extraordinary transactions. This control results
because the multiple classes of stock will generally vote together as a single
class, except in limited circumstances where a separate class vote is required
to (1) to increase or decrease the authorized shares of that class of stock,
other than to effectuate a permitted conversion or distribution, (2) to amend
the terms of that class of stock and (3) as otherwise required under Bermuda
law, Nasdaq listing rules or stock exchange rules.
25
We expect that Global Crossing group stock will have a substantial majority
of the combined voting power of Global Crossing group stock and GlobalCenter
group stock because:
--the relative voting power per share of Global Crossing group stock and
GlobalCenter group stock is based on the relative market values per share
of the two classes of stock and we expect that initially Global Crossing
group stock will have a substantially larger market value than
GlobalCenter group stock, in part because of its continuing inter-group
interest in the GlobalCenter group; and
--the aggregate voting power of all outstanding shares of GlobalCenter
group stock is limited to 25% of the total voting power of all
outstanding shares of Global Crossing common stock, regardless of the
market value of GlobalCenter group stock.
As a result, the shareholders that own only GlobalCenter group stock cannot
ensure that their voting power will be sufficient to protect their interests.
. In circumstances where holders of GlobalCenter group stock would hold
more than 25% of the total voting power of all outstanding shares of
common stock of Global Crossing, the voting power of each share of
GlobalCenter group stock will be reduced.
The total voting power of the holders of GlobalCenter group stock could
increase as a result of:
--the issuance of shares of GlobalCenter group stock;
--an increase in average market value of outstanding GlobalCenter group
stock relative to Global Crossing group stock;
--the repurchase of shares of Global Crossing group stock; or
--a decrease in the average market value of outstanding Global Crossing
group stock relative to GlobalCenter group stock.
However, in circumstances where holders of GlobalCenter group stock would
otherwise hold more than 25% of the total voting power of all outstanding
shares of common stock of Global Crossing, the voting power of each share of
GlobalCenter group stock will be reduced so that all outstanding shares of
GlobalCenter group stock represent only 25% of the total voting power of all
outstanding shares of Global Crossing common stock.
Our intended disposition of the Global Crossing group's inter-group interest
in the GlobalCenter group and any issuance of additional shares of GlobalCenter
group stock for strategic investments, in acquisitions and other transactions
could cause reductions in the voting power of each share of GlobalCenter group
stock. As a result of any reduction, the holders of Global Crossing group stock
and the holders of GlobalCenter group stock would hold voting power in Global
Crossing that is not consistent with their relative economic interests in
Global Crossing.
. In circumstances where a separate class vote is required, the
GlobalCenter group stock can block action.
If Bermuda law, Nasdaq listing rules, stock exchange rules or our board of
directors requires a separate vote on a matter by the holders of GlobalCenter
group stock, or in the case of any proposal to increase or decrease the
authorized shares of GlobalCenter group stock or to amend the terms of that
class where a separate vote of holders of that class is required, those holders
could prevent approval of the matter--even if the holders of a majority of the
total number of votes cast or entitled to be cast, voting together as one
class, were to vote in favor of it.
. Holders of one group's stock will not be entitled to vote on a sale of
the assets attributed to that group, except in limited circumstances.
Assuming the assets attributed to either group represent less than
substantially all of the assets of Global Crossing as a whole, our board of
directors could, in its sole discretion and without shareholder approval,
approve sales and other dispositions of any amount, including all or
substantially all of the properties and assets
26
attributed to that group, because Bermuda law requires shareholder approval
only for a sale or other disposition of all or substantially all of the assets
of the entire company. In exercising its discretion, our board of directors is
not required to select the option that would result in the distribution with
the highest value to the holders of stock of the group whose assets are being
sold or with the smallest effect on the stock of the other group. Furthermore,
upon a sale or disposition of less than substantially all of the assets of the
Global Crossing group or the GlobalCenter group, our board of directors is
under no obligation to make any distribution to shareholders of the proceeds of
the sale or disposition.
In addition, under Bermuda law, our board of directors could decline to sell
the assets of a group, despite the request of a majority of the holders of the
stock of that group.
Sales or other issuances of GlobalCenter group stock will dilute your voting
power in Global Crossing.
The holders of Global Crossing group stock and the holders of GlobalCenter
group stock will generally vote together as a single group on those matters on
which they are entitled to vote. As a result, subject to the limitation on the
voting power of the holders of GlobalCenter group stock to 25% of the total
voting power of all Global Crossing shareholders, the issuance of GlobalCenter
group stock in the proposed public offering or otherwise, such as in
acquisitions, for strategic investments, for purchases of interests of minority
partners or for other transactions, will reduce your voting power in Global
Crossing.
Potential conflicts of interest exist between the holders of Global Crossing
group stock and the holders of GlobalCenter group stock that may be difficult
to resolve by our board of directors or that may be resolved adversely to one
of the groups.
The existence of separate classes of our common stock could give rise to
occasions when the interests of the holders of Global Crossing group stock and
the holders of GlobalCenter group stock diverge, conflict or appear to diverge
or conflict.
. Operational and financial decisions could favor one group over the
other, adversely affecting the market value of the other group.
Our board of directors could in its sole discretion and without shareholder
approval, from time to time, make operational and financial decisions or
implement policies that affect disproportionately the businesses of a
particular group. These decisions could include:
--allocation of financing opportunities in the public markets;
--allocation of business opportunities, resources and personnel, and
whether and to what extent the groups compete with each other; and
--transfers of funds or other assets between groups and other inter-group
transactions.
In each case, the opportunities or resources allocated, or services, funds or
assets transferred, to one group may be equally suitable for the other group.
Furthermore, any such decision may benefit one group more than the other. For
example, the decision to obtain funds for one group may adversely affect the
ability of the other group to obtain funds sufficient to implement its growth
strategy or may increase the cost of those funds.
The policy statement to be adopted by our board of directors to govern the
relationship between the Global Crossing group and the GlobalCenter group is
intended to address many of the operational and financial conflicts that may
arise between the groups. Our board of directors may amend, modify or rescind
the policies set forth in the policy statement, however, in its sole discretion
and without shareholder approval, consistent with its fiduciary duties to
Global Crossing and all of its shareholders.
27
. Proceeds of the issuance of GlobalCenter group stock could be allocated
to either the Global Crossing group or the GlobalCenter group, which
could favor one group over the other.
Our board of directors could choose to sell shares of GlobalCenter group
stock issuable with respect to the Global Crossing group's inter-group interest
in the GlobalCenter group. In that event, our board of directors would allocate
the proceeds of the offering of those shares of GlobalCenter group stock to the
Global Crossing group. Any such decision to sell shares issuable with respect
to the Global Crossing group's inter-group interest could disadvantage the
GlobalCenter group because it could adversely affect its ability to obtain
funds to finance its growth strategies. Conversely, our board of directors
could choose to sell shares of GlobalCenter group stock not issuable with
respect to the Global Crossing group's inter-group interest in the GlobalCenter
group. In that event, our board of directors would allocate the proceeds of the
offering of those shares of GlobalCenter group stock to the GlobalCenter group.
Any such decision to sell shares not issuable with respect to the Global
Crossing group's inter-group interest could disadvantage the Global Crossing
group because it could adversely affect its ability to implement its key
business strategies.
. Consideration received in mergers or consolidations may be allocated in
a manner that favors one group over the other, adversely affecting the
market value of the other group.
Because our bye-laws do not specify how consideration to be received in a
merger or consolidation involving Global Crossing will be allocated between the
holders of Global Crossing group stock and the holders of GlobalCenter group
stock, our board of directors will make that determination. That determination
could favor the holders of one group's stock at the expense of the holders of
other group's stock.
. Our board of directors may pay more or less dividends on one group's
stock than if that group were a separate company.
Subject to the limitations referred to below, our board of directors has the
authority to declare and pay dividends on Global Crossing group stock and
GlobalCenter group stock in any legal amount. Our board of directors could, in
its sole discretion and without shareholder approval, declare and pay dividends
on Global Crossing group stock, on GlobalCenter group stock, or on both, in
equal or unequal amounts. While we historically have not paid dividends on our
common stock, our board of directors could pay more dividends on one group's
stock than would be financially prudent if that group were a stand-alone
entity. Our board of directors is not required to consider the relative
available distribution amount for each class, the amount of dividends
previously declared on each class or the respective voting or liquidation
rights of each class. In addition, Bermuda law and our bye-laws impose
limitations on the amount of dividends which may be paid on each class of
stock. For additional information on these limitations, see "The Tracking Stock
Proposals--Description of Global Crossing group stock and GlobalCenter group
stock--Dividends."
. Holders of one class of stock may be adversely affected by an optional
conversion into the other group's stock.
Our board of directors could, in its sole discretion and without shareholder
approval, determine to convert shares of Global Crossing group stock into
shares of GlobalCenter group stock, or vice versa, so long as the market
capitalization of the class of common stock being issued in the conversion
exceeds the market capitalization of the class of common stock being converted.
Because a conversion would be at a premium, it may be disadvantageous to the
holders of the class of stock being issued in the conversion because it would
dilute the interests in Global Crossing of the holders of that class of stock.
In addition, any conversion at either group could occur a time when either or
both classes of stock may be considered to be undervalued. Any conversion would
also preclude the holders of the class of stock being converted from retaining
their investment in a security that is intended to reflect separately the
performance of the assets held by that group. It also might give the holders of
the class of stock being converted a lesser premium than any premium that might
be paid by a third-party buyer of all or substantially all of the assets of
that group.
28
Sales or other issuances of GlobalCenter group stock will reduce your
proportionate interest in the GlobalCenter group.
We intend that, prior to the intended disposition, the holders of Global
Crossing group stock will participate in the performance of our GlobalCenter
business through the Global Crossing group's inter-group interest in the
GlobalCenter group. The price at which GlobalCenter group stock will be sold to
the public in the proposed offering will be determined by negotiations with the
underwriters. Holders of Global Crossing group stock will suffer an immediate
loss in value if the offering price is below the inherent value of GlobalCenter
group stock.
In addition, the price at which any shares of GlobalCenter group stock may be
sold or issued in the future, such as in acquisitions, for strategic
investments, for purchases of interests of minority partners or for other
transactions, may not reflect accurately the value of GlobalCenter group stock.
If these sales or other issuances occur at a price that is below the inherent
value of GlobalCenter group stock:
. prior to the intended disposition, the holders of Global Crossing group
stock and the holders of GlobalCenter group stock will suffer an
immediate loss in value; and
. after the intended disposition, the holders of GlobalCenter group stock
will suffer an immediate loss in value.
Our board of directors will have the ability to control transfers of funds or
other assets between the Global Crossing group and the GlobalCenter group
without shareholder approval.
Our board of directors may at any time and without shareholder approval
decide to transfer cash or other assets between groups, which may result in:
. a corresponding change in the Global Crossing group's inter-group
interest in the GlobalCenter group; or
. a loan, or repayment of a loan, from one group to the other group,
subject to the terms of our policy statement.
Any increase in the inter-group interest resulting from an equity
contribution by the Global Crossing group to the GlobalCenter group, or any
decrease in the inter-group interest resulting from a transfer of funds from
the GlobalCenter group to the Global Crossing group, would be determined by
reference to the then-current market value of GlobalCenter group stock. Such an
increase or decrease, however, could occur at a time when such shares are
considered undervalued. After the Global Crossing group's inter-group interest
in the GlobalCenter group has been eliminated, the GlobalCenter group could
acquire an inter-group interest in the Global Crossing group. In that case,
similar considerations would apply to transfers made between the groups.
Under our policy statement, either the Global Crossing group or the
GlobalCenter group may make loans to the other group at the weighted average
interest rate of the consolidated indebtedness of Global Crossing and on such
other terms and conditions as our board of directors or capital stock committee
determines to be in the best interests of Global Crossing. Our policy statement
contemplates that loans from one group to the other group will be made on this
basis regardless of the interest rates, terms and conditions on which those
funds may have been acquired.
Holders of Global Crossing group stock and GlobalCenter group stock may not
have any remedies if any action by directors and officers has a disadvantageous
effect on the stock of their group.
Shareholders may not have any remedies if any action or decision of our
directors or officers has a disadvantageous effect on the holders of one class
of stock compared to the holders other class of stock. Although we are not
aware of any Bermuda court adjudicating such an action in the context of our
anticipated capital structure, recent cases in Delaware involving tracking
stocks have indicated that decisions by directors
29
or officers involving treatment of tracking stock shareholders should be judged
under the business judgment rule unless self-interest is shown. The business
judgment rule provides that a director or officer will be deemed to have
satisfied his or her fiduciary duties to Global Crossing if that person acts in
a manner he or she believes in good faith to be in the best interests of Global
Crossing. Nevertheless, a Bermuda court hearing a case involving such a
challenge may decide to apply principles of Bermuda law different from the
principles of Delaware law discussed above, or may develop new principles of
law, in order to decide such a case.
Greater stock ownership held in the form of either Global Crossing group stock
or GlobalCenter group stock could cause directors and officers to favor one
group over the other.
Because the actual value of the stock ownership of our directors and
officers' in the Global Crossing group and the GlobalCenter group is
anticipated to vary significantly, it is possible that they could favor one
group over the other due to their stock and other benefits. However, while our
directors and officers may be inclined to favor one group over another, they
have a fiduciary duty to all shareholders of Global Crossing.
Our Chairman and Chief Executive Officer, Leo J. Hindery Jr., is also Chief
Executive Officer of GlobalCenter Inc. Mr. Hindery may make operational
decisions that affect disproportionately the business of a group. Mr. Hindery
owns options to purchase 2,500,000 shares of Global Crossing group stock and
shares of GlobalCenter group stock.
Decisions by our directors and officers that affect the market values of Global
Crossing group stock and GlobalCenter group stock could adversely affect your
voting and conversion rights.
The number of shares of one class of stock issuable upon the conversion of
the other class of stock and the relative voting power per share of each class
of stock will vary depending upon the relative market values of Global Crossing
group stock and GlobalCenter group stock, subject to the 25% voting power limit
on GlobalCenter group stock. The market value of either or both classes of
stock could be adversely affected by market reaction to decisions by our board
of directors or our management that investors perceive to affect differently
one class of stock compared to the other class of stock. These decisions could
involve changes to our policy statement, transfers of assets between groups,
allocations of corporate opportunities between groups or changes in dividend
policies.
Our board of directors may cause a mandatory spin-off of one group.
Our board of directors may, without shareholder approval, declare that all
outstanding shares of either class of stock will be exchanged for shares of one
or more qualifying subsidiaries of Global Crossing. Such an exchange would
result in the qualifying subsidiary or subsidiaries becoming independent of
Global Crossing and the holders of the class of stock exchanged owning shares
directly in that subsidiary or those subsidiaries. If our board of directors
chooses to exchange one class of stock, the market value of the common stock
received in that exchange could be or become less than the market value of the
class of stock exchanged.
Holders of one class of stock may receive less consideration upon a sale of all
or substantially all of the assets attributed to their group than if their
group were a separate company.
The proposed Certificate of Designations provides that if we sell all or
substantially all of the assets of either group, we must, subject to certain
exceptions:
. distribute to the holders of that group's stock by special dividend or
repurchase an amount equal to the net proceeds of the sale; or
. convert the outstanding shares of that group's stock into shares of the
other group's stock based on the average market values of the two
classes of stock at a 20% premium for the first year following the
completion of the proposed offering of GlobalCenter group stock, at a
15% premium during the second year and at a 10% premium thereafter.
30
If the group whose assets are sold were a separate, independent company and
its shares were acquired by another person, certain costs of that sale,
including corporate level taxes, might not be payable in connection with that
acquisition. As a result, shareholders of the separate, independent company
might receive a greater amount than the net proceeds that would be received by
the holders of the group's stock. In addition, we cannot assure you that the
net proceeds per share of that group's stock will be equal to or more than the
market value per share of that class of stock prior to or after announcement of
a sale. For additional information on the terms and conditions of the mandatory
dividend, repurchase or conversion upon a sale of the assets of a group, see
"The Tracking Stock Proposals--Description of Global Crossing group stock and
GlobalCenter group stock--Conversion and repurchase--Mandatory dividend,
repurchase or conversion of stock if disposition of group assets occurs."
It will not be possible for a third party to acquire the GlobalCenter group
without Global Crossing's consent.
If the GlobalCenter group were a stand-alone entity, a potential acquiror
could seek control of the GlobalCenter group by means of a tender offer or
proxy contest. However, because the GlobalCenter group is part of Global
Crossing, a potential acquiror interested in acquiring only the GlobalCenter
group without negotiation with our management would be required to seek control
of Global Crossing, including the required voting power represented by the
outstanding shares of Global Crossing group stock. This may discourage
potential interested bidders from seeking to acquire either group, reducing the
potential for a takeover premium and adversely impacting the market value of
GlobalCenter group stock.
In the future, we may issue additional classes of common stock, without
shareholder approval, including by reallocating assets and liabilities from an
existing group to a new group.
In addition to Global Crossing group stock and GlobalCenter group stock, the
tracking stock proposals will allow our board of directors to authorize the
issuance of shares of one or more classes of common stock. If approved, our
board of directors will have the authority to do so in its sole discretion and
without further shareholder approval, except as may be provided by Bermuda law,
Nasdaq listing rules or the rules of any stock exchange on which any class of
outstanding common stock may then be listed or by the provisions of our bye-
laws as determined by our board of directors.
If we issue additional classes of common stock, we may establish a new group
to which that class of common stock relates by allocating to it newly acquired
assets or by reallocating to it the assets and liabilities from either or both
of the Global Crossing group and the GlobalCenter group. In the latter case,
the group or groups to which those assets and liabilities were previously
attributed would hold an inter-group interest in the new group.
The issuance of additional classes of common stock would make our capital
structure and decisions relating to inter-group transactions and related
matters more complicated. In addition, our board of directors would likely
amend our policy statement at that time to provide for the new group and
transactions between it and both the Global Crossing group and the GlobalCenter
group. The new class of stock would be convertible into either Global Crossing
group stock or GlobalCenter group stock, or vice versa, at premiums determined
by our board of directors.
The United States Internal Revenue Service could assert that the receipt of
tracking stock is taxable.
While we believe the redesignation of our outstanding common stock into
Global Crossing group stock will not be taxable to you, there are no court
decisions or other authorities bearing directly on the effect of the features
of Global Crossing group stock and GlobalCenter group stock. In addition, the
Internal Revenue Service has announced that it will not issue rulings on the
characterization of stock with characteristics similar to the Global Crossing
group stock and the GlobalCenter group stock. It is possible, therefore, that
the Internal Revenue Service could successfully assert that the redesignation
of our outstanding common stock into Global Crossing group stock as well as the
subsequent conversion of one class of stock into the other could be taxable to
you and to us.
31
A Clinton Administration proposal could have adverse tax consequences for us or
for holders of Global Crossing group stock or GlobalCenter group stock.
The Clinton Administration proposed legislation in February 2000 dealing with
tracking stock such as Global Crossing group stock and GlobalCenter group
stock. This proposal would, among other things, treat the receipt of stock
similar to Global Crossing group stock and GlobalCenter group stock for other
stock in the issuing corporation or in a distribution by the issuing
corporation as taxable to the shareholders. If this proposal is enacted, you
could be subject to tax on your receipt of Global Crossing group stock or, if
we make the proposed distribution, on your receipt of GlobalCenter group stock.
A similar proposal was made in 1999. Congress did not act on the 1999 proposal,
and we cannot predict whether Congress will act upon this proposal or any other
proposal relating to tracking stock.
We may convert shares of Global Crossing group stock or GlobalCenter group
stock into shares of the other class without any premium if there is more than
an insubstantial risk of adverse United States federal income tax law
developments. The proposal of the Clinton Administration would be such an
adverse
development if it is implemented or results in certain legislative action. For
additional information regarding the ability of Global Crossing Ltd. to convert
shares under these circumstances and tax consequences of owning shares of
GlobalCenter group stock, see "The Tracking Stock Proposals--Description of
Global Crossing group stock and GlobalCenter group stock--Conversion and
repurchase--Conversion of common stock at option of Global Crossing at any
time" and "--United States federal income tax consequences."
Provisions governing our common stock could discourage a change of control of
Global Crossing and the payment of a premium for your shares.
Our bye-laws contain provisions that, among other things,
. limit the total voting power of any shareholder that beneficially owns
more than 9.5% of the voting power of common stock to 9.5% of the
aggregate voting power of all Global Crossing common stock and
. prohibits any transfer of shares of common stock or any interest in
those shares that results in a shareholder (other than certain existing
shareholders) beneficially owning more than 9.5% of the outstanding
shares of common stock, without the approval of a majority of the
members of our board of directors and of a majority of votes cast by
shareholders at a meeting called to approve the transfer.
In addition, our bye-laws provide for a "staggered" board of directors
consisting of three classes, with each class serving for a term of three years.
Each of these provisions could make it difficult for any person to acquire
control of Global Crossing without approval of our board of directors, and
therefore makes it less likely that you would receive payment of a takeover
premium that is typically paid to shareholders in such an acquisition.
We cannot assure you that the market price of Global Crossing group stock or
the combined market value of Global Crossing group stock and GlobalCenter group
stock will equal or exceed the market price of our existing common stock.
We cannot assure you that investors will value Global Crossing group stock
and GlobalCenter group stock based on the reported financial results and
prospects of their respective groups or the dividend policies established by
our board of directors with respect to each group.
Further, we cannot assure you that:
. the market value of Global Crossing group stock following the proposed
public offering of GlobalCenter group stock, but before the proposed
disposition to the holders of Global Crossing group stock of all of the
shares representing the Global Crossing group's inter-group interest in
the GlobalCenter group; or
32
. the combined market value of Global Crossing group stock and
GlobalCenter group stock after the proposed distribution
will equal or exceed the market value of our existing common stock. In
addition, during the period following the proposed public offering and before
any disposition of GlobalCenter group stock to the holders of Global Crossing
group stock, the market value of GlobalCenter group stock could be adversely
affected by the intended disposition. This, in turn, may adversely impact the
market value of Global Crossing group stock. Until an orderly market develops
for GlobalCenter group stock, trading prices of Global Crossing group stock
and GlobalCenter group stock may fluctuate significantly. In addition,
investors may discount the value of Global Crossing group stock and
GlobalCenter group stock because they are part of a common enterprise rather
than stand-alone entities.
Future sales, dispositions and/or issuances of GlobalCenter group stock could
adversely affect its market price and the GlobalCenter group's access to
capital in the future.
The market price of GlobalCenter group stock could be materially adversely
affected by any sales, dispositions and/or issuances of substantial amounts of
GlobalCenter group stock in the public market, whether as a result of:
. the proposed public offering of GlobalCenter group stock;
. the intended disposition of all or part of the shares representing the
Global Crossing group's ownership of the GlobalCenter group; or
. any issuances of GlobalCenter group stock in acquisitions, for strategic
investments and other transactions;
or the perception that these sales, dispositions and/or issuances might occur.
If the market price of GlobalCenter group stock is depressed as a result of
these factors, it could hurt the GlobalCenter group's access to capital in the
future.
The stock price of GlobalCenter group stock may be volatile after the proposed
public offering because shares of GlobalCenter group stock have not been
publicly traded.
We cannot assure you that an active market will develop or be sustained
after the proposed public offering of GlobalCenter group stock. The market
price after the proposed public offering may vary significantly from the
offering price in response to any of the following factors, some of which are
beyond the control of the GlobalCenter group:
. variations in the GlobalCenter group's quarterly operating results;
. changes in financial estimates or investment recommendations by
securities analysts relating to GlobalCenter group stock;
. announcements by the GlobalCenter group or its competitors of significant
contracts, acquisitions, strategic partnerships, joint ventures or
capital commitments;
. additions or departures of key personnel;
. the potential for future sales or distributions of GlobalCenter group
stock;
. investors' perceptions of investments relating to the GlobalCenter group;
. investors' perceptions of investments relating to us;
. the impact of the intended disposition of the Global Crossing group's
inter-group interest in the GlobalCenter group;
. investors' perceptions about tracking stock generally; and
. fluctuations in the market price and volume of traded shares generally.
33
Even if the tracking stock proposals are approved by shareholders, we cannot
assure you that we will complete any or all of the tracking stock transactions.
This proxy statement describes our current plan for the issuance of
GlobalCenter group stock and the adoption of the GlobalCenter stock incentive
plans. These transactions, including the proposed public offering of
GlobalCenter group stock and the proposed disposition of GlobalCenter group
stock to the holders of Global Crossing group stock, are subject to various
conditions and uncertainties. Further, our board of directors reserves the
right not to adopt the tracking stock capital structure, even if shareholders
approve the tracking stock proposals. We cannot assure you that we will
complete all or any of the transactions we describe, or that we will complete
them on the terms or in the time frame we describe in this proxy statement.
Risks Relating to the Business of the GlobalCenter Group
The GlobalCenter group has a limited operating history and its business model
is still evolving, which makes it more difficult for you to evaluate the group
and its prospects.
The GlobalCenter group's limited operating history makes evaluating its
business operations and its prospects difficult. The GlobalCenter group's range
of service offerings has changed since its inception and its business model is
still new and developing. The GlobalCenter group recently began offering a
wider range of applications and professional services with the aim of becoming
a total Internet services provider to differentiate itself from other Web
hosting companies. Because many of these services are new, it cannot be sure
that businesses will buy them. As a result, the revenue and income potential of
the GlobalCenter group's business is unproven. In addition, its prospects must
be considered in light of the risks, expenses and difficulties encountered by
companies in the new, rapidly evolving and highly-competitive market for
Internet infrastructure services, including complex Web hosting services. To
address these risks, among other things, the GlobalCenter group must:
. provide reliable, technologically current and cost-effective services;
. continue to upgrade and expand its global infrastructure;
. market its brand name and services effectively;
. develop new and extend its current business partnerships; and
. attract and retain qualified personnel.
The GlobalCenter group's ability to achieve its goals depends significantly
on its ability to partner with leading vendors of hardware, software and
Internet infrastructure applications, as well as professional service
providers, to develop and offer services that the market will want. This
entails risks, such as the risk that the GlobalCenter group will not be able to
partner, or, even if it does, that its selected partners will not provide it
with the necessary resources to remain a leader in its industry.
The GlobalCenter group has a history of significant losses and expects these
losses to continue in the foreseeable future.
The GlobalCenter group has experienced operating losses and negative cash
flows from operations in the past. The GlobalCenter group's net losses for the
three months ended March 31, 2000, the three months ended December 31, 1999,
the nine months ended September 30, 1999 and each of the years ended December
31, 1998 and 1997 were $41.1 million, $42.7 million, $16.8 million, $10.8
million and $2.8 million, respectively. While the GlobalCenter group's revenues
have grown in recent periods, this growth may not continue. In connection with
the GlobalCenter group's expansion plans, it anticipates making significant
investments in its data center infrastructure, as well as in sales, marketing,
technical and customer support personnel. As a result of its expansion plans,
we expect the GlobalCenter group's net losses and negative cash flows from
operations to continue for the foreseeable future. We cannot assure you that
the GlobalCenter group will ever become or remain profitable or that it will
generate positive cash flows from operations.
The GlobalCenter group may be unable to secure additional financing when it
needs it.
Historically, GlobalCenter has relied on Global Crossing Ltd. or Frontier
Corporation to satisfy its capital requirements. Global Crossing Ltd. is not
obligated, however, to serve as a source of funding. According to the
34
GlobalCenter group's current business plan, it expects that the proceeds from
this offering will provide it sufficient capital to sustain current operations
and capital expenditure plans for the next 12 to 18 months. However, the
GlobalCenter group's business is rapidly growing and capital intensive. Any
material changes to its funding requirements could require it to secure
additional funding. The sources from which the GlobalCenter group may satisfy
its future financing requirements may include funding from third parties, the
proceeds from the issuance of additional GlobalCenter group stock or additional
funding from Global Crossing Ltd. We cannot assure you that the GlobalCenter
group will be able to secure additional financing on an acceptable basis, if at
all.
The rapid expansion of the GlobalCenter group's data centers produces a
significant strain on its business and requires it to expend substantial
resources. Any delay in its expansion plans or failure to attract customers
could have a material adverse effect on the business of the GlobalCenter group.
The expansion of the GlobalCenter group's business through the opening of
additional data centers in geographically diverse locations is one of its key
strategies. The GlobalCenter group currently has 10 data centers located in
metropolitan areas in northern and southern California; northern Virginia; New
York City; London; and Melbourne. The GlobalCenter group is currently
developing 10 additional data centers, nine of which it plans to open in 2000.
To expand successfully, the GlobalCenter group must be able to assess markets,
locate and secure new data center sites, install data center facilities and
establish interconnections with the Global Crossing network or the networks of
other providers. To manage this expansion effectively, the GlobalCenter group
must continue to improve its operational and financial systems and expand,
train and manage its employee base. The GlobalCenter group's inability to
establish additional data centers or effectively manage its expansion would
limit its revenue growth, which would have a material adverse effect upon its
business.
The GlobalCenter group expects to expend substantial resources for leases
and/or the purchase of real estate, significant improvements of facilities,
purchase of complementary businesses, assets and equipment, implementation of
multiple telecommunications connections and hiring of network, administrative,
customer support and sales and marketing personnel with the establishment of
each new data center. Moreover, the GlobalCenter group expects to make
significant investments in sales and marketing and the development of new
services as part of its expansion strategy. If the net proceeds of this
offering are not sufficient to fund its growth, and if the GlobalCenter group
fails to generate sufficient cash flows or raise sufficient funds in the
future, it may be required to delay or abandon some or all of its development
and expansion plans or otherwise forego market opportunities, making it
difficult for it to generate additional revenue and to respond to competitive
pressures. Any delay in the completion of its new facilities may make the
GlobalCenter group less attractive to customers, which would adversely affect
its business.
In general, it takes the GlobalCenter group at least six months after a data
center site is leased to construct the necessary facilities, install equipment
and telecommunications infrastructure and hire operations and sales personnel.
Expenditures commence well before the data center opens, and it takes an
extended period of time for the GlobalCenter group to approach break-even
capacity utilization. As a result, the GlobalCenter group expects that
individual data centers will experience losses for one year or longer from the
time they are opened. The GlobalCenter group incurs further expenses to test
market its services in markets where there is no data center. Growth in the
number of its data centers is likely to increase the amount and duration of
losses. In addition, if the GlobalCenter group does not attract customers to
new data centers in a timely manner, or at all, those data centers would
continue to experience losses, which could materially adversely affect the
GlobalCenter Group's business.
The GlobalCenter group's strategy is based on the belief that the Web hosting
business will continue to grow and that businesses will outsource an increasing
portion of their more sophisticated Internet-related functions. If this belief
is incorrect, the GlobalCenter group is unlikely to become or remain
profitable.
The GlobalCenter group's future growth, if any, will depend on the continued
trend of businesses to outsource an increasing portion of their Internet-
related operations, including their Web hosting needs and
35
management systems, and its ability to provide and market dependable services
effectively. In addition, the GlobalCenter group's strategy is based on its
belief that businesses will outsource an increasing portion of their more
sophisticated Internet-related functions, and the GlobalCenter group is
therefore planning to invest a significant amount in developing products and
services to meet this expected demand. We cannot be sure, however, that the
market for the GlobalCenter group's services will develop, that its services
will be adopted, or that businesses will use Internet-based services in the
degree or manner that the GlobalCenter group expects. It is possible that, at
some point, businesses may find it cheaper, more secure or otherwise preferable
to host their Web sites internally and decide not to outsource the management
of their Web sites. If the GlobalCenter group is unable to react quickly to
changes in the market, if the market fails to develop or develops more slowly
than expected, or if its services do not achieve market acceptance, then the
GlobalCenter group is unlikely to become or remain profitable.
The market for Web hosting and for other Internet infrastructure services is
highly competitive and there are few substantial barriers to entry. The
GlobalCenter group may be unable to compete effectively and achieve its
operating and financial objectives due to this significant competition.
The market for Web hosting and for other Internet infrastructure services is
highly competitive and there are few substantial barriers to entry. The
GlobalCenter group's current and potential competitors in the market include
Web hosting service providers, Internet service providers, commonly known as
ISPs, telecommunications companies and large information technology outsourcing
firms. The GlobalCenter group's competitors may operate in one or more of these
areas, and they include companies such as AboveNet Communications, AT&T,
British Telecom, Cable & Wireless, Digex, Digital Island, EDS, Exodus
Communications, Globix, Genuity, IBM, Intel, KPNQwest, Level 3 Communications,
MCI WorldCom, PSINet, NaviSite, Qwest Communications International and
USinternetworking.
Many of the GlobalCenter group's competitors have substantially greater
resources, more customers, greater name recognition and more established
relationships in the industry. As a result, these competitors may be able to
develop and expand their applications and service offerings more quickly,
devote greater resources to the marketing and sale of their products and adopt
more aggressive pricing policies. In addition, these competitors have entered
and will likely continue to enter into business relationships to provide
additional services competitive with those the GlobalCenter group provides. As
the GlobalCenter group moves toward its goal of becoming a total Internet
infrastructure services provider, the nature of its competition may change in
ways it will not anticipate. The GlobalCenter group also believes the Web
hosting market is likely to experience consolidation in the near future, which
could result in increased price and other competition that would make it more
difficult for it to compete. For further discussion of the GlobalCenter group's
competitive position, see "Business of the GlobalCenter Group--Competition."
The GlobalCenter group's business depends largely on network services it
receives from the Global Crossing group. Any disruption of these services or
the Global Crossing group's inability to maintain its peering and transit
relationships could be costly and could prevent the GlobalCenter group from
adequately serving its customers.
The GlobalCenter group relies primarily on the Global Crossing group for its
network capacity. The Global Crossing group operates its own global IP network,
which qualifies it as a tier-one service provider of Internet connectivity
services. A "tier-one service provider" is a company with an international IP
network which provides a presence in major cities in the United States and
Europe, geographically diverse peering connections, specified transport speeds
and round-the-clock network support services. If the Global Crossing network
experiences disruption, the GlobalCenter group's services may be disrupted as
well, which would be detrimental to the GlobalCenter group's customers.
Frequent or sustained disruptions in the Global Crossing network could harm the
GlobalCenter group's business. If the Global Crossing group were unable to
provide the GlobalCenter group sufficient network capacity, it would need to
rapidly secure an alternative provider of these services. As a result, the
GlobalCenter group could incur transition costs and its monthly costs of
operations could increase. In addition, such a transition could have a
detrimental effect on the service it provides its customers.
36
The Internet is composed of many ISPs that operate their own networks and
interconnect with other ISPs at various peering points. Peering and transit
relationships are a competitive factor that allow some Web hosting companies to
provide faster data transmission than others. If the Global Crossing group
fails to adapt its network infrastructure to meet industry requirements for
peering or loses its peering or transit relationships for any other reason,
then the GlobalCenter group's transmission rates could be reduced, resulting in
a decrease in the quality of services it provides to its customers.
The GlobalCenter group would not be able to provide adequate service to its
customers if it were unable to secure sufficient network capacity to meet its
future needs on reasonable terms or at all.
The GlobalCenter group must continue to expand and adapt its network
arrangements to accommodate an increasing amount of data traffic and changing
customer requirements. If the GlobalCenter group's future network capacity
requirements exceed the capacity the Global Crossing group is able to provide
to the GlobalCenter group, it may have to pay higher prices for such additional
network capacity from others or such capacity might not be available at all.
The GlobalCenter group's failure to achieve or maintain high capacity data
transmission could negatively affect its level of service to its existing
customers and limit its ability to attract new customers, which would harm its
business.
The GlobalCenter group's quarterly and annual results may fluctuate. If the
GlobalCenter group's results of operations fall below analysts' expectations,
the market price of GlobalCenter group stock and the value of your investment
could be reduced.
The GlobalCenter group's results of operations fluctuate on a quarterly and
annual basis. It expects to continue experiencing significant fluctuations in
its future quarterly and annual results of operations due to a variety of
factors, including the factors discussed in this section, many of which are
outside of the GlobalCenter group's control.
Due to these factors, revenues and operating results are difficult to
forecast. The GlobalCenter group believes that period to period comparisons of
its operating results will not necessarily be meaningful and you should not
rely on them as indications of its future performance. However, the market
price of GlobalCenter group stock may reflect the expectations of securities
analysts or investors relating to the GlobalCenter group's results of
operations. If, in some future periods, the GlobalCenter group's results of
operations fall below these expectations, it could negatively affect the market
price of GlobalCenter group stock and the value of your investment in Global
Crossing group stock and, after the intended disposition, in GlobalCenter group
stock.
The GlobalCenter group's data centers and the networks it relies on are
sensitive to harm from human actions and natural disasters. Any resulting
disruption could significantly damage its business.
The GlobalCenter group's ability to provide reliable service largely depends
on the performance and security of its data centers and equipment, and of the
network infrastructure of its connectivity providers, particularly the Global
Crossing IP network infrastructure. The GlobalCenter group's customers often
maintain confidential information on servers located in its data centers, such
as credit card and bank account numbers. The GlobalCenter group's data centers
and equipment, the networks it uses, and its customers' information are subject
to damage and unauthorized access from human error and tampering, breaches of
security, natural disasters, power loss, capacity limitations, software
defects, telecommunications failures, intentional acts of vandalism, including
computer viruses, and other factors that have caused, and will continue to
cause, interruptions in service or reduced capacity for customers. The
GlobalCenter group's data centers have experienced and may in the future
experience delays or interruptions in service as a result of accidental or
intentional actions of Internet users or others. For example, in February 2000,
hackers flooded one of the GlobalCenter group's customer's Web sites with an
enormous number of requests, which disrupted its services. Despite precautions
the GlobalCenter group has taken and plans to take, the occurrence of a
security breach, natural disaster, interruption in service or other
unanticipated problems could seriously damage its business and cause it to lose
customers. Additionally, the time and expense required to alleviate security
problems could be significant and could impair its operating results.
37
By providing services to customers with mission-critical Internet operations
GlobalCenter could potentially expose itself to lawsuits for customers' lost
profits or other damages.
Because the GlobalCenter group's services are critical to many of its
customers' businesses, any significant interruption in its services could
result in lost profits or other indirect or consequential damages to its
customers. The GlobalCenter group's customers are required to sign service
agreements which incorporate GlobalCenter's standard terms and conditions.
Although these terms disclaim its liability for any such damages, a customer
could still bring a lawsuit against the GlobalCenter group claiming lost
profits or other consequential damages as the result of a service interruption
or other Web site problems that the customer may attribute to the GlobalCenter
group. The GlobalCenter group cannot be sure a court would enforce any
limitations on its liability, and the outcome of any lawsuit may depend on the
specific facts of the case and the legal and policy considerations involved.
While the GlobalCenter group believes it would have meritorious defenses to any
such claims, it cannot be sure it would prevail. In such cases, the
GlobalCenter group could be liable for substantial damage awards. Such damage
awards might exceed its liability insurance by unknown but significant amounts,
which would seriously harm the GlobalCenter group's profitability or increase
its losses.
The GlobalCenter group provides service level commitments to its customers, so
any significant degradation in service could force it to reduce its fees enough
to harm its business.
The GlobalCenter group's customer contracts provide service level agreements
related to the continuous availability of its data center and network services.
The GlobalCenter group's commitment is generally limited to a credit consisting
of reduction in monthly fees for disruptions in Internet transmission services.
If the GlobalCenter group incurs significant service degradation in connection
with system downtime, it will be forced to reduce its fees and its business
would be harmed. As customers outsource more mission-critical operations to the
GlobalCenter group, it risks increased liability claims and customer
dissatisfaction if its systems fail to meet its customers' expectations.
If the GlobalCenter group does not respond effectively and on a timely basis to
rapid technological change and evolving industry standards, its services could
become obsolete or no longer competitive.
Internet and networking technology is changing rapidly. The GlobalCenter
group's future success will depend largely on its ability to:
. offer services that incorporate leading technologies;
. address the increasingly sophisticated and varied needs of its current
and prospective customers;
. respond to technological advances and emerging industry standards on a
timely and cost-effective basis; and
. continue offering services that are compatible with products and services
of other vendors.
Although the GlobalCenter group often works with various vendors in testing
newly developed products, we cannot be sure these products will be compatible
with its infrastructure or that these products will adequately address changing
customer needs. Although the GlobalCenter group currently intends to support
emerging standards, we cannot be sure that industry standards will be
established or, if they become established, that GlobalCenter will be able to
conform to these new standards in a timely or cost-effective fashion and
maintain a competitive position in the market. Keeping pace with technological
advances may require substantial expenditures and lead time. The GlobalCenter
group's failure to conform to the prevailing standards, or the failure of
common standards to emerge, could harm its business. In addition, products,
services or technologies developed by others may render its services obsolete
or no longer competitive.
The GlobalCenter group's business will not continue to grow unless Internet
usage continues to grow and Internet performance remains adequate.
The increased use of the Internet for retrieving, sharing and transferring
information among businesses and consumers has only recently begun to develop
on a mass scale. The GlobalCenter group's success will depend
38
on the continued growth in Internet usage, in particular on the growth of its
use as a commercial and entertainment distribution tool. The growth of the
Internet is subject to a high level of uncertainty and depends on a number of
factors, including the growth in consumer and business use of new interactive
technologies, the development of technologies that facilitate interactive
communications, security concerns and increases in data transport capacity. If
the Internet as a commercial medium fails to grow or develops more slowly than
expected, then the GlobalCenter group's business is unlikely to grow as
expected.
The recent growth in the use of the Internet in general has caused frequent
periods of performance degradation, requiring the upgrade of routers and
switches, telecommunications links and other components forming the
infrastructure of the Internet by ISPs and other organizations with links to
the Internet. Any perceived degradation in the performance of the Internet as a
whole could undermine the demand for the GlobalCenter group's services. The
performance of the GlobalCenter group's Web hosting services is ultimately
limited by and relies on the speed and reliability of the networks operated by
Global Crossing and third parties. Consequently, the growth of the market for
the GlobalCenter group's services depends on improvements being made to these
networks.
The GlobalCenter group's business could be harmed if its management team, which
has worked together at GlobalCenter for only a brief time, is unable to work
effectively, or if it is unable to retain and attract key personnel.
GlobalCenter has hired most of its senior management within the last six
months. As a result, its management team has worked for GlobalCenter for only a
brief time. The GlobalCenter group's success will depend, in significant part,
on the continued services of its senior management personnel and of its key
technical and sales personnel. If other companies offer GlobalCenter's key
employees substantial compensation or option packages, they may choose to
accept other employment. Neither we nor any of our subsidiaries have employment
agreements for any GlobalCenter employees other than Mr. Hindery, or key man
insurance for any GlobalCenter employees.
The GlobalCenter group's success will also depend largely on its ability to
attract and retain highly skilled technical, managerial, sales and marketing
personnel, particularly additional management in the areas of application
integration and technical support. Competition for such personnel is intense.
GlobalCenter may not be able to hire or retain the necessary personnel to
implement its business strategy, or it may need to pay higher compensation for
employees than it currently expects. If the GlobalCenter group is unable to
attract and retain such personnel, its growth would be limited and its business
would be harmed.
The GlobalCenter group may be unable to achieve its operating and financial
objectives if it cannot manage its anticipated growth effectively.
The GlobalCenter group is experiencing, and expects to continue experiencing,
rapid growth with respect to the building of its domestic and international
data centers, expansion of its service offerings, expansion of its customer
base and increases in the number of employees. This growth has placed, and the
GlobalCenter group expects it to continue to place, a significant strain on its
financial, management, operational and other resources, including its ability
to ensure customer satisfaction. This expansion also requires significant time
commitments from its senior management and places a significant strain on their
ability to manage the existing business. In addition, the GlobalCenter group is
required to manage multiple relationships with a growing number of third
parties as it seeks to complement its service offerings.
In order to manage this growth, the GlobalCenter group will need to:
. expand and enhance its operating and financial procedures and controls;
. replace or upgrade its operational and financial management information
systems; and
. attract, train, manage and retain key employees.
39
In early 2000, the GlobalCenter group began to implement and upgrade its
operational and financial systems, procedures and controls, including
evaluating the implementation of a new billing system and IT system.
Implementation of those systems and improvements could be disruptive to the
GlobalCenter group's business.
The GlobalCenter group may experience difficulty in integrating future
acquisitions or joint ventures which could harm its operating results.
GlobalCenter Inc. may acquire businesses with complementary products,
services and technologies that will be allocated to the GlobalCenter group.
After purchasing a company, GlobalCenter could have difficulty in assimilating
that company's technology, personnel and operations. In addition, the key
personnel of the acquired company may decide not to work for GlobalCenter.
These difficulties could disrupt the GlobalCenter group's ongoing business,
distract its management and employees and increase its expenses. In addition,
future acquisitions by GlobalCenter Inc. may require it to incur additional
debt, result in large one-time write-offs or create goodwill or other
intangible assets that could result in amortization expenses.
As part of the GlobalCenter group's expansion, GlobalCenter Inc. may also
pursue relationships and joint ventures with companies located in or with
relationships in the markets it wishes to enter, or who have specific
technologies, products or services it needs to serve its customers.
GlobalCenter Inc. may not have a majority interest in or control of the
governing body of any such joint venture. There is a risk that the other joint
venture partner may at any time have economic, business or legal interests or
goals that are inconsistent with those of the joint venture or of GlobalCenter.
A joint venture partner may be unable to meet its economic or other obligations
and GlobalCenter may be required to fulfill those obligations. In addition, if
GlobalCenter Inc. does not have a majority interest in a joint venture, it may
not have control of the operation or assets of that joint venture.
Because the GlobalCenter group is planning significant international expansion
in the next year, difficulties presented by international economic, political,
legal, accounting and business factors could harm its business.
One component of the GlobalCenter group's strategy is to expand into
international markets. It currently has two data centers outside of the United
States, one in London, England and one in Melbourne, Australia. The
GlobalCenter group has also announced plans to open new data centers later this
year in Europe and Australia. In addition, GlobalCenter Inc. has entered into a
joint venture agreement with Asia Global Crossing, an affiliated company,
pursuant to which this joint venture will open data centers in Asia. In order
to further expand the GlobalCenter group's international operations,
GlobalCenter Inc. may enter into additional joint ventures or outsourcing
agreements with third parties, acquire complementary businesses or operations,
or establish and maintain new operations outside of the United States. If
GlobalCenter Inc. is unable to do any of these things in a timely and cost-
effective manner, it could be precluded from successfully developing its
international operations. In addition, the GlobalCenter group may depend on
third parties to be successful in its international operations, but we cannot
assure you that the GlobalCenter group will be successful in securing such
third party relationships.
In addition, the rate of development and adoption of the Internet has been
slower outside of the United States, and the cost of bandwidth has been higher,
which may adversely affect the GlobalCenter group's ability to expand
operations and may result in higher relative costs for its international
operations. The risks inherent in conducting business internationally include:
. unexpected changes in regulatory requirements, export restrictions,
tariffs and other trade barriers;
. challenges in staffing and managing foreign operations;
. differences in technology standards;
. employment laws and practices in foreign countries;
40
. longer payment cycles and problems in collecting accounts receivable;
. political instability;
. fluctuations in currency exchange rates and imposition of currency
exchange controls; and
. potentially adverse tax consequences.
Laws in the United States and elsewhere regarding the Internet are largely
unsettled, but are becoming an increasing focus for lawmakers. Changes in these
laws could require the GlobalCenter group to expend significant resources to
comply or could limit its business.
The GlobalCenter group provides services over the Internet in the United
States and in many foreign countries, and it facilitates the activities of its
customers in these jurisdictions. As a result, the GlobalCenter group may be
required to qualify to do business, or be subject to taxation, or be subject to
other laws and regulations, in jurisdictions even if it does not have a
physical presence or employees or property in these jurisdictions. The
application of these multiple sets of laws and regulations is uncertain,
GlobalCenter could be subject to regulation, taxation, enforcement or other
liability in unexpected ways, which could make it more expensive to conduct its
business or limit its ability to conduct its business. Regulation of the
Internet may also harm GlobalCenter's customers' businesses, which could lead
to reduced demand for its services.
The law in the United States relating to the liability of online and Internet
service providers for information disseminated through their systems remains
largely unsettled. It may take years to determine whether and how existing
laws, such as those governing intellectual property, privacy, consumer
protection, libel and taxation, apply to the Internet. The growth and
development of the market for online commerce may also prompt calls for more
stringent consumer protection laws that may impose additional burdens on
companies conducting business online.
The United States Congress has recently considered enacting Internet laws
regarding privacy, copyrights, taxation and the transmission of sexually
explicit materials. The Federal Trade Commission has recently commenced
investigations of the practices of certain Internet companies relating to
privacy and consumer protection laws. The European Union recently enacted its
own privacy regulations. The application of existing laws or promulgation of
new laws could require the GlobalCenter group to expend substantial resources
to comply with such laws or discontinue some service offerings. Increased
attention to liability issues could also divert management attention, result in
unanticipated expenses and harm its business.
The GlobalCenter group's business is not currently subject to direct
regulation by the Federal Communications Commission, or the "FCC," or any other
government agency, other than as to regulations applicable to business in
general. However, in the future it may be subject to regulation by the FCC or
other federal or state agencies, which could increase its costs and harm its
business. For further discussion of the regulations to which the GlobalCenter
group may be subject, see "Business of the GlobalCenter Group--Government
Regulation."
Global Crossing Ltd. is subject to United States and international regulation
relating to its existing network and its future expansion of its network. If
Global Crossing's network or expansion plans were limited by governmental
regulation, it could have a material adverse effect on the GlobalCenter group's
business. For a discussion of risks relating to the business of Global Crossing
Ltd., see "Business--Forward Looking Statements and Risk Factors" in Global
Crossing Ltd.'s Annual Report on Form 10-K for the year ended December 31,
1999, which is incorporated by reference in this proxy statement.
As the host of information carried on the Internet, the GlobalCenter group
could be held liable for the information disseminated through its network.
If the GlobalCenter group and other Web hosting and network providers become
liable for information carried on or disseminated through their systems, the
GlobalCenter group could be required to implement
41
measures to reduce exposure to legal liability. This may require the
expenditure of substantial funds, or discontinuance of various service or
product offerings. The costs of defending against any claims and potential
adverse outcomes of these claims could adversely affect the GlobalCenter
group's profitability or increase its losses. While the GlobalCenter group
carries professional liability insurance, it may not be adequate to compensate
GlobalCenter or may not cover it in the event it becomes liable for information
carried on or disseminated through its network. The law relating to the
liability of online services companies, private network operators and ISPs for
information carried on or disseminated through their networks is currently
unsettled. The Child Online Protection Act of 1998 imposes criminal penalties
and civil liability on anyone engaged in the business of selling or
transferring material that is harmful to minors, by means of the Web, without
restricting access to this type of material by underage persons. Numerous
states have adopted or are currently considering similar types of legislation.
In addition, some ISPs and other online services companies could deny network
access to the GlobalCenter group and its customers if it allows undesired
content to be transmitted through its network. Although the GlobalCenter group
prohibits customers by contract from distributing illegal material or engaging
in practices such as sending unsolicited commercial e-mail advertisements, we
cannot be sure that the GlobalCenter group's customers will not violate these
prohibitions, which could cause the GlobalCenter group to face significant
liability.
The GlobalCenter group may be unable to protect its intellectual property
rights or to license the intellectual property that it expects to need in the
future from others.
The GlobalCenter group relies on a combination of copyright, trademark,
service mark and trade secret laws and contractual restrictions to establish
and protect certain of its proprietary rights. It has no patented technology
that would bar competitors from its market. Despite its efforts to protect its
proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use its data or technology. In addition, the laws of various foreign
countries may not protect its products, services or intellectual property
rights to the same extent as do the laws of the United States.
The GlobalCenter group does not currently rely in a material way on
technologies licensed from third parties, but it expects that, as it continues
to offer new services through partnerships with third parties, its reliance on
licensed technology will grow. The GlobalCenter group cannot be sure these
licenses will be available to it on commercially reasonable terms or at all.
The inability to use such technology could require it to obtain substitute
technology of lower quality or performance standards or at greater cost, which
could harm its business.
Other parties may claim that the GlobalCenter group has infringed their
proprietary rights. Such claims, whether or not meritorious, may require it to
expend significant financial and managerial resources, result in injunctions
against it, or impose damages it must pay. The GlobalCenter group may need to
obtain a license from third parties who allege that it has infringed their
rights, but such license may not be available on terms acceptable to it or at
all.
42
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS
This proxy statement and the information incorporated by reference in this
proxy statement include forward-looking statements. Forward-looking statements
do not relate strictly to historical or current facts. Forward-looking
statements may be identified by the use of forward-looking words or phrases
such as "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe" and other words and terms of similar meaning. Forward-looking
statements are based on our current expectations and are subject to risks and
uncertainties. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for such forward-looking statements.
A number of important factors, including those risks and uncertainties
described as "Risk Factors" both in this proxy statement and in our Annual
Report on Form 10-K, could affect future operating results and financial
position and cause actual results to differ materially from those expressed in
the forward-looking statements. These risks and uncertainties are not
exhaustive. These and other developments could cause our actual results to
differ materially from those forecast or implied in the forward-looking
statements. You are cautioned not to place undue reliance on these forward-
looking statements. We have no obligation, and we do not intend, to publicly
release the results of any revisions to these forward-looking statements to
reflect subsequent events or circumstances.
43
THE SPECIAL MEETING
General
We are furnishing this document to you in connection with the solicitation of
proxies by our board of directors for use at the special meeting of
shareholders and any adjournment or postponement of the meeting.
Date, time and place
We will hold the special meeting at on , 2000 at , local time,
subject to any adjournments or postponements.
Proposals to be considered at the special meeting
For more information regarding the proposals described below, see "The
Tracking Stock Proposals" beginning on page 47 and "The GlobalCenter Stock
Incentive Plan Proposals" beginning on page 123.
The tracking stock proposals
At the special meeting, you will be asked to consider and vote to approve:
. a proposal to increase our authorized share capital to $45,250,000 by
the creation of an additional 1,500,000,000 shares of common stock, par
value $0.01 per share, and 5,000,000 shares of preferred stock, par
value $0.01 per share, and
. a proposal to allow our board of directors to designate our authorized
shares of common stock into two or more separate classes of common
stock, to approve the terms of the Global Crossing group stock and
GlobalCenter group stock and to redesignate our outstanding common stock
as Global Crossing group stock.
The GlobalCenter stock incentive plan proposals
In addition, at the special meeting, you will be asked to consider and vote
to approve the adoption of the GlobalCenter Management Stock Plan and the
GlobalCenter 2000 Stock Plan.
We are submitting these proposals for your approval pursuant to our bye-laws
and the requirements of the National Association of Securities Dealers
applicable to companies with securities quoted on the Nasdaq National Market.
In addition, we are submitting each of the GlobalCenter stock incentive plan
proposals for your approval in order for those plans to satisfy the
requirements of Section 162(m) of the Internal Revenue Code of 1986.
Record date; votes per share
Our board of directors has fixed the close of business on , 2000 as the
record date for the determination of shareholders entitled to vote at the
special meeting. On that date, the outstanding voting shares of our capital
stock consisted of shares of common stock. You will be entitled to attend
and vote at the meeting only if you were a shareholder of record of common
stock as of the close of business on , 2000.
On a poll, each share entitled to vote at the meeting, other than shares held
by holders of greater than 9.5% of the total votes cast in connection with any
shareholder action by a holder whose voting power will be limited as described
in the next two paragraphs, will be entitled to one vote plus any additional
votes that may be allocated to each share based on a formula contained in our
bye-laws and described in the next two paragraphs.
44
For purposes of the following discussion, when we refer to "Controlled
Shares" we mean, among other things, all shares of Global Crossing common stock
that a shareholder is deemed (1) to own directly, indirectly or constructively
pursuant to Section 958 of the U.S. Internal Revenue Code or (2) to own
beneficially directly or indirectly as a result of the possession of sole or
shared voting power within the meaning of Section 13(d) of the Securities
Exchange Act of 1934 and the rules and regulations under that act.
Under our bye-laws, on a poll each share of common stock will have one vote,
except that if, and so long as, the Controlled Shares of (1) any shareholder
constitute more than 9.5% of the total votes cast in connection with any
shareholder action or (2) Canadian Imperial Bank of Commerce and its affiliates
constitute more than 20% of the voting power of the total votes cast in
connection with any shareholder action, the voting rights with respect to the
Controlled Shares owned by that shareholder will be limited, in the aggregate,
to a voting power of 9.5% of the total votes cast or, in the case of Canadian
Imperial Bank of Commerce and its affiliates, collectively, to 20% of the total
votes cast based on a formula contained in our bye-laws. The additional votes
that could be cast by that shareholder or the Canadian Imperial Bank of
Commerce and its affiliates if there were no restrictions on voting rights will
be allocated to the other holders of common stock, pro rata based on their
number of shares of common stock. However, no shareholder that has been
allocated any additional votes may exceed the limitation on voting rights as a
result of that allocation. For additional information relating to voting
restrictions on shareholders, see "Description of Global Crossing Capital
Stock--Voting restrictions."
On the record date for determination of the holders entitled to vote at the
special meeting, each share of Global Crossing common stock, other than shares
held by any 9.5% or larger shareholder, would have been entitled on a poll to
approximately votes.
Quorum
The presence in person or by proxy of at least two shareholders entitled to
vote and holding shares representing more than 50% of the votes of all
outstanding shares of Global Crossing common stock will constitute a quorum at
the special meeting.
Abstentions and shares held by brokers that are represented at the special
meeting without specific instructions by shareholders on how to vote those
shares, which we refer to as "broker non-votes," will be counted as present for
purposes of determining whether there is a quorum at the special meeting.
Approval of the GlobalCenter stock incentive plan proposals additionally
requires that holders of a majority of all outstanding shares actually cast
votes on each of the proposals. For these proposals, therefore, abstentions and
broker non-votes will be the equivalent of voting against the proposals and
will have the practical effect of reducing the likelihood that this requirement
will be satisfied.
Votes required
The following shareholder votes are required for approval of each proposal:
The tracking stock proposals
The favorable vote of a majority of all votes cast by the holders of Global
Crossing common stock is required to adopt each of the tracking stock
proposals. Some of the proposed resolutions contained in the tracking stock
proposals, if approved, will become effective only if and when the proposed
public offering of GlobalCenter group stock is completed.
By voting in favor of the tracking stock proposals at the special meeting,
shareholders may be forfeiting their rights to challenge the tracking stock
proposals in the future.
The GlobalCenter stock incentive plan proposals
The favorable vote of a majority of all votes cast by the holders of Global
Crossing common stock is required to adopt each of the GlobalCenter stock
incentive plan proposals.
If the tracking stock proposals are approved, we intend to implement it
whether or not the GlobalCenter stock incentive plan proposals are approved. If
the tracking stock proposals are not approved, we will not implement the
GlobalCenter stock incentive plan proposals.
45
As of April 24, 2000, directors and executive officers of Global Crossing
were entitled to vote approximately 20.84% of the outstanding votes entitled to
be cast by Global Crossing shareholders at the special meeting after giving
effect to the voting limitations of large shareholders.
How shares will be voted at the special meeting
Shares of Global Crossing common stock represented by a proxy properly
executed and received before the vote at the special meeting will be voted on a
poll in the manner directed on the proxy card, unless the proxy is revoked in
advance of the vote.
Properly executed blank proxy cards will be voted (1) in favor of the
proposals described in the notice of the , 2000 special meeting to
shareholders and (2) in the discretion of the authorized proxies with respect
to any other business that may properly come before the special meeting or any
adjournment or postponement of the meeting.
Abstentions and shares held by brokers and represented at the special meeting
without specific instructions by shareholders on how to vote those shares will
not be voted and will not be counted either as a vote for or against the
proposals to be voted on at the special meeting.
To be valid, proxy cards must be received at the offices of our transfer
agent, EquiServe, by , 2000. As an alternative to appointing a proxy, a
shareholder which is a corporation may appoint any person to act as its
representative by delivering written evidence of that appointment, which must
be received at our principal executive offices not later than one hour before
the time fixed for the beginning of the special meeting. A representative so
appointed may exercise the same powers, including voting rights, as the
appointing corporation could exercise if it were an individual shareholder.
How to revoke a proxy
You may revoke your proxy at any time before it is voted by (1) so notifying
the Secretary of Global Crossing in writing at the address of our principal
executive offices not less than one hour before the time fixed for the
beginning of the meeting, (2) signing and dating a new and different proxy card
or (3) voting your shares in person or by an appointed agent or representative
at the special meeting. You may not revoke your proxy by merely attending the
special meeting.
Our board of directors is not currently aware of any business that will be
brought before the special meeting other than the proposals described in the
notice of the , 2000 special meeting to shareholders. If, however, other
matters are properly brought before the special meeting or any adjournment or
postponement of the meeting, the persons appointed as proxies will have
discretionary authority to vote the shares represented by duly executed proxies
in accordance with their discretion and judgment.
Solicitation of proxies
We will bear the costs of soliciting proxies from the holders of Global
Crossing common stock. Proxies will initially be solicited by us by mail, but
directors, officers and selected other employees of Global Crossing may also
solicit proxies by personal interview, telephone, facsimile or e-mail.
Directors, executive officers and any other employees of Global Crossing who
solicit proxies will not be specially compensated for those services, but may
be reimbursed for out-of-pocket expenses incurred in connection with the
solicitation. Brokerage houses, nominees, fiduciaries and other custodians will
be requested to forward soliciting materials to beneficial owners and will be
reimbursed for their reasonable out-of-pocket expenses incurred in sending
proxy materials to beneficial owners. Global Crossing's transfer agent,
EquiServe, has agreed to assist Global Crossing in connection with the
tabulation of proxies.
46
THE TRACKING STOCK PROPOSALS
General
At the special meeting, we will ask you to consider and approve proposals
which provide for the implementation of the tracking stock structure. These
proposals, which are included in Annex I to this proxy statement, are to:
. increase our authorized share capital to $45,250,000 by the creation of
an additional 1,500,000,000 shares of common stock, par value $0.01 per
share, and 5,000,000 shares of preferred stock, par value $0.01 per
share.
. allow our board of directors to designate our common stock into two or
more separate classes of common stock, with 3,000,000,000 shares
authorized to be issued as Global Crossing group stock and 1,000,000,000
shares as GlobalCenter group stock, to approve the terms of the Global
Crossing group stock and GlobalCenter group stock and to redesignate our
outstanding common stock as Global Crossing group stock.
If the tracking stock proposals are implemented, your rights as shareholders
will continue to be governed by Bermuda law and our bye-laws and schedules
attached thereto, which have been filed with the SEC. The Certificate of
Designations for the Global Crossing group stock and the GlobalCenter group
stock, which will be attached as a schedule to our bye-laws, will contain the
terms of Global Crossing group stock and GlobalCenter group stock. Accordingly,
you should read carefully the proposed Certificate of Designations attached to
this proxy statement as Annex II.
If these proposals are approved and we complete our proposed public offering
of GlobalCenter group stock, we will file a Memorandum of Increase in Share
Capital with the Registrar of Companies of Bermuda reflecting the increase in
our authorized share capital. No regulatory approvals are required for the
consummation of the tracking stock proposals.
By voting in favor of the tracking stock proposals at the special meeting,
shareholders may be forfeiting their rights to challenge the tracking stock
proposals in the future.
Authorized and outstanding shares
Current capital structure
We are currently authorized to issue 3,020,000,000 shares of stock,
consisting of 3,000,000,000 shares of common stock, par value $0.01 per share,
and 20,000,000 shares of preferred stock, par value $0.01 per share. As of
April 24, 2000, (1) 817,653,894 shares of common stock, (2) 10,000,000 shares
of 6 3/8% cumulative convertible preferred stock, (3) 2,600,000 shares of 7%
cumulative convertible preferred stock, (4) 400,000 shares of 6 3/8% cumulative
convertible preferred stock, series B, and (5) 4,600,000 shares of 6 3/4%
cumulative convertible preferred stock were issued and outstanding.
Proposed capital structure
Common stock. The tracking stock proposals will authorize us to issue up to
4,500,000,000 shares of common stock, of which 3,000,000,000 shares will be
designated Global Crossing group stock and 1,000,000,000 shares will be
designated GlobalCenter group stock. If approved by shareholders, the tracking
stock proposals will redesignate each outstanding share of our outstanding
common stock into one share of Global Crossing group stock effective upon the
completion of the proposed public offering of GlobalCenter group stock.
47
Preferred stock. The tracking stock proposals will authorize us to issue up
to 25,000,000 shares of preferred stock. The preferred stock, if authorized,
could be issued at the discretion of the our board of directors without any
further approval by shareholders, except as required by applicable law or
regulation, in connection with acquisitions, efforts to raise additional
capital for us and other corporate purposes. Our board of directors has no
present plan or intention to issue any of the additional shares of preferred
stock authorized by the tracking stock proposals.
Issuances of additional common stock and preferred stock without shareholder
approval
Common stock. After the completion of the proposed public offering of
GlobalCenter group stock, our board of directors may issue the authorized but
unissued shares of Global Crossing group stock and GlobalCenter group stock
from time to time for any proper corporate purposes. Our board of directors
also may decide to authorize the issuance of shares of one or more classes of
common stock relating to an additional business group as described below, in
addition to Global Crossing group stock and GlobalCenter group stock. Our board
of directors will have the authority to issue additional shares of GlobalCenter
group stock or Global Crossing group stock or shares of additional classes of
common stock in its sole discretion and without further shareholder approval,
except as may be provided by Bermuda law or the rules of the Nasdaq National
Market or any stock exchange on which any class of outstanding common stock may
then be listed.
If our board of directors decides to issue additional classes of common
stock, Global Crossing may establish a new group to which such new class of
common stock relates either by allocating to it newly acquired assets or by
reallocating to it assets and liabilities from any one or more of the Global
Crossing group, the GlobalCenter group and any previously created additional
group. If our board of directors decides to reallocate assets and liabilities,
the group or groups to which those assets and liabilities were previously
attributed would hold an inter-group interest in the new group. Our board of
directors does not currently have any plan to issue any additional class of
common stock.
Our board of directors may at any time and without shareholder approval
increase the number of shares allocated to Global Crossing group stock or any
additional class of common stock, but not GlobalCenter group stock, so long as
the number of shares in all classes of common stock immediately after the
increase does not exceed the total number of shares of the authorized common
stock of Global Crossing. Approval of the holders of GlobalCenter group stock
in most cases would be required to increase the number of authorized shares
allocated to GlobalCenter group stock. In addition, shareholder approval would
be required to effect any decrease in the number of shares previously allocated
to any class of common stock.
Preferred stock. The tracking stock proposals would authorize our board of
directors, 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. Any series or class of preferred
stock could, as determined by our board of directors at the time of issuance,
rank, with respect to dividends, voting rights, redemption and liquidation
rights, senior to the Global Crossing common stock. The preferred stock to be
authorized is of the type commonly known as "blank-check" preferred stock.
The creation and issuance of preferred stock may constitute a variation of
certain rights of the Global Crossing common stock. It is not possible to state
the precise effects of the authorization of the preferred stock upon the rights
of the holders of existing Global Crossing common stock, Global Crossing group
stock or GlobalCenter group stock until our board of directors determines the
respective preferences, limitations and relative rights of the holders of the
class as a whole or of any series or class of the preferred stock. Holders of
Global Crossing common stock do not have preemptive rights to purchase shares
in future issuances.
The proposed public offering
We currently plan to offer in the proposed public offering shares of
GlobalCenter group stock in an amount based on capital requirements of the
GlobalCenter group, market conditions at the time of the public offering and
other factors. We will allocate all of the net proceeds of the proposed
offering to the GlobalCenter group.
48
We currently expect to complete the proposed offering shortly following
shareholder approval of the tracking stock proposals.
If subsequent considerations arise, our board of directors could decide not
to implement the tracking stock structure and abandon plans for the proposed
offering, even if our shareholders have approved the tracking stock proposals.
Prior to the completion of the proposed offering of GlobalCenter group stock
and after the special meeting, our board of directors will designate the
initial number of shares of GlobalCenter group stock that may be issued in
respect of the Global Crossing group's inter-group interest in the GlobalCenter
group. For additional information regarding the Global Crossing group's inter-
group interest in the GlobalCenter group, see "Description of Global Crossing
group stock and GlobalCenter group stock--Inter--group interest" below.
The intended disposition
We intend to dispose of all of the Global Crossing group's remaining inter-
group interest in the GlobalCenter group following the proposed offering in the
form of additional GlobalCenter group stock. This disposition is intended to
include a distribution in the form of a dividend to holders of Global Crossing
group stock for at least a portion of such interest, but may include an
exchange offer, a further sale of GlobalCenter group stock, or a combination
thereof. We currently intend to dispose of the inter-group interest at some
time after this offering and the expiration of any lock-up period; however, we
have not yet determined the exact method and timing of this disposition. There
is no guarantee, however, that any disposition will follow this offering.
We expect to base our decision with regard to the method and timing of the
disposition on market conditions and the target of maximizing value for all of
Global Crossing's shareholders. The disposition may occur in several stages,
following which we expect that, all of the Global Crossing group's inter-group
interest in the GlobalCenter group would be represented by newly issued shares
of GlobalCenter group stock.
Even after this disposition, however,
. all of the assets of the GlobalCenter group and the Global Crossing
group will still remain part of, and under control of, Global Crossing,
and
. in the event of a liquidation of Global Crossing, holders of
GlobalCenter group stock and Global Crossing group stock would not have
an exclusive claim on the assets of the GlobalCenter group or the Global
Crossing group, respectively, but rather a claim on the assets of Global
Crossing as a whole.
Reasons for the tracking stock proposals
Our board of directors recommended the tracking stock proposals following its
review of various alternatives to provide a mechanism to increase market
awareness of the performance and value of our GlobalCenter business. In
addition to the creation of a tracking stock, our board of directors also
considered the alternatives of an initial public offering of shares of stock in
GlobalCenter Inc. and a spin-off of GlobalCenter Inc. to the shareholders of
Global Crossing. Our board of directors considered the following factors in
approving, and recommending that shareholders approve, the tracking stock
proposals.
49
In making its determination, our directors determined that implementation of
the tracking stock proposals would have the following advantages:
. Greater market recognition and more efficient valuation. Creating two
distinct classes of common stock that separate the performance of the
Global Crossing group and the GlobalCenter group and reflect separately
the operating results and growth prospects of each group will permit
greater market recognition and more efficient valuation of the Global
Crossing group and the GlobalCenter group than exists today with one
class of common stock. Separate public information about the
GlobalCenter group should result in broader and more focused coverage by
research analysts. As a result, investors should better understand the
GlobalCenter group and Global Crossing as a whole. Having two publicly
traded equity securities will allow potential equity investors to apply
different and more specific criteria in valuing the Global Crossing
group and the GlobalCenter group.
. Greater financial flexibility. We believe that the creation of the
GlobalCenter group stock will provide us with greater financial
flexibility. We expect that GlobalCenter group stock will assist the
GlobalCenter group in meeting its capital needs by creating an
additional publicly traded equity security that we can use to raise
capital for the group. We also believe that we could issue GlobalCenter
group stock in potential acquisitions and investments. This would allow
shareholders of an acquired entity the opportunity to participate more
directly in the success of the GlobalCenter business rather than
participating in the much larger and more diversified business of the
Global Crossing enterprise.
. More effective management incentives. GlobalCenter group stock will
permit us to structure distinctive and more effective incentive and
retention programs for our management and employees. Stock options and
other incentive awards to management and employees of the GlobalCenter
group will be tied more directly to the performance of the group in
which they work.
. Advantages of doing business under common ownership. In contrast to a
spin-off, the tracking stock proposals will retain for us the advantages
of doing business as a single company that retains complete legal
ownership of each group and allow each group to capitalize on
relationships with the other group. As a single organization, we expect
to continue to take advantage of the strategic and operational benefits
of synergies relating to technology and network sharing and cost savings
in corporate overhead expenses.
. Preserves capital structure flexibility. The tracking stock proposals
retain future restructuring flexibility by preserving our ability to
undertake future asset segmentation and capital restructurings, such as
spin-offs and split-offs, and the creation and issuance of other
tracking stocks reflecting other distinct business groups. The tracking
stock proposals also preserve our flexibility to unwind the tracking
stock structure.
Our board of directors also considered that the implementation of the
tracking stock proposals are not expected to be taxable for U.S. federal income
tax purposes to Global Crossing or to you. In addition, our board of directors
considered the performance of similar equity securities issued by other
telecommunications companies, such as US WEST, Inc., Sprint Corporation and
AT&T.
Our board of directors also considered the following potential negative
consequences of the tracking stock proposals:
. Uncertainty of market valuation. We cannot predict exactly:
--the degree to which the market price of Global Crossing group stock
and GlobalCenter group stock will reflect the separate performances of
the Global Crossing group and the GlobalCenter group, particularly
given the fact that the holders of each of these classes of stock are
shareholders of a
50
single company and thus subject to all of the risks of an investment
in Global Crossing and all of its businesses, assets and liabilities
and the other risks discussed under "Risk Factors";
--the impact of the tracking stock proposals on the market price of our
existing common stock prior to their adoption;
--the impact of the issuance of GlobalCenter group stock on the market
price of Global Crossing group stock upon the completion of the
proposed public offering of GlobalCenter group stock; or
--whether the issuance of Global Crossing group stock and GlobalCenter
group stock will increase the total market capitalization of Global
Crossing.
. More complex corporate governance. The tracking stock proposals
introduce additional corporate governance issues, such as the fiduciary
obligation of our board of directors to holders of Global Crossing group
stock and GlobalCenter group stock. Although our board of directors does
not have a separate fiduciary duty to the holders of Global Crossing
group stock or the holders of GlobalCenter group stock, the interests of
the two groups could diverge or conflict, or appear to diverge or
conflict, and issues could arise in resolving some conflicts with the
result that our board of directors may benefit one group over the other
group with respect to any particular issue.
. Complex capital structure. The tracking stock proposals wills make the
capital structure of Global Crossing more complex and could confuse
investors, thereby adversely affecting the valuation of the two groups.
In addition, a more complex capital structure will lead to increased
costs, including costs related to preparing combined financial
statements for each group in addition to the consolidated financial
statements of Global Crossing.
. Uncertainty of market reaction to decisions relating to tracking
stock. The market prices of Global Crossing group stock and GlobalCenter
group stock could be affected by the market reaction to decisions by our
board of directors and management that investors perceive as affecting
differently one class of common stock compared to the other. These
decisions could include decisions regarding business transactions
between the groups and the allocation of assets, expenses, liabilities
and corporate opportunities and financing resources between them.
. Limiting unsolicited acquisition offers. The existence of a tracking
stock structure, as opposed to traditional common stock, may limit
potential unsolicited acquisitions person a person interested in
acquiring only one group without negotiation with our management would
still be required to seek control of the voting power represented by all
of the outstanding capital stock of Global Crossing entitled to vote on
that acquisition, including the classes of common stock related to the
other groups.
. Potential adverse effects in connection with acquisitions. The issuance
of a tracking stock in connection with future acquisitions by us could
have various adverse effects, such as the possible inability or
increased difficulty of obtaining a ruling from the U.S. Internal
Revenue Service for an acquisition designed to be tax-free.
. Potential risks associated with an investment in a single company. The
holders of Global Crossing group stock and the holders of GlobalCenter
group stock will continue to bear the risks associated with an
investment in a single company, Global Crossing, and all of Global
Crossing's businesses, assets and liabilities.
. Potential adverse tax consequences. The Internal Revenue Service could
successfully assert that the redesignation of our outstanding common
stock as Global Crossing group stock could be taxable to you and/or us.
In addition, the Clinton Administration's Fiscal Year 2001 Budget
Proposal included a provision that would treat the receipt of stock
similar to Global Crossing group stock and
51
GlobalCenter group stock for other stock in the corporation or in a
distribution by the issuing corporation as taxable to the shareholders.
If this provision is enacted following the implementation of the
tracking stock structure, we might be required to change our plan to
dispose of GlobalCenter group stock or change our capital structure by
unwinding the tracking stock structure to avoid adverse tax
consequences.
Our board of directors also considered that, under the terms of the Global
Crossing group stock and the GlobalCenter group stock, we may, in certain
circumstances, elect to convert one class of our stock into another at a
premium to market value. These provisions, including the amount and calculation
of the applicable premium, are described in detail under "Description of
Capital Stock--GlobalCenter group stock--Conversion and repurchase." The
premiums are intended for the protection of the holders of the class of stock
being converted since a decision by us to convert that stock may be made
without the consent of the holders. Provisions similar to these, with
comparable premiums, are included in the terms of tracking stocks of other
public companies that have issued tracking stock. Accordingly, we believe these
premiums are necessary in order for us to be able to successfully market the
GlobalCenter group stock in the offering, which we believe to be in the best
interests of Global Crossing and its shareholders. Thus, notwithstanding the
potential dilutive effect to the holders of Global Crossing group stock in the
event our board of directors elects to convert the GlobalCenter group stock for
Global Crossing group stock under these provisions, we believe these provisions
to be in the best interests of Global Crossing and all of its shareholders.
Our board of directors determined that, on balance, the potential advantages
of the tracking stock proposals outweigh any potentially negative consequences
of the proposals. In considering the alternatives of an initial public offering
of stock of GlobalCenter Inc. and a spin-off of GlobalCenter Inc. to the
shareholders of Global Crossing, our board of directors recognized that certain
of the above-mentioned benefits would also be achieved by these alternatives,
and many of the negative consequences would be avoided. For instance, these
alternatives would permit the market to review separate financial information
for the groups and would provide the financial flexibility of separate publicly
traded securities representing the groups. In addition, neither of these
alternatives would have required the complex capital structure proposed to
effect the tracking stocks. Notwithstanding the foregoing, our board of
directors determined that a tracking stock would be more advantageous to Global
Crossing and its shareholders. In making this determination, our board of
directors concluded that tracking stock will better enable us to retain the
advantages of doing business as a single company. These advantages include our
ability to continue to take advantage of the strategic and operational benefits
of synergies existing between the groups relating to technology and network
sharing, in addition to maintaining cost savings in corporate overhead
expenses. These advantages would not necessarily be available in the case of an
initial public offering of shares of GlobalCenter Inc. even if we continued to
control GlobalCenter Inc. after the offering, and would likely be unavailable
if and when the sale of shares in GlobalCenter Inc. reduced our ownership below
a control position. In view of all of the foregoing, our board of directors
unanimously recommends approval of the tracking stock proposals.
Our board of directors believes that an increase in our authorized shares of
common stock and preferred stock at this time is in the best interests of
Global Crossing so that we can implement the tracking stock proposals and have
available the number of shares needed for possible acquisitions, capital
raising, future conversion, dividends and current and proposed stock incentive
plans.
As described under "--Conversion and repurchase," our board of directors has
the right to convert Global Crossing group stock into another class of our
stock at specified premiums payable in shares of that group's stock. Similarly,
our board of directors has the right to convert GlobalCenter group stock into
another class of our stock at specified premiums payable in shares of that
group's stock. The number of shares issuable in a conversion will vary based on
the relative market values of the outstanding classes of stock and the number
of outstanding shares of stock being converted. Our board of directors also may
pay a dividend in shares of a class of stock. If our board of directors
determines that a conversion or a share dividend is in the best interests
52
of Global Crossing, but at that time sufficient authorized shares of stock are
not available, our shareholders would be required to approve an increase in our
authorized share capital.
We will also reserve 14,971,471 shares of GlobalCenter group stock for
issuance under the GlobalCenter stock incentive plans to be effective, subject
to your approval, upon the completion of the proposed public offering of
GlobalCenter group stock. For information on the effect of the tracking stock
proposals on outstanding awards under the 1998 Global Crossing Stock Incentive
Plan, see "Effect on existing awards and convertible preferred stock" on page
73.
Other than the issuance of shares of GlobalCenter group stock in the proposed
public offering, the expected disposition of the Global Crossing group's inter-
group interest in the GlobalCenter group following the proposed public offering
in the form of additional GlobalCenter group stock and the issuance of shares
of GlobalCenter group stock under the GlobalCenter stock incentive plans to be
effective upon the completion of the proposed public offering of GlobalCenter
group stock, we have no present understanding or agreement for the issuance of
any additional shares of Global Crossing group stock or GlobalCenter group
stock or for the issuance of any class of additional common stock. Although our
board of directors has no present intention of doing so, the additional shares
or additional classes of stock that would be authorized for issuance if the
tracking stock proposal is implemented could be issued in one or more
transactions that would make a takeover of Global Crossing more difficult and,
therefore, less likely, even though a takeover might be financially beneficial
to Global Crossing and our shareholders. For additional information on
provisions of Bermuda law and our bye-laws that might deter a takeover, see "--
Certain anti-takeover provisions of Bermuda law and our bye-laws." We have no
knowledge of any person or entity that intends to seek a controlling interest
in Global Crossing or to make a takeover proposal.
Recommendation of our board of directors
Our board of directors has carefully considered the tracking stock proposals
and believes that the approval of these proposals by the shareholders is
advisable and in the best interests of our company and our shareholders. Our
board of directors unanimously recommends that you approve these proposals.
Dividend policy
Historically, we have not paid dividends on our existing common stock.
Dividends, if any, are declared at the discretion of our board of directors. We
presently do not anticipate paying dividends on either tracking stock.
Dividends on the Global Crossing group stock and the GlobalCenter group stock,
if any, will be declared at the discretion of our board of directors.
Because each of the Global Crossing group and the GlobalCenter group is
expected to require significant capital commitments to finance its operations
and fund its future growth, Global Crossing does not expect to pay any
dividends on shares of either Global Crossing group stock or GlobalCenter group
stock for the foreseeable future. If and when our board of directors does
determine to pay any dividends on shares of Global Crossing group stock or
GlobalCenter group stock, this determination will be based primarily on the
results of operations, financial condition and capital requirements of the
relevant group and of Global Crossing as a whole and such other factors as our
board of directors considers relevant. Payment of dividends on Global Crossing
group stock and GlobalCenter group stock also may be restricted by the terms of
some of the loan agreements, indentures and other transactions entered into by
Global Crossing from time to time.
In making its dividend decisions regarding Global Crossing group stock and
GlobalCenter group stock, our board of directors will rely on the respective
combined financial statements of the Global Crossing group and the GlobalCenter
group. See the combined financial statements of the GlobalCenter group and the
pro forma combined financial statements of the Global Crossing group included
in this proxy statement.
53
Bermuda law limits the amount of dividends we can pay on either group's
stock. For more information on these limitations, see "--Description of Global
Crossing group stock and GlobalCenter group stock--Dividends."
Description of Global Crossing group stock and GlobalCenter group stock
We have summarized below the material terms of Global Crossing group stock
and GlobalCenter group stock. We encourage you to read the proposed Certificate
of Designations which is attached to this proxy statement as Annex II.
The Global Crossing group and the Global Center group
We designed GlobalCenter group tracking stock to track the economic
performance of the GlobalCenter group. The Certificate of Designations defines
the "Global Crossing Group" generally as the interest of the Global Crossing
group or any of its affiliates in all of the businesses in which Global
Crossing or any of its affiliates or any of their predecessors or successors is
or has been engaged, directly or indirectly, and the respective assets and
liabilities of Global Crossing or any of its affiliates, other than that
portion of the GlobalCenter group represented by the outstanding shares of
GlobalCenter group stock. The Certificate of Designations defines the
"GlobalCenter Group" generally as all of the businesses, assets, properties and
liabilities of GlobalCenter Inc. and its subsidiaries. The Certificate of
Designations contains adjustments to the definition of the GlobalCenter group
to reflect, among other things, related assets and liabilities (including
contingent liabilities), net income and net losses arising after the date of
such financial statements, contributions and allocations of assets, liabilities
and businesses between the groups and acquisitions and dispositions.
Inter-group interest
Prior to the completion of the proposed public offering of GlobalCenter group
stock, the Global Crossing group will hold a 100% interest in the earnings and
losses of the GlobalCenter group and, therefore, a 100% inter-group interest in
the GlobalCenter group. Prior to the completion of the proposed public offering
and after the special meeting, our board of directors will determine the number
of shares of GlobalCenter group stock that, if issued, would represent 100% of
the Global Crossing group's inter-group interest in the GlobalCenter group.
That number will be determined based on:
. the future prospects of the GlobalCenter group and Global Crossing;
. sales, earnings and certain other financial and operating information of
Global Crossing in recent periods;
. the price-earnings or price-sales ratios, the market prices of
securities and certain financial and operating information of companies
engaged in activities similar to those of the GlobalCenter group;
. prevailing equity market conditions; and
. the anticipated range of the offering price of GlobalCenter group stock
in the proposed offering.
These considerations are similar to those that will be considered in
determining the initial public offering price of GlobalCenter group stock in
the proposed initial public offering.
The Global Crossing group's inter-group interest in the GlobalCenter group
represents the ownership of the Global Crossing group in the portion of the
GlobalCenter group that is not represented by shares of GlobalCenter group
stock issued to the public.
The outstanding interest fraction represents the ownership of the
GlobalCenter group that is represented by shares of GlobalCenter group stock
issued to the public compared to 100% of the equity value of the GlobalCenter
group. The outstanding interest fraction equals the number of shares of
GlobalCenter group stock outstanding divided by the sum of the number of shares
of GlobalCenter group stock outstanding and the number of shares issuable with
respect to the Global Crossing group's inter-group interest in the GlobalCenter
54
group. The outstanding interest fraction will equal one, and the inter-group
interest will equal zero, at any time that all of the ownership of the
GlobalCenter group is represented by the outstanding GlobalCenter group stock.
The following illustration demonstrates the calculation of the outstanding
interest fraction. If:
. 10 million shares of GlobalCenter group stock were outstanding as a
result of the initial public offering;
. 90 million shares of GlobalCenter group stock were issuable with respect
to the Global Crossing group's inter-group interest in the GlobalCenter
group (that is, the Global Crossing group held a 90% inter-group
interest in the GlobalCenter group),
then the outstanding interest fraction with respect to the GlobalCenter group
would equal 10% based on the following calculation:
number of shares of GlobalCenter group stock = outstanding interest
outstanding fraction
- --------------------------------------------------
number of shares of GlobalCenter group stock
outstanding +
number of shares issuable with respect to the
Global Crossing
group's inter-group interest in the GlobalCenter
group
10 million shares = 10%
---------------------------------
10 million shares + 90
million shares
The number of shares of GlobalCenter group stock issuable with respect to the
Global Crossing group's inter-group interest in the GlobalCenter group shall
be:
. adjusted to reflect equitably any subdivision, by stock split or
otherwise, or combination, by reverse stock split or otherwise, of
GlobalCenter group stock or any distribution of shares of GlobalCenter
group stock to holders of GlobalCenter group stock or any
reclassification of GlobalCenter group stock;
. decreased by:
. the number of shares of GlobalCenter group stock issued or sold by
us that, immediately prior to that issuance or sale, were included
in the number of shares issuable with respect to the Global Crossing
group's inter-group interest;
. the number of shares of GlobalCenter group stock issued upon
conversion, exchange or exercise of convertible securities that,
immediately prior to the issuance or sale of these convertible
securities, were included in the number of shares issuable with
respect to the Global Crossing group's inter-group interest;
. the number of shares of GlobalCenter group stock issued by us as a
share dividend or in connection with any reclassification or
exchange of shares, including any exchange offer, to holders of
Global Crossing group stock;
. the number of shares of GlobalCenter group stock issued upon the
conversion, exchange or exercise of any convertible securities
issued by us as a share dividend or in connection with any
reclassification or exchange of shares, including any exchange
offer, to holders of Global Crossing group stock;
. the number equal to the percentage of the outstanding shares
repurchased after a disposition of substantially all, but not all,
of the assets attributed to the GlobalCenter group times the number
of shares of GlobalCenter group stock issuable with respect to the
Global Crossing group's inter-group interest;
. the number equal to the quotient of (x) the aggregate fair value as
of the date of contribution of assets transferred from the
GlobalCenter group to the Global Crossing group in consideration of
55
a reduction in the number of shares issuable with respect to the
Global Crossing group's inter-group interest in the GlobalCenter
group divided by (y) the average market value of one share of
GlobalCenter group stock over the 20-trading day period ending on the
date of such contribution;
. increased by:
. the number of outstanding shares of GlobalCenter group stock
repurchased by us for consideration that is attributed to the Global
Crossing group;
. the number equal to the quotient of (x) the fair value of assets
attributed to the Global Crossing group that are contributed to the
GlobalCenter group in consideration of an increase in the number of
shares issuable with respect to the Global Crossing group's inter-
group interest, divided by (y) the average market value of one share
of GlobalCenter group stock over the 20-trading day period ending on
the date of such contribution; and
. the number of shares of GlobalCenter group stock into or for which
convertible securities deemed held by the Global Crossing group are
deemed converted, exchanged or exercised;
. increased or decreased under those other circumstances as our board of
directors determines appropriate to reflect the economic substance of
any other event or circumstance.
At any time the Global Crossing group holds an inter-group interest in the
GlobalCenter group, the outstanding interest fraction will be used to allocate
to the Global Crossing group any dividend or repurchase payment made to
holders of GlobalCenter group stock.
Our board of directors also may pay dividends in shares of GlobalCenter
group stock on shares of Global Crossing group stock to the extent the number
of shares issued in connection with the share dividend is less than or equal
to the number of shares issuable with respect to the Global Crossing group's
inter-group interest in the GlobalCenter group. Distributions of assets
attributed to the GlobalCenter group on shares of Global Crossing group stock
are similarly limited.
If the Global Crossing group's inter-group interest in the GlobalCenter
group has been eliminated and the GlobalCenter group has acquired an inter-
group interest in the Global Crossing group, our board of directors may pay
dividends in shares of Global Crossing group stock or distribute assets
attributed to the Global Crossing group on shares of GlobalCenter group stock
but only subject to limitations similar to those described above when the
Global Crossing group holds an inter-group interest in the GlobalCenter group.
Any group may hold an inter-group interest in any other group, unless our
board of directors shall determine otherwise at the time of issuance. However,
no group can hold an inter-group interest in any other group if the two groups
would then hold an inter-group interest in each other. Accordingly, the
GlobalCenter group may hold an inter-group interest in the Global Crossing
group only if the Global Crossing group's inter-group interest has been
eliminated. Additional groups also may hold an inter-group interest in the
Global Crossing group or the GlobalCenter group. If the GlobalCenter group
acquired an inter-group interest in the Global Crossing group, similar changes
would be made to that inter-group interest if transactions similar to those
described above relating to the Global Crossing group's inter-group interest
in the GlobalCenter group occurred with respect to Global Crossing group stock
or the Global Crossing group. If an additional group acquired an inter-group
interest in the GlobalCenter group or the GlobalCenter group held an inter-
group interest in any additional group, similar provisions would also apply.
Dividends
The Certificate of Designations relating to Global Crossing group stock and
GlobalCenter group stock provides that dividends on Global Crossing group
stock or GlobalCenter group stock will be limited to the lesser of:
. the funds of Global Crossing legally available for distributions under
Bermuda law; and
56
. the available distribution amount for the Global Crossing group, which
is the same amount that would be legally available for the payment of
dividends on GlobalCenter group's stock if the GlobalCenter group were a
separate company under Bermuda law.
The available distribution amount for a particular group is calculated as
follows:
. the outstanding interest fraction for that group,
multiplied by
. the lesser of:
. any amount in excess of the minimum amount necessary to pay debts
attributed to that group as they become due; and
. the realizable value of the assets attributed to that group less the
sum of the total liabilities attributed to that group together with
the amount of the issued share capital and share premium account
attributable to that group.
Under Bermuda law, the amount of legally available funds of Global Crossing
is determined on the basis of our entire company, and not only the respective
groups. As a result, the amount of our legally available funds will reflect the
amount of:
. any net losses of each group, including any additional groups;
. any distributions made on Global Crossing group stock, GlobalCenter
group stock, any additional class of common stock or any preferred
stock; and
. any repurchases of Global Crossing group stock, GlobalCenter group
stock, any additional class of common stock or any preferred stock.
Dividend payments on Global Crossing group stock or GlobalCenter group stock
could be precluded because legally available funds are not available under
Bermuda law, even though the available distribution amount test for the
particular group was met. We cannot assure you that there will be an available
distribution amount for any group or, if met, that we will have legally
available funds to pay such a dividend.
Subject to the prior payment of dividends on any outstanding shares of
preferred stock and the limitations described above, our board of directors
will be able, in its sole discretion, to declare and pay dividends exclusively
on Global Crossing group stock, exclusively on GlobalCenter group stock,
exclusively on any additional tracking stock or on any combination of class of
stock, in equal or unequal amounts. In making its dividend decisions, our board
of directors will not be required to consider the relative available
distribution amounts for any group, the amount of dividends previously declared
on any class of stock, the respective voting or liquidation rights of any class
or any other factor.
The terms of some of our debt instruments also place limitations on our
ability to pay dividends.
If the Global Crossing group still holds an inter-group interest in the
GlobalCenter group at the time of any dividend on the outstanding shares of
GlobalCenter group stock, we will credit to the Global Crossing group, and
charge against the GlobalCenter group, a corresponding amount in respect of the
Global Crossing group's inter-group interest in the GlobalCenter group.
Voting rights
The holders of GlobalCenter group stock and the holders of Global Crossing
group stock, as well as the holders of any additional class of common stock
that might subsequently be created and upon which similar voting power is
vested, will be entitled to vote on any matter on which our shareholders are,
by Bermuda law,
57
Nasdaq listing rules or stock exchange rules or by the provisions of our bye-
laws as determined by our board of directors, entitled to vote, subject to
certain restrictions described below.
The holders of GlobalCenter group stock, the holders of Global Crossing group
stock and the holders of any additional class of common stock that might
subsequently be created and upon which similar voting power is vested will vote
together as a single voting group on each matter on which holders of common
stock are generally entitled to vote, except as described below.
On all matters as to which all classes of common stock will vote together as
a single class, subject to certain restrictions described below:
. each share of GlobalCenter group stock then outstanding will have a
number of votes equal to the quotient of the average market value of one
share of GlobalCenter group stock during the 20-trading day period
ending on the tenth trading day prior to the record date for determining
the holders of stock entitled to vote, divided by the average market
value of one share of Global Crossing group stock during the same
period. However, if this calculation results in the holders of
GlobalCenter group stock holding more than 25% of the total voting power
of all outstanding shares of common stock, the vote of each share of
GlobalCenter group stock will be reduced so that all of the outstanding
shares of GlobalCenter group stock represent 25% of the total voting
power of all outstanding shares of common stock. The 25% limitation on
the total voting power of all outstanding shares of common stock will be
eliminated if the outstanding shares of Global Crossing group stock are
converted into shares of the GlobalCenter group; and
. each share of Global Crossing group stock then outstanding will have one
vote.
If we issue shares of an additional class of common stock, each share of such
additional class of common stock will have a number of votes, including a
fraction of one vote or no vote, as our board of directors determines at the
time of issuance. Shares issuable with respect to a group's inter-group
interest in another group will have no voting rights.
Accordingly, the relative per share voting rights of GlobalCenter group
stock, Global Crossing group stock and any additional class of common stock
that is entitled to a number of votes per share based on market values will
fluctuate depending on changes in the relative market values of shares of the
classes of common stock.
Global Crossing group stock will have and will retain a substantial majority
of the combined voting power of GlobalCenter group stock and Global Crossing
group stock because:
. we expect that initially the aggregate market value of the outstanding
shares of Global Crossing group stock will be substantially greater than
the aggregate market value of the outstanding shares of GlobalCenter
group stock; and
. the aggregate voting power of all of the outstanding shares of
GlobalCenter group stock is limited to 25% of the total voting power of
all outstanding shares of common stock, regardless of the market value
of the GlobalCenter group stock.
Fluctuations in the relative voting rights of GlobalCenter group stock,
Global Crossing group stock and any additional class of common stock that is
subsequently created and entitled to a number of votes per share based on
market values could influence an investor interested in acquiring and
maintaining a fixed percentage of the voting power of our common stock to
acquire such percentage by acquiring the class of common stock having a greater
number of votes per share.
We will set forth the number of outstanding shares of GlobalCenter group
stock, Global Crossing group stock and any additional class of common stock in
our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q filed
under the Securities Exchange Act of 1934. We will disclose in any proxy
statement for a
58
shareholders' meeting the number of outstanding shares and per share voting
rights of GlobalCenter group stock, Global Crossing group stock and additional
group stock, if any.
If shares of only GlobalCenter group stock are outstanding, each share will
have one vote and, in situations where GlobalCenter group stock is entitled to
vote as a separate voting group with respect to any matter, each share of
GlobalCenter group stock will, for purposes of such vote, also have one vote on
such matter.
The holders of Global Crossing group stock or GlobalCenter group stock will
not have any rights to vote separately as a class on any matter, except in the
case of any required proposal to (1) increase or decrease the authorized shares
of the relevant class, other than an increase in authorized shares required to
effectuate a conversion of one group into the other group or a distribution to
holders of Global Crossing group stock of all or a portion of its inter-group
interest in the GlobalCenter group, or (2) amend the terms of that class, and
except for the limited single class voting rights provided under Bermuda law,
Nasdaq listing rules or stock exchange rules or by the provisions of our bye-
laws as determined by our board of directors. In addition to the approval of
holders of a majority of all shares of stock voting together as a single voting
group present at the meeting, the approval of a majority of the outstanding
shares of GlobalCenter group stock or Global Crossing group stock present at a
meeting, voting as a separate voting group, would be required under Bermuda law
to approve any amendment to our bye-laws or the Certificate of Designations
relating to that class of common stock that would, among other things, change
the designation, rights, preferences or limitations of the shares of that
class.
The following illustration demonstrates the calculation of the number of
votes to which each share of GlobalCenter group stock would be entitled on all
matters on which the holders of GlobalCenter group stock and the holders of
Global Crossing group stock vote as a single voting group, where the average
market values calculation does not result in the holders of GlobalCenter group
stock holding more than 25% of the total voting power of all outstanding shares
of common stock and therefore a reduction in the voting power of each share of
GlobalCenter group stock is not required. If:
. 10 million shares of GlobalCenter group stock and 400 million shares of
Global Crossing group stock were outstanding;
. the average market value for the 20-trading day valuation period was $20
for GlobalCenter group stock; and
. the average market value for the 20-trading day valuation period was $40
for Global Crossing group stock;
then each share of Global Crossing group stock would have one vote and each
share of GlobalCenter group stock would have 0.5 votes based on the following
calculation:
average market value
of GlobalCenter
group stock
$20 per share 0.5 votes per
= -------------- = share of
- ---------------------- $40 per share GlobalCenter
average market value group stock
of Global Crossing
group stock
As a result, the shares of GlobalCenter group stock would represent 5 million
votes, which equals 1.2% of the total voting power of Global Crossing, and the
shares of Global Crossing group stock would represent 400 million votes, which
equals 98.8% of the total voting power of Global Crossing. These amounts are
calculated as follows:
0.5 votes per share X 10 million outstanding = 5 million votes for
of GlobalCenter shares of GlobalCenter GlobalCenter group
group stock group stock stock
59
1 vote per share of 400 million shares of 400 million votes
Global Crossing X Global Crossing group = for Global Crossing
group stock stock group stock
5 million votes for GlobalCenter
group stock
1.2% of total voting power
= held by GlobalCenter group stock
- -------------------------------------
5 million votes for GlobalCenter
group stock +
400 million votes for Global
Crossing group stock
400 million votes for Global
Crossing group stock
98.8% of total voting power held
= by Global Crossing group stock
- -------------------------------------
5 million votes for GlobalCenter
group stock +
400 million votes for Global
Crossing group stock
The following illustration demonstrates the calculation of the number of
votes to which each share of GlobalCenter group stock would be entitled on all
matters on which the holders of Global Crossing group stock and the holders of
GlobalCenter group stock vote as a single voting group, where the average
market values calculation does result in the holders of GlobalCenter group
stock holding more than 25% of the total voting power of all outstanding
shares of common stock and therefore a reduction in the voting power of each
share of GlobalCenter group stock is required. If:
. 200 million shares of GlobalCenter group stock and 400 million shares of
Global Crossing group stock were outstanding;
. the average market value for the 20-trading day valuation period was $50
for GlobalCenter group stock; and
. the average market value for the 20-trading day valuation period was $40
for Global Crossing group stock;
then each share of Global Crossing group stock would have one vote and each
share of GlobalCenter group stock would have 1.25 votes based on the following
calculation:
average market value
of GlobalCenter
group stock
$50 per 1.25 votes per
= share = share of
- --------------------- ------------ GlobalCenter
average market value $40 per group stock
of Global Crossing share
group stock
1.25 votes per 200 million 38.5% of total
share of outstanding voting power
GlobalCenter X shares of = 250 million = held by
group stock GlobalCenter votes GlobalCenter
group stock group stock
Because the total voting power of GlobalCenter group stock would exceed the
25% limitation, we would calculate the maximum number of votes to which the
holders of GlobalCenter group stock are entitled in the aggregate by using
this formula:
x 25% of total voting power of common stock
------------ =
x + y
where:
. x = the maximum number of votes to which the holders of outstanding
shares of GlobalCenter group stock are entitled in the aggregate; and
. y = the number of votes to which the holders of the outstanding shares
of Global Crossing group stock are entitled, based on one vote per
share.
60
Applied to the foregoing facts, this formula results in the following:
x
---------------- = 0.25
x + y
x
---------------- = 0.25
x +
4,000,000,000
x = 0.25 x + 100,000,000
0.75 x = 100,000,000
x = 133,333,333 maximum votes for
holders of GlobalCenter
group stock
Global Crossing would then calculate the maximum number of votes per share of
GlobalCenter group stock as follows:
x 133,333,333 0.667 votes per
- --------------------- = ------------ = share of
the number of shares 200,000,000 GlobalCenter
of GlobalCenter group stock
group stock
outstanding
Voting restrictions
Under our bye-laws, if any shareholder owns, directly, indirectly or
constructively under Section 958 of the U.S. Internal Revenue Code or
beneficially directly or indirectly as a result of the possession of sole or
shared voting power within the meaning of Section 13(d) of the Securities
Exchange Act of 1934 and the rules and regulations promulgated under that act,
more than 9.5% of the total voting power of Global Crossing common stock, or,
in the case of Canadian Imperial Bank of Commerce and its affiliates,
collectively, more than 20% of the total voting power of Global Crossing common
stock, the number of votes of that shareholder will be limited to 9.5% of the
aggregate voting power of Global Crossing common stock, or, in the case of
Canadian Imperial Bank of Commerce and its affiliates, collectively, to 20% of
the aggregate voting power of Global Crossing common stock, based on a formula
contained in the bye-laws. The additional votes that could be cast by that
shareholder but for the restrictions on voting rights will be allocated to the
other shareholders, pro rata based on their number of shares of common stock.
Shareholders that have been allocated additional votes may not exceed the
voting limitation as a result of that allocation.
Holders of shares of Global Crossing group stock and holders of GlobalCenter
group stock are subject to the voting restrictions currently imposed on holders
of our existing Global Crossing common stock.
Conversion and repurchase
Our current bye-laws do not provide for either mandatory or optional
conversion or repurchase of our existing common stock. The proposed resolution
will permit the conversion or repurchase of Global Crossing group stock and
GlobalCenter group stock as described below.
Conversion of common stock at option of Global Crossing at any time
Except as described below, our board of directors may at any time convert
each share of Global Crossing group stock into a number of shares of
GlobalCenter group stock or another class of our common stock, as determined by
our board of directors at the time of conversion, equal to the applicable
percentage described below of the ratio of the average market value of one
share of Global Crossing group stock to the average
61
market value of one share of the other class of our common stock during a 20-
trading day period. Similarly, except as described below, our board of
directors may at any time convert each share of GlobalCenter group stock into a
number of shares of Global Crossing group stock or another class of our common
stock, as determined by our board of directors at the time of conversion, equal
to a percentage of the ratio of the average market value of one share of
GlobalCenter group stock to the average market value of one share of the other
class of our common stock during a 20-trading day period. We will calculate the
ratio of average market values as of the fifth trading day prior to the date we
mail the conversion notice to holders. The applicable percentage of the ratio
of the average market values will be 120% during the first year following the
completion of the planned initial public offering of GlobalCenter group stock,
115% during the second year and 110% thereafter.
Any optional conversion as described above can only be effected if, as of
close of business on the last day of the 20-trading day period, the market
capitalization of the class of common stock being issued in the conversion
exceeds the market capitalization of the class of common stock being converted.
In addition, if our board of directors determines to issue one or more
classes of additional common stock, shares of that class or those classes could
be convertible into Global Crossing group stock or GlobalCenter group stock on
terms determined by our board at the time of issuance.
The premiums described above that are provided upon any conversion of
GlobalCenter group stock or Global Crossing group stock are intended for the
protection of the holders of that class of stock since a decision by Global
Crossing Ltd. to convert that class of stock may be made without the consent of
the holders of that class of stock. The decrease in the premium from 20% to 10%
over the first two years the GlobalCenter group stock is outstanding is
intended to allow greater flexibility to Global Crossing Ltd. in using these
provisions over time. Provisions similar to these, with comparable declining
premiums, are included in the terms of tracking stocks of other public
companies that have issued tracking stock. Accordingly, we believe these
premiums are necessary in order for us to be able to successfully market the
GlobalCenter group stock in the planned initial public offering of that class
of common stock, while balancing the need for Global Crossing Ltd. to maintain
flexibility in its capital structure.
If a tax event occurs at any time, a factor of 100% rather than the
percentages discussed above will be applied to the ratio of the average market
values. This means that the holders of the class of stock being converted will
not receive any premium in a conversion.
The term "tax event" means the receipt by Global Crossing of an opinion of
tax counsel to the effect that, as a result of (a) any amendment to, official
clarification of, or change or proposed change in, the laws, or interpretation
or application of the laws, of Bermuda or the United States or any political
subdivision or taxing authority thereof or therein, including:
. the enactment of any legislation;
. the publication of any judicial or regulatory decision, determination,
pronouncement; or
. any announced proposed change in law by an applicable legislative
committee or the chair thereof, but not including a legislative proposal
by an administration until acted upon by the applicable legislative
committee or chair thereof,
regardless of whether the amendment, clarification, change or proposed change
is issued to or in connection with a proceeding involving us, the Global
Crossing group or the GlobalCenter group and regardless of whether the
amendment, clarification, change or proposed change is subject to appeal, there
is more than an insubstantial risk that (b):
. any issuance of Global Crossing group stock or GlobalCenter group stock
would be treated for tax purposes as a sale or other taxable disposition
by us or any of our subsidiaries of any of the assets, operations or
relevant subsidiaries to which Global Crossing group stock or
GlobalCenter group stock relates;
62
. the issuance or existence of Global Crossing group stock or GlobalCenter
group stock would subject us, our subsidiaries or affiliates, or our or
their successors or shareholders to the imposition of any tax or other
adverse tax consequences that, in the reasonable discretion and good
faith of Global Crossing, are more than de minimis; or
. either Global Crossing group stock or GlobalCenter group stock is not,
or at any time in the future will not be, treated for tax purposes
solely as common stock of Global Crossing.
For purposes of rendering such an opinion, tax counsel will assume that any
such legislative or administrative proposals will be adopted or enacted as
proposed. For the avoidance of doubt, a tax event does not include the
occurrence of any of the events listed in (a) above, if, as a result of a
"grandfathering" provision, such event results in not more than an
insubstantial risk that the issuance or existence of either Global Crossing
group stock or GlobalCenter group stock would result in any of the consequences
described in (b) above.
These provisions allow us the flexibility to recapitalize two classes of our
stock into one class of our stock that would, after the recapitalization,
represent an equity interest in the combined businesses of the Global Crossing
group or the GlobalCenter group, as the case may be, and the group related to
the class of our stock into which Global Crossing group stock or GlobalCenter
group stock, as the case may be, is converted. The optional conversion could be
exercised at any future time if our board of directors determines that, under
particular facts and circumstances then existing, an equity structure
consisting of these two classes of stock was no longer in the best interests of
Global Crossing. A conversion could be exercised, however, at a time that is
disadvantageous to the holders of one class of stock. For additional
information on the risks of a conversion and the limited remedies available to
shareholders, see "Risk Factors--Holders of Global Crossing group stock and
GlobalCenter group stock may not have any remedies if any action by directors
and officers has a disadvantageous effect on the stock of their group" and "--
Potential conflicts of interest exist between Global Crossing group stock and
GlobalCenter group stock that may be difficult to resolve by our board of
directors or that may be resolved adversely to one of the classes."
Conversion would be based upon the relative market values of Global Crossing
group stock or GlobalCenter group stock, as the case may be, and the group
related to the class of our stock into which Global Crossing group stock or
GlobalCenter group stock, as the case may be, is converted. Many factors could
affect the market values of Global Crossing group stock, GlobalCenter group
stock or the other class of stock, including our results of operations and
those of each of the groups, trading volume and general economic and market
conditions. Market values also could be affected by decisions by our board of
directors or our management that investors perceive to affect differently one
class of stock compared to the other. These decisions could include changes to
our tracking stock policies, transfers of assets between groups, allocations of
corporate opportunities and financing resources between the groups and changes
in dividend policies.
The following illustration demonstrates the calculation of the number of
shares issuable upon conversion of one class of common stock into shares of
another class of our common stock at our option at any time after the second
year after the completion of the proposed initial public offering of
GlobalCenter group stock. If:
. a tax event has not occurred;
. 10 million shares of GlobalCenter group stock and 400 million shares of
Global Crossing group stock were outstanding immediately prior to the
conversion;
. the average market value of one share of GlobalCenter group stock over
the 20-trading day valuation period was $20; and
. the average market value of one share of Global Crossing group stock
over the 20-trading day valuation period was $40;
63
then each share of GlobalCenter group stock could be converted into 0.55 shares
of Global Crossing group stock based on the following calculation:
average market value of GlobalCenter shares of Global Crossing
110% group stock group stock
X =
------------------------
average market value of Global
Crossing group stock
$20 per share
1.1 X ------------------------ = 0.55 shares of Global
$40 per share Crossing group stock
Repurchase for stock of subsidiary
Our board of directors may at any time repurchase on a pro rata basis all of
the outstanding shares of Global Crossing group stock or GlobalCenter group
stock for shares of the common stock of one or more of our wholly-owned
subsidiaries that own all of the assets and liabilities attributed to the
relevant group.
If the Global Crossing group still holds an inter-group interest in the
GlobalCenter group at the time of any such repurchase of GlobalCenter group
stock, the number of shares of those subsidiaries that we will exchange for
GlobalCenter group stock in such repurchase will be equal to the product of the
outstanding interest fraction and the number of shares of common stock of each
subsidiary that will be outstanding immediately after the repurchase. We will
retain the balance of the shares of those subsidiaries for the Global Crossing
group or distribute them to the holders of Global Crossing group stock.
If the Global Crossing group still holds an inter-group interest in the
GlobalCenter group at the time of any such repurchase of Global Crossing group
stock, we will exchange, in addition to shares of one of more subsidiaries that
own all of the assets and liabilities attributed to the Global Crossing group,
a number of shares of GlobalCenter group stock equal to the number of shares
issuable with respect to the Global Crossing group's inter-group interest in
the GlobalCenter group to either (1) the holders of Global Crossing group stock
or (2) one or more of those Global Crossing group subsidiaries.
We may repurchase shares of Global Crossing group stock or GlobalCenter group
stock for subsidiary stock only if we have legally available funds under
Bermuda law.
These provisions are intended to give us increased flexibility with respect
to spinning off the assets of one of the groups by transferring the assets of
that group to one or more wholly-owned subsidiaries. As a result of any such
repurchase, the holders of each Global Crossing group stock and the holders of
GlobalCenter group stock would hold securities of separate legal entities
operating in distinct lines of business. We currently do not have any intention
of spinning off the assets of the GlobalCenter group; however, this repurchase
could be authorized by our board of directors at any time in the future if it
determines that, under the facts and circumstances then existing, an equity
structure comprised of Global Crossing group stock and GlobalCenter group stock
is no longer in the best interests of Global Crossing as a whole.
The following illustration demonstrates the provisions with respect to a
repurchase of all of GlobalCenter group stock for shares of the common stock of
one of our wholly-owned subsidiaries that owns all of the assets and
liabilities attributed to the GlobalCenter group. If:
. the Global Crossing group holds an 90% inter-group interest in the
GlobalCenter group, resulting in a 10% outstanding interest fraction;
. 100 million shares of common stock of that GlobalCenter group subsidiary
would be outstanding immediately after the repurchase;
64
then we will exchange 10 million shares of common stock of that GlobalCenter
group subsidiary for GlobalCenter group stock based on the following
calculation:
outstanding the number of shares of shares of
interest X common stock of that = GlobalCenter
fraction GlobalCenter group group subsidiary
subsidiary that will be
outstanding immediately
after the repurchase
0.10 X 100 million = 10 million
shares
As a result of the Global Crossing group's 90% inter-group interest, we would
retain the remaining 90 million shares of common stock of that GlobalCenter
group subsidiary for the Global Crossing group.
Mandatory dividend, repurchase or conversion of stock if disposition of
group assets occurs
If we dispose of all or substantially all of the properties and assets
attributed to either the Global Crossing group or the GlobalCenter group in a
transaction or series of related transactions other than those described below
under "--Exceptions to the mandatory dividend, repurchase or conversion
requirement if a disposition occurs," we are required to take action that
returns the value of the net proceeds of those assets to the holders of that
group's stock. That action could take the form of a dividend, a repurchase of
shares or a conversion into another class of our stock.
Accordingly, if we dispose of all or substantially all of the properties and
assets attributed to the Global Crossing group or the GlobalCenter group in a
transaction or series of related transactions other than those described below,
we will:
. pay a dividend to the holders of shares of that group's stock in cash
and/or securities or other property having a fair value equal to the net
proceeds of the disposition; or
. if the disposition involves all of the properties and assets, repurchase
all outstanding shares of that group's stock for cash and/or securities
or other property having a fair value equal to the net proceeds of the
disposition; or
. if the disposition involves substantially all, but not all, of the
properties and assets, repurchase a number of shares of that group's
stock for cash and/or securities or other property having a fair value
equal to the net proceeds of the disposition; the number of shares so
repurchased will have in the aggregate an average market value, during
the 10-day trading period beginning on the 51st trading day following
the disposition date; or
. convert each outstanding share of that group's stock into a number of
shares of another class of our common stock, as determined by our board
of directors at the time of conversion, equal to the applicable
percentage, described above under "Conversion of common stock at option
of Global Crossing at any time," of the ratio of the average market
value of one share of stock of the group whose assets are disposed to
the average market value of one share of the other class of our common
stock during the 10-day trading period beginning on the 51st trading day
following the disposition date.
We may only pay a dividend or repurchase shares of Global Crossing group
stock and GlobalCenter group stock if we have legally available funds under
Bermuda law and the amount to be paid to holders is less than or equal to the
available distribution amount for the group. We will pay the dividend or
complete the repurchase or conversion on or prior to the 120th trading day
following the disposition date.
For purposes of determining whether a disposition has occurred,
"substantially all of the properties and assets" attributed to either group
means a portion of the properties and assets that represents at least 80% of
the then fair value of the properties and assets attributed to that group.
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The "net proceeds" of a disposition means an amount equal to what remains of
the gross proceeds of the disposition after any payment of, or reasonable
provision is made as determined by our board of directors for:
. any taxes we estimate will be payable by us, or which we estimate would
have been payable but for the utilization of tax benefits attributable
to another group, in respect of the disposition or in respect of any
resulting dividend or repurchase;
. any transaction costs, including, without limitation, any legal,
investment banking and accounting fees and expenses;
. any liabilities of or attributed to the group whose assets are disposed,
including, without limitation, any liabilities for deferred taxes, any
indemnity or guarantee obligations incurred in connection with the
disposition or otherwise and any liabilities for future purchase price
adjustments and any preferential amounts; and
. any accumulated and unpaid dividends in respect of any preferred stock
attributed to that group.
We may elect to pay the dividend or repurchase price either in the same form
in which the proceeds of the disposition were received or in any other
combination that our directors determines will have an aggregate market value
of not less than the fair value of the net proceeds. For these purposes, (1)
the fair value of securities that have been publicly traded for a period of at
least will equal the market value of the securities, if determinable and (2)
the fair value of securities that have been publicly traded for a period of
less than , securities for which the market value is not determinable and
property other than cash or securities will be determined in good faith by our
board of directors. Our board of directors will not be required to obtain a
third party fairness opinion in connection with this determination.
The following illustration demonstrates the provisions requiring a mandatory
dividend, repurchase or conversion if a disposition occurs following the second
year after the consummation of this offering. If:
. 10 million shares of GlobalCenter group stock were outstanding;
. the Global Crossing group holds an 90% inter-group interest in the
GlobalCenter group, resulting in a 10% outstanding interest fraction;
. the net proceeds of the sale of substantially all, but not all, of the
assets of the GlobalCenter group equals $100 million;
. the average market value of GlobalCenter group stock during the 10-
trading day valuation period was $20 per share; and
. the average market value of Global Crossing group stock during the 10-
trading day valuation period was $40 per share;
then we could do any of the following:
(1) pay a dividend to the holders of GlobalCenter group stock equal to:
outstanding X net proceeds = dividend per
interest fraction ------------------------- share
number of outstanding
shares of GlobalCenter
group stock
0.10 X $100 million = $1 per share
-------------------------
10 million shares
As a result of the Global Crossing group's 90% inter-group interest, we would
credit to the Global Crossing group, and charge against the GlobalCenter group,
$90 million.
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(2) repurchase for $20 per share a number of shares of GlobalCenter group
stock equal to:
shares of
outstanding X net proceeds = GlobalCenter
interest fraction ------------------------- group stock
average market value of
GlobalCenter group stock
0.10 X $10 million = 500,000 shares
-------------------------
$20 per share
As a result of the Global Crossing group's 90% inter-group interest, we will
effectively repurchase 4.5 million shares issuable with respect to the Global
Crossing group's inter-group interest in the GlobalCenter group for $20 per
share by crediting to the Global Crossing group, and charging against the
GlobalCenter group, $90 million.
(3) convert each outstanding share of GlobalCenter group stock into a number
of shares of Global Crossing group stock equal to:
110% X average market value of =
GlobalCenter group stock shares of
------------------------- Global Crossing
average market value of group stock
Global Crossing group
stock
1.1 X $20 per share = 0.55 shares of
------------------------- Global Crossing
$40 per share group stock
Our board of directors may, within two years after a dividend or repurchase
following a disposition of substantially all, but not all, of the properties
and assets attributed to the Global Crossing group or the GlobalCenter group,
convert each outstanding share of that group's stock into a number of shares of
another class of our stock, as determined by our board of directors at the time
of conversion, equal to 110% of the ratio of the average market values of one
share of stock of the group whose assets are disposed to one share of the other
class of our stock over a 20-trading day period, unless we would be entitled to
convert without any premium as described under "--Conversion of common stock at
option of Global Crossing at any time." In that event, there will be no
premium. We will calculate the ratio of average market values as of the fifth
trading day prior to the date we mail the conversion notice to holders.
The following illustration demonstrates the calculation of the number of
shares issuable upon conversion of one class of stock into shares of another
class of our stock within two years after a dividend following a disposition of
substantially all of the group's assets. If:
. the Global Crossing group holds an 90% inter-group interest in the
GlobalCenter group, resulting in a 10% outstanding interest fraction;
. the average market value of GlobalCenter group stock during the 20-
trading day valuation period was $20 per share; and
. the average market value of Global Crossing group stock during the 20-
trading day valuation period was $80 per share;
then each share of GlobalCenter group stock could be converted into 0.275
shares of Global Crossing group stock based on the following calculation:
110% X average market value of = shares of
GlobalCenter group stock Global
------------------------- Crossing group
average market value of stock
Global Crossing group
stock
$20 per share 0.275 shares
-------------------------
1.1 X $80 per share =
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Exceptions to the mandatory dividend, repurchase or conversion requirement if
a disposition occurs. We are not required to take any of the above actions for
any disposition of all or substantially all of the properties and assets
attributed to either group in a transaction or class of related transactions
that results in our receiving for those properties and assets primarily equity
securities of any entity which:
. acquires those properties or assets or succeeds to the business
conducted with those properties or assets or controls such acquiror or
successor; and
. is primarily engaged or proposes to engage primarily in one or more
businesses similar or complementary to the businesses conducted by that
group prior to the disposition, as determined by our board of directors.
The purpose of this exception is to enable us technically to "dispose" of
properties or assets of a group to other entities, including joint ventures,
engaged or proposing to engage in businesses similar or complementary to those
of that group without requiring a dividend on, or a repurchase or conversion
of, the class of stock of that group, so long as we receive an equity interest
in that entity. We are not required to control that entity, whether by
ownership or contract provisions.
We also are not required to effect a dividend, repurchase or conversion if
the disposition is:
. of all or substantially all of our properties and assets in one
transaction or a series of related transactions in connection with our
dissolution and the distribution of our assets to shareholders;
. on a pro rata basis, such as in a spin-off, to the holders of all
outstanding shares of the stock of the group whose assets are disposed
and, to the extent that any group not subject to the disposition holds
an inter-group interest in the group whose assets are being disposed,
the group not subject to the disposition;
. made to any person or entity controlled by us, as determined by our
board of directors; or
. a disposition conditioned upon the affirmative vote of a majority of all
votes cast by the holders of that group's stock, voting as a separate
class.
Notices if disposition of group assets occurs. Not later than the 20th
trading day after the consummation of a disposition, we will announce publicly
by press release:
. the net proceeds of the disposition;
. the number of shares outstanding of the stock of the group whose assets
are disposed;
. the number of shares of that group's stock into or for which convertible
securities are then convertible, exchangeable or exercisable and the
conversion, exchange or exercise price of those convertible securities;
and
. if applicable, the outstanding interest fraction on the date of the
notice.
Not earlier than the 36th trading day and not later than the 40th trading day
after the consummation of the disposition, we will announce publicly by press
release whether we will pay a dividend or repurchase shares of stock with the
net proceeds of the disposition or convert the shares of stock of the group
whose assets are disposed into another class of our stock.
We will mail to each holder of shares of the group whose assets are disposed
the additional notices and other information required by our bye-laws.
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Selection of shares for repurchase. If fewer than all of the outstanding
shares of a class of stock are to be repurchased, we will repurchase those
shares proportionately from among the holders of outstanding shares of that
class of stock or by such method as may be determined by our board of directors
to be equitable.
Fractional interests; transfer taxes. We will not be required to issue
fractional shares of any capital stock or any fractional securities to any
holder of either class of stock upon any conversion, repurchase, dividend or
other distribution described above. If a fraction is not issued to a holder, we
will pay cash instead of that fraction.
We will pay all documentary, stamp or similar issue or transfer taxes that
may be payable in respect of the issue or delivery of any shares of capital
stock and/or other securities on repurchase or conversion of shares.
Liquidation rights
Currently, in the event of our dissolution after payment or provision for
payment of our debts and other liabilities and the payment of full preferential
amounts to which the holders of any preferred stock are entitled, the holders
of existing common stock are entitled to share equally in our remaining net
assets.
Under the Certificate of Designations, in the event of our dissolution, after
payment or provision for payment of the debts and other liabilities and full
preferential amounts to which holders of any preferred stock are entitled, the
holders of Global Crossing group stock, the holders of GlobalCenter group stock
and the holders of any additional tracking stock will be entitled to receive
our assets remaining, if any, for distribution to holders of common stock on a
per share basis in proportion to the liquidation units per share of such class.
The liquidation rights of the class will be as follows:
. each share of Global Crossing group stock will have one liquidation
unit; and
. each share of GlobalCenter group stock will have a number of liquidation
units equal to the quotient of the average market value of a share of
GlobalCenter group stock over the 20-trading day period ending on the
40th trading day after the initial issuance of the GlobalCenter group
stock, divided by the average market value of a share of Global Crossing
group stock over the same period; and
. if we issue an additional class or classes of common stock, each share
of an additional class of common stock will have a number of liquidation
units, including a fraction of one liquidation unit, as our board of
directors shall determine at the time of issuance.
After the number of liquidation units to which each share of GlobalCenter
group stock is entitled has been calculated in accordance with this formula,
the number of liquidation units to which each share of Global Crossing group
stock or GlobalCenter group stock is entitled will not be changed without the
approval of the holders of each class of stock voting as a separate class,
except in the limited circumstances described below. As a result, after the
date of the calculation of the number of liquidation units to which
GlobalCenter group stock is entitled, the liquidation rights of the holders of
the respective class of stock may not bear any relationship to the relative
market values or the relative voting rights of the two classes.
No holder of Global Crossing group stock will have any special right to
receive specific assets of the Global Crossing group and no holder of
GlobalCenter group stock will have any special right to receive specific assets
of the GlobalCenter group in the case of our dissolution.
If we subdivide or combine the outstanding shares of a class of stock or
declare a dividend or other distribution of shares of a class of stock to
holders of that class of stock, the number of liquidation units of the other
class of stock will be appropriately adjusted. This adjustment will be made by
our board of directors, to avoid any dilution in the aggregate, relative
liquidation rights of any class of stock.
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Neither a consolidation, merger or share exchange of Global Crossing into or
with any other corporation, nor any sale, conveyance, lease, exchange or
transfer of all or substantially all of our assets, will, alone, cause the
dissolution of Global Crossing, for purposes of these liquidation provisions.
Determinations by the board of directors
Any determinations made in good faith by our board of directors with respect
to a class of common stock will be final and binding on all of our
shareholders.
Preemptive rights
The holders of any class of stock will not have any preemptive rights.
Additional classes of common stock
If the tracking stock proposal is approved, our board of directors may decide
to authorize the issuance of shares of one or more classes of common stock in
addition to Global Crossing group stock and GlobalCenter group stock, although
we do not have any current plan to do so. Our board of directors will have the
authority to do so in its sole discretion and without further shareholder
approval, except as may be provided by Bermuda law or Nasdaq National Market
rules or the rules of any stock exchange on which any class of outstanding
common stock may then be listed.
If our board of directors decides to issue additional classes of common
stock, Global Crossing may establish a new group to which such new class of
common stock relates either by allocating to it newly acquired assets or by
reallocating to it assets and liabilities from any one or more of the Global
Crossing group, the GlobalCenter group or any previously created additional
group. In the latter case, the group or groups to which those assets and
liabilities were previously attributed would hold an inter-group interest in
the new group.
At the time of issuance of any class of additional common stock, our board of
directors will determine the dividend, voting and liquidation rights and
conversion, repurchase and other provisions applicable to that additional
common stock. Any additional common stock issued may be convertible into either
Global Crossing group stock or GlobalCenter group stock on such terms as may be
determined by our board of directors.
Our board of directors also may determine at the time of issuance of any
additional common stock that the additional group may acquire an inter-group
interest in either the Global Crossing group or the GlobalCenter group, or
both. Alternatively, our board of directors may permit the Global Crossing
group or the GlobalCenter group, or both, to acquire an inter-group interest in
the additional group.
Certain anti-takeover provisions of Bermuda law and our bye-laws
The following discussion concerns certain provisions of Bermuda law and our
bye-laws that could be viewed as having the effect of discouraging an attempt
to obtain control of Global Crossing.
Authorized but unissued shares of common stock and preferred stock
The tracking stock proposals may have an anti-takeover effect. The
flexibility vested in our board of directors to authorize the issuance of
additional common stock and preferred stock in one or more classes or series
could enhance our board of directors' bargaining capability on behalf of
shareholders in a takeover situation and could, under some circumstances, be
used to render more difficult or discourage a merger, tender offer or proxy
contest, the assumption of control by a holder of a large block of Global
Crossing securities or the removal of incumbent management, even if such a
transaction were favored by the holders of the requisite number of the then
outstanding shares of our capital stock. For example, our board of directors
could issue preferred stock having terms that could discourage an acquisition
attempt or other transaction that some or a majority of shareholders might
believe to be in their best interests or in which shareholders might receive a
premium for their stock over the then-current market price. Accordingly, you
might be deprived of an opportunity to consider a takeover proposal which a
third party might consider if Global Crossing did not have authorized but
unissued shares of capital stock.
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In addition, the existence of tracking stock, as opposed to a stand-alone
entity, may limit potential unsolicited acquisitions since a person interested
in acquiring only one group without negotiation with our management would still
be required to seek control of the voting power represented by all of the
outstanding common stock of Global Crossing entitled to vote on that
acquisition, including the classes of common shares related to the other
groups.
Shareholder nominations and proposals
Our bye-laws provide that any shareholder may present a nomination for a
directorship or a proposal at an annual meeting of shareholders only if the
nominee for director has been approved by the board of directors or advance
notice of a nomination or proposal has been delivered to Global Crossing not
less than 120 days or more than 150 days prior to date which is 12 months after
the anniversary of the release of the proxy statement to shareholders for the
annual meeting held in the prior year.
The foregoing notice must describe, among other things, all information
relating to each nominee for director that is required to be disclosed in
solicitations of proxies for election of directors and the number of shares
owned by such person.
These procedural requirements could have the effect of delaying or preventing
the submission of matters proposed by any shareholder to a vote of the
shareholders.
Voting and transfer restrictions
Voting restriction. Pursuant to our bye-laws, each share of Global Crossing
common stock has one vote, except that if any shareholder owns, directly,
indirectly or constructively under Section 958 of the Internal Revenue Code or
beneficially directly or indirectly as a result of the possession of sole or
shared voting power within the meaning of Section 13(d) of the Securities
Exchange Act of 1934 and the rules and regulations promulgated under that act,
more than 9.5% of the voting power of the common stock, or, in the case of
Canadian Imperial Bank of Commerce and its affiliates, collectively, more than
20% of the total voting power of the Global Crossing capital stock, the number
of votes of that shareholder will be limited to 9.5% of the aggregate voting
power of the Global Crossing common stock, or, in the case of Canadian Imperial
Bank of Commerce and its affiliates, collectively, to 20% of the aggregate
voting power of the Global Crossing capital stock, based on a formula contained
in the bye-laws. The additional votes that could be cast by that shareholder
but for the restrictions on voting rights will be allocated to the other
shareholders, pro rata based on their number of shares of common stock.
Shareholders that have been allocated additional votes may not exceed the
voting limitation as a result of that allocation.
Transfer restriction. The bye-laws also provide that any transfer of shares
of common stock or any interest in those shares that results in a shareholder,
other than Pacific Capital Group, GKW Unified Holdings, Canadian Imperial Bank
of Commerce, Continental Casualty Company or MRCo or their affiliates or
certain lenders to any of them, beneficially owning within the meaning of
Section 13(d) of the Exchange Act, directly or indirectly, 5% of the
outstanding shares of common stock, if that shareholder is a natural person, or
otherwise 9.5% of the outstanding shares of common stock, without the approval
of a majority of the members of the board of directors and of a majority of
votes cast by shareholders at a meeting called to approve the transfer will not
be registered in the share register and will be void and of no effect.
Amendments to the voting reallocation and transfer restriction provisions of
the bye-laws require the approval of the Global Crossing board of directors and
shareholders holding at least 75% of the votes of all outstanding shares of
common stock. In the event of any amendment to these bye-laws, under certain
circumstances, Global Crossing has the obligation to indemnify and hold
harmless any shareholder who, as a result of that amendment, becomes
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subject to treatment as a "U.S. Shareholder" for purposes of Section 951 et
seq. of the Internal Revenue Code from and against all losses, costs, damages,
liabilities and expenses directly or indirectly arising out of that treatment.
These voting reallocation and transfer restrictions could make it difficult
for any person or group of persons acting in concert, other than certain
existing owners, to acquire control of Global Crossing without approval of our
board of directors.
Staggered board
Our board of directors is divided into three classes of directors serving
staggered three-year terms. Each class consists of, as nearly as possible, one-
third of the total number of directors.
The classification of directors makes it more difficult for shareholders to
change the composition of our board of directors. At least two annual meetings
of shareholders, instead of one, generally will be required to change the
majority of our board of directors. The classification provisions of our bye-
laws could discourage a third party from initiating a proxy contest, making a
tender offer or otherwise attempting to obtain control of Global Crossing.
United States federal income tax consequences
General
The following discussion is a summary of material United States federal
income tax consequences of the implementation of the tracking stock proposal.
The discussion is based on the Internal Revenue Code of 1986, as amended,
Treasury regulations, published positions of the Internal Revenue Service,
which we refer to as the "IRS," and court decisions now in effect, all of which
are subject to change. In particular, Congress could enact legislation
affecting the treatment of stock with characteristics similar to Global
Crossing group stock or GlobalCenter group stock, or the Treasury could issue
regulations that change current law. Any future legislation or regulations
could apply retroactively to the implementation of the tracking stock proposal.
This discussion addresses only those of you who hold your existing common
stock and would hold your Global Crossing group stock as a capital asset. This
discussion does not discuss all aspects of United States federal income
taxation that may be relevant to you in light of your particular tax
circumstances. This discussion does not apply to you if you are a foreign
person, a dealer in securities or currencies, a trader in securities that has
elected the mark-to-market method of accounting for your securities, a tax-
exempt organization, an S corporation or other pass-through entity, a mutual
fund, a small business investment company, a regulated investment company, an
insurance company or other financial institution, a broker-dealer, a United
States person whose "functional currency" is not the U.S. dollar, or are
otherwise subject to special treatment under the federal income tax laws. This
discussion also does not apply to those of you who hold your existing common
stock as part of a hedging, integrated or conversion transaction, constructive
sale or straddle. You should consult your own tax advisor with regard to the
application of the federal income tax laws, as well as to the applicability and
effect of any state, local or foreign tax laws to which you may be subject.
Tax implications to you of the implementation of the tracking stock proposal
In the opinion of Simpson Thacher & Bartlett, Global Crossing's counsel, for
federal income tax purposes GlobalCenter group stock will be considered common
stock of Global Crossing Ltd. This means that:
. you will not recognize any income, gain or loss on the reclassification
of your existing common stock for shares of Global Crossing group stock;
. your basis in Global Crossing group stock received will equal your basis
in our existing common stock exchanged therefor;
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. your holding period of Global Crossing group stock will include the
holding period of the existing common stock; and
. any gain or loss recognized upon a subsequent sale or exchange of Global
Crossing group stock will be capital gain or loss.
Tax implications to you of a conversion of Global Crossing group stock or
GlobalCenter group stock
Generally, you will not recognize any income, gain or loss if we exercise any
of our options to convert one class of common stock into the other class of
common stock, and you will have a carryover adjusted tax basis in the shares of
common stock that you receive and generally a holding period that includes the
holding period of the common stock you surrendered in the conversion.
No IRS ruling
No ruling has been sought from the IRS. The IRS has announced that it will
not issue any advance rulings on the classification of an instrument whose
dividend rights are determined by reference to the earnings of a segregated
portion of the issuing corporation's assets, including assets held by a
subsidiary. Simpson Thacher & Bartlett's opinion is not binding on the IRS. In
addition, there are no court decisions or other authorities bearing directly on
the classification of instruments with characteristics similar to those of
Global Crossing group stock and GlobalCenter group stock. It is possible,
therefore, that the IRS could assert that the receipt of Global Crossing group
stock as well as any subsequent conversion of one class of common stock into
the other class of common stock could be taxable to you and to us.
Clinton Administration proposal
The Clinton Administration recently proposed legislation dealing with
tracking stock such as Global Crossing group stock and GlobalCenter group
stock. This proposal would, among other things, treat the receipt of stock
similar to Global Crossing group stock and GlobalCenter group stock for other
stock in the corporation or in a distribution by the issuing corporation as
taxable to the shareholders. If this proposal is enacted, you could be subject
to tax on your receipt of Global Crossing group stock after the date of
enactment. A similar proposal was made in 1999. Congress did not act on the
1999 proposal, and it is impossible to predict whether Congress will act upon
this proposal or any other proposal relating to tracking stock. We may convert
Global Crossing group stock or GlobalCenter group stock into shares of the
other class without any premium on such conversion if there is more than an
insubstantial risk of adverse United States federal income tax developments.
See "--Conversion and repurchase--Conversion of common stock at option of
Global Crossing at any time." The proposal of the Clinton Administration would
be such an adverse development if it is implemented or receives certain
legislative action.
Stock exchange listings
We expect Global Crossing group stock and GlobalCenter group stock to be
listed on the Nasdaq National Market and the Bermuda Stock Exchange. Global
Crossing group stock will be listed under the symbol GBLX. GlobalCenter group
stock will be listed under the symbol GCTR.
Stock transfer agent and registrar
Our existing stock transfer agent and registrar, EquiServe, will act as the
stock transfer agent and registrar for both Global Crossing group stock and
GlobalCenter group stock.
Effect on existing awards and convertible preferred stock
If the proposed offering of GlobalCenter group stock is completed, each
outstanding award for our existing common stock under our 1998 Global Crossing
Ltd. Stock Incentive Plan will be redesignated into an award for .
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Similarly, following the completion of the proposed offering of GlobalCenter
group stock, holders of our outstanding shares of convertible preferred stock
will be entitled to convert each share of Global Crossing convertible preferred
stock into one share of Global Crossing group stock at the current conversion
price. In addition, if we effect the proposed distribution of GlobalCenter
group stock to the holders of Global Crossing group stock, subsequent to such
distribution holders of our outstanding shares of convertible preferred stock
will be entitled to convert each share of Global Crossing convertible preferred
stock into one share of Global Crossing group stock at a conversion price
reduced to reflect the fair market value of the GlobalCenter group stock that
was distributed.
No dissenters' rights
Under Bermuda law, shareholders who dissent from the tracking stock proposal
will not have appraisal rights.
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BUSINESS OF THE GLOBALCENTER GROUP
Overview
The GlobalCenter group is a leading provider of Internet infrastructure
services incorporating:
.complex Web hosting;
.IP network services, using primarily the Global Crossing network;
.hardware and software procurement and installation;
.content distribution, integration and management services;
.systems applications; and
.professional services.
Industry Background
As a result of its rapid growth, the Internet has become an important new
global communications and commerce medium. This new medium has given
enterprises an opportunity to interact in new and different ways with their
customers, employees, suppliers and partners. Furthermore, the Internet has
become an additional point of competitive differentiation across a broad
variety of commercial sectors and geographies, and a large number of companies
have now embraced the Internet either proactively or reactively to grow or
defend their market position.
Companies are responding to the opportunities and challenges presented by
Internet technologies by rapidly increasing their investment in Web sites and
Internet-enabled services. Over the last several years, newer Internet
companies that focus solely on distributing products and services over the
Internet have emerged and, more recently, mainstream businesses have begun to
use Web sites to complement traditional business models and distribution
channels.
The rapidly growing number of companies focused on implementing Internet
strategies has created a significant shortage of Internet-focused systems
developers and networking personnel. At the same time, Internet operations are
becoming more complex and challenging for enterprises to operate. For example,
in order to establish a high quality, reliable Web site or to run Web-based
applications on the Internet, businesses must, among other things, procure and
integrate sophisticated hardware and software, develop application-specific
technical skills, and have access to a secure, fault-tolerant physical location
and reliable Internet connectivity. Ensuring the quality, reliability, and
availability of these Internet operations typically requires substantial
investments in developing Internet expertise and infrastructures outside their
core business functions. However, such a continuing significant investment of
resources is often an inefficient use of enterprises' management focus and
limited resources.
As a result, businesses are increasingly seeking outsourcing arrangements
with service providers that can speed time-to-market; improve performance,
reliability, scalability and security; provide continuous operation and support
of their Internet operations and reduce operating expenses. To address this
need, a variety of providers of Web hosting services have emerged. Web hosting
services range from lower-cost shared hosting, in which multiple smaller
customers share a single server for basic Web sites, to higher-cost complex Web
hosting, in which a larger customer's Web site is hosted on multiple dedicated
servers, which are monitored and communicate amongst one another to balance
traffic loads to minimize data latency and loss, often for customized
applications and systems. Complex Web hosting companies, in general, provide
various infrastructure-related services, including secure, monitored data
centers with high degrees of redundancy and reliability, high-speed IP network
connectivity and various enhanced services. Generally, complex Web hosting
providers also support a range of hardware, operating systems and software.
The market for complex Web hosting and related services is growing rapidly
and continues to evolve as new enabling technologies are developed and new
business practices are implemented. According to IDC, the
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U.S. market for Web hosting services (which does not include internet access
services) is estimated to be $1.7 billion in 1999 increasing to $17.6 billion
in 2003. We also believe that complex Web hosting companies will be well
positioned to take a significant share of the application service provider, or
ASP, market, as companies seek to Web-enable their traditional business
functions and applications such as customer service, procurement, human
resource management and sales force automation. According to IDC, the ASP
market is expected to grow to $7.8 billion in 2004.
While a variety of existing industry participants and emerging service
providers are attempting to target this rapidly growing market, many are niche
service providers and others are often unable to exercise significant control
over the underlying network services upon which the quality of their solutions
depend. We believe that as customers continue to outsource mission-critical
Internet-related services, quality of service and breadth of solutions offered
will be the key factors driving customers' purchasing decisions.
GlobalCenter Strategy
The GlobalCenter group's objective is to become the leading total services
provider for its customers' mission-critical Internet infrastructure
requirements. To achieve this objective, the GlobalCenter group is implementing
a business strategy focused on the following key elements:
Enhance and expand portfolio of value-added applications and professional
services. The GlobalCenter group currently provides a broad range of Internet
infrastructure services that allow its customers to effectively outsource the
management and operation of their Web sites to it. The GlobalCenter group
intends to continue to develop and market new services to position itself as a
total services provider for businesses' Internet infrastructure needs. The
GlobalCenter group believes this will enable it to build stronger customer
relationships, maximize its revenue per customer and grow its business. By the
end of 2000, the GlobalCenter group plans to introduce a number of additional
services including: content distribution services for a variety of new media,
e-commerce applications providing back-end infrastructure for e-commerce sites,
database-on-demand providing the infrastructure components that enable database
functionality, virtual private network services to provide a highly secure
method of transmitting data and end-user monitoring services to allow customers
to monitor the usage of their Web sites.
Expand global footprint by opening new data centers. The GlobalCenter group
currently operates 10 data centers located in strategic markets in the United
States, Europe and Australia. The GlobalCenter group is currently developing
new data centers to meet the growing international demand for outsourced Web
hosting services and the increasingly global e-business and information
technology needs of its customer base. The GlobalCenter group is therefore
planning to open an additional nine data centers in the United States, Europe
and Australia in 2000. Through a joint venture with Asia Global Crossing,
GlobalCenter is also planning to open data centers in Asia. The GlobalCenter
group will continue to identify new geographic markets into which it will
expand to meet the growing needs of businesses with mission-critical Internet
operations.
Develop and market services tailored to the needs of selected information-
intensive industries. The GlobalCenter group's product development and
marketing strategy is to target industries it believes will have a significant
demand for Internet infrastructure applications and services, such as media and
entertainment, financial services, retail and business-to-business exchanges.
The GlobalCenter group believes that by targeting these industries and
developing tailored service offerings for their use, it can accelerate its
growth by attracting more customers and generating higher revenue per customer,
increase its gross margins, and realize operating efficiencies.
Continue to take advantage of the GlobalCenter group's unique relationship
with the Global Crossing group. As part of its Web hosting services, the
GlobalCenter group provides businesses with high performance Internet
connectivity through Global Crossing's IP-based fiber-optic network. The
GlobalCenter group will continue to locate its data centers to take maximum
advantage of the Global Crossing network. The GlobalCenter group believes its
unique relationship with Global Crossing provides numerous competitive
advantages, including higher availability and scalability of network capacity
and enhanced, integrated network
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monitoring and problem resolution, which improve its ability to offer its
customers service level agreements. Scalability refers to the immediate
capacity of a network to meet the demands in growth, without sacrifice in
quality or performance, the GlobalCenter group participates in the Network and
Services Management Committee for the Global Crossing network, allowing it to
help determine the strategic and technological direction of the network in a
way that will secure capacity and high quality service for its customers. The
IP network services the GlobalCenter group purchases from the Global Crossing
group are available to it with preferred market-based pricing, taking into
account volume, term, and the exclusive nature of the arrangement and any
guarantee of service levels provided by Global Crossing. In addition, the
GlobalCenter group plans to integrate its service offerings with those offered
by Global Crossing in order to market the combined company as a total
telecommunications and Internet infrastructure services provider to customers
in Global Crossing's targeted markets, such as large multinational
corporations. The GlobalCenter group believes the fact that its group stock is
being offered to the public in the form of a tracking stock rather than as a
separate company helps it to preserve and enhance its close ties and unique
relationship with the Global Crossing group and its access to the Global
Crossing network.
Expand direct sales force and develop new channels of distribution. To date,
the GlobalCenter group has established its rapid growth and market position
solely through its direct sales efforts. In 2000, the GlobalCenter group plans
to significantly expand its direct sales force, invest in training and
development and enhance sales incentives in order to focus its sales efforts on
increasing sales of value-added applications and professional service
offerings. To complement its direct sales efforts, the GlobalCenter group
intends to develop new channels of distribution. In addition to its sales and
marketing arrangements with Global Crossing, with which it intends to exchange
sales referrals and offer bundled products and services, GlobalCenter expects
to build co-marketing arrangements with consulting firms, content developers,
Internet service providers, systems developers and technology partners.
Develop and strengthen relationships with industry leading technology
vendors. The GlobalCenter group has developed strong relationships with
technology vendors such as Akamai, Oracle, StorageNetworks, StorageTek and
Tanning Technology to offer enhanced caching, database, storage, backup
services and e-commerce services to its customers. The GlobalCenter group plans
to continue to develop relationships with selected technology vendors to help
its customers identify the best technology services for their requirements and
to rapidly and effectively design and deploy these technologies. The
GlobalCenter group believes its relationships with these vendors will enhance
its ability to support its customers' needs. For example, its relationship with
Oracle will broaden its service offering to include database applications and
services, its relationship with Tanning Technology will allow it to offer
electronic commerce services and its relationship with Storage Networks will
enable it to provide highly scalable and reliable storage services, all of
which will better enable the GlobalCenter group to become a total services
provider for its customers.
Enter into strategic partnerships and make targeted acquisitions to
complement internal development efforts. As the GlobalCenter group develops new
applications and services, it plans to complement its internal development
through strategic relationships and acquisitions. GlobalCenter Inc. will enter
into these strategic relationships and acquisitions, and they will be allocated
to the GlobalCenter group. The GlobalCenter group will seek strategic
relationships that will enable it to gain quicker access to innovative
technologies, assist it with the development of new applications and service
offerings, provide it with new distribution channels and advance its entry into
new geographic markets. In addition, the GlobalCenter group may seek to acquire
companies which it believes will enable it to cost-effectively augment its
existing products, services, technology, infrastructure, skill sets, geographic
presence or customer base.
The GlobalCenter Group's Services
The GlobalCenter group currently provides a broad range of Internet
infrastructure services that allow its customers to effectively outsource the
management and operation of their Internet operations to GlobalCenter. The
GlobalCenter group creates tailored services for its customers based on their
unique business and technical requirements, and modify the services as the
customers' needs evolve.
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Complex Web Hosting Services
The GlobalCenter group offers complex Web hosting services designed to enable
businesses to outsource operation of mission-critical Web sites, based on
industry-leading technologies and offering high service level guarantees. The
GlobalCenter group supports all leading Internet hardware and software systems.
This flexibility enables its customers to retain control over their technical
solution and to integrate GlobalCenter's services with their existing IT
architectures. The GlobalCenter group offers a number of services to dedicated
Web site management customers to ensure ease of implementation, security,
performance and scalability. Specifically, it provides:
. configuration, installation and support of operating systems, including
Unix, Windows NT, Solaris and Linux; hardware platforms, including those
offered by Sun Microsystems, Dell, Cisco, IBM, VA Linux and Compaq;
. installation and maintenance of Web sites on server hardware;
. help desk support 24-hours a day, seven days a week, with access to
certified technical professionals;
. industry and vendor security alerts and maintenance;
. load balancing and geographical distribution of network traffic among
multiple servers and multiple data centers; and
. 24-hours a day, seven days a week, physical and remote access to
equipment.
Hardware and Software Procurement Services
The GlobalCenter group has experienced equipment services professionals
available to help make its customers' equipment purchases simple and
economical. The GlobalCenter group selects and purchases equipment from various
manufacturers based on customer orders and resells the equipment to its
customers. The GlobalCenter group also arranges for equipment to be shipped
directly to a customer's location in GlobalCenter's data centers and installed
in the appropriate location. The GlobalCenter group equipment services allow it
to move new customers into its data centers more quickly and efficiently.
IP Network Services
The GlobalCenter group directly connects its data centers, other than
Melbourne, to Global Crossing's high performance, IP-based fiber-optic backbone
network with redundant high speed lines, which also gives it access to Global
Crossing's extensive peering and transit relationships with other major
Internet backbone providers. The GlobalCenter group's connectivity arrangements
are designed to deliver the scalability, high availability and performance
required for high-volume bandwidth and application-intensive Internet
operations. Since its customers' Internet operations often experience traffic
spikes due to promotions or events, the GlobalCenter group typically maintains
sufficient excess network capacity to handle its customers peak traffic needs.
Each of its data centers is also connected to the communications networks of
other major carriers. The Global Crossing network does not reach Australia, so
the GlobalCenter group's Melbourne data center is connected to the Global
Crossing network through the communications networks of other major carriers.
Through its unique relationship with the Global Crossing group, the
GlobalCenter group has special access to the Global Crossing global network and
extensive peering and transit arrangements. The GlobalCenter group believes its
connection to the Global Crossing network provides it with the following
benefits:
. Network Performance. When fully deployed, the Global Crossing network
will provide service to all of the world's major business centers. The
extensive geographic reach of the Global Crossing network and Global
Crossing's extensive peering and transit relationships with other major
Internet service providers will enable GlobalCenter to avoid many of the
congested Internet public exchange points and deliver IP traffic directly
to its destination network or the intended IP address. By avoiding the
need to route traffic across multiple networks or public interconnection
points, the performance of its customers' Internet applications will be
substantially increased. Pursuant to Global Crossing Ltd.'s policy
statement,
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the Global Crossing group has agreed to provide the GlobalCenter group
with service level commitments for near 100% network availability for
traffic on the Global Crossing network, which will enable the GlobalCenter
group to offer similar service levels to its customers. This policy may be
changed at the discretion of the board of directors of Global Crossing
Ltd. and without shareholder approval.
. Scaling and Availability. The GlobalCenter group will have constant
access to the Global Crossing network and an ability to scale its use of
the Global Crossing network according to its needs and the needs of its
customers.
. Management Committee. The GlobalCenter group participates in the Network
and Services Management Committee for the Global Crossing IP network,
allowing it to help determine the strategic and technological direction
of the network in a way that will secure capacity and high quality
service for its customers. The committee will consist of three senior
executives from each group and will review and agree on data center
bandwidth requirements by location and volume, review and agree on
network expansion plans as required to support the data centers and
establish service level targets for the data center connections and track
performance against those targets.
. Monitoring Capability. The GlobalCenter group has the ability to monitor
the entire Global Crossing network from its network control centers or
the Global Crossing network operations centers, which allows it to
locate, respond to and resolve problems quickly.
. Cost Advantage. The GlobalCenter group's special access to Global
Crossing's network frees it from the costs associated with independently
building and maintaining an IP network, such as an extensive set of
routers and switches, and from the costs associated with peering
relationships when traffic flows becomes unequal. The price the
GlobalCenter group pays for its access to the network will be preferred
market-based pricing, taking into account volume, term, and the exclusive
nature of the arrangement and any guarantee of service levels provided by
the Global Crossing group.
Value-Added Applications and Services
The GlobalCenter group's value-added applications and services enable its
customers to improve the performance, reliability and storage and backup
capability of their Internet operations. We believe these services will become
increasingly important to the GlobalCenter group's customers. A key component
of GlobalCenter's strategy is to continue to grow its value-added service
offerings to distinguish itself in the marketplace. The GlobalCenter group's
current services include the following:
Performance Monitoring Services. The GlobalCenter group works with Keynote, a
provider of Internet performance measurement, diagnostic and consulting
services, to provide and jointly market Perspective(TM), a service that gives
companies real-time statistics about their Web sites' performance from the
viewpoint of users around the world. Perspective employs a network of more than
100 data collection agents deployed in 30 large metropolitan areas, both in the
U.S. and internationally, connected to the backbone networks of a variety of
major service providers. The agents measure access and download times at pre-
set intervals. The GlobalCenter group's network control centers and its
customers' Web managers receive daily reports and threshold based alarms.
Content Delivery Services. The GlobalCenter group works with Akamai to offer
FreeFlow SM, a caching service that moves content closer to end users and
intelligently routes requests to multiple servers. As a result, FreeFlow
reduces problems caused by server overloads and network bottlenecks. This
increases peak demand capacity for Web sites, speeds user downloads and
improves overall quality.
Disk-On-DemandSM Storage Services. The GlobalCenter group works with
StorageNetworks, a storage services provider, to provide Disk-On-Demand, highly
scaleable and reliable on-demand disk storage services that the GlobalCenter
group offers on a usage basis. Disk-On-Demand gives GlobalCenter's customers
access to technologically advanced storage, normally available only to large
enterprises, on a cost effective basis.
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Tape-On-DemandSM Storage Services. The GlobalCenter group works with
StorageTek and ManagedStorage International, network storage services
providers, to provide Tape-On-Demand, backup and disaster recovery services
that the GlobalCenter group offers on a usage basis. Tape-On-Demand reduces
GlobalCenter's customers' need to invest in and manage expensive disaster
recovery systems.
Security Services. The GlobalCenter group's security services are designed to
ensure the security of GlobalCenter's customer's Web operations by applying
industry leading security diagnostic tools. Security engineers are located at
its data centers to deliver security solutions including firewalls, encryption
and authentication.
Testing Services. The GlobalCenter group's testing services aim to identify
problems that could degrade the expected performance and availability of a
customer's Web operations. For example, GlobalCenter's stress testing services
simulate users accessing a Web site to provide information for isolating
problems, optimizing performance and accelerating the deployment of Web sites.
Professional Services
The GlobalCenter group's professional services teams consult with customers
on a wide range of issues including Web applications development, Internet
connectivity, server maintenance, performance and site scaling. The
GlobalCenter group believes its professional services will play an increasingly
important role in supporting the implementation and maintenance of Internet
based mission-critical operations as customers continue to rapidly adopt
emerging technologies. The GlobalCenter group's professional services currently
include system architecture and design; disaster recovery, migration and
capacity planning; database optimization; and performance tuning.
GlobalCenter's sales engineers offer several services to GlobalCenter
customers, including configuring systems and specifying hardware and software
for implementations or upgrades. The GlobalCenter group assigns technical
account teams, consisting of three to five personnel, to act as its customers'
on-site network and information technology staff. Through its relationship with
Tanning Technology, the GlobalCenter group also has access to Tanning
Technology's information technology services, which include electronic commerce
solutions, enterprise customer relationship management solutions and core
operations solutions.
Strategic Relationships
The GlobalCenter group believes that strategic technology and marketing
relationships enhance its ability to better serve existing customers as well as
reach new customers. Its strategic relationships enable it to gain quicker
access to innovative technologies, assist it with the development of new
applications and service offerings and provide it with powerful additional
sales channels. As opportunities arise, the GlobalCenter group will continue to
establish new relationships with hardware and software vendors and application
service providers. An example of the GlobalCenter group's strategic
relationship strategy is its relationship with Tanning Technology, which
enables the GlobalCenter group to provide its customers with preferred access
to Tanning Technology's pool of over 350 technical and sales professionals. The
combination of Tanning Technology's expertise in systems integration services
involving high volume transactional businesses and the GlobalCenter group's
Internet infrastructure services business will enable the GlobalCenter group to
provide a bundled service offering that will include infrastructure hardware
and software, operational systems and services, integration services and e-
business services. The GlobalCenter group has also established a preferred
marketing arrangement with Tanning Technology designed to cross-promote and
sell each other's products and services. In February 2000, GlobalCenter Inc.
also invested $10 million in Tanning Technology's common stock. A second
example of the GlobalCentter group's strategic relationship strategy is its
relationship with Oracle. The Oracle relationship has several key components.
As a member of Oracle's Business-on-Line program, GlobalCenter is a preferred
hosting partner of Oracle and Oracle will jointly market its products and
services with GlobalCenter. GlobalCenter is also an Oracle authorized reseller
and has access to consulting services to support Oracle's database and other
products in GlobalCenter's data centers. Together, the Oracle Business-on-Line,
authorized reseller and consulting arrangements provide GlobalCenter with the
ability to
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offer customers a bundled package of database infastructure services. Finally,
GlobalCenter and Oracle's Internet Platform Alliance Division are working
together to jointly provide products and services for customers in
GlobalCenter's targeted industries.
Customers
The GlobalCenter group has a large and diverse customer base ranging from
large enterprises to Web-Centric companies. As of March 31, 2000, the
GlobalCenter group was serving over 500 customers, none of which accounted for
10% or more of its revenues. The following is a representative list of its
customers as of March 2000:
24/7 Media marchFIRST Talk City
About.com Match Logic Toys R Us
Akamai Microsoft bCentral Viacom
Ask Jeeves NBCi The Washington Post
eGroups Network Solutions Webshot
Encyclopedia Britannica Novell Wineshopper.com
eToys Playboy Enterprises Xdrive
Goto.com QUOTE.COM Yahoo!
LookSmart Red Hat ZDNet
The GlobalCenter group's contracts with customers generally cover its
provision of services for a one to three-year period and may contain, among
other things, various service level agreements. The GlobalCenter group
generally provides customers with a 99.5% network connectivity uptime guarantee
and a 99.9999% facility uptime guarantee. Pursuant to these service level
warranties, customers' monthly fees are reduced based on the amount of network
connectivity downtime and data center downtime that affects the customer.
Sales, Communications and Marketing and Customer Service
The GlobalCenter group's sales objective is to focus on larger customers to
whom it believes it can sell multiple basic and value-added services to
maximize its sales force productivity and revenue per data center. The
GlobalCenter group sells its services directly through a highly-skilled
professional sales force and receives referrals through a network of business
partners.
Sales
The GlobalCenter group uses a team approach in selling to prospective
customers. Customer account teams are organized into three units, consisting of
account executives, sales engineers and client services representatives.
Account executives are the team leaders and are primarily responsible for new
account acquisitions and maintenance of the strategic relationships with our
customers. Sales engineers support the account executives by providing pre-
sales technical support, including customer site architecture and design.
Client services representatives are responsible for the day-to-day account
management and for marketing additional services to existing customers.
The domestic sales force is located in six geographic regions of the United
States centered around existing and planned data centers. As of March 31, 2000,
GlobalCenter had 84 employees engaged in sales and sales support. The
GlobalCenter group will actively seek to increase its sales capabilities and
coverage in the United States and to expand internationally as additional data
centers are constructed. In 2000, the GlobalCenter group plans to significantly
expand its direct sales force, invest in training and development and enhance
sales incentives in order to focus sales efforts on increasing its sales of
value-added service offerings. We estimate that the costs for expanding
GlobalCenter's sales force will be approximately $12 million over the next
12 months. To complement its direct sales efforts, the GlobalCenter group
intends to develop new channels of distribution. In addition to its co-
marketing arrangement with the Global Crossing group, with which the
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GlobalCenter group intends to exchange sales referrals and offer bundled
products and services, the GlobalCenter group expects to build co-marketing
arrangements with consulting firms, content developers, Internet service
providers, systems developers and other technology partners.
The GlobalCenter group also intends to make its service offerings available
to Global Crossing's sales force in order to market the combined company as a
total telecommunications and Internet provider. By doing so, we believe the
GlobalCenter group will be able to expand its customer base to include the
Global Crossing group's targeted markets, such as large multinational
corporations.
Communications and Marketing
The GlobalCenter group's communications and marketing organization is
responsible for product and partner marketing management, marketing
communications and corporate communications. Product and partner marketing
management includes bringing to market the portfolio of services and programs
that will address customer needs. These activities include product strategy,
pricing, competitive analysis, product launches and partner program management.
The GlobalCenter group's marketing communications unit stimulates service
demand and brand awareness for GlobalCenter through a broad range of marketing
communications, advertising, seminars, open houses, tradeshows, as well as
through its Web site. Corporate communications focuses on cultivating industry
analyst and media relationships with the goal of securing broad media coverage
and public recognition of GlobalCenter's leadership position in its market.
Customer Service
The GlobalCenter group is committed to providing superior customer service by
understanding the business objectives and technical requirements of its
customers and by fulfilling their needs on an individual basis. Working closely
with its customers, the GlobalCenter group seeks to optimize the performance of
their Internet operations, minimize downtime, resolve problems that may arise,
and make appropriate adjustments in services as customer needs change over
time. In order to enhance its customer service delivery and increase operating
efficiencies, the GlobalCenter group operates a centralized response center
which handles inbound calls, monitoring, and problem resolution for its data
centers in the United States. The GlobalCenter group also solicits feedback to
ensure that it continues to offer the highest quality of service. It uses
advanced software tools to aid in customer monitoring and service efforts. Many
of its customer service personnel have been specifically trained and certified
by the vendors of its software tools, including Sun Microsystems, Microsoft,
Oracle and Computer Associates.
The GlobalCenter group also provides customer service and technical support
during the installation phase, including a transition team and project
management support. In addition, it provides system integration services
between the customer's Internet site and legacy systems. After installation,
primary customer support is coordinated through the GlobalCenter group's
network control centers. These centers are operated 24 hours a day, seven days
a week by engineers who monitor site and network operations, and coordinate
teams to solve problems that arise. The GlobalCenter group's customer service
personnel are also available to assist customers whose operations require
specialized procedures.
The GlobalCenter group employs network engineers and systems administrators
who work with customers to design and maintain their Internet operations. The
GlobalCenter group's network engineers and system administrators are trained
specialists who support Windows NT, Linux, Solaris and other UNIX platforms.
They are also trained to support routers and switches of most major equipment
manufacturers. They also serve as the second level of support for customer
issues that cannot be resolved by the GlobalCenter group's network control
centers.
Product Management and Development
The GlobalCenter group's product management and development groups are
responsible for evaluating and developing new product ideas and strategies,
including potential partnerships related to these products. These
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groups work to combine the GlobalCenter group's own technology with partner
expertise to offer a robust and scalable service and product offering to its
customers. The GlobalCenter group plans to complement its internal product
development through strategic relationships and acquisitions. By partnering
with the technology leaders in different service and product categories, the
GlobalCenter group is able to move its offerings to market quickly, with an
ability to support and manage them at the highest level. The GlobalCenter
group's product management group is responsible for assessing the business case
and ancillary needs for each product as well as managing the product's
lifecycle. The GlobalCenter group's product development group is responsible
for research and development efforts aimed at exploring and identifying new
technologies that complement its business strategy. The GlobalCenter group
currently has 16 employees dedicated to product management and development and
expects to expand the size of these groups by the end of 2000.
Data Center Infrastructure
The GlobalCenter group's data centers are designed to deliver high
availability and performance for customers. Its data centers are physically
located in major metropolitan business centers and all but one are located
directly on the Global Crossing IP network. The GlobalCenter group's data
centers are built to specifications that deliver high standards in security,
reliability and redundancy.
The physical infrastructure and security controls of the GlobalCenter group's
data centers have been designed to support rigorous requirements for complex
Web hosting. Specifically, its data centers offer the following major physical
benefits to its customers:
. multi-level physical security;
. multi-redundant utilities and environmental controls; and
. network connectivity.
Multi-level physical security. Based upon their technical and security
requirements, customers can select from racks in common areas, highly secure
cabinets, enclosed cage facilities or private vaults. The GlobalCenter group
has implemented robust security systems, which include biometric hand scanners,
security verification, guards, cameras, bullet proof glass, round-the-clock
monitoring and mantrap areas.
Multi-redundant utilities and environmental controls. GlobalCenter data
centers have power systems that include redundant connections to the power
utilities, back up power supplies and diesel generators that can run for days
without refueling if needed. Laser detection, inert gas and dry pipe sprinkler
systems protect GlobalCenter's customers' equipment from fire and inadvertent
water damage. Cooling and environmental controls for each data center are
designed to monitor and ensure proper temperature and humidity. The
GlobalCenter group's data centers are also constructed with raised floors and
seismically braced racks.
Network Connectivity. GlobalCenter data centers are connected to the
Internet through network points of presence within the centers. These points of
presence provide high-performance, reliable networking connectivity to the
Internet for its customers. Telecommunications circuits enter the data centers
through multiple points from diverse service providers. Multiple points of
presence ensure continued operation of service without degradation in the
unlikely event of a cable cut or local carrier network outage. All but one of
GlobalCenter's data centers are located directly on Global Crossing's
international IP-based fiber optic network for high bandwidth worldwide
connectivity and scale. Each of its data centers has access to the
communications networks of other major carriers.
Competition
The market served by GlobalCenter is highly competitive. There are few
substantial barriers to entry, and we expect GlobalCenter to face additional
competition from existing competitors and new market entrants in the future.
The principal competitive factors in this market include:
. quality of services and scalability of infrastructure;
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. quality of customer service and support;
. value-added applications and services offered;
. network capacity, reliability and security;
. Internet system engineering expertise;
. relationships with partners and vendors;
. brand name;
. price;
. product innovation; and
. financial resources.
We believe that GlobalCenter competes favorably overall in its industry based
on these factors. However, many of the GlobalCenter group's competitors have
substantially greater resources, more customers, greater name recognition and
more established relationships in the industry.
The GlobalCenter group's current and potential competitors in the market
include Web hosting service providers, ISPs, telecommunications companies and
large information technology outsourcing firms. Its competitors may operate in
one or more of these areas and include companies such as AboveNet
Communications, AT&T, British Telecom, Cable & Wireless, Digex, Digital Island,
EDS, Exodus Communications, Globix, Genuity, Intel, IBM, KPNQwest, Level 3
Communications, MCI WorldCom, PSINet, NaviSite, Qwest Communications
International, and USinternetworking. As the GlobalCenter group expands its
range of applications and service offerings, it expects that the nature of its
competitors will change.
Intellectual Property Rights
The GlobalCenter group relies on a combination of copyright, trademark,
service mark and trade secret laws and contractual restrictions to establish
and protect certain proprietary rights in its data, applications and services.
The GlobalCenter group currently has no patents and does not rely materially on
technologies it licenses from third parties. As it continues to offer new
services through partnerships with third parties, the GlobalCenter group
expects its reliance on licensed technology to grow. However, other than its
trademarks and service marks, the GlobalCenter group does not believe that the
loss of any particular one of its intellectual property rights would harm its
business.
Government Regulation
The GlobalCenter group is not currently subject to direct United States
federal, state or local or international government regulation, other than
regulations applicable to businesses generally. There is currently only a small
body of laws and regulations directly applicable to access to or commerce on
the Internet.
The Digital Millennium Copyright Act, which became effective in October 1998,
includes a limitation on liability of on-line service providers for copyright
infringement for transmitting, routing, or providing connections, transient
storage or caching at the direction of a user. This limitation on liability
applies if the service provider had no actual knowledge or awareness that the
transmitted or stored material was infringing and if other conditions are met.
Since this law is relatively new, the GlobalCenter group is unsure of how it
will be applied to limit any liability it may face in the future for any
possible copyright infringement or copyright-related issues. This law also
requires ISPs to follow "notice and take-down" procedures in order to be able
to take advantage of the limitation on liability. The GlobalCenter group has
implemented these procedures. The GlobalCenter group's customers are subject to
an acceptable use policy which prohibits them from posting, transmitting or
storing material on or through any of its services which, in the GlobalCenter
group's sole judgment is (1) in violation
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of any local, state, federal or foreign law or regulation, (2) threatening,
obscene, indecent or defamatory or that otherwise could adversely affect any
individual, group or entity or (3) in violation of the intellectual property
rights or other rights of any person. Although this policy is designed to
promote the security, reliability and privacy of GlobalCenter's systems and
network, there is no assurance that its policy will accomplish this goal or
shield the GlobalCenter group from liability under the Digital Millennium
Copyright Act.
Despite enactment of the Digital Millennium Copyright Act, the law relating
to the liability of on-line services companies and Internet access providers
for information carried on or disseminated through their networks remains
largely unsettled. It is possible claims could be made against on-line services
companies and Internet access providers under both United States and foreign
law for defamation, obscenity, negligence, copyright or trademark infringement,
violations of privacy and consumer protection laws or other theories based on
the nature and content of the materials disseminated through their networks.
Several private lawsuits seeking to impose such liability upon on-line services
companies and Internet access providers are currently pending.
Although sections of the Communications Decency Act of 1996 that proposed to
impose criminal penalties on anyone distributing indecent material to minors
over the Internet were held to be unconstitutional by the U.S. Supreme Court,
similar laws may be proposed, adopted and upheld. For example, the Child Online
Protection Act of 1998 imposes criminal penalties and civil liability on anyone
engaged in the business of selling or transferring material that is harmful to
minors, by means of the Web, without restricting access to this type of
material by underage persons. Numerous states have adopted or are currently
considering similar types of legislation. The nature of future legislation and
the manner in which it may be interpreted and enforced cannot be fully
determined and, therefore, legislation similar to the Communications Decency
Act or the Child Online Protection Act could subject GlobalCenter and/or its
customers to potential liability, which in turn could harm its business. The
adoption of any of these types of laws or regulations might decrease the growth
of the Internet, which in turn could decrease the demand for GlobalCenter's
services, increase the GlobalCenter group's cost of doing business or in some
other manner harm its business.
Due to the increasing popularity and use of the Internet, it is likely a
number of additional laws and regulations may be adopted at the federal, state
and local levels in the United States and internationally with respect to the
Internet, covering issues such as user privacy, freedom of expression, pricing,
characteristics and quality of products and services, taxation, advertising,
intellectual property rights, information security and the convergence of
traditional telecommunications services with Internet communications. For
example, the European Union recently enacted privacy regulations. The United
States Congress has recently considered enacting Internet laws regarding
privacy, copyrights taxation and the transmission of sexually explicit
materials. The Federal Trade Commission has recently commenced investigations
of the practices of certain Internet companies relating to privacy and consumer
protection laws. The adoption of any such laws or regulations might decrease
the growth of the Internet, which in turn could decrease the demand for
GlobalCenter's services or increase the cost of doing business or in some other
manner harm its business. In addition, applicability to the Internet of
existing laws governing areas such as property ownership, copyrights and other
intellectual property issues, taxation, libel, on-line contract enforcement,
obscenity and personal privacy is uncertain. The vast majority of such laws
were adopted prior to the advent of the Internet and related technologies and,
as a result, do not contemplate or address the unique issues of the Internet
and related technologies.
Global Crossing's network and its expansion plans are subject to regulation
in the United States and internationally. See Global Crossing's Annual Report
on Form 10-K for the year ended December 31, 1999 which is incorporated in this
prospectus by reference.
Employees
As of April 7, 2000, the GlobalCenter group employed approximately 580 full-
time employees. None of its employees is covered by a collective bargaining
agreement. The GlobalCenter group believes that its employee relations are
good.
85
Properties
The GlobalCenter group's executive offices are located in Sunnyvale,
California and consist of approximately 54,000 square feet that are leased
pursuant to an agreement that expires in July 2005. Space leased for data
centers covers an aggregate of more than 1,400,000 gross square feet. The
GlobalCenter group's currently operational data centers cover an aggregate of
approximately 300,000 gross square feet. The GlobalCenter group leases
facilities in the following cities:
City and State Lease Expiration
-------------- ----------------
Anaheim, California............................ April 2009
Chicago, Illinois*............................. November 2009
Frankfurt, Germany*............................ October 2020
Herndon, Virginia, Sales Office................ June 2006
Herndon, Virginia*............................. January 2015
Herndon, Virginia.............................. March 2009
Irvine, California, Sales Office............... May 2003
London, England*............................... October 2014
London, England ............................... October 2014
London, England, Sales Office.................. December 2009
Melbourne, Australia........................... October 2001
Mountain View, California...................... October 2002
Munich, Germany*............................... July 2019
New York, New York............................. August 2008
New York, New York............................. August 2014
New York, New York, Sales Office............... December 2009
New York, New York*............................ April 2016
Paris, France, Sales Office.................... July 2009
Paris, France*................................. September 2012
Sunnyvale, California.......................... November 2001
Sunnyvale, California.......................... November 2011
Sunnyvale, California.......................... August 2008
Sunnyvale, California*......................... March 2015
Sydney, Australia*............................. November 2009
Waltham, Massachusetts*........................ March 2018
- --------
* GlobalCenter's data centers in these locations are under development and are
not yet operational.
86
SELECTED HISTORICAL COMBINED FINANCIAL DATA
OF THE GLOBALCENTER GROUP
The table below provides selected historical combined financial data of the
GlobalCenter group, an integrated business of Global Crossing. We prepared this
information using the historical combined financial data from the GlobalCenter
group's combined financial statements at and for the three-month period ended
March 31, 1999 and 2000, the nine-month period ended September 30, 1999, the
three-month period ended December 31, 1999 and each of the years in the two-
year period ending December 31, 1998 included elsewhere in this proxy
statement. The statement of operations data for the year ended December 31,
1997 and balance sheet data as of December 31, 1997 are derived from audited
combined financial statements included elsewhere in this proxy statement. We
derived the combined statement of operations and the assets and liabilities
data below for the three-month period ended December 31, 1999, the nine month
period ended September 30, 1999 and the year ended December 31, 1998 from
combined financial statements audited by Arthur Andersen LLP, independent
public accountants. The financial data as of March 31, 2000 and for the three
months ended March 31, 1999 and 2000 are derived from the GlobalCenter group's
unaudited consolidated financial statements. The GlobalCenter group has made
adjustments, consisting of normal recurring adjustments necessary to present
its financial position as of March 31, 2000 and the results of operations for
the three months ended March 31, 1999 and 2000, which in the opinion of the
GlobalCenter group's management are necessary for a fair presentation. Results
of operations for the three months ended March 31, 1999 and 2000 are not
necessarily indicative of the results that may be expected for the full year or
for any future period.
GlobalCenter Inc. was acquired by Frontier Corporation in February 1998 in a
pooling-of-interests transaction. On September 28, 1999, we acquired Frontier
Corporation in a merger transaction. A subsidiary of Frontier Corporation was
the owner of substantially all of the assets of the GlobalCenter group. For
financial reporting purposes, our merger with Frontier Corporation was deemed
to have occurred on September 30, 1999. In connection with the merger, the
assets and liabilities of the GlobalCenter group were adjusted to their
respective fair values under the purchase method of accounting. We have
included the assets and liabilities of the GlobalCenter group and the related
consolidated results of operations for periods prior to October 1, 1999 under
the heading "Old GlobalCenter," and for periods subsequent to September 30,
1999 under the heading "New GlobalCenter." The fair value adjustments to the
GlobalCenter group's assets and liabilities from the merger, including goodwill
and other intangibles and the associated amortization, are shown in the New
GlobalCenter Statement of Operations Data and Balance Sheet and Other Data.
The presentation in the "Pro Forma GlobalCenter Group" column provides
prospective purchasers of GlobalCenter group stock with a basis for comparing
the year ended December 31, 1999 to the year ended December 31, 1998, in the
table we have also combined the operating results of the Old GlobalCenter for
the nine months ended September 30, 1999 with the operating results of New
GlobalCenter for the three months ended December 31, 1999. This combination
includes adjustments for depreciation of property and equipment and pro forma
amortization of goodwill and intangibles for the nine months ended September
30, 1999 resulting from our merger with Frontier Corporation. Depreciation,
amortization and certain other line items included in the operating results,
and property, equipment and goodwill balances included in the balance sheet of
the GlobalCenter group are not directly comparable between periods because the
three-month New GlobalCenter period ended December 31, 1999 includes the
effects of purchase accounting adjustments related to our merger with Frontier
Corporation, while prior periods do not. For this and other reasons, the
selected combined historical financial data provided below should be read in
conjunction with the Combined Financial Statements of the GlobalCenter Group
and related notes which appear elsewhere in this proxy statement and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the GlobalCenter Group" which appears following this table.
87
Pro Forma
New GlobalCenter Old New
Old GlobalCenter GlobalCenter Group GlobalCenter GlobalCenter
-------------------------------- ------------ ------------ ------------ ------------
Unaudited
Year Ended Nine Months Three Months Unaudited Three Months Ended
December 31, Ended Ended Year Ended March 31,
----------------- September 30, December 31, December 31, -------------------------
1997 1998 1999 1999 1999 1999 2000
------- -------- ------------- ------------ ------------ ------------ ------------
(in thousands)
Statement of Operations
Data:
Revenues:
Service revenues...... $ 6,511 $ 19,600 $ 29,951 $ 17,753 $ 47,704 $ 6,451 $ 25,562
Equipment revenues.... 1,228 3,640 17,228 5,971 23,199 4,496 13,747
------- -------- -------- -------- --------- ------- --------
Total revenues...... 7,739 23,240 47,179 23,724 70,903 10,947 38,309
Costs and expenses:
Cost of service
revenues............. 5,257 14,804 36,451 17,328 53,779 9,363 21,442
Cost of equipment
revenues............. 995 3,208 15,573 5,365 20,938 4,057 13,089
Sales and marketing... 1,966 8,948 9,531 6,088 15,619 2,110 6,455
General and
administrative....... 2,044 4,694 6,897 3,067 9,964 1,216 5,835
Depreciation and
amortization......... 912 4,023 4,242 1,913 6,428 1,103 3,155
Goodwill and
intangibles
amortization......... 325 1,294 974 37,135 148,540 324 37,135
Merger costs.......... -- 2,060 -- -- -- -- --
------- -------- -------- -------- --------- ------- --------
Total costs and
expenses........... 11,499 39,031 73,668 70,896 255,268 18,173 87,111
------- -------- -------- -------- --------- ------- --------
Loss from operations.... (3,760) (15,791) (26,489) (47,172) (184,365) (7,226) (48,802)
Other income (expense),
net.................... 45 55 (44) 114 70 (18) (211)
------- -------- -------- -------- --------- ------- --------
Loss before income
taxes.................. (3,715) (15,736) (26,533) (47,058) (184,295) (7,244) (49,013)
Income tax benefit...... 941 4,911 9,742 4,333 14,075 2,660 7,933
------- -------- -------- -------- --------- ------- --------
Net loss................ $(2,774) $(10,825) $(16,791) $(42,725) $(170,220) $(4,584) (41,000)
======= ======== ======== ======== ========= ======= ========
Operating Data:
Cash (used in) provided
by operating
activities............. $(3,147) $ (5,752) $(10,057) $ (2,545) $ (12,602) $(4,020) $ 6,517
Cash used in investing
activities............. 1,285 28,978 20,871 68,397 89,268 4,891 59,084
Cash from financing
activities............. $ 1,847 $ 34,238 $ 30,928 $ 70,942 $ 101,870 $ 8,911 $ 52,567
Old GlobalCenter New GlobalCenter
----------------- ---------------------
As of December 31, Unaudited
---------------------------- March 31,
1997 1998 1999 2000
-------- -------- ---------- ----------
(dollars in thousands)
Balance Sheet and Other Data:
Goodwill and intangibles, net.......... $ 8,764 $ 7,470 $1,488,265 $1,411,130
Total assets........................... 18,172 48,021 1,596,083 1,628,628
Total liabilities...................... 8,221 12,084 65,938 87,070
Group equity........................... 9,951 35,937 1,530,145 1,541,558
Total liabilities and group equity..... $ 18,172 $ 48,021 $1,596,083 $1,628,628
Number of data centers................. 2 6 8 10
Data center gross square footage....... 23,000 72,000 238,000 314,000
88
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE GLOBALCENTER GROUP
The following discussion of our financial condition and results of operations
should be read in conjunction with the selected combined historical financial
data and combined financial statements and the related notes included elsewhere
in this proxy statement. This discussion contains forward-looking statements
that involve risks and uncertainties. Actual results may differ materially from
those anticipated in these forward-looking statements. Factors that may cause
such a difference include those set forth under "Risk Factors." Although our
management is under no legal obligation to continue to provide combined
financial statements for the GlobalCenter group in conformity with accounting
principles generally accepted in the United States, it intends to do so for so
long as shares of GlobalCenter group stock remain outstanding.
Overview
GlobalCenter Inc. was acquired by Frontier Corporation in February 1998 in a
pooling-of-interests transaction. In September 1999, we acquired Frontier
Corporation using the purchase method of accounting. As a result of this
acquisition, the fair value of goodwill and other intangibles directly related
to the GlobalCenter group was determined to be approximately $1.5 billion. The
goodwill and other intangible assets are being amortized on a straight-line
basis over 10 years. The GlobalCenter group expects annual amortization of the
existing goodwill and other intangibles to be approximately $148.5 million in
the future. GlobalCenter Inc. is an indirect wholly owned subsidiary of Global
Crossing and owns all of the operating assets and liabilities of the
GlobalCenter group. The goodwill and other intangible assets of the
GlobalCenter group are owned by GlobalCenter Holding Co., an indirect wholly
owned subsidiary of Global Crossing. This is a discussion of the operations,
assets and liabilities of the GlobalCenter group and not any separately
incorporated entity.
Prior to the completion of the proposed offering, the GlobalCenter group
obtained the majority of its network access from third party telecommunications
providers based on agreements with market-based pricing terms. Some of those
third party agreements required price escalation or contract renegotiation in
the event of unequal traffic flows. The GlobalCenter group also obtained some
of its network access from Frontier Corporation prior to October 1999. After
the acquisition of Frontier Corporation on September 30, 1999, the GlobalCenter
group has obtained substantially all of its network access from the Global
Crossing group. Following the completion of this offering, its IP transit
capacity will be provided by the Global Crossing group based on preferred
market-based pricing, taking into account volume, term and the exclusive nature
of the arrangement and any guarantee of service levels provided by the Global
Crossing group. The GlobalCenter group will pay for access based on this
preferred market-based pricing and its actual usage. The GlobalCenter group
expects that the price it pays for access will be lower in the future than in
previous periods.
Since October 1, 1999, the GlobalCenter group has received administrative
services from the Global Crossing group that include information systems
support, tax services, payroll and benefit administration and certain other
accounting and administrative services. From March 1, 1998 through September
30, 1999, Frontier Corporation provided these services to the GlobalCenter
group. Its costs for these services were based on total actual costs allocated
to the GlobalCenter group using bases that management considered reasonable
given the nature of the costs and the usage by the GlobalCenter group. The
Global Crossing group will continue to provide certain administrative services
on a similar cost allocation basis.
The GlobalCenter group currently operates 10 data centers and plans to open
nine additional data centers during 2000. It typically takes the GlobalCenter
group at least six months after a data center site is leased to construct the
data center facility, install equipment and telecommunications infrastructure
and to hire operations and sales personnel. As a result, the GlobalCenter group
makes a large capital investment and incurs significant start-up costs before
generating customer revenues at any new data center. Start-up costs are
expensed as incurred. The GlobalCenter group expects a new data center to incur
losses for a year or longer until reaching break-even utilization. Largely as a
result of these costs, the GlobalCenter group has experienced operating losses
and negative cash flows from operations in each annual period. The GlobalCenter
group's net losses for
89
the three months ended March 31, 2000 and December 31, 1999, the nine months
ended September 30, 1999 and each of the years ended December 31, 1998 and 1997
were $41.1 million, $42.7 million, $16.8 million, $10.8 million and $2.8
million, respectively.
As of March 31, 2000, stock options to purchase approximately 9.6% of
GlobalCenter Inc. common stock or GlobalCenter group stock, subject to election
by the employee, had been approved for grant under the Management Stock Plan.
The aggregate exercise price of such options is approximately $191 million.
Upon approval of the Management Stock Plan by the shareholders, the
GlobalCenter group will record deferred stock compensation equal to the
difference between the exercise price and the fair value of shares at the date
of approval. The resulting deferred stock compensation will be amortized in
accordance with the terms of vesting of such options and consistent with the
accounting policy adopted by Global Crossing.
Our board of directors will have the ability to control transfers of funds or
other assets and allocate revenues and expenses between the Global Crossing
group and the GlobalCenter group consistent with its fiduciary duty to Global
Crossing as a whole and its shareholders. Our board of directors can make
operational and financial decisions that could favor the Global Crossing group
over the GlobalCenter group, or vice versa, determine the allocation of
proceeds from future issuances of GlobalCenter group stock, determine the
allocation of any consideration received in a merger or consolidation
transaction and change the amounts or methodologies for allocations of
corporate expenses between the GlobalCenter group and Global Crossing group.
Results of Operations
Three Months Ended March 31, 2000 compared with the Three Months Ended March
31, 1999
GlobalCenter Inc. was acquired by Frontier Corporation in February 1998 in a
pooling-of-interests transaction. On September 28, 1999, we acquired Frontier
Corporation, the owner of substantially all the assets of the GlobalCenter
Group, in a merger transaction. For financial reporting purposes, our merger
with Frontier Corporation was deemed to have occurred on September 30, 1999. In
connection with the merger, the assets and liabilities of the GlobalCenter
group were adjusted to their respective fair values under the purchase method
of accounting. GlobalCenter included the assets and liabilities of the
GlobalCenter group and the related consolidated results of operations for
periods prior to October 1, 1999 under the heading "Old GlobalCenter," and for
periods subsequent to September 30, 1999 under the heading "New GlobalCenter."
Depreciation, amortization and certain other line items included in the
operating results of New GlobalCenter are not directly comparable to Old
GlobalCenter because the three-month period ended March 31, 2000 includes the
effects of purchase accounting adjustments related to our merger with Frontier
Corporation, while prior periods do not.
Revenues. The GlobalCenter group's service revenues consist of fees from
customers for Web hosting, IP network services, content distribution, systems
applications and professional services. The GlobalCenter group typically
provides its services under one-to-three year contracts with minimum customer
commitments for connectivity and services. Service revenues are recognized as
the services are provided. Service revenues also include fees for equipment
installation. Revenues for equipment installation are recognized when
installation of the equipment is complete. The Global Center group's equipment
revenues consist of revenue derived from the resale to its customers of
computers, computer peripherals and networking equipment which the Global
Center group buys from third parties upon receipt of a customer order. The
GlobalCenter group assists its customer with equipment selection, procurement
and installation to facilitate and accelerate the customer's entry into the
data center. Equipment revenues are recognized when equipment installation in a
data center is complete. Equipment that has been purchased on behalf of
customers but not yet transferred to the customer or installed is recorded as
equipment held for resale.
The GlobalCenter group's total revenues increased 250% to $38.3 million for
the quarter ended March 31, 2000 from $10.9 million for the quarter ended March
31, 1999, as a result of increase in service revenues and
90
equipment revenues. Service revenues increased 281% to $24.6 million for the
quarter ended March 31, 2000 from $6.5 million for the quarter ended March 31,
1999. The GlobalCenter group's equipment revenues increased 206% to
$13.7 million for the quarter ended March 31, 2000 from $4.5 million for the
quarter ended March 31, 1999.
The growth in the GlobalCenter group's service revenue was primarily the
result of opening new data centers, adding new customers and services, and
increasing revenues from existing customers. During the first quarter of 2000,
the GlobalCenter group opened two new data centers. Data center square footage
increased by 176% at March 31, 2000 compared to March 31, 1999. The
GlobalCenter group's largest data center opened at the end of 1999 with sales
in this data center commencing in January 2000.
The GlobalCenter group's equipment revenues increased primarily because more
customers in its new data centers chose to purchase their equipment from the
GlobalCenter group rather than directly from a third party vendor. Equipment
sales as a percentage of total revenue and in absolute dollars can and will
fluctuate from period to period depending on the timing and number of new data
centers the GlobalCenter group opens, the mix of new and existing customers and
the requirements of those customers of new and replacement equipment. The
GlobalCenter group expects that, as a general matter, equipment sales will
constitute a smaller portion of its total revenues in the future.
Cost of Revenues. Cost of service revenues is comprised of telecommunication
costs for the backbone network and costs for connectivity to other networks and
telecommunications providers. Other expenses in cost of service revenues
include salaries, benefits, rent and other expenses for operation of our data
centers, customer service and network engineering personnel. Cost of equipment
revenues is the cost of third-party equipment sold to the GlobalCenter group's
customers.
Cost of service revenues increased 129% to $21.4 million for the quarter
ended March 31, 2000 from $9.4 million for the comparable period in 1999. This
increase was primarily due to increased network usage by GlobalCenter group's
customers, and rent and facilities costs for the addition and expansion of its
data centers. GlobalCenter group expects increases to continue with the
addition of new customers and addition and expansion of its data centers. Cost
of service revenues decreased as a percentage of service revenue from 145% in
the quarter ended March 31, 1999 to 87% in the quarter ended March 31, 2000
primarily due to better utilization of network capacity. In the future, network
cost of service will be based on preferred market-based pricing and actual
usage under GlobalCenter group's arrangement with the Global Crossing group.
Cost of equipment revenues increased 223% to $13.1 million for the quarter
ended March 31, 2000 from $4.1 million for the quarter ended March 31, 1999,
due to increased equipment sales. The cost of equipment, as a percentage of
equipment revenues, increased to 95% during the quarter ended March 31, 2000
from 90% during the quarter ended March 31, 1999, as a result of competitive
price pressure in the market.
Sales and Marketing. The GlobalCenter group's sales and marketing expenses
consist of salaries, commissions, benefits and other expenses for direct sales,
sales support, product marketing, and public relations personnel, as well as
costs associated with marketing programs, collateral material, and corporate
marketing activities, including public relations.
Sales and marketing expenses increased 206% to $6.5 million for the quarter
ended March 31, 2000 from $2.1 million for the comparable period in 1999. The
increase is primarily a result of having additional direct sales and marketing
personnel and other sales and marketing expenses in connection with new data
centers and our expanding operations and services. The GlobalCenter group
expects its sales and marketing expenses to continue to increase with the
addition of new data centers in the future. As a percent of total revenue,
sales and marketing expenses decreased from 19% in the quarter ended March 31,
1999 to 17% in the quarter ended March 31, 2000 primarily due to the increase
in revenues.
91
General and Administrative. The GlobalCenter group's general and
administrative expenses consist of payroll and benefit administration,
information systems services, accounting and back office support, headquarters
facility costs, executive salaries and other general and administrative costs,
including the GlobalCenter group's allocation of corporate administrative
services. Since October 1, 1999, the Global Crossing group has provided payroll
and benefits administration, purchasing and certain other accounting and
corporate administrative services. The GlobalCenter group pays the Global
Crossing group a monthly fee for these support services. Expenses for the three
months ended March 31, 2000 include $1.0 million for these services. From March
1, 1998 through September 30, 1999, Frontier Corporation provided these
services and corporate administration to the GlobalCenter group. Expenses for
the three months ended March 31, 1999, included $0.6 million for these
services.
The GlobalCenter group's total general and administrative expenses increased
380% to $5.8 million for the quarter ended March 31, 2000 from $1.2 million for
the same period in 1999, primarily because it hired additional management and
administrative personnel to support expanding operations. The GlobalCenter
group expects its general and administrative expenses to continue to increase
with the addition of new data centers in the future. General and administrative
expenses as a percent of total revenue increased from 11% in the first quarter
of 1999 to 15% in the first quarter of 2000 primarily due to the increase in
personnel and related costs to support its growth between comparison periods.
Depreciation and Amortization. Depreciation and amortization expenses consist
of depreciation of leasehold improvements and network infrastructure
improvements, furniture and amortization of capital lease equipment.
Depreciation and amortization expense increased 186% to $3.2 million for the
quarter ended March 31, 2000 from $1.1 million for the same period of 1999,
primarily as a result of the new data centers and the related leasehold and
network investments.
Goodwill and Intangibles Amortization. In connection with our merger with
Frontier Corporation in September 1999, we contributed approximately $1.5
billion of goodwill and intangible assets to the GlobalCenter group. The
goodwill and identified intangibles are being amortized over 10 years using the
straight-line method. The GlobalCenter group recognized amortization expense of
$37.1 million in the quarter ended March 31, 2000 related to this goodwill and
intangible assets.
The GlobalCenter group also recorded goodwill totaling approximately $9.1
million in connection with an acquisition completed in November 1997. The
goodwill from this transaction was amortized over a seven-year period using the
straight-line method until our acquisition of Frontier Corporation in September
1999. The GlobalCenter group recognized amortization expense of $0.3 million in
the quarter ended March 31, 1999 related to this goodwill.
Income Tax Benefit. Income taxes have been calculated on a pro-rata basis.
The GlobalCenter group's benefit for income taxes is based on the increase or
decrease in tax liability of the Global Crossing North America, formerly
Frontier Corporation, consolidated tax group resulting from the inclusion of
items in the Global Crossing North America consolidated tax return which are
attributable to the GlobalCenter group. The GlobalCenter group's benefit in the
quarter ended March 31, 2000 and the quarter ended March 31, 1999 reflects the
use of the GlobalCenter group tax losses in the Global Crossing North America
consolidated tax return.
Net Loss. The GlobalCenter group's net loss was $41.1 million for the three
months ended March 31, 2000 compared to $4.6 million for the three months ended
March 31, 1999. The increase in net loss was primarily due to the difference in
goodwill and intangibles amortization that resulted from our acquisition of
GlobalCenter Inc. in September 1999 as part of the Frontier Corporation merger,
increased depreciation and amortization from additions to property and
equipment over the course of the year and operating expenses that are in excess
of revenues. The GlobalCenter group is currently in an expansion phase, adding
additional data centers and related personnel. The GlobalCenter group expects a
new data center to incur losses for a year or longer before reaching break-even
utilization.
92
Pro Forma Year Ended December 31, 1999 Compared with the Year Ended December
31, 1998
For purposes of the following discussion and to provide a meaningful basis
for comparing the year ended December 31, 1999 to the year ended December 31,
1998, we have combined, as shown below and in the selected historical financial
data of the GlobalCenter group, the operating results of Old GlobalCenter for
the nine months ended September 30, 1999 with the operating results of New
GlobalCenter for the three months ended December 31, 1999. The pro forma
presentation for the year ended December 31, 1999 includes adjustments for
depreciation of property and equipment and amortization of goodwill and
intangibles for the nine months ended September 30, 1999, resulting from our
merger with Frontier Corporation as follows:
Old New
GlobalCenter GlobalCenter Pro Forma
Nine Months Three Months Twelve
Ended Ended Months Ended
September 30, Pro Forma December 31, December 31,
1999 (1) Adjustments 1999 (4) 1999
------------- ----------- ------------ ------------
($ in thousands)
Revenues:
Service revenues...... $ 29,951 $ -- $ 17,753 $ 47,704
Equipment revenues.... 17,228 -- 5,971 23,199
-------- --------- -------- ---------
Total revenues...... 47,179 -- 23,724 70,903
-------- --------- -------- ---------
Costs and expenses:
Cost of service
revenue.............. 36,451 -- 17,328 53,779
Cost of equipment
revenue.............. 15,573 -- 5,365 20,938
Sales and marketing... 9,531 -- 6,088 15,619
General and
administrative....... 6,897 -- 3,067 9,964
Depreciation and
amortization......... 4,242 273 (2) 1,913 6,428
Goodwill and
intangibles
amortization......... 974 (974) 37,135 148,540
111,405 (3)
-------- --------- -------- ---------
Total costs and
expenses........... 73,668 110,704 70,896 255,268
-------- --------- -------- ---------
Loss from operations.... (26,489) (110,704) (47,172) $(184,365)
Other income (expense),
net.................... (44) -- 114 70
-------- --------- -------- ---------
Loss before income
taxes.................. (26,533) (110,704) (47,058) (184,295)
Income tax benefit...... 9,742 -- 4,333 14,075
-------- --------- -------- ---------
Net loss................ $(16,791) $(110,704) $(42,725) $(170,220)
======== ========= ======== =========
(1) This column represents the results of operations of the GlobalCenter group
for the nine months ended September 30, 1999 prior to our acquisition of
Frontier Corporation.
(2) This adjustment reflects the depreciation and amortization of the
approximately $1.7 million increase in the fair value assigned to the
assets acquired over the related book value for the nine months ended
September 30, 1999. We are amortizing this adjustment using the straight-
line method over the average useful life of the underlying assets. The
initial purchase price allocation is based on current estimates. We will
make the final purchase price allocation based upon final values for
certain assets and liabilities. As a result, the final purchase price
allocation may differ from the presented estimate.
(3) This adjustment reflects the amortization expense of the excess
consideration over the net assets acquired (goodwill) of approximately
$1.48 billion for the nine months ended September 30, 1999. We are
amortizing goodwill and other intangible assets on the straight-line method
over 10 years. The initial purchase price allocation is based on current
estimates. We will make the final purchase price allocation
93
based upon final values for certain assets and liabilities. As a result, the
final purchase price allocation may differ from the presented estimate.
(4) This column represents the historical results of operations of the
GlobalCenter group for the three months ended December 31, 1999. On
September 28, 1999, we acquired Frontier Corporation. For financial
reporting purposes, our merger with Frontier Corporation was deemed to have
occurred on September 30, 1999. In connection with the merger, the assets
and liabilities of the GlobalCenter group were adjusted to their respective
fair values pursuant to the purchase method of accounting.
Revenues. The GlobalCenter group's total revenues increased 205% to $70.9
million for the year ended December 31, 1999 from $23.2 million for the year
ended December 31, 1998, as a result of an increase in service revenues and
equipment revenues. Service revenues increased 143% to $47.7 million for the
year ended December 31, 1999 from $19.6 million for the year ended December 31,
1998. The GlobalCenter group's equipment revenues increased 537% to $23.2
million for the year ended December 31, 1999 from $3.6 million for the year
ended December 31, 1998.
The growth in the GlobalCenter group's service revenue was primarily the
result of opening new and expanding existing data centers, adding new customers
and services, and increasing revenues from existing customers. During 1999, the
GlobalCenter group opened two new data centers, and expanded a third. Data
center square footage increased by 230% at December 31, 1999 compared to
December 31, 1998. The largest data center addition in 1999 opened at the end
of the fourth quarter with sales in this data center commencing in January
2000.
The GlobalCenter group's equipment revenues increased primarily because more
customers in its new data centers chose to purchase their equipment from the
GlobalCenter group rather than directly from a third party vendor.
Cost of Revenues. Cost of service revenues increased 263% to $53.8 million
for the year ended December 31, 1999 from $14.8 million for the comparable
period in 1998. This increase was primarily due to increased network usage by
the GlobalCenter group's customers, and rent and facilities costs for the
addition and expansion of its data centers. Cost of service revenues increased
as a percentage of service revenue from 76% in 1998 to 113% in 1999 primarily
due to the addition of network capacity in advance of its utilization.
Cost of equipment revenues increased 553% to $20.9 million for the year ended
December 31, 1999 from $3.2 million for the year ended December 31, 1998, due
to increased equipment sales. The cost of equipment remained fairly consistent
as a percentage of equipment revenues, increasing to 90% during 1999 from 88%
during 1998.
Sales and Marketing. Sales and marketing expenses increased 75% to $15.6
million for the year ended December 31, 1999 from $8.9 million for the
comparable period in 1998. The increase is primarily a result of having
additional direct sales and marketing personnel and other sales and marketing
expenses in connection with new data centers and the GlobalCenter group's
expanding operations and services. As a percent of total revenue, sales and
marketing expenses decreased from 39% in 1998 to 22% in 1999 primarily due to
the significant increase in revenue between comparison periods.
General and Administrative. Since October 1, 1999, the Global Crossing group
has provided to the GlobalCenter group support services including information
systems support, tax return preparation and advisory services, payroll and
benefits administration, purchasing and certain other accounting and
administrative services. The GlobalCenter group pays the Global Crossing group
a monthly fee for these support services. Expenses for the three months ended
December 31, 1999 include $0.9 million for these services. From March 1, 1998
through September 30, 1999, Frontier Corporation provided these services to the
GlobalCenter group. Expenses for the nine months ended September 30, 1999
include $1.7 million for these services.
The GlobalCenter group's total general and administrative expenses increased
112% to $10.0 million for the year ended December 31, 1999 from $4.7 million
for the same period in 1998, primarily because it hired additional management
and administrative personnel to support expanding operations. General and
94
administrative expenses as a percentage of revenue decreased from 20% to 14%
for the same period primarily due to the significant increase in revenue
between comparison periods.
Depreciation and Amortization. Pro forma depreciation and amortization
expense increased 60% to $6.4 million for the year ended December 31, 1999 from
$4.0 million for the same period of 1998, primarily as a result of the new data
centers and the related leasehold and network investments.
Goodwill and Intangibles Amortization. In connection with our merger with
Frontier Corporation in September 1999, we contributed approximately $1.5
billion of goodwill and intangible assets to the GlobalCenter group. The
goodwill and identified intangibles are being amortized over 10 years using the
straight-line method. Pro forma amortization for the year ended December 31,
1999, was $148.5 million.
The GlobalCenter group also recorded goodwill totaling approximately $9.1
million in connection with an acquisition completed in November 1997. The
goodwill from this transaction was amortized over a seven-year period using the
straight-line method until our acquisition of Frontier Corporation in September
1999.
Net Loss. The GlobalCenter group's pro forma net loss was $170.2 million for
the year ended December 31, 1999 compared to $10.8 million for the year ended
December 31, 1998. The increase in net loss was primarily due to the difference
in goodwill and intangibles amortization that resulted from our acquisition of
GlobalCenter Inc. as part of the Frontier Corporation merger, increased
depreciation and amortization from additions to property and equipment over the
course of the year and operating expenses that are in excess of revenues.
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
Revenues. Total revenues increased 200% to $23.2 million for the year ended
December 31, 1998 from $7.7 million for the year ended December 31, 1997.
Service revenues increased 201% to $19.6 million for the year ended December
31, 1998 from $6.5 million for the year ended December 31, 1997. The
GlobalCenter group's equipment revenues increased from $1.2 million for the
year ended 1997 to $3.6 million for the year ended December 31, 1998, an
increase of 196%.
The overall increase in the GlobalCenter group's revenues was primarily the
result of opening new data center locations, the addition of new customers,
equipment sales to new customers and increased sales to existing customers.
During 1998, the GlobalCenter group opened four additional data centers,
tripling its available square footage. The largest of the new data centers
became operational during the fourth quarter of 1998.
Cost of Revenues. Cost of service revenues increased 182% to $14.8 million
for the year ended December 31, 1998 from $5.3 million for the year ended
December 31, 1997. This increase was due primarily to higher telecommunications
expenses associated with increased volume of usage by customers, the expansion
of the GlobalCenter group's network and the addition of new data centers, as
well as an increase in the number of network administration and customer
support personnel. Cost of service revenues decreased as a percentage of
service revenues from 81% in 1997 to 76% in 1998 due to the fixed nature of
data center lease and maintenance costs and the increasing revenue for the
periods.
Cost of equipment revenues increased 222% to $3.2 million for the year ended
December 31, 1998 from $1.0 million for the year ended December 31, 1997. This
increase resulted from more customers in the GlobalCenter group's new data
centers choosing to purchase their equipment from the GlobalCenter group rather
than direct from a third party vendor.
Sales and Marketing. The GlobalCenter group's sales and marketing expenses
increased 355% to $8.9 million for the year ended December 31, 1998 from $2.0
million for the year ended December 31, 1997. As a percent of total sales,
sales and marketing expense increased from 25% in 1997 to 39% in 1998. The
increase in sales and marketing expenses is related to the increase in the
number of data centers. As the GlobalCenter group adds data centers, it
increases the sales and marketing personnel and related costs to obtain new
customers and to sell and market new products.
95
General and Administrative. The GlobalCenter group's general and
administrative expenses increased 130% to $4.7 million for the year ended
December 31, 1998 from $2.0 million for the year ended December 31, 1997. The
increase was a result of increased personnel costs associated with increasing
the GlobalCenter group's management, administrative and accounting personnel
and processes and related costs to support the growth in its overall customer
base. General and administrative expense decreased as a percentage of total
revenue to 20% for the year ended December 31, 1998 from 26% for the year ended
December 31, 1997 as a result of the increase in revenues.
Depreciation and Amortization. Depreciation and amortization expense
increased 341% to $4.0 million for the year ended December 31, 1998 from $0.9
million for the year ended December 31, 1997, primarily due to increased
investment in network and increased data center capacity.
Goodwill and Intangibles Amortization. The GlobalCenter group recorded
goodwill totaling $9.1 million in connection with an acquisition completed in
November 1997. The goodwill from this transaction was amortized over a seven-
year period using the straight-line method.
Merger Costs. In connection with Frontier Corporation's acquisition of
GlobalCenter Inc. that was accounted for as a pooling, approximately $2.1
million of merger costs have been reflected in the accompanying statement of
operations.
Net Loss. The GlobalCenter group's net loss was $10.8 million for the year
ended December 31, 1998 compared to $2.8 million for the year ended December
31, 1998. The increase in the level of net loss was primarily due to operating
expenses that were in excess of revenues and costs related to Frontier
Corporation's accquisition of GlobalCenter Inc. in February 1998. Operating
expenses increased as a result of new data centers opened.
Liquidity and Capital Resources
Our board of directors and its capital stock committee each has a wide degree
of discretion over the cash management policies of both the GlobalCenter group
and the Global Crossing group, consistent with their fiduciary duties to Global
Crossing as a whole. Pursuant to this discretion, our board of directors and
its capital stock committee may freely transfer cash generated by the
GlobalCenter group to the Global Crossing group and vice versa, as well as
determine the allocation of proceeds from future issuances of GlobalCenter
group stock. In addition, the timing and decision to finance capital
expenditures of the GlobalCenter group remains at the discretion of our board
of directors. Pursuant to the policy statement, our board of directors has the
authority to determine the uses of the net proceeds allocated to the
GlobalCenter group. Our board of directors can amend, modify or rescind the
policy statement in its sole discretion and without shareholder approval.
The construction and expansion of the GlobalCenter group's data centers and
the marketing and distribution of its service offerings will continue to
require substantial capital investment. To date, the GlobalCenter group has
funded its operations through internally generated funds and permanent capital
contributions from the Global Crossing group and, prior to September 30, 1999,
from Frontier Corporation. Based on its current business plan, the GlobalCenter
group expects the proceeds from this offering to provide sufficient capital to
sustain current operations and capital expenditure plans for the next 12 to 18
months. We have no current plans to issue additional GlobalCenter group stock
in the next 12 to 18 months; however, competitive or other factors beyond our
control may cause us to change our business plan and increase our future
financing requirements. The sources from which we may satisfy our future
financing requirements may include funding from third parties, the issuance of
additional GlobalCenter group stock or additional funding from the Global
Crossing group, although there is no obligation on the Global Crossing group's
part to provide any additional funding. We would choose the source of our
financing based on the relative costs of capital that existed among such
sources at the time.
Net cash used in operating activities in 1997, 1998, and 1999 was $3.1
million, $5.8 million, and $11.6 million, respectively. Net cash used in
operating activities in each of these periods was primarily the
96
result of operating losses and changes in working capital. Net cash provided by
operations for the three months ended March 31, 2000 of $6.6 million was
primarily the result of an increase in accounts payable and accrued
liabilities.
Net cash used in investing activities in 1997, 1998, 1999 and for the three
months ended March 31, 2000 was $1.3 million, $29.0 million, $90.3 million and
$59.1 million, respectively. Net cash used in investing activities in each of
these periods was primarily the result of capital expenditures for data centers
and their infrastructure, leasehold improvements, furniture and fixtures, and
other equipment.
We will manage some of the GlobalCenter group's financial activities on a
centralized basis. Allocations that are treated as loans from the GlobalCenter
group to the Global Crossing group and loans from the Global Crossing group to
the GlobalCenter group will be made at the weighted average interest rate of
the consolidated indebtedness of Global Crossing Ltd. and on such other terms
and conditions as our board of directors or its capital stock committee
determines to be in the best interest of Global Crossing. Any fees incurred in
connection with debt incurred will be allocated to the borrowing group.
The GlobalCenter group also expects to require funds to make product
development investments. For example, it engaged Tanning Technology Corporation
to provide consulting and project services to help it expand its service and
product solutions and to provide an infrastructure to scale Internet
businesses. GlobalCenter Inc. has a commitment with Tanning Technology to
purchase services aggregating $10 million over the 12-month term of the
agreement beginning in February 2000. GlobalCenter Inc. also purchased
$10 million of Tanning Technology common stock in February 2000.
Recent Accounting Pronouncement
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which is required to be adopted
by Global Crossing in the quarter ending June 30, 2000. SAB 101 provides
additional guidance on revenue recognition as well as criteria for when revenue
is generally realized and earned. GlobalCenter management is currently
assessing the impact of SAB 101 on the results of operations and financial
position of the GlobalCenter group. GlobalCenter management does not expect the
effects of SAB 101 to have a material effect on the accompanying financial
statements of the GlobalCenter group.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for
Derivative Instruments and Hedging Activities, which is effective for all
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and hedging activities.
Because the GlobalCenter group does not currently hold any derivative
instruments and does not engage in hedging activities, management expects that
the adoption of SFAS No. 133 will not have a material impact on the
GlobalCenter group's financial position, results of operations or cash flows.
It will be required to implement SFAS No. 133 for the year ending December 31,
2001.
Year 2000
Prior to December 31, 1999, we took all actions necessary to insure that our
business operations would be Year 2000 compliant. In particular, we established
a Year 2000 compliance task force, reviewed the status of systems, submitted
information requests to third party service providers, received assurances
regarding Year 2000 compliance from our major suppliers and developed
contingency plans to address any potential Year 2000 compliance failure.
Neither the Global Crossing group nor the GlobalCenter group experienced any
significant malfunctions or errors in their respective operating or business
systems when the date changed from 1999 to 2000. Based on its operations since
January 1, 2000, the GlobalCenter group does not expect any significant impact
to ongoing business as a result of the Year 2000 issue. In addition, it is not
aware of any significant Year 2000 issues or problems that may have arisen for
its significant customers and suppliers.
97
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.
Transition to the Euro will create a number of issues for the GlobalCenter
group. Business issues that must be addressed include product pricing policies
and ensuring the continuity of business and financial contracts. Finance and
accounting issues will include the conversion of bank accounts and other
treasury and cash management activities.
The GlobalCenter group continues to address these transition issues and does
not expect the transition to the Euro to have a material effect on its results
of operations or financial condition. The GlobalCenter group does not expect
the cost of system modifications to be material and it will continue to
evaluate the impact of the Euro conversion.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The GlobalCenter group's major market risk exposure is changing interest
rates. We will manage most of its financial activities including investing
surplus funds, the issuance and repayment of debt and managing its interest
rate risk. Our policy is to manage interest rates through the use of a
combination of fixed and floating rate debt. We may use interest rate swaps to
manage interest rate exposures when appropriate, based upon market conditions,
and not engage in such transactions for speculative purposes.
Foreign Currency Risk
As of December 31, 1999, the functional currency of the GlobalCenter's
group's current foreign operations located in Australia and England is the
United States dollar. The GlobalCenter group's foreign currency transactions
are recorded based on exchange rates at the time such transactions arise. Its
existing operations, assets and liabilities as of December 31, 1999 that are
denominated in currencies other than the United States dollar are not material.
As the manager for most of the GlobalCenter group's financing activities, we
use foreign currency forward transactions to hedge exposure to foreign currency
exchange rate fluctuations.
98
SELECTED HISTORICAL FINANCIAL DATA OF GLOBAL CROSSING LTD.
Selected Historical Financial Data
The table below shows selected historical financial data for Global Crossing
Ltd. This data has been prepared using our consolidated financial statements as
of the dates indicated and for each of the years ended December 31, 1999 and
1998, for the period from March 19, 1997, the date of our inception, to
December 31, 1997 and for the three months ended March 31, 1999 and 2000.
In reading the following selected historical financial data, please note the
following:
. The financial data as of March 31, 2000 and for the three months ended
March 31, 1999 and 2000 are derived from our unaudited consolidated
financial statements included elsewhere in this proxy statement. We have
made adjustments, consisting of normal recurring adjustments necessary to
present the financial position as of March 31, 2000 and the results of
operations for the three months ended March 31, 1999 and 2000, which in
the opinion of our management are necessary for a fair presentation.
Results of operations for the three months ended March 31, 1999 and 2000
are not necessarily indicative of the results that we expect for the full
year or for any future period.
. The statement of operations data for the year ended December 31, 1999
includes the results of Global Marine Systems for the period from July 2,
1999, date of acquisition, through December 31, 1999; the results of
Frontier Corporation for the period from September 30, 1999, date of
acquisition, through December 31, 1999; and the results of Racal Telecom
for the period from November 24, 1999, date of acquisition, through
December 31, 1999. The Consolidated Balance Sheet as of December 31, 1999
includes amounts related to Global Marine Systems, Frontier Corporation
and Racal Telecom. This information should be read in conjunction with
pro forma financial information of Global Crossing Ltd. and related notes
included elsewhere in this proxy statement.
. During the year ended December 31, 1999, we recorded a $15 million
expense, net of tax benefit, due to the adoption of Statement of Position
98-5, "Reporting on the Cost of Start-Up Activities". See the "Cumulative
effect of change in accounting principles" item in the Statement of
Operations Data.
. On March 24, 2000, we increased our interest in the PC-1 cable system
from 57.75% to 64.50% for approximately $21 million by acquiring the
remaining ownership of another partner in PC-1 and the PC-1 shareholder
agreement was amended, which enabled us to exercise effective control
over PC-1. As a result of these changes, we have, effective January 1,
2000, consolidated PC-1's operating results.
. On January 12, 2000, we established a joint venture, called Hutchison
Global Crossing, with Hutchison Whampoa Limited, to pursue fixed-line
telecommunications and Internet opportunities in Hong Kong. For its 50%
share, Hutchison Whampoa Limited 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 Whampoa
Limited has agreed that any fixed-line telecommunications activities it
pursues in China will be carried out by the joint venture. For our 50%
share, we provided to Hutchison Whampoa Limited $400 million in Global
Crossing Ltd. convertible preferred stock, convertible into shares of
Global Crossing group stock at a rate of $45 per share, and committed to
contribute to the joint venture international telecommunications capacity
rights on Global Crossing's network and global media distribution center
capabilities which together are valued at $350 million, as well as $50
million in cash. We intend to integrate our interest in Hutchison Global
Crossing into our Asia Global Crossing joint venture.
. On December 15, 1999, we issued 2,600,000 shares of 7% cumulative
convertible preferred stock at a liquidation preference of $250.00 for
net proceeds of $630 million. Each share of preferred stock is
convertible into 4.6948 shares of Global Crossing group stock based on a
conversion price of $53.25. Dividends on the preferred stock are
cumulative from the date of issue and will be payable on February 1, May
1, August 1 and November 1 of each year, beginning on February 1, 2000,
at the annual rate of 7%.
99
. On November 24, 1999, we completed our acquisition of Racal Telecom, a
group of wholly owned subsidiaries of Racal Electronics plc, for
approximately $1.6 billion in cash. Racal Telecom owns one of the most
extensive fiber telecommunications networks in the United Kingdom,
consisting of approximately 4,650 route miles of fiber and reaching more
than 2,000 cities and towns.
. On November 12, 1999, Global Crossing Holdings Ltd., a wholly-owned
subsidiary of Global Crossing, issued two series of senior unsecured
notes. The 9 1/8% senior notes are due November 15, 2006 with a face
value of $900 million and the 9 1/2% senior notes are due November 15,
2009 with a face value of $1,100 million. The New Senior Notes are
guaranteed by Global Crossing Ltd. Interest will be paid on the notes on
May 15 and November 15 of each year, beginning on May 15, 2000.
. On November 5, 1999, we issued 10,000,000 shares of 6 3/8% cumulative
convertible preferred stock at a liquidation preference of $100.00 for
net proceeds of approximately $969 million. Each share of preferred stock
is convertible into 2.2222 shares of Global Crossing group stock, based
on a conversion price of $45.00. Dividends on the preferred stock are
cumulative from the date of issue and will be payable on February 1, May
1, August 1 and November 1 of each year, beginning on February 1, 2000,
at the annual rate of 6 3/8%.
. On September 28, 1999, we completed our acquisition of Frontier
Corporation in a merger transaction valued at over $10 billion, with
Frontier Corporation shareholders receiving 2.05 shares of Global
Crossing common stock for each share of Frontier Corporation common stock
held. Frontier Corporation is one of the largest long distance
telecommunications companies in the United States and one of the leading
providers of facilities-based integrated communications and Internet
services.
. On July 2, 1999, we completed our acquisition of the Global Marine
Systems division of Cable & Wireless Plc for approximately $908 million
in cash and assumed liabilities. Global Marine Systems owns the largest
fleet of cable laying and maintenance vessels in the world and currently
services more than a third of the world's undersea cable miles.
. On May 16, 1999, we entered into a definitive agreement to merge with U S
WEST, Inc. On July 18, 1999, we and U S WEST agreed to terminate our
merger agreement, and U S WEST agreed to merge with Qwest Communications
International Inc. As a result, U S WEST paid us a termination fee of
$140 million in cash and returned 2,231,076 shares of Global Crossing
common stock purchased in a related tender offer, and Qwest committed to
purchase capacity on the Global Crossing network at established market
unit prices for delivery over the next four years and committed to make
purchase price payments to us for this capacity of $140 million over the
next two years. During the year ended December 31, 1999, we recognized
$210 million, net of merger related expenses, of other income in
connection with the termination of the U S WEST merger agreement.
. The "Termination of advisory services agreement" item in the Statements
of Operations Data includes a charge for the termination of the advisory
services agreement as of June 30, 1998. We acquired the rights from those
entitled to fees payable under the advisory services agreement in
consideration from the issuance of common stock having an aggregate value
of $135 million and the cancellation of approximately $3 million owed to
us under a related advance agreement. As a result of this transaction, we
recorded a non-recurring charge in the approximate amount of $138 million
during the year ended December 31, 1998. In addition, we recognized as an
expense approximately $2 million of advisory fees incurred prior to
termination of the contract.
. We granted warrants to Pacific Capital Group, Inc., a shareholder, and
some of our affiliates for the Pacific Crossing, Mid-Atlantic Crossing
and Pan American Crossing systems and related rights. The $275 million
value of the common stock was originally allocated to "Construction in
progress" in the amount of $112 million and as "Investment in and
advances to/from affiliates" in the amount of $163 million. See the
"property and equipment" item in the Balance Sheet Data. The "Investment
in and advance to/from affiliates" item in the balance sheet data
includes $163 million as of December 31, 1999 and 1998, respectively,
representing the value of the warrants described in the bullet point
immediately above applicable to the Pacific Crossing system.
100
. Adjusted EBITDA is defined as operating income (loss), plus goodwill
amortization, depreciation and amortization, non-cash cost of capacity
sold, stock related expenses, incremental cash deferred revenue and
amounts relating to the termination of the advisory services agreement.
This definition is consistent with financial covenants contained in
Global Crossing's major financial agreements. We present Adjusted EBITDA
because it is a financial indicator used by investors and analysts to
analyze and compare companies on the basis of operating performance and
because we believe that Adjusted EBITDA is an additional, meaningful
measure of performance and liquidity. Our management uses Adjusted EBITDA
to monitor Global Crossing's compliance with its financial covenants and
to understand the financial indicators investors and analysts are using
to measure Global Crossing's performance. This information should not be
considered 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.
101
The selected consolidated financial data as of December 31, 1997, 1998 and
1999, for the period from March 19, 1997 (Date of Inception) to December 31,
1997, and for the years ended December 31, 1998 and 1999, respectively, are
derived from our audited consolidated financial statements and should be read
in conjunction with our audited consolidated financial statements and notes
included elsewhere in this proxy statement.
Period from
March 19, 1997 Three Months Ended
(Date of Inception) to Year Ended Year Ended March 31,
December 31, December 31, December 31, ------------------------
1997 1998 1999 1999 2000
---------------------- ------------ ------------ ----------- -----------
(in thousands, except share and per share information)
(Unaudited)
Statement of Operations
Data:
Revenue................. $ -- $ 419,866 $ 1,664,824 $ 176,319 $ 1,119,516
----------- ----------- ----------- ----------- -----------
Expenses:
Cost of sales........... -- 178,492 850,483 69,387 579,907
Operations,
administration and
maintenance............ -- 18,140 134,266 12,026 144,578
Sales and marketing..... 1,366 31,748 152,115 10,437 104,318
Network development..... 78 14,204 33,304 7,376 19,209
General and
administrative......... 1,618 56,797 250,202 35,815 166,751
Depreciation and
amortization........... 39 541 124,294 211 140,943
Goodwill and intangibles
amortization........... -- -- 127,621 -- 131,634
Termination of advisory
services agreement..... 139,669 -- -- --
----------- ----------- ----------- ----------- -----------
3,101 439,591 1,672,285 135,252 1,287,340
----------- ----------- ----------- ----------- -----------
Operating (loss)
income................. (3,101) (19,725) (7,461) 41,067 (167,824)
Equity in income (loss)
of affiliates.......... -- (2,508) 15,708 (2,736) (5,140)
Minority interest....... -- -- (1,338) -- (15,731)
Other income (expense):
Interest income........ 2,941 29,986 67,407 14,392 22,798
Interest expense....... -- (42,880) (139,077) (23,779) (85,676)
Other expense, net..... -- -- 180,765 -- (5,628)
Provision for income
taxes.................. -- (33,067) (126,539) (16,142) (5,000)
----------- ----------- ----------- ----------- -----------
(Loss) income before
extraordinary item and
cumulative effect of
change in accounting
principle............. (160) (68,194) (10,535) 12,802 (262,201)
Extraordinary loss on
retirement of debt..... -- (19,709) (45,681) -- --
----------- ----------- ----------- ----------- -----------
(Loss) income before
cumulative effect of
change in accounting
principle.............. (160) (87,903) (56,216) 12,802 (262,201)
Cumulative effect of
change in accounting
principle, net of
income tax benefit of
$1,400................. -- -- (14,710) (14,710) --
----------- ----------- ----------- ----------- -----------
Net loss................ (160) (87,903) (70,926) (1,908) (262,201)
Preferred stock
dividends.............. (12,690) (12,681) (66,642) (13,044) (45,258)
Repurchase of preferred
stock.................. -- (34,140) -- -- --
----------- ----------- ----------- ----------- -----------
Net loss applicable to
common shareholders.... $ (12,850) $ (134,724) $ (137,568) $ (14,952) $ (307,459)
=========== =========== =========== =========== ===========
Net Loss per Common
Share:
Loss applicable to
common shareholders
before extraordinary
item and cumulative
effect of change in
accounting principle
Basic and diluted...... $ (0.04) $ (0.32) $ (0.15) $ (0.00) $ (0.39)
=========== =========== =========== =========== ===========
Extraordinary item
Basic and diluted...... $ -- $ (0.06) $ (0.09) $ -- $ --
=========== =========== =========== =========== ===========
Cumulative effect of
change in accounting
principle
Basic and diluted...... $ -- $ -- $ (0.03) $ (0.04) $ --
=========== =========== =========== =========== ===========
Net loss applicable to
common shareholders
Basic and diluted...... $ (0.04) $ (0.38) $ (0.27) $ (0.04) $ (0.39)
=========== =========== =========== =========== ===========
Shares used in computing
basic and diluted loss
per share.............. 325,773,934 358,735,340 502,400,851 410,797,073 778,780,323
=========== =========== =========== =========== ===========
Operating Data:
Cash from operating
activities............. $ 5,121 $ 208,727 $ 506,084 $ (19,441) $ 240,158
Cash from investing
activities............. (428,743) (430,697) (4,009,977) (158,008) (1,030,576)
Cash from financing
activities............. 425,075 1,027,110 4,330,799 (64,796) 407,872
Adjusted EBITDA......... $ 2,263 $ 364,948 $ 708,181 $ 128,208 $ 388,591
102
December 31,
--------------------------------- March 31,
1997 1998 1999 2000
-------- ---------- ----------- -----------
(in thousands) (Unaudited)
Balance Sheet Data:
Current assets including cash and cash equivalents
and restricted cash and cash equivalents............ $ 27,744 $ 976,615 $ 2,946,533 $ 2,615,603
Long term restricted cash and cash equivalents....... -- 367,600 138,118 69,545
Long term accounts receivable........................ -- 43,315 52,052 42,419
Capacity available for sale.......................... -- 574,849 -- --
Property and equipment, net.......................... 518,519 433,707 6,026,053 7,985,651
Other assets......................................... 25,934 65,757 661,442 735,746
Investments in and advances to/from affiliates, net.. -- 177,334 323,960 604,291
Goodwill and intangibles, net........................ -- -- 9,557,422 9,436,715
-------- ---------- ----------- -----------
Total assets....................................... $572,197 $2,639,177 $19,705,580 $21,489,970
======== ========== =========== ===========
Current liabilities.................................. $ 90,817 $ 256,265 $ 1,852,593 $ 2,233,153
Long term debt....................................... 312,325 1,066,093 5,018,544 6,031,662
Deferred revenue..................................... -- 25,325 383,287 489,331
Deferred credits and other........................... 3,009 34,174 796,606 819,485
-------- ---------- ----------- -----------
Total liabilities.................................... 406,151 1,381,857 8,051,030 9,573,631
Minority interest.................................... -- -- 351,338 478,030
Mandatorily redeemable and cumulative convertible
preferred stock..................................... 91,925 483,000 2,084,697 2,485,267
Shareholders' equity:
Common stock....................................... 3,258 4,328 7,992 8,030
Treasury stock..................................... -- (209,415) (209,415) (209,415)
Other shareholders' equity......................... 71,023 1,067,470 9,578,927 9,575,617
Accumulated deficit................................ (160) (88,063) (158,989) (421,190)
-------- ---------- ----------- -----------
Total shareholders' equity........................... 74,121 774,320 9,218,515 8,953,042
-------- ---------- ----------- -----------
Total liabilities and shareholders' equity........... $572,197 $2,639,177 $19,705,580 $21,489,970
======== ========== =========== ===========
103
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF GLOBAL CROSSING LTD.
Recent Financial Accounting Developments
During the third and fourth quarters of 1999, changes in our business
activities, together with a newly effective accounting standard, caused us to
modify some of our practices regarding recognition of revenue and costs related
to sales of capacity. None of the accounting practices described below affect
its cash flows.
As a result of Financial Accounting Standards Board (FASB) Interpretation No.
43, "Real Estate Sales, an interpretation of FASB Statement No. 66" (FIN 43),
which became effective July 1, 1999, we have accounted revenue from terrestrial
circuits sold after that date as operating leases and have amortized that
revenue over the terms of the related contracts. Previously, we had recognized
these sales as current revenue upon activation of the circuits. This deferral
in revenue recognition has no impact on cash flow.
With the consummation of our acquisition of Frontier Corporation on September
28, 1999, service offerings became a significant source of our revenue.
Consequently, we initiated service contract accounting for our subsea systems
during the fourth quarter, because we, since that date, no longer hold subsea
capacity exclusively for sale. As a result, since the beginning of the fourth
quarter, we have depreciated investments in both subsea and terrestrial systems
over their remaining economic lives and have recognized revenue related to
service contracts over the terms of the contracts. We have recognized revenue
and costs related to the sale of subsea circuits upon activation, if the
criteria of sales-type lease accounting have been satisfied with respect to
those circuits.
During the fourth quarter, our global network service capabilities were
significantly expanded by the activation of several previously announced
systems and by the integration of other networks obtained through acquisition
and joint venture agreements. With this network expansion, we began offering
our customers flexible bandwidth products to multiple destinations, which makes
the historical practice of fixed, point-to-point routing of traffic and
restoration capacity both impractical and inefficient. To ensure the required
network flexibility, we will modify our future capacity purchase agreements and
our network management in a manner that precludes the use of sales-type lease
accounting.
Because of these contract changes and the network management required to meet
customer demands for flexible bandwidth, multiple destinations and system
performance, we anticipate that most of the contracts for subsea circuits
entered into after January 1, 2000 will be part of a service offering and,
therefore, will not meet the criteria of sales-type lease accounting and will
be accounted for as operating leases. Consequently, we will defer revenue
related to those circuits and amortize it over the appropriate term of the
contract. In certain circumstances, if a contract meets all of the requirements
of sales-type lease accounting, we will recognize revenue without deferral upon
payment and activation.
We note that accounting practice and authoritative guidance regarding the
applicability of sales-type lease accounting to the sale of capacity is still
evolving. Based on the accounting practices described above, we believe that
additional changes, if any, in accounting practice or authoritative guidance
affecting sales of capacity would have little or no impact on our financial
position, results of operations, cash flows and the financial statements taken
as a whole.
Results of Operations for the Three Months Ended March 31, 2000 and March 31,
1999
During the second half of 1999, we completed our merger with Frontier
Corporation and our acquisitions of Global Marine Systems and Racal Telecom. We
refer to these acquisitions together as the "Acquisitions." 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.
104
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 our 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 were 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. Operations, administration and
maintenance costs for the three months ended March 31, 2000 were $145 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 our network operations center,
the expansion of our 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 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 $19 million, or 2% of revenue, compared to $7 million, or
4% 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, including stock compensation and
professional fees associated with the expansion of our network.
General and administrative. General and administrative expenses for the three
months ended March 31, 2000 were $167 million, or 15% of revenue, compared to
$36 million, or 20% of revenue, for the three months ended March 31, 1999. The
increase was comprised principally of salaries, employee benefits, including
stock compensation and recruiting for our 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.
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.
105
Minority interest. Minority interest for the three months ended March 31,
2000 was $16 million and relates to minority interest in net income of Pacific
Crossing Ltd. and Asia Global Crossing.
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 capacity purchase agreement 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 our subsidiaries have a
presence in taxable jurisdictions.
Cumulative effect of change in accounting principle. We 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. We 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, we 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, which we refer to as
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 our major
financial agreements. We present Adjusted EBITDA because it is a financial
indicator used by certain investors and analysts to analyze and compare
companies on the basis of operating performance and because we believe that
Adjusted EBITDA is an additional, meaningful measure of performance and
liquidity.
Results of Operations for the Years Ended December 31, 1999 and December 31,
1998
HISTORICAL
In 1999, we completed our merger with Frontier Corporation and our
acquisitions of Global Marine Systems and Racal Telecom. Results for 1999
include operations of Global Marine Systems from July 2, 1999, Frontier
Corporation from October 1, 1999 and Racal Telecom from November 24, 1999. Due
to these transactions, the comparability of our results of operations for the
years ended December 31, 1999 and 1998 is limited.
106
Revenue. Revenue for 1999 increased 296% to $1,665 million as compared to
$420 million for 1998. The increase in revenue is attributable to our merger
with Frontier Corporation and our acquisitions of Global Marine Systems and
Racal Telecom, as well as growth from our existing business.
Cost of sales. Cost of sales during 1999 was $850 million (51% of revenue)
compared to $178 million (43% of revenue) in 1998. This increase is primarily
attributable to the Frontier Corporation merger and the Global Marine Systems
and Racal Telecom acquisitions. Lower margins are partially due to lower prices
of capacity sold to customers and wholesale cost of capacity purchased from
unconsolidated joint ventures (Global Access Limited and Pacific Crossing
Ltd.), our profit on which is included in equity in income of affiliates.
Non-cash cost of undersea capacity sold was $292 million and $141 million
during the years ended December 31, 1999 and 1998, respectively. For 1998 and
the first nine months of the year ended December 31, 1999, we calculated costs
of undersea capacity sold for the Atlantic Crossing cable system based on the
ratio of the period's actual revenue to total expected future revenues given a
minimum projected sales capacity of 1024 circuits (512 circuits in 1998) times
the construction cost of the system. Beginning in the fourth quarter of 1999,
we began to depreciate its undersea capacity and calculate cost of sales based
on the estimated net book value of the circuit at the time of sale.
Operations, administration and maintenance. Operations, administration and
maintenance for the year ended December 31, 1999 was $134 million (8% of
revenue), compared to $18 million (4% of revenue) for the year ended December
31, 1998. The increase is primarily the result of costs incurred in connection
with the development of our network operations center, expansion of our network
and the expenses of acquired companies.
Sales and marketing. Sales and marketing costs for the year ended December
31, 1999 were $152 million (9% of revenue), compared to $32 million (8% of
revenue) for the year ended December 31, 1998. The increase is primarily
attributable to additions in headcount, occupancy costs, plus marketing costs,
commissions paid and other promotional expenses to support our rapid growth and
the expenses of acquired companies.
Network development. Network development costs for the year ended December
31, 1999 were $33 million (2% of revenue), compared to $14 million (3% of
revenue) for the year ended December 31, 1998. The increase is primarily
attributable to the additional salaries, employee benefits, including stock
compensation, travel and professional fees associated with the construction of
our network.
General and administrative. General and administrative expenses for the year
ended December 31, 1999 were $250 million (14% of revenue), compared to $57
million (14% of revenue) for the year ended December 31, 1998. Such charges are
comprised principally of salaries, employee benefits, including stock
compensation and recruiting fees reflecting our staffing for multiple systems,
travel, professional fees, insurance costs and occupancy costs. The increase in
general and administrative expenses is primarily attributable to our merger
with Frontier Corporation and our acquisitions of Global Marine Systems and
Racal Telecom.
Depreciation and amortization. Depreciation and amortization for the year
ended December 31, 1999 was $124 million (8% as a percentage of revenue),
compared to $.54 million for the year ended December 31, 1998. This increase
was driven by charges from the newly acquired companies and depreciation of
subsea systems as of October 1, 1999.
Goodwill amortization. Goodwill amortization for the year ended December 31,
1999 of $128 million (8% of revenue) resulted from our merger with Frontier
Corporation and our acquisitions of Global Marine Systems and Racal Telecom
during the year ended December 31, 1999. There was no goodwill amortization for
the year ended December 31, 1998.
Operating loss. We incurred an operating loss for the year ended December 31,
1999 of $7 million, compared to a loss of $20 million (5% of revenue) for the
year ended December 31, 1998.
107
Interest income and Interest expense. Interest income for the year ended
December 31, 1999 was $67 million, compared to $30 million for the year ended
December 31, 1998. The increase is due to earnings on investments of funds from
financings and operations for the year ended December 31 1999. Interest expense
for the year ended December 31, 1999 was $139 million, compared to $43 million
for the year ended December 31, 1998, due to our merger with Frontier
Corporation and our acquisitions of Global Marine Systems and Racal Telecom and
increases in debt outstanding to support our capital spending.
Other income, net. Other income, net for the year ended December 31, 1999
resulted primarily from a $210 million payment to us by US West, Inc. in
connection with the termination of its merger agreement with us, less related
expenses.
Provision for income taxes. The income tax provision of $127 million and $33
million for the years ended December 31, 1999 and 1998, respectively, provide
for taxes on profits earned from telecommunications services, installation and
maintenance services, ILEC services and other income where our subsidiaries
have a presence in taxable jurisdictions.
Extraordinary loss from retirement of debt. Extraordinary loss from
retirement of debt of $46 million for the year ended December 31, 1999 compared
to $20 million for the year ended December 31, 1998. During 1999, we recognized
an extraordinary loss of $15 million in connection with the prepayment of
existing debt in connection with the issuance of our $3 billion Senior Secured
Credit Facility and an additional $31 million for the early extinguishment of
$2 billion, in principal value, under the Senior Secured Credit Facility.
During 1998, we recognized an extraordinary loss of $20 million in connection
with the repurchase of Global Telesystems Holdings' outstanding senior notes,
comprising a premium of $10 million and a write-off of $10 million of
unamortized deferred financing costs.
Cumulative effect of change in accounting principle. We adopted Statement of
Position 98-5 (SOP 98-5), "Reporting on the Cost of Start-Up Activities,"
issued by the American Institute of Certified Public Accountants, during the
year ended December 31, 1999. SOP 98-5 requires that certain start-up
expenditures previously capitalized during system development must now be
expensed. We incurred a one-time charge during the first quarter of $15
million, net of tax benefit, that represents start-up costs incurred and
capitalized during previous periods.
Net loss. During the year ended December 31, 1999, we reported a net loss of
$71 million compared to a net loss of $88 million for the prior year.
Net loss applicable to common shareholders. During the years ended December
31, 1999 and 1998, we reported a net loss applicable to common shareholders of
$138 million and $135 million, respectively.
Adjusted EBITDA. Adjusted EBITDA of $708 million in 1999 increased 94% from
$365 million for the year ended December 31, 1998. The increase is primarily
due to the inclusion of Frontier Corporation, Global Marine Systems and Racal
as well as growth from our existing businesses for the year ended December 31,
1999. Adjusted EBITDA is defined as operating income (loss), plus goodwill
amortization, depreciation and amortization, non-cash cost of capacity sold,
stock related expenses, incremental cash deferred revenue and amounts relating
to the termination of an advisory services agreement. This definition is
consistent with financial covenants contained in our major financial
agreements. We present Adjusted EBITDA because it is a financial indicator used
by investors and analysts to analyze and compare companies on the basis of
operating performance and because we believe that Adjusted EBITDA is an
additional, meaningful measure of performance and liquidity. Our management
uses Adjusted EBITDA to monitor its compliance with Global Crossing's financial
covenants and to understand the financial indicators investors and analysts are
using to measure its performance. This information should not be considered as
an alternative to any measure of performance as promulgated under generally
accepted accounting principles. Our calculation of Adjusted EBITDA may be
different from the calculation used by other companies and, therefore,
comparability may be limited.
108
PRO FORMA
This section of "Management's Discussion and Analysis of Financial Condition
and Results of Operations" focuses on pro forma information for the periods
covered giving effect to the acquisitions from the beginning of each period.
Our management believes that the pro forma results provide the most meaningful
comparability among periods presented, since historical results reflect full-
company operations only after the close of the Frontier Corporation merger and
the acquisitions of Racal Telecom and Global Marine Systems. However, the pro
forma data are not necessarily indicative of the results that would have been
achieved had such transactions actually occurred at the beginning of each
period, nor are they necessarily indicative of our future results.
The following reflects the pro forma results of operations for the years
ended December 31, 1999 and 1998.
For the year ended
December 31,
----------------------
1999 1998
---------- ----------
(In thousands)
REVENUE:
Telecommunications services ......................... $3,071,553 $2,591,066
Installation and maintenance services................ 334,153 322,017
Incumbent local exchange carrier services............ 729,231 701,935
Corporate and other.................................. 4,960 28,503
---------- ----------
4,139,897 3,643,521
---------- ----------
EXPENSES:
Operating, selling, general and administrative....... 3,484,330 2,847,045
Depreciation and amortization........................ 363,427 262,847
Goodwill amortization................................ 506,928 506,928
Termination of Advisory Services Agreement........... -- 139,669
---------- ----------
4,354,685 3,756,489
---------- ----------
OPERATING LOSS......................................... (214,788) (112,968)
EQUITY IN LOSS OF AFFILIATES........................... (747) (21,180)
MINORITY INTEREST...................................... (1,338) --
OTHER INCOME (EXPENSE):
Interest income...................................... 76,528 42,877
Interest expense..................................... (345,956) (283,984)
Other income, net.................................... 178,931 23,641
---------- ----------
LOSS BEFORE PROVISION FOR INCOME TAXES, EXTRAORDINARY
ITEM AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE............................................. (307,370) (351,614)
Provision for income taxes........................... (155,174) (123,268)
---------- ----------
LOSS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE........................ (462,544) (474,882)
Preferred stock dividends ........................... (92,171) (38,181)
---------- ----------
LOSS APPLICABLE TO COMMON SHAREHOLDERS BEFORE
EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE.................................. $ (554,715) $ (513,063)
========== ==========
Adjusted EBITDA........................................ $1,150,644 $1,071,969
========== ==========
109
Pro forma revenue--Telecommunications services. Pro forma revenue for the
telecommunications services segment for the years ended December 31, 1999 and
1998 resulted from sales of the following products:
For the year ended
December 31,
-----------------------
1999 1998
----------- -----------
(In thousands, except
minutes)
PRODUCT REVENUE:
Switched Voice....................................... $ 1,386,124 $ 1,416,088
CLEC (Local and LD).................................. 223,021 153,109
----------- -----------
Total Business Voice Products...................... 1,609,145 1,569,197
Data................................................. 1,274,689 782,087
Consumer long distance............................... 187,719 239,782
----------- -----------
TOTAL PRODUCT REVENUE.................................. $ 3,071,553 $ 2,591,066
=========== ===========
MINUTES................................................ 20,472,178 14,481,697
=========== ===========
In North America, data products continued to grow at triple digit rates--data
product revenue, primarily private line, from telecommunication carrier
customers grew 588% for the full year. Frame relay revenue, sales from
dedicated internet and web hosting revenue increased 304%, 159% and 187%,
respectively, over the prior year. Competitive Local Exchange Carrier (CLEC)
revenue increased 46% year-on-year.
Revenue from telecommunication commercial customers increased to $1.27
billion for the year ended December 31, 1999 from $1.26 billion for the year
ended December 31, 1998. Revenue from telecommunication consumer customers fell
to $188 million for the year ended December 31, 1999 from $240 million for the
year ended December 31, 1998. Revenue from telecommunication carrier customers
experienced a 48% increase in revenue year-on-year, from $1.09 billion to $1.61
billion, driven by strong growth in international city to city circuit
activations and an 87% increase in wholesale minutes sold on a year-on-year
basis.
Pro forma revenue--Installation and maintenance services. Pro forma revenue
increased by 4% year-on-year, despite delays in the installation of TAT-14 and
U.S.-Japan cables, which had been scheduled for installation during the fourth
quarter of 1999. Global Marine Systems added three ships to their fleet during
the year to service our growth in subsea cable installations. Revenue from
maintenance increased from $117 million to $139 million, while revenue from
installation decreased from $205 million to $195 million.
Pro forma revenue--ILEC services. The following table provides supplemental
pro forma detail for the ILEC segment:
December
31,
-----------
1999 1998
----- -----
(In
thousands)
ACCESS LINES:
Commercial........................................................ 335 327
Consumer.......................................................... 737 718
----- -----
TOTAL ACCESS LINES.................................................. 1,072 1,045
===== =====
The ILEC segment continued to exceed service metrics required by the New York
State Public Service Commission. Revenue increased by 4% year-on-year. Market
deployment of the consumer ADSL product, Lightning Link, was initiated in
selected markets in the fourth quarter.
110
Operating, selling, general and administrative. Operating, selling, general
and administrative expenses of $3,433 million for the year ended December 31,
1999 increased by 22% from $2,808 million for the year ended December 31, 1998.
This change resulted from costs of new systems being activated, cost of sales
relating to increased revenues, occupancy costs, marketing costs, commissions
paid and our overall growth and staffing for multiple systems.
Non-cash cost of undersea capacity sold, included in operating, selling,
general and administrative expenses, was $292 million and $141 million during
the years ended December 31, 1999 and 1998, respectively. For 1998 and the
first nine months of 1999, we calculated costs of undersea capacity sold based
on the ratio of the period's actual revenue to total expected future revenues
given a minimum projected sales capacity multiplied by the construction cost of
the system. Beginning in the fourth quarter of 1999, we began to depreciate the
undersea capacity and calculate cost of sales based on the estimated net book
value of the circuit at the time of sale.
Stock related expense. Stock related expense of $51 million for the year
ended December 31, 1999, increased 30% from $39 million for the year ended
December 31, 1998 as a result of additional stock options issued below fair
market value.
Depreciation and amortization. Depreciation and amortization of $363 million
for the year ended December 31, 1999 increased 38% from $263 million for the
year ended December 31, 1998. This increase was primarily due to the
depreciation of subsea and terrestrial systems during 1999.
Operating loss. We incurred an operating loss for the year ended December 31,
1999 of $215 million compared to a loss of $113 million for the year ended
December 31, 1998.
Equity in loss of affiliates. Equity in loss of affiliates of $0.7 million
for the year ended December 31, 1999 compared to a loss of $21 million for the
year ended December 31, 1998. The decrease in the net loss is primarily due to
sales of capacity on certain segments of Pacific Crossing which became
available for sale in 1999.
Interest income and Interest expense. Interest income of $77 million for the
year ended December 31, 1999 compared to $43 million for the year ended
December 31, 1998, due to earnings on investments of additional funds from
financings and operations during the year ended December 31, 1999. Interest
expense of $346 million for the year ended December 31, 1999 compared to
interest expense of $284 million for the year ended December 31, 1998, due to
our merger with Frontier Corporation and our acquisition of Global Marine
Systems and Racal Telecom and increases in debt outstanding to support our
capital spending.
Other income, net. Other income of $179 million for the year ended December
31, 1999 compared to $24 million for the year ended December 31, 1998. The
increase is primarily a result of the receipt of a $210 million payment to us
by US West, Inc. in connection with the termination of our merger agreement,
less related expenses.
Provision for income taxes. The income tax provision of $155 million and $123
million for the years ended December 31, 1999 and 1998, respectively, provides
for taxes on profits earned from telecommunications services, installation and
maintenance, incumbent local exchange services and other income where our
subsidiaries have a presence in taxable jurisdictions.
Preferred stock dividends. Preferred stock dividends were $92 million for the
year ended December 31, 1999 compared to $38 million in 1998. The increase was
attributable to payment of dividends on $1.5 billion of preferred shares issued
during the year ended December 31, 1999.
Adjusted EBITDA. Adjusted EBITDA of $1,151 million for the years ended
December 31, 1999 increased 7% from $1,072 in 1998. The increase was primarily
due to increased capacity sales and other data products, partially off-set by
our increased spending to augment our sales force, add network
111
and web hosting capacity, add to our fleet of installation and maintenance
vessels, activate new fiber optic systems, and consummate and integrate our
acquisitions. The definition of Adjusted EBITDA is consistent with financial
covenants contained in our major financial agreements. Adjusted EBITDA should
not be considered as an alternative to any measure of performance as
promulgated under generally accepted accounting principles. Our calculation of
Adjusted EBITDA may be different from the calculation used by other companies
and, therefore, comparability may be limited.
Historical Results of Operations for the Year Ended December 31, 1998 and the
Period from March 19, 1997 (Date of Inception) to December 31, 1997
Revenue. During the year ended December 31, 1998, we executed firm
commitments to sell capacity on its systems plus the sale of dark fiber on its
Pan European Crossing System totaling $911 million. Of this amount, we
recognized revenue of $418 million on sales of capacity relating to Atlantic
Crossing for the year ended December 31, 1998, in addition to revenue from
operations and maintenance services of $6 million.
Cost of sales. For the year ended December 31, 1998, we recognized $178
million in cost of capacity sold, resulting in a gross margin on capacity sales
of 57%. Cost of capacity sold for the year ended December 31, 1998 also
includes $38 million relating to terrestrial capacity sold which we had
purchased from third parties. We calculated undersea cost of capacity sold for
Atlantic Crossing based on the ratio of the period's actual revenue to total
expected revenue, assuming minimum projected sales capacity of 512 circuits,
multiplied by the construction cost of the system. This calculation of cost of
sales matches costs with the relative value of each sale. There were no sales
or related costs recognized during the period from March 19, 1997 (Date of
Inception) to December 31, 1997, as we were in our development stage.
Operations, administration and maintenance. We incurred operations,
administration and maintenance costs of $18 million during the year ended
December 31, 1998. We entered into an agreement with Tyco Submarine Systems
relating to operations, administration and maintenance of Atlantic Crossing,
which limits our total operations, administration and maintenance expense for
the system. We anticipate that our operations, administration and maintenance
costs will be largely recovered through charges to our customers under the
terms of CPAs. There were no operations, administration and maintenance costs
during the period from March 19, 1997, the date of our inception, to December
31, 1997, as we were in our development stage.
Sales and marketing. During the year ended December 31, 1998, we incurred
sales and marketing expenses of $32 million, including selling commissions of
$20 million incurred on capacity sales recognized during this period. During
the period from March 19, 1997, the date of our inception to December 31, 1997,
we incurred sales and marketing costs of approximately $1 million. The increase
from 1997 was due to additions in personnel and occupancy costs, plus
marketing, commissions paid and other promotional expenses to support our rapid
growth.
Network development. We incurred network development costs during the year
ended December 31, 1998 of $14 million relating to the development of systems.
During the period from March 19, 1997, the date of our inception, to December
31, 1997, these costs were $0.1 million. The increase from 1997 was due to
additional personnel, and costs to explore new projects.
General and administrative. General and administrative expenses totaled $57
million during the year ended December 31, 1998 and were comprised principally
of salaries, employee benefits, including stock compensation and recruiting
fees for staffing of multiple systems, travel, insurance costs and rent
expenses. During the period from March 19, 1997, the date of our inception, to
December 31, 1997, we incurred general and administrative costs of $2 million.
Termination of Advisory Services Agreement with PCG Telecom Services LLC. In
connection with the development and construction of Atlantic Crossing, we
entered into an advisory services agreement with PCG Telecom Services LLC, an
affiliate, providing for the payment by us of an advisory fee of 2% of the
gross
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revenue of Atlantic Crossing over a 25 year term. Our board of directors also
approved similar advisory fees and authorized us to enter into similar
agreements with respect to other cable systems under development by us. We
acquired the rights of the persons entitled to the fees payable under these
agreements in consideration for the issuance to such persons of shares of our
common stock, which had at the time of issuance an aggregate value of $135
million, and the cancellation of approximately $3 million owed to us under a
related advance agreement. In addition, we recognized approximately $2 million
of advisory fees incurred prior to termination of the contract.
Equity in loss of affiliates. During 1998, we entered into joint venture
agreements to construct and operate Pacific Crossing and Global Access Ltd.
Pacific Crossing is owned and operated by Pacific Crossing Ltd. We have an
economic interest in Pacific Crossing Ltd. represented by a 50% direct voting
interest and, through one of our joint venture partners, a further 8% economic
non-voting interest. We have a 49% interest in Global Access Ltd., which
operates Global Access Ltd. Our equity in the loss of Pacific Crossing Ltd. for
the year ended December 31, 1998 was $3 million.
Interest income. We reported interest income of $30 million during the year
ended December 31, 1998 and $3 million during the period from March 19, 1997,
the date of our inception, to December 31, 1997. Such interest income
represents earnings on cash raised from financing, its initial public offering,
the issuance by Global Crossing Holdings of preferred stock, operations and CPA
deposits.
Interest expense. During the year ended December 31, 1998, we incurred $93
million in interest costs, including the amortization of finance costs and debt
discount. Of this amount, we capitalized to construction in progress interest
of $50 million and expensed $43 million. During the period from March 19, 1997,
the date of our inception, to December 31, 1997, we incurred interest expense
of $10 million, which was capitalized to construction in progress.
Provision for income taxes. The income tax provision of $33 million for the
year ended December 31, 1998 provides for taxes on profits earned from capacity
sales and operations, administration and maintenance revenue where our
subsidiaries have a presence in taxable jurisdictions. During the period from
March 19, 1997, the date of our inception, to December 31, 1997, we incurred
operating losses, which relate to non-taxable jurisdictions and therefore
cannot be applied against future taxable earnings. Accordingly, no tax
provision or deferred tax benefit was recorded as of December 31, 1997.
Extraordinary item. During May 1998, we recognized an extraordinary loss of
$20 million in connection with the repurchase of Global Telesystem Holdings'
outstanding senior notes, comprising a premium of $10 million and a write-off
of $10 million of unamortized deferred financing costs.
Net loss. We incurred a net loss of $88 million for the year ended December
31, 1998, compared to a net loss of $0.2 million in the period from March 19,
1997, the date of our inception, to December 31, 1997. The net loss for the
year ended December 31, 1998 reflects an extraordinary loss on retirement of
the Global Telesystems Holdings' senior notes of $20 million and a non-
recurring charge of $140 million relating to the termination of the advisory
services agreement. Our net income before these items was $72 million.
Preferred stock dividends. During the year ended December 31, 1998, we
recorded preferred stock dividends of approximately $13 million. Preferred
stock dividends for the period from March 19, 1997, the date of our inception,
to December 31, 1997 were $13 million. Of the $13 million recorded in 1998, $4
million relates to the Global Crossing Holdings preferred stock issued during
December 1998.
Redemption of preferred stock. The redemption of Global Telesystems Holding
outstanding preferred stock occurred in June 1998 and resulted in a $34 million
charge against equity. This amount was comprised of a $16 million redemption
premium and a write-off of $18 million of unamortized discount and issuance
costs. The redemption premium and write-off of unamortized discount and
issuance costs are treated as a deduction to arrive at net loss applicable to
common shareholders in the consolidated statements of operations.
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Net loss applicable to common shareholders. During the year ended December
31, 1998, we reported a net loss applicable to common shareholders of $135
million. This loss reflects preferred stock dividends of $13 million and the
redemption cost of Global Telesystems Holdings preferred stock of $34 million.
During the period from March 19, 1997, the date of our inception, to December
31, 1997, we incurred a net loss applicable to common shareholders of $13
million after Global Telesystems Holdings preferred stock dividends of
$13 million.
Pro Forma Adjusted EBITADA. Our pro forma operating (loss) income plus pro
forma depreciation and amortization, goodwill and intangibles amortization,
stock related expense and the pro forma cash portion of the change in deferred
revenue, which we refer to as "Pro Forma Adjusted EBITDA," was $1,151 million
for the twelve months ended December 31, 1998. The increase in Pro Forma
Adjusted EBITDA is due to an increase in Pro Forma Adjusted EBITDA is due to an
increase in pro forma revenues, partially offset by an increase in pro forma
operating expenses. The definition of Adjusted EBITDA is consistent with
financial covenants contained in our major financial agreements. Adjusted
EBITDA should not be considered as an alternative to any measure of performance
as promulgated under generally accepted accounting principles. 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
We estimate that 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 our wholly-owned subsidiaries or joint
venture companies as well as by us.
In April 2000, we issued 21,673,706 shares of its 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, we issued an
additional 600,000 shares of 6 3/4% cumulative convertible preferred stock for
net proceeds of approximately $146 million.
On December 15, 1999, we issued $650 million aggregate liquidation preference
of 7% cumulative convertible preferred stock. The preferred stock is
convertible into common stock of Global Crossing based upon a conversion price
of $53.25 per share.
On November 24, 1999 we entered into a GBP 675 million (approximately $1,091
million as of December 31, 1999) credit facility to finance the acquisition of
Racal Telecom. As of December 31, 1999, we had an outstanding balance of $646
million under the Racal Term Loan A.
On November 12, 1999, Global Crossing Holdings Ltd. issued $1.1 billion in
aggregate principal amount of its 9 1/2% Senior Notes Due 2009, and $0.9
billion in aggregate principal amount of its 9 1/8% Senior Notes Due 2006. The
proceeds were partially used to pay down the term loans under our Corporate
Credit Facility.
On November 5, 1999, we issued $1.0 billion liquidation preference of 63/8%
cumulative convertible preferred stock. The preferred stock is convertible into
common stock of Global Crossing based upon a conversion price of $45.000 per
share.
On July 2, 1999, we entered into a $3 billion senior secured corporate credit
facility with a group of several lenders and The Chase Manhattan Bank as
administrative agent. The initial proceeds under the facility were used to
refinance outstanding balances under the AC-1 and MAC project finance
facilities, to refinance balances under a vendor financing arrangement with
Lucent, to refinance debt used for the purchase of the
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Global Marine business from Cable and Wireless and for general corporate
purposes. As of December 31, 1999, we had a remaining available balance of $308
million under the senior secured corporate credit facility. In connection with
the issuance of the senior notes due 2006 and the senior notes due 2009, a
portion of the proceeds were used to pay down the term loans under the
Corporate Credit Facility.
We have 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. We believe that our extension of financing to our customers
will not have a material effect on our liquidity.
Cash provided by and 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.
Cash provided by operating activities was $506 million and $209 million for
the years ended December 41, 1999 and 1998, respectively. the balances
principally represent cash received from capacity sales, and interest income
received, less sales and marketing, network development, general and
administrative and interest expenses paid.
Cash used in investing activities was $4,010 million and $431 million for the
years ended December 31, 1999 and 1998, respectively, and represents cash paid
for construction in progress, acquisitions, net of cash acquired, purchases of
property, plant and equipment and cash investments in affiliates.
Cash provided by financing activities was $4,331 million for the year ended
December 31, 1999 and primarily represents borrowings under the senior secured
corporate facility, issuance of senior notes and proceeds from the issuance of
preferred stock, partially offset by repayments of borrowings under long term
debt. Cash provided by financing activities was $1,027 million for the year
ended December 31, 1998 and primarily relates to proceeds from borrowings under
the AC-1 and MAC Credit Facilities, proceeds from the issuance of Global
Crossing Holdings senior notes, the Global Crossing Holdings preferred stock
and our initial public offering, less amounts paid to finance and organization
costs, the issuance of common preferred stock, the repayment of long term debt,
the redemption of the Global Telesystems Holdings preferred stock, the
retirement of the Global Crossing Holdings senior notes and the increase in
amounts held in restricted cash and cash equivalents.
We have a substantial amount of indebtedness. Based upon the current level of
operations, our management believes that our cash flows from operations,
together with available borrowings under our credit facility, and our continued
ability to raise capital, will be adequate to meet our 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 our business will
continue to generate cash flow at or above current levels or that currently
anticipated improvements will be achieved. If we are unable to generate
sufficient cash flow and raise capital to service our debt, we may be required
to reduce capital expenditures, refinance all or a portion of our existing debt
or obtain additional financing.
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Subsequent Events
We and our subsidiary, South American Crossing (Subsea) Ltd., filed a
lawsuit, on May 22, 2000, against Tyco Submarine Systems Ltd., in the United
States District Court for the Southern District of New York. Our complaint
alleges fraud, theft of trade secrets, breach of contract, and defamation
related to Tyco's agreements to install the South American Crossing fiber-optic
cable system. In addition, our subsidiary, Atlantic Crossing Ltd., together
with certain of its affiliates, filed arbitration claims against Tyco for
breaches of its obligations in connection with various contracts for the
development of its Atlantic Crossing-1 fiber-optic cable system. We do not
believe that the commencement of these actions will have an impact on our
network and/or the timely completion of any of our systems. We have contracted
with a diverse group of major suppliers for the construction of our announced
systems, including Alcatel, Bestel, Global Marine System, ImpSat, KDD/SCS,
Lucent, Nortel and Tyco. With respect to the announced segments of the Global
Crossing network, Tyco is under contract with us for slightly more than five
percent of the remaining work to achieve completion. Tyco is still completing
work under contracts with us for two of our cable systems which are scheduled
to be completed this year. Tyco has also contracted with Level3 for Atlantic
Crossing-2, a transatlantic cable that will be 50% owned by us. We expect Tyco
to fulfill its obligations under those contracts, and will be vigilant about
protecting our interests in these projects.
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RELATIONSHIP BETWEEN THE GLOBAL CROSSING GROUP
AND THE GLOBALCENTER GROUP
Our board of directors has adopted a policy statement regarding GlobalCenter
group and Global Crossing group matters. We have summarized below the material
provisions of the policy statement. The description below is a summary and is
qualified in its entirety by reference to the policy statement. We encourage
you to read the policy statement which is attached to this proxy statement as
Annex III.
General policy
The policy statement of Global Crossing Ltd. provides that all material
matters as to which the holders of Global Crossing group stock and GlobalCenter
group stock may have potentially divergent interests will be resolved in a
manner that our board of directors or its capital stock committee determines to
be in the best interests of Global Crossing, after giving fair consideration to
the potentially divergent interests and all other relevant interests of the
holders of the separate classes of common stock of Global Crossing. Under the
policy statement, a process of fair dealing will govern the relationship and
the means by which the terms of any material transaction between the groups
will be determined, pursuant to which matters will be resolved in an equitable
and impartial manner.
Amendment and modification of policy
Our board of directors may, without the approval of our shareholders, at any
time and from time to time, amend, modify or rescind the policies set forth in
our policy statement, including any resolution implementing the provisions of
the policy statement. Our board of directors also may, without the approval of
our shareholders, adopt additional or other policies or make exceptions with
respect to the application of these policies in connection with particular
facts and circumstances, all as our board of directors may determine,
consistent with its fiduciary duties.
Role of capital stock committee
Our policy statement provides that a capital stock committee comprised of
three independent directors will exercise the powers, authority and
responsibilities that our board of directors delegates to it with respect to
the GlobalCenter group stock and Global Crossing group stock. Our board of
directors will initially authorize the capital stock committee to (1)
interpret, make determinations under, and oversee the implementation of these
policies, (2) adopt additional general policies governing the relationship
between the Global Crossing group and the GlobalCenter group, and (3) engage
the services of accountants, investment bankers, appraisers, attorneys and
other service providers to assist it in discharging its duties. In making
determinations in connection with these policies, the members of our board of
directors and its capital stock committee will act in a manner consistent with
their fiduciary duty to consider whether a proposed action is for the overall
benefit of Global Crossing Ltd. pursuant to legal guidance concerning these
fiduciary obligations under applicable law.
Corporate opportunities
Our policy statement provides that our board of directors will allocate any
business opportunities and operations, any acquired assets and businesses and
any assumed liabilities between the GlobalCenter group and Global Crossing
group, in whole or in part, in a manner it considers to be in the best
interests of Global Crossing as contemplated by the other provisions of the
policy statement. To the extent that a business opportunity or operation, an
acquired asset or business, or an assumed liability would be suitable to be
undertaken by or allocated to either group, it will be allocated by our board
of directors in its business judgment or in accordance with procedures adopted
by it from time to time to ensure that decisions will be made in the best
interests of Global Crossing. Any such allocation may involve the consideration
of a number of factors that our board of directors determines to be relevant,
including, without limitation, whether the business opportunity or operation,
the acquired asset or business, or the assumed liability is principally within
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or related to the existing scope of a group's business and whether a group is
better positioned to undertake or have allocated to it such business
opportunity or operation, acquired assets or business or assumed liability.
Relationships between groups
Our policy statement provides that we will seek to manage the GlobalCenter
group and the Global Crossing group in a manner designed to maximize the
operations, unique assets and values of both groups, and with complementary
deployments of personnel, capital and facilities.
Exclusive Provision of Services
The Global Crossing group will be the exclusive provider of GBLX Services to
the GlobalCenter group. As such, the Global Crossing group will have the
exclusive right to provide GBLX Services and related products and services to
the GlobalCenter group.
Under the policy statement, "GBLX Services" is defined as:
. Internet Protocol transit service,
. dedicated Internet access,
. dial Internet access,
. IP virtual private networks, and
. IP exchange services--conditioned space for Global Crossing customers'
routers for interconnection with Global Crossing and other provider
networks.
The GlobalCenter group will be the exclusive provider of GCTR Services to the
Global Crossing group. As such, the GlobalCenter group will have the exclusive
right to provide GCTR Services and related products and services to the Global
Crossing group.
Under the policy statement, "GCTR Services" is defined as:
. complex web hosting--data centers conditioned space and related
services,
. data center professional services--consulting, engineering, and other
technology support services,
. data center equipment hardware and software sales and support,
. value added services to support hosting and distribution, including but
not limited to storage-on-demand; database; security; consulting
services; disaster recovery; application hosting; monitoring; staging,
sparing and laboratory test services; and managed services.
Network and Service Management
Network and Services Management Committee. A committee of three senior
executives from each group will be formed to provide management and direction
designed to fully implement the policy with respect to the various services to
be provided by one group to the other. In particular, the network and services
management committee will review and agree on data center bandwidth
requirements by location and volume, review and agree on network expansion
plans as required to support the data centers and establish service level
targets for the data center connections and track performance against those
targets.
Service Level Agreement. Each group will guarantee a level of service for the
services it provides to the other group that meets the standards committed to
by the other group to its customers and which have been approved by the network
and services management committee.
Monitoring. The GlobalCenter group will have the right to monitor from its
data centers the related portion of the Global Crossing IP network that the
GlobalCenter group relies upon to provide services to its
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customers as part of an integrated service offering. The monitoring rights will
give the GlobalCenter group the capability to view and monitor the end-to-end
service in the same manner that the Global Crossing group views the network. As
determined by the network and services management committee, the GlobalCenter
group will either become one of or have the same monitoring capabilities as one
of the Global Crossing network operations centers.
The Terms of Inter-group Transactions
All material transactions between the Global Crossing group and the
GlobalCenter group which are determined by Global Crossing Ltd.'s board of
directors to be in the ordinary course of business, including those described
above in "Preferred Provision of Services," are intended, to the extent
practicable, to be on terms consistent with those that would be applicable to
arm's-length dealings with unrelated third parties, taking into account a
number of factors, including quality, availability, volume and pricing. In
particular, the pricing for the access to its network provided by the Global
Crossing group to the GlobalCenter group will be preferred market-based
pricing, taking into account volume, term, and the exclusive nature of the
arrangement and any guarantee of service levels provided by the Global Crossing
group.
Marketing of Services
As a general matter, each group will continue to design, develop, deploy,
produce, market, sell and service their own service offerings and choose their
own selected sales channels. In addition, each group will cooperate with the
other in providing the use of their respective sales channels to offer their
respective services. Each group will operate in a manner that takes into
account the other's expansion, acquisition, deployment, marketing and sales
plans, with the goal of minimizing overlaps and conflicts between the two
groups.
Transfers of Other Assets and Liabilities
Our board of directors may, at any time and without shareholder approval,
reallocate assets (including cash) and liabilities between the Global Crossing
group and the GlobalCenter group in addition to transfers resulting from
commercial transactions which Global Crossing Ltd.'s board of directors
determines to be in the ordinary course of business of the groups described
above in "Terms of Inter-group Transactions." Any reallocation of assets and
liabilities between the groups not in the ordinary course of their respective
businesses will be effected by:
. the reallocation by the transferee group to the transferor group of
other assets or consideration or liabilities;
. the creation of inter-group debt owed by the transferee group to the
transferor group;
. the reduction of inter-group debt owed by the transferor group to the
transferee group;
. the creation of, or an increase in, an inter-group interest in the
transferee group held by the transferor group;
. the reduction of an inter-group interest in the transferor group held by
the transferee group; or
. a combination of any of the above factors;
in each case, in an amount having a fair value equivalent to the fair value of
the assets or liabilities reallocated by the transferor group and, in the case
of the creation of or an increase or decrease in an inter-group interest, in
accordance with the provisions of the Certificate of Designations. For these
purposes, the fair value of the assets or liabilities transferred will be
determined by the board of directors of Global Crossing Ltd. in its sole
discretion. Our board of directors will approve any creation of, or increase or
decrease in, an inter-group interest.
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Financing Arrangements
Loans from the Global Crossing group or the GlobalCenter group to the other
group will be made at the weighted average interest rate of our consolidated
indebtedness and on such other terms and conditions as our board of directors
or its capital stock committee determines to be in the best interests of Global
Crossing. Any fees incurred in connection with debt incurred for a particular
group will be allocated to the borrowing group. As of March 31, 2000, the
weighted average interest rate of the consolidated indebtedness of Global
Crossing Ltd. was approximately 12%.
Intellectual Property
We will manage on a centralized basis our intellectual property attributed to
the groups, except that the GlobalCenter group will manage the intellectual
property attributed to it that is owned by the companies in the GlobalCenter
group.
Each group will have the right to use the intellectual property attributed to
the other group for appropriate business activities on appropriate terms.
Any fees obtained through the sale or licensing of intellectual property will
be principally allocated to the group that paid to develop the intellectual
property sold or licensed. If the intellectual property being sold or licensed
was jointly developed by the groups and the groups agree to allocate fees
obtained in proportion to the development costs incurred by each group, then
any fees obtained through the sale or licensing will be so allocated. If such
intellectual property was not predominantly developed by any one group or was
jointly developed by the groups but the groups do not agree to allocate fees
obtained in proportion to costs incurred, then any fees obtained through such
sale or licensing will be allocated using the same general allocation as
overhead expenses, as described below in "Financial Reporting; Allocation
Matters."
Dividend policy
Our policy statement provides that, subject to the limitations set forth in
the Certificate of Designations, any preferential rights of any series of
preferred stock of Global Crossing Ltd., and to the limitations of applicable
law, holders of shares of Global Crossing group stock or GlobalCenter group
stock will be entitled to receive dividends on their respective stock when, as
and if authorized and declared by our board of directors.
The payment of dividends on either class of common stock will be a business
decision to be made by our board of directors from time to time based upon the
results of operations, financial condition and capital requirements of the
relevant group and such other factors as the board of directors considers
relevant. Payment of dividends may be restricted by loan agreements, indentures
and other transactions entered into by us from time to time. Because both
groups are expected to require significant capital commitments to finance their
respective operations and fund future growth, we do not expect to pay any
dividends on either class of common stock for the foreseeable future.
Financial reporting; allocation matters
Financial Reporting
Our policy statement provides that we will prepare and include in its filings
with the Securities and Exchange Commission under the Securities Exchange Act
of 1934, as amended, consolidated financial statements of Global Crossing Ltd.
and combined financial statements of each of the Global Crossing group and the
GlobalCenter group for so long as the related class of common stock is
outstanding. The combined financial statements of each group will reflect the
combined financial position, results of operations and cash flows of the
businesses attributed thereto and in the case of annual financial statements
shall be audited.
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Shared Corporate Services
A portion of our shared corporate services (such as executive management,
human resources, legal, accounting and auditing, tax, treasury, strategic
planning, investor relations and corporate technology) will be allocated to the
Global Crossing group and the GlobalCenter group based upon specific
identification of such services used by that group. Where determinations based
on use alone are impracticable, other methods and criteria will be used that
management believes are fair and provide a reasonable estimate of the cost
attributable to the groups.
GlobalCenter Inc. board of directors
Our policy statement provides that the board of directors of GlobalCenter
Inc. will at all times be composed of six directors appointed by the board of
directors of Global Crossing and five directors appointed by the board of
directors of Global Crossing upon the nomination by the Chief Executive Officer
of GlobalCenter Inc. The members of GlobalCenter Inc.'s board of directors will
have a fiduciary duty to consider whether a proposed action is in the best
interests of Global Crossing and will not have a separate fiduciary duty to
holders of GlobalCenter group stock. The board of directors of GlobalCenter
Inc. will have the authority to:
. appoint officers of GlobalCenter Inc., who will manage the GlobalCenter
group;
. approve the budget of the GlobalCenter group;
. approve any acquisitions of businesses that are attributed to the
GlobalCenter group;
. approve the incurrence of indebtedness at GlobalCenter Inc. of up to 25%
of the market capitalization of GlobalCenter group stock; and
. approve the issuance of capital stock of GlobalCenter Inc. or the
issuance of GlobalCenter group stock by Global Crossing Ltd.
With respect to the last three items, the board of directors of GlobalCenter
Inc. will only have such authority to the extent that such actions would not
have any adverse effect on Global Crossing.
Tax sharing agreement
Prior to the issuance of shares of GlobalCenter group stock, the allocation
of tax liabilities between GlobalCenter Inc. and Global Crossing North America
Inc., formerly Frontier Corporation, the Global Crossing Ltd. subsidiary that
files a consolidated tax return in the United States with GlobalCenter Inc.,
will be made in accordance with the intercompany tax policy of Global Crossing
North America. In general, this policy requires that taxes payable by each
company be computed on a pro-rata basis. However, under the policy, tax
benefits derived by the Global Crossing North America consolidated group
arising from the use by the group of a member's tax attributes (such as net
operating losses) are allocated to the member whose attributes generated such
benefits. Thus, for example, if GlobalCenter Inc. were to incur a net operating
loss that reduced the consolidated group's taxable income, GlobalCenter Inc.
would receive the benefit of such reduction.
On the effective date of the offering, Global Crossing North America and
GlobalCenter Inc. will enter into a formal tax sharing agreement that provides
for a pro-rata allocation of tax liabilities among members of the Global
Crossing North America consolidated group. Under the new agreement, for tax
periods during which GlobalCenter Inc. and its subsidiaries are included in any
consolidated federal income tax return or any comparable state, local, and
foreign or franchise income tax return filed by Global Crossing North America
(collectively, the "Consolidated Returns"), the tax sharing agreement will
require GlobalCenter Inc. to pay to Global Crossing North America any taxes
that Global Crossing North America and its subsidiaries (other than
GlobalCenter Inc. and its subsidiaries) were required to pay, and any tax
benefits that they did not receive as a result of GlobalCenter Inc. and its
subsidiaries being included in the Consolidated Returns. The tax sharing
agreement will also require Global Crossing North America to pay to
GlobalCenter Inc. any taxes that Global Crossing North America and its
subsidiaries (other than GlobalCenter Inc. and its subsidiaries) would have
121
been required to pay, and any tax benefits that they would not have received,
had GlobalCenter Inc. or any of its subsidiaries not been included in the
Consolidated Returns.
Under the tax sharing agreement, Global Crossing North America will have the
sole and exclusive responsibility for (i) preparing all Consolidated Returns;
(ii) representing GlobalCenter Inc. and its subsidiaries in any tax audit or
tax contest relating to the Consolidated Returns; and (iii) engaging outside
tax counsel or other tax advisors in connection with such tax audits or tax
contests. GlobalCenter Inc. will reimburse Global Crossing North America for
its share of reasonable expenses that are incurred by Global Crossing North
America in connection with such tax audits or tax contests.
Each member of a consolidated group is jointly and severally liable for the
federal income tax liability of each other member of the consolidated group.
Accordingly, although the tax sharing agreement allocates tax liabilities
between GlobalCenter Inc. and Global Crossing North America, during the period
in which GlobalCenter Inc. and its subsidiaries are included in the federal
income tax consolidated returns filed by Global Crossing North America,
GlobalCenter Inc. could be liable in the event that any federal income tax
liability is incurred, but not discharged, by any other entity included in
those returns. Global Crossing North America is required, under the terms of
the tax sharing agreement, to indemnify GlobalCenter Inc. for any tax liability
of Global Crossing North America or its subsidiaries that GlobalCenter Inc.
must pay to a taxing authority, except to the extent that such tax liability is
attributable to GlobalCenter Inc. and GlobalCenter Inc. has not yet made a
corresponding tax sharing payment to Global Crossing North America.
The foregoing discussion assumes that GlobalCenter Inc. and its subsidiaries
are members of the same affiliated, consolidated, combined or unitary group as
Global Crossing North America for the relevant federal, state or local income
tax purposes. It is possible, however, that the Internal Revenue Service may
assert that GlobalCenter group stock is not stock of Global Crossing, in which
case this assumption will not be true if the GlobalCenter group stock that is
held by persons other than Global Crossing is deemed to represent more than 20%
of the GlobalCenter group stock. Although we believe that it is unlikely that
the Internal Revenue Service would prevail on that view, no assurance can be
given in that regard.
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THE GLOBALCENTER STOCK INCENTIVE PLAN PROPOSALS
On April 12, 2000, the Global Crossing board of directors unanimously adopted
resolutions to adopt both the GlobalCenter Management Stock Plan and the
GlobalCenter 2000 Stock Plan. The Global Crossing board of directors is asking
shareholders to similarly adopt resolutions relating to these stock incentive
plans, which are included in Annex I to this proxy statement.
Management stock plan
The GlobalCenter Management Stock Plan, which we refer to as the "Management
Stock Plan," was approved by the Global Crossing Compensation Committee on
March 2, 2000 and by the Global Crossing board of directors on April 12, 2000.
The board of directors adopted the Management Stock Plan to enable the
GlobalCenter group to attract and retain directors, employees and service
providers and enable such persons to align their interests with the interests
of the holders of GlobalCenter group stock.
The following is a brief description of the material features of the
Management Stock Plan. You should read the full text of the Management Stock
Plan, which has been included as Annex IV to this proxy statement.
Awards. The terms of the Management Stock Plan provide for grants of stock
options to purchase shares of GlobalCenter group stock and grants restricted
shares of GlobalCenter group stock. Options granted under the Management Stock
Plan may be "incentive stock options" under the Internal Revenue Code or
nonstatutory stock options.
Shares Subject to the Management Stock Plan and Annual Per-Person Limits.
Under the Management Stock Plan, the total number of shares of GlobalCenter
group stock that may be subject to outstanding options or restricted stock
grants shall not exceed 27,470,588, subject to adjustment, as described below.
In addition, the Management Stock Plan imposes individual limits on the
amount of awards. Under these limits, during any fiscal year the number of
shares of GlobalCenter group stock subject to options and restricted stock
granted to any one participant under the Management Stock Plan shall not exceed
shares, subject to adjustment in certain circumstances, as described
below.
The Global Crossing compensation committee will make appropriate and
equitable adjustments as it deems necessary to the number of shares and type of
securities subject to the aggregate share limitations and annual limitations
under the Management Stock Plan and subject to outstanding awards, including
adjustments to exercise prices and number of shares subject to options, in the
event that a dividend or other distribution, recapitalization, forward or
reverse split, reorganization, merger, consolidation, spin-off, combination or
share exchange, or other similar corporate transaction or event affects
GlobalCenter group stock.
Eligibility. Key employees and directors of GlobalCenter Inc. and service
providers to GlobalCenter Inc., its parent and affiliates are eligible to be
granted awards under the Management Stock Plan.
Administration. The Management Stock Plan is administered by the Global
Crossing compensation committee. Subject to the terms and conditions of the
Management Stock Plan, the compensation committee is authorized to interpret
the Management Stock Plan, construe terms, adopt rules and regulations and make
all determinations under the Management Stock Plan.
Terms of Stock Options. The exercise price per share subject to an option is
determined by the compensation committee. All terms regarding each option are
fixed by the compensation committee in an award agreement, except that no
option may have a term exceeding ten years. Options may be exercised by payment
of the exercise price in cash or through a "same-day" sale arranged with a
broker.
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Terms of Restricted Stock Awards. The compensation committee generally
determines the terms applicable to each restricted stock award in an award
agreement.
Outstanding Awards. As of the completion of the proposed public offering,
nonstatutory stock options to purchase 26,234,412 shares of GlobalCenter group
stock will have been granted. No incentive stock options or shares of
restricted stock have been awarded under the Management Stock Plan.
Effectiveness. The Management Stock Plan became effective as of , 2000.
However, if the plan is not approved by shareholders at the special meeting,
the Management Stock Plan and all outstanding stock options or grants of
restricted shares will terminate. In that event, our board of directors will
consider other alternatives for compensating the participants in the plan.
2000 Stock Plan
The board of directors of Global Crossing adopted the GlobalCenter 2000 Stock
Plan, which we refer to as the "2000 Stock Plan," on April 12, 2000. The board
of directors adopted the 2000 Stock Plan to enable the GlobalCenter group to
attract and retain employees and service providers and enable such persons to
align their interests with the interests of the holders of GlobalCenter group
stock. The 2000 Stock Plan will become effective upon the consummation of
proposed public offering of GlobalCenter group stock.
The following is a brief description of the material features of the 2000
Stock Plan. You should read the full text of the 2000 Stock Plan, which has
been included as Annex V to this proxy statement.
Awards. The terms of the 2000 Stock Plan provide for grants of stock options
to purchase shares of GlobalCenter group stock, stock appreciation rights and
other stock-based awards. Options granted under the 2000 Stock Plan may be
"incentive stock options" under the Internal Revenue Code or nonstatutory stock
options.
Shares Subject to the 2000 Stock Plan and Annual Per-Person Limits
Under the 2000 Stock Plan, the total number of shares of GlobalCenter group
stock that may be subject to awards shall not exceed 13,735,294 shares of
GlobalCenter group stock, subject to adjustment, as described below.
In addition, the 2000 Stock Plan imposes individual limits on the amount of
awards. Under these limits, during any calendar year the number of shares of
GlobalCenter group stock subject to awards that may be granted to any one
participant under the 2000 Stock Plan shall not exceed shares of
GlobalCenter group stock, subject to adjustment in some circumstances, as
described below.
The Global Crossing board of directors will adjust the number of shares and
type of securities subject to the aggregate share limitations and annual
limitations under the 2000 Stock Plan and subject to outstanding awards,
including adjustments to exercise prices and number of shares subject to
options and stock appreciation rights, in the event that a dividend or other
distribution, recapitalization, forward or reverse split, reorganization,
merger, consolidation, spin-off, combination or share exchange, or other
similar corporate transaction or event affects GlobalCenter group stock.
Eligibility. Individuals selected by the board of directors of Global
Crossing are eligible to be granted awards under the 2000 Stock Plan.
Administration. The 2000 Stock Plan is administered by the Global Crossing
board of directors. Subject to the terms and conditions of the 2000 Stock Plan,
the board of directors is authorized to interpret the 2000 Stock Plan, construe
terms, adopt rules and regulations and make all determinations under the 2000
Stock Plan.
Terms of Stock Options. The exercise price per share subject to an option is
determined by the Global Crossing board of directors. All terms regarding each
option are fixed by the Global Crossing board of directors in an award
agreement, except that no option may have a term exceeding ten years. Options
may be exercised
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by payment of the exercise price in cash, by delivering shares of previously
acquired GlobalCenter group stock or by having such shares withheld, or, after
a "qualified public offering," through a "same-day" sale arranged with a
broker.
Terms of Other Awards. The board of directors generally determines the terms
applicable to stock appreciation rights, and other stock-based awards in each
award agreement.
Effectiveness. The 2000 Plan became effective as of , 2000. However, if
the plan is not approved by shareholders at the special meeting, the 2000 Plan
and all outstanding stock options, stock appreciation rights and other stock-
based awards will terminate. In that event, our board of directors will
consider other alternatives for compensating the participants in the plan.
Federal Income Tax Implications of the Management Stock Plan and the 2000 Plan
The following is a summary of certain United States federal income tax rules
with respect to the Management Stock Plan and the 2000 Plan and the awards
granted thereunder. This summary is not intended to be a complete description
of all possible tax consequences of the Management Stock Plan and the 2000 Plan
and the awards, and each participant should consult his or her own tax advisor
concerning the federal, state, local and other tax implications of the
Management Stock Plan and the 2000 Plan and of the awards granted thereunder.
Moreover, as the following discussion is limited to United States federal
income tax matters, any such individuals who are subject to taxation by other
jurisdictions, foreign or domestic, should consult their tax advisors with
respect to the applicable tax laws of such other jurisdictions.
Incentive Stock Options ("ISO"s). Under current law, a participant will not
realize taxable income upon either the grant or the exercise of an ISO, and his
or her employer will not receive an income tax deduction at either time. If the
participant does not sell the shares acquired by exercising an ISO within
either
. two years after the date he or she was granted the underlying ISO, or
. one year after the date he or she exercised the underlying ISO,
a subsequent sale will be taxed as long-term capital gain or loss. If, within
either of the above periods, the participant disposes of the shares acquired by
exercising the ISO, the participant generally will realize as ordinary income
an amount equal to the lesser of
. the gain he or she realized on such disposition, or
. the excess of the fair market value of the shares on the date of
exercise over the exercise price.
In such event, the participant's employer generally will be entitled to an
income tax deduction equal to the amount recognized as ordinary income, subject
to compliance with Section 162(m) of the Internal Revenue Code (the "Code").
Any gain in excess of such amount that the participant realizes as ordinary
income will be taxed as a short-term or long-term capital gain (depending on
the holding period).
Nonqualified Stock Options ("NQSO"s). Under current law, a participant will
not realize taxable income upon the grant of a NQSO and the participant's
employer will not receive an income tax deduction at such time. When the
participant exercises a NQSO, he or she will generally realize ordinary income
in an amount equal to the excess of the fair market value of the shares on the
date of exercise over the exercise price. When the participant sells the shares
he or she will recognize short-term or long-term capital gain depending upon
how long the shares were held. The participant's employer generally is allowed
an income tax deduction equal to the amount the participant recognized as
ordinary income, subject, where applicable, to compliance with Section 162(m)
of the Code.
Stock appreciation rights. Amounts received upon the exercise of a stock
appreciation right are taxed at ordinary rates when received. Global Crossing
is generally allowed an income tax deduction equal to the amount recognized as
ordinary income by the participant.
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Restricted Stock and Other Stock-Based Awards. Restricted stock and other
stock-based Awards are ordinarily taxed at ordinary rates when received.
However, if the Award is subject to a substantial risk of forfeiture, it
generally will not be taxed until the substantial risk of forfeiture lapses or
until the participant makes an election under Section 83(b) of the Code. The
participant's employer generally is allowed an income tax deduction equal to
the amount recognized as ordinary income.
GLOBAL CROSSING EXECUTIVE COMPENSATION
Compensation committee report
Compensation Philosophy
Our compensation philosophy is to relate the compensation of Global
Crossing's executive officers to measures of company performance that
contribute to increased value for Global Crossing's shareholders.
To assure that compensation policies are appropriately aligned with the value
Global Crossing creates for shareholders, our compensation philosophy for
executive officers takes into account the following goals:
. enhancing shareholder value;
. representing a competitive and performance-oriented environment that
motivates executive officers to achieve a high level of individual,
business unit and corporate results in the business environment in which
they operate;
. relating incentive-based compensation to the performance of each
executive officer, as measured by financial and strategic performance
goals; and
. enabling Global Crossing to attract and retain top quality management.
The Compensation Committee of the Global Crossing board of directors, which
we will refer to as the "Committee," periodically reviews the components of
compensation for Global Crossing's executive officers on the basis of this
philosophy and periodically evaluates the competitiveness of its executive
officer compensation program relative to comparable companies. When the
Committee determines that executive officer compensation adjustments or bonus
awards are necessary or appropriate, it makes such modifications as it deems
appropriate. However, the board of directors has sole authority to modify the
compensation of the Chairman, the Co-Chairman and the Chief Executive Officer
("CEO"), although the Committee makes recommendations to the board in this
regard.
Section 162(m) of the Internal Revenue Code of 1986 limits the deductibility
of certain annual compensation payments in excess of $1 million to a company's
executive officers. It is the objective of the Committee to administer
compensation plans in compliance with the provisions of Section 162(m) where
feasible and where consistent with our compensation philosophy as stated above.
In that connection, at the 2000 Annual General Meeting of Shareholders, we
intend to recommend the adoption of an annual bonus plan meeting the
requirements of Section 162(m). We already have in place a stock incentive plan
pursuant to which stock-based incentives may be awarded in compliance with
Section 162(m).
Executive Compensation Components
The major components of compensation for executive officers, including the
CEO, are base salary, annual bonuses and stock option grants. Each component of
the total executive officer compensation package emphasizes a different aspect
of our compensation philosophy.
. Base salary. Base salaries for executive officers are initially set upon
hiring by the Committee (or, in the case of the Chairman, the Co-
Chairman and the CEO, by the board of directors upon the Committee's
recommendation) based on recruiting requirements (i.e., market demand),
competitive pay practices, individual experience and breadth of
knowledge, internal equity considerations and other objective and
subjective factors. Increases to base salary are also determined by the
Committee
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or the board of directors, as applicable. Increases are determined
primarily on an evaluation of competitive data, the individual's
performance and contribution to Global Crossing, and Global Crossing's
overall performance. Base salaries are periodically reviewed by the
Committee.
. Target annual bonuses. We rely to a large degree on annual bonus
compensation to attract, retain and reward executives of outstanding
abilities and to motivate them to perform to the full extent of their
abilities. Target bonuses for executive officers, including the CEO, are
determined on the basis of competitive bonus levels, level of
responsibility, ability to influence results on a corporate or business
unit level and, on occasion, subjective factors. Target annual bonuses
for the Chairman, the Co-Chairman and the CEO are determined by the
board of directors upon recommendation by the Committee. Target annual
bonuses for other executive officers are determined by the Committee.
. Stock option grants. The only current long-term incentive opportunity
for executive officers, including the CEO, is the award of stock option
grants under the 1998 Global Crossing Ltd. Stock Incentive Plan. In
contrast to bonuses that are paid for prior year accomplishments, stock
option grants represent incentives tied to future stock appreciation.
They are intended to provide executive officers with a direct incentive
to enhance shareholder value. Options generally vest over a three-year
period with a maximum term of ten years. Option grants are awarded at
the discretion of the Committee primarily based on an evaluation of
competitive data and the anticipated contribution that the executive
officer will make to Global Crossing.
The Committee conducts annually a full review of the performance of Global
Crossing and its executive officers in assessing compensation levels. The
Committee considers various qualitative and quantitative indicators of both
Global Crossing and the individual performance of its executive officers. This
review evaluates Global Crossing's performance both on a shortand long-term
basis. The Committee may consider such quantitative measures as total
shareholder return, return on shareholder's equity, return on capital employed,
revenue growth, and growth in Adjusted EBITDA and other measures of
profitability. The Committee may also consider qualitative measures such as
leadership, experience, strategic direction and overall contribution to Global
Crossing.
In addition, the Committee evaluates compensation in light of the
compensation practices of other companies in the telecommunications industry
and peer group companies as may be determined by the Committee. These companies
are used as a reference standard for establishing levels of base salary, bonus
and stock options. For 1999, executive officer compensation was targeted at the
75th percentile relative to peer group companies in the telecom industry.
2000 executive compensation review
Based on the factors set forth above, the Committee approved (or, in the case
of the Chairman, Co-Chairman and CEO, recommended that the board of directors
approve) salary increases and 1999 bonus awards for all executive officers. In
addition, the Committee approved approximately 11,000,000 additional stock
option grants to executive officers during 1999.
Robert Annunziata was appointed CEO in February 1999. Jack Scanlon held the
position of CEO from the beginning of 1999 through February 1999. In
determining salary increases and 1999 bonus awards for Messrs. Annunziata and
Scanlon, the Committee reviewed the performance of Global Crossing against its
goals. During 1999, annual revenue increased from $420 million to $1.7 billion
as a result of internal growth and acquisitions completed during the year.
Global Crossing's market capitalization grew from $10 billion to $43 billion or
330%. In addition, Mr. Annunziata was a key member of the team that completed
the successful merger with Frontier Corporation, and the acquisitions of Racal
Telecom and Global Marine Systems.
THE COMPENSATION COMMITTEE
James F. McDonald, Chairman
Geoffrey J.W. Kent
Douglas McCorkindale
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Summary compensation table
The table below sets forth information concerning compensation paid to
certain executive officers during the last fiscal year.
Annual Compensation Long Term Compensation
----------------------------------------- -----------------------------------------------
Other Restricted Securities
Annual Stock Underlying LTIP All Other
Year Salary Bonus(1) Compensation(2) Award(s) Options/SARs Payouts Compensation(3)
---- -------- ----------- --------------- ---------- ------------ ------- ---------------
Gary Winnick............ 1999 $169,615 $ 785,000 $ 94,097 -- -- -- --
Chairman
Robert Annunziata*...... 1999 464,679 11,000,000 -- -- 7,500,000 -- --
Former Chief
Executive Officer
Jack M. Scanlon*........ 1999 622,500 504,000 -- -- -- -- $ 5,000
Vice Chairman, Asia 1998 450,000 480,000 $213,569 -- 3,600,000 -- --
Global Crossing
Thomas J. Casey......... 1999 925,000 625,000 -- -- 1,600,000 -- --
Vice Chairman 1998 266,667 533,333 -- -- 2,000,000 -- --
John A. Scarpati........ 1999 36,217 2,000,000 -- -- 1,000,000 -- 222,222
Chief Administrative
Officer
William B. Carter....... 1999 622,500 395,000 -- -- -- -- 5,000
President, Global 1998 600,000 1,050,000 -- -- 3,000,000 -- $ 5,000
Crossing Development 1997 $200,000 $ 750,000 -- -- -- -- --
Co.; Chief Executive
Officer, Global Marine
Systems
- --------
* Mr. Annunziata became Chief Executive Officer in February 1999 and Mr.
Scanlon resigned the position in February 1999. Mr. Scanlon is still one of
the four most highly compensated officers of Global Crossing other than the
CEO.
(1) The amounts in this column represent annual bonuses, except that Mr.
Annunziata's amount reflects a $10,000,000 signing bonus and a $1,000,000
annual bonus; and Mr. Scarpati's amount reflects a $2,000,000 signing
bonus.
(2) Mr. Winnick received imputed income for the personal use of corporate
aircraft in 1999.
(3) Messrs. Scanlon and Carter received matching company contributions on their
401(k) plan deferrals. Mr. Scarpati is to receive an $8,000,000 bonus upon
the completion of 3 years of service, of which 1/36th was accrued in 1999.
Certain compensation arrangements
The 1998 Global Crossing Ltd. Stock Incentive Plan (the "1998 Plan") provides
that, unless otherwise provided in the specific award agreement, upon a "change
in control," certain awards granted under the 1998 Plan may, in the sole
discretion of the Committee, be deemed to vest immediately. The award
agreements generally provide for accelerated vesting upon a change in control.
"Change in control" is defined under the 1998 Plan in general as the occurrence
of any of the following: (1) any person or entity, other than certain of our
affiliates, becomes the "beneficial owner," as defined under Rule 13d-3
promulgated under the Securities Exchange Act of 1934, of securities of Global
Crossing representing 30% or more of the combined voting power of our then
outstanding securities; (2) during any period of 24 months, individuals who at
the beginning of such period constituted the board of directors and any new
director (other than any directors who meet certain exceptions specified in the
1998 Plan) whose election was approved in advance by a vote of at least two-
thirds of the directors then still in office cease for any reason to constitute
at least a majority of the board; (3) our shareholders approve any transaction
pursuant to which Global Crossing is merged or consolidated with any other
company, other than a merger or consolidation which would result in our
shareholders immediately prior thereto continuing to own more than 65% of the
combined voting power of the voting securities of the surviving entity
outstanding after such transaction; or (4) our shareholders approve a plan of
complete liquidation of Global Crossing or an agreement for the sale or
disposition by Global Crossing of all or substantially all of our assets, other
than the liquidation of Global Crossing into a wholly owned subsidiary.
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In January 2000, the board of directors authorized Global Crossing to enter
into change in control agreements with our executive officers and certain of
our other key executives. These agreements provide for certain benefits upon
actual or constructive termination of employment in the event of a "Change in
Control" (as defined below). With respect to any of the executive officers
named in the Summary Compensation Table above, if, within 24 months of the
month in which a Change in Control occurs, his employment is terminated by us
(other than for cause or by reason of death or disability), or he terminates
employment for "good reason" (generally, an unfavorable change in employment
status, compensation or benefits or a required relocation), he shall be
entitled to receive (1) a lump sum payment equal to three times the sum of his
annual base salary plus guideline bonus opportunity (reduced by any cash
severance benefit otherwise paid to the executive under any applicable
severance plan or other severance arrangement), (2) a prorated annual target
bonus for the year in which the Change in Control occurs, (3) continuation of
his life and health insurance coverages for three years and (4) payment of any
excise taxes due in respect of the foregoing benefits and of any other payments
made to the executive as a result of the Change in Control. The term of each of
these agreements will continue through December 31, 2001, after which it will
be automatically extended for additional one-year terms subject to termination
by either party on one year's prior notice. There is an automatic 24-month
extension following any Change in Control. A Change in Control generally is
deemed to occur if: (1) any person or entity, other than certain of our
affiliates, becomes the "beneficial owner" of securities of Global Crossing
representing 20% or more of the combined voting power of our then outstanding
securities; (2) during any period of 24 months, individuals who at the
beginning of such period constituted the board of directors and any new
director (other than any directors who meet certain exceptions specified in the
change in control agreement) whose election was approved in advance by a vote
of at least two-thirds of the directors then still in office cease for any
reason to constitute at least a majority of the board; (3) any transaction is
consummated pursuant to which Global Crossing is merged or consolidated with
any other company, other than a merger or consolidation which would result in
our shareholders immediately prior thereto continuing to own more than 65% of
the combined voting power of the voting securities of the surviving entity
outstanding after such transaction; or (4) Global Crossing is completely
liquidated or we sell or dispose of all or substantially all of our assets,
other than the liquidation of Global Crossing into a wholly owned subsidiary.
In December 1999, we entered into an employment agreement with Leo J.
Hindery, Jr. providing for Mr. Hindery's employment as Chairman and Chief
Executive Officer of our GlobalCenter subsidiary for an initial term of three
years. The employment agreement provided for a base annual salary of not less
than $500,000 and a guaranteed bonus of not less than $500,000. Mr. Hindery
also received stock options to purchase 500,000 shares of Global Crossing
common stock at an exercise price of $45 per share. These stock options vest
34% on Mr. Hindery's first date of employment and the balance in 22% increments
on each of the first, second and third anniversaries of such date. Pursuant to
the employment agreement, Mr. Hindery is also entitled to receive stock options
covering 5.5% of the common stock of our GlobalCenter subsidiary or of a
tracking stock designed to reflect the performance of the GlobalCenter
business. Such GlobalCenter stock options will have an aggregate exercise price
of $110 million and will vest 34% immediately and the balance in 22% increments
on each of the first, second and third anniversaries of Mr. Hindery's
employment start date. In March 2000, Mr. Hindery's compensation arrangements
were changed to reflect his new responsibilities as Chief Executive Officer of
Global Crossing Ltd. At that time, Mr. Hindery's annual base salary was
increased to $995,000 and he received an additional 2,000,000 Global Crossing
Ltd. stock options at an exercise price of $54.375 per share, such options to
vest ratably over three years. Upon a "change in control" or upon the actual or
constructive discharge of Mr. Hindery without "cause" (as defined in Mr.
Hindery's agreement), all of his options will immediately vest in full, and Mr.
Hindery will be entitled to receive a lump sum payment equal to the sum of his
annual base salary and bonus through the end of the term of the agreement.
In February 1999, we entered into an employment agreement with Robert
Annunziata providing for Mr. Annunziata's employment as Chief Executive Officer
of Global Crossing for an initial term of three years. The employment agreement
provided for a base annual salary of not less than $500,000 and a target annual
bonus of not less than $500,000. In addition, Mr. Annunziata was provided a $10
million signing bonus, subject to partial repayment in certain circumstances,
as well as a $5 million fully recourse loan facility to be used to
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purchase shares of Global Crossing common stock to the extent Mr. Annunziata
used a like amount of his own funds for such purpose. Mr. Annunziata did not
elect to make use of this loan facility. Mr. Annunziata also received stock
options to purchase 4,000,000 (after giving effect to the March 9, 1999 stock
split) shares of Global Crossing common stock at a split-adjusted exercise
price of $19.81 per share. These stock options were to vest in 25% increments
starting on February 19, 1999 and on February 22 of each of the first three
years of Mr. Annunziata's employment. Under the employment agreement, Mr.
Annunziata was given the right, for a period of six months following the
initial term of the agreement, to require Global Crossing to purchase from him
any shares of Global Crossing common stock held by him as a result of the
exercise of the 4,000,000 stock options at a purchase price equal to $49.625
per share. Pursuant to the employment agreement, Mr. Annunziata also received
stock options to purchase an aggregate of 500,000 (post-split) shares of Global
Crossing common stock, at a split-adjusted exercise price of $24.81 per share,
all of which became vested on Mr. Annunziata's first day of employment. Upon
Mr. Annunziata's resignation as CEO on March 2, 2000, all of Mr. Annunziata's
then unvested stock options granted under the agreement became immediately
vested and Mr. Annunziata became entitled to receive a lump sum payment equal
to two times his then annual base salary and bonus.
Global Crossing entered into an employment agreement, dated as of April 1,
1998, with Jack Scanlon, providing for Mr. Scanlon's employment as Global
Crossing's Chief Executive Officer for an initial term of two years. The
employment agreement provided for a base annual salary of not less than
$600,000 and a guaranteed bonus of not less than $400,000. In addition, Mr.
Scanlon was issued options to purchase a total of 3,600,000 (after adjusting
for subsequent stock splits) shares of Global Crossing common stock at a split-
adjusted exercise price of $0.835 per share. These options vest in 25%
increments on Mr. Scanlon's first day of employment and on each of the first
three anniversaries of that date. Upon a "change in control" of Global
Crossing, as defined in the 1998 Plan, all of these options will immediately
vest, and Mr. Scanlon will be entitled to terminate the agreement and receive a
lump sum payment equal to two times his then annual base salary and bonus. Mr.
Scanlon will also be entitled to such lump sum payment if he is actually or
constructively discharged without "cause" (as defined in the agreement). Mr.
Scanlon voluntarily resigned as Chief Executive Officer of Global Crossing in
February 1999 to become Vice Chairman of Global Crossing. His employment
agreement was extended for one additional year at that time but otherwise was
left substantially unchanged.
In September 1998, Mr. Thomas Casey was hired by Pacific Capital Group as its
President. At such time, it was also agreed among Pacific Capital Group, Global
Crossing and Mr. Casey that, in addition to Mr. Casey's role as President of
Pacific Capital Group, Mr. Casey would also serve as Managing Director of
Global Crossing. In connection with such employment, Mr. Casey received
economic rights to 2,000,000 shares of Global Crossing common stock at an
effective price of $2.00 per share. Such rights vest in 33% increments on the
first day of Mr. Casey's employment and on each of the first and second
anniversaries of the first day of Mr. Casey's employment. In connection with
Mr. Casey's dual employment, Global Crossing and Pacific Capital Group
established an arrangement whereby each entity would be responsible for a
portion of Mr. Casey's salary and long-term compensation based upon the
relative amount of time spent by Mr. Casey on matters pertaining to such
entity. Initially, 80% of Mr. Casey's salary and long-term compensation was
allocated to Global Crossing and 20% of such amounts was allocated to Pacific
Capital Group, subject to adjustment and re-allocation on an annual basis. On
March 18, 1999, in recognition of the time spent by Mr. Casey on Global
Crossing matters to such date and his expected ongoing responsibilities with
Global Crossing, the Global Crossing board of directors elected to assume Mr.
Casey's employment agreement, including the full amount of Mr. Casey's salary
and long-term compensation, with Mr. Casey serving full time in his role with
Global Crossing as Managing Director and Vice Chairman of the board of
directors.
In December 1999, Global Crossing entered into an employment agreement with
John A. Scarpati providing for Mr. Scarpati's employment as Chief
Administrative Officer of Global Crossing for an initial term of three years.
The employment agreement provides for a base salary of not less than $500,000
and a target annual bonus of 100% of his base annual salary. In addition, Mr.
Scarpati was provided a $2 million signing bonus, subject to partial repayment
in certain circumstances, as well as the right to an $8 million payment in the
event he remains employed by Global Crossing for three years or is actually or
constructively discharged
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without "cause" (as defined in the agreement). In connection with his
employment, Mr. Scarpati received stock options to purchase 1,000,000 shares of
Global Crossing common stock at an exercise price of $53 per share. These stock
options vest in 25% increments on the date Mr. Scarpati commenced employment
with Global Crossing and on each of the first three anniversaries thereof. Upon
a "change in control" (as defined in the 1998 Plan) or upon the actual or
constructive discharge of Mr. Scarpati without "cause" (as defined in the
agreement), these options will immediately vest in full, and Mr. Scarpati will
be entitled to terminate the agreement and receive a lump sum payment equal to
the sum of his then annual base salary and bonus.
Compensation of outside directors
Each director who is not an employee of Global Crossing receives cash
compensation of $2,500 for each meeting of the board of directors attended and
$1,500 for each attended meeting of a committee of the board of which he or she
is a member. In addition, each non-employee chairman of a board committee also
receives an annual retainer of $5,000. Each non-employee director commencing
service on the board also receives options to purchase 120,000 shares of Global
Crossing common stock at an exercise price equal to the fair market value of
Global Crossing common stock on the date of grant. Each such option has a term
of 10 years, becomes exercisable immediately with respect to the first 30,000
shares, and will become exercisable with respect to the remaining 90,000 shares
in two equal installments on each of the first and second anniversaries of the
date of grant, in each case so long as such director continues to be a director
of Global Crossing on such date.
Option grants in last fiscal year
The table below sets forth information concerning options granted to certain
executive officers during the last fiscal year.
Potential Realizable Value At
Assorted Annual Rates of Stock Price
Individual Grants Appreciation for Option Term
----------------------------------------------------------- -------------------------------------
Number of % of Total
Securities Options Market Price
Underlying Granted to of Common
Options Employees in Exercise or Stock on Expiration
Name Granted Fiscal Year Base Price Grant Date Date 0% 5% 10%
- ---- ---------- ------------ ----------- ------------ ---------- ----------- ----------- ------------
Gary Winnick........... -- -- -- -- -- -- -- --
Chairman
Robert Annunziata...... 4,000,000 11.16% $19.813 $24.812 2/22/09 $19,996,000 $82,412,534 $178,171,752
Former Chief Executive 500,000 1.40% 24.812 24.812 2/22/09 -- 7,802,067 19,771,969
Officer 3,000,000 8.37% 45.000 45.000 12/3/09 -- 84,900,775 215,155,232
Jack M. Scanlon........ -- -- -- -- -- -- -- --
Vice Chairman, Asia
Global Crossing
Thomas J. Casey........ 300,000 0.84% 61.375 61.375 5/16/09 -- 11,579,522 29,344,783
Vice Chairman 300,000 0.84% 25.000 25.000 9/24/09 -- 4,716,710 11,953,068
1,000,000 2.79% 45.000 45.000 12/3/09 -- 28,300,258 71,718,411
John A. Scarpati....... 1,000,000 2.79% $53.000 $45.000 12/3/09 $(8,000,000) $20,300,258 $ 63,718,411
Chief Administrative
Officer
William B. Carter...... -- -- -- -- -- -- -- --
President, Global
Crossing Development
Co.; Chief Executive
Officer, Global
Marine Systems
131
Aggregated option exercises in last fiscal year and fiscal year-end option
values
The table below sets forth information concerning exercises of stock options
by certain executive officers during the last fiscal year and the fiscal year-
end value of such executive officers' unexercised options.
Number of Securities
Underlying Unexercised Value of Unexercised
Options In-The-Money Options(2)
------------------------- -------------------------
Shares Acquired Value
Name On Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ----------- ----------- ------------- ----------- -------------
Gary Winnick............ -- -- 1,200,000 600,000 $58,998,000 $ 29,499,000
Chairman
Robert Annunziata....... 81,576 $ 2,243,340 1,500,000 6,000,000 42,781,000 105,561,000
Former Chief Executive
Officer
Jack M. Scanlon......... 345,680 12,525,410 1,334,560 1,800,000 65,613,642 88,497,000
Vice Chairman, Asia
Global Crossing
Thomas J. Casey......... -- -- 1,006,666 1,926,666 33,699,968 42,799,968
Vice Chairman
John A. Scarpati........ -- -- 333,334 666,666 -- --
Chief Administrative
Officer
William B. Carter....... 174,144 4,860,345 1,706,096 1,000,000 83,880,210 49,165,000
President, Global
Crossing Development
Co., Chief Executive
Office Global Marine
- --------
(1) Amounts indicated are based upon the difference between the exercise price
and the closing market price on the exercise date.
(2) Amounts indicated are based upon the difference between the exercise price
and the closing market price per share of the common stock of $50.00 on
December 31, 1999.
Compensation committee interlocks and insider participation
The Compensation Committee of the Global Crossing board of directors consists
of Messrs. McDonald, Kent and McCorkindale, none of whom had any relationships
with Global Crossing requiring disclosure under Securities and Exchange
Commission rules. However, prior to November 4, 1999, the Compensation
Committee consisted of Lodwrick M. Cook, Michael R. Steed and Jay R. Levine (an
employee of an affiliate of Canadian Imperial Bank of Commerce), who were
involved in certain transactions described in Note 18 to our consolidated
financial statements incorporated by reference into this proxy statement.
132
Comparison of cumulative total returns
The graph below compares the cumulative total shareholder return on Global
Crossing common stock for the period from August 14, 1998, the initial date of
trading of Global Crossing common stock, to December 31, 1999 with the
cumulative total return of the Standard & Poor's 500 Stock Index and the NASDAQ
Telecom Index over the same period. The graph assumes $100 invested on August
14, 1998 in Global Crossing common stock and $100 invested on such date in each
of the Standard & Poor's 500 Stock Index and the NASDAQ Telecom Index, with
dividends reinvested. In the proxy statement provided to shareholders in
connection with our 1999 Annual General Meeting of Shareholders, we used a peer
group of fiber optic cable providers comprised of Qwest, Level 3
Communications, Inc., Metromedia Fiber Network, Inc., IXC Communications, Inc.
and Equant NV (the "Old Peer Group"). We have decided to replace the Old Peer
Group index with the NASDAQ Telecom Index because we believe the latter index
to be readily accessible to our shareholders and more representative of the
industries in which we now compete. In accordance with SEC rules, the graph
below also illustrates the cumulative total shareholder return of the Old Peer
Group over the relevant period.
Stock Performance
[LINE GRAPH]
S&P 500 NASDAQ
GBLX Stock Index Telecom Index Old Peer Group
------ ----------- ------------- --------------
08/14/1998 100 100 100 100
09/30/1998 81.86 95.7 91.16 83.51
12/31/1998 176.96 115.67 125.6 124.49
03/31/1999 362.75 121.04 155.04 178.48
06/30/1999 334.31 129.17 164.27 175.77
09/30/1999 207.84 120.7 156.67 151.07
12/31/1999 392.16 138.25 254.61 230.11
At 12/31/99, a $100 initial investment is worth:
GBLX $392.16
S&P 500 Stock Index $138.25
NASDAQ Telecom Index $254.61
Old Peer Group $230.11
133
STOCK OWNERSHIP OF MANAGEMENT, DIRECTORS
AND 5% SHAREHOLDERS OF GLOBAL CROSSING
The following table sets forth, as of April 24, 2000, certain information
regarding the beneficial ownership of our common stock by (1) each person or
entity who is known by us to own beneficially 5% or more of our voting common
stock, (2) each of our directors and executive officers and (3) all of our
directors and executive officers as a group. To our knowledge, each such
shareholder has sole voting and investment power with respect to the shares
shown, unless otherwise noted. For purposes of this table, an individual is
deemed to have sole beneficial ownership of securities owned jointly with such
individual's spouse. Amounts appearing in the table below include (1) all
shares of common stock outstanding as of April 24, 2000, (2) all shares of
common stock issuable upon the exercise of options within 60 days of April 24,
2000 and (3) all shares of common stock issuable upon the exercise of warrants
within 60 days of April 24, 2000. The warrants designated below as "New PCG
Warrants" and "GCL Warrants" each represent the right to immediately purchase
shares of Global Crossing common stock at an exercise price of $9.50 per share.
Beneficial Ownership of Common Stock
------------------------------------------------------
Shares Shares
Subject to Subject Shares
Number of New PCG to GCL Subject to Percentage
Shares(1) Warrants Warrants Options(2) of Class
----------- ---------- --------- ---------- ----------
Pacific Capital Group,
Inc.(3)................ 79,136,648 6,050,004 2,515,788 0 10.62%
360 North Crescent
Drive
Beverly Hills,
California 90210
Canadian Imperial Bank
of Commerce(4)......... 68,529,669 0 0 240,000 8.41%
161 Bay Street, 8th
Floor--BCE Place
P.P. Box 500
M5J258, Toronto, Canada
Gary Winnick(5)......... 79,136,648 6,050,004 2,515,788 1,800,000 10.81%
Lodwrick M. Cook........ 3,143,929 950,002 0 362,240 *
Leo J. Hindery, Jr...... 0 0 0 170,000 *
Thomas J. Casey(6)...... 422,749 0 0 1,106,666 *
Joseph Clayton.......... 542,396 0 0 1,440,000 *
Dan J. Cohrs............ 0 0 0 927,505 *
John Comparin........... 5,000 0 0 0 *
James C. Gorton......... 15,000 0 0 617,690 *
David L. Lee(7)......... 17,350,014 1,825,002 663,456 900,000 2.53%
Barry Porter............ 15,814,795 1,825,002 610,266 900,000 2.33%
John M. Scanlon......... 363,748 0 0 1,904,965 *
John A. Scarpati........ 900 0 0 333,334 *
Robert Sheh............. 0 0 0 583,685 *
William B. Carter....... 239,520 0 0 1,556,096 *
Wallace S. Dawson....... 68,958 0 0 530,400 *
Edward Mulligan......... 6,012 0 0 50,000 *
Robert Annunziata....... 0 0 0 5,438,424 *
Jay R. Bloom(8)......... 13,993,966 0 0 128,533 1.73%
William E. Conway,
Jr.(9)................. 2,247,640 0 0 75,000 *
Canning Fok Kin-ning.... 0 0 0 8,898,889 1.08%
Eric Hippeau............ 35,895 0 0 42,300 *
Dean C. Kehler(8)....... 14,805,827 0 0 128,533 1.83%
Geoffrey J.W. Kent...... 0 0 0 75,000 *
Douglas McCorkindale.... 38,855 0 0 87,400 *
James McDonald.......... 5,351 0 0 40,932 *
Bruce Raben............. 0 0 0 120,000 *
Michael R. Steed........ 0 0 0 120,000 *
All Directors and
Executive Officers as a
Group.................. 136,565,241 10,650,010 3,789,510 28,337,592 20.84%
- --------
* Percentage of shares beneficially owned does not exceed one percent.
(1) As of April 24, 2000, 817,653,894 shares of common stock were issued and
outstanding.
(2) Represents stock options issued under stock option plans of Global
Crossing, except that Mr. Fok's amount includes 8,888,889 shares of
common stock issuable upon conversion of the 400,000 shares of
convertible preferred stock issued to Hutchison Whampoa in connection
with the formation of the
134
Hutchison Global Crossing joint venture. As Managing Director of Hutchison
Whampoa, Mr. Fok may be deemed to share investment and voting control over
these shares.
(3) Includes 40,349,650 shares of common stock and common stock warrants
owned or managed by GKW Unified Holdings, a company formed for the
benefit of Gary Winnick and members of his family and managed by Pacific
Capital Group, which thereby shares investment and voting power over
such shares.
(4) These share amounts, which are effective as of April 14, 2000, include
11,453,529 shares held by certain affiliates of Canadian Imperial Bank
of Commerce in such a manner that CIBC shares investment power over such
shares. The indicated options have been assigned to CIBC by CIBC
employees who previously served on the GCL board of directors.
(5) Includes all shares of common stock beneficially owned by Pacific
Capital Group, a company controlled by Mr. Winnick.
(6) Includes 422,749 shares of common stock owned by Casey Global Holdings
LLC, which is managed by GCL in such a manner that Mr. Casey shares
investment and voting power over such shares.
(7) Includes (a) all 9,900,822 shares of common stock and 513,156 shares of
common stock issuable upon the exercise of warrants owned by San Pasqual
Corp., a corporation of which Mr. Lee and his family are the sole
shareholders and over whose portfolio securities Mr. Lee shares
investment and voting power and (b) all 3,988,242 shares of common stock
and 150,300 shares of common stock issuable upon the exercise of
warrants owned by the David and Ellen Lee Family Trust, of which Mr. Lee
is a trustee and in such capacity shares investment and voting power
over such shares.
(8) Includes (a) 11,453,529 shares held by certain affiliates of Canadian
Imperial Bank of Commerce in such a manner that Messrs. Bloom and Kehler
have shared investment and voting power over such shares and (b) 218,434
shares held by Caravelle Investment Fund, LLC, for whose investment
advisor Messrs. Bloom and Kehler serve as managing directors.
(9) Includes 2,239,640 shares of common stock beneficially owned by the
Carlyle Group, of which Mr. Conway is managing director and in such
capacity shares voting and investment control over such shares.
135
SUBMISSION OF FUTURE SHAREHOLDER PROPOSALS
All proposals of shareholders who wish to bring business before Global
Crossing's 2001 Annual General Meeting of Shareholders must be received by us
at our principal executive offices at Wessex House, 45 Reid Street, Hamilton
HM12 Bermuda, not later than January 8, 2001, for inclusion in our proxy
statement and form of proxy relating to such annual meeting. Upon timely
receipt of any such proposal, we will determine whether or not to include such
proposal in the proxy statement and proxy in accordance with applicable
regulations and provisions governing the solicitation of proxies.
Under the Companies Act, any shareholders who represent not less than 5% of
the total voting power of shareholders having the right to vote at the meeting
or who are 100 or more in number may requisition any resolution which may
properly be moved at an annual shareholders' meeting. A shareholder wishing to
move a resolution at an annual meeting is generally required to give us notice
of the resolution at our registered office at least six weeks before the
meeting. Any such proposal must also comply with the other provisions contained
in our bye-laws relating to shareholder proposals.
Pursuant to our bye-laws, for a shareholder to nominate a director for
election at the 2001 Annual General Meeting of Shareholders, a notice executed
by that shareholder (not being the person to be proposed) must be received by
our Secretary not later than January 8, 2001 stating the intention of that
shareholder to propose such person for appointment and setting forth as to each
person whom the shareholder proposes to nominate for election (i) the name,
age, business address and residence address of such person, (ii) the principal
occupation or employment of such person, (iii) the class, series and number of
shares of Global Crossing which are beneficially owned by such person, (iv)
particulars which would, if such person were so appointed, be required to be
included in our register of directors and officers and (v) all other
information relating to such person that is required to be disclosed in
solicitations for proxies for the election of directors pursuant to the rules
and regulations of the Securities and Exchange Commission under Section 14 of
the Securities Exchange Act of 1934, as amended, together with notice executed
by such person of his or her willingness to serve as a director if so elected.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and other reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any reports, statements or other information we file at the Securities and
Exchange Commission's public reference rooms in Washington, D.C., New York, New
York and Chicago, Illinois. Please call the Securities and Exchange Commission
at 1-800-SEC-0330 for further information on the public reference rooms. Our
Securities and Exchange Commission filings are also available to the public
from commercial document retrieval services and at the web site maintained by
the Securities and Exchange Commission at "http://www.sec.gov." You may also
visit Global Crossing at http://www.globalcrossing.net. The information on
Global Crossing's Web site is not part of this proxy statement.
136
INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to provide information about our business and other
important information to you by "incorporating by reference" the information we
file with the SEC. This means that we can disclose the information to you by
referring in this proxy statement to the documents we file with the SEC. Under
the SEC's regulations, any statement contained in the information incorporated
by reference in this proxy statement is automatically updated and superseded by
any information contained in this proxy statement, or in any information
contained in any subsequently filed amendments to our Annual Report on Form 10-
K for the year ended December 31, 1999.
We incorporate by reference the following documents that have been filed with
the SEC:
. the financial statements of Frontier Corporation and the Global Marine
Systems business of Cable & Wireless Plc incorporated by reference or
included in our Registration Statement on Form S-4 filed on September 8,
1999 (File No. 333-86693),
. the financial statements of Racal Telecom and HCL Holdings Limited
included in our Current Report on Form 8-K filed on January 11, 2000, as
amended by our Current Report on Form 8-K/A filed on January 19, 2000,
and
. the pro forma financial information for Global Crossing Ltd. included in
our Registration Statement of Form S-3 filed on March 20, 2000 (File No.
333-32810).
Each of these items are an important part of this proxy statement.
Any person, including any beneficial owner, to whom this proxy statement is
delivered may obtain the information incorporated by reference in, but not
delivered with, this proxy statement by requesting it at no cost, by writing or
telephoning us at the following address or telephone number:
Global Crossing Ltd.
360 N. Crescent Drive
Beverly Hills, CA 90210
Attention: Investor Relations
Phone: (310) 385-5200
137
INDEX TO FINANCIAL STATEMENTS
Page
----
GLOBAL CENTER GROUP (AN INTEGRATED BUSINESS OF GLOBAL CROSSING LTD.)
Report of Independent Public Accountants.................................. F-3
Combined Balance Sheets................................................... F-4
Combined Statements of Operations and Comprehensive Income................ F-5
Combined Statements of Group Net Worth.................................... F-6
Combined Statements of Cash Flows......................................... F-7
Notes to Combined Financial Statements.................................... F-8
GLOBAL CROSSING LTD. AND SUBSIDIARIES
Report of Independent Public Accountants.................................. F-21
Consolidated Balance Sheets as of December 31, 1999 and 1998.............. F-22
Consolidated Statements of Operations for the years ended December 31,
1999 and 1998 and for the period March 19, 1997 (Date of Inception) to
December 31, 1997........................................................ F-23
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999 and 1998 and for the period March 19, 1997 (Date of
Inception) to December 31, 1997.......................................... F-24
Consolidated Statements of Cash Flows for the years ended December 31,
1999 and 1998 and for the period March 19, 1997 (Date of Inception) to
December 31, 1997........................................................ F-25
Consolidated Statements of Comprehensive Income for the years ended
December 31, 1999 and 1998 and for the period March 19, 1997 (Date of
Inception) to December 31, 1997.......................................... F-27
Notes to Consolidated Financial Statements................................ F-28
Condensed Consolidated Statements of Operations for the three months ended
March 31, 2000 and 1999.................................................. F-62
Condensed Consolidated Balance Sheets as of March 31, 2000 and December
31, 1999................................................................. F-63
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2000 and 1999.................................................. F-64
Condensed Consolidated Statements of Comprehensive Income for the three
months ended December 31, 2000 and 1999.................................. F-66
Notes to Condensed Consolidated Financial Statements...................... F-67
PRO FORMA FINANCIAL STATEMENTS
Global Crossing Group
Unaudited Pro Forma Condensed Combined Financial Statements............... F-73
Unaudited Pro Forma Condensed Combined Balance Sheet as of March 31,
2000..................................................................... F-74
Unaudited Pro Forma Condensed Combined Statements of Operations for the
three months ended March 31, 2000........................................ F-75
Unaudited Pro Forma Condensed Combined Statements of Operations for the
year ended December 31, 1999............................................. F-76
Notes to Unaudited Pro Forma Condensed Combined Financial Statements...... F-77
F-1
The GlobalCenter group is an integrated business of Global Crossing Ltd.
and is not a separate legal entity. The holders of GlobalCenter group stock
and Global Crossing group stock will be shareholders of a single company,
Global Crossing Ltd. The GlobalCenter group stock is a tracking stock.
Tracking stock is a type of common stock that is intended to reflect or
"track" the separate performance of a particular business or group of
businesses that does not reflect direct ownership of the tracked assets. The
issuance of GlobalCenter group stock and the allocation of assets and
liabilities between the Global Crossing group and the GlobalCenter group will
not result in a distribution or spin-off to shareholders of any of Global
Crossing Ltd.'s assets or liabilities and will not affect Global Crossing
Ltd.'s ownership of the assets or responsibility for its liabilities or those
of its subsidiaries. The assets attributed to the GlobalCenter group are owned
by Global Crossing Ltd. and could be subject to the liabilities of Global
Crossing group. The liabilities attributed to GlobalCenter group continue to
be liabilities of Global Crossing Ltd. The Global Crossing Ltd. board of
directors will have the ability to control transfers of funds or other assets
between the Global Crossing group and the GlobalCenter group. The financial
statements of the GlobalCenter group are presented to provide additional
disclosure to investors related to the underlying business that will be
tracked by the GlobalCenter group stock. Management intends to continue
providing audited financial statements prepared in accordance with generally
accepted accounting principles for the GlobalCenter group as long as the
GlobalCenter group stock is outstanding.
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Global Crossing Ltd:
We have audited the accompanying combined balance sheet of New GlobalCenter
("New GlobalCenter") as of December 31, 1999 and of Old GlobalCenter ("Old
GlobalCenter") as of December 31, 1998, and the related combined statements of
operations and comprehensive income, group net worth and cash flows for the
periods from October 1, 1999 to December 31, 1999 ("New GlobalCenter period")
and from January 1, 1999 to September 30, 1999 and for each of the two years in
the period ended December 31, 1998 ("Old GlobalCenter periods"). These
financial statements are the responsibility of management of New GlobalCenter
and Old GlobalCenter. 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 provide a
reasonable basis for our opinion.
In our opinion, the New GlobalCenter combined financial statements referred
to above present fairly, in all material respects, the financial position of
New GlobalCenter as of December 31, 1999 and the results of its operations and
its cash flows for the New GlobalCenter period in conformity with accounting
principles generally accepted in the United States. Further, in our opinion,
the combined financial statements of Old GlobalCenter referred to above present
fairly, in all material respects, the financial position of Old GlobalCenter as
of December 31, 1998, and the results of its operations and its cash flows for
the Old GlobalCenter periods in conformity with accounting principles generally
accepted in the United States.
New GlobalCenter is a fully integrated business of Global Crossing Ltd. Old
GlobalCenter was a fully integrated business of Frontier Corporation.
Accordingly, as described in Note 1, New GlobalCenter and Old GlobalCenter
combined financial statements have been derived from the consolidated financial
statements and accounting records of Global Crossing Ltd. and Frontier
Corporation, respectively, and, therefore, reflect certain assumptions and
allocations. As more fully discussed in Note 1, the combined financial
statements of New GlobalCenter should be read in conjunction with the audited
consolidated financial statements of Global Crossing Ltd.
Arthur Andersen LLP
San Jose, California
April 14, 2000
F-3
GLOBALCENTER GROUP
(An integrated business of Global Crossing Ltd.)
COMBINED BALANCE SHEETS
(Amounts in thousands)
Old GlobalCenter New GlobalCenter
---------------- -----------------------
December 31, March 31,
--------------------------- -----------
1998 1999 2000
---------------- ---------- -----------
(Unaudited)
ASSETS
Current assets:
Accounts receivable, net of
allowance for doubtful accounts of
$975, $1,379 and $2,878,
respectively....................... $ 6,492 $ 18,811 $ 30,309
Equipment held for resale........... 773 6,941 10,019
Prepaid expenses and other current
assets............................. 300 2,825 1,555
Deferred tax asset.................. 2,393 2,926 3,503
-------- ---------- ----------
Total current assets................ 9,958 31,503 45,386
-------- ---------- ----------
Property and equipment, net........... 30,372 116,315 162,241
Goodwill and intangibles, net......... 7,470 1,448,265 1,411,130
Investment............................ -- -- 9,871
Other assets.......................... 221 -- --
-------- ---------- ----------
Total assets........................ $ 48,021 $1,596,083 $1,628,628
======== ========== ==========
LIABILITIES AND GROUP NET WORTH
Current liabilities:
Capital lease obligations........... $ 404 $ 374 $ 398
Accounts payable.................... 5,995 28,046 44,657
Other current liabilities........... 5,099 8,514 12,784
-------- ---------- ----------
Total current liabilities........... 11,498 36,934 57,839
-------- ---------- ----------
Capital lease obligations, net of
current portion...................... 586 194 90
Long-term deferred tax liability...... -- 28,316 28,108
Other liabilities..................... -- 494 1,033
-------- ---------- ----------
Total liabilities................... 12,084 65,938 87,070
-------- ---------- ----------
Group net worth:
Funds allocated by Frontier
Corporation/Global Crossing Ltd.... 49,439 1,572,870 1,625,440
Other comprehensive income.......... -- -- (77)
Accumulated net losses.............. (13,502) (42,725) (83,805)
-------- ---------- ----------
Total group net worth............... 35,937 1,530,145 1,541,558
-------- ---------- ----------
Total liabilities and group net
worth................................ $ 48,021 $1,596,083 $1,628,628
======== ========== ==========
The accompanying notes are an integral part of these combined financial
statements.
F-4
GLOBALCENTER GROUP
(An integrated business of Global Crossing Ltd.)
COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Amounts in thousands)
Old GlobalCenter New GlobalCenter Old GlobalCenter New GlobalCenter
-------------------------------- ---------------- ---------------- ----------------
Year Ended Nine Months Three Months
December 31, Ended Ended Three Months Ended March 31,
----------------- September 30, December 31, ---------------------------------
1997 1998 1999 1999 1999 2000
------- -------- ------------- ---------------- ---------------- ----------------
(Unaudited) (Unaudited)
Revenues:
Service revenues....... $ 6,511 $ 19,600 $ 29,951 $ 17,753 $ 6,451 $ 24,562
Equipment revenues..... 1,228 3,640 17,228 5,971 4,496 13,747
------- -------- -------- -------- ------- --------
Total revenues........ 7,739 23,240 47,179 23,724 10,947 38,309
Costs and expenses:
Cost of service
revenues.............. 5,257 14,804 36,451 17,328 9,363 21,442
Cost of equipment
revenues.............. 995 3,208 15,573 5,365 4,057 13,089
Sales and marketing.... 1,966 8,948 9,531 6,088 2,110 6,455
General and
administrative........ 2,044 4,694 6,897 3,067 1,216 5,835
Depreciation and
amortization.......... 912 4,023 4,242 1,913 1,103 3,155
Goodwill and
intangibles
amortization.......... 325 1,294 974 37,135 324 37,135
Merger costs........... -- 2,060 -- -- -- --
------- -------- -------- -------- ------- --------
Total costs and
expenses.............. 11,499 39,031 73,668 70,896 18,173 87,111
------- -------- -------- -------- ------- --------
Loss from operations... (3,760) (15,791) (26,489) (47,172) (7,226) (48,802)
Other income (expense),
net................... 45 55 (44) 114 (18) (211)
------- -------- -------- -------- ------- --------
Loss before income
taxes................. (3,715) (15,736) (26,533) (47,058) (7,244) (49,013)
Income tax benefit..... 941 4,911 9,742 4,333 2,660 7,933
------- -------- -------- -------- ------- --------
Net loss............... $(2,774) $(10,825) $(16,791) $(42,725) $(4,584) $(41,080)
------- -------- -------- -------- ------- --------
Other comprehensive
earnings, net of
taxes:
Unrealized holding
losses arising during
period................ -- -- -- -- -- (77)
------- -------- -------- -------- ------- --------
Comprehensive loss..... $(2,774) $(10,825) $(16,791) $(42,725) $(4,584) $(41,157)
======= ======== ======== ======== ======= ========
The accompanying notes are an integral part of these combined financial
statements.
F-5
GLOBALCENTER GROUP
(An integrated business of Global Crossing Ltd.)
COMBINED STATEMENTS OF GROUP NET WORTH
(Amounts in thousands)
Funds Allocated by
Frontier Other Total
Corporation/Global Comprehensive Accumulated Group Net
Crossing Ltd. Income Net Losses Worth
------------------ ------------- ----------- ----------
Old GlobalCenter
Balance at January 1,
1997................. $ 3,100 $ -- $ 97 $ 3,197
Net loss............ -- -- (2,774) (2,774)
Acquisition of
Voyager............ 9,528 -- -- 9,528
---------- ----- -------- ----------
Balance at December
31, 1997............. 12,628 -- (2,677) 9,951
Net loss............ -- -- (10,825) (10,825)
Funds allocated by
Frontier
Corporation, net .. 36,811 -- -- 36,811
---------- ----- -------- ----------
Balance at December
31, 1998............. 49,439 -- (13,502) 35,937
Net loss............ -- -- (16,791) (16,791)
Funds allocated by
Frontier
Corporation, net .. 31,267 -- -- 31,267
---------- ----- -------- ----------
Balance at September
30, 1999............. $ 80,706 $ -- $(30,293) $ 50,413
========== ===== ======== ==========
New GlobalCenter
Net loss............ $ -- $ -- $(42,725) $ (42,725)
Funds allocated by
Global Crossing
Ltd., net.......... 71,025 -- -- 71,025
Contribution from
Global Crossing
Ltd................ 1,501,845 -- -- 1,501,845
---------- ----- -------- ----------
Balance at December
31, 1999............. $1,572,870 $ -- $(42,725) $1,530,145
========== ===== ======== ==========
Unrealized loss on
available for sale
securities, net of
$52 tax
(unaudited)........ -- (77) -- (77)
Net loss
(unaudited)........ -- -- (41,080) (41,080)
Funds allocated by
Global Crossing
Ltd., net
(unaudited)........ 52,570 -- -- 52,570
---------- ----- -------- ----------
Balance March 31, 2000
(unaudited).......... $1,625,440 $ (77) $(83,805) $1,541,558
========== ===== ======== ==========
The accompanying notes are an integrated part of these combined financial
statements
F-6
GLOBALCENTER GROUP
(An integrated business of Global Crossing Ltd.)
COMBINED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Old New
Old GlobalCenter New GlobalCenter GlobalCenter GlobalCenter
---------------------------------- ---------------- ------------ ------------
Year Ended Nine Months Three Months Three Months
December 31, Ended Ended Ended March 31,
------------------- September 30, December 31, -------------------------
1997 1998 1999 1999 1999 2000
-------- --------- ------------- ---------------- ------------ ------------
(Unaudited) (Unaudited)
Operating activities:
Net loss............... $ (2,774) $ (10,825) $ (16,791) $ (42,725) $ (4,584) $(41,080)
Adjustments to
reconcile net loss to
net cash (used in)
from operating
activities
Depreciation and
amortization.......... 912 4,023 4,242 1,913 1,103 3,155
Goodwill and
intangibles
amortization.......... 325 1,294 974 37,135 324 37,135
Deferred income taxes.. (888) (2,049) 983 (2,279) 299 (730)
Changes in operating
assets and liabilities
net of the effects of
acquisitions:
Accounts receivable.... (949) (4,047) (11,346) (973) (1,146) (11,498)
Prepaid expenses and
other assets.......... (93) 335 (1,602) (923) (1,135) 1,270
Equipment held for
resale................ -- (704) 177 (6,345) (1,210) (3,078)
Accounts payable and
accrued liabilities... 320 6,221 13,306 12,654 2,329 21,420
-------- --------- --------- ----------- -------- --------
Net cash (used in) from
operating activities... (3,147) (5,752) (10,057) (1,543) (4,020) 6,594
-------- --------- --------- ----------- -------- --------
Investing activities:
Purchases of property
and equipment......... (1,853) (28,978) (20,871) (69,399) (4,891) (49,084)
Investment............. -- -- -- -- -- (10,000)
Cash from acquisition.. 568 -- -- -- -- --
-------- --------- --------- ----------- -------- --------
Net cash used in
investing activities... (1,285) (28,978) (20,871) (69,399) (4,891) (59,084)
-------- --------- --------- ----------- -------- --------
Financing activities:
Payments on capital
leases and debt....... (90) (2,573) (339) (83) (132) (80)
Proceeds from issuance
of debt............... 1,937 -- -- -- -- --
Funds allocated by
Frontier
Corporation/Global
Crossing Ltd., net.... -- 36,811 31,267 71,025 9,043 52,570
-------- --------- --------- ----------- -------- --------
Net cash from financing
activities............. 1,847 34,238 30,928 70,942 8,911 52,490
-------- --------- --------- ----------- -------- --------
Net increase (decrease)
in cash............... (2,585) (492) -- -- -- --
Cash at beginning of
period................ 3,077 492 -- -- -- --
-------- --------- --------- ----------- -------- --------
Cash at end of period.. $ 492 $ -- $ -- $ -- $ -- $ --
======== ========= ========= =========== ======== ========
Supplemental schedule
of non-cash activities:
Acquisition of New
GlobalCenter, net..... $ -- $ -- $ -- $ 1,451,432 $ -- $ --
Assets acquired under
capital leases........ $ 1,031 $ 215 $ -- $ -- $ -- $ --
The accompanying notes are an integral part of these combined financial
statements.
F-7
GLOBALCENTER GROUP
(An integrated business of Global Crossing Ltd.)
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) Organization and Operations
The Board of Directors of Global Crossing Ltd. ("Global Crossing") approved
a proposal that would result in the creation of two series of common stock
intended to separately reflect the performance of its complex Web hosting,
Internet Protocol network services, content distribution, systems applications
and related professional services businesses, referred to below as "the
GlobalCenter group," and all other businesses of Global Crossing, referred to
below as "the Global Crossing group." The GlobalCenter group is a fully
integrated business of Global Crossing. Global Crossing plans an initial
public offering of shares of the GlobalCenter group stock (the "Offering"),
all of the proceeds of which will be contributed to the GlobalCenter group.
Immediately prior to the completion of the Offering, the Global Crossing group
will hold a 100% interest in the earnings and losses of the GlobalCenter
group. GlobalCenter Inc., together with its subsidiaries in the United Kingdom
and Australia, is an indirect wholly owned subsidiary of Global Crossing and
owns all of the operating assets and liabilities of the GlobalCenter group.
The goodwill and other intangible assets of the GlobalCenter group are owned
by GlobalCenter Holding Co., an indirect wholly owned subsidiary of Global
Crossing. These combined financial statements are based on the operations,
assets and liabilities of the GlobalCenter group and are not representative of
any separately incorporated entity.
GlobalCenter Inc. was acquired by Frontier Corporation ("Frontier") in
February 1998. Frontier accounted for its acquisition of GlobalCenter Inc.
using the pooling-of-interests method. On September 28, 1999, Global Crossing
acquired Frontier. For financial reporting purposes, the merger of Global
Crossing and Frontier was deemed to have occurred on September 30, 1999. Prior
to this merger, the GlobalCenter group was a fully integrated business of
Frontier. For periods prior to October 1, 1999, the assets and liabilities of
the GlobalCenter group and the related combined results of operations and cash
flows are referred to below as "Old GlobalCenter," and for periods subsequent
to September 30, 1999, the assets and liabilities and the related combined
results of operations and cash flows are referred to as "New GlobalCenter." In
connection with Global Crossing's acquisition of Frontier, the assets and
liabilities of New GlobalCenter were adjusted to their respective fair values
pursuant to the purchase method of accounting. Global Crossing and Frontier
are collectively referred to below as "the Parents."
The combined financial statements of the GlobalCenter group reflect the
results of operations, financial position, changes in group net worth and cash
flows of the GlobalCenter group as if the GlobalCenter group was a separate
entity for all periods presented. The financial information included herein
may not necessarily reflect the combined results of operations, financial
position, changes in group net worth and cash flows of the GlobalCenter group
had it been a separate, stand-alone entity during the periods presented. The
combined financial statements of the GlobalCenter group should be read in
conjunction with the audited consolidated financial statements of Global
Crossing.
As a fully integrated business of the Parents, the GlobalCenter group does
not prepare separate financial statements in accordance with generally
accepted accounting principles ("GAAP") in the normal course of operations.
However, these combined financial statements were prepared in accordance with
GAAP for purposes of this filing. The combined financial statements reflect
certain assets, liabilities, revenues and expenses directly attributable to
the GlobalCenter group as well as allocations deemed reasonable by management
to present the financial position, results of operations and cash flows on a
stand-alone basis. The allocation methodologies have been described within the
notes to these combined financial statements. Management considers the
allocation methodologies adopted to be reasonable, however, the costs of these
services charged to the GlobalCenter group are not necessarily indicative of
the costs that would have been incurred if the GlobalCenter group had
performed these functions entirely as a standalone entity. The funds allocated
by Frontier and Global Crossing to Old GlobalCenter and New GlobalCenter,
respectively, are included with accumulated losses in group net worth. The
assets attributed to the GlobalCenter group are owned by Global Crossing Ltd.
and could be subject to the liabilities of Global Crossing group. The
liabilities attributed to GlobalCenter group continue to be liabilities of
F-8
GLOBALCENTER GROUP
(An integrated business of Global Crossing Ltd.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Global Crossing Ltd. The Global Crossing Ltd. Board of Directors will have the
ability to control transfers of funds or other assets between the Global
Crossing group and the GlobalCenter group. The financial statements of the
GlobalCenter group are presented to provide additional disclosure to investors
related to the underlying business that will be tracked by the GlobalCenter
group stock. Management intends to continue providing audited financial
statements prepared in accordance with generally accepted accounting
principles for the GlobalCenter group as long as the GlobalCenter group stock
is outstanding.
Allocation and related party transaction policies adopted by Global
Crossing's Board of Directors can be rescinded or amended at the discretion of
the Board of Directors, without any prior approval of stockholders, although
no such changes are currently contemplated. In addition, the assets attributed
to the GlobalCenter group could be subject to the liabilities of Global
Crossing and vice versa, even if these liabilities arise from lawsuits,
contracts or indebtedness that are attributed to the other party.
(2) Significant Accounting Policies
Interim Financial Data
The combined financial statements for the three months ended March 31, 1999
and 2000 and the related amounts in the Notes to Combined Financial Statements
are unaudited, but, in the opinion of management, reflect all normal and
recurring adjustments necessary for a fair presentation of the results of
those periods. Operating results for the three months ended March 31, 2000 are
not necessarily an indication of the results that may be expected for the year
ended December 31, 2000.
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. Significant estimates made in preparing the combined
financial statements include depreciation and amortization periods, the
allowance for doubtful accounts and income tax valuation allowances. Actual
amounts and results could differ from those estimates.
The GlobalCenter group's operations and ability to grow may be affected by
numerous factors, including changes in customer requirements, new laws,
technological advances, entry of new competitors and changes in the
willingness of Global Crossing and other potential lenders to finance
operations. The GlobalCenter group cannot predict which, if any, of these or
other factors might have a significant impact on the GlobalCenter group in the
future, nor can it predict what impact, if any, the occurrence of these or
other events might have on the GlobalCenter group's operations.
Property and Equipment, Net
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the property and
equipment, generally two to five years for network and computer equipment,
four years for furniture and fixtures and seven years for leasehold
improvements. Equipment acquired under capital leases is amortized using the
straight-line method over the shorter of the lease term or the estimated
useful life of the asset. Property and equipment under construction is
capitalized and depreciation commences when the asset is placed in service.
Goodwill and Intangibles, Net
Costs in excess of tangible assets acquired and liabilities assumed are
recorded as goodwill and intangibles. Goodwill and intangibles are amortized
on a straight-line basis over seven to ten years.
F-9
GLOBALCENTER GROUP
(An integrated business of Global Crossing Ltd.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Investment
As of March 31, 2000, the GlobalCenter Group's investment consisted of a
single investment in marketable equity securities classified as available for
sale. Accordingly, the investment is recorded at its fair value with any
unrealized holding gains or losses reported as other comprehensive income. Any
decline in value, which is other than a temporary decline, is charged
immediately to earnings in the period in which the impairment occurs. As of
March 31, 2000, the Company's investment had a fair value of $9.9 million, a
cost basis of $10 million and an unrealized loss before tax benefit of $0.1
million.
Impairment of Long-lived Assets
The GlobalCenter group periodically reviews the carrying amounts of
property and equipment, intangible assets and goodwill to determine whether
current events or changes in circumstances indicate that the carrying amount
may not be recoverable. The GlobalCenter group recognizes an impairment in
long-lived assets when the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets. If an impairment
adjustment is deemed necessary, such loss is measured by the amount that the
carrying value of such assets exceeds their fair value. Fair value is based on
the expected future discounted cash flows to be generated from the assets.
Considerable management judgment is necessary to estimate the fair value of
assets, accordingly, actual results could vary significantly from such
estimates.
Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by
the GlobalCenter group using available market information and valuation
methodologies. Considerable judgment is required in estimating fair values.
Accordingly, the estimates may not be indicative of the amounts the
GlobalCenter group could realize in a current market exchange. The carrying
amounts for accounts receivable, construction in progress, investment,
accounts payable, accrued liabilities and capital leases approximate their
fair value.
Equipment Held For Resale
The GlobalCenter group obtains computers, computer equipment, peripherals
and networking equipment from third parties and resells the equipment to its
customers. Equipment that has been purchased on behalf of customers but not
yet transferred to customers or installed is recorded at the lower of cost or
net realizable value as equipment held for resale.
Other Current Liabilities
Other current liabilities consist of the following:
Old GlobalCenter New GlobalCenter
---------------- ----------------
December 31, Unaudited
----------------------- March 31,
1998 1999 2000
---------------- ------ ---------
(Amounts in thousands)
Accrued professional fees................ $1,250 $2,000 $ 2,060
Accrued benefits, compensation and re-
lated taxes............................. 1,596 3,627 5,309
Other.................................... 2,253 2,887 5,415
------ ------ -------
Total other current liabilities........ $5,099 $8,514 $12,784
====== ====== =======
Income Taxes
Beginning with the acquisition by Frontier Corporation of GlobalCenter
Inc., GlobalCenter Inc. is included in the consolidated federal income tax
return of Global Crossing North America (formerly Frontier Corporation) for
federal and state purposes. On the effective date of the Offering, Global
Crossing North America, Inc. and
F-10
GLOBALCENTER GROUP
(An integrated business of Global Crossing Ltd.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
GlobalCenter Inc. will enter into a formal tax sharing agreement that provides
for a pro rata allocation of tax liabilities among members of the Global
Crossing North America, Inc. consolidated group. The income tax provision for
the GlobalCenter group has been calculated on a pro rata return basis taking
account of the increase or decrease in the tax liability of the Global
Crossing North America, Inc. consolidated group resulting from the inclusion
of GlobalCenter Inc. in the Global Crossing North America, Inc. consolidated
tax return.
Stock-Based Compensation
Financial Accounting Standard Board SFAS No. 123, "Accounting for Stock-
Based Compensation" ("SFAS No. 123") permits the use of either a fair value
based method or the method defined in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB No. 25"), to account for
stock-based compensation arrangements. Companies that elect to employ the
valuation method provided in APB No. 25 are required to disclose the pro forma
net income (loss) that wold have resulted from the use of the fair value based
method. New GlobalCenter has elected to determine the value of stock-based
compensation arrangements under the provisions of APB No. 25.
Segment Reporting
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131")
establishes standards for disclosure about operating segments, products,
services, geographic areas and major customers. When applying the management
approach defined in SFAS No. 131, the GlobalCenter group operates in a single
segment, namely the provision of complex Web hosting, Internet Protocol
network services, content distribution, systems applications and professional
services.
Concentration of Credit Risk
Financial instruments that potentially subject the GlobalCenter group to
concentrations of credit risk consist primarily of trade receivables. The
concentration of credit risk is limited due to the large number of customers
comprising the GlobalCenter group's customer base.
Revenue Recognition
Service revenues consist of fees from customers for complex Web hosting,
Internet Protocol network services, content distribution, systems applications
and professional services. Service revenues are recognized as the monthly
service is provided. Service revenues also include fees for equipment
installation. Revenues from equipment installation are recognized when
equipment installation is complete.
Equipment revenues consist of revenue derived from the resale of computers,
computer peripherals and networking equipment from third parties. Equipment
revenues are recognized when equipment is delivered to the customer or, if
installation is required, when installation of the equipment is complete.
Cost of Service Revenues
Cost of service revenues is comprised of telecommunications costs for the
network provided by the Parents and costs for connecting to other networks and
telecommunications providers. Other expenses in cost of service revenues
include salaries, benefits, rent and other expenses for operation of the data
centers, customer service and network engineering personnel.
Foreign Currency
As of December 31, 1999, the functional currency of the GlobalCenter
group's foreign operations is also the U.S. dollar. Foreign currency
transactions are recorded based on exchange rates at the time such
transactions
F-11
GLOBALCENTER GROUP
(An integrated business of Global Crossing Ltd.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
arise. Subsequent changes in exchange rates result in transaction gains and
losses which are reflected in the accompanying combined statements of
operations as unrealized (based on the applicable period end exchange rate) or
realized upon settlement of the transactions. Foreign currency gains (losses)
from our existing operations were not material in any period presented.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which is required to be adopted by Global Crossing Ltd. in the
quarter ending June 30, 2000. SAB 101 provides additional guidance on revenue
recognition as well as criteria for when revenue is generally realized and
earned. Management is currently assessing the impact of SAB 101 on the results
of operations and financial position of the GlobalCenter group and Global
Crossing group, respectively. Management does not expect the effects of SAB
101 to have a material effect on the accompanying financial statements of the
GlobalCenter group.
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 of all
fiscal years beginning after June 15, 2000. This statement standardizes the
accounting for derivatives and hedging activities and requires that all
derivatives be recognized in the statement of financial position as either
assets or liabilities at fair value. Changes in the fair value of derivatives
that do not meet the hedge accounting criteria are to be reported in earnings.
Management expects that the adoption of SFAS No. 133 will not have a material
impact on New GlobalCenter's financial position, results of operations or cash
flows.
Vendor Concentration
New GlobalCenter relies primarily on Global Crossing for network services
pursuant to a network services agreement. Global Crossing operates its own
global network. If the Global Crossing network experiences disruption and or
if our network services agreement with Global Crossing were terminated, New
GlobalCenter's business, operating results and financial condition could be
materially adversely affected.
(3) Related Party Transactions
Cash Management
Prior to the merger with Frontier, GlobalCenter Inc. maintained its own
cash management function. Old GlobalCenter utilized the central cash
management systems of Frontier. New GlobalCenter utilizes the central cash
management of Global Crossing. Under a centralized cash management system, no
cash balances are maintained at a subsidiary level. As a subsidiary of Global
Crossing, GlobalCenter Inc. maintains no cash balances and no cash has been
allocated to the GlobalCenter group in the accompanying combined financial
statements. Historically, Global Crossing Ltd. determined the amount of
funding provided to the GlobalCenter group based on actual cash used for
capital and operating expenses, net of GlobalCenter cash receipts. Such
funding has been recorded as funds allocated by Frontier Corporation/Global
Crossing Ltd. in the accompanying combined financial statements. Funds
required by the GlobalCenter group are subject to the ongoing approval and
budgeting processes of Global Crossing Ltd. All proceeds from the Offering
will be allocated to the GlobalCenter group. The GlobalCenter group will
continue to utilize the cash management systems of Global Crossing Ltd. to
manage the offering proceeds allocated to the GlobalCenter group.
Corporate Allocations
The direct operating expenses of the GlobalCenter Group, such as network
costs, are charged directly to the GlobalCenter group. The GlobalCenter group
is allocated a portion of corporate overhead costs. For the year ended
December 31, 1997, Old GlobalCenter operated on a standalone basis and no
corporate allocation costs were recorded in the statement of operations.
F-12
GLOBALCENTER GROUP
(An integrated business of Global Crossing Ltd.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The following table summarizes corporate charges and allocations included
in the accompanying combined financial statements.
Old GlobalCenter New GlobalCenter Old GlobalCenter New GlobalCenter
-------------------------- ---------------- ---------------- ----------------
Nine months Three months Unaudited
Year ended ended ended Three months ended March 31,
December 31, September 30, December 31, ---------------------------------
1998 1999 1999 1999 2000
------------ ------------- ---------------- ---------------- ----------------
(Amounts in thousands)
Statement of Operations
caption:
Cost of service
revenues............. $ -- $4,722 $1,978 $1,128 $2,322
General and
administrative....... 1,284 1,740 867 580 952
------ ------ ------ ------ ------
Total corporate
charges and
allocations.......... $1,284 $6,462 $2,845 $1,708 $3,274
====== ====== ====== ====== ======
Management believes that the allocation methodologies applied are
reasonable. However, it was not practical to determine whether the allocated
amounts represent amounts that would have been incurred on a standalone basis.
Management believes that the historical corporate charges and allocations are
comparable to the expected future allocations. Explanations of the composition
and the method of allocation for the above captions are described below.
Cost of Service Revenues
Allocated costs within this caption include the costs of the
telecommunications network provided by the Parents to the GlobalCenter group.
These costs were allocated to the GlobalCenter group based upon circuit usage,
rate and capacity information. Following the completion of the Offering, the
GlobalCenter group's IP transit capacity will be provided by the Global
Crossing group based on preferred market-based pricing, taking into account
volume, term and the exclusive nature of the arrangement and any guarantee of
service levels provided by the Global Crossing group. The GlobalCenter group
will pay for access based on actual usage.
General and Administrative
Allocated costs within this caption include the costs of information
systems services, tax return preparation and advisory services, payroll and
benefits administration, purchasing and certain other accounting and
administrative services. These costs were allocated based upon headcount,
square footage and revenue, depending on the type of cost to be allocated.
Policy Statement Between the Global Crossing Group and the GlobalCenter Group
The Board of Directors of Global Crossing Ltd. has fiduciary duties to all
shareholders of Global Crossing Ltd., and not separate fiduciary duties to the
holders of GlobalCenter group stock and Global Crossing group stock. The Board
of Directors of Global Crossing Ltd. has adopted a policy statement regarding
GlobalCenter group and Global Crossing group matters. Global Crossing Ltd.'s
Board of Directors may amend, modify or rescind the policies set forth in this
policy statement at any time at the sole discretion of the Global Crossing
Ltd.'s Board of Directors and without shareholder approval. The material
provisions of the policy statement are as follows:
General Policy
The policy statement provides that all material matters as to which the
holders of the Global Crossing group stock and the GlobalCenter group stock
may have potentially divergent interests will be resolved in a manner that the
Board of Directors of Global Crossing or its capital stock committee
determines to be in the best interests
F-13
GLOBALCENTER GROUP
(An integrated business of Global Crossing Ltd.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
of Global Crossing, after giving fair consideration to the potentially
divergent interests and all other relevant interests of the holders of the
separate classes of common stock of Global Crossing. The policy statement
provides that Global Crossing will seek to manage the GlobalCenter group and
the Global Crossing group in a manner designed to maximize the operations,
unique assets and values of both groups, and with complementary deployments of
personnel, capital and facilities.
Exclusive Provision of Services
The Global Crossing group will be the exclusive provider of certain
services, including Internet Protocol transit services and dedicated internet
access, to the GlobalCenter group. As such, the Global Crossing group will
have the exclusive right to provide these services and related products and
services to the GlobalCenter group. New GlobalCenter will be the exclusive
provider of certain services, including complex web hosting, data center
professional services and data center equipment hardware and software sales
and support, to the Global Crossing group. As such, New GlobalCenter will have
the exclusive right to provide these services and related products and
services to the Global Crossing group.
Network and Service Management
A committee of three senior executives from each of the Global Crossing
group and the GlobalCenter group will be formed to provide management and
direction designed to fully implement the policy statement with respect to the
various services to be provided by one group to the other. In particular, the
network and services management committee will review and agree on data center
bandwidth requirements by location and volume, review and agree on network
expansion plans as required to support the data centers and establish service
level targets for the data center connections and track performance against
those targets.
The terms of inter-group transactions
All material transactions which are determined by Global Crossing Ltd.'s
Board of Directors to be in the ordinary course of business between the Global
Crossing group and the GlobalCenter group, including those described above,
are intended to be on terms consistent with those that would be applicable to
arm's-length dealings with unrelated third parties, taking into account a
number of factors, including quality, availability, volume and pricing. In
particular, the pricing for the access to its network provided by Global
Crossing to the GlobalCenter group will be preferred market-based pricing,
taking into account volume, term, and the exclusive nature of the arrangement
and any guarantee of service levels provided by the Global Crossing group.
Financing Arrangements
Loans from the Global Crossing group or the GlobalCenter group to the other
will be made at the weighted average interest rate of the consolidated
indebtedness of Global Crossing and on such other terms and conditions as the
board of directors of Global Crossing or its capital stock committee
determines to be in the best interests of Global Crossing.
Shared Corporate Services
A portion of Global Crossing shared corporate services (such as human
resources, legal, accounting and auditing, tax, treasury, strategic planning,
investor relations and corporate technology) will be allocated to the
GlobalCenter group based upon specific identification of such services used by
the GlobalCenter group. Where determinations based on use alone are
impracticable, other methods and criteria will be used that management
believes are fair and provide a reasonable estimate of the cost attributable
to the GlobalCenter group.
F-14
GLOBALCENTER GROUP
(An integrated business of Global Crossing Ltd.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Tax Sharing Agreement
On the effective date of the Offering, Global Crossing North America, Inc.
and GlobalCenter Inc. will enter into a formal tax sharing agreement that
provides for a pro rata allocation of tax liabilities among members of the
Global Crossing North America, Inc. consolidated group.
Tanning Technology Corporation
The Chief Executive Officer of GlobalCenter Inc. and Global Crossing is a
member of the Board of Directors of Tanning Technology Corporation
("Tanning"). On February 1, 2000, GlobalCenter Inc. acquired approximately
229,000 shares of Tanning common stock for an aggregate purchase price of $10
million based on the fair market value of Tanning's stock on that date. This
investment represents less than 2% of the outstanding shares of Tanning common
stock as of March 31, 2000. In addition, the GlobalCenter group and Tanning
entered into a preferred marketing agreement to create, market, sell and
deliver combined service offerings to customers and also entered into an
additional arrangement where the GlobalCenter group has agreed to pay $10
million for consulting services to be provided by Tanning over a twelve-month
period commencing in February 2000.
(4) Property and Equipment, Net
Property and equipment consists of the following:
Old GlobalCenter New GlobalCenter
---------------- -------------------
December 31, Unaudited
------------------------- March 31,
1998 1999 2000
---------------- -------- ---------
(Amounts in thousands)
Network and computer equipment........ $13,410 $ 16,200 $ 25,822
Furniture and fixtures................ 307 2,143 8,499
Leasehold improvements................ 2,179 20,759 59,150
------- -------- --------
15,896 39,102 93,471
Accumulated depreciation and amortiza-
tion................................. (5,096) (1,913) (5,067)
------- -------- --------
10,800 37,189 88,404
Construction in progress.............. 19,572 79,126 73,837
------- -------- --------
Total property and equipment, net... $30,372 $116,315 $162,241
======= ======== ========
Included in property and equipment are assets acquired under capital lease
obligations with an original cost of approximately $1.5 million. Accumulated
amortization on the leased assets was approximately $0.8 million, $1.3 million
and $1.4 million at December 31, 1998 and 1999 and March 31, 2000,
respectively. Interest paid on capital lease obligations is not material to
the combined financial statements for all periods presented.
(5) Goodwill and Intangibles, Net
In connection with the acquisition of Frontier Corporation by Global
Crossing Ltd. approximately $1.5 billion of the purchase price was determined
to be the fair value of net assets, goodwill and intangibles related to New
GlobalCenter. Approximately $43.9 million was the fair value of the tangible
net assets acquired and liabilities assumed of New GlobalCenter at the
acquisition date. The remaining purchase price was assigned to goodwill and
intangibles and related deferred tax liability. The intangibles relate to the
fair value of New GlobalCenter's customer lists at the date of acquisition.
Pro forma combined statements of operations
F-15
GLOBALCENTER GROUP
(An integrated business of Global Crossing Ltd.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
information for the year ended December 31, 1999 and 1998 is not presented as
Global Crossing had no material operations that would be included within the
GlobalCenter group. The amounts and estimated lives of the goodwill and
intangibles are as follows:
March 31,
Estimated Life December 31, 1999 2000
-------------- ---------------------- ----------
(Amounts in thousands) Unaudited
Customer lists........... 10 years $ 78,000 $ 78,000
Goodwill................. 10 years 1,407,400 1,407,400
---------- ----------
1,485,400 1,485,400
Less accumulated amorti-
zation.................. (37,135) (74,270)
---------- ----------
Goodwill and intangibles,
net..................... $1,448,265 $1,411,130
========== ==========
In October 1997, GlobalCenter Inc. acquired Voyager Networks, Inc.
("Voyager") in a business combination accounted for as a purchase. After
allocating the purchase price to the tangible and specifically identifiable
intangible assets acquired and liabilities assumed, the excess purchase price
of approximately $9.1 million was allocated to goodwill. The Voyager goodwill
was amortized using the straight-line method over seven years until the
acquisition of Frontier by Global Crossing. As of December 31, 1998, the
accumulated amortization related to the Voyager goodwill was approximately
$1.6 million. Pro forma combined revenues and net loss before benefit for
income taxes for the year ended December 31, 1997, assuming Voyager was
acquired on January 1, 1997, was $10.5 million and $4.2 million, respectively.
(6) Income Taxes
The following table shows the principal reasons for the difference between
the effective income tax rate and the U.S federal statutory income tax rate:
New
Old GlobalCenter GlobalCenter
------------------------------- ------------
Year Ended Nine Months Three Months
December 31, Ended Ended
---------------- September 30, December 31,
1997 1998 1999 1999
------- ------- ------------- ------------
(Amounts in thousands)
Federal income tax at statutory
rate (35%)...................... $(1,300) $(5,508) $(9,286) $(16,470)
State and local income taxes, net
of federal effect............... (118) 125 (449) (180)
Amortization of goodwill and in-
tangibles....................... 114 453 341 12,315
Change in valuation allowance and
other estimates................. 361 -- (361) --
Other differences................ 2 19 13 2
------- ------- ------- --------
Benefit for income taxes......... $ (941) $(4,911) $(9,742) $ (4,333)
======= ======= ======= ========
F-16
GLOBALCENTER GROUP
(An integrated business of Global Crossing Ltd.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The benefit for income taxes consists of the following:
Old GlobalCenter New GlobalCenter
----------------------------- ----------------
Year Ended Nine Months Three Months
December 31, Ended Ended
-------------- September 30, December 31,
1997 1998 1999 1999
----- ------- ------------- ----------------
(Amounts in thousands)
Benefit for income taxes
Current:
Federal........................ $ -- $(3,307) $(10,126) $(1,979)
State and local................ -- -- (514) (160)
----- ------- -------- -------
Subtotal..................... -- (3,307) (10,640) (2,139)
Deferred:
Federal........................ (760) (1,797) 1,074 (2,077)
State and local................ (181) 193 (176) (117)
----- ------- -------- -------
Subtotal..................... (941) (1,604) 898 (2,194)
----- ------- -------- -------
Benefit for income taxes......... $(941) $(4,911) $ (9,742) $(4,333)
===== ======= ======== =======
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. The following is a summary
of the significant items giving rise to components of Old GlobalCenter and New
GlobalCenter's deferred tax assets and liabilities.
Old GlobalCenter New GlobalCenter
---------------- ----------------
December 31,
---------------------------------
1998 1999
---------------- ----------------
Assets (Liabilities)
---------------------------------
(Amounts in thousands)
Long-term deferred income tax assets (liabil-
ities)
Intangibles................................ $ -- $(28,530)
Depreciation............................... 221 214
Net operating losses....................... 515 1,412
------ --------
736 (26,904)
Less: Valuation allowance.................. (515) (1,412)
------ --------
Net long-term deferred income tax assets
(liabilities)........................... $ 221 $(28,316)
====== ========
Current deferred income tax assets
Accrued benefits and compensation.......... $ 688 $ 168
Reserves and allowances.................... 1,594 1,681
Other...................................... 111 1,077
------ --------
Total current deferred income tax
assets.................................. $2,393 $ 2,926
====== ========
New GlobalCenter established a valuation allowance of approximately $1.4
million as of December 31, 1999 against net operating losses. The valuation
allowance relates to the uncertainty of realizing the full benefit of the net
operating loss carryforwards. In evaluating the amount of valuation allowance
needed, the GlobalCenter group considers the prior operating results and
future plans and expectations. The utilization period of the net operating
loss carryforwards and the turnaround period of other temporary differences
are also considered. The GlobalCenter group's net operating losses begin to
expire in 2001. The realization of the current
F-17
GLOBALCENTER GROUP
(An integrated business of Global Crossing Ltd.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
net deferred income tax asset is dependent on the consolidated tax group, of
which GlobalCenter group is a component, generating taxable income. Although
realization is not assured, management believes it is more likely than not
that the deferred income tax asset at December 31, 1999 will be realized. The
amount of the deferred tax asset considered realizable, however, could be
reduced if estimates of taxable income in future years are reduced.
(7) Commitments and Contingencies
Lease Commitments
The GlobalCenter group has entered into various lease agreements for office
space and data center facilities. Rent expense was $1.2 million, $3.6 million,
$2.3 million, $3.7 million, $1.3 million, and $1.0 million for the three
months ended March 31, 1999, March 31, 2000 and December 31, 1999, nine months
ended September 30, 1999 and the years ended December 31, 1998 and 1997,
respectively. The GlobalCenter group leases certain equipment under capital
lease arrangements.
A summary of future minimum lease payments under capital and noncancelable
operating lease agreements as of December 31, 1999 are as follows.
Capital Operating
Leases Leases
---------- -------------
(Amounts in thousands)
Years Ending December 31,
2000........................................... $ 423 $ 12,509
2001........................................... 211 12,133
2002........................................... -- 12,026
2003........................................... -- 12,361
2004........................................... -- 12,843
Thereafter..................................... -- 84,354
--------- -------------
634 $ 146,226
=============
Less amount representing interest................ (66)
---------
Present value of lease payments.................. 568
Current portion of capital leases................ (374)
---------
Noncurrent portion of capital leases............. $ 194
=========
It is expected that in the normal course of business, leases that expire
generally will be renewed or replaced by leases on other properties; thus, it
is anticipated that future minimum lease commitments will not be less than the
amount shown for 2000.
Other
Management believes that there are no pending or threatened legal
proceedings that, if adversely determined, would have a material adverse
effect on the GlobalCenter group.
F-18
GLOBALCENTER GROUP
(An integrated business of Global Crossing Ltd.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(8) Stock Option Plans
Management Stock Plan
The board of directors and the stockholder of GlobalCenter Inc. adopted the
GlobalCenter Management Stock Plan ("Management Stock Plan") in January 2000.
The Management Stock Plan was approved by the Global Crossing Ltd. compensation
committee on March 2, 2000 and by the Global Crossing Ltd. Board of Directors,
subject to stockholder approval, on April 12, 2000. The Management Stock Plan
provides for grants of stock options to purchase shares of GlobalCenter Group
stock and grants restricted shares of GlobalCenter group stock. Options granted
under the Management Stock Plan may be incentive stock options or nonstatutory
stock options.
The total number of shares of GlobalCenter Inc. common stock reserved for
awards shall not exceed 10% of the outstanding common stock of GlobalCenter
Inc. The number of shares of such GlobalCenter group stock available for grant
under the Management Stock Plan is approximately 27.5 million. Also, the
outstanding options at the time of such issuance of the tracking stock shall be
exercisable for a percentage of shares of GlobalCenter group stock equal to the
percentage of outstanding shares of GlobalCenter, Inc. common stock at grant,
after taking into account the value of Global Crossing inter-group interests.
The Management Stock Plan imposes individual limits on the amount of awards
that a participant can receive in any fiscal year. The Management Stock Plan is
administered by the Global Crossing Ltd. compensation committee. The exercise
price per share for a Management Stock Plan option will typically be the fair
market value of GlobalCenter group stock on the date of grant. As of December
31, 1999, stock options to purchase 5.5% of GlobalCenter Inc. stock or
GlobalCenter group stock, subject to election by the employee, had been
approved for grant under the Management Stock Plan. The weighted average
exercise price of such options to purchase 5.5% of shares is $110 million. As
of December 31, 1999, no shares of restricted stock have been awarded under the
Management Stock Plan. The pro forma effect of GlobalCenter group stock options
issued on the accompanying combined financial statements is not material.
As of March 31, 2000, stock options to purchase approximately 9.6% of
GlobalCenter Inc. common stock or GlobalCenter group stock, subject to election
by the employees, had been approved for grant under the Management Stock Plan.
The aggregate exercise price of such options is approximately $191 million.
Upon approval of the Management Stock Plan by the shareholders, the
GlobalCenter group will record deferred stock compensation equal to the
difference between the exercise price and the fair value of shares at the date
of approval. The resulting deferred stock compensation will be amortized in
accordance with the terms of vesting of such options and consistent with the
accounting policy adopted by Global Crossing Ltd.
2000 Stock Plan
The board of directors of Global Crossing Ltd. approved the GlobalCenter
2000 Stock Plan ("2000 Stock Plan"), subject to stockholder approval, on April
12, 2000. The 2000 Stock Plan will become effective upon the consummation of
the Offering. The terms of the 2000 Stock Plan provide for grants of stock
options to purchase shares of GlobalCenter group stock, stock appreciation
rights and other stock-based awards. Options granted under the 2000 Stock Plan
may be incentive stock options or nonstatutory stock options. The total number
of shares of GlobalCenter group stock that are available for grant under the
2000 Stock Plan is approximately 13.7 million.
F-19
GLOBALCENTER GROUP
(An integrated business of Global Crossing Ltd.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The 2000 Stock Plan imposes individual limits on the amount of awards that a
participant can receive in any calendar year. The 2000 Stock Plan is
administered by the Global Crossing Ltd. board of directors. The exercise price
per share for a 2000 Stock Plan option will typically be the fair market value
of GlobalCenter group stock on the date of grant. All terms regarding each
option are fixed by the board of directors in an award agreement, except that
no option may have a term exceeding ten years.
Global Crossing Ltd. Stock Option Plans
Employees of GlobalCenter group participate in the stock option plans of
Global Crossing Ltd. Global Crossing Ltd. maintains a stock option plan under
which options to acquire shares may be granted to directors, officers,
employees and consultants. Global Crossing Ltd. accounts for this plan under
APB Opinion No. 25, under which compensation cost is recognized only to the
extent that the market price at the date of grant exceeds the exercise price.
Terms and conditions of Global Crossing Ltd's options, including exercise price
and the period in which options are exercisable, generally are at the
discretion of the compensation committee of Global Crossing Ltd., however, no
options are exercisable more than ten years after date of grant. Certain
employees of GlobalCenter group own stock options to acquire Global Crossing
Ltd. stock. As GlobalCenter group was not part of the capital structure of
Global Crossing Ltd. for the periods presented, the pro forma effect of Global
Crossing Ltd. stock options held by GlobalCenter group employees in the
accompanying combined financial statements is not presented. Upon effectiveness
of the Offering, GlobalCenter group employees typically will no longer
participate in Global Crossing group stock option plans.
(9) Subsequent Event (Unaudited)
GlobalCenter Asia Joint Venture
In May 2000, Global Center Inc. entered into a Master Joint Venture
Agreement with Asia Global Crossing Ltd. ("AGC"), a joint venture among Global
Crossing Ltd., Microsoft Corporation and Softbank Corp. The purpose of the
joint venture will be to exploit the GlobalCenter business in Asia.
F-20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Global Crossing Ltd.:
We have audited the accompanying consolidated balance sheets of Global
Crossing Ltd. (a Bermuda company) and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, shareholders'
equity, cash flows and comprehensive income for the years ended December 31,
1999 and 1998 and for the period March 19, 1997 (Date of Inception) to
December 31, 1997. These financial statements and schedule 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 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 Crossing
Ltd. and subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for the years ended December 31, 1999
and 1998 and for the period March 19, 1997 (Date of Inception) to December 31,
1997, 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.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Consolidated Financial Statements and Schedule is presented for purposes of
complying with the Securities and Exchange Commission's rules and regulations
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
/s/ Arthur Andersen
_________________________________
Arthur Andersen
Hamilton, Bermuda
February 23, 2000
F-21
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share information)
December 31, 1999 December 31, 1998
----------------- -----------------
ASSETS:
Current assets:
Cash and cash equivalents................. $ 1,633,499 $ 806,593
Restricted cash and cash equivalents...... 93,294 77,190
Accounts receivable, net.................. 966,973 71,195
Other assets and prepaid costs............ 252,767 21,637
----------- ----------
Total current assets...................... 2,946,533 976,615
Restricted cash and cash equivalents...... 138,118 367,600
Accounts receivable....................... 52,052 43,315
Capacity available for sale............... -- 574,849
Property and equipment, net............... 6,026,053 433,707
Goodwill and intangibles, net............. 9,557,422 --
Investment in and advances to/from
affiliates, net.......................... 323,960 177,334
Other assets.............................. 661,442 65,757
----------- ----------
Total assets.............................. $19,705,580 $2,639,177
=========== ==========
LIABILITIES:
Current liabilities:
Accrued construction costs................ $ 275,361 $ 129,081
Accounts payable.......................... 509,866 2,018
Accrued cost of access.................... 154,285 --
Accrued liabilities....................... 280,629 29,972
Accrued interest and preferred dividends.. 66,745 14,428
Deferred revenue.......................... 127,367 44,197
Income taxes payable...................... 140,034 15,604
Current portion of long term debt......... 5,496 6,393
Other current liabilities................. 292,810 14,572
----------- ----------
Total current liabilities................. 1,852,593 256,265
Long-term debt............................ 5,018,544 1,066,093
Deferred revenue.......................... 383,287 25,325
Deferred credits and other................ 796,606 34,174
----------- ----------
Total liabilities......................... 8,051,030 1,381,857
----------- ----------
MINORITY INTEREST.......................... 351,338 --
----------- ----------
MANDATORILY REDEEMABLE AND CUMULATIVE
CONVERTIBLE PREFERRED STOCK:
10 1/2% Mandatorily Redeemable Preferred
Stock, 5,000,000 shares issued and
outstanding as of December 31, 1999 and
1998, $100 liquidation preference per
share.................................... 485,947 483,000
----------- ----------
6 3/8% Cumulative Convertible Preferred
Stock, 10,000,000 and 0 shares issued and
outstanding as of December 31, 1999 and
1998, respectively, $100 liquidation
preference per share..................... 969,000 --
----------- ----------
7% Cumulative Convertible Preferred Stock,
2,600,000 and 0 shares issued and
outstanding as of December 31, 1999 and
1998, $250 liquidation preference per
share.................................... 629,750 --
----------- ----------
SHAREHOLDERS' EQUITY:
Common stock, 3,000,000,000 shares
authorized, par value $.01, 799,137,142
and 432,776,246 shares issued as of
December 31, 1999 and 1998,
respectively............................. 7,992 4,328
Treasury stock, 22,033,758 shares......... (209,415) (209,415)
Additional paid-in capital and other
shareholders' equity..................... 9,578,927 1,067,470
Accumulated deficit....................... (158,989) (88,063)
----------- ----------
9,218,515 774,320
----------- ----------
Total liabilities and shareholders'
equity................................... $19,705,580 $2,639,177
=========== ==========
See accompanying notes.
F-22
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share information)
Period from
March 19, 1997
Year Ended Year Ended (Date of Inception)
December 31, 1999 December 31, 1998 to December 31, 1997
----------------- ----------------- --------------------
REVENUE................. $ 1,664,824 $ 419,866 $ --
----------- ----------- -----------
EXPENSES:
Cost of sales.......... 850,483 178,492 --
Operations,
administration and
maintenance........... 134,266 18,140 --
Sales and marketing.... 152,115 31,748 1,366
Network development.... 33,304 14,204 78
General and
administrative........ 250,202 56,797 1,618
Depreciation and
amortization.......... 124,294 541 39
Goodwill and
intangibles
amortization.......... 127,621 -- --
Termination of advisory
services agreement.... -- 139,669 --
----------- ----------- -----------
1,672,285 439,591 3,101
----------- ----------- -----------
OPERATING LOSS.......... (7,461) (19,725) (3,101)
EQUITY IN INCOME (LOSS)
OF AFFILIATES.......... 15,708 (2,508) --
MINORITY INTEREST....... (1,338) -- --
OTHER INCOME (EXPENSE):
Interest income........ 67,407 29,986 2,941
Interest expense....... (139,077) (42,880) --
Other income, net...... 180,765 -- --
----------- ----------- -----------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME
TAXES, EXTRAORDINARY
ITEM AND CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE... 116,004 (35,127) (160)
Provision for income
taxes................. (126,539) (33,067) --
----------- ----------- -----------
LOSS BEFORE
EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE.............. (10,535) (68,194) (160)
Extraordinary loss on
retirement of debt.... (45,681) (19,709) --
----------- ----------- -----------
LOSS BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE... (56,216) (87,903) (160)
Cumulative effect of
change in accounting
principle, net of
income tax benefit of
$1,400................ (14,710) -- --
----------- ----------- -----------
NET LOSS................ (70,926) (87,903) (160)
Preferred stock
dividends............. (66,642) (12,681) (12,690)
Redemption of preferred
stock................. -- (34,140) --
----------- ----------- -----------
LOSS APPLICABLE TO
COMMON SHAREHOLDERS.... $ (137,568) $ (134,724) $ (12,850)
=========== =========== ===========
NET LOSS PER COMMON
SHARE:
Loss applicable to
common shareholders
before extraordinary
item and cumulative
effect of change in
accounting principle,
basic and diluted..... $ (0.15) $ (0.32) $ (0.04)
----------- ----------- -----------
Extraordinary item,
basic and diluted..... (0.09) (0.06) --
----------- ----------- -----------
Cumulative effect of
change in accounting
principle,
basic and diluted..... (0.03) -- --
----------- ----------- -----------
Net loss applicable to
common shareholders,
basic and diluted..... $ (0.27) $ (0.38) $ (0.04)
=========== =========== ===========
Shares used in
computing basic and
diluted loss per
share................. 502,400,851 358,735,340 325,773,934
=========== =========== ===========
See accompanying notes.
F-23
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share and per share information)
Other Shareholders'
Common Stock Treasury Stock Equity
------------------- -------------------- --------------------
Additional Total
Paid-in Accumulated Shareholders'
Shares Amount Shares Amount Capital(a) Other Deficit Equity
----------- ------ ---------- --------- ---------- -------- ----------- -------------
Issuance of common stock
for cash in March 1997
(Date of Inception),
net of $1,264 issuance
costs................. 325,773,934 $3,258 -- $ -- $ 83,713 $ -- $ -- $ 86,971
Preferred stock
dividends............. -- -- -- -- (12,690) -- -- (12,690)
Net loss for the
period................ (160) (160)
----------- ------ ---------- --------- ---------- -------- --------- ----------
Balance, December 31,
1997................... 325,773,934 3,258 -- -- 71,023 -- (160) 74,121
Issuance of common
stock for cash........ 1,575,000 16 -- -- 2,772 -- -- 2,788
Cash reimbursement to
certain shareholders.. -- -- -- -- (7,047) -- -- (7,047)
Unearned compensation.. -- -- -- -- 93,758 (93,758) -- --
Amortization of
compensation expense.. -- -- -- -- -- 37,111 -- 37,111
PCG Warrants........... 24,406,340 244 -- -- 275,054 -- -- 275,298
Issuance of common
stock in exchange for
termination of
advisory services
agreement............. 14,210,526 142 -- -- 134,858 -- -- 135,000
Preferred stock
dividends............. -- -- -- -- (12,681) -- -- (12,681)
Premium on redemption
of preferred stock.... -- -- -- -- (34,140) -- -- (34,140)
Common stock
transactions with
certain shareholders.. 21,733,758 217 22,033,758 (209,415) 209,198 -- -- --
Issuance of common
stock in connection
with initial public
offering, net of
$30,916 issuance
costs................. 44,420,000 444 -- -- 390,630 -- -- 391,074
Issuance of common
stock from exercise of
stock options......... 656,688 7 -- -- 692 -- -- 699
Net loss............... -- -- -- -- -- -- (87,903) (87,903)
----------- ------ ---------- --------- ---------- -------- --------- ----------
Balance, December 31,
1998................... 432,776,246 4,328 22,033,758 (209,415) 1,124,117 (56,647) (88,063) 774,320
Issuance of common
stock from exercise of
stock options......... 10,058,073 101 -- -- 111,263 -- -- 111,364
Income tax benefit from
exercise of stock
options............... -- -- -- -- 9,368 -- -- 9,368
Unearned compensation.. -- -- -- -- 55,066 (55,066) -- --
Amortization of
compensation expense.. -- -- -- -- -- 51,306 -- 51,306
Issuance of common
stock in exchange for
non-compete rights and
licenses.............. 2,239,632 22 -- -- 19,978 -- -- 20,000
Cancellation of shares
issued in connection
with terminated merger
with US West.......... (2,231,076) (22) -- -- (103,362) -- -- (103,384)
Preferred stock
dividends............. -- -- -- -- (66,642) -- -- (66,642)
Shares issued in
connection with
Frontier acquisition.. 355,263,135 3,553 -- -- 8,503,974 -- -- 8,507,527
Shares issued for
retirement of debt.... 1,031,132 10 -- -- 5,290 -- -- 5,300
Foreign currency
translation
adjustment............ -- -- -- -- -- (20,698) -- (20,698)
Unrealized gain on
securities............ -- -- -- -- -- 980 -- 980
Net loss............... -- -- -- -- -- -- (70,926) (70,926)
----------- ------ ---------- --------- ---------- -------- --------- ----------
Balance, December 31,
1999................... 799,137,142 $7,992 22,033,758 $(209,415) $9,659,052 $(80,125) $(158,989) $9,218,515
=========== ====== ========== ========= ========== ======== ========= ==========
- --------
(a) Additional Paid-in-Capital has been charged retroactively for the par
value of the shares issued as a result of the 2-for-1 stock split effected
in the form of a stock dividend effective on March 9, 1999.
See accompanying notes.
F-24
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Period From
March 19, 1997
Year Ended Year Ended (Date of Inception)
December 31, 1999 December 31, 1998 to December 31, 1997
----------------- ----------------- --------------------
CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES:
Net loss.............. $ (70,926) $ (87,903) $ (160)
Adjustments to
reconcile net loss to
net cash provided by
operating activities:
Extraordinary loss on
retirement of senior
notes................ 45,681 19,709 --
Cumulative effect of
change in accounting
principle............ 14,710 -- --
Non-cash portion of US
West termination
agreement............ (103,384) -- --
Stock related
expenses............. 51,306 39,374 --
Termination of
advisory services
agreement............ -- 135,000 --
Equity in (income)
loss of affiliates... (15,708) 2,508 --
Depreciation and
amortization......... 251,915 541 39
Provision for doubtful
accounts............. 37,157 4,233 --
Deferred income
taxes................ 35,274 9,654 --
Capacity available for
sale excluding cash
expenditures for
investing
activities........... -- 123,329 (21,200)
Other................. 7,726 -- --
Changes in operating
assets and
liabilities.......... 252,333 (37,718) 26,442
---------- --------- --------
Net cash provided by
operating
activities.......... 506,084 208,727 5,121
---------- --------- --------
CASH FLOWS USED IN
INVESTING ACTIVITIES:
Cash paid for
construction in
progress and capacity
available for sale... (1,577,044) (413,996) (428,743)
Acquisitions, net of
cash acquired........ (2,456,811) -- --
Proceeds from sale of
unconsolidated
subsidiary........... 379,086 -- --
Purchases of property
and equipment........ (193,871) -- --
Investments in and
advances to
affiliates........... (161,337) (16,701) --
---------- --------- --------
Net cash used in
investing
activities.......... (4,009,977) (430,697) (428,743)
---------- --------- --------
CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES:
Proceeds from issuance
of common stock,
net.................. 111,364 392,298 73,736
Proceeds from issuance
of preferred stock,
net.................. 1,598,750 483,000 92,470
Proceeds from issuance
of senior notes...... 2,000,000 796,495 150,000
Proceeds from long-
term debt............ 3,544,083 290,556 162,325
Repayment of long-term
debt................. (3,351,732) (176,890) --
Retirement of 1997
issued senior notes.. -- (159,750) --
Redemption of 1997
issued preferred
stock................ -- (134,372) --
Finance costs
incurred............. (141,027) (37,665) (28,181)
Cash reimbursement to
certain
shareholders......... -- (7,047) --
Minority interest
investment in
subsidiary........... 350,000 -- --
Preferred dividends... (52,429) -- --
Decrease (increase) in
restricted cash and
cash equivalents..... 271,790 (419,515) (25,275)
---------- --------- --------
Net cash provided by
financing
activities.......... 4,330,799 1,027,110 425,075
---------- --------- --------
NET INCREASE IN CASH
AND CASH EQUIVALENTS.. 826,906 805,140 1,453
CASH AND CASH
EQUIVALENTS, beginning
of period............. 806,593 1,453 --
---------- --------- --------
CASH AND CASH
EQUIVALENTS, end of
period................ $1,633,499 $ 806,593 $ 1,453
========== ========= ========
F-25
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(In thousands)
Period From
March 19, 1997
Year Ended Year Ended (Date of Inception)
December 31, 1999 December 31, 1998 to December 31, 1997
----------------- ----------------- --------------------
SUPPLEMENTAL INFORMATION
ON NON-CASH FINANCING
ACTIVITIES:
Common stock issued to
holders of preferred
stock................. $ -- $ -- $ 13,325
=========== ========= ========
Common stock issued
upon conversion of
debt.................. $ 5,300 $ -- $ --
=========== ========= ========
SUPPLEMENTAL INFORMATION
ON NON-CASH INVESTING
ACTIVITIES:
Costs incurred for
construction in
progress and capacity
available for sale.... $ 1,704,258 $ 607,865 $497,319
Increase in accrued
construction costs.... (119,405) (77,077) (52,414)
Increase in accrued
interest.............. -- (8,412) (1,641)
Amortization of
deferred finance
costs................. (7,809) (7,883) (2,223)
(Increase) decrease in
obligations under
capital leases........ -- 11,660 (12,298)
PCG Warrants........... -- (112,157) --
----------- --------- --------
Cash paid for
construction in
progress and capacity
available for sale.... $ 1,577,044 $ 413,996 $428,743
=========== ========= ========
Non-cash purchases of
property and
equipment............. $ 38,300 $ -- $ --
=========== ========= ========
Transfer of capacity
available for sale to
property and
equipment............. $ 574,849 $ -- $ --
=========== ========= ========
Common stock issued for
non-compete rights.... $ 20,000 $ -- $ --
=========== ========= ========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Changes in operating
assets and
liabilities:
Accounts receivable.... $ (296,467) $(118,743) $ --
Other current assets... (47,915) (46,662) (1,032)
Other Long-Term
Assets................ (98,029) -- --
Deferred revenue....... 331,475 64,197 5,325
Accounts payable and
accrued liabilities... 258,739 30,332 1,249
Income taxes payable... 73,650 15,604 --
Obligations under
inland services
agreement............. (21,994) 17,554 20,900
Deferred credits and
other................. 52,874 -- --
----------- --------- --------
$ 252,333 $ (37,718) $ 26,442
=========== ========= ========
Detail of acquisitions:
Assets acquired........ $11,120,676 $ -- $ --
Liabilities assumed.... (2,613,149) -- --
----------- --------- --------
Common stock issued.... $ 8,507,527 $ -- $ --
=========== ========= ========
Net cash paid for
acquisitions.......... $ 2,456,811 $ -- $ --
Cash acquired in
acquisitions.......... 123,855 -- --
----------- --------- --------
Cash paid for
acquisition, including
transaction fees...... $ 2,580,666 $ -- $ --
=========== ========= ========
Investments in
Affiliates:
Cost of investments in
affiliates............ $ (161,337) $(179,842) $ --
PCG Warrants........... -- 163,141 --
=========== ========= ========
$ (161,337) $ (16,701) $ --
=========== ========= ========
Cash paid for interest
and income taxes:
Interest paid and
capitalized........... $ 219,289 $ 39,424 $ 8,136
=========== ========= ========
Interest paid (net of
capitalized
interest)............. $ 141,230 $ 33,854 $ --
=========== ========= ========
Cash paid for taxes.... $ 14,589 $ 7,809 $ --
=========== ========= ========
See accompanying notes.
F-26
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Period from
March 19, 1997
Year Ended Year Ended (Date of Inception)
December 31, 1999 December 31, 1998 to December 31, 1997
----------------- ----------------- --------------------
Net loss................ $(70,926) $(87,903) $(160)
Foreign currency
translation
adjustment............ (20,698) -- --
Unrealized gain on
securities............ 980 -- --
-------- -------- -----
Comprehensive loss...... $(90,644) $(87,903) $(160)
======== ======== =====
See accompanying notes.
F-27
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND ORGANIZATION
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 and 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.
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.
Global Crossing Ltd. serves as a holding company for its subsidiaries'
operations, including Global Marine Systems (acquired July 2, 1999), Frontier
Corporation (acquired September 28, 1999), and Racal Telecom (acquired
November 24, 1999).
In February 1999, the Company's Board of Directors declared a 2-for-1 split
of the Company's common stock in the form of a stock dividend which was
effective on March 9, 1999. All share information presented in these
consolidated financial statements gives retroactive effect to the 100-for-1
stock split in January 1998, 1.5-for-1 stock dividend in August 1998 and 2-
for-1 stock dividend on March 9, 1999.
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 GCL and its
wholly-owned subsidiaries. All significant intercompany transactions have been
eliminated.
As described in Note 3, the Company completed the acquisitions of Global
Marine Systems, Frontier and Racal Telecom during 1999. These acquisitions
have had a major impact on the comparability of the Company's financial
statements. To assist the reader of these financial statements and related
notes, the Company has disclosed certain financial information in Note 3
including the pro forma impact of these acquisitions.
b) 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
F-28
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
c) Development Stage Company
The Company was in its development stage until May 1998 when the United
States to United Kingdom segment of the AC-1 system was placed into service,
and the Company began generating significant amounts of revenue.
d) Revenue Recognition
Services
Revenue derived from telecommunication, incumbent local exchange ("ILEC")
and maintenance services, including sales of capacity under operating type
leases, are recognized as services are provided, net of an estimate for
uncollectible accounts. Payments received from customers before the relevant
criteria for revenue recognition are satisfied are included in deferred
revenue in the accompanying consolidated balance sheets.
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. Certain
customers who have entered into CPAs for capacity have paid deposits toward
the purchase price which have been included as deferred revenue in the
accompanying consolidated balance sheets.
Prior to July 1, 1999, substantially all CPAs were treated as sales-type
leases as described in Statement of Financial Accounting Standards No. 13,
"Accounting for Leases" ("SFAS 13"). On July 1, 1999, the Company adopted
Financial Accounting Standards Board Interpretation No. 43, "Real Estate
Sales, an interpretation of FASB Statement No. 66" ("FIN 43"), which requires
prospective transactions to meet the criteria set forth in Statement of
Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate"
("SFAS 66") to qualify for sales-type lease accounting. Since sales of
terrestrial capacity did not meet the new criteria, the terrestrial portion of
CPAs executed subsequent to June 30, 1999 were recognized over the terms of
the contracts, as services.
Percentage-of-Completion
Revenue and estimated profits under long-term contracts for undersea
telecommunication installation by Global Marine Systems are recognized under
the percentage-of-completion method of accounting.
F-29
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
e) Cost of Sales
Services
Costs of the network 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
Prior to October 1, 1999, the effective date of the Frontier merger, cost
of sales for subsea circuits was calculated based on the ratio of capacity
revenue recognized in the period to total expected capacity revenue over the
life of the network system, multiplied by the total remaining costs of
constructing the network system. This calculation of cost of sales matches
costs with the value of each sale relative to total expected revenue. Until
the entire system was completed, for purposes of calculating cost of sales,
the total system costs incurred included an estimate of remaining costs to be
incurred to complete the entire system plus the cost of system upgrades that
management had the intent and ability to complete, provided the need for such
upgrades was supported by a third party consultant's independent revenue
forecast.
Beginning October 1, 1999, the Company initiated service contract
accounting and therefore began depreciating all of its systems; however,
certain contracts still qualified for sales-type lease accounting. For these
transactions, the Company's policy provided for recording cost of sales in the
period in which the related revenue was recognized, in addition to the
depreciation charge described below (see Property and Equipment and
Construction in Progress). Under service contract accounting, the amount
charged to cost of sales relating to subsea capacity was calculated by
determining the estimated net book value of the specific subsea capacity at
the time of the sale. The estimated book value includes expected costs of
capacity the Company has the intent and ability to add through upgrades of
that system, provided the need for such upgrades is supported by a third-party
consultant's independent revenue forecast.
f) Commissions and Advisory Services Fees
The Company's policy is to record sales commissions and advisory fee
expenses and related payables upon the recognition of revenue so as to
appropriately match these costs with the related revenue. Under the Advisory
Services Agreement ("ASA"), which was terminated by December 31, 1998, the
Company paid PCG Telecom Services LLC ("PCG Telecom") and its affiliates 2% of
revenue for advisory services performed. Under the Sales Agency Agreement, the
Company paid Tyco Submarine Systems Ltd. ("TSSL") a commission based on a
percentage of revenue from the sale of capacity on certain of the Company's
systems.
g) Cash and Cash Equivalents, Restricted Cash and Cash Equivalents (Current
and Long Term)
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. Cash and cash equivalents and restricted cash
and cash equivalents are stated at cost which approximates fair value.
h) Property and Equipment and Construction in Progress
Property and equipment, which includes capitalized leases, are 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 applicable
system becomes operational.
F-30
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Construction in progress includes direct expenditures for construction of
network systems 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.
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.
In connection with the construction of the Global Crossing network, the
Company has entered into various agreements to sell or exchange dark fiber,
ducts, rights of ways, and certain capacity. These non-monetary exchanges are
recorded at the cost of the asset transferred or, if applicable, the fair
value of the asset received.
Interest incurred, which includes the amortization of deferred finance fees
and issuance discount ("interest cost"), are capitalized to construction in
progress. Total interest cost incurred and interest capitalized to
construction in progress during the periods presented were:
For the period
March 31, 1997
Year Ended Year Ended (Date of Inception)
December 31, 1999 December 31, 1998 to December 31, 1997
----------------- ----------------- --------------------
(In thousands)
Interest cost incurred.. $217,136 $92,813 $9,777
======== ======= ======
Interest cost
capitalized to
construction in
progress............... $ 78,059 $49,933 $9,777
======== ======= ======
Depreciation is provided on a straight-line basis over the estimated useful
lives of the assets, 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:
Buildings...................................................... 10-40 years
Leasehold improvements......................................... 2-25 years
Furniture, fixtures and equipment.............................. 2-30 years
Transmission equipment......................................... 3-25 years
Beginning October 1, 1999, the Company commenced service contract
accounting. Carrying amounts related to completed subsea systems were
reclassified from capacity available for sale to depreciable assets, and are
being depreciated over their remaining economic useful lives.
When property or equipment is retired or otherwise disposed of, the cost
and accumulated depreciation are relieved from the accounts, and resulting
gains or losses are reflected in the determination of current net income.
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) Goodwill and Intangibles
Costs in excess of net assets of acquired businesses are amortized on the
straight-line method over 3 to 25 years. In cases where undiscounted expected
future cash flows are less than the carrying value, the impairment
F-31
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
loss would be included in the determination of current net income. Subsequent
to acquisitions, the Company continually evaluates whether later events and
circumstances have occurred which indicate that the remaining estimated useful
life of intangible assets may warrant revision or that the remaining balance
of such assets may not be recoverable. When factors indicate that intangible
assets should be evaluated for possible impairment, the Company uses an
estimate of the undiscounted operating income over the remaining life of the
intangible assets in measuring whether the intangible assets are recoverable.
j) Deferred Finance Costs
Costs incurred to obtain financing through the issuance of senior notes and
long-term debt have been reflected as an asset included in other assets in the
accompanying consolidated balance sheets. Costs incurred to obtain financing
through the issuance of preferred stock have been reflected as a reduction in
the carrying value of the issued preferred stock. The financing costs relating
to the debt are amortized over the lesser of the term of the related debt
agreements or the expected payment date of the debt obligation. In 1998,
certain preferred stock was redeemed at which time the remaining balance of
unamortized discount and offering costs was charged against additional paid-in
capital. In 1999 and 1998, certain long-term debt was extinguished, at which
time the remaining balance of unamortized discount and offering costs was
written off and included in extraordinary loss on retirement of debt.
During the construction period, the amortized portion of deferred financing
costs relating to the senior notes and 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". The amortized
portion of the deferred financing costs relating to the preferred stock is
included as a component of preferred stock dividends.
k) Investments
Investments in which the Company does not have significant influence or in
which the Company holds an ownership interest of less than 20% are recorded
using the cost method of accounting. The equity method of accounting is
applied for investments in affiliates, if the Company owns an aggregate of 20%
to 50% of the affiliate and if the Company exercises significant influence
over the affiliate. The equity method is also applied for entities in which
the Company's ownership is in excess of 50% but over which the Company is
unable to exercise effective control, due to minority shareholders
participating in significant decisions in the ordinary course of business. If
the Company holds more than 50% of the ownership and is able to exercise
effective control, the owned entity's financial statements and the appropriate
deductions for minority interest are included in the accompanying consolidated
financial statements.
l) Financial Instruments
The Company uses derivative financial instruments to reduce its exposure to
adverse fluctuations in interest rates and foreign currency exchange 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 sheet at their carrying values, which approximates their
fair values. Fair values are based on market quotes, current interest rates or
management estimates, as appropriate.
The Company has entered into forward currency contracts, hedging the
exchange risk on committed foreign currency transactions. Gains and losses on
these contracts are recognized at the time the underlying transaction is
completed.
As discussed in Note 15, the Company has entered into an interest rate swap
agreement to hedge its variable interest-rate exposure on debt. Hedge
accounting was applied in respect of these instruments; accordingly, the
F-32
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
net cash amounts to be paid or received on the agreement are accrued and
recognized as an adjustment to interest expense on the related debt.
m) Income Taxes
The Company recognizes current and deferred income tax assets and
liabilities based upon all events that have been recognized in the
consolidated financial statements as measured by the enacted tax laws.
n) Effect of Foreign Currencies
For those subsidiaries using the U.S. Dollar as their functional currency,
transaction loss is recorded in the accompanying consolidated statements of
operations. The Company's foreign transaction loss was $26.9 million for the
year ended December 31, 1999. The effect of foreign currency transactions in
all periods prior to the year ended December 31, 1999 were immaterial.
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 are translated at
average exchange rates during the period. Resulting translation adjustments
are recorded directly to a separate component of shareholders' equity. For the
year ended December 31, 1999, the Company incurred a foreign currency
translation loss of $20.7 million. For all periods prior to December 31, 1999,
the translation adjustments were immaterial.
o) Stock Option Plan
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and, accordingly, recognizes compensation expense for stock option
grants to the extent that the estimated fair value of the stock exceeds the
exercise price of the option at the measurement date. The compensation expense
is charged against operations ratably over the vesting period of the options.
p) 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 and for the year ended December 31, 1999, five
customers represented 14% and 29% of the Company's receivables and revenue,
respectively.
q) Change in Accounting Policy
The Company adopted Statement of Position 98-5, "Reporting on the Costs of
Start-Up Activities" ("SOP 98-5") in the first quarter of 1999. Accordingly, a
one-time charge of $15 million (net of tax benefit), representing start-up
costs incurred and capitalized during previous periods, was charged against
net income.
r) 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.
F-33
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
s) Reclassifications
Certain prior year amounts have been reclassified in the consolidated
financial statements to conform to current year presentation.
3. MERGERS AND ACQUISITIONS
The following mergers and acquisitions occurred during 1999 and have been
accounted for in the accompanying consolidated financial statements under the
purchase method of accounting for business combinations. The purchase price
was allocated based on the estimated fair value of acquired assets and
liabilities at the date of acquisition.
Global Marine Systems Acquisition
On July 2, 1999, the Company acquired the Global Marine business of Cable &
Wireless Plc for approximately $908 million, consisting of a combination of
cash and assumed indebtedness. This resulted in an excess of purchase price
over net assets acquired of $693 million, which was allocated to goodwill and
other intangible assets and are being amortized on the straight-line method
over 3-25 years. Global Marine Systems provides services, including
maintenance under a number of long-term contracts, to cables built by carriers
and is the world's largest undersea cable installation and maintenance
company. The Company initially financed the acquisition with committed bank
financing in the amount of $600 million and the remainder with cash on hand.
Frontier Corporation Merger
On September 28, 1999, the Company completed its merger with Frontier
Corporation, resulting in Frontier becoming a wholly owned subsidiary of the
Company.
Frontier shareholders received 2.05 shares of the Company's common stock for
each outstanding share of common stock of Frontier Corporation, for a total of
355 million shares of Global Crossing common stock, including outstanding and
unexercised stock options. The purchase price of $10.3 billion reflects a
Global Crossing stock price of $22 15/16 per share, the average closing price
of Global Crossing common stock from September 1, 1999 through September 3,
1999, and includes long term debt and Frontier stock options assumed by Global
Crossing. For accounting purposes, the merger with the Company is deemed to
have occurred as of the close of business on September 30, 1999. The excess of
purchase price over net assets acquired of $7.7 billion was allocated to
goodwill and other intangible assets; goodwill and intangible assets are being
amortized on the straight-line method over 6-25 years.
Racal Telecom Acquisition
On November 24, 1999, the Company acquired Racal Telecom for approximately
$1.6 billion in cash. The Company entered into a (Pounds)675 million
(approximately $1,091 million as of December 31, 1999) credit facility to
finance the acquisition. The excess of purchase price over net assets acquired
of $1.3 billion was allocated to goodwill and is being amortized on the
straight-line method over 6-25 years. Racal Telecom owns one of the most
extensive fiber telecommunications networks in the United Kingdom. For
accounting purposes, the acquisition is deemed to have occurred as of the
close of business on November 30, 1999.
Asia Global Crossing
On November 24, 1999, the Asia Global Crossing joint venture was
established. In exchange for a majority interest, the Company contributed to
the joint venture its development rights in East Asia Crossing ("EAC") and its
58% interest in Pacific Crossing ("PC-1"). Softbank Corp. and Microsoft
Corporation each contributed
F-34
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$175 million in cash to Asia Global Crossing. In addition, Softbank and
Microsoft committed to make a total of at least $200 million in capacity
purchases on our network over a three-year period, expected to be utilized
primarily on PC-1 and EAC. Softbank and Microsoft have also agreed to use Asia
Global Crossing's network in the region, subject to specified conditions.
Minority interest of $351 million was recorded in 1999 in connection with this
joint venture.
Hutchison Global Crossing
On November 15, 1999, the Company entered into an agreement with Hutchison
Whampoa Limited ("Hutchison") to form a joint venture called Hutchison Global
Crossing, which began operations on January 12, 2000. The joint venture is
owned in equal parts by the Company and Hutchison. In exchange for its 50
percent interest, the Company will contribute certain assets and services to
the joint venture and, in January 2000, issued to Hutchison $400 million
aggregate liquidation preference of its 6 3/8% cumulative convertible
preferred stock, series B, convertible into its common stock. Hutchison Global
Crossing will be accounted for as an unconsolidated joint venture under the
equity method of accounting.
The initial purchase price allocations for the 1999 business combinations
are based on current estimates. 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.
The following unaudited pro forma condensed combined financial information
of Global Crossing, Global Marine Systems, Frontier, Racal Telecom and the
Hutchison Global Crossing joint venture demonstrates the results of operations
had the merger and acquisitions related transactions been completed at the
beginning of the periods presented.
December 31,
--------------------------
1999 1998
------------ ------------
(unaudited)
(In thousands, except
share and per share data)
Revenue........................................ $ 4,139,897 $ 3,643,521
============ ============
Net loss before extraordinary items and
cumulative effect of change in accounting
principles.................................... $ (462,544) $ (474,882)
============ ============
Net loss....................................... $ (522,935) $ (496,346)
============ ============
Loss applicable to common shareholders before
extraordinary items and cumulative effect of
change in accounting principles............... $ (554,715) $ (513,063)
============ ============
Loss applicable to common shareholders......... $ (614,986) $ (568,487)
============ ============
Loss per common share:
Loss applicable to common shareholders
Basic and diluted............................ $ (0.80) $ (0.80)
============ ============
Loss applicable to common shareholders before
extraordinary items and cumulative effect of
change in accounting principles
Basic and diluted............................ $ (0.72) $ (0.72)
============ ============
Shares used in computing loss per share
Basic and diluted............................ 767,355,151 708,518,640
============ ============
F-35
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. RESTRICTED CASH AND CASH EQUIVALENTS
Current and long term restricted cash and cash equivalents include the
following:
December 31,
-----------------
1999 1998
-------- --------
(In thousands)
Funds restricted for PC-1 construction................... $138,118 $231,790
Funds restricted under the AC-1 Credit Facility.......... -- 89,000
Funds restricted for MAC construction.................... -- 65,000
Funds restricted for dividends payments to parent
company................................................. 76,202 --
Funding for future interest on senior notes.............. -- 38,000
Other.................................................... 17,092 21,000
-------- --------
$231,412 $444,790
======== ========
Under the Open Market Plan, dividend payments to the parent company are
temporarily prohibited until Frontier Telephone of Rochester, Inc. ("FTR")
receives clearance from the New York State Public Service Commission that
service requirements are being met. Cash restricted for dividend payments by
FTR, as of December 31, 1999, was approximately $76.2 million.
5. ACCOUNTS RECEIVABLE
Current and long term accounts receivable are comprised of:
December 31,
--------------------
1999 1998
---------- --------
(In thousands)
Accounts receivable.................................... $1,114,135 $118,743
Allowance for doubtful accounts........................ (95,110) (4,233)
---------- --------
Accounts receivable, net............................... $1,019,025 $114,510
========== ========
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
--------------------
1999 1998
---------- --------
(In thousands)
Land................................................... $ 14,886 $ --
Buildings.............................................. 184,827 --
Leasehold improvements................................. 29,096 774
Furniture, fixtures and equipment...................... 771,585 5,306
Transmission equipment................................. 2,544,903 --
---------- --------
3,545,297 6,080
Accumulated depreciation............................... (124,874) (580)
---------- --------
3,420,423 5,500
Construction in progress............................... 2,605,630 428,207
---------- --------
Total property and equipment, net...................... $6,026,053 $433,707
========== ========
F-36
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation and amortization expense for the year ended December 31, 1999
was approximately $124 million. Depreciation expense for December 31, 1998 and
for the period ended March 19, 1997 (date of inception) to December 31, 1997
was insignificant.
7. GOODWILL AND INTANGIBLES
The Company acquired three companies in 1999 as described in Note 3. All
companies acquired have been accounted for as purchases with the excess of the
purchase price over the estimated fair value of the net assets acquired
recorded as goodwill.
Goodwill and intangibles are as follows:
December 31,
----------------
1999 1998
---------- ----
(In thousands)
Goodwill and intangibles................................... $9,685,043 $--
Accumulated amortization................................... (127,621) --
---------- ----
Goodwill and intangibles, net.............................. $9,557,422 $--
========== ====
8. INVESTMENT IN AND ADVANCES TO/FROM AFFILIATES
Investment in Pacific Crossing Ltd. ("PCL")
In April 1998, the Company entered into a joint venture to construct the
PC-1 cable system which is owned and operated by PCL. The Company has an
economic interest in PCL represented by a 50% direct voting interest and,
through one of the joint venture partners, owns a further 8% economic non-
voting interest.
Investment in Global Access Ltd.
In December 1998, the Company entered into a joint venture, Global Access
Ltd., to construct and operate GAL, a terrestrial cable system connecting
Tokyo, Osaka and Nagoya with PC-1. The Company has a 49% interest in Global
Access Ltd.
The Company's investments in PCL and GAL are accounted for as interest in
affiliates under the equity method because the Company is not able to exercise
effective control over their operations.
The Company's investment in affiliates consists of the following:
December 31,
-----------------
1999 1998
-------- --------
(In thousands)
Investment in Pacific Crossing Ltd........................ $266,068 $160,639
Investment in Global Access Ltd........................... 22,693 16,695
Other investments and advances to/from affiliates......... 35,199 --
-------- --------
Investment in and advances to/from affiliates............. $323,960 $177,334
======== ========
F-37
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes" ("SFAS 109"). The provision for income taxes is
comprised of the following:
December 31,
-----------------
1999 1998
-------- -------
(In thousands)
Current................................................... $144,906 $23,413
Deferred.................................................. (18,367) 9,654
-------- -------
Total income tax expense.................................. $126,539 $33,067
======== =======
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.
Bermuda does not impose a statutory income tax and consequently the
provision for income taxes recorded relates to income earned by certain
subsidiaries of the Company which are located in jurisdictions which impose
income taxes.
The following is a summary of the significant items giving rise to
components of the Company's deferred tax assets and liabilities:
December 31,
------------------------------------------
1999 1998
--------------------- --------------------
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
(In thousands) (In thousands)
Bad debt reserve................ $ 11,199 $ -- $ -- $ --
Research and development costs.. -- (41,018) -- --
Depreciation.................... -- (380,893) -- (4,042)
Basis adjustment to purchased
companies...................... -- (9,282) -- --
Employee benefits obligation.... -- (32,918) -- --
Net operating loss (NOL)
carryforwards.................. 58,865 -- -- --
Deferred and stock related
compensation................... 11,066 -- 504 --
Other........................... 35,156 (15,235) -- (6,116)
-------- --------- -------- --------
116,286 (479,346) 504 (10,158)
Valuation allowance............. (54,780) -- -- --
-------- --------- -------- --------
$ 61,506 $(479,346) $ 504 $(10,158)
======== ========= ======== ========
The Company established a valuation allowance of $54,780 as of December 31,
1999. The valuation allowance is related to deferred tax assets due to the
uncertainty of realizing the full benefit of the NOL carryforwards. In
evaluating the amount of valuation allowance needed, the Company considers the
acquired companies' prior operating results and future plans and expectations.
The utilization period of the NOL carryforwards and the turnaround period of
other temporary differences are also considered. The Company's NOLs begin to
expire in 2004.
F-38
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. LONG-TERM DEBT
Outstanding debt consists of the following:
December 31,
----------------------
1999 1998
---------- ----------
(In thousands)
9 1/2% Senior Notes due 2009........................ $1,100,000 $ --
9 1/8% Senior Notes due 2006........................ 900,000 --
9 5/8% Senior Notes due 2008........................ 800,000 800,000
Senior Secured Revolving Credit Facility............ 648,597 --
Racal Telecom Term Loan A........................... 646,130 --
Medium-Term Notes, 7.51%--9.3%, due 2000 to 2004.... 219,000 --
7 1/4% Senior Notes due 2004........................ 300,000 --
6% Dealer Remarketable Securities (DRS) due 2013.... 200,000 --
AC-1 Credit Facility................................ -- 266,799
Other............................................... 242,028 9,192
---------- ----------
Total debt.......................................... 5,055,755 1,075,991
Less: discount on long-term debt, net............... (31,715) (3,505)
Less: current portion of long-term debt............. (5,496) (6,393)
---------- ----------
Long-term debt...................................... $5,018,544 $1,066,093
========== ==========
Maturities of long-term debt are as follows (in thousands):
Year Ending December 31,
2000.......................................................... $ 5,496
2001.......................................................... 121,411
2002.......................................................... 43,618
2003.......................................................... 38,336
2004.......................................................... 1,167,256
Thereafter.................................................... 3,679,638
----------
Total......................................................... $5,055,755
==========
Senior Notes
On November 12, 1999, Global Crossing Holdings Ltd. ("GCH"), a wholly-owned
subsidiary of GCL, issued two series of senior unsecured notes ("New Senior
Notes"). The 9 1/8% senior notes are due November 15, 2006 with a face value
of $900 million and the 9 1/2% senior notes are due November 15, 2009 with a
face value of $1.1 billion. The New Senior Notes are guaranteed by GCL.
Interest will be paid on the notes on May 15 and November 15 of each year,
beginning on May 15, 2000.
On May 18, 1998, GCH also issued 9 5/8% senior notes due May 15, 2008, with
a face value of $800 million ("9 5/8% Senior Notes"). The 9 5/8% Senior Notes
are guaranteed by GCL. Interest will be paid on the notes on May 15 and
November 15 of each year.
The 12% senior notes issued by Global Telesystems Holdings Ltd. ("GTH"),
now known as Atlantic Crossing Holdings Ltd., with a face value of $150
million, due March 31, 2004 ("Old Senior Notes"), were repurchased in May 1998
with the proceeds from the issuance of the 9 5/8% Senior Notes. The Company
F-39
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
recognized an extraordinary loss of approximately $20 million on repurchase
comprised of a premium of approximately $10 million and a write-off of
approximately $10 million of unamortized deferred financing costs during 1998.
Senior Secured Revolving Credit Facility
On July 2, 1999, the Company, through GCH, entered into a $3 billion senior
secured corporate credit facility ("Corporate Credit Facility") with several
lenders. The proceeds from the Corporate Credit Facility were used to repay
existing indebtedness and fund capital expenditures. The Corporate Credit
Facility consisted of two term loans and a revolving credit facility, which
matures on July 2, 2004. The term loans were paid in full during fiscal year
1999. Unused credit under the revolving credit facility is approximately $350
million as of December 31, 1999. Interest is payable at LIBOR plus 2.25
percent (8.44 percent at December 31, 1999).
During 1999, the Company recognized an extraordinary loss resulting from
the payoff of existing debt in connection with the issuance of the Corporate
Credit Facility, comprised of a write-off of $15 million of unamortized
deferred financing costs.
On November 12, 1999, the proceeds from the issuance of the New Senior
Notes were used to pay down the fixed term portion of the Corporate Credit
Facility, resulting in a write-off of $31 million of unamortized deferred
financing costs.
AC-1 Credit Facility
During 1997, the Company's wholly-owned subsidiary, Atlantic Crossing Ltd.
("ACL"), entered into a $482 million aggregate senior secured non-recourse
loan facility (the "AC-1 Credit Facility") with a group of banks led by CIBC
and Deutsche Bank AG, for the construction and financing costs of AC-1. The
AC-1 Credit Facility was paid in full in July 1999.
MAC Credit Facility
During November 1998, the Company's wholly-owned subsidiary, Mid-Atlantic
Crossing Ltd. ("MACL"), entered into a $260 million aggregate senior secured
non-recourse loan facility (the "MAC Credit Facility"). As of December 31,
1998, the outstanding balance was $9 million. The MAC Credit Facility was paid
in full in July 1999.
6% Dealer Remarketable Securities
The 6% DRS were issued by Frontier Corporation and were outstanding at the
date of acquisition. The 6% DRS are due on October 15, 2013. Interest will be
paid on April 15 and October 15 each year. These notes may be put back to the
Company in October 2003, depending on the interest rate environment at that
time.
7 1/4% Senior Notes
The 7 1/4% Senior Notes were issued by Frontier Corporation and were
outstanding at the date of acquisition. The 7 1/4% Senior Notes are due May
14, 2004. Interest will be paid on May 15 and November 15 each year.
In December 1997, the Company entered into an interest rate hedge agreement
that effectively converts $200 million of the Company's 7.25% fixed-rate notes
due May 2004 into a floating rate based on the US dollar London Interbank
Offered Rate ("LIBOR") index rate plus 1.26%. The agreement expires in May
2004. Interest expense and the related cash flows under the agreement are
accounted for on an accrual basis. The Company periodically enters into such
agreements to balance its floating rate and fixed rate obligations to insulate
against interest rate risk and minimize interest expense.
F-40
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Racal Telecom Term Loan A
On November 24, 1999, the Company entered into a GBP 675 million
(approximately $1,091 million as of December 31, 1999) credit facility to
finance the acquisition of Racal Telecom. The facility consists of two term
loans due November 24, 2007. Interest is payable at LIBOR plus 2.5 percent
(8.44 percent at December 31, 1999).
Medium Term Notes
The Medium Term Notes were issued by Frontier Corporation and were
outstanding at the date of acquisition. The Company intends to refinance the
notes due in fiscal 2000 with proceeds from the other available debt
facilities.
Certain of the debt facilities mentioned above contain various financial
and non financial restrictive covenants and limitations, including, among
other things, the satisfaction of tests of "consolidated cash flow", as
defined. Additionally, certain ILEC assets are pledged as security.
11. OBLIGATIONS UNDER INLAND SERVICES AGREEMENT, CAPITAL LEASES AND OPERATING
LEASES
The Company has capitalized the minimum lease payment of property and
equipment under leases that qualify as capital leases.
At December 31, 1999, future minimum payments under these capital leases
are as follows (in thousands) and are included in Deferred credits and other
in the accompanying Consolidated Balance Sheet:
Year Ending December 31,
2000.............................................................. $ 53,235
2001.............................................................. 43,279
2002.............................................................. 38,390
2003.............................................................. 36,486
2004.............................................................. 53,195
Thereafter........................................................ 436,580
---------
Total minimum lease payments...................................... 661,165
Less: Amount representing maintenance payments.................... (133,240)
Less: Amount representing interest................................ (272,358)
---------
Present value of minimum lease payments........................... $ 255,567
=========
The Company has commitments under various non-cancelable operating leases.
Estimated future minimum lease payments on operating leases are approximately
as follows (in thousands):
Year Ending December 31,
2000.............................................................. $ 131,569
2001.............................................................. 79,932
2002.............................................................. 77,646
2003.............................................................. 70,678
2004.............................................................. 65,908
Thereafter........................................................ 347,924
---------
Total............................................................. $ 773,657
=========
F-41
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rental expense for the years December 31, 1999 and 1998 and period from
March 19, 1997 (Date of Inception) to December 31, 1997 is $74,249, $754 and
none, respectively (in thousands).
12. COMMITMENTS, CONTINGENCIES AND OTHER
As of December 31, 1999, ACL was committed under contracts with Tyco
Submarine Systems Ltd. ("TSSL") for AC-1 upgrades totaling approximately $59
million and is committed under the OA&M contract with TSSL to quarterly
payments, over the next eight years, totaling approximately $247 million which
will be borne by the Company's customers or by the Company to the extent there
is unsold capacity.
ACL was committed to paying TSSL commissions ranging from 3% to 7% on
revenue received until 2002, subject to certain reductions. The Company also
had a commission sharing agreement with TSSL whereby GCL had primary
responsibility for the marketing and sale of capacity of AC-1 and PC-1 and
shared a percentage of commissions payable to TSSL as consideration for
assuming primary responsibility for the sales effort and marketing of the
Company's projects. The Sales Agency Agreement with TSSL will terminate in
March 2002 with an option by the Company to extend it until March 2005. The
Company provided TSSL with a notice of termination with respect to these
agreements effective February 22, 2000.
As of December 31, 1999, the Company was committed under the contracts to
construct its Mid-Atlantic Crossing, Pan American Crossing, South American
Crossing, Pan European Crossing and East Asia Crossing systems for future
construction costs totaling approximately $2 billion.
In addition, as of December 31, 1999, the Company was committed to make
future equity contributions to PCL in the amount of $240 million.
The Company and a number of its subsidiaries in the normal course of
business are party to a number of judicial, regulatory and administrative
proceedings. The Company's management does not believe that any material
liability will be imposed as a result of any of these matters.
13. PREFERRED STOCK
Cumulative Convertible Preferred Stock
In September 1999, GCL authorized 20,000,000 shares of preferred stock on
terms and conditions to be established from time to time at the discretion of
the Board of Directors.
In December 1999, GCL issued 2,600,000 shares of 7% cumulative convertible
preferred stock at a liquidation preference of $250.00 per share for net
proceeds of $630 million. Each share of preferred stock is convertible into
4.6948 shares of common stock based on a conversion price of $53.25. Dividends
on the preferred stock are cumulative from the date of issue and will be
payable on February 1, May 1, August 1 and November 1 of each year, beginning
on February 1, 2000, at the annual rate of 7%. Dividends accrued as of
December 31, 1999 were $1.9 million.
In November 1999, GCL issued 10,000,000 shares of 6 3/8% cumulative
convertible preferred stock at a liquidation preference of $100.00 per share
for net proceeds of approximately $969 million. Each share of preferred stock
is convertible into 2.2222 shares of common stock, based on a conversion price
of $45.00. Dividends on the preferred stock are cumulative from the date of
issue and will be payable on February 1, May 1, August 1 and November 1 of
each year, beginning on February 1, 2000, at the annual rate of 6 3/8%.
Dividends accrued as of December 31, 1999 were $9.7 million.
F-42
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The convertible preferred stock ranks junior to each other class of capital
stock other than common stock of GCL with respect to dividend rights, rights
of redemption or rights on liquidation and on a parity with any future
preferred stock of GCL. The convertible preferred stock is junior in right of
payment of all indebtedness of GCL and its subsidiaries. The preferred stock
is non-voting unless the accumulation of unpaid dividends on the outstanding
preferred stock is an amount equal to six quarterly dividend payments. The
preferred stock can be redeemed, at the Company's option, starting in 2004 at
specified premiums declining to par in 2009. Holders of preferred stock have
the right to require the Company to repurchase shares of the preferred stock
at par following the occurrence of certain change of control transactions.
10 1/2% Mandatorily Redeemable Preferred Stock
In December 1998, GCH authorized the issuance of 7,500,000 shares of
preferred stock ("GCH Preferred Stock") at a liquidation preference of $100.00
per share plus accumulated and unpaid dividends. In December 1998, 5,000,000
shares of GCH Preferred Stock were issued for $500 million in cash. The
Company reserved for future issuances up to 2,500,000 shares to pay dividends.
Dividends accrued as of December 31, 1999 and 1998 were $4 million.
Unamortized issuance costs were $14.1 million and $17 million as of December
31, 1999 and 1998, respectively.
The holders of the GCH Preferred Stock are entitled to receive cumulative,
semi-annual compounding dividends at an annual rate of 10 1/2% of the $100
liquidation preference per share. At the Company's option, accrued dividends
may be paid in cash or paid by issuing additional preferred stock (i.e. pay-
in-kind) until June 1, 2002, at which time they must be paid in cash. As of
December 31, 1999, all dividends had been paid in cash. Dividends are payable
semi-annually in arrears on each June 1 and December 1. The preferred stock
ranks senior to all common stock of GCH with respect to dividend rights,
rights of redemption or rights on liquidation and on a parity with any future
preferred stock of GCH. The preferred stock is junior in right of payment of
all indebtedness of GCH and its subsidiaries. The preferred stock is non-
voting unless the accumulation of unpaid dividends (or if, beginning on June
1, 2002, such dividends are not paid in cash) on the outstanding preferred
stock is an amount equal to three semi-annual dividend payments.
The preferred stock has a mandatory redemption on December 1, 2008 at a
price in cash equal to the then effective liquidation preference thereof, plus
all accumulated and unpaid dividends thereon to the date of redemption. The
preferred stock can be redeemed, in whole or in part, at the Company's option
at redemption prices starting at 105.25% of the liquidation preference in
2003, declining to 103.5% in 2004, 101.75% in 2005 and 100% thereafter.
The certificate of designation governing the preferred stock imposes
certain limitations on the ability of the Company to, among other things, (i)
incur additional indebtedness and (ii) pay certain dividends and make certain
other restricted payments and investments, which limitations are in part based
upon satisfaction of tests of "consolidated cash flow," as defined.
14% Mandatorily Redeemable Preferred Stock
In March 1997, GTH authorized and issued 500,000 shares of preferred stock
("GTH Preferred Stock") at a liquidation preference of $1,000 per share.
In June 1998, proceeds from the issuance of the 9 5/8% Senior Notes were
used to redeem this preferred stock. The redemption resulted in a $34 million
charge against additional paid-in capital comprised of a $16 million
redemption premium and $18 million of unamortized discount and issuance cost
on the preferred stock on the date of the redemption. The redemption premium
and write-off of unamortized discount and issuance costs on the preferred
stock were treated as a deduction to arrive at the net loss applicable to
common shareholders in the consolidated statement of operations.
F-43
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Preferred stock dividends included the following:
December 31,
---------------
1999 1998
------- -------
(In thousands)
Preferred stock dividends................................. $63,742 $11,712
Amortization of discount on preferred stock............... -- 618
Amortization of preferred stock issuance costs............ 2,900 351
------- -------
$66,642 $12,681
======= =======
14. NET LOSS PER SHARE
Losses per share are calculated in accordance with SFAS No. 128, "Earnings
Per Share." Share and per share data presented reflects all stock dividends
and stock splits.
The following is a reconciliation of the numerators and the denominators of
the basic and diluted loss per share:
For the period
December 31, March 31, 1997
-------------------------------- (Date of Inception)
1999 1998 to December 31, 1997
--------------- --------------- --------------------------
(In thousands, except share and per share data)
Loss before
extraordinary item and
cumulative effect of
change in accounting
principle.............. $ (10,535) $ (68,194) $ (160)
Preferred stock
dividends.............. (66,642) (12,681) (12,690)
Redemption of preferred
stock.................. -- (34,140) --
--------------- --------------- ---------------
Loss applicable to
common shareholders
before extraordinary
item and cumulative
effect of change in
accounting principle... $ (77,177) $ (115,015) $ (12,850)
=============== =============== ===============
Weighted average share
outstanding:
Basic and diluted..... 502,400,851 358,735,340 325,773,934
=============== =============== ===============
Loss applicable to
common shareholders
before extraordinary
items and cumulative
effect of change in
accounting principle
Basic and diluted..... $ (0.15) $ (0.32) $ (0.04)
=============== =============== ===============
Dilutive options and warrants did not have an effect on the computation of
diluted loss per share in 1999 and 1998 since they were anti-dilutive. The
impact of dilutive options and warrants increases the weighted average shares
outstanding to 552,466,665 shares as of December 31, 1999.
F-44
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. 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 inland
services agreements and capital leases and long term debt approximate their
fair value. The fair value of the senior notes (the New Senior Notes and 9
5/8% Senior Notes), mandatorily redeemable preferred stock, cumulative
convertible preferred stock and the interest rate swap are based on market
quotes and the fair values are as follows:
December 31, 1999 December 31, 1998
-------------------------- --------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
(In thousands) (In thousands)
Senior notes............ $3,135,000 $3,090,294 $796,495 $834,000
Mandatorily redeemable
preferred stock........ 485,947 498,750 483,000 480,000
Cumulative convertible
preferred stock........ 1,598,750 1,975,300 -- --
Interest rate swap...... $ -- $ 6,602 $ -- $ 26
16. STOCK OPTION PLAN
GCL maintains a stock option plan under which options to acquire shares may
be granted to directors, officers, employees and consultants of the Company.
The Company accounts for this plan under APB Opinion No. 25, under which
compensation cost is recognized only to the extent that the market price of
the stock exceeds the exercise price. Terms and conditions of the Company's
options, including exercise price and the period in which options are
exercisable, generally are at the discretion of the Compensation Committee of
the Board of Directors; however, no options are exercisable more than ten
years after date of grant.
Prior to its merger with the Company, Frontier maintained stock option
plans for its directors, executives and certain employees. The exercise price
for options under all Frontier plans was the fair market value of the stock on
the date of the grant. The stock options expire ten years from the date of the
grant and vest over a period from one to three years. The Frontier plans
provided for discretionary grants of stock options which were subject to the
passage of time and continued employment restrictions.
In connection with the Frontier merger, the Company exchanged all of the
outstanding Frontier stock options for 25.3 million Global Crossing stock
options which vested immediately at the date of the merger. As of December 31,
1999, 17.7 million stock options under the Frontier plans remained vested and
outstanding.
Additional information regarding options granted and outstanding for the
years ended December 31, 1998 and 1999 are summarized below:
Weighted
Options Number of Average
Available Options Exercise
For Grant Outstanding Price
----------- ----------- --------
Balance as of December 31, 1997........... -- -- --
Authorized.............................. 33,215,730
Granted................................. (30,762,466) 30,762,466 $ 2.85
Exercised............................... (656,688) 1.06
Cancelled............................... 3,253,000 (3,253,000) 1.11
----------- ----------- ------
Balance as of December 31, 1998........... 5,706,264 26,852,778 3.11
Authorized.............................. 82,010,014 -- --
Granted................................. (65,019,955) 65,019,955 24.20
Exercised............................... (10,058,073) 11.07
Cancelled............................... 3,175,154 (3,175,154) 22.17
----------- ----------- ------
Balance as of December 31, 1999........... 25,871,477 78,639,506 $18.76
=========== =========== ======
F-45
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables summarize information concerning outstanding and
exercisable options:
December 31, 1999
------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------- ----------------------------
Weighted Average Weighted Average Weighted Average Weighted Average
Range of Number Remaining Contractual Exercise Price Number Exercise Price
Exercise Prices Outstanding Life (in years) per Share Exercisable per Share
--------------- ---------------- --------------------- ---------------- ----------- ----------------
$ 0.35 to $ 1.43 14,153,480 7.79 $ 0.83 7,871,980 $ 0.83
2.00 to 9.00 7,157,036 8.18 3.14 3,635,345 3.29
9.30 to 13.80 12,539,297 7.71 11.61 10,207,026 11.60
13.96 to 19.82 11,961,988 8.54 17.15 8,961,988 16.26
20.60 to 23.44 19,975,778 9.65 25.82 1,175,228 24.48
$33.00 to $61.38 12,851,927 9.73 44.68 1,741,334 46.15
---------------- ---------------- --------------------- ---------------- ----------- ----------------
Total 78,639,506 8.73 $18.76 33,592,901 $11.66
================ ===================== ================ =========== ================
December 31, 1998
------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------- ----------------------------
Weighted Average Weighted Average Weighted Average Weighted Average
Range of Number Remaining Contractual Exercise Price Number Exercise Price
Exercise Prices Outstanding Life (in years) per Share Exercisable per Share
--------------- ---------------- --------------------- ---------------- ----------- ----------------
$0.35 to $0.83 15,717,280 9.2 $ 0.83 4,803,833 $ 0.83
2.00 to 3.33 6,844,598 9.5 3.13 1,625,000 3.33
9.50 to 13.26 4,290,900 9.7 11.44 302,834 11.34
--------------- ---------------- --------------------- ---------------- ----------- ----------------
Total 26,852,778 9.3 $ 3.11 6,731,667 $ 1.91
================ ===================== ================ =========== ================
During the years ended December 31, 1999 and 1998, the Company recorded in
additional paid-in capital $55 million and $94 million, respectively, of
unearned compensation, relating to awards under the stock incentive plan plus
the grant of certain economic rights and options to purchase common stock.
During 1999 and 1998 the Company recognized expense of $51 million and $39
million, respectively, of stock related compensation relating to the stock
incentive plan and the vested economic rights to purchase common stock. The
remaining $60 million of unearned compensation will be recognized as follows:
$36 million in 2000, $20 million in 2001 and $4 million in 2002.
The Company entered into an employment arrangement with a key executive,
and granted him economic rights to purchase two million shares of common stock
at $2.00 per share. One-third of these economic rights vested immediately and
the balance vests over two years. The Company recorded the excess of the fair
market value of these options and rights over the purchase price as unearned
stock compensation in the amount of $15 million during the year ended December
31, 1998. The unearned compensation is being recognized as expense over the
vesting period of the economic right.
F-46
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), the Company accounted for employee stock options under APB 25
and is recognizing compensation expense over the vesting period to the extent
that the fair value of the stock on the date the options were granted exceeded
the exercise price. Had compensation cost for the Company's stock-based
compensation plans been determined consistent with the SFAS 123 fair value
approach, the impact on the Company's loss applicable to common shareholders
and loss per share would be as follows:
Period from
March 19, 1997
Year Ended Year Ended (Date of Inception)
December 31, 1999 December 31, 1998 to December 31, 1997
----------------- ----------------- --------------------
(In thousands, except per share information)
Net loss applicable to
common shareholders:
As reported........... $(137,568) $(134,724) $(12,850)
Pro forma............. $(236,184) $(141,585) $(12,850)
Basic and diluted net
loss per share:
As reported........... $ (0.27) $ (0.38) $ (0.04)
Pro forma............. $ (0.47) $ (0.39) $ (0.04)
Under SFAS 123, the fair value of each option is estimated on the date of
grant using the Black-Scholes option-pricing model assuming the following
weighted average assumptions used for the year ended December 31, 1999; zero
dividend yield, expected volatility of 40.00, weighted average risk free rate
of return of 6.56% and expected life of 4 years. For the year ended December
31, 1998; zero dividend yield, expected volatility of 0% to 42%, weighted
average risk free rate of return of 5.45% and expected life of 4 years.
17. EMPLOYEE BENEFIT PLANS
401(k) Plan
Beginning in 1998, the Company offered its qualified employees the
opportunity to participate in a defined contribution retirement plan
qualifying under the provisions of Section 401(k) of the Internal Revenue
Code. Each eligible employee may contribute on a tax-deferred basis a portion
of their annual earnings not to exceed certain limits. The Company matches
one-half of individual employee contributions up to a maximum level not to
exceed 7.5% of the employee's compensation. The Company's contributions to the
plan vest immediately. Expenses recorded by the Company relating to its 401(k)
plan were approximately $0.6 million and $0.2 million for the years ended
December 31, 1999 and 1998, respectively.
The Company also sponsors a number of defined contribution plans for
Frontier employees. The most significant plan covers non-bargaining employees,
who can elect to make contributions through payroll deduction. The Company
provides a contribution of .5 percent of gross compensation in common stock
for every employee eligible to participate in the plan. The common stock used
for matching contributions is purchased on the open market by the plan's
trustee. The Company also provides one hundred percent matching contributions
in its common stock up to three percent of gross compensation, and may, at the
discretion of the Management Benefit Committee, provide additional matching
contributions based upon Frontier's financial results. The total cost
recognized for all defined contribution plans was $2.6 million from the date
of the merger through December 31, 1999.
Pension Plan
As a result of the merger with Frontier, the Company has noncontributory
plans which have been frozen, providing for service pensions and certain death
benefits for substantially all Frontier employees. The assets and
F-47
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
liabilities related to these plans were recorded at fair market value at the
date of the merger. In 1995 and 1996, these defined benefit plans were frozen.
On an annual basis, contributions are remitted to the trustees to ensure
proper funding of the plans.
The majority of the Company's pension plans have plan assets that exceed
accumulated benefit obligations. There are certain plans, however, with
accumulated benefit obligations which exceed plan assets. The following table
summarizes the funded status of the Company's pension plans and the related
amounts that are included in "Other assets" in the Consolidated Balance Sheet
of the Company as of December 31, 1999 (in thousands):
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at September 30, 1999........................ $451,600
Service cost.................................................... 14
Interest cost................................................... 8,397
Actuarial gain.................................................. (11,025)
Benefits paid................................................... (9,151)
--------
Benefit obligation at December 31, 1999......................... $439,835
========
CHANGE IN PLAN ASSETS
Fair value of plan assets at September 30, 1999................. $621,100
Actual return on plan assets.................................... 86,516
Employer contribution........................................... 550
Benefits paid................................................... (9,151)
--------
Fair value of plan assets at December 31, 1999.................. $699,015
========
Funded status................................................... $259,180
Unrecognized net gain........................................... (83,192)
--------
Prepaid benefit cost, net....................................... $175,988
========
The net periodic pension cost consists of the following for the three month
period ended December 31, 1999 (in thousands):
Service cost...................................................... $ 14
Interest cost on projected benefit obligation..................... 8,397
Return on plan assets............................................. (14,349)
--------
Net periodic pension benefit...................................... $ (5,938)
========
The following rates and assumptions were used to calculate the projected
benefit obligation as of December 31, 1999:
Weighted average discount rate.................................... 8.00%
Rate of salary increase........................................... 5.00%
Expected return on plan assets.................................... 9.50%
The Company's policy is to make contributions for pension benefits based on
actuarial computations which reflect the long-term nature of the pension plan.
However, under SFAS No. 87, "Employers' Accounting for Pensions," the
development of the projected benefit obligation essentially is computed for
financial reporting purposes and may differ from the actuarial determination
for funding due to varying assumptions and methods of computation.
F-48
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Postretirement Benefit Other Than Pensions
The Company provides postretirement health care and life insurance
benefits, which have been frozen, to most of its employees. Plan assets
consist principally of life insurance policies and money market instruments.
In 1996, Frontier amended its healthcare benefits plan to cap the cost
absorbed by the Company for healthcare and life insurance for its bargaining
employees who retire after December 31, 1996. The assets and liabilities
related to these plans were recorded at fair market value at the date of the
merger.
The following table summarizes the funded status of the plan (in thousands)
and the related amounts included in "Deferred credits and other" in the
Consolidated Balance Sheet of the Company as of December 31, 1999 (in
thousands):
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at September 30, 1999...................... $ 114,305
Service cost.................................................. 135
Interest cost................................................. 2,134
Actuarial gain................................................ (2,970)
Benefits paid................................................. (2,016)
---------
Benefit obligation at December 31, 1999....................... $ 111,588
=========
CHANGE IN PLAN ASSETS
Fair value of plan assets at September 30, 1999............... $ 2,989
Actual return on plan assets.................................. 180
Employer contribution......................................... 1,902
Benefits paid................................................. (2,016)
---------
Fair value of plan assets at December 31, 1999................ $ 3,055
=========
Funded status................................................. $(108,533)
Unrecognized net loss......................................... (2,133)
---------
Accrued benefit cost, net..................................... $(110,666)
=========
The components of the estimated postretirement benefit cost are as follows
for the three month period ended December 31, 1999 (in thousands):
Service cost.................................................... $ 135
Interest cost on projected benefit obligation................... 2,134
Expected return on plan assets.................................. (67)
---------
Net periodic pension cost (benefit)............................. $ 2,202
=========
The following rates and assumptions were used to calculate the projected
benefit obligation as of December 31, 1999:
Weighted average discount rate.................................. 8.00%
Rate of salary increase......................................... 5.00%
Expected return on plan assets.................................. 9.50%
Assumed rate of increase in cost of covered health care
benefits....................................................... 6.17%
Increases in health care costs were assumed to decline consistently to a
rate of 5.0% by 2006 and remain at that level thereafter. If the health care
cost trend rates were increased by one percentage point, the accumulated
F-49
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
postretirement benefit health care obligation as of December 31, 1999 would
increase by $8.2 million while the sum of the service and interest cost
components of the net postretirement benefit health care costs for 1999 would
increase by $191,000. If the health care cost trend rates were decreased by
one percentage point, the accumulated postretirement benefit health care
obligations as of December 31, 1999 would decrease by $7.3 million while the
sum of the service interest cost components of the net postretirement benefit
health care cost for 1999 would decrease by $168,000.
18. RELATED PARTY TRANSACTIONS
Transactions with Global Access Ltd. and Pacific Crossing Ltd.
During 1999, Global Crossing entered into certain transactions with GAL and
PCL to purchase $101.4 million of terrestrial and subsea capacity.
Transactions with Pacific Capital Group and its Affiliates
Prior to 1999, Global Crossing entered into certain transactions with
affiliates of Pacific Capital Group ("PCG"), including the acquisition of
development rights to certain of the Company's fiber optic cable systems. PCG
is controlled by certain officers and directors of Global Crossing who either
currently are or at one time were affiliated with PCG. During 1999, Global
Crossing subleased from PCG two suites of offices in Beverly Hills for
payments aggregating approximately $287,000 over the year. In October 1999,
Global Crossing entered into a lease with North Crescent Realty V, LLC, which
is managed by and affiliated with PCG, for an aggregate monthly cost of
approximately $400,000. North Cresent Realty, LLC paid approximately $7.5
million to improve the property to meet Global Crossing's specifications and
was reimbursed approximately $3.2 million of this amount by Global Crossing.
Global Crossing engaged an independent real estate consultant to review the
terms of Global Crossing's occupancy of the building, which terms were found
by the consultant to be consistent with market terms and conditions and the
product of an arm's length negotiation. Global Crossing subleases
approximately 12,000 square feet of the building to PCG for an aggregate
monthly cost of approximately $53,000.
PCG has fractional ownership interests in aircrafts used by Global Crossing
during 1999. Global Crossing reimburses PCG for PCG's cost of maintaining
these ownership interests such that PCG realizes no profit from the
relationship. During 1999, PCG billed Global Crossing approximately $2 million
in aggregate under this arrangement.
In 1997, the Company paid $7 million in fees to PCG and certain of its key
executives, who are shareholders of GCL, and another shareholder for services
provided in respect of obtaining the AC-1 Credit Facility, Old Senior Notes
and the GTH Preferred Stock financing. Of the fees paid, $5 million was
allocated to the AC-1 Credit Facility and Old Senior Notes and recorded as
deferred finance costs, $1 million was allocated to the GCH Preferred Stock
and recorded as a reduction in the carrying value of the preferred stock and
$1 million was recorded as common stock issuance costs.
Transactions with Canadian Imperial Bank of Commerce and its affiliates
During 1999, Canadian Imperial Bank of Commerce and its affiliates ("CIBC")
entered into certain financing transactions with Global Crossing. In
particular, CIBC: (1) acted as an arranger for the $600 million ten-day demand
note issued by Global Marine Systems in July, (2) acted as an arranger for the
$3 billion senior secured credit facility entered into by GCH in July, (3) was
an initial purchaser of the $2 billion aggregate principal amount of unsecured
senior notes issued by GCH in November, and (4) was an initial purchaser of
GCL's $650 million aggregate liquidation preference 7% cumulative convertible
preferred stock issued in
F-50
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December. During 1999, Global Crossing paid CIBC approximately $5.6 million in
fees in connection with these transactions. CIBC has a substantial beneficial
ownership interest in Global Crossing, and certain directors of Global
Crossing are employees of an affiliate of CIBC.
In 1998, CIBC was one of the initial purchasers of the New Senior Notes and
GCH Preferred Stock, a member of the PC-1 and MAC credit facility syndicates,
and was also one of the underwriters of the Company's initial public offering
("IPO"). CIBC was paid $19 million in fees and credit facility interest during
the year ended December 31, 1998. In 1997, GCL paid CIBC approximately $25
million in fees related to the financing obtained under the Old Senior Notes,
the AC-1 Credit Facility, and the issuance of the GTH Preferred Stock. Of the
fees incurred, approximately $6 million related to underwriting and commitment
fees pertaining to the issuance of the GTH Preferred Stock and was recorded as
a reduction in the carrying value of the GTH Preferred Stock, approximately $9
million related to underwriting, commitment and advisory fees in connection
with the issuance of the Old Senior Notes and approximately $10 million
related to fees associated with obtaining the AC-1 Credit Facility which was
recorded as deferred finance costs.
Relationship to Ziff-Davis Inc. and Affiliates
A director of Global Crossing is the chairman and chief executive officer
of Ziff-Davis Inc., a majority of the common stock of which is beneficially
owned by Softbank Corp. Softbank is a party to the Asia Global Crossing joint
venture established to provide advanced network-based telecommunications
services to businesses and consumers throughout Asia. Global Crossing, which
is responsible for the management and operation of the network, contributed to
the venture its 57.75% share of the Pacific Crossing system and its
development rights in East Asia Crossing. Softbank and Microsoft each
contributed $175 million in cash to Asia Global Crossing and also committed to
make a total of at least $200 million in Global Crossing Network capacity
purchases over a three-year period, expected to be utilized primarily on the
Pacific Crossing system and East Asia Crossing. Softbank and Microsoft also
agreed to use Asia Global Crossing's network in the region. Global Crossing
currently owns 93% of Asia Global Crossing, with Softbank and Microsoft each
owning 3.5%. When the fair market value of Asia Global Crossing is determined
to exceed $5 billion, the ownership interest of Softbank and Microsoft will
increase to a maximum of 19% each at a valuation of $7.5 billion and above.
The Global Crossing director is Softbank's representative on the Asia Global
Crossing board of directors. In addition, Ziff-Davis is one of the largest
web-hosting customers of our GlobalCenter subsidiary.
Relationship to Hutchison Whampoa Limited
The managing director of Hutchison was recently appointed a director of
Global Crossing. In November 1999, Hutchison and Global Crossing entered into
an agreement to form a 50/50 joint venture to pursue fixed-line
telecommunications and Internet opportunities in the Hong Kong Special
Administrative Region, China. The joint venture, the formation of which was
completed in January 2000, combines Hutchison's existing territory-wide,
building-to-building fixed-line fiber optic telecommunications network and
certain Internet-related assets in Hong Kong with Global Crossing's
international fiber optic broadband cable capacity and web hosting, Internet
applications and data services. For its 50% share, Global Crossing provided to
Hutchison $400 million in Global Crossing 6 3/8% cumulative convertible
preferred stock. Additionally, Global Crossing committed to contribute to the
joint venture international telecommunications capacity rights on its global
fiber optic network and data center related capabilities which together are
valued at $350 million, as well as $50 million in cash.
Agreements with Global Crossing Stockholders
In August 1998, PCG, GKW Unified Holdings (an affiliate of PCG), affiliates
of CIBC, Global Crossing and some other Global Crossing shareholders,
including some officers and directors and their affiliates, entered
F-51
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
into a Stockholders Agreement and a Registration Rights Agreement. Under the
Stockholders Agreement, Global Crossing has been granted a right of first
refusal on specified private transfers by these shareholders during the first
two years after the consummation of the IPO on August 14, 1998. In addition,
subject to the exceptions in the Stockholders Agreement, some of these
shareholders have rights, which are referred to as tag-along rights,
permitting these shareholders to participate, on the same terms and
conditions, in some transfers of shares by any other of these shareholders as
follows: (1) PCG, GKW Unified Holdings and CIBC and their affiliates and
permitted transferees have the right to participate in any transaction
initiated by any of them to transfer 5% or more of our outstanding securities;
and (2) PCG, GKW Unified Holdings, CIBC and their affiliates and permitted
transferees have the right to participate in any transaction initiated by any
of them to transfer any Global Crossing securities if that transaction would
result in a change of control of Global Crossing. Under the Registration
Rights Agreement, Global Crossing shareholders who are parties to that
agreement and a number of their transferees have demand and piggyback
registration rights and will receive indemnification and, in some
circumstances, reimbursement for expenses from the Company in connection with
an applicable registration.
Principal shareholders of Global Crossing, representing at that time over a
majority of the voting power of the Company's common stock, entered into a
Voting Agreement with Frontier Corporation in March 1999 in connection with
the Frontier merger. These Global Crossing shareholders reaffirmed their
voting obligations under the Voting Agreement in connection with subsequent
amendments made to the merger agreement during 1999. Pursuant to the Second
Reaffirmation of Voting Agreement and Share Transfer Restriction Agreement
dated September 2, 1999, the Global Crossing shareholders that are parties to
the Voting Agreement also agreed, from September 2, 1999 until March 28, 2000,
not to transfer record or beneficial ownership of any shares of Global
Crossing common stock held by such shareholders, other than transfers to
charities, transfers made with the consent of the Company and other limited
exceptions, and to work in good faith toward implementing a program with the
purpose that, if the Global Crossing shareholders that are parties to the
Voting Agreement wish to sell or transfer their shares after March 28, 2000,
these sales or transfers would be completed in a manner that would provide for
an orderly trading market for the shares of Global Crossing common stock.
Also on September 2, 1999, fourteen of the Company's executive officers and
three executive officers of Frontier entered into a Share Transfer Restriction
Agreement with Global Crossing. Under this agreement, the Global Crossing
executive officers agreed not to sell or transfer shares of the Company's
common stock, and the Frontier executive officers agreed not to sell or
transfer shares of Frontier common stock and the shares of Global Crossing
common stock they would receive in exchange for their Frontier common stock in
the merger, until March 28, 2000, subject in each case to substantially the
same exceptions as are applicable to the Second Reaffirmation of Voting
Agreement and Share Transfer Restriction Agreement described in the
immediately preceding paragraph.
Advisory Services Agreement ("ASA")
ACL entered into the ASA with PCG Telecom, an affiliate of PCG which is a
shareholder of GCL. Under the ASA, PCG Telecom provided ACL with advice in
respect of the development and maintenance of AC-1, development and
implementation of marketing and pricing strategies and the preparation of
business plans and budgets. As compensation for its advisory services, PCG
Telecom received a 2% fee on the gross revenue of the Company over a 25 year
term, subject to certain restrictions, with the first such payment to occur at
the AC-1 RFS date. Advances on fees payable under the ASA were being paid to
PCG Telecom at a rate of 1% on signed CPAs until the ASA was terminated, as
described below. Fees paid under the ASA to PCG Telecom were shared amongst
Union Labor Life Insurance Company ("ULLICO"), PCG, CIBC, and certain
directors and officers of the Company, all of whom are shareholders of GCL.
Effective June 1998, GCL acquired the rights under the ASA on behalf of the
Company for common stock and contributed such rights to the Company as the ASA
was terminated. This transaction was recorded in the consolidated financial
statements as an increase in additional
F-52
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
paid-in capital of $135 million and a charge against operations in the amount
of $138 million. The $138 million is comprised of a $135 million settlement of
the fees that would have been payable and the cancellation of $3 million owed
to the Company under a related advance agreement. The $135 million amount was
calculated by applying the 2% advisory services fee to projected future
revenue and discounting the amount relating to AC-1 revenue by 12% and the
amount relating to all other system's revenue by 15%. The result of this
calculation was $156 million, which amount was subsequently reduced to $135
million. Both the discount rates and the ultimate valuation were determined as
a result of a negotiation process including a non management director of the
Company and the various persons entitled to fees under the ASA. The Company
obtained a fairness opinion from an independent financial advisor in
connection with this transaction. In addition, the Company incurred
approximately $2 million of advisory fees prior to termination of the
contract, for a total expense of $140 million for the year ended December 31,
1998.
PCG Warrants
PCG Warrants, issued in 1998 by the Company's predecessor, Global Crossing
Ltd., LDL ("Old GCL") became exercisable upon the completion of the IPO. The
PCG Warrants gave each holder the option to convert each share under warrant
into a fraction of a Class B of Old GCL share based upon the ratio of the
current per share valuation at the time of conversion less the per share
exercise price of the warrant divided by the current per share valuation at
the time of conversion multiplied by the 36,906,372 shares available under the
PCG Warrants, together with a new warrant ("New PCG Warrants") to purchase the
remaining fraction of such Class B share at an exercise price equal to the
then current per share valuation. Prior to the IPO, the holders of the PCG
Warrants exercised their warrants to acquire Class B of Old GCL shares by way
of the cashless conversion and the New PCG Warrants were issued with an
exercise price based on the per share valuation at the conversion date, the
obligation on which were assumed by GCL.
The Company accounted for the cashless conversion of the PCG Warrants,
which occurred as of June 1998, using the current estimated per share
valuation at the expected conversion date, multiplied by the number of Class B
shares of Old GCL estimated to be converted in exchange for the PCG Warrants.
The resulting value under this calculation is approximately $213 million,
which was allocated to the new systems in exchange for the PCG Warrants. In
connection with the formation of PCL, the Company agreed to make available to
PCL the consideration received by the Company in connection with the grant of
the PCG Warrants, in addition to the $231 million cash investment made by the
Company. Therefore, the Company recorded an increase in its investment in PCL
in the amount of approximately $127 million and an increase in construction in
progress for PAC and MAC in the amounts of approximately $50 million and $36
million, respectively, with a corresponding increase of $213 million in
additional paid-in capital. The $213 million was allocated on a pro rata basis
to the three projects according to the estimated cost of each system. The
Company's accounting for the PCG Warrants is pursuant to 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. The Company has
recorded the estimated value of the PCG Warrants as of June 1998, since the
IPO was probable at that date. The $213 million value attributed to the PCG
Warrants as of June 1998 was adjusted to the actual value of $275 million on
the date of the IPO based upon the $9.50 price per share of the IPO.
The Company gave accounting recognition for the New PCG Warrants on the
date these warrants were issued, which was the date of the IPO. The Company
valued each of the New PCG Warrants at $3.48 based on an independent valuation
based on the IPO price of $9.50 per share. The New PCG Warrants had a total
value of approximately $43 million. The Company recorded the actual value of
the New PCG Warrants in a manner
F-53
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
similar to that described above whereby the total value was allocated to the
investment in PC-1, MAC and PAC based on their relative total contract costs.
Other transactions
In 1998, GCL purchased all common shares owned by Telecommunications
Development Corporation ("TDC") in the Company in exchange for 300,000 fewer
newly issued shares of common stock based upon the per share value at the
repurchase date. The transaction benefited GCL since 300,000 fewer shares were
outstanding after the repurchase without any cost to GCL. This transaction was
accounted for as the acquisition of treasury stock and was recorded as $209
million, the fair value of the consideration given. Certain officers and
directors of the Company held direct or indirect equity ownership positions in
TDC, resulting in these officers and directors having a majority of the
outstanding common stock of TDC. Following this transaction, TDC distributed
all of its shares of common stock and GCL warrants to the holders of its
common stock and was then liquidated.
19. SEGMENT REPORTING
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. While the Company's chief decision maker monitors the
revenue streams of the various products and geographic locations, operations
are managed and financial performance evaluated based on the delivery of
multiple, integrated services to customers over a single network. 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.
F-54
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The information below summarizes certain financial data of the Company by
segment (in thousands):
Period from
March 19, 1997
Year Ended Year Ended (Date of Inception)
December 31, 1999 December 31, 1998 to December 31, 1997
----------------- ----------------- --------------------
Telecommunication
Services
Revenue
Commercial............ $ 279,603 $ -- $ --
Consumer.............. 46,661 -- --
Carrier............... 991,984 419,866 --
----------- ---------- --------
$ 1,318,248 $ 419,866 $ --
=========== ========== ========
Operating expenses..... $ 1,370,534 $ 299,922 $ 3,101
=========== ========== ========
Operating income
(loss)................ $ (52,286) $ 119,944 $ (3,101)
=========== ========== ========
Adjusted EBITDA........ $ 581,912 $ 364,948 $ 2,263
=========== ========== ========
Cash paid for capital
expenditures.......... $ 1,552,019 $ 413,996 $428,743
=========== ========== ========
Total assets........... $16,813,242 $2,639,177 $572,197
=========== ========== ========
Installation and
Maintenance Services
Revenue................
Total revenue.......... 160,655 -- --
=========== ========== ========
Operating expenses..... 162,209 -- --
=========== ========== ========
Operating loss......... $ (1,554) $ -- $ --
=========== ========== ========
Adjusted EBITDA........ $ 39,263 $ -- $ --
=========== ========== ========
Cash paid for capital
expenditures.......... $ 170,585 $ -- $ --
=========== ========== ========
Total assets........... $ 1,519,166 $ -- $ --
=========== ========== ========
Incumbent Local Exchange
Carrier Services
Revenue................ $ 185,921 $ -- $ --
=========== ========== ========
Operating expenses..... 131,942 -- --
=========== ========== ========
Operating income....... $ 53,979 $ -- --
=========== ========== ========
Adjusted EBITDA........ $ 94,606 $ -- $ --
=========== ========== ========
Cash paid for capital
expenditures.......... $ 48,311 $ -- $ --
=========== ========== ========
Total assets........... $ 1,373,172 $ -- --
=========== ========== ========
Corporate and Other
Revenue................ $ -- $ -- $ --
=========== ========== ========
Operating expenses..... 7,600 139,669 --
=========== ========== ========
Operating loss......... $ (7,600) $ (139,669) $ --
=========== ========== ========
Adjusted EBITDA........ $ (7,600) $ -- $ --
=========== ========== ========
Cash paid for capital
expenditures.......... $ -- $ -- $ --
=========== ========== ========
Total assets........... $ -- $ -- $ --
=========== ========== ========
F-55
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period from
March 19, 1997
Year Ended Year Ended (Date of Inception)
December 31, 1999 December 31, 1998 to December 31, 1997
----------------- ----------------- --------------------
Consolidated
Consolidated revenue... $ 1,664,824 $ 419,866 $ --
Consolidated operating
expense............... 1,672,285 439,591 3,101
----------- ---------- --------
Consolidated operating
(loss)................ $ (7,461) $ (19,725) $ (3,101)
=========== ========== ========
Adjusted EBITDA........ $ 708,181 $ 364,948 $ 2,263
=========== ========== ========
Consolidated cash paid
for capital
expenditures.......... $ 1,770,915 $ 413,996 $428,743
=========== ========== ========
Consolidated total
assets................ $19,705,580 $2,639,177 $572,197
=========== ========== ========
Adjusted Earnings before Interest, Taxes, Depreciation and Amortization
(Adjusted EBITDA) is calculated as operating income (loss), plus goodwill
amortization, depreciation and amortization, non-cash cost of capacity sold,
stock related expenses, incremental cash deferred revenue and amounts relating
to the termination of an advisory services agreement. This definition is
consistent with financial covenants contained in Global Crossing Ltd.'s major
financial agreements. Global Crossing Ltd. presents Adjusted EBITDA because it
is a financial indicator used by investors and analysts to analyze and compare
companies on the basis of operating performance and because management
believes that Adjusted EBITDA is an additional, meaningful measure of
performance and liquidity. Global Crossing Ltd.'s management uses Adjusted
EBITDA to monitor its compliance with its financial covenants and to
understand the financial indicators investors and analysts are using to
measure its performance. This information should not be considered as an
alternative to any measure of performance as promulgated under GAAP. Global
Crossing Ltd.'s calculation of adjusted EBITDA may be different from the
calculation used by other companies and, therefore, comparability may be
limited. The calculation of Adjusted EBITDA is as follows:
Period from
March 19, 1997
Year Ended Year Ended (Date of Inception)
December 31, 1999 December 31, 1998 to December 31, 1997
----------------- ----------------- --------------------
Operating loss.......... $ (7,461) $(19,725) $(3,101)
Goodwill amortization... 127,621 -- --
Depreciation and
amortization........... 124,294 541 39
Stock related expense... 51,306 39,374 --
Non-cash cost of
capacity sold.......... 291,764 140,892 --
Incremental cash
deferred revenue....... 120,657 64,197 5,325
Termination of Advisory
Services Agreement..... -- 139,669 --
-------- -------- -------
Adjusted EBITDA......... $708,181 $364,948 $ 2,263
======== ======== =======
F-56
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1999 1998
--------------------- ---------------------
Long-Lived Long-Lived
Revenue Assets Revenue(1) Assets(2)
---------- ---------- ---------- ----------
(In thousands)
North America
United States.................. $ 997,025 $3,029,828 $193,142 $ 76,055
Other.......................... 64,040 26,515 64,558 --
---------- ---------- -------- ----------
1,061,065 3,056,343 257,700 76,055
Europe
The Netherlands................ 89,600 92,251 46,770 82,433
Germany........................ 145,289 204,564 36,047 30,021
England........................ 106,815 722,462 34,777 49,081
Other.......................... 244,351 302,645 44,572 --
---------- ---------- -------- ----------
586,055 1,321,922 162,166 161,535
International waters............. -- 1,339,614 -- 770,966
Other............................ 17,704 308,174 -- --
---------- ---------- -------- ----------
Consolidated..................... $1,664,824 $6,026,053 $419,866 $1,008,556
========== ========== ======== ==========
- --------
(1) During 1998, there was one customer located in the United States that
accounted for 16% of consolidated revenue, another customer located in
Canada that accounted for 16% of consolidated revenue, and one customer
located in the Netherlands that accounted for 11% of consolidated revenue.
There were no individual customers in 1999 that accounted for more than
10% of consolidated revenue.
(2) Long-lived assets include capacity available for sale and construction in
progress as of December 31, 1999 and 1998.
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's unaudited quarterly results are as follows:
1999 Quarter Ended
--------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
(In thousands, except per share data)
Revenue.......................... $176,319 $188,459 $234,582 $1,065,464
Operating income (loss).......... 41,067 39,764 13,226 (101,518)
Income (loss) before
extraordinary item and
cumulative effect of change in
accounting principle............ 12,802 9,978 135,854 (169,169)
Net income (loss)................ (1,908) 9,978 120,989 (199,985)
Net income (loss) applicable to
common shareholders............. (14,952) (4,219) 106,918 (225,315)
Income (loss) per common share
before extraordinary item and
cumulative effect of change in
accounting principle, basic..... (0.00) (0.01) 0.30 (.25)
Net income (loss) per common
share, basic.................... (0.04) (0.01) 0.26 (.29)
Income (loss) per common share
before extraordinary item and
cumulative effect of change in
accounting principle, diluted... (0.00) (0.01) 0.27 (.25)
Net income (loss) per common
share, diluted.................. $ (0.04) $ (0.01) $ 0.24 $ (.29)
F-57
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant 1999 interim events:
On December 15, 1999, the Company issued 2,600,000 shares of 7% cumulative
convertible preferred stock at a liquidation preference of $250.00 for net
proceeds of $630 million.
On November 24, 1999, the Company acquired Racal Telecom, a group of wholly
owned subsidiaries of Racal Electronics plc, for approximately $1.6 billion in
cash.
On November 12, 1999, GCH issued two series of senior unsecured notes. The
9 1/8% senior notes are due November 15, 2006 with a face value of $900
million, for net proceeds of $887 million and the 9 1/2% senior notes are due
November 15, 2009 with a face value of $1,100 million, for net proceeds of
$1,084 million.
On November 5, 1999, the Company issued 10,000,000 shares of 6 3/8%
cumulative convertible preferred stock at a liquidation preference of $100.00
for net proceeds of approximately $969 million.
On September 28, 1999, the Company consummated its merger with Frontier
Corporation in a transaction valued at $10.3 billion.
On July 2, 1999, the Company completed its acquisition of the Global Marine
Systems division of Cable & Wireless Plc for approximately $908 million in
cash and assumed liabilities.
During the third quarter, the Company recognized $210 million, net of
merger related expenses, of other income in connection with the termination of
the US WEST merger agreement.
1998 Quarter Ended
---------------------------------------------
March 31 June 30 September 30 December 31
-------- --------- ------------ -----------
(In thousands, except per share data)
Revenue......................... $ -- $ 100,244 $116,494 $203,128
Operating income (loss)......... (3,794) (123,649) 31,994 75,724
Income (loss) before
extraordinary loss............. (3,722) (135,725) 15,229 56,024
Net income (loss)............... (3,722) (155,434) 15,229 56,024
Net income (loss) applicable to
common shareholders............ (8,129) (193,473) 15,229 51,649
Income (loss) per common share
before extraordinary item,
basic.......................... (0.02) (0.52) 0.04 0.13
Net income (loss) per common
share, basic................... (0.02) (0.58) 0.04 0.13
Income (loss) per common share
before extraordinary item,
diluted........................ (0.02) (0.52) 0.04 0.12
Net income (loss) per common
share, diluted................. $ (0.02) $ (0.58) $ 0.04 $ 0.12
Significant 1998 interim events:
In December 1998, 5,000,000 shares of GCH 10 1/2% Preferred Stock were
issued for proceeds of $483 million.
During August 1998, the Company completed an IPO for which the Company
received net proceeds of approximately $391 million.
In May 1998, the first segment of AC-1, the United States to United Kingdom
route, was completed and commenced operations.
During the second quarter, the Company acquired the rights from those
entitled to fees payable under the advisory services agreement in
consideration for the issuance of common stock having an aggregate value of
F-58
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$135 million and the cancellation of approximately $3 million owed to the
Company under a related advance agreement. As a result of this transaction,
the Company recorded a non-recurring charge in the approximate amount of $138
million during the second quarter. In addition, the Company recognized as an
expense approximately $2 million of advisory fees incurred prior to
termination of the contract.
On May 18, 1998, the Company issued 9 5/8% senior notes due May 15, 2008,
with a face value of $800 million.
21. SHAREHOLDERS' EQUITY
Share Cancellation
As part of the Company's break-up fee received from US West, Inc. ("US
West"), the Company received 2,231,076 shares of its common stock from US West
which were cancelled by the Company. For the year ended December 31, 1999,
other income, net was composed primarily of a $210 million termination fee
paid by US West in connection with the termination of its merger agreement
with the Company, net of related expenses.
Old GCL Common Stock and Additional Paid-in Capital
During March 1997, Old GCL, formerly GT Parent Holdings LDC, was
incorporated as an exempted limited duration company in the Cayman Islands. In
March 1998, GCL, a Bermuda company, was formed as a wholly-owned subsidiary of
Old GCL. At that time, Old GCL contributed its investment in Global
Telesystems Holdings Ltd. ("GTH") to GCL. During April 1998, GCL formed a
wholly-owned subsidiary, Global Crossing Holdings Ltd. ("GCH"), a Bermuda
company, and contributed its investment in GTH to GCH upon its formation.
In January 1998, Old GCL effected a 100-for-1 stock split of each of its
Class A, B, C and D common stock and undesignated stock and amended the par
value of each share of common stock from $.0001 per share to $.000001 per
share. Prior to GCL's IPO in August 1998, GCL declared a stock dividend to Old
GCL resulting in Old GCL holding 1.5 shares of common stock of GCL for each
share of common stock of Old GCL outstanding. Pursuant to the terms of the
Articles of Association of Old GCL and prior to the Company's IPO, each holder
of Class D shares of Old GCL converted such shares into a fraction of a Class
E share of Old GCL based upon a valuation at the time of such conversion,
together with a warrant to purchase the remaining fraction of such Class E
share at an exercise price based upon such market valuation. In addition, each
holder of Class E shares of Old GCL had such Class E shares converted into
Class B shares of Old GCL. Accordingly, each holder of Class D and Class E
shares ultimately received Class B shares, with the warrants to purchase Class
E shares received by former Class D shareholders then cancelled in exchange
for warrants ("New GCL Warrants") to purchase shares of Common Stock of GCL at
an exercise price equal to the IPO price of $9.50 per share.
Subsequent to the above transaction and prior to the Company's IPO, each
shareholder of Old GCL (other than CIBC) exchanged their interests in Old GCL
for shares of common stock of GCL held by Old GCL at a rate of 1.5 shares of
common stock of GCL for each share of common stock of Old GCL ("Old GCL
Exchange"). CIBC did not participate in the above mentioned transaction and
continued to maintain its ownership of GCL through Old GCL, which became a
wholly owned subsidiary of CIBC.
Because Old GCL, GCL and GCH were entities under common control, the
transfers by Old GCL to GCL and GCL to GCH and the Old GCL Exchange were
accounted for similar to a pooling of interests. The consolidated financial
statements presented have been retroactively restated to reflect these
transactions as if they had occurred as of March 19, 1997 (Date of Inception).
F-59
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information with respect to Old GCL common stock and additional paid-in
capital prior to the Old GCL Exchange is as follows:
Common Stock:
Authorized:
1,000,000,000 Class A common stock of $.00000067 par value
1,000,000,000 Class B common stock of $.00000067 par value
1,000,000,000 Class C common stock of $.00000067 par value
3,000,000,000 Class D common stock of $.00000067 par value
1,000,000,000 Class E common stock of $.00000067 par value
43,000,000,000 undesignated common stock of $.00000067 par value
Class A shares, Class B shares and Class C shares all had voting rights. On
March 25, 1997, Old GCL issued 22,500,000 Class A shares, 101,250,000 Class B
shares, 101,250,000 Class C shares for $.33 per share, resulting in aggregate
proceeds of $75 million. In addition to the 22,500,000 Class A shares issued
to the preference shareholders for cash in connection with the issuance of the
preference shares, a total of 39,705,900 Class A shares were distributed to
the initial preference shareholder representing 15% of the aggregate number of
Class A, B and C shares outstanding. In addition, warrants to acquire a
maximum of 92,880 shares of common stock of Old GCL were issued into escrow
for the benefit of the holders of preferred stock. Effective January 21, 1998,
Old GCL authorized 1,000,000,000 new Class E non-voting shares.
Certain of the Class B shareholders were issued a total of 66,176,400 Class
D shares on March 25, 1997. Of the $34 million of proceeds received from the
issuance of Class B shares, $3 million was allocated to the Class D shares
representing the estimated fair value of the Class D shares based on an
independent valuation. Class D shares were non-voting shares which carried
special preference rights on the cash distributions made by Old GCL. Class D
shareholders were to receive 10% of cash distributions to common shareholders
once the internal rate of return to Class C shareholders exceeded 10%, and
then increasing to 20% of cash distributions to common shareholders once the
internal rate of return to Class C shareholders exceeded 30%. Effective
January 1998, Class D share rights were amended such that Class D shareholders
received the option to convert each Class D share into one Class E share upon
payment to Old GCL of $.74 per share or to a fraction of a Class E share based
upon a valuation at the time of such conversion, together with a warrant to
purchase the remaining fraction of such Class E share at an exercise price
based upon such market valuation. By granting to holders of the Class D shares
an option to convert such shares into Class E shares, the Company obtained
effective assurance that it could effect a change to a corporate structure in
the event of a major equity event, such as a merger or other business
combination or in the event of an IPO by GCL, of its common stock, since the
holders of the Class D shares would need to exercise their options in order to
participate directly in benefits of a merger or acquisition of the Company or
in order to obtain the benefits of any trading market for the common stock of
the Company; no trading market was expected to develop for the Class D shares.
The grant of the options to Class D shareholders represents an equity
transaction since the Company granted these shareholders amended share rights
in the form of options with new warrants. Since the Company had an accumulated
deficit, the charge was made against additional paid in capital, which had no
impact on the consolidated financial statements. The Company accounted for the
new warrants as an equity transaction on the date the warrants were issued,
which was the IPO date of August 13, 1998.
In 1998, the Company issued, at a price of $0.33 per share, 900,000 Class B
shares and 675,000 Class E shares. Since the estimated fair value of shares
exceeded the issue price, the Company increased stock related expense and
shareholders' equity by $2 million in 1998.
F-60
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
22. SUBSEQUENT EVENTS
IXnet and IPC Acquisitions
On February 22, 2000, the Company 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 common stock of Global
Crossing valued at approximately $3.8 billion. Under the terms of the
definitive merger agreement, 1.184 Global Crossing shares will be exchanged
for each IXnet share not owned by IPC and 5.417 Global Crossing shares will be
exchanged for each share of IPC. The acquisition is expected to be completed
in the second quarter of 2000 and is subject to regulatory approval and
customary closing conditions.
GlobalCenter Japan
On January 26, 2000, the Company's Asia Global Crossing joint venture
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. Asia Global Crossing will own 89 percent
of GlobalCenter Japan, with IRI owning the remaining 11 percent.
Hutchison Global Crossing Joint Venture
On January 12, 2000, the Company established a joint venture, called
Hutchison Global Crossing, with 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 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 Asia Global Crossing.
F-61
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.......... 144,578 12,026
Sales and marketing................................. 104,318 10,437
Network development................................. 19,209 7,376
General and administrative.......................... 166,751 3,585
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.
F-62
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.
F-63
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.
F-64
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.
F-65
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.
F-66
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
F-67
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
Acquisitions were 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
===========
F-68
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.
F-69
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The information below summarizes certain financial data of the Company by
segment (in thousands):
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, non-cash cost of capacity sold and the incremental cash deferred
revenue. This definition is consistent with financial covenants contained in
Global Crossing Ltd.'s major financial agreements. We present
F-70
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Adjusted EBITDA because it is a financial indicator used by investors and
analysts to analyze and compare companies on the basis of operating
performance and because we believe that Adjusted EBITDA is an additional,
meaningful measure of performance and liquidity. Global Crossing Ltd.'s
management uses Adjusted EBITDA to monitor its compliance with its financial
covenants and to understand the financial indicators investors and analysts
are using to measure its performance. This information should not be
considered as an alternative to any measure of performance as promulgated
under GAAP. Global Crossing Ltd.'s calculation of adjusted EBITDA may be
different from the calculation used by other companies and, therefore,
comparability may be limited. The calculation of Adjusted EBITDA is as
follows:
Three Months Ended
March 31,
------------------
2000 1999
-------- ---------
Operating loss........................................ $ 41,067 $(167,824)
Goodwill amortization................................. -- 131,634
Depreciation and amortization......................... 211 140,943
Stock related expense................................. 16,716 18,850
Non-cash cost of capacity sold........................ 53,514 99,056
Incremental cash deferred revenue..................... 16,700 165,932
-------- ---------
Adjusted EBITDA....................................... $128,208 $ 388,591
======== =========
(8)Pending Accounting Standards
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which is required to be adopted by the Company in the quarter
ending June 30, 2000. SAB 101 provides additional guidance on revenue
recognition as well as criteria for when revenue is generally realized and
earned. Management is currently assessing the impact of SAB 101 on the results
of operations and financial position of the Company.
(9) Reclassifications
Certain prior year amounts have been reclassified in the condensed
consolidated financial statements for consistent presentation to current year
amounts.
(10) 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 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
F-71
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 from 57.75% to 64.50% for approximately $21 million by acquiring the
remaining ownership of another partner in PC-1. In connection with this
transaction, 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.
(11) 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.
F-72
GLOBAL CROSSING GROUP UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
of the Global Crossing group has been prepared to demonstrate how this group
might have looked if (1) the Global Marine Systems acquisition and related
financing, (2) the Frontier acquisition, (3) the Racal Telecom acquisition and
related financing, (4) the Hutchison Global Crossing joint venture, including
the related issuance of the 6 3/8% cumulative convertible preferred stock,
series B, of Global Crossing, (5) the IPC and IXnet acquisitions, (6) the
offering of our 6 3/8% cumulative convertible preferred stock completed on
November 5, 1999, (7) the offering of the 9 1/8% senior notes due 2006 and 9
1/2% senior notes due 2009 of Global Crossing Holdings completed on November
19, 1999, (8) the offering of our 7% cumulative convertible preferred stock
completed on December 15, 1999, (9) the offering of our 6 3/4% cumulative
convertible preferred stock and 21,673,706 shares of our common stock
completed on April 14, 2000 and (10) the tracking stock proposals had been
completed as of the date or at the beginning of the period presented. This pro
forma information does not give effect to the $350 million cash received in
connection with the formation of the Asia Global Crossing joint venture.
The pro forma information illustrates the allocation of assets,
liabilities and operations between the Global Crossing group and the
GlobalCenter group following the approval and implementation of the tracking
stock proposals. Holders of GlobalCenter group stock and Global Crossing group
stock will not have an exclusive claim on the assets of the GlobalCenter group
and the Global Crossing group, respectively. Instead, holders of both classes
of common stock will remain stockholders of Global Crossing and will have a
claim on the assets of Global Crossing as a whole. Legal ownership of the
assets comprising the Global Crossing group and GlobalCenter group will remain
held by Global Crossing Ltd.
The pro forma information, while helpful in illustrating the financial
characteristics of the Global Crossing group, does not attempt to predict or
suggest future results. You should not reply on pro forma financial
information as an indication of the future results that the Global Crossing
group will experience after approval and implementation of the tracking stock
proposals.
You should read these unaudited pro forma condensed combined financial
statements in conjunction with the historical financial statements of Global
Crossing, Global Marine Systems, Frontier Corporation, Racal Telecom, HCL
Holdings, IPC and IXnet and related Global Crossing Pro Forma Information,
each of which are incorporated by reference in this proxy statement.
F-73
Pro Forma Global Crossing Group
Unaudited Pro Forma Condensed Combined Balance Sheet
as of March 31, 2000
(in thousands)
Global
Global Crossing
Crossing New Global Group Pro
Pro Forma(1) Center(3) Forma
------------ ---------- -----------
ASSETS
Current Assets:
Cash, restricted cash and
investments........................... $ 3,220,590 $ -- $ 3,220,590
Accounts receivable, net............... 995,671 30,309 965,362
Other assets and prepaid costs......... 383,892 15,077 368,815
----------- ---------- -----------
Total Current Assets................. 4,600,153 45,386 4,554,767
Restricted cash and cash equivalents.... 69,545 -- 69,545
Accounts receivable..................... 42,419 -- 42,419
Property and equipment, net............. 8,103,033 162,241 7,940,792
Goodwill and other intangibles, net..... 12,649,272 1,411,130 11,238,142
Investment in and advances to/from
affiliates, net........................ 604,291 -- 604,291
Other assets, net....................... 895,506 9,871 885,635
----------- ---------- -----------
Total Assets......................... $26,964,219 $1,628,628 $25,335,591
=========== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accrued construction costs............. $ 570,461 $ -- $ 570,461
Accounts payable and accrued
liabilities........................... 1,041,855 44,657 997,198
Accrued interest and preferred
dividends............................. 162,260 -- 162,260
Deferred revenue....................... 257,602 -- 257,602
Income taxes payable................... 88,325 -- 88,325
Current portion of long term debt...... 61,965 -- 61,965
Other current liabilities.............. 271,519 13,182 258,337
----------- ---------- -----------
Total Current Liabilities............ 2,453,987 57,839 2,396,148
Long term debt......................... 6,257,812 -- 6,257,812
Deferred revenue....................... 489,331 -- 489,331
Deferred credits and other............. 841,691 29,231 812,460
----------- ---------- -----------
Total Liabilities.................... 10,042,821 87,070 9,955,751
----------- ---------- -----------
MINORITY INTEREST....................... 478,030 -- 478,030
----------- ---------- -----------
MANDATORILY REDEEMABLE AND CUMULATIVE
CONVERTIBLE PREFERRED STOCK............ 3,598,267 -- 3,598,267
----------- ---------- -----------
SHAREHOLDERS' EQUITY:
Common stock........................... 8,821 -- 8,821
Treasury stock......................... (209,415) -- (209,415)
Other shareholders' equity............. 13,466,885 1,541,558 11,925,327
Accumulated deficit.................... (421,190) -- (421,190)
----------- ---------- -----------
12,845,101 1,541,558 11,303,543
----------- ---------- -----------
Total Liabilities and Shareholders'
Equity.............................. $26,964,219 $1,628,628 $25,335,591
=========== ========== ===========
F-74
Pro Forma Global Crossing Group
Unaudited Pro Forma Condensed Combined Statements of Operations
For the three months Ended March 31, 2000
(in thousands, except share and per share amounts)
Global
Global GlobalCenter Crossing
Crossing Group Group
Pro Forma(1) Pro forma Pro Forma
------------ ------------ -----------
Operating Revenues...................... $ 1,207,256 $ 38,309 $ 1,168,947
----------- ----------- -----------
Operating Expenses:
Operating, selling, general and
administrative........................ 1,108,280 46,821 1,061,459
Merger Expenses........................ 23,288 -- 23,288
Depreciation and amortization.......... 149,569 3,155 146,414
Goodwill and intangibles
amortization.......................... 211,948 37,135 174,813
----------- ----------- -----------
1,493,085 87,111 1,405,974
----------- ----------- -----------
Operating (loss)........................ (285,829) (48,802) (237,027)
Equity in loss of affiliates............ (5,140) -- (5,140)
Minority interest....................... (15,731) -- (15,731)
Other income (expense):
Interest expense....................... (93,123) -- (93,123)
Interest income........................ 22,798 -- 22,798
Other income (expense)................. (6,396) (211) (6,185)
----------- ----------- -----------
Loss before provision for income taxes.. (383,421) (49,013) (334,408)
(Provision) benefit for income taxes... (6,219) 7,933 (14,152)
----------- ----------- -----------
Net loss................................ (389,640) (41,080) (348,560)
Preferred stock dividends.............. (64,664) -- (64,664)
----------- ----------- -----------
Loss applicable to common shareholders.. $ (454,304) $ (41,080) (413,224)
=========== =========== ===========
Net loss per common share:
Loss applicable to common shareholders
Basic and diluted.................... $ (0.53) $ (0.14) $ (0.48)
=========== =========== ===========
Shares used in computing information
applicable to common shareholders
Basic and diluted.................... 857,864,029 291,000,000 857,864,029
=========== =========== ===========
F-75
Pro Forma Global Crossing Group
Unaudited Pro Forma Condensed Combined Statements of Operations
For the Year Ended December 31, 1999
(in thousands, except share and per share amounts)
New Global Center Global
Global Three Months Crossing
Crossing Ended Group
Pro Forma(1) March 31, 2000(3) Pro Forma
------------ ----------------- -----------
Operating Revenues............... $ 4,494,819 $ 70,903 $ 4,423,916
----------- ----------- -----------
Operating Expenses:
Operating, selling, general and
administrative................. 3,729,988 100,300 3,629,658
Merger expenses................. 99,119 -- 99,119
Depreciation and amortization... 386,790 6,428 380,362
Goodwill and intangibles
amortization................... 830,317 148,540 681,777
----------- ----------- -----------
5,046,214 255,268 4,790,946
----------- ----------- -----------
Operating income (loss).......... (551,395) (184,365) (367,030)
Equity in income (loss) of
affiliates...................... (143) -- (143)
Minority interest................ (1,338) -- (1,338)
Other income (expense):
Interest expense................ (523,558) -- (523,558)
Interest income................. 76,528 -- 76,528
Other income (expenses)......... 179,500 70 179,430
----------- ----------- -----------
Income (loss) before provision
for income taxes, extraordinary
item and cumulative effect of
change in accounting principle.. (820,406) (184,295) (636,111)
(Provision) benefit for income
taxes.......................... (170,653) 14,075 (184,728)
----------- ----------- -----------
Income (loss) before
extraordinary item and
cumulative effect of change in
accounting principle............ (991,059) (170,220) (820,839)
Preferred stock dividends....... (278,732) -- (278,732)
----------- ----------- -----------
Income (loss) applicable to
common shareholders before
extraordinary item and
cumulative effect of change in
accounting principle............ (1,269,791) (170,220) (1,099,571)
Diluted earnings adjustment..... -- --
----------- ----------- -----------
Income (loss) applicable to
common shareholders before
extraordinary item and
cumulative effect of change in
accounting principle (Diluted).. $(1,269,791) $ (170,220) $(1,099,571)
=========== =========== ===========
Income (loss) per common share:
Income (loss) applicable to
common shareholders before
extraordinary item and
cumulative effect of change in
accounting principle
Basic and diluted............. $ (1.50) $ (0.58) $ (1.29)
=========== =========== ===========
Shares used in computing
information applicable to
common shareholders
Basic and diluted............. 849,438,857 291,000,000 849,438,857
=========== =========== ===========
F-76
Pro Forma Global Crossing Group
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
- --------
(1) These columns represent the unaudited pro forma condensed combined
financial information of Global Crossing, Global Marine Systems, Frontier,
Racal Telecom, the Hutchison Global Crossing joint venture and IPC
Communications, Inc. "IPC" which we refer to as "Pro Forma Global
Crossing," which have been prepared to demonstrate how these companies or
businesses might have looked if (1) the Global Marine Systems acquisition
and related financing, (2) the Frontier Corporation acquisition, (3) the
Racal Telecom acquisition and related financing, (4) the Hutchison Global
Crossing joint venture, including the related issuance of the 6 3/8%
cumulative convertible preferred stock, series B, of Global Crossing, (5)
the IPC and IXnet Inc. acquisitions, (6) the offering of Global Crossing's
6 3/8% cumulative convertible preferred stock completed on November 5,
1999, (7) the offering of the 9 1/8% senior notes due 2006 and 9 1/2%
senior notes due 2009 of Global Crossing Holdings completed on November
19, 1999, (8) the offering of Global Crossing's 7% cumulative convertible
preferred stock completed on December 15, 1999 and (9) the offering of our
6 3/4% cumulative convertible preferred stock and 21,673,706 shares of our
common stock completed on April 14, 2000 had been completed as of the date
or at the beginning of the period presented. For a comprehensive
presentation of the calculations performed to derive the pro forma
financial information presented in these columns, please refer to our
Current Report on Form 8-K dated June 14, 2000, which has been
incorporated by reference into this proxy statement.
(2) This column combines the operating results of Old GlobalCenter for the
nine months ended September 30, 1999 with the operating results of New
GlobalCenter for the three months ended December 31, 1999. This pro forma
presentation includes pro forma adjustments for depreciation of property
and equipment and amortization of goodwill and intangibles for the nine
months ended September 30, 1999 resulting from the acquisition by Global
Crossing.
(3) This column represents the historical financial position and results of
operations of the GlobalCenter group as of and for the three months ended
March 31, 2000.
F-77
ANNEX I
PROPOSED RESOLUTIONS OF GLOBAL CROSSING'S SHAREHOLDERS
IN CONNECTION WITH THE SPECIAL MEETING
PROPOSAL NOS. 1 AND 2: THE TRACKING STOCK PROPOSALS
Proposal No. 1: Increase Global Crossing's authorized share capital
RESOLVED, that, with effect at and from such time as the officers of the
Company shall determine, the authorized share capital of the Company shall be
increased from $30,200,000 to $45,250,000 by the creation of an additional
1,500,000,000 shares of Common Stock, of par value $0.01 per share and
5,000,000 shares of Preferred Stock, of par value $0.01 per share;
RESOLVED, that, with effect at and from such time as the officers of the
Company shall determine, the Board be and is hereby authorized to issue from
time to time for any purpose authorized shares of Preferred Stock of the
Company, in one or more classes or series and with such voting powers (full or
limited), designations, preferences and relative, participating optional or
other rights, if any, and with such qualifications, limitations, restrictions
or redemption provisions, if any, as the Board of Directors of the Company may
determine; and
RESOLVED, that, each officer of the Company be and is hereby authorized,
empowered and directed to take any and all actions necessary, proper or
advisable in order fully to carry out the intent and accomplish the purposes
of the resolutions adopted hereby and each of them, including, without
limitation, to deposit with the Bermuda Registrar of Companies an applicable
Memorandum of Increase of Share Capital of the Company pursuant to the
Companies Act 1981 of Bermuda, and all such actions heretofore taken are
hereby ratified and confirmed as the act and deed of the Company.
Proposal No. 2: Establish multiple classes of Global Crossing common stock
and designate outstanding shares of Global Crossing common stock as Global
Crossing Group Stock
RESOLVED, that, with effect at and from such time as the officers of the
Company shall determine, the Board be and is hereby authorized to designate
authorized shares of Common Stock of the Company into (1) 3,000,000,000 shares
of a special class of Common Stock to be called "Global Crossing Group Stock"
and (2) 1,000,000,000 shares of a special class of Common Stock to be called
"GlobalCenter Group Stock," in each case with the rights set out for such
class of Common Stock in the Certificate of Designations which shall be
attached as a Schedule to the Bye-laws of the Company (but which shall not
form part of those Bye-laws), with the balance of the authorized shares of
Common Stock of the Company available for designation by the Board of
Directors as either Global Crossing Group Stock, GlobalCenter Group Stock or
any additional class of Common Stock of the Company to be established from
time to time by resolution of the Board;
RESOLVED, that, with effect at and from such time as the officers of the
Company shall determine, the Board be and is hereby authorized to (1)
designate any additional class of Common Stock of the Company as determined
from time to time by resolution of the Board, subject to the Company's Bye-
laws as in effect at such time, and (2) attach to the Bye-laws as a Schedule
(but which Schedule shall not form part of those Bye-laws) the Certificate of
Designation for any such class, which Schedule shall set out the rights of the
shares of such Class;
RESOLVED, that, with effect at and from such time as the officers of the
Company shall determine, the Board be and is hereby authorized to issue from
time to time for any purpose authorized shares of Common Stock of the Company,
including shares of authorized Global Crossing Group Stock and GlobalCenter
Group Stock;
RESOLVED, that, with effect at and from such time as the officers of the
Company shall determine, the Board be and is hereby authorized to redesignate
each share of outstanding Global Crossing Common Stock as a share of Global
Crossing Group Stock;
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PROPOSAL NOS. 3 AND 4: THE GLOBALCENTER STOCK INCENTIVE PLAN PROPOSALS
Proposal No. 3: Adopt the GlobalCenter Management Stock Plan
RESOLVED, that, the terms of the GlobalCenter Management Stock Plan be and
hereby is approved and adopted and, with effect at and from such time as the
officers of the Company shall determine, 27,470,588 shares of GlobalCenter
Group Stock be and hereby are reserved for issuance by the Board in accordance
with the terms of such Plan; and
Proposal No. 4: Adopt the GlobalCenter 2000 Stock Plan
RESOLVED, that, the terms of the GlobalCenter 2000 Stock Plan be and hereby
is approved and adopted and, with effect at and from such time as the officers
of the Company shall determine, 13,735,294 shares of GlobalCenter Group Stock
be and hereby are reserved for issuance by the Board in accordance with the
terms of such Plan.
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ANNEX II
Schedule to the Bye-Laws
of Global Crossing Ltd.
CERTIFICATE OF DESIGNATIONS
OF
GLOBAL CROSSING GROUP STOCK
AND
GLOBALCENTER GROUP STOCK
The terms of the authorized Global Crossing Group Stock and GlobalCenter
Group Stock of Global Crossing Ltd., a company incorporated under the laws of
Bermuda (the "Company"), shall be as set forth below in this Schedule to the
Bye-Laws of the Company (this "Schedule").
The number of authorized shares of Global Crossing Group Stock and of
GlobalCenter Group Stock shall be as specified by the Board of Directors from
time to time, so long as the number of shares in all classes of Common Stock
does not exceed the total number of shares of Common Stock the Company is
authorized to issue. Each share of Global Crossing Group Stock and GlobalCenter
Group Stock will have a par value of $.01 per share. All shares of Global
Crossing Group Stock or GlobalCenter Group Stock repurchased, converted or
otherwise re-acquired by the Company shall be retired and canceled and, upon
the taking of any action required by applicable law, shall be restored to the
status of authorized but unissued shares of Global Crossing Group Stock or
GlobalCenter Group Stock, respectively, and may thereafter be reissued.
All shares of Global Crossing Group Stock and GlobalCenter Group Stock shall
be denominated in United States currency, and all payments and distributions
thereon or with respect thereto shall be made in United States currency. All
references herein to "$" or "dollars" refer to United States currency.
Section 1. Distributions and Share Dividends.
Subject to the prior and superior rights of the holders of any shares of
preferred stock of the Company ranking prior and superior to the shares of
Common Stock, distributions and share dividends may be declared and paid upon
any class of Common Stock, upon the terms with respect to each such class, and
subject to the limitations provided for below, as the Board of Directors may
determine.
(A) Distributions on Global Crossing Group Stock. Distributions on Global
Crossing Group Stock may be declared and paid only out of the lesser of:
(i) the funds legally available for that purpose; and
(ii) the Global Crossing Group Available Distribution Amount.
(B) Distributions on GlobalCenter Group Stock. Distributions on GlobalCenter
Group Stock may be declared and paid only out of the lesser of:
(i) the funds legally available for that purpose; and
(ii) the GlobalCenter Group Available Distribution Amount.
(C) Additional Limitations on Distributions and Share Dividends. In addition
to the transactions contemplated by Section 4, the Board of Directors may only
declare and pay share dividends of shares of Global Crossing Group Stock and
GlobalCenter Group Stock (or distributions of Convertible Securities
II-1
convertible into or exchangeable or exercisable for shares of Global Crossing
Group Stock or GlobalCenter Group Stock) or distributions of assets (including
securities) attributed to the Global Crossing Group or the GlobalCenter Group
on shares of Common Stock as follows:
(i) on shares of Global Crossing Group Stock, dividends of shares of
Global Crossing Group Stock (or distributions of Convertible Securities
convertible into or exchangeable or exercisable for shares of Global
Crossing Group Stock) or distributions of assets (including securities)
attributed to the Global Crossing Group;
(ii) on shares of GlobalCenter Group Stock, dividends of shares of
GlobalCenter Group Stock (or distributions of Convertible Securities
convertible into or exchangeable or exercisable for shares of GlobalCenter
Group Stock) or distributions of assets (including securities) attributed
to the GlobalCenter Group;
(iii) on shares of any class of Common Stock (other than Global Crossing
Group Stock), dividends of shares of Global Crossing Group Stock (or
distributions of Convertible Securities convertible into or exchangeable or
exercisable for shares of Global Crossing Group Stock), but only if the sum
of:
(1) the number of shares of Global Crossing Group Stock to be so
issued (or the number of such shares which would be issuable upon
repurchase, exchange or exercise of any Convertible Securities to be so
issued); and
(2) the number of shares of Global Crossing Group Stock which are
issuable upon repurchase, exchange or exercise of any Convertible
Securities then outstanding that are attributed to the Group related to
the class of Common Stock on which the dividend or distribution is to
be so paid
is less than or equal to the Number of Shares Issuable with Respect to the
Inter-Group Interest in the Global Crossing Group held by such Group;
(iv) on shares of any class of Common Stock (other than GlobalCenter
Group Stock), dividends of shares of GlobalCenter Group Stock (or
distributions of Convertible Securities convertible into or exchangeable or
exercisable for shares of GlobalCenter Group Stock), but only if the sum
of:
(1) the number of shares of GlobalCenter Group Stock to be so issued
(or the number of such shares which would be issuable upon repurchase,
exchange or exercise of any Convertible Securities to be so issued);
and
(2) the number of shares of GlobalCenter Group Stock which are
issuable upon repurchase, exchange or exercise of any Convertible
Securities then outstanding that are attributed to the Group related to
the class of Common Stock on which the dividend or distribution is to
be so paid
is less than or equal to the Number of Shares Issuable with Respect to the
Inter-Group Interest in the GlobalCenter Group held by such Group;
(v) on shares of any class of Common Stock (other than Global Crossing
Group Stock), distributions of assets (including securities) attributed to
the Global Crossing Group, but only if the sum of:
(1) the number or amount of such assets (including securities) to be
so paid; and
(2) the number or amount of such assets (including securities), if
any, payable upon repurchase, exchange or exercise of any Convertible
Securities then outstanding that are attributed to the Group related to
the class of Common Stock on which the distribution is to be so paid
is equal to the product of:
(x) the number or amount of such assets (including securities) to be
paid concurrently to holders of outstanding Global Crossing Group
Stock; and
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(y) a fraction, the numerator of which is equal to the Number of
Shares Issuable with Respect to the Inter-Group Interest in the Global
Crossing Group held by such Group and the denominator of which is equal
to the number of outstanding shares of Global Crossing Group Stock; and
(vi) on shares of any class of Common Stock (other than GlobalCenter
Group Stock), distributions of assets (including securities) attributed to
the GlobalCenter Group, but only if the sum of:
(1) the number or amount of such assets (including securities) to be
so paid; and
(2) the number or amount of such assets (including securities), if
any, payable upon repurchase, exchange or exercise of any Convertible
Securities then outstanding that are attributed to the Group related to
the class of Common Stock on which the distribution is to be so paid
is equal to the product of:
(x) the number or amount of such assets (including securities) to be
paid concurrently to holders of outstanding GlobalCenter Group Stock;
and
(y) a fraction, the numerator of which is equal to the Number of
Shares Issuable with Respect to the Inter-Group Interest in the
GlobalCenter Group held by such Group and the denominator of which is
equal to the number of outstanding shares of GlobalCenter Group Stock.
For purposes of this Section 1(C), any outstanding Convertible Securities
that are convertible into or exchangeable or exercisable for any other
Convertible Securities which are themselves convertible into or exchangeable or
exercisable for any class of Common Stock (or other Convertible Securities that
are so convertible, exchangeable or exercisable) shall be deemed to have been
repurchased, exchanged or exercised in full for such Convertible Securities.
(D) Discrimination Between or Among Classes of Common Stock. The Board of
Directors, subject to the provisions of this Section 1, may at any time declare
and pay distributions and share dividends exclusively on Global Crossing Group
Stock, exclusively on GlobalCenter Group Stock, exclusively on Additional Group
Stock or on any combination thereof, in equal or unequal amounts,
notwithstanding the relationship between the Available Distribution Amount with
respect to any particular Group and any other Group, the amount of
distributions and share dividends previously declared or paid on any series,
the respective voting or liquidation rights of any series or any other factor.
Section 2. Voting Rights.
(A) General. Except as otherwise provided by law, by the terms of any
outstanding preferred stock or by any provision of the Company's Bye-laws
(including all schedules thereto) restricting the power to vote on a specified
matter to other shareholders, holders of shares of Common Stock shall
collectively have unlimited voting rights. Such voting rights may be allocated
among one or more classes of Common Stock pursuant to the terms of such classes
as fixed or as determined by the Board of Directors in a manner permitted by
law. All classes of Common Stock shall vote thereon together as a single class,
except as otherwise provided by law, by Section 2(B) or by a Certificate of
Designations creating another class of Common Stock.
(B) Class Votes. The affirmative vote of the majority of votes cast by the
holders of shares of Global Crossing Group Stock or GlobalCenter Group Stock,
as the case may be, voting as a class, in person or by proxy, at a special or
annual meeting called for the purpose, or by written consent in lieu of a
meeting, shall be required to do any of the following:
(i) increase or decrease (but not below the number of shares of such
class of Common Stock then outstanding) the number of authorized shares of
such class of Common Stock, other than an increase in the number of
authorized shares of such class of Common Stock required to effectuate a
conversion of
II-3
shares of one class of Common Stock into another class of Common Stock
pursuant to Section 4 or a distribution to holders of Global Crossing Group
Stock of all or a portion of its Inter-Group Interest in the GlobalCenter
Group; or
(ii) make any amendment to the terms of such class of Common Stock as set
forth in this Certificate of Designations.
(C) Number of Votes for Each Class of Common Stock. On each matter to be
voted on by the holders of all classes of Common Stock voting together as a
single class, the number of votes per share of each class shall be as follows:
(i) each outstanding share of Global Crossing Group Stock shall have one
vote;
(ii) each outstanding share of GlobalCenter Group Stock shall have a
number of votes equal to the quotient of the average Market Value of one
share of GlobalCenter Group Stock during the 20-trading day period ending
on the tenth trading day prior to the record date for determining the
holders of stock entitled to vote, divided by the average Market Value of
one share of Global Crossing Group Stock during the same period; provided
that if this calculation results in the holders of GlobalCenter Group Stock
holding more than 25% of the total voting power of all outstanding shares
of Common Stock, the vote of each share of GlobalCenter Group Stock shall
be reduced so that all of the outstanding shares of GlobalCenter Group
Stock represent 25% of the total voting power of all outstanding shares of
Common Stock, except where the outstanding shares of Global Crossing Group
Stock have been converted into shares of GlobalCenter Group Stock, in which
case the foregoing limitation on the voting power of holders of
GlobalCenter Group Stock shall not apply;
(iii) each outstanding share of any class of Additional Group Stock shall
have a number of votes (including a fraction of one vote), or be not
entitled to be voted with shares of other classes of Common Stock, as may
be set forth in or determined pursuant to the Certificate of Designations
creating such class of Additional Group Stock;
Notwithstanding the foregoing provisions of this Section 2(C), if shares of
only one class of Common Stock are outstanding on the record date for
determining the holders of Common Stock entitled to vote on any matter, then
each share of that class shall be entitled to one vote and, if any class of
Common Stock is entitled to vote as a separate class with respect to any
matter, each share of that class shall, for purpose of such vote, be entitled
to one vote on such matter.
Section 3. Liquidation Rights.
(A) General. In the event of any voluntary or involuntary dissolution of the
Company, after payment or provision for payment of the debts and other
liabilities of the Company and after making provision for preferred stock prior
and superior to Common Stock as to payments upon dissolution (regardless of the
Group to which such shares of the preferred stock were attributed), the holders
of Global Crossing Group Stock, GlobalCenter Group Stock and each series of
Additional Group Stock then outstanding shall be entitled to receive out of the
net assets, if any, of the Company remaining for distribution to holders of
Common Stock (regardless of the Group to which such assets are then attributed)
an amount on a per share basis in proportion to the respective liquidation
units per share of such series. For purposes of this Section 3, neither the
voluntary sale, lease, exchange or other disposition of all or substantially
all of the property or assets of the Company or a consolidation or merger of
the Company or a share exchange by the Company with one or more other
corporations (whether or not the Company is the corporation surviving such
consolidation or merger) or the acquiring company in such share exchange nor
any transaction or event pursuant to Section 4 or transaction or event
involving any series of Additional Group Stock pursuant to comparable
provisions creating such series of Additional Group Stock shall be deemed a
voluntary or involuntary dissolution of the Company for purposes of this
Section 3.
II-4
(B) Liquidation Units for Each Class of Common Stock. The liquidation units
for share of each class of Common Stock shall be as follows:
(i) each share of Global Crossing Group Stock shall have one liquidation
unit;
(ii) each share of GlobalCenter Group Stock shall have a number of
liquidation units (including a fraction of one liquidation unit) equal to
the quotient, rounded to the nearest 1/10,000 (.0001), of the average
Market Value of one share of GlobalCenter Group Stock over the period of 20
consecutive Trading Days ending on the 40th Trading Day after the effective
date of this certificate of designations, divided by the average Market
Value of one share of Global Crossing Group Stock during the same 20-
Trading Day period; and
(iii) each share of any class of Additional Group Stock shall have the
number of liquidation units (including a fraction of one liquidation unit)
as may be set forth in or determined pursuant to the Certificate of
Designations creating such class of Additional Group Stock;
provided that, if the Company shall in any manner subdivide (by stock split,
reclassification or otherwise) or combine (by reverse stock split,
reclassification or otherwise) the outstanding shares of any class of Common
Stock, or declare and pay a dividend in shares of any class of Common Stock to
holders of such class, the per share liquidation units of the class of Common
Stock, as adjusted from time to time, shall be appropriately adjusted, as
determined by the Board of Directors, so as to avoid any dilution in the
aggregate, relative liquidation rights of the shares of any class of Common
Stock.
Section 4. Conversion or Repurchase of, and Special Distributions on, Global
Crossing Group Stock and GlobalCenter Group Stock.
(A) Conversion of Global Crossing Group Stock at Company's Option at Any Time
or if a Tax Event Occurs. The Board of Directors may at any time declare that
each outstanding share of Global Crossing Group Stock shall be converted, as of
the Conversion Date set forth in a notice delivered in accordance with Section
4(H)(v)(2), into a number of fully paid and nonassessable shares of
GlobalCenter Group Stock or, if so determined by the Board of Directors,
Additional Group Stock equal to the applicable percentage set forth in the
following sentence of the ratio, rounded to the nearest 1/10,000 (.0001), of
the average Market Value of one share of Global Crossing Group Stock over the
period of 20 consecutive Trading Days ending on the fifth Trading Day
immediately preceding the date of the notice of conversion required by Section
4(H)(v) to the average Market Value of one share of GlobalCenter Group Stock or
Additional Group Stock, as applicable, during the same 20-Trading Day period;
provided that the Board of Directors may only declare that the Global Crossing
Group Stock shall be so converted, if, as of the close of business on such
fifth Trading Day, the Market Capitalization of the Global Crossing Group Stock
shall be less than the Market Capitalization of the GlobalCenter Group Stock or
the Additional Group Stock, as applicable. The applicable percentage referred
to in the preceding sentence shall equal:
(1) if a Tax Event has not occurred,
(a) prior to the first anniversary of the Initial Issuance Date,
120%;
(b) beginning on the first anniversary of the Initial Issuance
Date and prior to the second anniversary of the Initial Issuance
Date, 115%; and
(c) beginning on the second anniversary of the Initial Issuance
Date, 110%; or
(2) if a Tax Event has occurred, 100%.
(B) Repurchase of Global Crossing Group Stock for Global Crossing Subsidiary
Stock. At any time at which all of the assets and liabilities attributed to the
Global Crossing Group (and no other businesses, assets, properties or
liabilities of the Company or any subsidiary thereof) are held directly or
indirectly by one or more wholly-owned subsidiaries of the Company (each, a
"Global Crossing Subsidiary"), the Board of Directors may, provided that there
are funds legally available for the purpose:
II-5
(i) if the Aggregate Number of Shares Issuable with Respect to the Inter-
Group Interest in the Global Crossing Group is zero and the Global Crossing
Group does not hold an Inter-Group Interest in any other Group, repurchase
all of the outstanding shares of Global Crossing Group Stock, on the
Repurchase Date set forth in a notice delivered in accordance with Section
4(H)(vi), for all of the shares of common stock of each Global Crossing
Subsidiary as will be outstanding immediately following such repurchase of
shares;
(ii) if the Aggregate Number of Shares Issuable with Respect to the
Inter-Group Interest in the Global Crossing Group is greater than zero and
the Global Crossing Group does not hold an Inter-Group Interest in any
other Group, repurchase all of the outstanding shares of Global Crossing
Group Stock, on the Repurchase Date set forth in a notice delivered in
accordance with Section 4(H)(vi), for a number of shares of common stock of
each Global Crossing Subsidiary equal to the product of:
(x) the Outstanding Interest Fraction with respect to Global Crossing
Group Stock, and
(y) the number of shares of common stock of each Global Crossing
Subsidiary as will be outstanding immediately following such repurchase
of shares;
(iii) if the Aggregate Number of Shares Issuable with Respect to the
Inter-Group Interest in the Global Crossing Group is zero and the Global
Crossing Group holds an Inter-Group Interest in any other Group, repurchase
all of the outstanding shares of Global Crossing Group Stock, on the
Repurchase Date set forth in a notice delivered in accordance with Section
4(H)(vi), for:
(1) all of the shares of common stock of each Global Crossing
Subsidiary as will be outstanding immediately following such repurchase
of shares; and
(2) for each Group in respect of which the Global Crossing Group
holds an Inter-Group Interest, the related Number of Shares Issuable
with Respect to the Inter-Group Interest in each such Group held by the
Global Crossing Group; or
(iv) if the Aggregate Number of Shares Issuable with Respect to the
Inter-Group Interest for the Global Crossing Group is greater than zero and
the Global Crossing Group holds an Inter-Group Interest in any other Group,
repurchase all of the outstanding shares of Global Crossing Group Stock, on
the Repurchase Date set forth in a notice delivered in accordance with
Section 4(H)(vi), for:
(1) a number of shares of common stock of each Global Crossing
Subsidiary equal to the product of:
(x) the Outstanding Interest Fraction with respect to Global
Crossing Group Stock; and
(y) the number of shares of common stock of each Global Crossing
Subsidiary as will be outstanding immediately following such
repurchase of shares; and
(2) for each Group in respect of which the Global Crossing Group
holds an Inter-Group Interest, the related Number of Shares Issuable
with Respect to the Inter-Group Interest in each such Group held by the
Global Crossing Group.
The shares of common stock of each Global Crossing Subsidiary and the shares of
Common Stock equal to the Number of Shares Issuable with Respect to the Inter-
Group Interest in any Group held by the Global Crossing Group to be delivered
to the holders of shares of Global Crossing Group Stock on any Repurchase Date
may be delivered either directly or indirectly through the delivery of shares
of another Global Crossing Subsidiary that owns directly or indirectly all such
shares, and such shares shall be divided among the holders of Global Crossing
Group Stock pro rata in accordance with the number of shares of Global Crossing
Group Stock held by each such holder on such Repurchase Date. Each share of
common stock of each Global Crossing Subsidiary and share of Common Stock in
respect of such Number of Shares Issuable with Respect to the Inter-Group
Interest shall be, upon such delivery, fully paid and nonassessable.
II-6
(C) Special Distributions on, and Conversion and Repurchase of, Global
Crossing Group Stock if a Disposition of All or Substantially All Assets of the
Global Crossing Group Occurs. (i) In the event of the Disposition, in one
transaction or a series of related transactions (other than in one or a series
of Excluded Transactions), by the Company and/or its subsidiaries of all or
substantially all of the business, properties and assets attributed to the
Global Crossing Group, the Company shall, on or prior to the 120th Trading Day
after the Disposition Date, as the Board of Directors shall have determined in
its sole discretion:
(1) provided that there are funds legally available for the purpose:
(a) subject to compliance with Section 1, pay to the holders of
the shares of Global Crossing Group Stock a distribution pro rata in
accordance with the number of shares of Global Crossing Group Stock
held by each such holder, in cash and/or securities or other
property having a Fair Value as of the Disposition Date in the
aggregate equal to the product of:
(x) the Outstanding Interest Fraction with respect to Global
Crossing Group Stock as of the record date for determining
holders entitled to receive such distribution; and
(y) the Fair Value as of the Disposition Date of the Net
Proceeds of such Disposition; or
(b) (I) subject to the last sentence of this Section 4(C)(i), if
such Disposition involves all (not merely substantially all) of the
business, properties and assets attributed to the Global Crossing
Group, repurchase as of the Repurchase Date set forth in a notice
delivered in accordance with Section 4(H)(iii)(2), all outstanding
shares of Global Crossing Group Stock for cash and/or securities
(other than shares of a class of Common Stock of the Company) or
other property having a Fair Value as of the Disposition Date in the
aggregate equal to the product of:
(x) the Outstanding Interest Fraction with respect to Global
Crossing Group Stock as of such Repurchase Date; and
(y) the Fair Value as of the Disposition Date of the Net
Proceeds of such Disposition; or
(II) subject to the last sentence of this Section 4(C)(i), if such
Disposition involves substantially all (but not all) of the
business, properties and assets attributed to the Global Crossing
Group, repurchase as of the Repurchase Date set forth in a notice
delivered in accordance with Section 4(H)(iv)(2), the number of
whole shares of Global Crossing Group Stock equal to the lesser of:
(x) the number of shares of Global Crossing Group Stock
outstanding; and
(y) such number of shares of Global Crossing Group Stock as
have in the aggregate an average Market Value during the period
of ten consecutive Trading Days beginning on the 51st Trading
Day immediately succeeding the Disposition Date closest to the
product of:
(xx) the Outstanding Interest Fraction with respect to
Global Crossing Group
Stock as of the record date for determining shares selected
for repurchase; and
(yy) the Fair Value as of the Disposition Date of the Net
Proceeds of such Disposition,
for, on a pro rata basis, cash and/or securities (other than shares
of a class of Common Stock) or other property having a Fair Value as
of the Disposition Date in the aggregate equal to such product; or
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(2) declare that each outstanding share of Global Crossing Group
Stock shall be converted as of the Conversion Date set forth in a
notice delivered in accordance with Section 4(H)(v)(2), for a number of
fully paid and nonassessable shares of GlobalCenter Group Stock or, if
so determined by the Board of Directors, Additional Group Stock equal
to the applicable percentage set forth in Section 4(A) of the ratio,
rounded to the nearest 1/10,000 (.0001), of the average Market Value of
one share of Global Crossing Group Stock over the period of ten
consecutive Trading Days beginning on the 51st Trading Day following
the Disposition Date to the average Market Value of one share of
GlobalCenter Group Stock or such Additional Group Stock during the same
ten-Trading Day period.
Notwithstanding the foregoing provisions of this Section 4(C)(i), the Company
shall repurchase shares of Global Crossing Group Stock as provided by Section
4(C)(i)(1)(b)(I) or (II) only if the amount to be paid to repurchase such stock
is less than or equal to the Global Crossing Group Available Distribution
Amount as of the Repurchase Date.
(ii) For purposes of this Section 4(C):
(1) as of any date, "substantially all of the business, properties
and assets" attributed to the Global Crossing Group shall mean a
portion of such business, properties and assets that represents at
least 80% of the Fair Value of the properties and assets attributed to
the Global Crossing Group as of such date;
(2) in the case of a Disposition of the business, properties and
assets attributed to the Global Crossing Group in a series of related
transactions, such Disposition shall not be deemed to have been
consummated until the consummation of the last of such transactions;
and
(3) the Board of Directors may pay any dividend or repurchase price
referred to in Section 4(C)(i) in cash, securities (other than shares
of a class or class of Common Stock of the Company) or other property,
regardless of the form or nature of the proceeds of the Disposition.
(iii) After the payment of any distribution or repurchase price with
respect to the Global Crossing Group Stock as provided for by Section
4(C)(i)(1), the Board of Directors may declare that each share of Global
Crossing Group Stock remaining outstanding shall be converted, but only as
of a Conversion Date set forth in a notice delivered in accordance with
Section 4(H)(v)(2), prior to the second anniversary of the payment of such
distribution or repurchase price, into a number of fully paid and
nonassessable shares of GlobalCenter Group Stock or, if so determined by
the Board of Directors, Additional Group Stock equal to 110% of the ratio,
rounded to the nearest 1/10,000 (.0001), of the average Market Value of one
share of Global Crossing Group Stock during the period of 20 consecutive
Trading Days ending on the fifth Trading Day immediately preceding the date
of the notice of such conversion required by Section 4(H)(v) to the average
Market Value of one share of GlobalCenter Group Stock or such Additional
Group Stock, as applicable, during the same 20-Trading Day period.
(D) Conversion of GlobalCenter Group Stock at Company's Option at Any Time or
if a Tax Event Occurs. The Board of Directors may at any time declare that each
outstanding share of GlobalCenter Group Stock shall be converted, as of the
Conversion Date set forth in a notice delivered in accordance with Section
4(H)(v)(2), into a number of fully paid and nonassessable shares of Global
Crossing Group Stock or, if so determined by the Board of Directors, Additional
Group Stock equal to the applicable percentage set forth in the following
sentence of the ratio, rounded to the nearest 1/10,000 (.0001), of the average
Market Value of one share of GlobalCenter Group Stock over the period of 20
consecutive Trading Days ending on the fifth Trading Day immediately preceding
the date of the notice of conversion required by Section 4(H)(v) to the average
Market Value of one share of Global Crossing Group Stock or Additional Group
Stock, as applicable, during the same 20-Trading Day period; provided that the
Board of Directors may only declare that the GlobalCenter Group Stock shall be
so converted, if, as of the close of business on such fifth Trading Day, the
Market Capitalization of the GlobalCenter Group Stock shall be less than the
Market Capitalization of the Global
II-8
Crossing Group Stock or the Additional Group Stock, as applicable. The
applicable percentage referred to in the preceding sentence shall equal:
(1) if a Tax Event has not occurred,
(a) prior to the first anniversary of the Initial Issuance Date,
120%;
(b) beginning on the first anniversary of the Initial Issuance
Date and prior to the second anniversary of the Initial Issuance
Date, 115%; and
(c) beginning on the second anniversary of the Initial Issuance
Date, 110%; or
(2) if a Tax Event has occurred, 100%.
(E) Repurchase of GlobalCenter Group Stock for GlobalCenter Subsidiary
Stock. At any time at which all of the assets and liabilities attributed to the
GlobalCenter Group (and no other businesses, assets, properties or liabilities
of the Company or any subsidiary thereof) are held directly or indirectly by
one or more wholly-owned subsidiaries of the Company (each, a "GlobalCenter
Subsidiary"), the Board of Directors may, provided that there are funds legally
available for the purpose:
(i) if the Aggregate Number of Shares Issuable with Respect to the Inter-
Group Interest in the GlobalCenter Group is zero and the GlobalCenter Group
does not hold an Inter-Group Interest in any other Group, repurchase all of
the outstanding shares of GlobalCenter Group Stock, on the Repurchase Date
set forth in a notice delivered in accordance with Section 4(H)(vi), for
all of the shares of common stock of each GlobalCenter Subsidiary as will
be outstanding immediately following such repurchase of shares;
(ii) if the Aggregate Number of Shares Issuable with Respect to the
Inter-Group Interest in the GlobalCenter Group is greater than zero and the
GlobalCenter Group does not hold an Inter-Group Interest in any other
Group, repurchase all of the outstanding shares of GlobalCenter Group
Stock, on the Repurchase Date set forth in a notice delivered in accordance
with Section 4(H)(vi), for a number of shares of common stock of each
GlobalCenter Subsidiary equal to the product of:
(x) the Outstanding Interest Fraction with respect to GlobalCenter
Group Stock, and
(y) the number of shares of common stock of each GlobalCenter
Subsidiary as will be outstanding immediately following such repurchase
of shares;
(iii) if the Aggregate Number of Shares Issuable with Respect to the
Inter-Group Interest in the GlobalCenter Group is zero and the GlobalCenter
Group holds an Inter-Group Interest in any other Group, repurchase all of
the outstanding shares of GlobalCenter Group Stock, on the Repurchase Date
set forth in a notice delivered in accordance with Section 4(H)(vi), for:
(1) all of the shares of common stock of each GlobalCenter
Subsidiary as will be outstanding immediately following such
repurchase of shares; and
(2) for each Group in respect of which the GlobalCenter Group
holds an Inter-Group Interest, the related Number of Shares Issuable
with Respect to the Inter-Group Interest in each such Group held by
the GlobalCenter Group; or
(iv) if the Aggregate Number of Shares Issuable with Respect to the
Inter-Group Interest for the GlobalCenter Group is greater than zero and
the GlobalCenter Group holds an Inter-Group Interest in any other Group,
repurchase all of the outstanding shares of GlobalCenter Group Stock, on
the Repurchase Date set forth in a notice delivered in accordance with
Section 4(H)(vi), for:
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(1) a number of shares of common stock of each GlobalCenter
Subsidiary equal to the product of:
(x) the Outstanding Interest Fraction with respect to
GlobalCenter Group Stock; and
(y) the number of shares of common stock of each GlobalCenter
Subsidiary as will be outstanding immediately following such
repurchase of shares; and
(2) for each Group in respect of which the GlobalCenter Group
holds an Inter-Group Interest, the related Number of Shares Issuable
with Respect to the Inter-Group Interest in each such Group held by
the GlobalCenter Group.
The shares of common stock of each GlobalCenter Subsidiary and the shares of
Common Stock equal to the Number of Shares Issuable with Respect to the Inter-
Group Interest in any Group held by the GlobalCenter Group to be delivered to
the holders of shares of GlobalCenter Group Stock on any Repurchase Date may be
delivered either directly or indirectly through the delivery of shares of
another GlobalCenter Subsidiary that owns directly or indirectly all such
shares, and such shares shall be divided among the holders of GlobalCenter
Group Stock pro rata in accordance with the number of shares of GlobalCenter
Group Stock held by each such holder on such Repurchase Date. Each share of
common stock of each GlobalCenter Subsidiary and share of Common Stock in
respect of such Number of Shares Issuable with Respect to the Inter-Group
Interest shall be, upon such delivery, fully paid and nonassessable.
(F) Special Distributions on, and Conversion and Repurchase of, GlobalCenter
Group Stock if a Disposition of All or Substantially All Assets of the
GlobalCenter Group Occurs. (i) In the event of the Disposition, in one
transaction or a series of related transactions (other than in one or a series
of Excluded Transactions), by the Company and/or its subsidiaries of all or
substantially all of the business, properties and assets attributed to the
GlobalCenter Group, the Company shall, on or prior to the 120th Trading Day
after the Disposition Date, as the Board of Directors shall have determined in
its sole discretion:
(1) provided that there are funds legally available for the purpose:
(a) subject to compliance with Section 1, pay to the holders of
the shares of GlobalCenter Group Stock a distribution pro rata in
accordance with the number of shares of GlobalCenter Group Stock
held by each such holder, in cash and/or securities or other
property having a Fair Value as of the Disposition Date in the
aggregate equal to the product of:
(x) the Outstanding Interest Fraction with respect to
GlobalCenter Group Stock as of the record date for determining
holders entitled to receive such distribution; and
(y) the Fair Value as of the Disposition Date of the Net
Proceeds of such Disposition; or
(b) (I) subject to the last sentence of this Section 4(F)(i), if
such Disposition involves all (not merely substantially all) of the
business, properties and assets attributed to the GlobalCenter
Group, repurchase as of the Repurchase Date set forth in a notice
delivered in accordance with Section 4(H)(iii)(2), all outstanding
shares of GlobalCenter Group Stock in exchange for cash and/or
securities (other than shares of a class or class of Common Stock of
the Company) or other property having a Fair Value as of the
Disposition Date in the aggregate equal to the product of:
(x) the Outstanding Interest Fraction with respect to
GlobalCenter Group Stock as of such Repurchase Date; and
(y) the Fair Value as of the Disposition Date of the Net
Proceeds of such Disposition; or
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(II) subject to the last sentence of this Section 4(F)(i), if such
Disposition involves substantially all (but not all) of the
business, properties and assets attributed to the GlobalCenter
Group, repurchase as of the Repurchase Date set forth in a notice
delivered in accordance with Section 4(H)(iv)(2), the number of
whole shares of GlobalCenter Group Stock equal to the lesser of:
(x) the number of shares of GlobalCenter Group Stock
outstanding; and
(y) such number of shares of GlobalCenter Group Stock as have
in the aggregate an average Market Value during the period of
ten consecutive Trading Days beginning on the 51st Trading Day
immediately succeeding the Disposition Date closest to the
product of:
(xx) the Outstanding Interest Fraction with respect to
GlobalCenter Group Stock as of the record date for
determining shares selected for repurchase; and
(yy) the Fair Value as of the Disposition Date of the Net
Proceeds of such Disposition,
for, on a pro rata basis, cash and/or securities (other than shares of
a class or class of Common Stock) or other property having a Fair Value
as of the Disposition Date in the aggregate equal to such product; or
(2) declare that each outstanding share of GlobalCenter Group Stock
shall be converted as of the Conversion Date set forth in a notice
delivered in accordance with Section 4(H)(v)(2), into a number of fully
paid and nonassessable shares of Global Crossing Group Stock or, if so
determined by the Board of Directors, Additional Group Stock equal to
the applicable percentage set forth in Section 4(D) of the ratio,
rounded to the nearest 1/10,000 (.0001), of the average Market Value of
one share of GlobalCenter Group Stock over the period of ten
consecutive Trading Days beginning on the 51st Trading Day following
the Disposition Date to the average Market Value of one share of Global
Crossing Group Stock or such Additional Group Stock during the same
ten-Trading Day period.
Notwithstanding the foregoing provisions of this Section 4(F)(i), the Company
shall repurchase shares of GlobalCenter Group Stock as provided by Section
4(F)(i)(1)(b)(I) or (II) only if the amount to be paid to repurchase such
stock is less than or equal to the GlobalCenter Group Available Distribution
Amount as of the Repurchase Date.
(ii) For purposes of this Section 4(F):
(1) as of any date, "substantially all of the business, properties
and assets" attributed to the GlobalCenter Group shall mean a portion
of such business, properties and assets that represents at least 80% of
the Fair Value of the properties and assets attributed to the
GlobalCenter Group as of such date;
(2) in the case of a Disposition of the business, properties and
assets attributed to the GlobalCenter Group in a series of related
transactions, such Disposition shall not be deemed to have been
consummated until the consummation of the last of such transactions;
and
(3) the Board of Directors may pay any dividend or repurchase price
referred to in Section 4(F)(i) in cash, securities (other than shares
of a class or class of Common Stock of the Company) or other property,
regardless of the form or nature of the proceeds of the Disposition.
(iii) After the payment of any distribution or repurchase price with
respect to the GlobalCenter Group Stock as provided for by Section
4(F)(i)(1), the Board of Directors may declare that each share of
GlobalCenter Group Stock remaining outstanding shall be converted, but only
as of a Conversion Date set
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forth in a notice delivered in accordance with Section 4(H)(v)(2), prior to
the second anniversary of the payment of such distribution or repurchase
price, into a number of fully paid and nonassessable shares of Global
Crossing Group Stock or, if so determined by the Board of Directors,
Additional Group Stock equal to 110% of the ratio, rounded to the nearest
1/10,000 (.0001), of the average Market Value of one share of GlobalCenter
Group Stock during the period of 20 consecutive Trading Days ending on the
fifth Trading Day immediately preceding the date of the notice of such
conversion required by Section 4(H)(v) to the average Market Value of one
share of Global Crossing Group Stock or such Additional Group Stock, as
applicable, during the same 20-Trading Day period.
(G) Treatment of Convertible Securities. After any Repurchase Date or
Conversion Date on which all outstanding shares of either Global Crossing Group
Stock or GlobalCenter Group Stock are repurchased or converted, any share of
such class of Common Stock of the Company that is to be issued on conversion,
exchange or exercise of any Convertible Securities shall, immediately upon such
conversion, exchange or exercise and without any notice from or to, or any
other action on the part of, the Company or its Board of Directors or the
holder of such Convertible Security:
(i) in the event the shares of such class of Common Stock outstanding on
such Repurchase Date were repurchased pursuant to Section 4(B), Section
4(C)(i)(1)(b), Section 4(E) or Section 4(F)(i)(1)(b), be repurchased, to
the extent of funds legally available therefor, for $.01 per share in cash
for each share of such class of Common Stock that otherwise would be issued
upon such conversion, exchange or exercise; or
(ii) in the event the shares of such class of Common Stock outstanding on
such Conversion Date were converted into shares of another class of Common
Stock pursuant to Section 4(A), Section 4(C)(i)(2), Section 4(C)(iii),
Section 4(D), Section 4(F)(i)(2) or Section 4(F)(iii), be converted into
the amount of cash and/or the number of shares of the kind of capital stock
and/or other securities or property of the Company that shares of such
class of Common Stock would have received had such shares been converted
and outstanding on such Conversion Date.
The provisions of the immediately preceding sentence of this Section 4(G) shall
not apply to the extent that other adjustments in respect of such conversion,
exchange or repurchase of a class of Common Stock are otherwise made pursuant
to the provisions of such Convertible Securities.
(H) Notice and Other Provisions. (i) Not later than the 45th Trading Day
following the Disposition Date referred to in Section 4(C)(i) or Section
4(F)(i), the Company shall announce publicly by press release:
(1) the Net Proceeds of such Disposition;
(2) the number of shares outstanding of the class of Common Stock
related to the Group subject to such Disposition;
(3) the number of shares of such class of Common Stock into or for
which Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof; and
(4) if applicable for the Group subject to such Disposition, the
Outstanding Interest Fraction for the class of Common Stock relating to
such Group on the date of such notice.
Not earlier than the 61st Trading Day and not later than the 65th Trading Day
following the Disposition Date, the Company shall announce publicly by press
release which of the actions specified in Section 4(C)(i) or Section 4(F)(i),
as the case may be, it has irrevocably determined to take in respect of such
Disposition.
(ii) If the Company determines to pay a dividend pursuant to Section
4(C)(i)(1)(a) or Section 4(F)(i)(1)(a), the Company shall, not later than
the 65th Trading Day following the Disposition Date, cause
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notice to be given to each holder of shares of the class of Common Stock
related to the Group subject to such Disposition and to each holder of
Convertible Securities that are convertible into or exchangeable or
exercisable for shares of such class of Common Stock (unless alternate
provision for such notice to the holders of such Convertible Securities is
made pursuant to the terms of such Convertible Securities), setting forth:
(1) the record date for determining holders entitled to receive such
dividend, which shall be not earlier than the tenth Trading Day and not
later than the 20th Trading Day following the date of such notice;
(2) the anticipated payment date of such dividend (which shall not be
more than 120 Trading Days following the Disposition Date);
(3) the type of property to be paid as such dividend in respect of
the outstanding shares of such class of Common Stock;
(4) the Net Proceeds of such Disposition;
(5) if applicable for the Group subject to such Disposition, the
Outstanding Interest Fraction for the class of Common Stock related to
such Group on the date of such notice;
(6) the number of outstanding shares of such class of Common Stock
and the number of shares of such class of Common Stock into or for
which outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise
price thereof; and
(7) in the case of notice to be given to holders of Convertible
Securities, a statement to the effect that a holder of such Convertible
Securities shall be entitled to receive such dividend if such holder
properly converts, exchanges or exercises such Convertible Securities
on or prior to the record date referred to in clause (1) of this
sentence.
(iii) If the Company determines to undertake a repurchase pursuant to
Section 4(C)(i)(1)(b)(I) or Section 4(F)(i)(1)(b)(I), the Company shall,
not earlier than the 45th Trading Day and not later than the 35th Trading
Day prior to the Repurchase Date, cause notice to be given to each holder
of shares of the class of Common Stock related to the Group subject to such
Disposition and to each holder of Convertible Securities convertible into
or exchangeable or exercisable for shares of such class of Common Stock
(unless alternate provision for such notice to the holders of such
Convertible Securities is made pursuant to the terms of such Convertible
Securities), setting forth:
(1) a statement that all outstanding shares of such class of Common
Stock shall be repurchased;
(2) the Repurchase Date (which shall not be more than 120 Trading
Days following the Disposition Date);
(3) the type of property in which the repurchase price for the shares
to be repurchased is to be paid;
(4) the Net Proceeds of such Disposition;
(5) if applicable for the Group subject to such Disposition, the
Outstanding Interest Fraction for the class of Common Stock related to
such Group on the date of such notice;
(6) the place or places where certificates for such shares, properly
endorsed or assigned for transfer (unless the Company waives such
requirement), are to be surrendered for delivery of cash and/or
securities or other property;
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(7) a statement to the effect that, subject to Section 4(H)(x),
dividends on shares of such class of Common Stock shall cease to be
paid as of such Repurchase Date;
(8) the number of outstanding shares of such class of Common Stock
and the number of shares of such class of Common Stock into or for
which outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise
price thereof; and
(9) in the case of notice to be given to holders of Convertible
Securities, a statement to the effect that a holder of such Convertible
Securities shall be entitled to participate in such repurchase if such
holder properly converts, exchanges or exercises such Convertible
Securities on or prior to the Repurchase Date referred to in clause (2)
of this sentence and a statement as to what, if anything, such holder
will be entitled to receive pursuant to the terms of such Convertible
Securities or, if applicable, Section 4(G) if such holder thereafter
converts, exchanges or exercises such Convertible Securities.
(iv) If the Company determines to undertake a repurchase pursuant to
Section 4(C)(i)(1)(b)(II) or Section 4(F)(i)(1)(b)(II), the Company shall,
not later than the 65th Trading Day following the Disposition Date referred
to in such Section, cause notice to be given to each holder of shares of
the class of Common Stock related to the Group subject to such Disposition
and to each holder of Convertible Securities that are convertible into or
exchangeable or exercisable for shares of such class of Common Stock
(unless alternate provision for such notice to the holders of such
Convertible Securities is made pursuant to the terms of such Convertible
Securities) setting forth:
(1) a date not earlier than the tenth Trading Day and not later than
the 20th Trading Day following the date of such notice on which shares
of such class of Common Stock shall be selected for repurchase;
(2) the anticipated Repurchase Date (which shall not be more than 120
Trading Days following the Disposition Date);
(3) the type of property in which the repurchase price for the shares
to be repurchased is to be paid;
(4) the Net Proceeds of such Disposition;
(5) if applicable for the Group subject to such Disposition, the
Outstanding Interest Fraction for the class of Common Stock related to
such Group on the date of such notice;
(6) a statement that the Company will not be required to register a
transfer of any shares of such class of Common Stock for a period of 15
Trading Days next preceding the date referred to in clause (1) of this
sentence.
(7) the number of shares of such class of Common Stock outstanding
and the number of shares of such class of Common Stock into or for
which outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise
price thereof; and
(8) in the case of notice to be given to holders of Convertible
Securities, a statement to the effect that a holder of such Convertible
Securities shall be eligible to participate in such selection for
repurchase only if such holder properly converts, exchanges or
exercises such Convertible Securities on or prior to the record date
referred to in clause (1) of this sentence, and a statement as to what,
if anything, such holder will be entitled to receive pursuant to the
terms of such Convertible Securities or, if applicable, Section 4(G) if
such holder thereafter converts, exchanges or exercises such
Convertible Securities.
Promptly following the date referred to in clause (1) of the preceding
sentence, the Company shall cause a notice to be given to each holder of shares
of the class of Common Stock to be repurchased setting forth:
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(1) the number of shares of such class of Common Stock held by such
holder to be repurchased;
(2) a statement that such shares shall be repurchased;
(3) the Repurchase Date (which shall not be more than 120 Trading
Days following the Disposition Date);
(4) the kind and per share amount of cash and/or securities or other
property to be received by such holder with respect to each share to be
repurchased, including details as to the calculation thereof;
(5) the place or places where certificates for such shares, properly
endorsed or assigned for transfer (unless the Company shall waive such
requirement), are to be surrendered for delivery of such cash and/or
securities or other property;
(6) if applicable, a statement to the effect that the shares being
repurchased may no longer be transferred on the transfer books of the
Company after the Repurchase Date; and
(7) a statement to the effect that, subject to Section 4(H)(x),
dividends on such shares shall cease to be paid as of the Repurchase
Date.
(v) If the Company determines to convert Global Crossing Group Stock or
GlobalCenter Group Stock into another class of Common Stock pursuant to
Section 4(A), Section 4(C)(i)(2) or Section 4(C)(iii) (in the case of
Global Crossing Group Stock), or Section 4(D), Section 4(F)(i)(2), Section
4(F)(iii) (in the case of GlobalCenter Group Stock), the Company shall, not
earlier than the 45th Trading Day and not later than the 35th Trading Day
prior to the Conversion Date, cause notice to be given to each holder of
shares of the class of Common Stock to be so converted and to each holder
of Convertible Securities that are convertible into or exchangeable or
exercisable for shares of such class of Common Stock (unless alternate
provision for such notice to the holders of such Convertible Securities is
made pursuant to the terms of such Convertible Securities) setting forth:
(1) a statement that all outstanding shares of such class of Common
Stock shall be converted;
(2) the Conversion Date (which, in the case of a conversion after a
Disposition, shall not be more than 120 Trading Days following the
Disposition Date);
(3) the per share number of shares of the class of Common Stock to be
received with respect to each share of such class of Common Stock,
including details as to the calculation thereof;
(4) the place or places where certificates for such shares, properly
endorsed or assigned for transfer (unless the Company shall waive such
requirement), are to be surrendered for delivery of certificates for
shares of the class of Common Stock into which such shares are to be
converted;
(5) a statement to the effect that, subject to Section 4(H)(x),
dividends on shares of such class of Common Stock shall cease to be
paid as of such Conversion Date;
(6) the number of outstanding shares of such class of Common Stock
and the number of shares of such class of Common Stock into or for
which outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise
price thereof; and
(7) in the case of notice to holders of such Convertible Securities,
a statement to the effect that a holder of such Convertible Securities
shall be entitled to receive shares of such class of Common Stock upon
such conversion only if such holder properly converts, exchanges or
exercises such Convertible Securities on or prior to such Conversion
Date and a statement as to what, if anything, such holder will be
entitled to receive pursuant to the terms of such Convertible
Securities or, if applicable, Section 4(G) if such holder thereafter
converts, exchanges or exercises such Convertible Securities.
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(vi) If the Company determines to repurchase shares of Global Crossing
Group Stock pursuant to Section 4(B) or GlobalCenter Group Stock pursuant
to Section 4(E), the Company shall, not earlier than the 45th Trading Day
and not later than the 35th Trading Day prior to the Repurchase Date, cause
notice to be given to each holder of shares of such class of Common Stock
to be repurchased and to each holder of Convertible Securities that are
convertible into or exchangeable or exercisable for shares of such class of
Common Stock (unless alternate provision for such notice to the holders of
such Convertible Securities is made pursuant to the terms of such
Convertible Securities), setting forth:
(1) a statement that all shares of such class of Common Stock
outstanding on the Repurchase Date shall be repurchased for shares of
common stock of each Global Crossing Subsidiary or GlobalCenter
Subsidiary, as applicable (and, if such repurchase is pursuant to
Section 4(B)(iii)(1) or Section 4(B)(iv)(1) (in the case of a
repurchase of Global Crossing Group Stock) or pursuant to Section
4(E)(iii)(1) or Section 4(E)(iv)(1) (in the case of a repurchase of
GlobalCenter Group Stock), shares of the class of Common Stock
specified in such Sections);
(2) the Repurchase Date;
(3) if applicable for the class of Common Stock subject to such
repurchase, the Outstanding Interest Fraction for such class of Common
Stock on the date of such notice;
(4) the place or places where certificates for such shares, properly
endorsed or assigned for transfer (unless the Company shall waive such
requirement), are to be surrendered for delivery of certificates for
the shares of common stock to be issued in exchange therefor;
(5) a statement to the effect that, subject to Section 4(H)(x),
dividends on shares of such class of Common Stock shall cease to be
paid as of such Repurchase Date;
(6) the number of outstanding shares of such class of Common Stock
and the number of shares of such class of Common Stock into or for
which outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise
price thereof; and
(7) in the case of notice to holders of Convertible Securities, a
statement to the effect that a holder of Convertible Securities shall
be entitled to participate in such repurchase if such holder properly
converts, exchanges or exercises such Convertible Securities on or
prior to the Repurchase Date and a statement as to what, if anything,
such holder will be entitled to receive pursuant to the terms of such
Convertible Securities or, if applicable, Section 4(G), if such holder
thereafter converts, exchanges or exercises such Convertible
Securities.
(vii) Any notice required to be given each holder of shares of Common
Stock or Convertible Securities pursuant to this Section 4(H) shall be sent
by first-class mail, postage prepaid, to each such holder at such holder's
address as the same appears on the transfer books of the Company or the
Company's transfer agent or registrar on the record date fixed for such
notice. Neither the failure to mail any notice required by this Section
4(H) to any particular holder of Common Stock or of Convertible Securities
nor any defect therein shall affect the sufficiency thereof with respect to
any other holder of outstanding shares of Common Stock or of Convertible
Securities or the validity of any such repurchase or repurchase.
(viii) If less than all of the outstanding shares of any class of Common
Stock are to be repurchased pursuant to Section 4(C)(i)(1)(b)(II) or
Section 4(F)(i)(1)(b)(II), the shares to be repurchased by the Company
shall be selected from among the holders of shares of such class of Common
Stock outstanding at the close of business on the record date for such
repurchase on a pro rata basis among all such holders or by lot or by such
other method as may be determined by the Board of Directors to be
equitable.
(ix) The Company shall not be required to issue or deliver fractional
shares of any capital stock or of any other securities to any holder of
Common Stock upon any dividend or other distribution, repurchase or
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conversion pursuant to this Section 4. If more than one share of a class of
Common Stock shall be held at the same time by the same holder, the Company
may aggregate the number of shares of any capital stock that shall be
issuable or any other securities or property that shall be distributable to
such holder upon any dividend or other distribution, repurchase or
conversion (including any fractional shares). If there are fractional
shares of any capital stock or of any other securities remaining to be
issued or distributed to the holders of any class of Common Stock, the
Company shall, if such fractional shares are not issued or distributed to
the holder, pay cash in respect of such fractional shares in an amount
equal to the Fair Value thereof (without interest).
(x) No adjustments in respect of dividends shall be made upon the
repurchase or conversion of shares of any class of Common Stock; provided,
however, that if the Repurchase Date or Conversion Date, as the case may
be, with respect to shares of any class of Common Stock shall be subsequent
to the record date for the payment of a dividend or other distribution
thereon or with respect thereto, the holders of such class of Common Stock
at the close of business on such record date shall be entitled to receive
the dividend or other distribution payable on or with respect to such
shares on the date set for payment of such dividend or other distribution,
in each case without interest, notwithstanding the subsequent repurchase or
conversion of such shares.
(xi) Before any holder of shares of any class of Common Stock shall be
entitled to receive any cash payment and/or certificates or instruments
representing shares of any capital stock and/or other securities or
property to be distributed to such holder with respect to such class of
Common Stock pursuant to this Section 4, such holder shall surrender (at
such place as the Company shall specify) certificates for shares of such
class of Common Stock, properly endorsed or assigned for transfer (unless
the Company shall waive such requirement). The Company shall as soon as
practicable after receipt of certificates representing such shares of
Common Stock deliver to the person for whose account such shares of Common
Stock were so surrendered, or to such person's nominee or nominees, the
cash and/or the certificates or instruments representing the number of
whole shares of the kind of capital stock and/or other securities or
property to which such person shall be entitled as aforesaid, together with
any payment in respect of fractional shares contemplated by Section
4(H)(ix), in each case without interest. If less than all of the shares of
any class of Common Stock represented by any one certificate are to be
repurchased, the Company shall issue and deliver a new certificate for the
shares of such class of Common Stock not repurchased.
(xii) From and after any applicable Repurchase Date or Conversion Date,
as the case may be, all rights of a holder of shares of any class of Common
Stock that were repurchased or converted shall cease except for the right,
upon surrender of the certificates representing such shares of Common Stock
as required by Section 4(H)(xi), to receive the certificates representing
shares of the kind and amount of capital stock and/or other securities or
property for which such shares were repurchased or converted, together with
any payment in respect of fractional shares contemplated by Section
4(H)(ix) and rights to dividends as provided in Section 4(H)(x), in each
case without interest. No holder of a certificate that immediately prior to
the applicable Repurchase Date or Conversion Date represented shares of any
class of Common Stock shall be entitled to receive any dividend or other
distribution or interest payment with respect to shares of any kind of
capital stock or other security or instrument for which such class of
Common Stock was repurchased or converted until the surrender as required
by this Section 4 of such certificate for a certificate or certificates or
instrument or instruments representing such capital stock or other
security. Upon such surrender, there shall be paid to the holder the amount
of any dividends or other distributions (without interest) which
theretofore became payable on any class or series of capital stock of the
Company as of a record date after the Repurchase Date, but that were not
paid by reason of the foregoing, with respect to the number of whole shares
of the kind of capital stock represented by the certificate or certificates
issued upon such surrender. From and after a Repurchase Date or Conversion
Date, the Company shall, however, be entitled to treat the certificates for
a class of Common Stock that have not yet been surrendered for conversion
as evidencing the ownership of the number of whole shares of the kind or
kinds of capital stock of the Company for which the shares of such class of
Common Stock
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represented by such certificates shall have been converted, notwithstanding
the failure to surrender such certificates.
(xiii) The Company shall pay any and all documentary, stamp or similar
issue or transfer taxes that may be payable in respect of the issuance or
delivery of any shares of capital stock and/or other securities upon
repurchase or conversion of shares of any class of Common Stock pursuant to
this Section 4. The Company shall not, however, be required to pay any tax
that may be payable in respect of any transfer involved in the issuance or
delivery of any shares of capital stock and/or other securities in a name
other than that in which the shares of such class of Common Stock so
repurchased or converted were registered, and no such issuance or delivery
shall be made unless the person requesting such issuance or delivery has
paid to the Company the amount of any such tax or has established to the
satisfaction of the Company that such tax has been paid.
(xiv) The Board of Directors may establish such rules and requirements to
facilitate the effectuation of the transactions contemplated by this
Section 4 as the Board of Directors shall determine to be appropriate.
Section 5. Inter-Group Interest and Related Transfers Between and Among
Groups.
(A) Changes in Inter-Group Interest. The Number of Shares Issuable with
Respect to the Inter-Group Interest in any Group held by any other Group shall
from time to time be:
(i) adjusted, if before such adjustment such number is greater than zero,
as determined by the Board of Directors to be appropriate to reflect
equitably any subdivision (by stock split or otherwise) or combination (by
reverse stock split or otherwise) of the class of Common Stock related to
the Group in which such Inter-Group Interest is held or any share dividend
of shares of such class of Common Stock to holders of shares of such class
of Common Stock or any reclassification of such class of Common Stock;
provided that no such adjustment shall be made to the extent any such share
dividend is paid to the holders of the class of Common Stock related to the
Group holding such Inter-Group Interest as permitted by Section 1(C);
(ii) decreased (but to not less than zero), if before such adjustment
such number is greater than zero, by action of the Board of Directors by:
(1) the number of shares of the class of Common Stock related to the
Group in which such Inter-Group Interest is held issued or sold by the
Company that, immediately prior to such issuance or sale, were included
in the Number of Shares Issuable with Respect to the Inter-Group
Interest in such Group;
(2) the number of shares of such class of Common Stock issued upon
conversion, exchange or exercise of Convertible Securities that,
immediately prior to the issuance or sale of such Convertible
Securities, were included in the Number of Shares Issuable with Respect
to the Inter-Group Interest in such Group;
(3) the number of shares of such class of Common Stock issued by the
Company as a share dividend or in connection with any reclassification
or exchange of shares, including by exchange offer, to holders of the
class of Common Stock related to the Group holding such Inter-Group
Interest;
(4) the number of shares of such class of Common Stock issued upon
the conversion, exchange or exercise of any Convertible Securities
issued by the Company as a share dividend or in connection with any
reclassification or exchange of shares, including by exchange offer, to
holders of the class of Common Stock related to the Group holding such
Inter-Group Interest;
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(5) the number of shares of such class of Common Stock equal to the
product of (x) a fraction, the numerator of which is the number of
shares of such class of Common Stock repurchased or exchanged pursuant
to Section 4(C)(i)(1)(b)(II) or Section 4(F)(i)(1)(b)(II) (or any
similar provision in the Certificate of Designations creating any class
of Additional Group Stock) and the denominator of which is the number
of shares of such class of Common Stock outstanding and (y) the Number
of Shares Issuable with Respect to the Inter-Group Interest in such
Group, in each case on the record date for determining such shares
selected for such repurchase; and
(6) the number (rounded, if necessary, to the nearest whole number)
equal to the quotient of (x) the aggregate Fair Value as of the date of
(I) contribution of properties or assets (including cash) transferred
from the Group in which such Inter-Group Interest is held to the Group
holding such Inter-Group Interest or (II) transfer of liabilities from
the Group holding such Inter-Group Interest to the Group in which such
Inter-Group Interest is held, in consideration of a reduction in the
Number of Shares Issuable with Respect to the Inter-Group Interest in
the Group in which such Inter-Group Interest is held divided by (y) the
average Market Value of one share of the class of Common Stock related
to the Group in which such Inter-Group Interest is held during the
period of 20 consecutive Trading Days ending on the date of such
contribution or transfer;
(iii) increased by action of the Board of Directors by:
(1) the number of outstanding shares of the class of Common Stock
related to the Group in which such Inter-Group Interest is held
repurchased by the Company for consideration that is attributed as
provided by the definitions of the Global Crossing Group and the
GlobalCenter Group (or any similar provision in the Certificate of
Designations creating any class of Additional Group Stock) to the Group
holding such Inter-Group Interest;
(2) the number (rounded, if necessary, to the nearest whole number)
equal to the quotient of (x) the aggregate Fair Value as of the date of
(I) contribution of properties or assets (including cash) transferred
from the Group holding such Inter-Group Interest to the Group in which
such Inter-Group Interest is held or (II) transfer of liabilities from
the Group in which such Inter-Group Interest is held to the Group
holding such Inter-Group Interest, in consideration of an increase in
the Number of Shares Issuable with Respect to the Inter-Group Interest
in the Group in which such Inter-Group Interest is held, divided by (y)
the average Market Value of one share of the class of Common Stock
related to the Group in which such Inter-Group Interest is held during
the period of 20 consecutive Trading Days ending on the date of such
contribution or transfer; and
(3) the number of shares of such class of Common Stock into or for
which Convertible Securities are deemed converted, exchanged or
exercised pursuant to Section 5(C) (or any such similar provision); and
(iv) increased or decreased under such other circumstances as the Board
of Directors determines appropriate to reflect the economic substance of
any other event or circumstance; provided that, in each case, the
adjustment shall be made in a manner that is fair and equitable to holders
of Common Stock and intended to reflect the relative economic ownership of
one or more Groups in any other Group.
(B) Transfers Upon Certain Distributions. (i) From and after the payment date
of any distribution with respect to shares of any class of Common Stock, each
Group holding an Inter-Group Interest in the Group in respect of which such
class of Common Stock has been issued shall be attributed an amount of assets
or properties, previously attributed to the Group in which such Inter-Group
Interest is held, of the same kind as were paid in such distribution as have a
Fair Value on the record date for such distribution equal to the product of:
(1) the Fair Value on such record date of the aggregate distribution
to holders of shares of such class of Common Stock; and
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(2) a fraction, the numerator of which is equal to the Number of
Shares Issuable with Respect to the Inter-Group Interest in such Group
held by the Group holding such Inter-Group Interest and the denominator
of which is equal to the number of outstanding shares of the class of
Common Stock related to such Group in which such Inter-Group Interest
is held, in each case, in effect on the record date for such
distribution;
provided that no such attribution shall be made in connection with the
following transactions:
(w) a repurchase pursuant to any provision similar to Section
4(C)(i)(1)(b)(II) or 4(F)(i)(1)(b)(II) (or any similar provision
contained in the Certificate of Designations creating any class of
Additional Group Stock), with respect to each of which an adjustment
shall be made as provided in Section 5(B)(ii)(5);
(x) a repurchase or conversion of such class pursuant to any
provision similar to Section 4(A), Section 4(B), Section
4(C)(i)(1)(b)(I), Section 4(C)(i)(2), Section 4(C)(iii), Section 4(D),
Section 4(E), Section 4(F)(i)(1)(b)(I), Section 4(F)(i)(2) or Section
4(F)(iii) (or any such similar provision contained in the Certificate
of Designations creating any class of Additional Group Stock);
(y) any other distribution payable on shares of such class of Common
Stock to the extent that a distribution permitted by Section 1(C) is
paid on shares of the class of Common Stock related to the Group
holding such Inter-Group Interest; and
(z) a distribution payable in securities of the Company attributed to
any Group in which an Inter-Group Interest is held for which provision
shall be made as provided in Section 5(B)(ii).
(ii) If the Company shall pay a distribution payable in securities of the
Company that are attributed to any Group in which an Inter-Group Interest
is held, each Group holding any such Inter-Group Interest shall be
attributed an interest in the Group in which such Inter-Group Interest is
held equivalent to the number or amount of such securities that is equal to
the product of:
(x) the number or amount of securities so distributed to holders of
shares of the class of Common Stock related to the Group in which such
Inter-Group Interest is held; and
(y) a fraction, the numerator of which is equal to the Number of
Shares Issuable with Respect to the Inter-Group Interest in such Group
held by the Group holding such Inter-Group Interest and the denominator
of which is equal to the number of outstanding shares of the class of
Common Stock related to such Group in which such Inter-Group Interest
is held,
in each case, in effect on the record date for such dividend or other
distribution and, to the extent interest is or dividends are paid on the
securities so distributed, each Group holding any such Inter-Group Interest
shall include a corresponding ratable amount of the kind of assets paid as such
interest or dividends as would have been paid in respect of such securities so
deemed to be held by such Group holding such Inter-Group Interest if such
securities were outstanding; provided that no such attribution shall be made in
connection with the following transactions:
(x) a repurchase pursuant to Section 4(C)(i)(1)(b)(II) or Section
4(F)(i)(1)(b)(II) (or any similar provision contained in the
Certificate of Designations creating any class of Additional Group
Stock), with respect to each of which an adjustment shall be made as
provided in Section 5(B)(ii)(5);
(y) a repurchase or conversion of such class pursuant to any
provision similar to Section 4(A), Section 4(B), Section
4(C)(i)(1)(b)(I), Section 4(C)(i)(2), Section 4(C)(iii), Section 4(D),
Section 4(E), Section 4(F)(i)(1)(b)(I), Section 4(F)(i)(2) or Section
4(F)(iii) (or any such similar provision contained in the Certificate
of Designations creating any class of Additional Group Stock); and
(z) any other distribution payable on shares of such class of Common
Stock to the extent that a distribution permitted by Section 1(C) is
paid on shares of the class of Common Stock related to the Group the
class of Common Stock related to the Group holding such Inter-Group
Interest.
II-20
(C) Deemed Conversion of Certain Convertible Securities. The Company may (in
addition to making an adjustment pursuant to Section 5(B)(ii)), to the extent
Convertible Securities are paid as a dividend or other distribution to the
holders of any class of Common Stock and at the time are convertible into or
exchangeable or exercisable for shares of such class, treat such Convertible
Securities as are so deemed to be held by any Group holding an Inter-Group
Interest in the Group in respect of which such class of Common Stock has been
issued to be deemed to be converted, exchanged or exercised, and shall do so to
the extent such Convertible Securities are mandatorily converted, exchanged or
exercised (and to the extent the terms of such Convertible Securities require
payment of consideration for such conversion, exchange or exercise, each Group
holding such an Inter-Group Interest shall then no longer include an amount of
the kind of properties or assets required to be paid as such consideration for
the amount of Convertible Securities deemed converted, exchanged or exercised
(and such Group in respect of which such class of Common Stock is issued shall
be attributed such properties or assets)), in which case, from and after such
time, the securities into or for which such Convertible Securities so deemed to
be held by each Group holding such an Inter-Group Interest were so considered
converted, exchanged or exercised shall be deemed held by such Group and such
Convertible Securities shall no longer be deemed to be held by such Group
holding such Inter-Group Interest. A statement setting forth the election to
effectuate any such deemed conversion, exchange or exercise of Convertible
Securities so deemed to be held by such Group and the properties or assets, if
any, to be attributed to any other Group in consideration of such conversion,
exchange or exercise, if any, shall be filed in the records of the actions of
the Board of Directors and, upon such filing, such deemed conversion, exchange
or exercise shall be effectuated.
(D) Permitted Inter-Group Interests. Any Group may hold an Inter-Group
Interest in any other Group, unless with respect to any Additional Group the
Certificate of Designations creating the class of Additional Group Stock
related to such Group provides otherwise; provided that no Group may hold a
direct Inter-Group Interest in any other Group if, immediately after the
creation of such Inter-Group Interest, such two Groups would hold Inter-Group
Interests in each other.
Section 6. Application of Common Stock Terms.
(A) Certain Determinations by the Board of Directors. The Board of Directors
shall make such determinations with respect to (a) the businesses, assets,
properties and liabilities to be attributed to the Global Crossing Group and
the GlobalCenter Group and, to the extent applicable, any Additional Group, (b)
the application of the provisions of the Bye-laws of the Company (including all
schedules attached thereto) to transactions to be engaged in by the Company and
(c) the voting powers, preferences, designations, rights, qualifications,
limitations or restrictions rights of the holders of each class of Common
Stock, as may be or become necessary or appropriate to the exercise of such
voting powers, preferences, designations, rights, qualifications, limitations
or restrictions, including, without limiting the foregoing, the determinations
referred to in this Section 6. A record of any such determination shall be
filed with the records of the actions of the Board of Directors.
(i) Upon any acquisition by the Company or its subsidiaries of any
businesses, assets or properties, or any assumption of liabilities, outside
of the ordinary course of business of any Group, the Board of Directors
shall determine whether such assets, business and liabilities (or an
interest therein) shall be for the benefit of the Global Crossing Group,
the GlobalCenter Group or any Additional Group or any combination thereof
and, accordingly, shall be attributed to such Group or Groups, in
accordance with the definitions of the Global Crossing Group and the
GlobalCenter Group in Section 7 (or any other similar provision in the
Certificate of Designations creating any class of Additional Group Stock),
as the case may be.
(ii) Upon any issuance of shares of any class of Common Stock at a time
when the Aggregate Number of Shares Issuable with Respect to the Inter-
Group Interest in the Group related to such series is greater than zero,
the Board of Directors shall determine, based on the use of the proceeds of
such issuance and any other relevant factors, whether all or any part of
the shares of such series so issued shall reduce such Aggregate Number of
Shares Issuable with Respect to the Inter-Group Interest (and, if more
II-21
than one other Group then holds an Inter-Group Interest that comprises such
Aggregate Number of Shares Issuable with Respect to the Inter-Group
Interest in such Group, the allocation of such reduction among such
Groups).
(iii) Upon any issuance by the Company or any subsidiary thereof of any
Convertible Securities that are convertible into or exchangeable or
exercisable for shares of any class of Common Stock, if at the time such
Convertible Securities are issued the Aggregate Number of Shares Issuable
with Respect to the Inter-Group Interest in the Group related to such class
is greater than zero, the Board of Directors shall determine, based on the
use of the proceeds of such issuance and any other relevant factors,
whether, upon conversion, exchange or exercise thereof, the issuance of
shares of such class of Common Stock pursuant thereto shall, in whole or in
part, reduce such Aggregate Number of Shares Issuable with Respect to the
Inter-Group Interest (and, if more than one Group then holds an Inter-Group
Interest that comprises such Aggregate Number of Shares Issuable with
Respect to the Inter-Group Interest in such Group, the allocation of such
reduction among such Groups).
(iv) Upon any issuance of any shares of preferred stock of any series,
the Board of Directors shall attribute, based on the use of proceeds of
such issuance of shares of preferred stock in the business of one or more
Groups and any other relevant factors, the shares so issued entirely to the
Global Crossing Group, entirely to the GlobalCenter Group or entirely to
any Additional Group, or partly to any combination of the Groups, in such
proportion as the Board of Directors shall determine.
(v) Upon any repurchase or repurchase by the Company or any subsidiary
thereof of shares of preferred stock of any class or series or of other
securities or debt obligations of the Company, the Board of Directors shall
determine, based on the property used to repurchase or purchase such
shares, other securities or debt obligations, which, if any, of such
shares, other securities or debt obligations repurchased or repurchased
shall be attributed to the Global Crossing Group, to the GlobalCenter Group
or to any Additional Group, or any combination thereof, and, accordingly,
how many of the shares of such series of the preferred stock or of such
other securities, or how much of such debt obligations, that remain
outstanding, if any, are thereafter attributed to each Group.
(vi) Upon any transfer of assets or liabilities attributed to any Group
to any other Group, the consideration therefor to be attributed to the
transferring Group in exchange therefor, including, without limitation,
cash, securities or other property of such other Group or, if permitted by
Section 5(D), a decrease or an increase in the Number of Shares of Shares
Issuable with Respect to the Inter-Group Interest in such other Group, as
described in Section 5(A)(ii)(6) or Section 5(A)(iii)(2).
(vii) In connection with the creation of any Additional Group and the
issuance of Additional Group Stock in respect thereof, the Board of
Directors shall determine whether any businesses, assets, properties and/or
liabilities that are, prior to the creation of such Additional Group,
attributed to one or more other Groups shall be contributed to such
Additional Group for the attribution of such consideration as the Board of
Directors shall determine, including, without limitation, cash, securities
of such Additional Group or a Number of Shares issuable with Respect to the
Inter-Group Interest in such Additional Group.
(B) Certain Determinations Not Required. Notwithstanding the foregoing
provisions of this Section 6 or any other provision contained in a Certificate
of Designations related to any other class of Common Stock, at any time when
there are not outstanding more than one class of Common Stock (or Convertible
Securities convertible into or exchangeable or exercisable for more than one
class of Common Stock), the Company need not:
(i) attribute any of the businesses, assets, properties or
liabilities of the Company or any of its subsidiaries to the Global
Crossing Group, the GlobalCenter Group or any Additional Group; or
(ii) make any determination required in connection therewith, nor
shall the Board of Directors be required to make any of the
determinations otherwise required by this Certificate of Designations
or
II-22
any other Certificate of Designations related to another class of
Common Stock, and in such circumstances the holders of the shares of
Global Crossing Group Stock, GlobalCenter Group Stock and any
Additional Group Stock outstanding, as the case may be, shall (unless
otherwise specifically provided by this Certificate of Designations or
any other Certificate of Designations related to another class of
Common Stock) be entitled to all the voting powers, preferences,
designations, rights, qualifications, limitations or restrictions of
common stock.
(C) Board Determinations Binding. Any determinations made in good faith by
the Board of Directors of the Company under any provision of this Section 6 or
otherwise in furtherance of the application of these resolutions shall be
final and binding on all shareholders.
Section 7. Certain Definitions and Rules of Interpretation.
As used in this Article, the following terms shall have the following
meanings (with terms defined in the singular having comparable meaning when
used in the plural and vice versa), unless the context otherwise requires. For
purposes of this Certificate of Designations, the Global Crossing Group Stock,
when issued, shall be considered issued in respect of the Global Crossing
Group and the GlobalCenter Group Stock, when issued, shall be considered
issued in respect of the GlobalCenter Group. As used in this Section 7, a
"contribution" or "transfer" of businesses, assets, properties or liabilities
from one Group to another shall refer to the reattribution of such businesses,
assets, properties or liabilities from the contributing or transferring Group
to the other Group and correlative phrases shall have correlative meanings.
"Additional Group" shall mean, as of any date, all businesses, assets,
properties and liabilities of the Company, whether at any time prior thereto
part of one or more other Groups or acquired or assumed by the Company, that
have been designated by the Board of Directors to comprise an additional
business group of the Company in respect of which the Company shall have
created and issued a class of Additional Group Stock pursuant to a Certificate
of Designations adopted by the Board of Directors or by the shareholders of
the Company in accordance with applicable law, and having terms that do not
conflict with any of the voting powers, preferences, designations, rights,
qualifications, limitations or restrictions contained in this Certificate of
Designations. Additional Group Stock may be convertible into any other class
of Common Stock on such terms as shall be determined by the Board of
Directors.
"Additional Group Stock" shall mean one or more additional classes of Common
Stock of the Company issued from time to time in respect of any Additional
Group, as provided in a Certificate of Designations adopted by the Board of
Directors or by the shareholders of the Company in accordance with applicable
law.
"Aggregate Number of Shares Issuable with Respect to the Inter-Group
Interest" shall mean, with respect to any Group at any date, the sum of each
of the Number of Shares Issuable with Respect to the Inter-Group Interest in
such Group held by all other Groups at such date.
"Available Distribution Amount" shall mean, as the context requires, a
reference to the Global Crossing Group Available Distribution Amount,
GlobalCenter Group Available Distribution Amount or, if applicable, the
available distribution amount (or comparable definition) with respect to any
Additional Group Stock.
"Board of Directors" shall mean the board of directors of the Company or a
duly authorized committee thereof.
"Common Stock" shall mean the collective reference to Global Crossing Group
Stock, GlobalCenter Group Stock and, if applicable, any Additional Group
Stock, and any of which may sometimes be called a class of Common Stock.
"Conversion Date" shall mean the date fixed by the Board of Directors as the
effective date for the conversion of shares of Global Crossing Group Stock
into shares of GlobalCenter Group Stock or, if so
II-23
determined by the Board of Directors, Additional Group Stock, as the case may
be, or shares of GlobalCenter Group Stock into shares of Global Crossing Group
Stock or, if so determined by the Board of Directors, Additional Group Stock,
as the case may be, as shall be set forth in the notice to holders of shares
of the class of Common Stock subject to conversion and to holders of any
Convertible Securities that are convertible into or exchangeable or
exercisable for shares of such class of Common Stock required pursuant to
Section 4(H)(v).
"Convertible Securities" shall mean, at any time, any securities of the
Company or of any subsidiary thereof (other than shares of Common Stock),
including warrants and options, outstanding at such time that by their terms
are convertible into or exchangeable or exercisable for or evidence the right
to acquire any shares of any class of Common Stock, whether convertible,
exchangeable or exercisable at such time or a later time or only upon the
occurrence of certain events, but in respect of antidilution provisions of
such securities only upon the effectiveness thereof.
"Disposition" shall mean a sale, transfer, assignment or other disposition
(whether by merger, share exchange, sale or contribution of assets or stock or
otherwise) of businesses, assets, properties or liabilities (including stock,
other securities and goodwill).
"Disposition Date" shall have the meaning specified in Section 4(C)(1) or
Section 4(F)(1), as applicable.
"Excluded Transaction" shall mean, with respect to the Global Crossing Group
or the GlobalCenter Group, as applicable:
(i) the Disposition by the Company of all or substantially all of its
businesses, properties and assets in one transaction or a series of related
transactions in connection with the dissolution of the Company and the
distribution of assets to shareholders as referred to in Section 3;
(ii) the Disposition of the businesses, properties and assets of such
Group as contemplated by Section 4(B) or 4(E) or otherwise to all holders
of shares of the class of Common Stock related to such Group divided among
such holders on a pro rata basis in accordance with the number of shares of
such class of Common Stock outstanding and, to the extent that the
Aggregate Number of Shares Issuable with Respect to the Inter-Group
Interest in such Group is greater than zero, to the Company or subsidiaries
thereof, divided among such holders and the Company or subsidiaries thereof
on a pro rata basis in accordance with the number of shares of such class
of Common Stock outstanding and such Aggregate Number of Shares Issuable
with Respect to the Inter-Group Interest in the related Group;
(iii) to any person or entity controlled (as determined by the Board of
Directors) by the Company;
(iv) in connection with a Related Business Transaction in respect of such
Group; or
(v) a Disposition conditioned upon the affirmative vote of a majority of
the votes cast by the holders of the class of Common Stock related to such
Group, voting as a separate class.
"Fair Value" shall mean:
(i) in the case of equity securities or debt securities of a class or
series that has previously been Publicly Traded for a period of at least
, the Market Value thereof (if such Market Value, as so defined, can be
determined);
(ii) in the case of equity securities or debt securities of a class or
series that has not previously been Publicly Traded for a period of at
least or the Market Value of which cannot be determined, the fair
value per share of stock or per other unit of such security, on a fully
distributed basis, as determined in good faith by the Board of Directors;
II-24
(iii) in the case of cash denominated in U.S. dollars, the face amount
thereof and, in the case of cash denominated in other than U.S. dollars,
the face amount thereof repurchased into U.S. dollars at the rate published
in The Wall Street Journal on the date for the determination of Fair Value
or, if not so published, at such rate as shall be determined in good faith
by the Board of Directors based upon such information as the Board of
Directors shall in good faith determine to be appropriate; and
(iv) in the case of property other than securities or cash, the "Fair
Value" thereof shall be determined in good faith by the Board of Directors,
which determination may be based upon such appraisals or valuation reports
of such independent experts as the Board of Directors shall in good faith
determine to be appropriate.
Any such determination of Fair Value shall be described in a statement filed
with the records of the actions of the Board of Directors.
"Global Crossing Group" shall mean, as of any date:
(i) the interest of the Company or any of its subsidiaries on such date
in all of the businesses, assets, properties and liabilities of the Company
or any of its subsidiaries (and any successor companies), other than any
businesses, assets, properties and liabilities attributed to the
GlobalCenter Group or any other Group in accordance with this Certificate
of Designations or any other Certificate of Designations related to another
class of Common Stock;
(ii) all businesses, assets, properties and liabilities transferred to
the Global Crossing Group from the GlobalCenter Group or any other Group
(other than in a transaction pursuant to clause (iv) below) pursuant to
transactions in the ordinary course of business of the Global Crossing
Group and the GlobalCenter Group or such other Group or otherwise as the
Board of Directors may have directed;
(iii) a proportionate undivided interest in each and every business,
asset, property and liability attributed to the GlobalCenter Group or any
other Group equal to the Inter-Group Interest in the GlobalCenter Group or
such other Group, in each case held by the Global Crossing Group as of such
date;
(iv) all businesses, assets, properties and liabilities transferred to
the Global Crossing Group from the GlobalCenter Group or any other Group in
connection with an increase in the Inter-Group Interest in the Global
Crossing Group held by the GlobalCenter Group or such other Group;
(v) all businesses, assets, properties and liabilities transferred to the
Global Crossing Group from the GlobalCenter Group or any other Group in
connection with a decrease in the Inter-Group Interest in the GlobalCenter
Group or such other Group, in each case held by the Global Crossing Group;
(vi) the interest of the Company or any of its subsidiaries in any
business, asset or property acquired and any liabilities assumed by the
Company or any of its subsidiaries and attributed to the Global Crossing
Group, as determined by the Board of Directors as contemplated by Section
6(A);
(vii) any assets or properties, including securities, attributed to the
Global Crossing Group pursuant to Section 5(B) or Section 5(C); and
(viii) all net income and net losses arising in respect of the foregoing
and proceeds of the Disposition thereof;
provided that from and after any permitted transfer of any businesses, assets,
properties or liabilities from the Global Crossing Group to one or more other
Groups, the Global Crossing Group shall no longer include such businesses,
assets, properties or liabilities so contributed or transferred (other than as
reflected, to the extent applicable, in respect of such a transfer by the
Inter-Group Interest in such other Group or Groups held by the Global Crossing
Group); and provided further that, subject to Section 6(B), in the event that
shares of Global
II-25
Crossing Group Stock are converted into shares of another class of Common Stock
pursuant to Section 4(A), Section 4(B)(i)(2) or Section 4(B)(iii), the
businesses, assets, properties and liabilities attributed to the Global
Crossing Group immediately prior to the Conversion Date shall become
businesses, assets, properties and liabilities attributed to the Group related
to the class of Common Stock into which Global Crossing Group Stock is
converted on the Conversion Date.
"Global Crossing Group Available Distribution Amount" shall mean, on any
date, the product of:
(i) the Outstanding Interest Fraction with respect to Global Crossing
Group Stock; and
(ii) the lesser of:
(x) any amount in excess of the minimum amount necessary to pay debts
attributed to the Global Crossing Group as they become due in the usual
course of business; and
(y) the realisable value of the assets attributed to the Global
Crossing Group less the sum of the total liabilities attributed to the
Global Crossing Group together with the amount of the issued share
capital and share premium account attributable to the Global Crossing
Group.
Notwithstanding the foregoing, and consistent with Section 6(B), at any time
when there are not outstanding both:
(i) one or more shares of Global Crossing Group Stock or Convertible
Securities convertible into or exchangeable or exercisable for Global
Crossing Group Stock; and
(ii) one or more shares of GlobalCenter Group Stock or Additional Group
Stock or Convertible Securities convertible into or exchangeable or
exercisable for GlobalCenter Group Stock or Additional Group Stock,
the "Available Distribution Amount," on any calculation date during such time
period, with respect to the Global Crossing Group Stock, the GlobalCenter Group
Stock or Additional Group Stock, as the case may be (depending on which of such
class of Common Stock or Convertible Securities convertible into or
exchangeable or exercisable for such class of Common Stock is outstanding),
shall mean the amount available for the payment of dividends on such Common
Stock in accordance with law.
"GlobalCenter Group" shall mean, as of any date:
(i) all businesses, assets, properties and liabilities of GlobalCenter
Inc. and its subsidiaries and any assets of the foregoing as of the Initial
Issuance Date (the "GlobalCenter Group Companies");
(ii) all businesses, assets, properties and liabilities of the Company
and its subsidiaries attributed by the Board of Directors to the
GlobalCenter Group, whether or not such businesses, assets, properties or
liabilities are or were also businesses, assets, properties and liabilities
of any of the GlobalCenter Group Companies;
(iii) all businesses, assets, properties and liabilities transferred to
the GlobalCenter Group from the Global Crossing Group or any other Group
(other than in a transaction pursuant to clause (v) below) pursuant to
transactions in the ordinary course of business of the GlobalCenter Group
and the Global Crossing Group or such other Group or otherwise as the Board
of Directors may have directed;
(iv) a proportionate undivided interest in each and every business,
asset, property and liability attributed to the Global Crossing Group or
any other Group equal to the Inter-Group Interest in the Global Crossing
Group or such other Group, in each case held by the GlobalCenter Group as
of such date;
II-26
(v) all businesses, assets, properties and liabilities transferred to the
GlobalCenter Group from the Global Crossing Group or any other Group in
connection with an increase in the Inter-Group Interest in the GlobalCenter
Group held by the Global Crossing Group or such other Group;
(vi) all businesses, assets, properties and liabilities transferred to
the GlobalCenter Group from the Global Crossing Group or any other Group in
connection with a decrease in the Inter-Group Interest in the Global
Crossing Group or such other Group, in each case held by the GlobalCenter
Group;
(vii) the interest of the Company or any of its subsidiaries in any
business, asset or property acquired and any liabilities assumed by the
Company or any of its subsidiaries and attributed to the GlobalCenter
Group, as determined by the Board of Directors as contemplated by Section
6(A);
(viii) any assets, or properties, including securities, attributed to the
GlobalCenter Group pursuant to Section 5(B) or Section 5(C); and
(ix) all net income and net losses arising in respect of the foregoing
and proceeds of the Disposition thereof;
provided that from and after any permitted transfer of any businesses, assets,
properties or liabilities from the GlobalCenter Group to one or more other
Groups, the GlobalCenter Group shall no longer include such businesses, assets,
properties or liabilities so contributed or transferred (other than as
reflected, to the extent applicable, in respect of such a transfer by the
Inter-Group Interest in such other Group or Groups held by the GlobalCenter
Group); and provided further, subject to Section 6(B), that in the event the
shares of GlobalCenter Group Stock are converted into shares of another class
of Common Stock pursuant to Section 4(D), Section 4(E)(i)(2) or Section
4(E)(iii), the businesses, assets, properties and liabilities attributed to the
GlobalCenter Group immediately prior to the Conversion Date shall become
businesses, assets, properties and liabilities attributed to the Group related
to the class of Common Stock into which GlobalCenter Group Stock is converted
on the Conversion Date.
"GlobalCenter Group Available Distribution Amount" shall mean, on any date
the product of:
(i) the Outstanding Interest Fraction with respect to GlobalCenter Group
Stock; and
(ii) the lesser of:
(x) any amount in excess of the minimum amount necessary to pay debts
attributed to the GlobalCenter Group as they become due in the usual
course of business; and
(y) the realisable value of the assets attributed to the GlobalCenter
Group less the sum of the total liabilities attributed to the
GlobalCenter Group together with the amount of the issued share capital
and share premium account attributable to the GlobalCenter Group.
Notwithstanding the foregoing, and consistent with Section 6(B), at any time
when there are not outstanding both:
(i) one or more shares of GlobalCenter Group Stock or Convertible
Securities convertible into or exchangeable or exercisable for GlobalCenter
Group Stock; and
(ii) one or more shares of Global Crossing Group Stock or Additional
Group Stock or Convertible Securities convertible into or exchangeable or
exercisable for Global Crossing Group Stock or Additional Group Stock,
the "Available Distribution Amount," on any calculation date during such time
period, with respect to the GlobalCenter Group Stock, the Global Crossing Group
Stock or Additional Group Stock, as the case may be
II-27
(depending on which of such class of Common Stock or Convertible Securities
convertible into or exchangeable or exercisable for such class of Common Stock
is outstanding), shall mean the amount available for the payment of dividends
on such Common Stock in accordance with law.
"Group" shall mean, as of any date, the Global Crossing Group, the
GlobalCenter Group or, if applicable, any Additional Group, as the case may
be.
"Initial Issuance Date" shall mean the date of first issuance of
GlobalCenter Group Stock.
"Inter-Group Interest" shall mean, as of any date with respect to any Group,
the Number of Shares Issuable with Respect to the Inter-Group Interest in any
other Group that are permitted to be held or held, as applicable, as of such
date by such first Group.
"Market Capitalization" shall mean, with respect to any class or series of
capital stock on any date, the product of:
(i) the Market Value of one share of such class or series of capital
stock on such date; and
(ii) the number of shares of such class or series of capital stock
outstanding on such date.
"Market Value" shall mean, with respect to a share of any class or series of
capital stock of the Company on any day,
(i) the average of the high and low reported sales prices regular way of
a share of such class or series on such Trading Day; or
(ii) in case no such reported sale takes place on such Trading Day, the
average of the reported closing bid and asked prices regular way of a share
of such class or series on such Trading Day, in either case as reported on
the New York Stock Exchange Composite Tape; or
(iii) if the shares of such class or series are not listed or admitted to
trading on such Exchange on such Trading Day, on the principal national
securities exchange in the United States on which the shares of such class
or series are listed or admitted to trading; or
(iv) if not listed or admitted to trading on any national securities
exchange on such Trading Day, on the NASDAQ National Market; or
(v) if the shares of such class or series are not listed or admitted to
trading on any national securities exchange or quoted on NASDAQ National
Market on such Trading Day, the average of the closing bid and asked prices
of a share of such class or series in the over-the-counter market on such
Trading Day, as furnished by any New York Stock Exchange member firm
selected from time to time by the Company; or
(vi) if such closing bid and asked prices are not made available by any
such New York Stock Exchange member firm on such Trading Day, the Fair
Value of a share of such class or series as set forth in clause (ii) of the
definition of Fair Value;
provided that, for purposes of determining the Market Value of a share of any
class or series of capital stock for any period:
(x) the "Market Value" of a share of capital stock on any day prior to
any "ex-dividend" date or any similar date occurring during such period for
any dividend or distribution (other than any dividend or distribution
contemplated by clause (y)(2) of this sentence) paid or to be paid with
respect to such capital stock shall be reduced by the Fair Value of the per
share amount of such dividend or distribution; and
(y) the "Market Value" of any share of capital stock on any day prior to:
II-28
(1) the effective date of any subdivision (by stock split or
otherwise) or combination (by reverse stock split or otherwise) of
outstanding shares of such class or series of capital stock occurring
during such period; or
(2) any "ex-dividend" date or any similar date occurring during such
period for any dividend or distribution with respect to such capital
stock to be made in shares of such class or series of capital stock or
Convertible Securities that are convertible, exchangeable or
exercisable for such class or series of capital stock;
shall be appropriately adjusted, as determined by the Board of Directors,
to reflect such subdivision, combination, dividend or distribution.
"Net Proceeds" shall mean, as of any date with respect to any Disposition of
any of the businesses, assets, properties and liabilities attributed to either
the Global Crossing Group or the GlobalCenter Group, an amount, if any, equal
to what remains of the gross proceeds of such Disposition after payment of, or
reasonable provision is made as determined by the Board of Directors for:
(i) any taxes the Company estimates will be payable by the Company (or
which the Company estimates would have been payable but for the utilization
of tax benefits attributable to any other Group) in respect of such
Disposition or in respect of any resulting dividend or repurchase pursuant
to Section 4(C)(i)(1)(a), 4(C)(i)(1)(b), Section 4(F)(i)(1)(a) or
4(F)(i)(1)(b);
(ii) any transaction costs, including, without limitation, any legal,
investment banking and accounting fees and expenses; and
(iii) any liabilities (contingent or otherwise) of or attributed to such
Group, including, without limitation, any liabilities for deferred taxes or
any indemnity or guarantee obligations of the Company incurred in
connection with the Disposition or otherwise, and any liabilities for
future purchase price adjustments and any preferential amounts plus any
accumulated and unpaid dividends in respect of the preferred stock
attributed to such Group.
For purposes of this definition, any businesses, properties and assets
attributed to the Group subject to such Disposition that remain after such
Disposition shall constitute "reasonable provision" for such amount of taxes,
costs and liabilities (contingent or otherwise) as the Board of Directors
determines can be expected to be supported by such businesses, properties and
assets.
"Number of Shares Issuable with Respect to the Inter-Group Interest" in any
Group held by any other Group shall be the number of shares of the class of
Common Stock related to the Group in which the Inter-Group Interest is held
that are deemed to be held from time to time by such other Group. The Number of
Shares Issuable with Respect to the Inter-Group Interest shall initially be:
(i) with respect to the Global Crossing Group Stock, zero;
(ii) with respect to the GlobalCenter Group Stock, , all of which shall
be deemed held by the Global Crossing Group; and
(ii) with respect to any Additional Group Stock, as set forth in or
pursuant to the Certificate of Designations creating such class of
Additional Group Stock,
in each case as adjusted, increased or decreased from time to time pursuant to:
(x) with respect to Global Crossing Group Stock and the GlobalCenter
Group Stock, Section 5; and
II-29
(y) with respect to any Additional Group with respect to the Number
of Shares Issuable with Respect to the Inter-Group Interest in the
Global Crossing Group or the GlobalCenter Group held by such Additional
Group, and the Number of Shares Issuable with Respect to the Inter-
Group Interest in such Additional Group held by the Global Crossing
Group or the GlobalCenter Group, Section 5 and the Certificate of
Designations creating such class of Additional Group Stock.
"Outstanding Interest Fraction" shall mean, as of any date with respect to
Global Crossing Group Stock, GlobalCenter Group Stock or any Additional Group
Stock, as the case may be, the fraction (which may simplify to 1/1), the
numerator of which shall be the number of outstanding shares of such class of
Common Stock on such date and the denominator of which shall be the sum of the
number of outstanding shares of such class of Common Stock on such date and the
Aggregate Number of Shares Issuable with Respect to the Inter-Group Interest in
the Group related to such class of Common Stock on such date. A statement
setting forth the Outstanding Interest Fraction for any class of Common Stock
as of the record date for the payment of any dividend or distribution on any
class of Common Stock and as of the end of each fiscal quarter of the Company
shall be filed by the Secretary of the Company in the records of the actions of
the Board of Directors not later than ten days after such date.
"Person" shall mean any individual, corporation, partnership, limited
liability company, joint venture, association, joint stock company, trust,
unincorporated organization, government or agency or political subdivision
thereof, or other entity, whether acting in an individual, fiduciary or other
capacity.
"Publicly Traded" shall mean, with respect to any security:
(i) registered under Section 12 of the Securities Exchange Act of 1934,
as amended (or any successor provision of law); and
(ii) listed for trading on the New York Stock Exchange or the America
Stock Exchange (or any national securities exchange registered under
Section 7 of the Securities Exchange Act of 1934, as amended (or any
successor provision of law), that is the successor to either such exchange)
or quoted in the NASDAQ National Market (or any successor market system).
"Related Business Transaction" shall mean any Disposition of all or
substantially all of the businesses, assets, properties and liabilities
attributed to the Global Crossing Group or the GlobalCenter Group, as the case
may be, in a transaction or series of related transactions that result in the
Company, one or more of its Subsidiaries or the holders of Common Stock
receiving in consideration of such businesses, assets, properties and
liabilities primarily equity securities (including, without limitation, capital
stock, debt securities convertible into or exchangeable for equity securities
or interests in a general or limited partnership or limited liability company,
without regard to the voting power or other management or governance rights
associated therewith) of any entity which:
(i) acquires such assets or properties or succeeds (by merger, formation
of a joint venture or otherwise) to the business conducted with such assets
or properties or controls such acquiror or successor; and
(ii) the Board of Directors determines is primarily engaged or proposes
to engage primarily in one or more businesses similar or complementary to
the businesses conducted by such Group prior to such Disposition.
"Repurchase Date" shall mean the date fixed by the Board of Directors as the
effective date for a repurchase of shares of any class of Common Stock, as set
forth in a notice to holders thereof required pursuant to Section 4(H)(iii),
Section 4(H)(iv) or Section 4(H)(vi).
"Subsidiary" shall mean, with respect to any Person, any corporation, limited
liability company or partnership 50% or more of whose outstanding voting
securities or membership or partnership interests, as the case may be, are,
directly or indirectly, owned by such Person.
II-30
"Substantially all of the business, properties and assets" shall have the
meaning specified in Section 4(C)(ii) or Section 4(F)(ii), as applicable.
"Tax Event" shall mean receipt by the Company of an opinion of tax counsel
to the effect that, as a result of (a) any amendment to, clarification of, or
change or proposed change in, the laws, or interpretation or application of
the laws, of Bermuda or the United States or any political subdivision or
taxing authority thereof or therein (including, but not limited to, the
enactment of any legislation, the publication of any judicial or regulatory
decision, determination or pronouncement or any announced proposed change in
law by an applicable legislative committee or the chair thereof (but not
including a legislative proposal by an administration until acted upon by the
applicable legislative committee or chair thereof)), regardless of whether
such amendment, clarification, change or proposed change is issued to or in
connection with a proceeding involving the Company, the Global Crossing Group
or the GlobalCenter Group and whether or not subject to appeal, there is more
than an insubstantial risk that:
(b)(i) any issuance of Global Crossing Group Stock or GlobalCenter Group
Stock would be treated for tax purposes as a sale or other taxable
disposition by the Company or any of its subsidiaries of any of the assets,
operations or relevant subsidiaries to which the Global Crossing Group
Stock or GlobalCenter Group Stock relates;
(ii) the issuance or existence of Global Crossing Group Stock or
GlobalCenter Group Stock would subject the Company, its subsidiaries or
affiliates, or any of their respective successors or shareholders, to the
imposition of tax or to other adverse tax consequences that, in the
reasonable discretion and good faith of the Company, are more than de
minimis; or
(iii) either Global Crossing Group Stock or GlobalCenter Group Stock is
not or, at any time in the future will not be, treated for tax purposes
solely as common stock of the Company.
For purposes of rendering such an opinion, tax counsel will assume that any
such legislative or administrative proposals will be adopted or enacted as
proposed. For the avoidance of doubt, a tax event does not include the
occurrence of any of the events listed in (a) above, if, as a result of a
"grandfathering" provision, such event results in not more than an
insubstantial risk that the issuance or existence of either Global Crossing
group stock or GlobalCenter group stock would result in any of the
consequences described in (b) above.
"Trading Day" shall mean each weekday other than any day on which the
relevant class of Common Stock of the Company is not traded on any national
securities exchange or quoted on the NASDAQ National Market or otherwise in
the over-the-counter market.
Section 8. Headings. The headings of the paragraphs of this Schedule are for
convenience of reference only and shall not define, limit or affect any of the
provisions hereof.
Section 9. Bye-Laws. This Schedule shall be attached to the Bye-Laws of the
Company but shall not form part of such Bye-Laws.
IN WITNESS WHEREOF, the Company has caused this Certificate of Designations
to be duly signed on its behalf on this day of , 2000.
GLOBAL CROSSING LTD., a company
incorporated under the laws of
Bermuda
By:
----------------------------------
Name:
II-31
ANNEX III
POLICY STATEMENT REGARDING
GLOBAL CROSSING GROUP STOCK AND GLOBALCENTER GROUP STOCK MATTERS
1. General Policy
It is the policy of the Board of Directors of Global Crossing Ltd. ("Global
Crossing") that:
(A) all material matters as to which the holders of Global Crossing Group
Stock and GlobalCenter Group Stock may have potentially divergent interests
shall be resolved in a manner that the Board of Directors or the Capital
Stock Committee of the Board of Directors determines to be in the best
interests of Global Crossing, after giving fair consideration to the
potentially divergent interests and all other relevant interests of the
holders of the separate series of Common Stock of Global Crossing; and
(B) a process of fair dealing will govern the relationship and the means
by which the terms of any material transaction between the Groups will be
determined, pursuant to which matters will be resolved in an equitable and
impartial manner.
2. Role of Capital Stock Committee
The Capital Stock Committee will have and exercise such powers, authority and
responsibilities as the Board may delegate to such Committee, which will
initially include authority to (a) interpret, make determinations under, and
oversee the implementation of these policies, (b) adopt additional general
policies governing the relationship between the Global Crossing Group and the
GlobalCenter Group, and (c) engage the services of accountants, investment
bankers, appraisers, attorneys and other service providers to assist it in
discharging its duties. In making determinations in connection with these
policies, the members of the Board and the Capital Stock Committee will act in
a manner consistent with their fiduciary duty to consider whether a proposed
action is for the overall benefit of Global Crossing Ltd. pursuant to legal
guidance concerning these fiduciary obligations under applicable law.
3. Corporate Opportunities
The Board of Directors will allocate any business opportunities and
operations, any acquired assets and businesses and any assumed liabilities
between the Global Crossing Group and the GlobalCenter Group, in whole or in
part, in a manner it considers to be in the best interests of Global Crossing
as contemplated by this Policy Statement. To the extent a business opportunity
or operation, an acquired asset or business, or an assumed liability would be
suitable to be undertaken by or allocated to either Group, it will be allocated
by the Board of Directors in its business judgment or in accordance with
procedures adopted by the Board of Directors from time to time to ensure that
decisions will be made in the best interests of Global Crossing. Any such
allocation may involve the consideration of a number of factors that the Board
of Directors determines to be relevant, including, without limitation, whether
the business opportunity or operation, the acquired asset or business, or the
assumed liability is principally within or related to the existing scope of a
Group's business and whether a Group is better positioned to undertake or have
allocated to it such business opportunity or operation, acquired assets or
business or assumed liability.
4. Relationships Between Groups
Global Crossing will seek to manage the Global Crossing Group and the
GlobalCenter Group in a manner designed to maximize the operations, unique
assets and values of both Groups, and with complementary deployments of
personnel, capital and facilities.
(A) Exclusive Provision of Services
(i) The Global Crossing Group will be the exclusive provider of GBLX
Services to the GlobalCenter Group. As such, the Global Crossing Group will
have the exclusive right to provide GBLX Services and related products and
services to the GlobalCenter Group.
III-1
For purposes of the foregoing, "GBLX Services" means:
(a) Internet Protocol transit service.
(b) Dedicated Internet access.
(c) Dial Internet access.
(d) IP virtual private network.
(e) IP exchange services--conditioned space for GBLX customers'
routers for interconnection with GBLX and other provider networks.
(ii) The GlobalCenter Group will be the exclusive provider of GCTR
Services to the Global Crossing Group. As such, the GlobalCenter Group will
have the exclusive right to provide GCTR Services and related products and
services to the Global Crossing Group.
For purposes of the foregoing, "GCTR Services" means:
(a) Complex web hosting--Data Centers conditioned space and related
services.
(b) Data Center professional services--consulting, engineering, and
other technology support services.
(c) Data Center equipment hardware and software sales and support.
(d) Value added services to support hosting and distribution,
including but not limited to:
. Storage-on-demand
. Database
. Security
. Consulting services
. Disaster recovery
. Application hosting
. Monitoring
. Staging, sparing and laboratory test services
. Managed services
(B) Network and Service Management
(i) Network and Services Management Committee.
A committee of three senior executives from each Group will be formed
to provide management and direction designed to fully implement this
Policy with respect to the various services to be provided by one Group
to the other (the "Network and Services Management Committee"). In
III-2
particular, the Network and Services Management Committee will (1)
review and agree on data center bandwidth requirements by location and
volume, (2) review and agree on network expansion plans as required to
support the data centers and (3) establish service level targets for
the data center connections and track performance against those
targets.
(ii) Service Level Agreement.
Each Group will guarantee a level of service for the services it
provides to the other Group that meets the standards committed to by
the other Group to its customers and which have been approved by the
Network and Services Management Committee.
(iii) Monitoring.
The GlobalCenter Group will have the right to monitor from its Data
Center the related portion of the Global Crossing Internet Protocol
network that the GlobalCenter Group relies upon to provide services to
its customers as part of an integrated service offering. The monitoring
rights will give the GlobalCenter Group the capability to view and
monitor the end-to-end service in the same manner that the Global
Crossing Group views the network. As determined by the Network and
Services Management Committee, the GlobalCenter Group will either
become one of or have the same monitoring capabilities as one of the
Global Crossing network operations centers.
(C) Terms of Inter-Group Transactions. All material transactions between the
Global Crossing Group and the GlobalCenter Group which are determined by the
Board of Directors to be in the ordinary course of business, including those
described in Paragraph 4(A), are intended, to the extent practicable, to be on
terms consistent with those that would be applicable to arm's-length dealings
with unrelated third parties, taking into account a number of factors,
including quality, availability, volume and pricing. In particular, the pricing
for the access to its network provided by the Global Crossing Group to the
GlobalCenter Group will be preferred market-based pricing, taking into account
volume, term, the exclusive nature of the arrangement and any guarantee of
service levels provided by the Global Crossing Group.
(D) Marketing of Services. As a general matter, each Group will continue to
design, develop, deploy, produce, market, sell and service their own service
offerings and choose their own selected sales channels. In addition, each Group
will cooperate with the other in providing the use of their respective sales
channels to offer their respective services. Each Group will operate in a
manner that takes into account the other's expansion, acquisition, deployment,
marketing and sales plans, with the goal of minimizing overlaps and conflicts
between the two Groups.
(E) Transfers of Other Assets and Liabilities. The Board of Directors may
reallocate assets (including cash) and liabilities between the Global Crossing
Group and the GlobalCenter Group in addition to transfers resulting from
commercial transactions which the Board of Directors determines to be in the
ordinary course of business of the Groups described in Paragraph 4(C). Any
reallocation of assets and liabilities between the Groups not in the ordinary
course of their respective businesses shall be effected by:
(i) the reallocation by the transferee Group to the transferor Group of
other assets or consideration or liabilities;
(ii) the creation of inter-group debt owed by the transferee Group to the
transferor Group;
(iii) the reduction of inter-group debt owed by the transferor Group to
the transferee Group;
(iv) the creation of, or an increase in, an Inter-Group Interest in the
transferee Group held by the transferor Group;
(v) the reduction of an Inter-Group Interest in the transferor Group held
by the transferee Group; or
(vi) a combination of any of the foregoing,
III-3
in each case, in an amount having a fair value equivalent to the fair value of
the assets or liabilities reallocated by the transferor Group and, in the case
of the creation of or an increase or decrease in an Inter-Group Interest, in
accordance with the provisions of the Certificate of Designations. For these
purposes, the fair value of the assets or liabilities transferred will be
determined by the Board of Directors in its sole discretion. The Board of
Directors will approve any creation of, or increase or decrease in, an Inter-
Group Interest.
(F) Cash Management. Global Crossing will continue to manage most financial
activities on a centralized basis. These activities include the investment of
surplus cash, the issuance and repayment of debt and the issuance and
repurchase of Common Stock and preferred stock for the account of each Group.
(G) Financing Arrangements. Loans from the Global Crossing or the
GlobalCenter Group to the other Group will be made at the weighted average
interest rate of the consolidated indebtedness of Global Crossing Ltd. and on
such other terms and conditions as the Board of Directors or the Capital Stock
Committee of the Board of Directors determines to be in the best interests of
Global Crossing. Any fees incurred in connection with debt incurred for a
particular Group will be allocated to the borrowing Group.
(H) Intellectual Property. Global Crossing will manage on a centralized basis
the intellectual property of Global Crossing attributed to the Groups, except
that the GlobalCenter Group will manage the intellectual property attributed to
it that is owned by the companies in the GlobalCenter Group.
Each Group will have the right to use the intellectual property attributed to
the other Group for appropriate business activities on appropriate terms.
Any fees obtained through the sale or licensing of intellectual property will
be principally allocated to the Group that paid to develop the intellectual
property sold or licensed. If the intellectual property being sold or licensed
was jointly developed by the Groups and the Groups agree to allocate fees
obtained in proportion to the development costs incurred by each Group, then
any fees obtained through the sale or licensing will be so allocated. If such
intellectual property was not predominantly developed by any one Group or was
jointly developed by the Groups but the Groups do not agree to allocate fees
obtained in proportion to costs incurred, then any fees obtained through such
sale or licensing will be allocated using the same general allocation as
overhead expenses.
5. Dividend Policy
Subject to the limitations set forth in the Certificate of Designations, any
preferential rights of any series of preferred stock of Global Crossing, and to
the limitations of applicable law, holders of shares of Global Crossing Stock
or GlobalCenter Stock will be entitled to receive dividends on such stock when,
as and if authorized and declared by the Board of Directors.
The payment of dividends on either class of Common Stock will be a business
decision to be made by the Board of Directors from time to time based upon the
results of operations, financial condition and capital requirements of the
relevant Group and such other factors as the Board of Directors considers
relevant. Payment of dividends may be restricted by loan agreements, indentures
and other transactions entered into by Global Crossing from time to time.
Because both Groups are expected to require significant capital commitments to
finance their respective operations and fund future growth, Global Crossing
does not expect to pay any dividends on either class of Common Stock for the
foreseeable future.
6. Financial Reporting; Allocation Matters
(A) Financial Reporting. Global Crossing will prepare and include in its
filings with the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended, consolidated financial statements of Global
Crossing and combined financial statements of each of the Global Crossing Group
and the GlobalCenter Group for so long as the related class of Common Stock is
outstanding. The combined financial
III-4
statements of each Group will reflect the combined financial position, results
of operations and cash flows of the businesses attributed thereto and in the
case of annual financial statements shall be audited.
(B) Shared Corporate Services. A portion of Global Crossing's shared
corporate services (such as executive management, human resources, legal,
accounting and auditing, tax, treasury, strategic planning, investor relations
and corporate technology) will be allocated to the Global Crossing Group and
the GlobalCenter Group based upon specific identification of such services used
by that Group. Where determinations based on use alone are impracticable, other
methods and criteria shall be used that management believes are fair and
provide a reasonable estimate of the cost attributable to the Groups.
7. GlobalCenter Inc. Board of Directors
The board of directors of GlobalCenter Inc. shall at all times be composed of
six directors nominated by the Board of Directors of Global Crossing Ltd. and
five directors nominated by the Chief Executive Officer of GlobalCenter Inc.
The board of directors of GlobalCenter Inc. shall have the authority to:
(i) appoint officers of GlobalCenter Inc.;
(ii) approve the budget of the GlobalCenter Group;
(iii) approve any acquisitions of businesses that are attributed to the
GlobalCenter Group;
(iv) approve the incurrence of indebtedness at GlobalCenter Inc. of up to
25% of the market capitalization of GlobalCenter group stock; and
(v) approve the issuance of capital stock of GlobalCenter Inc. or the
issuance of GlobalCenter group stock by Global Crossing Ltd.
With respect to the last three items, the board of directors of GlobalCenter
Inc. shall only have such authority to the extent that such actions would not
have any adverse effect on Global Crossing Ltd.
8. Amendment and Modification of Policy
This Policy Statement and any resolution implementing the provisions hereof
may at any time and from time to time be amended, modified or rescinded by the
Board of Directors, and the Board of Directors may adopt additional or other
policies or make exceptions with respect to the application of these policies
in connection with particular facts and circumstances, all as the Board of
Directors may determine, consistent with its fiduciary duties to Global
Crossing.
9. Definitions
Capitalized terms not defined in this Policy Statement shall have the
meanings set forth in the Certificate of Designations. "Certificate of
Designations" means the Certificate of Designations of Global Crossing Group
Stock and GlobalCenter Group Stock, as amended from time to time.
III-5
ANNEX IV
GLOBALCENTER MANAGEMENT STOCK PLAN
IV-1
ANNEX V
GLOBALCENTER 2000 STOCK PLAN
V-1
PROXY
GLOBAL CROSSING LTD.
Proxy for Special Meeting of Shareholders
, 2000
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Gary Winnick and Lodwrick M. Cook, and each of
them, with power of substitution, as proxies at the special meeting of
shareholders of GLOBAL CROSSING LTD. to be held on , 2000, and at any
adjournment thereof, and to vote shares of stock of the company which the
undersigned would be entitled to vote if personally present.
This proxy will be voted as directed with respect to the proposals referred to
in Items 1 through 4 on the reverse side, but in the absence of such direction
this proxy will be voted FOR the proposals referred to in Items 1 through 4.
PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
SEE REVERSE CONTINUED AND TO BE SIGNED ON REVERSE SIDESEE REVERSE
SIDE SIDE
V-2
FORM OF PROXY
[LOGO] Global Crossing(TM)
c/o EquiServe
P.O. Box 9398
Boston, MA 02205-9398
GLC40A
DETACH HERE
[X] Please mark
votes as in
this example.
The Board of Directors recommends a vote FOR proposals 1 through 4.
1. Proposal to increase FOR AGAINST ABSTAIN
authorized share capital of [_] [_] [_]
Global Crossing Ltd.
FOR AGAINST ABSTAIN
2. Proposal to authorize board [_] [_] [_]
of directors to establish
multiple classes of Global
Crossing common stock and
redesignate outstanding
shares of Global Crossing
common stock as Global
Crossing group stock.
3. Proposal to approve the FOR AGAINST ABSTAIN
GlobalCenter Management [_] [_] [_]
Stock Plan.
4. Proposal to approve the FOR AGAINST ABSTAIN
GlobalCenter 2000 Stock [_] [_] [_]
Plan.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [_]
Please sign exactly as your name(s) appear(s) on this proxy card. Joint owners
should each sign personally. When signing as attorney, executor, administrator,
trustee or guardian, please give your full title.
Signature: _________ Date: __________ Signature: _________ Date: __________
V-3