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Global Crossing North America, Inc – ‘DEFM14A’ on 8/6/99

On:  Friday, 8/6/99   ·   Accession #:  950130-99-4581   ·   File #:  1-04166

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 8/06/99  Global Crossing North America Inc DEFM14A                1:1.2M                                   Donnelley R R & S… 02/FA

Definitive Proxy Solicitation Material — Merger or Acquisition   —   Schedule 14A
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: DEFM14A     Definitive Proxy Statement                           354   1.86M 


Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Frontier Corporation
4Table of Contents
"Questions & Answers about the Merger
11Summary
"Overview
"The companies
12Interest Factor
14Ownership of Global Crossing after the merger
"Board recommendations
"Opinions of financial advisors
15Record date for voting; Required votes
17Transactions with Qwest and U S WEST
19Selected historical financial information
26Selected unaudited pro forma financial information
27Pro Forma Global Crossing
30Comparative per share data
31Market prices and dividends
32Frontier
33Risk Factors
39Global Crossing shareholders may be subject to Foreign Personal Holding Company, Passive Foreign Investment Company, Controlled Foreign Corporation and Personal Holding Company rules
41Cautionary Statement Regarding Forward-Looking Statements
42The Global Crossing Annual Meeting
"General
"Date, time and place
"Matters to be considered at the meeting
43Record date; votes per share
"Quorum
44Votes required
"How shares will be voted at the annual meeting
45How to revoke a proxy
"Solicitation of proxies
"1998 Audited Financial Statements
46The Frontier Special Meeting
"Matter to be considered at the special meeting
"Record date
"How shares will be voted at the special meeting
47Voting at the special meeting
"Methods of voting
49The Merger
"What you will receive in the merger
50Background of the merger
55Recommendation of the Global Crossing board of directors; Reasons for the merger
57Opinions of Global Crossing's financial advisors
67Recommendation of the Frontier board of directors; Reasons for the merger
68Opinion of Frontier's financial advisor
76Interests of members of Frontier's board of directors and management in the merger
78Indemnification and insurance
"Certain federal income tax and Bermuda tax consequences
80Distributions
"Passive Foreign Investment Company
84Anticipated accounting treatment
"Regulatory approvals
85No appraisal rights
"Quotation on the Nasdaq National Market
"Litigation
"Resales of Global Crossing common stock
87The Merger Agreement
"Effective time of the merger
"Exchange procedures
88Frontier preferred stock
"Stock options and warrants
"Representations and warranties
89Covenants
91No solicitation of transactions
92Board of directors' covenant to recommend
"Transition planning; Continued operations of Frontier
"Services agreement
93Reasonable best efforts
"Employee benefits
"Conditions to the completion of the merger
94Termination; Possible exchange ratio increase
97Termination fees
"Other expenses
"Amendments and waivers
98Alternative merger structure
99Related Agreements
"Stock option agreement
100Transfer
"Voting agreement
102Unaudited Pro Forma Condensed Combined Financial Statements
103Total
104Global Crossing
108Global Crossing Ltd
"Recent developments
109Business activity
110The Global Crossing network
111Atlantic Crossing
112Pacific Crossing
"Mid-Atlantic Crossing
"Pan American Crossing
113South American Crossing
"Terrestrial capacity
114Additional network expansion opportunities
"Other activities
"Financing plan
115System performance
116Sales and marketing
117Summary of principal terms of standard contractual documentation
"Operations, administration and maintenance support
118Competition
120Suppliers
"Regulation
"Employees
"Financial information by business segment and geographic area
121Strategy
122Integrated services
124Transmission
125Local communications services
126Global Crossing's Management Discussion and Analysis of Financial Condition and Results of Operations
"Revenues and deferred revenues
127Cost of sales
128Operating expenses
"Results of operations for the three months ended June 30, 1999 and June 30, 1998
"Revenues
"Cost of capacity sold
129General and administrative
"Network development
"Stock related expense
"Depreciation and amortization
"Provision for doubtful accounts
"Termination of advisory services agreement
130Equity in loss of affiliates
"Interest income
"Interest expense
"Other expense, net
"Provision for income taxes
"Extraordinary loss on retirement of senior notes
"Net income (loss)
"Preferred stock dividends
"Redemption of preferred stock
"Net loss applicable to common shareholders
131Results of operations for the six months ended June 30, 1999 and June 30, 1998
132Cumulative effect of change in accounting principle
133Results of operations for the year ended December 31, 1998 and the period from March 19, 1997 (date of inception) to December 31, 1997
"Expenses
"Operations, administration and maintenance
136Mandatorily redeemable preferred stock
"Liquidity and capital resources
"Restricted cash and investments
138Inflation
"Year 2000 compliance
139Euro conversion
140Foreign Currency Risk
141Stock Ownership of Management, Directors and 5% Shareholders of Global Crossing
143Stock Ownership of Management, Directors and 5% Shareholders of Frontier
145Description of Global Crossing Capital Stock
"Voting and transfer restrictions
146Global Crossing stockholders agreement and registration rights agreement
147Some Differences Between Rights of Shareholders of Frontier and Rights of Shareholders of Global Crossing
"Size and classification of the board of directors
"Removal of directors; vacancies; alternate directors
148Meetings of shareholders
"Action by written consent of shareholders; shareholder resolutions
"Vote required for extraordinary corporate transaction
149Interested director transactions
"Transfer restrictions
"Business combination statutes
150Shareholder suits
"Dissenters' rights
151Dividends
"Voting
"Preemptive rights
"Amendments to corporate governance documents
152Limitations on directors' liability
"Rights of inspection
153Repurchase of untraced shares
"Indemnification of Global Crossing by shareholders for some taxes and other impositions
"Indemnification of officers and directors
154Indemnification of shareholders by Global Crossing for some taxes
"Rights agreement
"Listing
155Proposals to Global Crossing Shareholders To Be Voted on at the Global Crossing Annual Meeting
"Proposal No. 1: Increase in Global Crossing's authorized share capital
"Common stock
156Preferred stock
157Proposal No. 2: Issuance of shares of Global Crossing common stock in the merger
"Proposals Nos. 3 and 4
"Proposal No. 3: Amendment and restatement of Global Crossing bye-laws (other than bye-laws 34(2), 63, 130 and 148)
160Proposal No. 4: Amendment and restatement of Global Crossing bye-laws 34(2), 63, 130 and 148
161Proposal No. 5: Election of directors
165Proposal No. 6: Amendment of the 1998 Global Crossing Ltd. Stock Incentive Plan
166Stock appreciation rights
"Other stock-based awards
167Proposal No. 7: Ratification of outside directors' compensation
168Proposal No. 8: Ratification of Arthur Andersen & Co. as Global Crossing's independent auditors for 1999 and approval of the board of directors' authority to determine their remuneration
"Receipt of financial statements
169Global Crossing Executive Compensation
"Compensation committee report
171Summary compensation table
"Certain compensation arrangements
172Compensation of outside directors
173Option grants in last fiscal year
174Aggregated option exercises in last fiscal year and fiscal year-end option values
"Compensation committee interlocks and insider participation
"Compliance with Section 16 of the Exchange Act
175Comparison of cumulative total returns
176Some Global Crossing Transactions
"Transactions with Pacific Capital Group and its affiliates
"PCG Warrants
178Transactions with Canadian Imperial Bank of Commerce and its affiliates
"Transactions with Worldport
179Transactions with Telecommunications Development Corporation
180Legal Matters
"Experts
"Service of Process and Enforcement of Liabilities
"Submission of Future Shareholder Proposals
181Where You Can Find More Information
186Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998
188Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 1999 and 1998
189Notes to Condensed Consolidated Financial Statements
193Report of Independent Public Accountants
198Notes to Consolidated Financial Statements
204Basic and Diluted
208AC-1 Credit Facility
209MAC Credit Facility
210Long term debt
211New Senior Notes
229Fixed assets
233Notes to financial statements
235Report of the Auditors
2641.1 the Merger
"1.2 Closing
2651.3 Effective Time
"1.4 Effects of the Merger
"1.5 Certificate of Incorporation
"1.6 By-Laws
"1.7 Officers and Directors of Surviving Corporation
"1.8 Effect on Capital Stock
2661.9 Voting Agreement
"1.10 Alternative Transaction Structure
2712.1 Exchange Fund
"2.2 Exchange Procedures
"2.3 Distributions With Respect to Unexchanged Shares
2722.4 No Further Ownership Rights in Frontier Common Stock
"2.5 No Fractional Shares of Global Common Stock
"2.6 Termination of Exchange Fund
"2.7 No Liability
"2.8 Investment of the Exchange Fund
2732.9 Lost Certificates
"2.10 Withholding Rights
"2.11 Further Assurances
"2.12 Stock Transfer Books
"3.1 Representations and Warranties of Frontier
2793.2 Representations and Warranties of Global
2833.3 Representations and Warranties of Global and Merger Sub
"4.1 Covenants of Frontier
2864.2 Covenants of Global
2884.3 Advice of Changes; Governmental Filings
"4.4 Transition Planning; Continued Operations of Frontier
"4.5 Services Agreement
2894.6 Control of Other Party's Business
"5.1 Preparation of Proxy Statement; Shareholders Meetings
2905.3 Access to Information
2915.4 Reasonable Best Efforts
2925.5 Acquisition Proposals
2935.6 Assumption of Frontier Stock Options and Warrants; Other Stock Plans; Employee Benefits Matters
2945.7 Fees and Expenses
"5.8 Directors' and Officers' Indemnification and Insurance
"5.9 Redemption of Frontier Preferred Stock
2955.10 Public Announcements
"5.11 Accountants' Letters
"5.12 Listing of Shares of Global Common Stock
"5.13 Voting Trust
"6.1 Conditions to Each Party's Obligation to Effect the Merger
2966.2 Additional Conditions to Obligations of Global and Merger Sub
2976.3 Additional Conditions to Obligations of Frontier
"7.1 Termination
2997.2 Effect of Termination
"7.3 Amendment
3007.4 Extension; Waiver
"8.1 Non-Survival of Representations, Warranties and Agreements
"8.2 Notices
3018.3 Interpretation
"8.4 Counterparts
"8.5 Entire Agreement; No Third Party Beneficiaries
"8.6 Governing Law
"8.7 Severability
"8.8 Assignment
3028.9 Submission to Jurisdiction; Waivers
"8.10 Enforcement
"8.11 Definitions
3038.12 Other Agreements
317Agreement
326Board of Directors
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SCHEDULE 14A (RULE 14A-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 Filed by the Registrant [X] Filed by a Party other than the Registrant [_] Check the appropriate box: [_] Preliminary Proxy Statement [_] Confidential, for Use of the Commission (as permitted by Rule 14a-6(e)(2)) [X] Definitive Proxy Statement [_] Definitive Additional Materials [_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12 FRONTIER CORPORATION -------------------------------------------------------------------------------- (Name of Registrant as Specified in its Charter) -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [_] No Fee required [_]Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. (1) Title of each class of securities to which transaction applies: (2) Aggregate number of securities to which transaction applies: (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): (4) Proposed maximum aggregate value of transaction: $ (5) Total fee paid: $ [X] Fee paid previously with preliminary materials. [_]Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: $ (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed:
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[LOGO OF FRONTIER CORPORATION] August 5, 1999 Dear Shareholders: You are cordially invited to attend a special meeting of shareholders of Frontier Corporation which we will hold at 10:30 a.m., local time, on September 23, 1999, at the Crowne Plaza of Rochester, 70 State Street, Rochester, New York. As you may know, on March 16, 1999, Frontier entered into a merger agreement, which was amended on May 16, 1999, with Global Crossing Ltd. and a subsidiary of Global Crossing pursuant to which Frontier will become a wholly owned subsidiary of Global Crossing. The purpose of this special meeting is to adopt the merger agreement and approve the merger transaction described in the merger agreement. In the merger, your shares of Frontier common stock will be exchanged for a number of shares of Global Crossing common stock. The number of shares you will receive will be based on the volume weighted averages of the trading prices of the Global Crossing common stock for 15 randomly selected trading days during a 30 trading day period ending one trading day before the conditions to the merger are satisfied or waived. If the average trading price is at least $34.5625 and not more than $56.7813, the value of the shares of Global Crossing common stock you receive for each Frontier share will be $63.00, based on the average trading price. You will not receive less than 1.1095 Global Crossing shares for each Frontier share or, subject to the next sentence, more than 1.8229 Global Crossing shares for each Frontier share. If the average trading price is less than $34.5625, Frontier may terminate the merger agreement unless Global Crossing elects to increase the merger consideration to ensure that you receive consideration having a value, based on the average trading price, of $63.00 per share, but it is not required to terminate the merger agreement. If we do not complete the merger by December 31, 1999, the value of the merger consideration will be increased by a specified interest factor unless the average trading price is above $56.7813. On August 4, 1999, the Global Crossing common stock, which is listed on the Nasdaq National Market under the symbol "GBLX," closed at $36.00 per share. Based on that Global Crossing trading price, the shares of Global Crossing common stock that you would receive for each Frontier share would have a value of $63.00. We believe this transaction represents an exciting strategic combination. Your board of directors has unanimously determined that the merger is in the best interest of Frontier and its shareholders and recommends that you adopt the merger agreement with Global Crossing. Please review carefully this entire document. You should consider the matters discussed under the caption "Risk Factors" beginning on page 23 of the enclosed document before voting. In order to vote at the special meeting, please either attend the special meeting, complete, sign and date the enclosed proxy and return it in the accompanying postage-paid envelope or cast your vote by telephone or electronically over the Internet. Sincerely, /s/ Joseph P. Clayton Joseph P. Clayton Chief Executive Officer The Securities and Exchange Commission and the state securities regulators have not approved or disapproved the shares of Global Crossing common stock to be issued in the merger or determined if this document is accurate or complete. Any representation to the contrary is a criminal offense. This document is dated August 5, 1999 and was first mailed to shareholders on or about August 9, 1999.
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[LOGO OF FRONTIER CORPORATIONS] Notice of Special Meeting of Shareholders to Be Held on September 23, 1999 We will hold a special meeting of shareholders of Frontier Corporation at 10:30 a.m., local time, on September 23, 1999, at the Crowne Plaza of Rochester, 70 State Street, Rochester, New York for the following purpose: To consider and vote upon a proposal to adopt the Agreement and Plan of Merger, dated as of March 16, 1999, as amended, among Global Crossing Ltd., GCF Acquisition Corp. and Frontier and on any other matters which may properly come before the meeting or which are incident to the conduct of the meeting. In the merger, Frontier will merge with GCF Acquisition Corp. and become a wholly owned subsidiary of Global Crossing and all outstanding shares of Frontier common stock, other than shares held by the parties to the merger agreement and Global Crossing's subsidiaries, will be converted into the right to receive a number of shares of Global Crossing common stock based on an exchange ratio that will be calculated shortly before the merger. Shareholders of record at the close of business on July 29, 1999 are entitled to vote their shares at the special meeting and any adjournments or postponements of it. Each share of Frontier common stock will entitle the record holder to one vote on each matter put to a vote at the special meeting. We cannot complete the merger unless the holders of two-thirds of the outstanding shares of Frontier common stock vote to adopt the merger agreement. You will need an admission card to gain entry to the special meeting. If you are planning to attend the special meeting, please check the appropriate box on the proxy card. Your admission card will be available at the registration table at the special meeting. The special meeting will be sign language interpreted for the hearing impaired. For more information about the merger, please review the accompanying document and the merger agreement attached as Annex A. A copy of this document is also available on Frontier's web site which can be found at: http://www.frontiercorp.com. Your vote is very important. Please either vote electronically or sign and date the enclosed proxy card and return it promptly in the enclosed return envelope, whether or not you plan to attend the meeting. The accompanying envelope requires no postage if mailed in the United States. If you do not specify your vote on your submission, your shares will be voted FOR the adoption of the merger agreement. If you fail to submit a proxy or vote electronically or if you abstain from voting, it will have the effect of a vote against the adoption of the merger agreement. You may revoke your proxy and vote in person if you decide to attend the special meeting. Please do not send in any stock certificates at this time. By action of the Board of Directors, /s/ Josephine S. Trubek JOSEPHINE S. TRUBEK Corporate Secretary
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To find any of the principal sections identified below, simply bend the document slightly to expose the black tabs and open the document to the tab which corresponds to the title of the section you wish to read. Table of contents Questions & answers about the merger Summary; Risk factors; The meetings The merger; The merger agreement; Related agreements Unaudited pro forma financial information The companies; Global Crossing common stock; Shareholder information Global Crossing annual meeting proposals and related information Additional information Financial statements of Global Crossing and Global Marine Annexes
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Table of Contents [Enlarge/Download Table] Page ---- Questions & Answers about the Merger................................................. vi Summary.............................................................................. 1 Overview........................................................................... 1 The companies...................................................................... 1 What you will receive in the merger................................................ 1 Ownership of Global Crossing after the merger...................................... 4 Tax consequences................................................................... 4 Board recommendations.............................................................. 4 Interests of members of Frontier's board of directors and management in the merger............................................................................ 4 Opinions of financial advisors..................................................... 4 Record date for voting; Required votes............................................. 5 Conditions to the completion of the merger......................................... 5 Termination of the merger agreement; Fees payable.................................. 6 Regulatory matters................................................................. 7 Accounting treatment............................................................... 7 No appraisal rights................................................................ 7 Trading of Global Crossing common stock............................................ 7 Transactions with Qwest and U S WEST............................................... 7 Selected historical financial information.......................................... 9 Selected unaudited pro forma financial information................................. 16 Comparative per share data......................................................... 20 Market prices and dividends........................................................ 21 Risk Factors......................................................................... 23 Cautionary Statement Regarding Forward-Looking Statements............................ 31 The Global Crossing Annual Meeting................................................... 32 General............................................................................ 32 Date, time and place............................................................... 32 Matters to be considered at the meeting............................................ 32 Record date; votes per share....................................................... 33 Quorum............................................................................. 33 Votes required..................................................................... 34 How shares will be voted at the annual meeting..................................... 34 How to revoke a proxy.............................................................. 35 Solicitation of proxies.......................................................... 35 1998 audited financial statements................................................ 35 The Frontier Special Meeting......................................................... 36 General.......................................................................... 36 Date, time and place............................................................. 36 Matter to be considered at the special meeting................................... 36 Record date...................................................................... 36 Vote required.................................................................... 36 How shares will be voted at the special meeting.................................. 36 Voting at the special meeting.................................................... 37 Methods of voting................................................................ 37 How to revoke a proxy............................................................ 37 Solicitation of proxies.......................................................... 37 The Merger........................................................................... 39 What you will receive in the merger.............................................. 39 Background of the merger......................................................... 39 i
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[Download Table] Page ---- Recommendation of the Global Crossing board of directors; Reasons for the merger............................................................. 45 Opinions of Global Crossing's financial advisors........................ 47 Recommendation of the Frontier board of directors; Reasons for the merger................................................................. 57 Opinion of Frontier's financial advisor................................. 58 Interests of members of Frontier's board of directors and management in the merger............................................................. 66 Certain federal income tax and Bermuda tax consequences ................ 68 Anticipated accounting treatment........................................ 74 Regulatory approvals.................................................... 74 No appraisal rights..................................................... 75 Quotation on the Nasdaq National Market................................. 75 Litigation.............................................................. 75 Resales of Global Crossing common stock................................. 75 The Merger Agreement...................................................... 77 The merger.............................................................. 77 Effective time of the merger............................................ 77 Exchange procedures..................................................... 77 Frontier preferred stock................................................ 78 Stock options and warrants.............................................. 78 Representations and warranties.......................................... 78 Covenants............................................................... 79 No solicitation of transactions......................................... 81 Board of directors' covenant to recommend............................... 82 Transition planning; Continued operations of Frontier................... 82 Services agreement...................................................... 82 Reasonable best efforts................................................. 83 Employee benefits....................................................... 83 Indemnification and insurance........................................... 83 Conditions to the completion of the merger.............................. 83 Termination; Possible exchange ratio increase........................... 84 Termination fees........................................................ 87 Other expenses.......................................................... 87 Amendments and waivers.................................................. 87 Alternative merger structure............................................ 88 Related Agreements........................................................ 89 Stock option agreement.................................................. 89 Voting agreement........................................................ 90 Unaudited Pro Forma Condensed Combined Financial Statements .............. 92 The Companies............................................................. 98 Global Crossing Ltd. ................................................... 98 Overview.............................................................. 98 Recent developments................................................... 98 Business activity..................................................... 99 The Global Crossing network........................................... 100 Atlantic Crossing..................................................... 101 Pacific Crossing...................................................... 102 Mid-Atlantic Crossing................................................. 102 Pan American Crossing................................................. 102 South American Crossing............................................... 103 Terrestrial capacity.................................................. 103 Additional network expansion opportunities............................ 104 Other activities...................................................... 104 ii
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[Download Table] Page ---- Financing plan........................................................ 104 System performance.................................................... 105 Sales and marketing................................................... 106 Summary of principal terms of standard contractual documentation...... 107 Operations, administration and maintenance support ................... 107 Competition........................................................... 108 Suppliers............................................................. 110 Regulation............................................................ 110 Employees............................................................. 110 Financial information by business segment and geographic area......... 110 Frontier Corporation.................................................... 111 Strategy.............................................................. 111 Integrated services................................................... 112 Transmission.......................................................... 114 Local communications services......................................... 115 Global Crossing's Management Discussion and Analysis of Financial Condition and Results of Operations...................................... 116 Overview................................................................ 116 Revenues and deferred revenues.......................................... 116 Cost of sales........................................................... 117 Operating expenses...................................................... 118 Results of operations for the three months ended June 30, 1999 and June 30, 1998............................................................... 118 Results of operations for the six months ended June 30, 1999 and June 30, 1998............................................................... 121 Results of operations for the year ended December 31, 1998 and the period from March 19, 1997 (date of inception) to December 31, 1997.... 123 Liquidity and capital resources......................................... 126 Inflation............................................................... 128 Year 2000 compliance.................................................... 128 Euro conversion......................................................... 129 Qualitative and quantitative disclosures about market risk.............. 129 Foreign Currency Risk................................................... 130 Stock Ownership of Management, Directors and 5% Shareholders of Global Crossing................................................................. 131 Stock Ownership of Management, Directors and 5% Shareholders of Frontier.. 133 Description of Global Crossing Capital Stock.............................. 135 General................................................................. 135 Voting and transfer restrictions........................................ 135 Distributions........................................................... 136 Global Crossing stockholders agreement and registration rights agreement.............................................................. 136 Some Differences Between Rights of Shareholders of Frontier and Rights of Shareholders of Global Crossing.......................................... 137 Size and classification of the board of directors....................... 137 Removal of directors; vacancies; alternate directors.................... 137 Meetings of shareholders................................................ 138 Action by written consent of shareholders; shareholder resolutions...... 138 Vote required for extraordinary corporate transaction................... 138 Interested director transactions........................................ 139 Transfer restrictions................................................... 139 Business combination statutes........................................... 139 Shareholder suits....................................................... 140 iii
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[Download Table] Page ---- Dissenters' rights....................................................... 140 Dividends................................................................ 141 Voting................................................................... 141 Preemptive rights........................................................ 141 Amendments to corporate governance documents............................. 141 Limitations on directors' liability...................................... 142 Rights of inspection..................................................... 142 Repurchase of untraced shares............................................ 143 Indemnification of Global Crossing by shareholders for some taxes and other impositions....................................................... 143 Indemnification of officers and directors................................ 143 Indemnification of shareholders by Global Crossing for some taxes........ 144 Rights agreement......................................................... 144 "Anti-Greenmail"......................................................... 144 Listing.................................................................. 144 Proposals to Global Crossing Shareholders To Be Voted on at the Global Crossing Annual Meeting................................................... 145 Proposal No. 1: Increase in Global Crossing's authorized share capital... 145 Proposal No. 2: Issuance of shares of Global Crossing common stock in the merger.................................................................. 147 Proposals Nos. 3 and 4: Amendment and restatement of Global Crossing bye- laws.................................................................... 147 Proposal No. 3: Amendment and restatement of Global Crossing bye-laws (other than bye-laws 34(2), 63, 130 and 148)........................... 147 Proposal No. 4: Amendment and restatement of Global Crossing bye-laws 34(2), 63, 130 and 148................................................. 150 Proposal No. 5: Election of directors.................................... 151 Proposal No. 6: Amendment of the 1998 Global Crossing Ltd. Stock Incentive Plan ......................................................... 155 Proposal No. 7: Ratification of outside directors' compensation.......... 157 Proposal No. 8: Ratification of Arthur Andersen & Co. as Global Crossing's independent auditors for 1999 and approval of the board of directors' authority to determine their remuneration.................... 158 Receipt of financial statements.......................................... 158 Global Crossing Executive Compensation..................................... 159 Compensation committee report............................................ 159 Summary compensation table............................................... 161 Certain compensation arrangements........................................ 161 Compensation of outside directors........................................ 162 Option grants in last fiscal year........................................ 163 Aggregated option exercises in last fiscal year and fiscal year-end option values........................................................... 164 Compensation committee interlocks and insider participation.............. 164 Compliance with Section 16 of the Exchange Act........................... 164 Comparison of cumulative total returns................................... 165 Some Global Crossing Transactions.......................................... 166 Transactions with Pacific Capital Group and its affiliates............... 166 Transactions with Canadian Imperial Bank of Commerce and its affiliates.. 168 Transactions with Worldport.............................................. 168 Transactions with Telecommunications Development Corporation............. 169 Legal Matters.............................................................. 170 Experts.................................................................... 170 Service of Process and Enforcement of Liabilities.......................... 170 Submission of Future Shareholder Proposals................................. 170 Global Crossing.......................................................... 170 Frontier................................................................. 171 Where You Can Find More Information........................................ 171 iv
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[Download Table] Page ---- Global Crossing Financial Statements....................................... F-1 Global Marine Financial Statements......................................... F-45 [Enlarge/Download Table] Annex A Agreement and Plan of Merger and Consent and Amendment No. 1 Annex B Stock Option Agreement Annex C Voting Agreement Annex D-1 Opinion of Salomon Smith Barney, dated as of March 16, 1999 Annex D-2 Opinion of Salomon Smith Barney, dated as of May 16, 1999 Annex E Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated Annex F Opinion of Morgan Stanley & Co. Incorporated Annex G Resolutions of Global Crossing's board of directors in connection with the annual meeting Annex H 1998 Global Crossing Ltd. Stock Incentive Plan v
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Questions & Answers about the Merger Q: Why are the two companies proposing the merger? A: Global Crossing and Frontier believe that the merger will create an innovative, highly competitive company with an integrated high capacity global telecommunications and Internet network. Global Crossing and Frontier believe that the combined company will be well-positioned to . meet the growing bandwidth demand worldwide required to handle Internet, data, video and voice transmissions, . capitalize on future growth opportunities and . provide more comprehensive products, services and support to customers across both the Internet and the public communications networks. To review the reasons for the merger in greater detail, see pages 45 through 47 and 57 through 58. Q: What do I need to do now? A: Global Crossing shareholders: 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 annual meeting. Frontier shareholders: First, carefully read this document. There are several ways your shares can be represented at the Frontier special meeting. You can indicate on the enclosed proxy card how you want to vote and then sign and mail the proxy card in the enclosed return envelope as soon as possible. You can also cast your vote electronically by telephone by calling the number on your proxy card or over the Internet by going to the web site designated on your proxy card. 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 your company's Secretary before your shareholders meeting or by attending the meeting in person and voting. Frontier shareholders can also change their vote by voting by telephone or Internet at a later time. Q: What do I need to do to get my Global Crossing shares? A: After the merger is completed we will send Frontier shareholders written instructions for exchanging their stock certificates. Frontier shareholders should not send in their stock certificates now. Global Crossing shareholders will keep their existing certificates. Q: Will I continue to receive a dividend on my shares after the merger? A: Global Crossing does not currently pay cash dividends on its common stock and does not anticipate paying dividends in the foreseeable future. Q: When do you expect to complete the merger? A: We expect to complete the merger late in the third quarter or early in the fourth quarter of 1999. We are working toward completing the merger as quickly as possible and expect to do so shortly after the meetings, provided that we have obtained the regulatory approvals necessary for the merger. Q: Who should I call with questions? A: Global Crossing shareholders: Investor Relations--Global Crossing Attention: Jensen Chow (310) 385-5200 Frontier shareholders: Innisfree M&A Incorporated (888) 750-5835 Investor Relations--Frontier (800) 573-2473 vi
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Summary This summary highlights selected information from this document. It does not contain all of the information that is important to you. We urge you to read carefully the entire document and the other documents referred to in this docu- ment to fully understand the merger. More information on Global Crossing is in- cluded in this document beginning on page 98. For a guide as to where you can obtain more information on Frontier, see "Where You Can Find More Information" on page 171. Overview Global Crossing, Frontier and a wholly owned subsidiary of Global Crossing entered into a merger agreement on March 16, 1999 which was amended on May 16, 1999. Under the terms of the Global Crossing--Frontier merger agreement, at the closing, shares of Frontier common stock will be converted into the right to receive a number of shares of Global Crossing common stock based on an exchange ratio that will be calculated shortly before the closing. Upon completion of the merger, Frontier will become a wholly owned subsidiary of Global Crossing. The companies Global Crossing Ltd. (Page 98) Wessex House 45 Reid Street Hamilton HM12, Bermuda (441) 296-8600 Global Crossing is building the world's first independent global network of state-of-the-art Internet and long distance telecommunications facilities util- izing a combination of undersea and terrestrial digital fiber optic cable sys- tems. Global Crossing offers "one-stop shopping" for its customers to multiple destinations worldwide and currently operates as a "carrier's carrier," provid- ing tiered pricing and segmented products to licensed providers of interna- tional telecommunications services. Capacity on the Global Crossing network is offered to all customers on an open, equal access basis. Upon completion, the currently announced segments of the Global Crossing net- work will directly connect Asia, North America, Europe, Central America, South America and the Carribean and, in addition, will provide terrestrial services to major cities in the United States, Europe, South America, Mexico and Japan. The undersea component of this initial portion of the Global Crossing network totals 74,700 km, and the terrestrial component adds 17,800 km, for a total of 92,500 km. On July 2, 1999, Global Crossing acquired the Global Marine business of Cable & Wireless plc. Global Marine is the world's largest undersea cable installa- tion and maintenance company with a fleet of 13 cable ships, representing ap- proximately 33% of the world's total, 21 submersible vehicles and 1,200 employ- ees servicing approximately 35% of the world's undersea cable miles. Frontier Corporation (Page 111) 180 South Clinton Avenue Rochester, New York 14646-0700 (716) 777-1000 Frontier's subsidiaries provide integrated telecommunications services in- cluding Internet, Internet Protocol and data applications, long distance, local telephone and enhanced services to business, carrier, web-centric and targeted residential customers nationwide and in some foreign countries. Through its Integrated Services segment, Frontier is one of the nation's largest long distance companies and its Frontier Optronics NetworkSM is nearing completion. When completed, Frontier Optronics NetworkSM will consist of ap- proximately 20,000 route miles: the core fiber network will offer more than 13,000 miles of dense wave division multiplexed optical fiber capacity and an- other 3,000 miles are currently under construction in the southeast United States. In addition, 4,000 miles of network are available through network swaps. What you will receive in the merger (Page 39) Global Crossing shareholders: After the merger each share of Global Crossing common stock will remain out- standing. 1
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Frontier shareholders: When we complete the merger, each Frontier share will be canceled and each Frontier shareholder will receive for each share of Frontier common stock a number of shares of Global Crossing common stock based on a floating exchange ratio, subject to a collar: [Download Table] If the average Global Crossing This is the number of trading price during Global Crossing the measurement shares to be issued for period is: each Frontier share: -------------------- ----------------------- more than $56.7813...................................... 1.1095 between $34.5625 and $56.7813........................... $63.00 divided by the average Global Crossing trading price during the measurement period (a number between 1.1095 and 1.8229), subject to increase if the closing occurs after December 31, 1999 as described below under "--Interest Factor" less than $34.5625...................................... 1.8229, subject to Frontier's walk-away right and Global Crossing's top-up right and subject to increase if the closing occurs after December 31, 1999, as described below under "--Interest Factor" The floating exchange ratio is intended to provide you with shares of Global Crossing common stock valued at $63.00, based on the average trading price of the Global Crossing common stock during the measurement period, so long as that average Global Crossing trading price remains between $34.5625 and $56.7813. The measurement period for purposes of determining the exchange ratio is 15 randomly selected trading days during a 30 trading-day period ending one trad- ing day before the conditions to the merger are satisfied or waived. In addi- tion, the collar means that the number of shares of Global Crossing common stock that Frontier shareholders will receive for each Frontier share in the merger will . never be less than 1.1095, regardless of what happens to Global Crossing's stock price during the measurement period, and . never be more than 1.8229 except as described below. Walk-Away Right/Top-Up Right. If the average trading price of the Global Crossing common stock during the measurement period is less than $34.5625, Frontier may, but is not required to, terminate the merger agreement unless Global Crossing agrees to increase the merger consideration. If Frontier elects to terminate the merger agreement, Global Crossing may elect to increase the merger consideration so that Frontier shareholders will receive consideration having a value, based on the average trading price of the Global Crossing com- mon stock during the measurement period, of $63.00 for each share of Frontier common stock. Global Crossing may use additional shares of Global Crossing com- mon stock to increase the merger consideration or may also use cash or a combi- nation of cash and stock under some circumstances. Since the date of the merger agreement, the Global Crossing common stock has traded within a range from $32.94 to $64.25. The average trading price for purposes of determining the exchange ratio will be based on the trading prices of the Global Crossing common stock during the measurement period shortly before the closing, which measurement period may end after the date of the Frontier special meeting. Interest Factor. If the merger closing does not occur by December 31, 1999, the value of the shares of Global Crossing common stock to be received by Fron- tier shareholders in the merger will be increased by an interest factor equal to 7% per annum, compounded daily, from and after December 31, 1999 to the ef- fective time of the merger. This interest factor will not apply if the average trading price for the Global Crossing common stock during the measurement pe- riod is more than $56.7813. Therefore, if the merger closes after December 31, 1999, Frontier shareholders will receive for each Frontier share . a number of Global Crossing shares with a value of $63.00, as increased by the 7% per annum in- terest factor, if the average trading price during the measurement period is between $34.5625 and $56.7813, . 1.8229 Global Crossing shares, as increased by the 7% per annum interest fac- tor, if the average trading price during the measurement period is less than $34.5625, or 2
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. 1.1095 Global Crossing shares, without any increase for the 7% per annum in- terest factor, if the average trading price is more than $56.7813. For purposes of the examples contained in this document, we have assumed that the closing will occur by December 31, 1999 unless we have indicated otherwise. Calculation of the Exchange Ratio. Assuming the average Global Crossing trad- ing price during the measurement period is $36.00, which was the closing price of the Global Crossing common stock on August 4, 1999, because the price is be- tween $34.5625 and $56.7813, the exchange ratio would be 1.7500. Based on that Global Crossing stock price, the value of the merger consideration per share of Frontier common stock would be $63.00. The initial value of the shares of Global Crossing common stock you receive in the merger may be more or less than the value based on the average price because the trading price of the Global Crossing common stock at closing may be higher or lower than the average trad- ing price during the measurement period or because the average trading price may be outside the collar. The table below shows a range of assumed average trading prices of Global Crossing common stock along with entries showing the corresponding exchange ra- tios and values of the shares of Global Crossing common stock that would be is- sued in the merger in exchange for one share of Frontier common stock, based on the assumed average trading prices presented in the first column of the table. Because the calculation of the exchange ratio depends on when we complete the merger, the actual number of shares of Global Crossing common stock issuable in the merger for each share of Frontier common stock may be different from the examples listed in the table below and in this document. In addition, the val- ues of the Global Crossing common stock are illustrative only and do not repre- sent the actual amount per share of Global Crossing common stock that might be realized by any Frontier shareholder on or after the effective time of the merger. Frontier shareholders are urged to obtain and review current market quotations for Global Crossing common stock. Table of Illustrative Values [Download Table] Illustrative Assumed value of Global merger Crossing consideration average per share of trading Exchange Frontier price ratio common stock -------- -------- ------------- $60.00 1.1095 $66.57 59.00 1.1095 65.46 58.00 1.1095 64.35 57.00 1.1095 63.24 Minimum Exchange Ratio 56.7813 1.1095 63.00 56.00 1.1250 63.00 55.00 1.1455 63.00 54.00 1.1667 63.00 53.00 1.1887 63.00 52.00 1.2115 63.00 51.00 1.2353 63.00 50.00 1.2600 63.00 49.00 1.2857 63.00 48.00 1.3125 63.00 47.00 1.3404 63.00 46.00 1.3696 63.00 45.00 1.4000 63.00 44.00 1.4318 63.00 43.00 1.4651 63.00 42.00 1.5000 63.00 41.00 1.5366 63.00 40.00 1.5750 63.00 39.00 1.6154 63.00 38.00 1.6579 63.00 37.00 1.7027 63.00 36.00 1.7500 63.00 35.00 1.8000 63.00 Maximum Exchange Ratio 34.5625 1.8229 63.00 Walk-Away Right/Top-Up Right 34.00 1.8229 61.98 33.00 1.8229 60.16 32.00 1.8229 58.33 31.00 1.8229 56.51 30.00 1.8229 54.69 3
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Ownership of Global Crossing after the merger Assuming that the closing occurs by December 31, 1999, Global Crossing will issue between approximately 192,523,809 shares and 316,315,144 shares of common stock in the merger since the exchange ratio can vary between 1.1095 and 1.8229. These shares will represent between approximately 32% and 43% of the outstanding shares of Global Crossing common stock immediately after the merg- er. This information is based on the number of outstanding shares of Frontier on July 29, 1999 and the number of outstanding shares of Global Crossing on July 29, 1999, without taking into account shares issuable upon exercise of stock options or warrants. Tax consequences (Page 68) We expect the merger to qualify as a tax-free reorganization for United States federal income tax purposes. In general, Frontier shareholders will not recognize any gain or loss on the exchange of Frontier common stock for Global Crossing common stock, except to the extent they receive cash instead of fractional shares or otherwise as merger consideration. There will be no Bermuda tax of any kind payable in respect of the exchange of shares in themerger. We urge Frontier shareholders to consult their own tax advisors to discuss the tax consequences of the merger. Board recommendations Global Crossing (Page 45): The Global Crossing board of directors unanimously recommends that you vote FOR the proposals to approve the increase in authorized share capital and the share issuance, FOR the director nominees to be elected and FOR each other proposal presented at the 1999 annual meeting. Frontier (Page 57): The Frontier board of directors unanimously recommends that you vote FOR the proposal to adopt the merger agreement. Interests of members of Frontier's board of directors and management in the merger (Page 66) Some Frontier directors, officers and executives have interests in the merger that may be different from, or in addition to, the interests of other Frontier shareholders. These interests include employment agreements and stock options. In addition, some Frontier directors and executive officers will become Global Crossing directors or executive officers after the merger. You should be aware of these interests because they may conflict with yours. These interests in- clude: . eighteen of Frontier's officers and executives will become entitled to enhanced severance benefits, including cash payments and other benefits under specified circumstances, upon the termination of their employment following the merger, . all stock options held by directors and employees of Frontier will vest and become immediately exercisable, . when we complete the merger, four of the current directors of Frontier will be appointed to the Global Crossing board of directors, and . Global Crossing has agreed to take all action necessary to elect Joseph P. Clayton as a Vice Chairman of Global Crossing and Rolla P. Huff as President and Chief Operating Officer of North American Operations of Global Crossing. Opinions of financial advisors Global Crossing (Page 47): Salomon Smith Barney and Merrill Lynch, Pierce, Fenner & Smith Incorporated each delivered an opinion to the Global Crossing board of directors that, as of March 16, 1999, the original exchange ratio was fair from a financial point of view to Global Crossing. In addition, Salomon Smith Barney delivered an opinion to the Global Crossing board of directors that, as of May 16, 1999, the exchange ratio, as revised on that date, was fair from a financial point of view to Global Crossing. Merrill Lynch was not requested to deliver and did not deliver an opinion regarding the revised exchange ratio because it represented U S WEST in the proposed Global Crossing--U S WEST merger. These opinions are not recommendations to any 4
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Global Crossing shareholder as to how to vote. We have attached these opinions as Annexes D-1, D-2 and E to this document. You should read them in their entirety. Frontier (Page 58): Morgan Stanley & Co. Incorporated delivered an opinion to the Frontier board of directors that, as of March 16, 1999, the original exchange ratio was fair from a financial point of view to Frontier's shareholders. In addition, Morgan Stanley delivered an opinion to the Frontier board of directors that, as of May 16, 1999, the exchange ratio, as revised on that date, was fair from a finan- cial point of view to Frontier's shareholders. This opinion is not a recommen- dation as to how any Frontier shareholder should vote with respect to the merg- er. We have attached the May 16, 1999 opinion to this document as Annex F. You should read it in its entirety. Record date for voting; Required votes Global Crossing shareholders (Page 33): You can vote at the 1999 annual meeting of Global Crossing shareholders if you own Global Crossing common stock on the date of the meeting. You will be entitled on a poll to one vote per share. If, however, you hold more than 9.5% of all outstanding shares of Global Crossing common stock, your voting power will be limited. You will also beentitled to any additional votes that may be allocated to your shares pursuant to a formula contained in the Global Crossing bye-laws, but you will not be allocated any additional votes if you own more than 9.5% of the outstanding shares. The approval of at least a majority of all outstanding shares of Global Crossing common stock is required to adopt the proposals relating to the in- crease in authorized share capital, the share issuance and each other proposal presented at the annual meeting, with the exception of some proposed amendments to the Global Crossing bye-laws, which require the approval of 75% of all out- standing shares of Global Crossing common stock. Shareholders representing more than a majority of the voting power of Global Crossing have entered into a voting agreement with Frontier in which they agreed to vote in favor of both the proposal to in crease the authorized share capital of Global Crossing and the proposal to issue Global Crossing shares in the merger. The vote of these shareholders will be sufficient to approve these two proposals without any further vote by any other Global Crossing sharehold- er. We have attached a copy of the voting agreement as Annex C to this docu- ment. You should read it in its entirety. Frontier shareholders (Page 36): You can vote at the special meeting of Frontier shareholders if you owned Frontier common stock at the close of business on July 29, 1999. The approval of two-thirds of the outstanding shares of Frontier common stock is required to adopt the merger agreement. Conditions to the completion of the merger (Page 83) The completion of the merger depends on the satisfaction or waiver of a num- ber of conditions, including the following: . adoption of the merger agreement by Frontier's shareholders, .approval by Global Crossing's shareholders of the increase of its authorized share capital and of the issuance of the Global Crossing shares in the merger, . the absence of legal prohibitions to the merger, . the absence of any stop order suspending theeffectiveness of the registration statement relating to the Global Crossing shares to be issued in the merger and approval of those shares for trading on the Nasdaq National Market, . receipt of all FCC and state public utility commission approvals without the imposition of conditions that would reasonably be expected to have a material adverse effect on Global Crossing and its subsidiaries after the merger, other than approvals which, if not obtained, would not reasonably be expected to result in a material adverse effect on Global Crossing and its subsidiar- ies after the merger, 5
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. expiration or termination of the waiting periodapplicable to the merger under the Hart-Scott-Rodino Act, which was terminated on May 11, 1999, . receipt of the approval of the issuance and subsequent free transferability of Global Crossing shares by the Bermuda Monetary Authority, which approval was received on July 1, 1999, . receipt of opinions with respect to the tax-free nature of the merger, . redemption of all outstanding Frontier preferred stock, which was redeemed on July 1, 1999, and . material compliance by Global Crossing and Frontier with their obligations, and the truth and correctness of the representations made by each of them, under the merger agreement. Termination of the merger agreement; Fees payable (Pages 84 and 87) 1. Global Crossing and Frontier may agree to terminate the merger agreement at any time if both companies agree. 2. Either Global Crossing or Frontier may also terminate the merger agreement if: . the merger is not completed by March 16, 2000, except that if all the conditions to completing the merger have been satisfied or waived other than the conditions relating to FCC and state public utility commission approvals, then Global Crossing cannot terminate for this reason, . a governmental entity permanently prohibits the merger or has finally de- termined not to issue an order required to fulfill the conditions de- scribed in the fifth and sixth bullet points above under "Conditions to the completion of the merger," . the Frontier shareholders do not adopt the merger agreement, or . the Global Crossing shareholders do not approve the proposals to increase its authorized share capital and issue Global Crossing shares in the merger. 3. Global Crossing may terminate the merger agreement if, before the Frontier special meeting, the Frontier board of directors withdraws or adversely mod- ifies its approval of the merger or approves or recommends a superiorproposal. Frontier is required to pay Global Crossing a $270 million termination fee ifFrontier terminates the merger agreement for this reason. 4. Frontier may terminate the merger agreement: . at any time before the Frontier special meeting if the Frontier board of directors approves a superior proposal; however, Frontier must have com- plied with the relevant provisions of the merger agreement relating to not soliciting alternative proposals to acquire Frontier. Frontier may only exercise this termination right if it pays Global Crossing a $270 million termination fee and complies with specified notice and waiting period provisions in the merger agreement, or . if the average share price of Global Crossing common stock to be used in calculating the exchange ratio is less than $34.5625, unless Global Crossing agrees to increase the merger consideration so that Frontier shareholders receive consideration having a value, based on the average trading price of Global Crossing common stock during the measurement pe- riod, of $63.00 per share. Frontier's board of directors cannot assure you that it would exercise its right to terminate the merger agreement if the average price was less than $34.5625. If the Frontier board of directors exercises its right to terminate the merger agreement for this reason, Global Crossing's board of directors can- not assure you that it would increase the merger consideration. Adoption of the merger agreement by Frontier's shareholders and approval by Global Crossing's shareholders of the increase in the authorized share capital and the issuance of Global Crossing shares in the merger will give . the Frontier board of directors the power but not the obligation to decide to complete the merger if the average trading price of the Global Crossing 6
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common stock during the measurement period is less than $34.5625 and .the Global Crossing board of directors the power but not the obligation to de- cide to increase the merger consideration in the event that the Frontier board of directors exercises its right to terminate the merger agreement. These powers can be exercised by the Frontier board of directors and the Global Crossing board of directors without any further action or resolicitation of the Frontier shareholders or the Global Crossing shareholders. Frontier is required to pay Global Crossing a $270 million termination fee if the merger agreement is terminated under specified circumstancesafter a third party makes a proposal to acquire Frontier. In addition, on March 16, 1999, Frontier and Global Crossing entered into a stock option agreement under which Frontier has granted to Global Crossing an option to purchase up to 19.9% of the Frontier common stock at a price of $62.00 per share, exercisable only upon the occurrence of specified events when a termination fee would be payable by Frontier to Global Crossing under the merger agreement. The fee and the stock option could discourage other companies from trying or proposing to combine with Frontier. The total fees payable to Global Crossing under the merger agreement and the profit realizable by Global Crossing under the stock option agreement is limited to $275 million. We have attached the stock option agreement to this document as Annex B. You should read it in its entirety. Regulatory matters (Page 74) The completion of the merger is subject to regulatory requirements, including expiration or termination of the waiting period under the Hart-Scott-Rodino Act, which was terminated on May 11, 1999. The completion of the merger is also subject to obtaining required regulatory approvals from the FCC and some state public utilities commissions. Accounting treatment (Page 74) The merger will be accounted for using the purchase method of accounting. No appraisal rights (Page 75) Under the New York Business Corporation Law, Frontier shareholders are not entitled to appraisal rights in connection with the merger. Under Bermuda law, Global Crossing shareholders are not entitled to appraisal rights in connection with the merger. Trading of Global Crossing common stock (Page 75) Global Crossing's common stock is currently trading on the Nasdaq National Market and the Bermuda Stock Exchange. The shares of Global Crossing common stock to be issued in the merger will also trade on the Nasdaq National Market and the Bermuda Stock Exchange. Transactions with Qwest and U S WEST On May 16, 1999, Global Crossing entered into a merger agreement with U S WEST. As part of its agreement with Global Crossing, on June 18, 1999, U S WEST completed a tender offer pursuant to which U S WEST purchased 39,259,305 shares of Global Crossing common stock for $62.75 in cash per share. U S WEST agreed to vote the shares that it purchased in the tender offer in favor of the pro- posals relating to the Global Crossing--Frontier merger. On June 13, 1999, Qwest Communications International Inc. announced proposals to acquire all the outstanding stock of Frontier and U S WEST, which proposals were revised on June 23, 1999. On July 18, 1999, . the U S WEST board of directors approved Qwest's acquisition proposal, and U S WEST entered into a merger agreement with Qwest, . Global Crossing and U S WEST agreed to terminate their merger agreement. As a result, U S WEST paid Global Crossing $140 million in cash and returned to Global Crossing 2,231,076 shares of Global Crossing common 7
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stock that U S WEST had acquired for a total of $140 million in its tender offer for Global Crossing common stock, . Qwest committed to purchase capacity on the Global Crossing network at established market rate prices for delivery over the next four years and committed to make purchase price payments to Global Crossing for this capacity of $140 million over the next two years, and . Qwest withdrew its proposal to acquire all the outstanding stock of Frontier. U S WEST remains bound by its agreement to vote the remaining shares of Global Crossing common stock it purchased in the tender offer in favor of the proposals relating to the Global Crossing--Frontier merger. 8
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Selected historical financial information Selected historical financial information for Global Crossing, Global Marine and Frontier have been provided in the following tables. This selected historical financial information has been derived from the audited and unaudited financial statements of Global Crossing, Global Marine and Frontier for the periods presented. This information is only a summary and should be read together with the more detailed historical financial information included or incorporated by reference in this document. You can find financial information included in this document beginning on page F-1. For instructions on how to obtain information incorporated by reference, see "Where You Can Find More Information" on page 171. Global Crossing selected historical financial information The table below shows the selected historical financial information for Global Crossing. This information has been prepared using the consolidated financial statements of Global Crossing as of the dates indicated and for each of the fiscal years in the period from inception, March 19, 1997, to December 31, 1998 and for the six months ended June 30, 1999 and 1998. The consolidated income statement data below for each of the fiscal years in the period from inception, March 19, 1997, to December 31, 1998 and the consolidated balance sheet data as of December 31, 1998 and 1997 have been derived from financial statements audited by Arthur Andersen & Co., independent public accountants, which are included in this document beginning on page F-10. We derived the remaining data from unaudited condensed consolidated financial statements, which are included in this document beginning on page F-1. In reading the following selected historical financial information, please note the following: . During the six-month period ended June 30, 1999, Global Crossing 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. . During the year ended December 31, 1998, Global Crossing recognized $37 million from a total of $94 million of stock-related expense relating to stock options and rights to purchase stock issued during that period which entitle the holders to purchase common stock. The remaining $57 million will be recognized as follows: $28 million in 1999, $21 million in 2000 and $8 million in 2001. See the "Stock related expense" item in the Statement of Operations Data. . The "Termination of advisory services agreement" item in the Statement of Operations Data includes a charge for the termination of the advisory services agreement as of June 30, 1998. See "Some Global Crossing Transactions" on page 166. Global Crossing 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 $135 million and the cancellation of approximately $3 million owed to Global Crossing under a related advance agreement. As a result of this transaction, Global Crossing recorded a non-recurring charge in the approximate amount of $138 million during the year ended December 31, 1998. In addition, Global Crossing recognized as an expense approximately $2 million of advisory fees incurred prior to termination of the contract. . The "Provision for income taxes" item in the Statement of Operations Data reflects income taxes on profits earned during the periods presented in jurisdictions where Global Crossing has a taxable presence. A significant portion of Global Crossing's operating losses have been incurred in non-taxable jurisdictions, and, therefore, these operating losses cannot be applied to offset Global Crossing's future taxable earnings. . On May 18, 1998, a portion of the proceeds from the issuance of the 9 5/8% Senior Notes due 2008 of Global Crossing Holdings Ltd. was used to repurchase the 12% Senior Notes Due 2004 of Global Telesystems Holdings Ltd. Global Crossing recognized an extraordinary loss of approximately $20 9
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million in connection with this repurchase, comprised of a repurchase premium of approximately $10 million and the write-off of approximately $10 million of unamortized deferred financing costs. See the "Extraordinary loss on retirement of senior notes" item in the Statement of Operations Data. . The preferred stock dividends for the year ended December 31, 1998 include dividends from both the 10 1/2% Senior Exchangeable Preferred Stock due 2008 of Global Crossing Holdings and the 14% Senior Increasing Rate Redeemable Exchangeable Preferred Stock of Global Telesystems Holdings. The Global Crossing Holdings preferred stock is mandatorily redeemable on December 1, 2008 and exchangeable at any time by Global Crossing Holdings into notes. The Global Crossing Holdings preferred stock entitles the holders to receive cumulative compounding dividends at an annual rate of 10 1/2%. The dividends can be paid in cash or prior to June 1, 2002 with the issuance of additional Global Crossing Holdings preferred stock at the option of Global Crossing Holdings. The holders of the Global Telesystems Holdings preferred stock were entitled to receive cumulative, compounding dividends at an initial annual rate of 14%. Preferred stock dividends include cumulative 14% dividends and amortization of the discount and issuance costs. Global Crossing used proceeds from the Global Crossing Holdings Senior Notes to redeem all outstanding Global Telesystems Holdings preferred stock effective as of June 17, 1998. All dividends prior to the redemption had been paid through the issuance of additional preferred stock and charged against additional paid-in capital. See the "Preferred stock dividends" item in the Statement of Operations Data. . As a result of the redemption of the Global Telesystems Holdings preferred stock, Global Crossing incurred a one-time $34 million charge against additional paid-in capital. The charge consisted of: (1) a $16 million charge for redemption premium and (2) a write-off of $18 million of unamortized discount and unamortized deferred financing costs. See the "Redemption of preferred stock" item in the Statement of Operations Data. . Construction in progress and capacity available for sale includes direct and indirect expenditures for construction of the Atlantic Crossing system and other systems and is stated at cost. Included are costs incurred under (1) the construction contracts; (2) advisory, consulting and legal fees; (3) interest, including amortization of debt issuance costs incurred during the construction phase; and (4) other costs necessary for developing the Atlantic Crossing system and other systems. Additionally, Global Crossing granted warrants to Pacific Capital Group, Inc., a shareholder, and some of its 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 allocated to "Construction in progress" in the amount of $112 million and as "Investment in affiliates" in the amount of $163 million. See the "Construction in progress, property, plant and equipment and capacity available for sale" item in the Balance Sheet Data. . The "Investment in affiliates" item in the Balance Sheet Data includes $163 million as of December 31, 1998, representing the value of the warrants described in the bullet point immediately above applicable to the Pacific Crossing system. . The December 31, 1998 amount in the "Mandatorily redeemable preferred stock" item in the Balance Sheet Data includes (1) $500 million of Global Crossing Holdings preferred stock, less (2) $17 million reflecting the unamortized issue costs, plus (3) $4 million of accrued dividends. The December 31, 1997 amount includes (1) $100 million of the Global Telesystems Holdings preferred stock originally issued, plus (2) $10 million of Global Telesystems Holdings preferred stock issued as dividends on the originally issued Global Telesystems Holdings preferred stock, less (3) $19 million reflecting the unamortized discount and issue costs, plus $1 million of accrued dividends. Global Crossing redeemed all outstanding Global Telesystems Holdings preferred stock effective as of June 17, 1998. 10
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[Enlarge/Download Table] Period from For the Six For the Six For the March 19, 1997 Months Ended Months Ended Year Ended (Date of Inception) to June 30, 1999 June 30, 1998 December 31, 1998 December 31, 1997 ------------- ------------- ----------------- ---------------------- (unaudited) (unaudited) (in thousands, except share and per share information) Statement of Operations Data: Revenues................ $ 368,461 $ 101,256 $ 424,099 $ -- ----------- ----------- ----------- ----------- Expenses: Cost of capacity sold... 150,292 41,200 178,492 -- Operations, administration and maintenance............ 25,869 2,470 18,056 -- General and administrative......... 44,503 8,850 26,844 1,657 Sales and marketing..... 23,256 7,313 26,194 1,366 Network development..... 9,753 4,314 10,962 78 Stock related expense... 26,074 23,398 39,374 -- Depreciation and amortization........... 4,200 473 -- -- Provision for doubtful accounts............... 3,683 1,012 4,233 -- Termination of advisory services agreement..... -- 139,669 139,669 -- ----------- ----------- ----------- ----------- 287,630 228,699 443,824 3,101 ----------- ----------- ----------- ----------- Operating income (loss)................. 80,831 (127,443) (19,725) (3,101) Equity in loss of affiliates............. (5,542) -- (2,508) -- Other income (expense): Interest income........ 31,666 4,422 29,986 2,941 Interest expense....... (46,454) (7,426) (42,880) -- Other expense, net..... (7,683) -- -- -- Provision for income taxes.................. (30,038) (9,000) (33,067) -- ----------- ----------- ----------- ----------- Income (loss) before extraordinary item and cumulative effect of change in accounting principle.............. 22,780 (139,447) (68,194) (160) Extraordinary loss on retirement of senior notes.................. -- (19,709) (19,709) -- Cumulative effect of change in accounting principle.............. (14,710) -- -- -- ----------- ----------- ----------- ----------- Net income (loss)....... 8,070 (159,156) (87,903) (160) Preferred stock dividends.............. (27,241) (8,306) (12,681) (12,690) Redemption of preferred stock.................. -- (34,140) (34,140) -- ----------- ----------- ----------- ----------- Net loss applicable to common shareholders.... $ (19,171) $ (201,602) $ (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...... $ (0.01) $ (0.55) $ (0.32) $ (0.04) =========== =========== =========== =========== Extraordinary item Basic and Diluted...... $ -- $ (0.06) $ (0.06) $ -- =========== =========== =========== =========== Cumulative effect of change in accounting principle Basic and Diluted...... $ (0.04) $ -- $ -- $ -- =========== =========== =========== =========== Net loss applicable to common shareholders Basic and Diluted...... $ (0.05) $ (0.61) $ (0.38) $ (0.04) =========== =========== =========== =========== Shares used in computing basic and diluted loss per share.............. Basic and Diluted....... 412,000,658 332,125,394 358,735,340 325,773,934 =========== =========== =========== =========== 11
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[Download Table] December 31, June 30, --------------------- 1999 1998 1997 ----------- ---------- --------- (unaudited) (in thousands) Balance Sheet Data: Current assets including cash and investments and restricted cash and investments................................ $ 905,469 $ 976,615 $ 27,744 Long term restricted cash and investments... 367,387 367,600 -- Long term accounts receivable............... 63,128 43,315 -- Construction in progress, property, plant and equipment and capacity available for sale....................................... 1,406,170 1,008,556 518,519 Investment in affiliates.................... 184,676 177,334 -- Other assets................................ 111,767 65,757 25,934 ---------- ---------- --------- Total assets............................... $3,038,597 $2,639,177 $ 572,197 ========== ========== ========= Current liabilities......................... $ 302,082 $ 256,265 $ 90,817 Long term debt.............................. 559,707 269,598 162,325 Senior notes................................ 796,682 796,495 150,000 Deferred revenue............................ 60,140 25,325 -- Obligations under inland service agreements and capital leases......................... 15,237 24,520 3,009 Deferred income taxes....................... 24,167 9,654 -- ---------- ---------- --------- Total liabilities.......................... 1,758,015 1,381,857 406,151 Mandatorily redeemable preferred stock...... 484,958 483,000 91,925 Shareholders' equity........................ Common stock............................... 4,361 4,328 3,258 Treasury stock............................. (209,415) (209,415) -- Other shareholders' equity................. 1,080,671 1,067,470 71,023 Accumulated deficit........................ (79,993) (88,063) (160) ---------- ---------- --------- Total shareholders' equity.................. 795,624 774,320 74,121 ---------- ---------- --------- Total liabilities and shareholders' equity.. $3,038,597 $2,639,177 $ 572,197 ========== ========== ========= Global Marine selected historical financial information The table below shows selected historical financial information for Global Marine. This information has been prepared using the combined financial statements of Global Marine as of the dates indicated and for the three months ended June 30, 1999 and each of the fiscal years in the five-year period ended March 31, 1999 and for the three months ended June 30, 1999 and 1998. The combined income statement data below for each of the three fiscal years ended March 31, 1999 and the combined balance sheet data at March 31, 1999 and 1998 were derived from financial statements audited by KPMG Audit Plc, chartered accountants, which are included in this document beginning on page F-52. The combined income statement data below for each of the two fiscal years ended March 31, 1996 and the combined balance sheet data of March 31, 1996 and 1995 were derived from management accounts. We derived the remaining data from unaudited combined financial statements, which are included in this document beginning on page F-45. The unaudited translations of Global Marine's sterling amounts into U.S. dollars have been translated using convenience translation rates. The convenience translations should not be construed as representations that the sterling amounts have been, could have been, or could in the future be, converted into U.S. dollars at this rate or any other rate of exchange. [Enlarge/Download Table] For the Three For the Three For the Years Ended March 31, Months Ended Months Ended ---------------------------------------------- June 30, 1999 June 30, 1998 1999 1998 1997 1996 1995 ------------- ------------- -------- -------- -------- --------- --------- (in thousands) Operating revenues...... $ 78,004 $52,315 $347,335 $280,705 $288,813 $ 231,614 $ 127,725 Income from continuing operations............. 8,448 $ 6,665 47,051 22,730 30,140 42,134 17,337 Total assets............ 712,124 753,333 740,181 614,345 548,419 380,502 Long term obligations... $270,229 $261,923 $331,742 $263,420 $ 225,702 $ 88,718 12
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Frontier selected historical financial information The table below shows selected historical financial information for Frontier. This information has been prepared using the consolidated financial statements of Frontier as of the dates indicated and for each of the fiscal years in the five-year period ending December 31, 1998 and for the six months ended June 30, 1999 and 1998. The consolidated income statement data below for each of the fiscal years in the five-year period ending December 31, 1998 and the consolidated balance sheet data as of December 31, 1994 through December 31, 1998 have been derived from financial statements audited by PricewaterhouseCoopers LLP, independent accountants, which are incorporated by reference in this document. We derived the remaining data from unaudited consolidated financial statements, which are incorporated by reference in this document. For instructions on how to obtain information incorporated by reference, see "Where You Can Find More Information" on page 171. Revenues have been impacted by the following acquisitions for the periods presented: . On February 27, 1998, Frontier acquired GlobalCenter Inc., a leading provider in digital distribution, Internet and data services headquartered in Sunnyvale, California. Frontier acquired all of the outstanding shares of GlobalCenter and issued 6.4 million shares to effect this merger. At the time of the merger, GlobalCenter had 1.1 million stock options and warrants outstanding as converted into Frontier equivalents. This transaction was accounted for using the pooling of interests method of accounting and, accordingly, historical information has been restated to include GlobalCenter. . In August 1995, Frontier merged with ALC Communications Corporation. Frontier exchanged two shares of its common stock for each ALC common share. The total shares issued by Frontier to effect the merger were 69.2 million. In March 1995, Frontier acquired American Sharecom Inc. Frontier acquired all of the outstanding shares of American Sharecom for approximately 8.7 million shares of Frontier common stock. These transactions were accounted for as poolings of interests and, accordingly, historical information has been restated to include ALC and American Sharecom. . In 1995, Frontier paid $318.4 million in cash for several acquisitions that were accounted for as purchases. These purchase acquisitions were Minnesota Southern Cellular Telephone Company, ConferTech International, Inc., WCT Communications, Inc., Enhanced Telemanagement, Schneider Communications, Inc. and Schneider Communications' 80.8 percent interest in LinkUSA Corporation and Link-VTC, Inc. In February 1996, Frontier acquired the remaining 19.2 percent interest in LinkUSA Corporation for $2.3 million in cash, and in June 1996 made a payment of $4.3 million to Link-VTC, Inc. in settlement of the original earnout agreement. The following extraordinary, unusual or infrequently occurring items have impacted net income for the periods presented: . In the first quarter of 1999, Frontier recorded a $7.5 million charge, or $0.04 per diluted share, for costs related to the merger with Global Crossing. These charges primarily include investment banker fees, legal fees and other direct costs. . In the first quarter of 1998, Frontier recorded a pre-tax charge of $6.5 million associated with the acquisition of GlobalCenter. These charges included investment banker, legal fees and other direct costs. . In October 1997, Frontier recorded a pre-tax charge of $86.8 million consisting of a restructuring charge of $43.0 million and a provision for asset and lease impairments of $43.8 million. The restructuring charge was primarily associated with a workforce reduction, program cancellations and discontinuing some product lines. The provision for asset and lease impairments primarily relates to long term assets and some lease obligations Frontier was in the process of disposing of or exiting. 13
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. In March 1997, Frontier recorded a $96.6 million pre-tax charge primarily related to the write-off of certain leased network facilities no longer required as a result of the migration of Frontier's major carrier customer's one-plus traffic volume to other networks and Frontier's overall network integration efforts. . In November 1996, Frontier recorded a $48.8 million pre-tax charge. This charge included $28.0 million for the curtailment of specified Frontier pension plans and a $20.8 million charge primarily to the write-off of unrecoverable product development costs for its conference calling product line. . In December 1996, Frontier, through GlobalCenter, recorded a pre-tax charge of $18.9 million related to the write-off of in-process product development costs associated with the 1996 merger with GCIS, an Internet management services company. . Frontier's 1995 operating results reflect pre-tax acquisition related charges of $114.2 million associated with the integration of a number of long distance companies acquired during the year, including the August 1995 merger with ALC Communications. . Frontier determined in 1995 that Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation," was no longer applicable based upon changes in regulation, increasingly rapid advancements in telecommunications technology and other factors creating competitive markets. As a result of the discontinuance of FAS 71, Frontier recorded a non-cash extraordinary charge of $112.1 million, net of an income tax benefit of $68.4 million, as of September 30, 1995. Frontier also recorded a $9.0 million loss on the early extinguishment of debt in 1995. 14
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[Enlarge/Download Table] Six Months Six Months Year Ended December 31, Ended Ended ---------------------------------------------------------- June 30, 1999 June 30, 1998 1998 1997 1996 1995 1994 ------------- ------------- ---------- ---------- ---------- ---------- ---------- (unaudited) (in thousands, except per share information) Consolidated Statements of Income: Revenues................ $1,321,597 $1,280,314 $2,593,558 $2,374,809 $2,588,519 $2,150,328 $1,667,545 Costs and expenses...... 1,174,055 1,131,465 2,276,162 2,288,651 2,220,296 1,865,492 1,341,919 Operating income........ 147,542 148,849 317,396 86,158 368,223 284,836 325,626 Interest expense........ 29,850 25,989 55,318 48,239 43,312 53,572 50,216 Other income, net of other expense.......... 14,994 25,470 45,025 38,070 15,850 14,991 20,922 Income taxes............ 55,411 66,753 129,560 44,188 142,556 101,126 109,078 Income before extraordinary items and cumulative effect of changes in accounting principles............. 77,275 81,577 177,543 31,801 198,205 145,129 187,254 Extraordinary items..... -- -- -- -- -- (121,208) -- Cumulative effect of changes in accounting principles............. -- (1,755) (1,755) -- (8,018) (1,477) (7,197) Consolidated net income................. 77,275 79,822 175,788 31,801 190,187 22,444 180,057 Dividends on preferred stock.................. (506) (503) (1,005) (1,019) (1,182) (1,191) (1,187) Income applicable to common stock........... $ 76,769 $ 79,319 $ 174,783 $ 30,782 $ 189,005 $ 21,253 $ 178,870 Earnings per common share: Basic earnings per share: Income before extraordinary item and cumulative effect of changes in accounting principles............ $ .45 $ .48 $ 1.03 $ .18 $ 1.19 $ .94 $ 1.26 Net income............. .45 .47 1.02 .18 1.14 .14 1.21 Diluted earnings per share: Income before extraordinary item and cumulative effect of changes in accounting principles............ .43 .47 1.02 .18 1.18 .88 1.16 Net income............. .43 .46 1.01 .18 1.13 .13 1.11 Cash dividends declared per common share....... $ .10 $ .45 $ .89 $ .875 $ .855 $ .835 $ .815 Consolidated Balance Sheets (at period end): Current assets.......... $ 577,637 $ 566,674 $ 490,305 $ 477,761 $ 524,200 $ 673,826 Property, plant and equipment, net......... 2,038,457 1,677,559 1,046,884 975,982 883,046 1,034,442 Goodwill and customer base, net.............. 466,851 484,015 517,754 538,296 550,081 222,442 Deferred and other assets................. 391,493 330,495 432,977 237,353 154,088 130,084 Total assets........... $3,474,438 $3,058,743 $2,487,920 $2,229,392 $2,111,415 $2,060,794 Current liabilities..... $ 551,229 $ 567,697 $492,978 $ 424,397 $ 506,073 $ 305,698 Long-term debt.......... 1,647,960 1,350,821 934,681 677,570 618,867 661,549 Deferred income taxes... 50,462 40,046 10,927 2,542 15,644 98,217 Deferred employee benefits obligation.... 92,049 81,925 74,965 57,573 58,385 46,001 Preferred stock......... 18,294 18,770 20,126 22,611 22,769 22,777 Shareholders' equity, exclusive of preferred stock.................. 1,114,444 999,484 954,243 1,044,699 889,677 926,552 Total liabilities and shareholders' equity.. $3,474,438 $3,058,743 $2,487,920 $2,229,392 $2,111,415 $2,060,794 15
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Selected unaudited pro forma financial information The following unaudited pro forma condensed combined financial information of Global Crossing, Global Marine and Frontier, which we refer to as "Pro Forma Global Crossing," has been prepared to demonstrate how these companies or businesses might have looked if the merger and merger-related transactions had been completed as of the dates or at the beginning of the periods presented. We have prepared the pro forma financial information using the purchase method of accounting. We expect that we will have reorganization and restructuring expenses and potential synergies relating to our long distance business and increased opportunities to earn more revenue as a result of combining our companies. The unaudited pro forma information does not reflect these expenses and synergies. The pro forma information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not attempt to predict or suggest future results. The pro forma information also does not attempt to show how the combined company would actually have performed had the companies been combined throughout these periods. If the companies had actually been combined in prior periods, these companies and businesses might have performed differently. You should not rely on pro forma financial information as an indication of the results that would have been achieved if the transactions outlined in this document had taken place earlier or the future results that the companies will experience after completion of the transactions. Global Crossing and Frontier estimate that the Global Marine acquisition, the merger and related transactions will result in fees and expenses totaling approximately $95 million. These unaudited pro forma condensed combined financial statements should be read in conjunction with the historical financial statements of Global Crossing, Global Marine and Frontier, which, in the case of Global Crossing and Global Marine, are included in this document and, in the case of Frontier, are incorporated by reference in this document. 16
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Pro Forma Global Crossing Unaudited Pro Forma Condensed Combined Statement of Operations (in thousands, except share and per share data) [Download Table] Six Months Ended June 30, 1999 ---------------- Operating revenues............................................ $ 1,863,556 ------------ Operating expenses: Operating, selling, general and administrative.............. 1,430,520 Stock related expense....................................... 26,074 Depreciation and amortization............................... 315,960 ------------ 1,772,554 ------------ Operating income.............................................. 91,002 Equity in income of affiliates................................ 8,684 Other income (expense): Interest expense............................................ (107,173) Interest income............................................. 35,311 Other income................................................ (5,367) ------------ Income before taxes and cumulative effect of change in accounting principle......................................... 22,457 Provision for income taxes.................................. (87,206) ------------ Loss before cumulative effect of change in accounting principle.................................................... (64,749) Preferred stock dividends................................... (27,241) Redemption of preferred stock............................... (183) ------------ Loss applicable to common shareholders before cumulative effect of change in accounting principle (Basic and Diluted)..................................................... $ (92,173) ============ Loss per common share: Loss applicable to common shareholders before cumulative effect of change in accounting principle Basic and Diluted......................................... $ (0.13) ============ Shares used in computing information applicable to common shareholders Basic and Diluted......................................... 684,883,385 ============ 17
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Pro Forma Global Crossing Unaudited Pro Forma Condensed Combined Statement of Operations (in thousands, except share and per share data) [Download Table] Fiscal Year 1998 ---------------- Operating revenues........................................... $ 3,364,992 ------------ Operating expenses: Operating, selling, general and administrative............. 2,548,346 Termination of Advisory Services Agreement................. 139,669 Stock related expense...................................... 39,374 Depreciation and amortization.............................. 603,001 ------------ 3,330,390 ------------ Operating income............................................. 34,602 Equity in income of affiliates............................... 18,935 Other income (expense): Interest expense........................................... (157,374) Interest income............................................ 38,863 Other income............................................... 23,230 ------------ Income before taxes, extraordinary item, and cumulative effect of change in accounting principle.................... (41,744) Provision for income taxes................................. (168,064) ------------ Loss before extraordinary item and cumulative effect of change in accounting principle.............................. (209,808) Preferred stock dividends.................................. (12,681) Redemption of preferred stock.............................. (34,323) ------------ Loss applicable to common shareholders before extraordinary item and cumulative effect of change in accounting principle (Basic and Diluted)......................................... $ (256,812) ============ Loss per common share: Loss applicable to common shareholders before extraordinary item and cumulative effect of change in accounting principle Basic and Diluted........................................ $ (0.41) ============ Shares used in computing information applicable to common shareholders Basic and Diluted........................................ 631,618,067 ============ 18
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Pro Forma Global Crossing Unaudited Pro Forma Condensed Combined Balance Sheet (in thousands) [Download Table] June 30, 1999 ----------- Cash and cash equivalents.......................................... $ 318,918 Other current assets............................................... 779,923 ----------- Total current assets............................................. 1,098,841 Restricted cash and cash equivalents............................... 367,387 Accounts receivable................................................ 63,128 Capacity available for sale........................................ 503,878 Property, plant and equipment, net................................. 2,460,451 Construction in process............................................ 842,439 Goodwill and other intangibles, net................................ 11,480,897 Other assets, net.................................................. 503,260 Investment in affiliates........................................... 225,033 ----------- Total assets..................................................... $17,545,314 =========== Current liabilities................................................ $ 1,153,225 Long term debt..................................................... 2,790,906 Senior notes....................................................... 796,682 Deferred income taxes.............................................. (121,632) Postretirement and other post-employment benefit obligations....... 92,049 Deferred credits and other......................................... 191,926 ----------- Total liabilities................................................ 4,903,156 ----------- Mandatorily redeemable preferred stock............................. 484,958 ----------- Shareholders' equity Preferred stock.................................................. -- Common stock..................................................... 7,090 Other shareholders' equity....................................... 12,513,663 Unearned compensation............................................ (74,145) Treasury stock................................................... (209,415) Accumulated deficit.............................................. (79,993) ----------- Total shareholders' equity......................................... 12,157,200 ----------- Total liabilities and shareholders' equity....................... $17,545,314 =========== 19
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Comparative per share data Presented below is the income/loss from operations before extraordinary item and cumulative effect of changes in accounting principle, book value per common share and cash dividends per common share data for Global Crossing and Frontier on an historical basis and a pro forma basis. We combined historical consolidated financial information of Global Crossing, Global Marine and Frontier using the purchase method of accounting for business combinations. See "Unaudited Pro Forma Condensed Combined Financial Statements" beginning on page 92. The unaudited Frontier equivalent pro forma information was calculated by multiplying the corresponding unaudited Pro Forma Global Crossing consolidated data by an assumed exchange ratio of 1.5750, which is the exchange ratio if the average trading price of Global Crossing common stock during the measurement period is $40.00, the closing price of Global Crossing common stock on August 2, 1999. This information shows how each share of Frontier common stock would have participated in net earnings and book value of Global Crossing if the merger had been completed at January 1, 1998. These amounts, however, do not necessarily reflect future per share levels of net earnings or book value of Global Crossing. [Download Table] Six months Fiscal ended Year June 30, 1998 1999 ------ ---------- Global Crossing historical Loss per share: Basic...................................................... $(0.32) $(0.05) Diluted.................................................... (0.32) (0.58) Book value per common share.................................. 1.89 1.82 Cash dividends declared per common share..................... -- -- Frontier historical Earnings per share: Basic...................................................... 1.03 0.45 Diluted.................................................... 1.02 0.43 Book value per common share.................................. 5.93 6.54 Cash dividends declared per common share..................... 0.89 0.10 Unaudited Global Crossing equivalent pro forma Loss per share: Basic...................................................... (0.41) (0.13) Diluted.................................................... (0.41) (0.13) Book value per common share.................................. * 17.70 Unaudited Frontier equivalent pro forma Earnings per share: Basic...................................................... (0.65) (0.20) Diluted.................................................... (0.65) (0.20) Book value per common share.................................. * 27.88 -------- * Information not provided 20
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Market prices and dividends The Global Crossing common stock trades on both the Nasdaq National Market and the Bermuda Stock Exchange under the symbol "GBLX." Frontier common stock is listed on the New York Stock Exchange under the symbol "FRO." The table below shows, for the calendar quarters indicated, the reported high and low sale prices of Global Crossing common stock as reported on the Nasdaq National Market and the Frontier common stock as reported on the New York Stock Exchange Composite Transactions Tape, in each case based on published financial sources and the dividends, if any, declared on the stock. Share amounts and values for Global Crossing common stock take into account the two-for-one stock split in the form of a stock dividend effective March 9, 1999. The third quarter 1998 information for Global Crossing covers the period between August 14, the date of the initial public offering of the Global Crossing common stock, through September 30. [Download Table] Global Crossing Common Stock Frontier Common Stock -------------------------------------------------------- Market Price Cash Market Price Cash -------------------- Dividends ------------- Dividends High Low Declared High Low Declared ---------- --------- ------------------ ------ --------- Calendar 1997 First Quarter.......... -- -- -- $23.25 $17.75 $.2175 Second Quarter......... -- -- -- 20.50 15.38 .2175 Third Quarter.......... -- -- -- 24.19 19.00 .2175 Fourth Quarter......... -- -- -- 25.00 20.00 .2225 Calendar 1998 First Quarter.......... -- -- -- 33.44 24.44 .2225 Second Quarter......... -- -- -- 33.00 28.31 .2225 Third Quarter.......... $ 12.75 $ 8.00 -- 36.75 24.13 .2225 Fourth Quarter......... 23.50 8.63 -- 34.13 24.81 .2225 Calendar 1999 First Quarter.......... 62.63 18.94 -- 54.94 33.19 .0500 Second Quarter......... 64.25 39.63 -- 60.38 49.13 .0500 Third Quarter (through August 4, 1999)....... 50.00 32.94 -- 59.94 43.63 -- Since the date of the merger agreement, the Global Crossing common stock has traded within a range from $32.94 to $64.25. The average trading price for purposes of determining the exchange ratio will be based on the trading prices of the Global Crossing common stock during the measurement period shortly before the closing, which measurement period may end after the date of the Frontier special meeting. 21
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The following table presents trading information for the Global Crossing common stock and Frontier common stock on March 16, 1999 and August 4, 1999. March 16, 1999 was the last full trading day before our announcement of the signing of the merger agreement. August 4, 1999 was the last practicable trading day for which information was available before the date of this document. The equivalent pro forma price of Frontier common stock is also presented below for each price. The equivalent pro forma price for each date was determined by multiplying the applicable price of Global Crossing common stock by the exchange ratio that would result if the applicable price of Global Crossing common stock shown were the average trading price of Global Crossing common stock during the measurement period. We cannot assure you what the market prices of the Global Crossing common stock will be at the merger date or during the period when the exchange ratio is calculated. You should obtain current market quotations. [Download Table] Frontier Global Crossing Frontier Equivalent Pro Common Stock Common Stock Forma --------------- ------------ -------------- Closing price on March 16, 1999.... $ 51 1/2 $44 5/8 $63 Closing price on August 4, 1999.... $ 36 $47 3/8 $63 Global Crossing does not anticipate paying cash dividends on its common stock in the foreseeable future. The terms of some debt instruments of Global Crossing limit its ability to pay cash dividends. Future cash dividends, if any, will be at the discretion of the Global Crossing board of directors and will depend upon, among other things, Global Crossing's operations, capital requirements and surplus, general financial condition, contractual restrictions and those other factors the Global Crossing board of directors may deem relevant. See "Global Crossing's Management Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 116. 22
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Risk Factors Shareholders of Global Crossing and Frontier should consider the following factors, in addition to the other information contained in this document. Risks Relating to the Merger The successful integration of Frontier's business and the achievement of expected benefits cannot be assured We expect that the merger will result in benefits arising out of the creation of a seamless global network of telecommunications facilities and services. Even though Global Crossing and Frontier have little direct overlap of employees, markets, customers, products or facilities, we also expect the merger to result in some operating efficiencies and cost savings related to the transport of communications and information over long distances. Achieving the benefits of the merger will depend in part upon the integration of the businesses of Global Crossing and Frontier in an efficient manner. We cannot assure you that this will happen or that it will happen in a timely manner. Global Crossing has not previously had significant experience integrating the operations of acquired companies. The consolidation of operations will require substantial attention from management. The diversion of management attention and any difficulties encountered in the transition and integration process could have a material adverse effect on the revenues, levels of expenses and operating results of the combined company. We cannot assure you that the combined company will realize any of the anticipated benefits of the merger. Since the market price of the Global Crossing common stock will vary, Frontier shareholders cannot be sure of the value of the Global Crossing common stock to be received in the merger Since the date of the merger agreement, the Global Crossing common stock has traded within a range from $32.94 to $64.25. The average trading price for purposes of determining the exchange ratio will be based on the trading prices of the Global Crossing common stock during the measurement period shortly before the closing, which measurement period may end after the date of the Frontier special meeting. If the average trading price of the Global Crossing common stock during the measurement period for determining the exchange ratio is less than $34.5625, Frontier shareholders will receive less than $63.00 in value of Global Crossing common stock for each share of Frontier common stock in the merger, unless the Frontier board of directors chooses to terminate the merger agreement and Global Crossing chooses to increase the value of the merger consideration. Frontier shareholders will not be able to vote against the merger if the trading price of the Global Crossing common stock falls below $34.5625 after the Frontier special meeting and the Frontier board of directors will not be required to terminate the merger agreement if the average trading price during the measurement period is below $34.5625. In addition, the number of shares of Global Crossing common stock that Frontier shareholders will receive in the merger will not be adjusted for changes in Global Crossing's stock price if the average trading price during the measurement period is above $56.7813. As a result, the value of the Global Crossing shares received by Frontier shareholders in the merger will also vary with fluctuations in the Global Crossing stock price above this level. Also, the exchange ratio is based on an average price of the Global Crossing common stock during the measurement period shortly before the closing. Accordingly, because the market price of Global Crossing common stock will fluctuate and may increase or decrease during the period from the end of the measurement period to the effective time of the merger, and from the effective time until Global Crossing delivers certificates representing Global Crossing shares to Frontier shareholders, the value of the Global Crossing common stock actually received by Frontier shareholders may be more or less than the average trading price or the value of the Global Crossing common stock at the effective time of the merger. 23
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Because the closing of the merger may happen at a date later than the shareholder meetings, we cannot assure you that the price of the Global Crossing common stock on the date of the meetings will be indicative of its price at the closing of the merger. Risks relating to the business and operations of Global Crossing Global Crossing has a limited operating history Global Crossing was organized in March 1997 and has a limited operating history. Global Crossing's financial information relates principally to a period in which it was constructing and developing the Atlantic Crossing system and, until May 1998, had minimal revenues and operating costs. Despite recognizing approximately $793 million in revenues, Global Crossing has incurred a net loss applicable to common shareholders of approximately $167 million for the period from March 19, 1997, its date of inception, through June 30, 1999, due primarily to the termination of some advisory services agreements, the incurrence of stock-related expense, the extraordinary loss on the retirement of some senior notes, preferred stock dividends and the redemption of some preferred stock. Global Crossing has financed its net losses, debt service, capital expenditures and other cash needs to date through operations, the proceeds of sales of common stock and mandatorily redeemable preferred stock and the issuance of debt. Global Crossing will require substantial additional capital in order to carry out its business plan. Global Crossing's significant indebtedness could adversely affect it by leaving it with insufficient cash to fund operations and impairing its ability to obtain additional financing The amount of Global Crossing's debt could have important consequences for its future, including, among other things: . cash from operations may be insufficient to meet the principal and interest on its indebtedness as it becomes due, . payments of principal and interest on borrowings may leave it with insufficient cash resources for its operations, and . restrictive debt covenants may impair its ability to obtain additional financing. Global Crossing has incurred a high level of debt. As of June 30, 1999, Global Crossing and its consolidated subsidiaries had a total of $1,758 million of total liabilities, including approximately $1,384 million in senior indebtedness, of which $560 million was secured. Global Crossing's direct subsidiary, Global Crossing Holdings, also has mandatorily redeemable preferred stock outstanding with a face value of $500 million. In addition, Global Crossing's Pacific Crossing joint venture entered into an $850 million non- recourse credit facility, under which it had incurred $468 million of indebtedness as of June 30, 1999. Global Crossing also incurred additional indebtedness of $600 million in connection with its acquisition of Global Marine. Global Crossing's ability to repay its debt depends upon a number of factors, many of which are beyond its control. In addition, Global Crossing relies on dividends, loan repayments and other intercompany cash flows from its subsidiaries to repay its obligations. Global Crossing's operating subsidiaries have entered into a senior secured corporate credit facility. Accordingly, the payment of dividends from these operating subsidiaries and the making and repayments of loans and advances are subject to statutory, contractual and other restrictions. In addition, if Global Crossing is unable to generate sufficient cash flow to meet its debt service requirements, Global Crossing may have to renegotiate the terms of its long-term debt. Global Crossing cannot assure you that it would be able to successfully renegotiate those terms or refinance its indebtedness when required or that satisfactory terms of any refinancing would be available. If Global Crossing were not able to refinance its indebtedness or obtain new financing under these circumstances, Global Crossing would have to consider other options, such as: 24
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. sales of some assets to meet its debt service obligations, . sales of equity, . negotiations with its lenders to restructure applicable indebtedness, or . other options available to it under applicable law. Global Crossing may encounter difficulties in completing its cable systems Global Crossing's ability to achieve its strategic objectives will depend in large part upon the successful, timely and cost-effective completion of its planned cable systems as well as on achieving substantial capacity sales on these systems once they become operational. The construction of the Global Crossing systems will be affected by a variety of factors, uncertainties and contingencies, many of which are beyond Global Crossing's control including: . its ability to manage their construction effectively, . its ability to obtain all construction and operating permits and licenses, . third-party contractors performing their obligations on schedule, and . its ability to enter into favorable construction contracts with a limited number of suppliers. These factors may significantly delay or prevent completion of one or more of the Global Crossing systems, which could have a material adverse effect on Global Crossing's business, financial condition and results of operations. Global Crossing cannot assure you that each of its systems will be completed at the cost and in the time frame currently estimated by Global Crossing, or even at all. Although Global Crossing awards contracts for construction of its systems to suppliers who in most cases are expected to be bound by a fixed- price construction cost schedule and to provide guarantees in respect of completion dates and system design specifications, Global Crossing cannot assure you that the actual construction costs or the time required to complete these systems will not exceed its current estimates. These circumstances could have a material adverse effect on Global Crossing's results of operations or financial condition. Global Crossing depends upon the continued success of its sales and marketing capabilities Global Crossing's success will depend substantially on sales of capacity on its systems. Although Global Crossing's sales and marketing efforts have resulted to date in substantial sales of undersea and terrestrial capacity on its systems, Global Crossing cannot be certain that it will continue to be successful in selling capacity or that it will be able to realize its business plan. Furthermore, even if Global Crossing realizes its plan, it still may not be able to sustain operating profitability or generate sufficient cash flow to service its indebtedness. If Global Crossing is unable to effectively sell capacity on its cable systems, its results of operations will be materially adversely affected. Global Crossing's ability to achieve its business objectives depends in large part upon its sales and marketing capabilities. Global Crossing has assembled a dedicated sales and marketing force. Global Crossing depends upon the ability of these employees to effectively market and sell capacity. We cannot be certain that Global Crossing will be able to effectively sell capacity on its cable systems. Global Crossing's revenue growth plan depends on product and service expansion Global Crossing intends to grow revenues and profits by: . upgrading capacity on its planned systems, . developing additional undersea cable projects, . developing or purchasing additional terrestrial fiber capacity, and . introducing new services. If Global Crossing is unable to effect these upgrades, develop additional cable projects, develop or obtain additional terrestrial capacity or introduce new services, its business, financial condition and results of operations could be adversely affected. Some of Global Crossing's capacity purchase contracts are terminable under specified circumstances Under some capacity purchase agreements for the Atlantic Crossing system, the customer may terminate the agreement if, among other things, Global Crossing does not obtain and hold specified governmental authorizations, approvals, consents, licenses and permits. Purchase agreements for Global Crossing's other 25
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systems may contain similar provisions. If a substantial number of purchase agreements are terminated for these or other reasons, Global Crossing's business, financial condition and results of operations could be materially adversely affected. Global Crossing faces competition along its routes The international telecommunications industry is highly competitive. Global Crossing faces competition from existing and planned systems along each of its planned routes. Global Crossing also competes with satellite providers, including existing geosynchronous satellites and low- and medium-earth orbit systems now under construction. Global Crossing competes primarily on the basis of price, availability, transmission quality and reliability, customer service and the location of its systems. Traditionally, carriers have made substantial long-term investments in ownership of cable capacity. We cannot assure you that Global Crossing will be able to compete successfully against systems to which prospective customers have made long-term commitments. Global Crossing's principal shareholders may be able to materially influence the outcome of shareholder votes As of July 29, 1999, Pacific Capital Group had a 21.69% beneficial ownership interest in Global Crossing. Global Crossing has entered into various transactions with Pacific Capital Group and assumed the on-going development of some of its systems from an affiliate of Pacific Capital Group. Mr. Gary Winnick, co-chairman of the Global Crossing board of directors, controls Pacific Capital Group and its subsidiaries. In addition, several of Global Crossing's other officers and directors are affiliated with Pacific Capital Group. Furthermore, as of July 29, 1999, Canadian Imperial Bank of Commerce had a 19.98% beneficial ownership interest in Global Crossing. Canadian Imperial Bank of Commerce and its affiliates have acted as underwriter, lender or initial purchaser in several of Global Crossing's financial transactions in connection with the development and construction of the Global Crossing systems. Several members of the Global Crossing board of directors are employees of an affiliate of Canadian Imperial Bank of Commerce. As of July 29, 1999, Pacific Capital Group and Canadian Imperial Bank of Commerce collectively beneficially owned 41.67% of the outstanding Global Crossing common stock. Accordingly, Pacific Capital Group and Canadian Imperial Bank of Commerce may be able to materially influence the outcome of matters submitted to a vote of Global Crossing shareholders, including the election of directors. Officers and directors own a substantial portion of Global Crossing and may have conflicts of interest Global Crossing's executive officers and directors have substantial equity interests in Global Crossing. As of July 29, 1999, all of Global Crossing's directors and executive officers as a group collectively beneficially owned 73.25% of the outstanding common stock of Global Crossing, including shares beneficially owned by Pacific Capital Group and Canadian Imperial Bank of Commerce. Some of these individuals have also received amounts from Global Crossing due to advisory services fees paid to Pacific Capital Group and its affiliates. Some of Global Crossing's directors and executive officers also serve as officers and directors of other companies. Additionally, some of Global Crossing's officers and directors are active investors in the telecommunications industry. Service as a director or officer of Global Crossing and as a director or officer of another company could create conflicts of interest when the director or officer is faced with decisions that could have different implications for Global Crossing and the other company. A conflict of interest could also exist with respect to allocation of time and attention of persons who are directors or officers of both Global Crossing and another company. The pursuit of these other business interests could distract these officers from pursuing opportunities on Global Crossing's behalf. These conflicts of interest could have a material adverse effect on Global Crossing's financial condition. Global Crossing must complete the transition to an operating company The transition from a development stage company to an operating company places significant demands on Global Crossing's management and operations. Global Crossing is in the process of expanding the management and operational capabilities necessary for this transition. 26
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Global Crossing's ability to manage this transition successfully will depend on, among other things: . expanding, training and managing Global Crossing's employee base, including attracting, retaining and motivating highly skilled personnel, . taking over or outsourcing its customer interface and operations, administrative and maintenance systems, . procuring terrestrial capacity to provide connectivity to inland cities, and . controlling expenses. We cannot assure you that Global Crossing will succeed in developing all or any of these capabilities, and any failure to do so could have a material adverse effect on its results of operations. Global Crossing is growing rapidly in a changing industry Part of Global Crossing's strategy is to construct several cable systems in a short time frame in order to take advantage of the supply and demand imbalance that currently exists and is projected to exist in the global marketplace. Global Crossing expects each of its currently announced systems to be operational between now and 2001. As a result of this aggressive strategy, Global Crossing is experiencing rapid expansion and expects it to continue for the foreseeable future. This growth has increased Global Crossing's operating complexity. At the same time, the international telecommunications industry is changing rapidly due to, among other things: . the easing of regulatory constraints, . the privatization of established carriers, . the expansion of telecommunications infrastructure, . the globalization of the world's economies, and . the changing technology for wired, wireless and satellite communication. Much of Global Crossing's planned growth is predicated upon the growth in demand for international telecommunications capacity. We cannot assure you that this anticipated demand growth will occur. Global Crossing faces pricing uncertainties Advances in fiber optic technology have resulted in significant per circuit price declines in the fiber optic cable transmission industry. Recent changes in technology caused prices for circuits to go down even further. If there is less demand than Global Crossing projects or a bigger drop in prices per circuit than it projects, there could be a material adverse effect on its business, financial condition and results of operations. We cannot assure you, even if Global Crossing's projections with respect to those factors are realized, that Global Crossing will be able to implement its strategy or that its strategy will be successful in the rapidly evolving telecommunications market. Global Crossing confronts several system operational risks Each of the Global Crossing systems will be subject to the risks inherent in a large-scale, complex fiber optic telecommunications system. The operation, administration, maintenance and repair of these systems requires the coordination and integration of sophisticated and highly specialized hardware and software technologies and equipment located throughout the world. We cannot assure you that, even if built to specifications, the Global Crossing systems will function as expected in a cost-effective manner. The failure of the hardware or software to function as required could render a cable system unable to perform at design specifications. Each of the Global Crossing systems either has or is expected to have a design life of generally 25 years; however, we cannot assure you of the actual useful life of any of these systems. A number of factors will affect the useful life of each of the Global Crossing systems, including, among other things: 27
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. quality of construction, . unexpected damage or deterioration, and . technological or economic obsolescence. Failure of any of the Global Crossing systems to operate for its full design life could have a material adverse effect on its business, financial condition and results of operations. Global Crossing depends on its key personnel Global Crossing's future success depends on the skills, experience and efforts of the officers and key technical and sales employees. As some of these officers and employees are new, we cannot be certain that Global Crossing will be able to integrate new management into its existing operations. In addition, competition for these individuals is intense, and Global Crossing may not be able to attract, motivate and retain highly skilled qualified personnel. Global Crossing does not have "key person" life insurance policies covering any of its employees. Global Crossing faces risks associated with international operations Because Global Crossing will derive substantial revenues from international operations and intends to have substantial physical assets in several jurisdictions along the routes of its planned systems, its business is subject to risks inherent in international operations, including: . political and economic conditions, . unexpected changes in regulatory environments, . exposure to different legal standards, and . difficulties in staffing and managing operations. Global Crossing has not experienced any material adverse effects with respect to its foreign operations arising from these factors. However, problems associated with these risks could arise in the future. Finally, managing operations in multiple jurisdictions may place further strain on Global Crossing's ability to manage its overall growth. Global Crossing is subject to government regulation in various jurisdictions Global Crossing will, in the ordinary course of development, construction and operation of its fiber optic cable systems, be required to obtain and maintain various permits, licenses and other authorizations in both the United States and in international jurisdictions where its cables land and exist. . Undersea cable landing or similar licenses will be required in many of the jurisdictions where the Global Crossing systems will land and exist. These licenses are typically issued for a term of years, subject to renewal. Moreover, the licenses may subject Global Crossing's business and operations to varying forms of regulation, which could change over time. If Global Crossing fails to obtain or renew a license or if there is a material change in the nature of the regulation to which Global Crossing is subject, there could be a material adverse effect on its business, financial condition and results of operations. . Global Crossing must obtain construction and operating licenses during the construction phase of each of its cable systems. Although Global Crossing intends that the construction contracts for each of its undersea cable systems impose the burden of acquiring and maintaining construction licenses and permits on the contractor for each of these systems, Global Crossing cannot assure you that the contractors will successfully obtain all permits and licenses. If Global Crossing or any contractor fails to obtain or maintain any construction or operating permit or license, there could be a material adverse effect on Global Crossing's business, financial condition and results of operations. 28
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Global Crossing depends on third parties for many functions Global Crossing depends and will continue to depend upon third parties to: . construct some of its systems and provide equipment and maintenance, . provide access to a number of origination and termination points of the Global Crossing systems in various jurisdictions, . construct and operate landing stations in a number of those jurisdictions, . acquire rights of way, . provide terrestrial capacity to its customers through contractual arrangements, and . act as joint venture participants with regard to some of its current and potential future systems. We cannot assure you that third parties will perform their contractual obligations or that they will not be subject to political or economic events which may have a material adverse effect on Global Crossing's business, financial condition and results of operations. Global Crossing cannot predict its future tax liabilities Global Crossing believes that a significant portion of the income derived from its undersea systems will not be subject to tax by any of (1) Bermuda, which currently does not have a corporate income tax, or (2) some other countries in which Global Crossing conducts activities or in which customers of Global Crossing are located. However, Global Crossing bases this belief upon . the anticipated nature and conduct of its business, which may change, and . its understanding of its position under the tax laws of the various countries in which it has assets or conducts activities, which position is subject to review and possible challenge by taxing authorities and to possible changes in law, which may have retroactive effect. We cannot predict the amount of tax to which Global Crossing may become subject and cannot be certain that any of these factors would not have a material adverse effect on its business, financial condition and results of operations. Global Crossing shareholders may be subject to Foreign Personal Holding Company, Passive Foreign Investment Company, Controlled Foreign Corporation and Personal Holding Company rules Global Crossing believes that neither it nor any of its non-United States subsidiaries is a foreign personal holding company and does not expect that either it or any of its affiliates will become a foreign personal holding company. However, we cannot assure you in this regard. If a shareholder of Global Crossing is a United States person and Global Crossing or one of its non-United States subsidiaries is classified as a foreign personal holding company, then that shareholder would be required to pay tax on its pro rata share of Global Crossing's or its relevant non-United States subsidiary's undistributed foreign personal holding company income. Global Crossing intends to manage its affairs so as to attempt to avoid or minimize having income imputed to United States persons under these rules, to the extent this management of its affairs would be consistent with its business goals. Global Crossing believes that it is not a passive foreign investment company and does not expect to become a passive foreign investment company in the future. However, we cannot assure you in this regard. In addition, this belief is based, in part, on interpretations of existing law that Global Crossing believes are reasonable, but which have not been approved by any taxing authority. If Global Crossing were a passive foreign investment company, then a shareholder of Global Crossing that is a United States person could be liable to pay tax at the then prevailing rates on ordinary income plus an interest charge upon some distributions by Global Crossing or when that shareholder sold the Global Crossing capital stock at a gain. Furthermore, additional tax considerations would apply if Global Crossing or any of its affiliates were a controlled foreign corporation or a personal holding company. 29
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Global Crossing does not plan on paying dividends Global Crossing does not anticipate paying cash dividends on its common stock in the foreseeable future. Global Crossing's ability to pay dividends is limited by some of its debt instruments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and capital resources." Large Global Crossing shareholders face voting and transfer restrictions Global Crossing's bye-laws provide that each share of Global Crossing common stock will have one vote. However, if the shares controlled by any person constitute more than 9.5% (or, in the case of Canadian Imperial Bank of Commerce and its affiliates, more than 35%) of the voting power of the outstanding shares, the voting rights of that shareholder's shares will be limited to 9.5% (or 35% in the case of Canadian Imperial Bank of Commerce and its affiliates) of the voting power of the outstanding shares and the additional votes of those shares will be allocated to the other holders of common stock on a pro rata basis. The other holders who were allocated these additional votes may not exceed the above limitation as a result of this allocation. The bye-laws also prohibit any transfer of shares of common stock that, subject to specified exceptions, would result in a natural person beneficially owning shares in excess of 5% of the outstanding shares of common stock or a group of persons or any person other than a natural person beneficially owning shares in excess of 9.5% of the outstanding shares of common stock, without the approval of a majority of the members of the board of directors and shareholders holding at least 75% of the votes of all outstanding shares of Global Crossing common stock. These voting and transfer restrictions could make it difficult for any person or group of persons acting in concert (other than specified existing shareholders) to acquire a substantial ownership position in, or control of, Global Crossing. If the proposed bye-law amendments are adopted at the 1999 annual shareholder meeting of Global Crossing, . the voting power of any 9.5% or larger shareholder will be limited to 9.5% of the total votes cast at a shareholder meeting in connection with any matter being voted on (with reallocation of this voting power as specified above), . the voting power of Canadian Imperial Bank of Commerce and its affiliates will be limited to 20% of the total votes cast at a shareholder meeting in connection with any matter being voted on (with reallocation of this voting power as specified above) and . any transfer of shares of Global Crossing common stock that, subject to specified exceptions, would result in a shareholder beneficially owning 5% or more, if the shareholder is a natural person, or 9.5% or more, otherwise, of the outstanding shares of Global Crossing common stock will need to be approved by at least a majority of the directors and a majority of the total votes cast at the shareholder meeting called to approve that transfer. Global Crossing's stock performance may be volatile Historically, the market prices for securities of emerging companies in the telecommunications industry have been highly volatile. A number of factors could cause the market price of Global Crossing common stock to fluctuate substantially including: . quarterly variations in operating results, . competition, . announcements of technological innovations or new products by Global Crossing or its competitors, . product enhancements by Global Crossing or its competitors, . regulatory changes, . any differences in actual results and results expected by investors and analysts, . changes in financial estimates by securities analysts, and . other events or factors. In addition, the stock market has experienced volatility that has affected the market prices of equity securities of many companies, and that often has been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of Global Crossing's common stock. 30
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Cautionary Statement Regarding Forward-Looking Statements Global Crossing and Frontier have included forward-looking statements throughout this document. These statements describe their attempt to predict future occurrences. Global Crossing and Frontier use the words "believe," "anticipate," "expect," "intend" and similar expressions to identify forward- looking statements. These statements also include references to cost savings, benefits, revenues and earnings estimated to result from the merger and estimated costs of combining Global Crossing and Frontier. Forward-looking statements are subject to a number of risks, assumptions and uncertainties. For Global Crossing and Frontier, these risks, assumptions and uncertainties, which may cause actual results to differ materially from those predicted by the forward-looking statements, include: . the ability to complete systems within currently estimated time frames and budgets, . the ability to sell capacity on systems, . the successful transition of Global Crossing from a system development company to an operating company, . the ability to compete effectively in a rapidly evolving and price competitive marketplace, . international, national and local general economic and market conditions, . the size and growth of the overall telecommunications market, . new product and service development and introduction, . changes in consumer preferences, . existing governmental regulations and changes in the nature of telecommunications regulation in the United States and other countries, . the loss of significant customers, employees or suppliers, . changes in business strategy or development plans, . the ability to attract and retain qualified personnel, and . the successful integration of Global Crossing and Frontier. This list provides only an example of some of the risks, uncertainties and assumptions that may affect the forward-looking statements of Global Crossing and Frontier. If any of these risks or uncertainties materialize or fail to materialize, as applicable, or if the underlying assumptions prove incorrect, actual results may differ materially from those projected in the forward- looking statements. 31
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The Global Crossing Annual Meeting General We are furnishing this document to holders of Global Crossing common stock in connection with the solicitation of proxies by the Global Crossing board of directors for use at the annual meeting of Global Crossing shareholders and any adjournment or postponement of the meeting. Date, time and place We will hold the Global Crossing annual meeting at the St. Regis Hotel, 2 East 55th Street, New York, New York on September 22, 1999 at 10:00 a.m., local time, subject to any adjournments or postponements. Matters to be considered at the meeting For more information regarding the proposals described below, see "Proposals to Global Crossing Shareholders To Be Voted on at the Global Crossing Annual Meeting" beginning on page 145. The merger proposals At the Global Crossing annual meeting, the shareholders of Global Crossing will consider and vote upon two merger-related proposals: . to approve an increase in the authorized share capital of Global Crossing to 3,000,000,000 shares and . to approve the issuance of shares of Global Crossing common stock to Frontier shareholders in the merger. We are submitting these proposals for the approval of shareholders of Global Crossing pursuant to Global Crossing's bye-laws and the requirements of the National Association of Securities Dealers applicable to companies with securities quoted on the Nasdaq National Market. Other proposals In addition, at the Global Crossing annual meeting, the shareholders of Global Crossing will consider and vote upon: . a proposal to authorize 20,000,000 shares of preferred stock, par value $0.01 per share; . a proposal to amend a number of the bye-laws of Global Crossing and to restate them; . a proposal to elect Abbott L. Brown, Thomas J. Casey, William E. Conway and Barry Porter as class A directors with terms expiring in 2000; . a proposal to elect Robert Annunziata, Lodwrick M. Cook, Geoffrey J.W. Kent, David L. Lee, Bruce Raben and Jack M. Scanlon as class B directors with terms expiring in 2001; . a proposal to elect Jay R. Bloom, Dean C. Kehler, Michael R. Steed, Hillel Weinberger and Gary Winnick as class C directors with terms expiring in 2002; . a proposal to elect, subject to the merger closing, the following persons who are currently Frontier directors as directors of Global Crossing: James F. McDonald as a class A director with a term beginning immediately after the closing and expiring in 2000, Eric Hippeau as a class B director with a term beginning immediately after the closing and expiring in 2001 and Joseph P. Clayton and Douglas H. McCorkindale as class C directors, each with a term beginning immediately after the closing and expiring in 2002; . a proposal to amend the 1998 Global Crossing Ltd. Stock Incentive Plan for the purpose of increasing the number of authorized shares of Global Crossing common stock reserved for issuance under that plan; . a proposal to ratify Global Crossing's existing compensation plan for its outside directors; 32
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. a proposal to ratify the appointment of Arthur Andersen & Co. as independent auditors of Global Crossing for the year ending December 31, 1999 and authorize the Global Crossing board of directors to determine their remuneration; and . any other business which may properly come before the annual meeting or any adjournment or postponement thereof. Record date; votes per share The Global Crossing board of directors has fixed the close of business on July 29, 1999 as the record date for the determination of Global Crossing shareholders entitled to notice of the annual meeting. On that date, the outstanding voting shares of capital stock of Global Crossing consisted of 412,732,100 shares of common stock. However, all holders of record of shares of Global Crossing common stock on the date of the Global Crossing annual meeting will be entitled to attend and vote at the meeting. On a poll, each share entitled to vote at the meeting, other than shares held by holders of greater than 9.5% of all outstanding shares of Global Crossing common stock 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 the Global Crossing bye-laws and described in the next two paragraphs. 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 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 the Global Crossing 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 voting power of all outstanding shares of Global Crossing common stock or (2) Canadian Imperial Bank of Commerce and its affiliates constitute more than 35% of the voting power of all outstanding shares of Global Crossing capital stock, 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% or, in the case of Canadian Imperial Bank of Commerce and its affiliates, collectively, to 35% based on a formula contained in the 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. See "Description of Global Crossing Capital Stock--Voting and transfer restrictions." On the record date for notice of the annual 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 1.1794 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 annual meeting. Abstentions and shares held by brokers that are represented at the annual meeting without specific instructions by shareholders on how to vote those shares will be counted as present for purposes of determining whether there is a quorum at the annual meeting. 33
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Votes required Approval of each of the proposals requires the affirmative vote of at least a majority of all outstanding shares of Global Crossing common stock, except in the case of the proposed amendments of (1) bye-laws 34(2) and 63(2), (3) and (4) regarding the voting and transfer of share restrictions, (2) bye-laws 63(1) and 130 regarding the Global Crossing board of directors' authority to establish a record date for shareholders entitled to vote at annual and special meetings of shareholders and (3) bye-law 148 regarding minimum voting requirements for bye-law amendments, which in each case require the affirmative vote of at least 75% of all outstanding shares of Global Crossing common stock to be approved. Some of the proposed bye-law amendments, if approved, will become effective only if and when the merger is complete. Shareholders who beneficially own shares of Global Crossing common stock representing over a majority of the voting power of Global Crossing after giving effect to the voting limitations of large shareholders entered into a voting agreement with Frontier on March 16, 1999 which was reaffirmed on May 16, 1999. In addition, U S WEST entered into a voting agreement with Global Crossing with respect to shares it acquired in the tender offer. Under the voting agreements, these shareholders have agreed to vote in favor of both the proposal to increase the authorized share capital of Global Crossing and the proposal to issue shares of Global Crossing common stock in the merger. As a result, the vote of these shareholders will be sufficient to approve these two proposals without any further vote by any other Global Crossing shareholder. See "Related Agreements--Voting agreement." As of July 29, 1999, directors and executive officers of Global Crossing were entitled to vote approximately 68.43% of the outstanding votes entitled to be cast by Global Crossing shareholders at the annual meeting after giving effect to the voting limitations of large shareholders. Each director and executive officer of Global Crossing has indicated that he or she intends to vote his or her shares of common stock for the proposal to increase Global Crossing's authorized share capital and for the proposal to issue shares of Global Crossing common stock in the merger. How shares will be voted at the annual meeting Shares of Global Crossing common stock represented by a proxy properly executed and received before the vote at the Global Crossing annual meeting will be voted at the meeting 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 1999 annual meeting to Global Crossing shareholders and (2) in the discretion of the authorized proxies with respect to any other business that may properly come before the annual meeting or any adjournment or postponement of the meeting. Abstentions and shares held by brokers and represented at the annual meeting without specific instructions by shareholders on how to vote those shares will not be voted and will have the effect of a vote against the merger-related proposals and the other proposals to be voted on at the annual meeting. To be valid, proxy cards must be received at the offices of Global Crossing's transfer agent, First Chicago Trust Company of New York, by September 21, 1999. As an alternative to appointing a proxy, a Global Crossing 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 Global Crossing's principal executive offices not later than one hour before the time fixed for the beginning of the 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. 34
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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 Global Crossing's 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 meeting. You may not revoke your proxy by merely attending the Global Crossing annual meeting. The Global Crossing board of directors is not currently aware of any business that will be brought before the annual meeting other than the proposals described in the notice of the 1999 annual meeting to Global Crossing shareholders. If, however, other matters are properly brought before the Global Crossing annual 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 Global Crossing will bear the costs of soliciting proxies from the holders of Global Crossing common stock. Proxies will initially be solicited by Global Crossing by mail, but directors, officers and selected other employees of Global Crossing may also solicit proxies by personal interview, telephone, telegraph 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 has retained MacKenzie Partners, Inc. to aid in the solicitation of proxies. MacKenzie Partners will receive customary fees and expense reimbursement for its services. Global Crossing's transfer agent, First Chicago Trust Company of New York, has agreed to assist Global Crossing in connection with the tabulation of proxies. 1998 audited financial statements Under the Global Crossing bye-laws and Bermuda law, audited financial statements must be presented to shareholders at an annual meeting. To fulfill this requirement, Global Crossing will present at the annual meeting audited consolidated financial statements for the fiscal year 1998. Global Crossing has included copies of those financial statements in this document. Representatives of Arthur Andersen & Co., Global Crossing's independent auditors, will be present at the annual meeting and available to respond to appropriate questions. These representatives will have the opportunity to make a statement at the annual meeting if they desire to do so. 35
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The Frontier Special Meeting General We are furnishing this document to holders of Frontier common stock for use at a special meeting of Frontier shareholders and any adjournments or postponements of the meeting. Date, time and place We will hold a special meeting of Frontier shareholders on September 23, 1999, at 10:30 a.m., local time, at the Crowne Plaza of Rochester, 70 State Street, Rochester, New York, subject to any adjournments or postponements thereof. Matter to be considered at the special meeting At the Frontier special meeting, Frontier shareholders will be asked to consider and vote on a proposal to adopt the merger agreement. You are urged to read the copy of the merger agreement attached to this document as Annex A. Representatives of PricewaterhouseCoopers LLP, Frontier's independent auditors, are expected to be present at the Frontier special meeting and available to respond to appropriate questions. These representatives will be given the opportunity to make a statement at the Frontier special meeting if they desire to do so. Record date Only holders of record of Frontier common stock at the close of business on July 29, 1999 will be entitled to receive notice of and to vote at the Frontier special meeting. As of the Frontier record date, there were 173,523,037 outstanding shares of Frontier common stock. Vote required The affirmative vote by holders of two-thirds of the outstanding shares of Frontier common stock is required in order to adopt the merger agreement. Therefore, if you fail to submit a proxy or vote electronically or if you abstain from voting, it will have the effect of a vote against the adoption of the merger agreement. Each share of Frontier common stock is entitled to one vote. Holders of a majority of the shares entitled to vote at the Frontier special meeting, present in person or by proxy, will constitute a quorum for the transaction of business at the Frontier special meeting. As of July 29, 1999, Frontier's current directors and executive officers beneficially owned a total of approximately 3,026,000 shares of Frontier common stock, or approximately 1.7% of the issued and outstanding shares of Frontier common stock on that date. The shareholders present at the Frontier special meeting, in person or by proxy, may by a majority vote adjourn the meeting despite the absence of a quorum. In the event of an absence of a quorum, Frontier expects that the meeting will be adjourned or postponed to solicit additional proxies. How shares will be voted at the special meeting All shares of Frontier common stock represented by properly executed proxies received before or at the Frontier special meeting, and not revoked, will be voted as specified in the proxies. Properly executed proxies that do not contain voting instructions will be voted FOR the adoption of the merger agreement. Frontier will count a properly executed proxy marked "ABSTAIN" as present for purposes of determining whether there is a quorum at the Frontier special meeting. Abstentions, however, will have the same effect as a vote against the adoption of the merger agreement. 36
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Under New York Stock Exchange rules, your broker cannot vote your shares of Frontier common stock without specific instructions from you. Unless you follow the directions your broker provides to you regarding how to instruct your broker to vote your shares, your shares will not be voted and will have the effect of a vote against the adoption of the merger agreement. The Frontier board of directors is not currently aware of any other business to be brought before the Frontier special meeting. If, however, other matters are properly brought before the Frontier special meeting or any adjournment or postponement of the meeting, the people appointed as proxies will have discretionary authority to vote the shares represented by duly executed proxies in accordance with their discretion and judgment. The people named as proxies by a shareholder may propose and vote for one or more adjournments of the Frontier special meeting to permit further solicitations of proxies in favor of adoption of the merger agreement; except that no proxy which is voted against the adoption of the merger agreement will be voted in favor of any adjournment. Voting at the special meeting Whether or not you plan to attend the special meeting, please take the time to vote your shares as soon as possible. Your prompt voting by telephone, electronically or by mail may save Frontier the expense of a second mailing. Each proxy which is properly completed will be voted at the special meeting. If you return a proxy by mail or vote by telephone or electronically over the Internet and do not specify your vote, your shares will be voted as recommended by the Frontier board of directors. Specifically, if your proxy does not specify a choice, your shares will be voted FOR the adoption of the merger agreement. Methods of voting All shareholders may vote by mail. Shareholders of record can also vote by telephone or electronically over the Internet. Shareholders who hold their shares through a bank or broker can vote by telephone or electronically over the Internet if that option is offered by the bank or broker. . Voting by mail. Shareholders may sign, date and mail their proxies in the postage-paid envelope provided. . Voting by telephone or Internet. Shareholders of record may vote by using the toll-free number listed on the proxy card or electronically over the Internet. Telephone and/or Internet voting is also available to shareholders who hold their shares through a Frontier Corporation benefit plan. The telephone and Internet voting procedures verify shareholders through the use of a control number that is provided on each proxy card. Both procedures allow you to vote your shares and to confirm that your shares have been properly recorded. Please see your proxy card for specific instructions. How to revoke a proxy Your grant of a proxy on the enclosed proxy card does not prevent you from voting in person or otherwise revoking your proxy. You may revoke your proxy at any time before its use by delivering to the Corporate Secretary of Frontier a signed notice of revocation or a later-dated signed proxy or by voting by telephone or Internet at a later time or by attending the Frontier special meeting and voting in person. Attendance at the Frontier special meeting will not itself constitute the revocation of a proxy. Solicitation of proxies Frontier will pay the cost of solicitation of proxies for the Frontier special meeting. In addition to solicitation by mail, Frontier will arrange for brokerage houses and other custodians, nominees and fiduciaries to send the proxy materials to beneficial owners, and Frontier will, upon request, reimburse the brokerage 37
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houses and custodians for their reasonable expenses. Frontier has retained Innisfree M&A Incorporated to aid in the solicitation of proxies and to verify some of the records related to the solicitations. Innisfree will receive customary fees, and expense reimbursement for its services. To the extent necessary in order to ensure sufficient representation at its meeting, Frontier or its representatives may request by telephone, facsimile, electronic mail or the Internet the return of proxy cards. The extent to which this will be necessary depends entirely on how promptly proxy cards are returned. We urge you to send in your proxies as soon as possible. 38
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The Merger What you will receive in the merger At the effective time of the merger, a direct wholly owned subsidiary of Global Crossing will be merged with and into Frontier. As a result of the merger, Frontier will continue as the surviving corporation of the merger and will become a wholly owned subsidiary of Global Crossing. At the effective time of the merger, each issued and outstanding share of Frontier common stock, other than shares owned or held directly or indirectly by Global Crossing or directly by Frontier, which will be canceled, will be converted into the right to receive a number of shares of Global Crossing common stock equal to the exchange ratio. The exchange ratio will be equal to the number, rounded to the nearest 1/10,000, obtained by dividing $63.00, as increased by 7% per annum, compounded daily, from and after December 31, 1999 to and including the effective time of the merger, by the average, rounded to the nearest 1/10,000, of the volume weighted averages, rounded to the nearest 1/10,000, of the trading prices of the Global Crossing common stock for 15 trading days randomly selected by lot by Frontier and Global Crossing during the 30 trading days ending on the trading day before the date that all conditions to closing have been satisfied or waived. However, the merger agreement provides that the exchange ratio will not be less than 1.1095, when the average trading price is more than $56.7813, or, except as described in the next sentence, greater than 1.8229, as increased by 7% per annum, compounded daily, from and after December 31, 1999 to and including the effective time of the merger, when the average trading price is less than $34.5625. The exchange ratio will remain 1.1095, without any increase for the 7% per annum interest factor, if the average trading price during the measurement period is more than $56.7813. Since the date of the merger agreement, the Global Crossing common stock has traded within a range from $32.94 to $64.25. The average trading price for purposes of determining the exchange ratio will be based on the trading prices of the Global Crossing common stock during the measurement period shortly before the closing, which measurement period may end after the date of the Frontier special meeting. If the average price of Global Crossing common stock during the measurement period is less than $34.5625, Frontier may, but is not required to, terminate the merger agreement unless Global Crossing elects to increase the merger consideration so that the value of the merger consideration to be received by Frontier shareholders, based on the average price during the measurement period, is equal to $63.00. Global Crossing will not issue fractional shares of Global Crossing common stock in the merger. Instead, Frontier shareholders who would otherwise have been entitled to receive a fraction of a share of Global Crossing common stock will receive cash, without interest, in an amount equal to the product of the fractional part of a share of Global Crossing common stock multiplied by the last sales price per share of the Global Crossing common stock reported on the Nasdaq National Market on the closing date. As an example, if the closing occurs on or before December 31, 1999 and you own 100 shares of Frontier common stock and assuming that the average trading price during the measurement period is $36.00, which was the closing price of the Global Crossing common stock on August 4, 1999, the exchange ratio would be 1.7500, or $63 divided by $36.00. This would translate into 175 shares of Global Crossing common stock. Using this same trading price, if the closing occurs on March 31, 2000, the exchange ratio would be 1.7807, or $64.1060 divided by $36.00. $64.1060 is equal to $63.00 plus the 7% per annum interest factor compounded daily from January 1, 2000 through March 31, 2000. In this case, you would receive 178 shares of Global Crossing common stock. In the event of fractional shares, you would receive a check for an amount equal to the fractional share multiplied by the last sales price of Global Crossing common stock on the closing date. 39
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Background of the merger In light of the rapid changes in the telecommunications and Internet industries, including industry consolidation and globalization, it had become a regular practice of the Frontier board of directors to review periodically with senior management Frontier's position relative to its traditional peers and new entrants in the industry, changes in the competitive landscape and technology as well as the strategic alternatives available to Frontier in order for it to remain competitive and enhance shareholder value. In connection with this ongoing review of its long-term strategic plans, Frontier had been considering a wide range of strategic options, including internal growth through the buildout and aggressive marketing of its existing network to existing and emerging telecommunications and information service providers, growth through various strategic alliances, acquisitions or combinations and potential corporate restructuring transactions. In furtherance of these objectives, from time to time Frontier has had contact with various parties to explore on a preliminary basis several of these alternatives, including some discussions with one or more parties during the time periods described below. In October of 1998, at a Morgan Stanley investors' conference, Barry Porter, a Senior Vice President of Global Crossing, suggested to Rolla Huff, then Chief Financial Officer of Frontier, that Frontier and Global Crossing consider the possibility of engaging in strategic partnerships. A few weeks later, Thomas Casey, a Vice Chairman of Global Crossing, contacted Joseph Clayton, Chief Executive Officer of Frontier, and requested a meeting to discuss a number of potential mutually beneficial business arrangements, including purchases or swaps of capacity, other commercial arms'-length business transactions and the possibility of a strategic transaction involving the two companies. On November 17, 1998, Mr. Casey met with Mr. Huff, Jonathan Horowitch, Vice President-Corporate Development of Frontier, and R. Charles Mancini, Vice President-Network Financial Management of Frontier. At the meeting, the representatives of each company discussed generally their respective businesses and various potential strategic business arrangements that might benefit both Frontier and Global Crossing. In addition, Mr. Casey raised the possibility of a "merger of equals" business combination transaction involving a share-for- share exchange of Frontier shares for Global Crossing shares following which either Frontier shareholders or Global Crossing shareholders would own a majority of the resulting company, based on the respective capitalizations of the two companies at that time. At its regularly scheduled executive committee meeting on November 23, 1998, the executive committee of the Frontier board of directors was briefed on recent discussions with various entities, including Global Crossing, regarding potential strategic transactions. During the next few weeks, there were various meetings and discussions among representatives of Global Crossing, Frontier, Merrill Lynch, one of Global Crossing's financial advisors, and Morgan Stanley & Co. Incorporated, Frontier's financial advisor, regarding possible transaction structures and the strategic objectives that could be achieved through such a transaction. At a meeting held on November 30, 1998, Mr. Casey indicated that Global Crossing was contemplating a transaction based upon one of two alternative structures, the first involving consideration consisting of a combination of cash and Global Crossing common stock, subject to a collar, and shares of Frontier's local exchange company following a split-off of that company, and the other proposal involving cash and Global Crossing common stock, subject to a collar. The collar mechanism would provide for a range of exchange ratios, subject to a maximum ratio and a minimum ratio, at which one share of Frontier common stock would be exchanged for shares of Global Crossing common stock. The collar would enable the value of the shares of Global Crossing common stock to remain fixed so long as the average trading price of the Global Crossing common stock during a period of time shortly before the closing remained within the endpoints of the collar. Mr. Huff indicated that Frontier would need to better understand the structure of Global Crossing's financing of any transaction involving cash and that, in any such transaction, Frontier would not bear the risk of that financing not being obtained. On December 5, 1998, Global Crossing engaged Salomon Smith Barney as its financial advisor in addition to Merrill Lynch. 40
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On December 8, 1998, Global Crossing and Frontier executed a confidentiality agreement, effective as of November 30, 1998, covering the exchange of nonpublic information between the companies for the purpose of evaluating a potential strategic combination. On December 15, 1998, at a regularly scheduled meeting of the Frontier board of directors, Mr. Huff, in connection with updating the Frontier board of directors on the progress with respect to the various strategic alternatives discussed at an earlier meeting in October and at the November executive committee meeting, briefly reviewed the discussions with Global Crossing and other entities to date. On December 18, 1998, representatives of Global Crossing and its financial advisors discussed its financing plans with Frontier and its representatives. On December 30, 1998, representatives of Global Crossing and its financial advisors met with representatives of Frontier and its financial advisor to discuss Global Crossing's business plan and to hold further discussions regarding the respective valuations of Global Crossing and Frontier and the appropriate mechanisms to protect the value of the consideration to be received by Frontier shareholders. Representatives of Global Crossing and Frontier and their respective financial advisors again met on January 11, 1999 to discuss a potential combination of the two companies and the potential valuation of Frontier. At the end of the meeting, the parties determined that there was a difference in views as to the appropriate value to be placed on the stock of Frontier and discussions with respect to a business combination transaction were terminated with no expectation that they would be resumed in the immediate future. Frontier subsequently focused on the pursuit of other strategic alternatives designed to enhance shareholder value, including those described below. On January 25, 1999, at its regularly scheduled meeting, the Frontier board of directors was updated on the status of the prior discussions with Global Crossing. Representatives of Morgan Stanley gave a presentation on Global Crossing, including a discussion of Global Crossing's business, strategy and financial results, the strategic rationale for a transaction between Global Crossing and Frontier, an analysis of Frontier's current position and a review of other potential strategic and capitalization alternatives, including a possible spin-off transaction. At the meeting, presentations were also made regarding a change in Frontier's dividend policy. After discussion and consideration, the Frontier board of directors decided to adopt a reduction in the dividend to be paid on the Frontier common shares effective with the next quarterly dividend to be declared and it determined to continue studying the possibility of a spin-off. Although discussions regarding a business combination between Global Crossing and Frontier had broken off, Frontier and Global Crossing continued to discuss other mutually beneficial business arrangements, including shared capacity and network swaps. In mid-February 1999, during a meeting to discuss these arrangements, the possibility of a business combination was again discussed. Mr. Huff suggested that Frontier might be willing to resume discussions if Global Crossing provided increased value to Frontier shareholders and offered appropriate collar protection. On March 2, 1999, Mr. Casey telephoned Mr. Clayton to arrange a meeting to discuss a potential business combination. On March 3, 1999, Messrs. Clayton and Huff met with Robert Annunziata, the Chief Executive Officer of Global Crossing, and Mr. Casey. At the meeting, the parties renewed discussions regarding potential transaction structures and valuations based on the current price of Global Crossing common stock, which at the close of trading on the day of the meeting was $31.5625 (adjusted for the March 9 stock split). At the meeting, the parties agreed that any transaction would be structured to provide consideration to Frontier shareholders based on a fixed value of Global Crossing shares, with the value of the consideration to be protected through a collar mechanism. Following the meeting, Messrs. Clayton and Huff telephoned the members of the executive committee of the Frontier board of directors to report on these discussions. Frontier also contacted, and authorized Morgan Stanley to contact, other potential acquirors, none of whom made a proposal to acquire Frontier. By March 8, 1999, Global Crossing's stock price had increased to $37.50 (adjusted for the March 9 stock split). During the week of March 8th, Mr. Huff called Mr. Casey to discuss the recent increases in Global Crossing's stock price. Mr. Huff informed Mr. Casey that, as a result of the increase in Global Crossing's stock price, the level of value and the structure of the value assurance protection that the parties had been discussing 41
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were no longer appropriate. Accordingly, before any transaction could be agreed upon, Global Crossing would have to reconsider the levels of value being discussed to increase the consideration to be paid to Frontier shareholders to take into account the increase in Global Crossing stock price. Also, Global Crossing would need to consider adjusting the collar mechanism so that the increase in price did not eliminate the protection against a decline in Global Crossing stock price that had previously been discussed and so that Frontier shareholders would still have an opportunity to share in future increases in Global Crossing's stock price. The parties agreed to continue conducting due diligence and defer further discussions of the pricing issues until near the end of the contract negotiations. Also during the week of March 8th, representatives of Global Crossing and Frontier and their respective legal and financial advisors conducted due diligence on each other, including tax due diligence to determine the feasibility of Global Crossing completing a tax-free reorganization. In the beginning of that week, Skadden, Arps, Slate, Meagher & Flom LLP, Global Crossing's legal advisor, also delivered a draft merger agreement to Frontier and Simpson Thacher & Bartlett, Frontier's legal advisor. During the remainder of that week, there were numerous meetings and telephone calls between senior management of both parties and their respective legal and financial advisors to negotiate the terms of the merger agreement and the related agreements. On March 12, 1999, when the price of Global Crossing's common stock was $49.375, representatives of Global Crossing suggested that Global Crossing at that time would be prepared to offer, subject to board approval, completion of due diligence and the negotiation of satisfactory definitive agreements, shares of Global Crossing common stock valued at $62.00, based on the average trading prices for the Global Crossing common stock during a period shortly before the merger, for each share of Frontier common stock, with a 30% downside collar and a 15% upside collar, all based on the Global Crossing closing price of $49.375 on that date. As a result, Frontier shareholders would receive $62.00 per share, based on that average trading price, so long as Global Crossing's average trading price was between $34.5625 and $56.7813. In addition, Frontier would have the right, but not the obligation, to terminate the merger agreement if the Global Crossing average trading price during the applicable measurement period was below $34.5625, unless Global Crossing agreed to provide additional consideration to ensure that Frontier shareholders would receive $62.00 in value in the merger, based on the average trading price. Frontier shareholders would also be able to participate in an increase in Global Crossing's stock price above $56.7813. On March 13th and 14th, Messrs. Clayton and Huff contacted each member of the Frontier board of directors to update him or her on the discussions that had taken place during the past two weeks. Also on those dates, representatives of Frontier and Global Crossing and their legal counsel continued to negotiate the terms of a definitive merger agreement and the related agreements and continued due diligence. On March 15, 1999, the Frontier board held a meeting to review the terms of the proposed merger. At the beginning of the meeting, Simpson Thacher & Bartlett advised the Frontier board regarding its fiduciary duties with respect to any potential transaction involving Global Crossing. Senior management of Frontier updated the Frontier board on the negotiations that had taken place during the last two days. The Frontier board of directors was also informed of the status of contacts with other potential acquirors as to any interest in a potential business combination with Frontier and it discussed its other strategic alternatives, including the alternative of engaging in no transaction. Representatives of Simpson Thacher & Bartlett reviewed the terms of the proposed merger agreement, stock option agreement and voting agreement. Representatives of Morgan Stanley reviewed in detail with the Frontier board of directors their financial and valuation analyses of the Global Crossing proposal as well as provided a brief summary of certain of the restructuring options. The Frontier board also discussed the break-up fee requested by Global Crossing as well as the stock option and, after discussions with senior management and its advisors, concluded that those deal protections would not meaningfully impair the possibility of a superior alternative transaction. After further discussion, the Frontier board authorized senior management to pursue discussions to finalize a definitive merger agreement and stock option agreement with Global Crossing. On March 16, 1999, the Global Crossing board of directors met to consider the terms and conditions of a proposed merger with Frontier. At the meeting, Skadden, Arps, Slate, Meagher & Flom LLP and Appleby 42
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Spurling & Kempe advised the Global Crossing board of directors regarding its fiduciary duties with respect to any potential merger transaction involving Frontier. Several presentations were then made by Global Crossing senior management regarding, among other things, an overview of Frontier, strategy for the combined company and the results of due diligence. Representatives of management and Skadden, Arps, Slate, Meagher & Flom LLP reviewed the terms of the proposed merger agreement, the stock option agreement and the voting agreement. The board of directors also discussed the deal protection benefits provided by the break-up fee and the stock option agreement. Representatives of Merrill Lynch and Salomon Smith Barney reviewed in detail their financial and valuation analyses of the merger proposal and rendered their respective opinions that the original exchange ratio was fair from a financial point of view to Global Crossing. After further discussion and consideration, the Global Crossing board of directors unanimously determined that the merger was fair to Global Crossing and approved the merger agreement, the stock option agreement and the voting agreement and the transactions contemplated by the merger agreement, the stock option agreement and the voting agreement, including the increase in authorized share capital and the issuance of shares of Global Crossing common stock in the merger. On March 16, 1999, the Frontier board of directors met to continue its consideration of the Global Crossing proposal. The Frontier board was updated on the discussions held since the previous day and on a few changes to the terms of the merger agreement. In addition, Morgan Stanley gave a presentation that provided additional analysis of the Global Crossing proposal and rendered its opinion as to the fairness from a financial point of view of the original exchange ratio to Frontier shareholders. Following discussion among the board members, Messrs. Annunziata and Casey joined the meeting to elaborate on Global Crossing's strategy and rationale for the transaction and to answer questions raised by the directors. After Messrs. Annunziata and Casey departed and following further discussion and consideration, the Frontier board of directors unanimously determined that the merger was fair to and in the best interests of Frontier and its shareholders and adopted the merger agreement and approved the merger and the stock option agreement and the transactions contemplated by the merger agreement and the stock option agreement. Following the Frontier board meeting, the merger agreement, the stock option agreement and the voting agreement were executed. The parties issued a joint press release announcing the proposed merger before the opening of business on March 17, 1999. During late April, representatives of Global Crossing disclosed to representatives of Frontier that Global Crossing was holding preliminary discussions with U S WEST regarding a possible business combination. At the beginning of the week of May 10, 1999, representatives of Global Crossing contacted representatives of Frontier to inform them of a proposed transaction between Global Crossing and U S WEST and to request Frontier's consent to the transaction pursuant to specified provisions of the merger agreement. Throughout the remainder of that week, representatives of Global Crossing and its legal and financial advisors held various meetings with representatives of Frontier and its legal and financial advisors to discuss the terms of the proposed transaction and the impact of that transaction on the pending merger with Frontier. After discussion and negotiation, Global Crossing and Frontier agreed to specified amendments to the merger agreement, including, among other things, an increase in the fixed value per share consideration to be received by Frontier shareholders in the merger to $63.00 so long as the cash tender offer to be made by U S WEST to purchase Global Crossing shares was completed and an increase in the value of the consideration by a 7% per annum interest factor if the Frontier merger did not close by December 31, 1999 and the average trading price of the Global Crossing common stock during the measurement period was not greater than $56.7813. On May 16, 1999, the Frontier board of directors had a telephonic meeting to consider whether to consent to the Global Crossing--U S WEST transaction. At that meeting, management of Frontier described the structure of the transaction with U S WEST and the potential impact on the merger with Frontier, representatives of Simpson Thacher & Bartlett described the proposed amendments to the terms of the Frontier merger agreement and representatives of Global Crossing and its legal and financial advisors provided additional information and answered questions regarding the proposed U S WEST transaction. Representatives of Salomon Smith Barney, Global Crossing's financial advisor, gave a presentation regarding financial aspects 43
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of the proposed U S WEST merger that they planned to make to the Global Crossing board of directors and informed the Frontier board of directors that Salomon Smith Barney would be rendering an opinion to the Global Crossing board of directors as to the fairness from a financial point of view of the consideration to be received by Global Crossing shareholders in the U S WEST merger. Representatives of Morgan Stanley also gave a presentation with respect to the U S WEST merger and the amended terms of the Global Crossing-- Frontier merger agreement and rendered its opinion as to the fairness from a financial point of view of the revised exchange ratio to the Frontier shareholders. Following additional discussion, the board of directors of Frontier determined by the unanimous vote of all directors present that Frontier should consent to Global Crossing entering into the merger agreement with U S WEST and approved the amendment to the merger agreement. On May 16, 1999, the Global Crossing board of directors met to consider, among other things, the terms and conditions of the proposed merger with U S WEST and the terms and conditions of the amendment to the merger agreement. Global Crossing's financial and legal advisors attended the meeting. Senior management of Global Crossing and representatives of Skadden Arps reviewed with the board of directors of Global Crossing the terms and conditions of the amendment to the merger agreement, as well as various matters relating to the proposed merger with U S WEST, and reviewed related legal considerations. Salomon Smith Barney addressed various financial aspects of the proposed U S WEST merger. In addition, Salomon Smith Barney orally rendered its opinion that, as of May 16, 1999, the revised exchange ratio, as set forth in the amendment to the merger agreement, was fair from a financial point of view to Global Crossing. Extensive discussion followed relating to the financial and legal aspects of the amendment to the merger agreement and the U S WEST transaction. After discussion, Global Crossing's board of directors unanimously approved the amendment to the merger agreement, as well as the merger with U S WEST and the various definitive agreements related to that merger. Before the opening of business on May 17, 1999, the parties executed the amendment to the merger agreement and Global Crossing and U S WEST entered into a merger agreement and related agreements. On June 13, 1999, Frontier received an unsolicited acquisition proposal from Qwest Communications International Inc. to acquire all of the common stock of Frontier. Qwest offered to pay $20 in cash and issue 1.181 shares of Qwest common stock for each share of Frontier common stock. On June 13, Qwest also announced a proposal to acquire all of the outstanding stock of U S WEST. In Qwest's June 13 proposal to Frontier, Qwest stated that it would increase the consideration payable for Frontier common stock to $20 in cash and 1.226 shares of Qwest common stock if U S WEST accepted Qwest's proposal. However, Qwest also stated that it would offer to enter into an agreement to acquire Frontier whether or not Qwest concluded its transaction with U S WEST. On June 17, 1999, Frontier issued a press release announcing that its board of directors had reviewed the unsolicited acquisition offer made by Qwest and had determined to take no action with respect to the offer at that time. Frontier's board of directors directed Frontier's management to monitor events relating to the Qwest proposal. On June 23, 1999, Qwest submitted a revised acquisition proposal to Frontier. Qwest offered to deliver cash and Qwest common stock having a value of $68 for each share of Frontier common stock consisting of $20 in cash and the balance in Qwest common stock. Qwest's revised offer included a "collar" on the price of Qwest common stock between $30.50 and $43.50. Qwest stated that it would protect the Frontier shareholders' value by paying more cash or issuing additional shares of Qwest common stock, at Qwest's option, to offset any decline in Qwest's stock price down to $30.50 per share. On June 23, 1999, Qwest also delivered a revised offer to U S WEST pursuant to which it increased the price of its offer and added a collar mechanism. On June 30, 1999, Frontier announced that in view of all currently available information and in consultation with its advisors, the Frontier board of directors had determined that the revised Qwest proposal 44
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"could reasonably be expected to constitute a superior proposal" for Frontier shareholders within the meaning of the Global Crossing merger agreement. The Frontier board of directors further determined that, consistent with its fiduciary obligations, it was appropriate to more fully inform itself in order to best serve Frontier's shareholders. Frontier's board of directors directed Frontier's management and advisors to meet with Qwest and explore the proposal and also to explore Global Crossing's position with respect to the revised Qwest proposal. On July 2, 1999, Frontier entered into a confidentiality agreement with Qwest. Over the next two weeks, Frontier and its financial and legal advisors had a number of meetings and conversations with Qwest and its financial and legal advisors to discuss the Qwest proposal. In addition, during this period representatives of Global Crossing and Qwest held discussions that included, among other things, the possibility that Qwest would terminate its acquisition proposal for Frontier upon execution by Qwest of a definitive merger agreement with U S WEST. On July 18, 1999, Global Crossing and Qwest entered into an agreement under which Global Crossing agreed to terminate its merger agreement with U S WEST, while Qwest agreed to cease all further discussions and actions in connection with its proposal to acquire Frontier. Also under this agreement, Qwest agreed to purchase capacity on the Global Crossing network at established market rate prices for delivery over the next four years and committed to make purchase price payments to Global Crossing for this capacity of $140 million over the next two years. Also on July 18, 1999, Global Crossing and U S WEST entered into an agreement to terminate the Global Crossing--U S WEST merger agreement. Under this agreement, U S WEST paid Global Crossing $140 million in cash and returned to Global Crossing 2,231,076 shares of Global Crossing common stock that U S WEST had acquired for a total of $140 million in its tender offer for Global Crossing common stock on June 18, 1999. U S WEST, however, remained bound by its agreement to vote the remaining shares of Global Crossing common stock it purchased in the tender offer in favor of the proposals relating to the Global Crossing--Frontier merger. U S WEST also agreed to give up the right it otherwise would have had upon termination of the Global Crossing--U S WEST merger agreement to appoint one member to the Global Crossing board of directors. Recommendation of the Global Crossing board of directors; Reasons for the merger The Global Crossing board of directors has unanimously determined that the merger and the share issuance in the merger are in the best interests of Global Crossing and its shareholders and has approved the merger agreement. The Global Crossing board of directors unanimously recommends that shareholders of Global Crossing vote FOR the increase in the authorized share capital and the share issuance at the Global Crossing annual meeting. The Global Crossing board of directors believes that the combined company following the merger would have the potential to realize long-term enhanced operating and financial results and a stronger competitive position. Specifically, the Global Crossing board of directors believes that the following represent benefits to be realized because of the merger and reasons for shareholders of Global Crossing to vote FOR approval of the proposals to increase the authorized share capital and issue the shares of Global Crossing common stock in the merger: 1. combining with Frontier will accelerate Global Crossing's global strategy by integrating Frontier's United States terrestrial fiber optic capacity with Global Crossing's worldwide undersea and terrestrial fiber optic network, creating a seamless global network of telecommunications facilities and services, 2. given the complementary nature of Global Crossing's and Frontier's businesses, the merger will expand Global Crossing's global customer base and create new revenue sources, 3. Global Crossing will be able to leverage its bandwidth capabilities to enter into Internet-related businesses and to offer national asynchronous transfer mode services, 45
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4. Global Crossing's shareholders will have the opportunity to participate in the potential for diversified and enhanced growth after the merger, 5. Frontier's network infrastructure and computer support systems and associated business processes will promote rapid deployment of an integrated voice and data network that will cover North America as well as the broader global market, 6. Global Crossing will avoid having to incur large build-out costs for United States terrestrial infrastructure, 7. the technical and marketing knowledge of Frontier's management and employees will permit Global Crossing to participate in the North American market immediately and aggressively, 8. the combined company will avoid the need to duplicate sales, marketing and administrative functions, and 9. the increased scale of activities in the combined company's long- distance and international operations will result in opportunities to reduce costs through greater purchasing power and the adoption of best practices in cost containment related to the transport of communications and information over long distance. In the course of deliberations, the Global Crossing board of directors reviewed with Global Crossing management and outside advisors a number of additional factors relevant to the merger, including: 1. historical information concerning Global Crossing's and Frontier's respective businesses, financial performance and condition, operations, technology, management and competitive position, 2. Global Crossing's view as to the financial condition, results of operations and businesses of Global Crossing and Frontier before and after giving effect to the merger based on management due diligence and publicly available information, 3. reports from management and legal advisors as to the results of their due diligence investigation of Frontier, 4. current financial market conditions and historical market prices and trading information with respect to Global Crossing common stock and Frontier common stock, 5. the consideration to be offered by Global Crossing in the merger and an analysis of the market value of the Global Crossing common stock to be issued in exchange for each share of Frontier common stock in light of comparable merger transactions, and 6. detailed financial analyses and pro forma and other information with respect to the companies presented by Merrill Lynch and Salomon Smith Barney in a board presentation, including Merrill Lynch's and Salomon Smith Barney's respective opinions that the original exchange ratio was fair, as of March 16, 1999, the date of their opinions, to Global Crossing from a financial point of view and Salomon Smith Barney's opinion that the revised exchange ratio was fair, as of May 16, 1999, to Global Crossing from a financial point of view. The Global Crossing board of directors also considered the terms of the merger agreement, the stock option agreement and the voting agreement. In addition, the Global Crossing board of directors noted that the merger is expected to be a tax-free transaction and accounted for as a purchase. The Global Crossing board of directors believed that these factors supported the board's recommendations of the merger when viewed together with the risks and potential benefits of the merger. The Global Crossing board of directors also identified and considered a variety of potentially negative factors in its deliberations concerning the merger, including, but not limited to: 1. the substantial charges to be incurred in connection with the merger, including costs of integrating the businesses and transaction expenses arising from the merger, 46
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2. the risk that the integration of the two companies' respective operations and employees might not occur in a timely manner, 3. the risk that, despite the efforts of the combined company, key technical and management personnel might not remain employed by the combined company, 4. the risk that the potential benefits sought in the merger might not be fully realized, 5. the risk that potential growth strategies might not be fully achieved, and 6. the other risks described under "Risk Factors" beginning on page 23 of this document. The Global Crossing board of directors believed that these risks were outweighed by the potential benefits of the merger. The foregoing discussion is not an exhaustive list of all factors considered by the Global Crossing board of directors. Each member of the Global Crossing board of directors may have considered different factors, and the Global Crossing board of directors evaluated these factors as a whole and did not quantify or otherwise assign relative weights to factors considered. The determination of the Global Crossing board of directors involved judgments with respect to, among other things, future economic, competitive, regulatory and financial market conditions and future business decisions which may not be realized and are inherently subject to significant business, economic, competitive and regulatory uncertainties, all of which are difficult to predict and many of which are beyond the control of Global Crossing and will be beyond the control of Global Crossing after the merger. In deciding whether or not to approve the merger, shareholders of Global Crossing should not put undue reliance upon this information. This section contains "forward looking statements." See "Cautionary Statement Regarding Forward-Looking Statements" on page 31 and "Risk Factors" on page 23. Opinions of Global Crossing's financial advisors On March 16, 1999, Salomon Smith Barney and Merrill Lynch delivered their oral opinions, subsequently confirmed in writing, to the Global Crossing board of directors to the effect that, as of that date, and based upon the assumptions made and matters considered as set forth in their opinions, the original exchange ratio was fair from a financial point of view to Global Crossing. On May 16, 1999, Salomon Smith Barney delivered its oral opinion, subsequently confirmed in writing, to the Global Crossing board of directors to the effect that, as of that date, the revised exchange ratio was fair from a financial point of view to Global Crossing. Merrill Lynch was not requested to deliver and did not deliver an opinion regarding the revised exchange ratio because it represented U S WEST in the negotiations of the proposed Global Crossing--U S WEST merger. Opinions of Salomon Smith Barney We have attached as Annexes D-1 and D-2 to this document a copy of the written opinions of Salomon Smith Barney. Global Crossing shareholders are urged to read carefully Salomon Smith Barney's opinions in their entirety. In connection with rendering its opinions, Salomon Smith Barney reviewed publicly available information concerning Global Crossing and Frontier and other financial information concerning Global Crossing and Frontier, including financial forecasts and estimated cost savings and synergies resulting from the merger, that Global Crossing and Frontier provided to Salomon Smith Barney. Salomon Smith Barney discussed the past and current business operations, financial condition and prospects of Global Crossing and Frontier with certain officers and employees of Global Crossing and Frontier. Salomon Smith Barney also considered other information, financial studies, analyses, investigations and financial, economic and market criteria that it deemed relevant. 47
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In its review and analysis and in arriving at its opinions, Salomon Smith Barney assumed and relied upon the accuracy and completeness of the information it reviewed, and Salomon Smith Barney did not assume any responsibility for independent verification of the information. Salomon Smith Barney assumed the financial forecasts of Global Crossing and Frontier were reasonably prepared on bases reflecting the best currently available estimates and judgments of the managements of Global Crossing and Frontier. Salomon Smith Barney expressed no opinion with respect to these forecasts or the assumptions on which they were based. Salomon Smith Barney also assumed that the merger will be consummated according to the terms of the merger agreement. Salomon Smith Barney did not make or obtain, or assume any responsibility for making or obtaining, any independent evaluation or appraisal of any of the assets or liabilities of Global Crossing or Frontier. Salomon Smith Barney's opinions are necessarily based upon conditions as they existed and could be evaluated on the respective dates of the opinions. Salomon Smith Barney's opinions do not imply any conclusion as to the likely trading range for Global Crossing common stock following the completion of the merger, which may vary depending upon, among other factors, changes in interest rates, dividend rates, market conditions, general economic conditions and other factors that generally influence the price of securities. Salomon Smith Barney's opinions do not address Global Crossing's underlying business decision to effect the merger. Salomon Smith Barney expressed no view on the effect on Global Crossing of the merger and related transactions. Further, Salomon Smith Barney's opinions are directed only to the fairness, from a financial point of view, of the original exchange ratio and the revised exchange ratio, respectively to Global Crossing and are not a recommendation concerning how the holders of Global Crossing common stock should vote on the proposed issuance of shares of Global Crossing common stock in the merger or any related matter. In an engagement letter dated December 5, 1998, Global Crossing agreed to pay to Salomon Smith Barney: (a) a fee of $250,000, which was payable on the date of execution of the engagement letter; (b) a fee of $4,000,000, which was payable on the date of execution of an agreement in principle or definitive agreement to merge Global Crossing and Frontier; and (c) an additional fee of $20,000,000, which is payable at the closing if the merger is completed, minus the $4,250,000 previously received. Global Crossing also agreed to reimburse Salomon Smith Barney for all reasonable fees and disbursements of Salomon Smith Barney's counsel and all of Salomon Smith Barney's reasonable travel and other out-of-pocket expenses incurred in connection with the merger, or otherwise from Salomon Smith Barney's engagement. Global Crossing further agreed to indemnify Salomon Smith Barney and certain related persons against various liabilities, including liabilities under the federal securities laws, relating to or arising out of its engagement. In the past, Salomon Smith Barney has rendered investment banking and financial advisory services to Global Crossing and Frontier for which Salomon Smith Barney received customary compensation. In addition, in the ordinary course of its business, Salomon Smith Barney and its affiliates may actively trade the securities of Global Crossing and Frontier for its own account and the accounts of its customers and, accordingly, may at any time hold a long or short position in their securities. Salomon Smith Barney and its affiliates may have other business relationships with Global Crossing and Frontier and their respective affiliates. Opinion of Merrill Lynch We have attached as Annex E to this document a copy of the Merrill Lynch opinion dated March 16, 1999 with respect to the original exchange ratio, which sets forth the assumptions made, matters considered and certain limitations on the scope of review undertaken by Merrill Lynch. Each holder of common stock is urged to read the Merrill Lynch opinion in its entirety. The opinion was intended for the use and benefit of the Global Crossing board of directors, was directed only to the fairness from a financial point of view to Global Crossing of the original exchange ratio, did not address the merits of the underlying decision by Global Crossing to engage in the merger and does not constitute a recommendation to any shareholder as to how that shareholder should vote on the proposed issuance of Global Crossing common stock or any related matter. The exchange ratio was determined on the basis of negotiations between Global Crossing and Frontier and was approved by the Global Crossing board of 48
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directors. The summary of the Merrill Lynch opinion set forth in this document is qualified in its entirety by reference to the full text of the opinion attached as Annex E. The Merrill Lynch opinion dated March 16, 1999 did not address the revised exchange ratio that was subsequently agreed to under the merger agreement. Merrill Lynch was not requested to deliver and did not deliver an opinion with respect to the revised exchange ratio because it represented U S WEST in the negotiations of the proposed Global Crossing--U S WEST merger. In arriving at its opinion, Merrill Lynch, among other things: 1. reviewed certain publicly available business and financial information relating to Frontier and Global Crossing that Merrill Lynch deemed to be relevant; 2. reviewed certain information, including financial forecasts, relating to the business, earnings, cash flow, assets, liabilities and prospects of Frontier and Global Crossing, as well as the amount and timing of the cost savings and related expenses, including potential tax expenses, and synergies expected to result from the merger furnished to Merrill Lynch by Frontier and Global Crossing, respectively; 3. conducted discussions with members of senior management and representatives of Frontier and Global Crossing concerning the matters described in clauses 1 and 2 above, as well as their respective businesses and prospects before and after giving effect to the merger and the expected synergies; 4. reviewed the market prices and valuation multiples for Frontier common stock and Global Crossing common stock and compared them with those of certain publicly traded companies that Merrill Lynch deemed to be relevant; 5. reviewed the results of operations of Frontier and Global Crossing and compared them with those of certain publicly traded companies that Merrill Lynch deemed to be relevant; 6. compared the proposed financial terms of the merger with the financial terms of certain other transactions that Merrill Lynch deemed to be relevant; 7. participated in certain discussions and negotiations among representatives of Frontier and Global Crossing and their financial and legal advisors; 8. reviewed the potential pro forma impact of the merger; 9. reviewed the merger agreement; and 10. reviewed such other financial studies and analyses and took into account other matters as Merrill Lynch deemed necessary, including Merrill Lynch's assessment of general economic, market and monetary conditions. In preparing its opinion, Merrill Lynch assumed and relied on the accuracy and completeness of all information supplied or otherwise made available to Merrill Lynch, discussed with or reviewed by or for Merrill Lynch, or publicly available. Merrill Lynch did not assume any responsibility for independently verifying such information or for undertaking an independent evaluation or appraisal of any of the assets or liabilities of Frontier or Global Crossing and was not furnished with any such evaluation or appraisal. In addition, Merrill Lynch did not assume any obligation to conduct any physical inspection of the properties or facilities of Frontier or Global Crossing. With respect to the financial forecast information and the expected synergies furnished to or discussed with Merrill Lynch by Frontier or Global Crossing, Merrill Lynch assumed that they were reasonably prepared and reflected the best currently available estimates and judgment of Frontier's or Global Crossing's management as to the expected future financial performance of Frontier or Global Crossing, as the case may be. Merrill Lynch further assumed that the merger will qualify as a tax-free reorganization for U.S. federal income tax purposes. The Merrill Lynch opinion was necessarily based upon market, economic and other conditions as they existed and could be evaluated on, and on the information made available to Merrill Lynch as of, the date of 49
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the Merrill Lynch opinion. Merrill Lynch assumed that in the course of obtaining the necessary regulatory or other consents or approvals, whether contractual or otherwise, for the merger, no restrictions, including any divestiture requirements or amendments or modifications, would be imposed that would have a material adverse effect on the contemplated benefits of the merger. In connection with the preparation of its opinion, Merrill Lynch was not authorized by Global Crossing or Global Crossing's board of directors to solicit, nor did Merrill Lynch solicit, third-party indications of interest for the acquisition of all or any part of Global Crossing. In addition, Merrill Lynch expressed no opinion as to the prices at which shares of Global Crossing common stock would trade following the announcement or consummation of the merger. Pursuant to the terms of a letter agreement between Global Crossing and Merrill Lynch dated March 9, 1999, Global Crossing has agreed to pay Merrill Lynch the following fees: 1. a fee of $4,250,000 upon the execution of the merger agreement and 2. an additional fee of $20,000,000 payable upon consummation of the merger, against which the $4.25 million fee referenced above will be credited. Global Crossing has also agreed to reimburse Merrill Lynch for its reasonable out-of-pocket expenses, including the reasonable fees and disbursements of legal counsel, and to indemnify Merrill Lynch and certain related parties from and against certain liabilities, including liabilities under the federal securities laws, arising out of its engagement. Merrill Lynch has, in the past, provided financing services to Global Crossing, including serving as co-lead underwriter in connection with Global Crossing's initial public offering in August 1998, and provided financial advisory and financing services to Frontier, and may continue to do so and has received, and may receive, fees for the rendering of those services. In addition, in the ordinary course of Merrill Lynch's business, Merrill Lynch may actively trade Frontier shares and other securities of Frontier, as well as Global Crossing shares and other securities of Global Crossing, for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in these securities. As of March 16, 1999, certain affiliates of Merrill Lynch's Asset Management Group held in various funds approximately 4.3% of Frontier's common stock. Merrill Lynch also provided financial advisory services to U S WEST in connection with the proposed Global Crossing--U S WEST merger. Financial Analyses The following is a summary of the material portions of the financial and comparative analyses performed by Salomon Smith Barney and Merrill Lynch which were jointly presented to Global Crossing's board of directors in connection with the opinions delivered to Global Crossing's board of directors on March 16, 1999 with respect to the original exchange ratio. Historical Stock Price Performance. Global Crossing's financial advisors reviewed the relationship between movements of the price of Frontier's common stock and the following long distance companies' common stock for the three- year period ending March 12, 1999: 1. AT&T Corp.; 2. MCI Worldcom, Inc.; 3. Qwest Communications International Inc.; and 4. Sprint Corporation. Global Crossing's financial advisors also reviewed the relationship between movements of the price of Frontier's common stock and the following local telephone companies' common stock for the three-year period ending March 12, 1999: 1. Aliant Communications Inc.; 50
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2. ALLTEL Corporation; 3. Century Telephone Enterprises, Inc.; 4. Cincinnati Bell Inc.; 5. Commonwealth Telephone Enterprises, Inc.; and 6. Telephone & Data Systems, Inc. Global Crossing's financial advisors also reviewed the relationship between movements of the price of Frontier's common stock and the S&P 500 for the three-year period ending March 12, 1999. Global Crossing's financial advisors noted that over this three-year period Frontier's common stock underperformed all the above listed companies' common stock and the S&P 500, with the underperformance becoming more dramatic in the last half of 1998. Implied Exchange Ratios. Global Crossing's financial advisors calculated a range of implied valuations for Frontier and Global Crossing by utilizing the following three principal valuation analyses: 1. Comparable Public Company Analysis. A comparable public company analysis reviews a business' operating performance and outlook relative to a group of publicly traded peer companies to determine an implied unaffected market trading value. 2. Comparable Transaction Analysis. A comparable transaction analysis provides a valuation range based upon financial information of companies which have been acquired in selected recent transactions and which are in the same or similar industries as the business being valued. 3. Discounted Cash Flow Analysis. A discounted cash flow analysis provides insight into the intrinsic value of a business based on the projected earnings and capital requirements and the net present value of the subsequent cash flows anticipated to be generated by the assets of the business. Based on these analyses, Global Crossing's financial advisors calculated the following implied exchange ratios: Comparable Public Company Valuation. The implied exchange ratio ranged from 0.7029x to 2.0116x based upon a comparison of estimated comparable public company valuations and including estimated synergies (resulting primarily from the long distance and Internet/data services business segments). This range of implied exchange ratios was calculated by comparing the lowest estimated valuation of Frontier common stock to the highest estimated valuation of Global Crossing common stock and the highest estimated valuation of Frontier common stock to the lowest estimated valuation of Global Crossing common stock. Comparable Transaction/Discounted Cash Flow Valuation. The implied exchange ratio ranged from 0.8448x to 1.6267x based upon a comparison of Frontier's estimated comparable transaction valuation to Global Crossing's discounted cash flow valuations. This range of implied exchange ratios was calculated by comparing the lowest estimated valuation of Frontier common stock to the highest estimated valuation of Global Crossing common stock and the highest estimated valuation of Frontier common stock to the lowest estimated valuation of Global Crossing common stock. Discounted Cash Flow Valuation. The implied exchange ratio ranged from 0.9129x to 1.9427x based upon a comparison of a valuation of Frontier which combined the discounted cash flow valuation of Frontier's local and integrated services business, which is comprised of the long distance telephony business and the Internet/data services business, with the public market valuation of Frontier's cellular business and excess fiber network, to the discounted cash flow valuation of Global Crossing, and including estimated synergies (resulting primarily from the long distance and Internet/data services business segments). This range of implied exchange ratios was calculated by comparing the lowest estimated valuation of Frontier common stock to the highest estimated valuation of Global Crossing common stock and the highest estimated valuation of Frontier common stock to the lowest estimated valuation of Global Crossing common stock. 51
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In each case, the ranges of implied exchange ratios were compared to the original exchange ratio in the merger. Frontier Valuation Global Crossing's financial advisors calculated estimated aggregate equity and per share equity valuation ranges for Frontier by separately analyzing and calculating the values of Frontier's main business segments, including the following: 1. Long distance telephony; 2. Local telephony; 3. Cellular telephony; 4. Internet/data services; and 5. Excess fiber network capacity. Based upon these analyses, which included a comparable public companies analysis, a comparable transaction analysis and a discounted cash flow analysis, including estimated synergies (resulting primarily from the long distance and Internet/data services business segments), and after subtracting estimated corporate overhead costs, Global Crossing's financial advisors calculated estimated aggregate equity valuations for Frontier which corresponded to estimated per share equity valuations for Frontier ranging from $40.00 to $75.76. Frontier Long Distance Telephony Segment Using the analyses described below, Global Crossing's financial advisors calculated an estimated enterprise valuation for Frontier's long distance telephony business segment. Comparable Public Companies Analysis. Global Crossing's financial advisors reviewed publicly available information to compare financial and operating information and multiples of firm value to 1999 estimated earnings before interest, taxes, depreciation and amortization, which is referred to as EBITDA, for Frontier's long distance telephony business segment with the corresponding financial and operating information and multiples for a group of publicly traded companies that Global Crossing's financial advisors deemed to be comparable to Frontier's long distance telephony business segment. Global Crossing's financial advisors determined the relevant range of these comparable public company multiples was 9.0x to 11.0x. The companies reviewed in this analysis included the following: 1. AT&T Corp.; 2. IXC Communications, Inc.; 3. Level 3 Communications, Inc.; 4. MCI Worldcom, Inc.; 5. Qwest Communications International Inc.; 6. Sprint Corporation; and 7. Tel-Save.com, Inc. Comparable Transaction Analysis. Global Crossing's financial advisors reviewed publicly available information to compare the merger with business combinations in the long distance telephony industry that they deemed relevant. Global Crossing's financial advisors compared the transaction value, which was calculated as the offer value plus total debt plus the value of the acquiror's minority interest less cash and marketable securities, of each of these transactions to the forward EBITDA of the acquired company. Global Crossing's financial advisors determined the relevant range of these comparable transaction multiples was 11.0x to 13.0x. The transactions reviewed in this analysis included the following: 1. EXCEL Communications, Inc./Telco Communications Group, Inc.; 52
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2. Worldcom, Inc./MCI Communications Corporation; 3. Teleport Communications Group Inc./ACC Corp.; 4. Qwest Communications International Inc./LCI International, Inc.; and 5. Teleglobe Inc./EXCEL Communications, Inc. Discounted Cash Flow Analysis. Global Crossing's financial advisors performed a discounted cash flow analysis for Frontier's combined integrated services business segment, which includes the long distance telephony and Internet/data services segments, using Frontier management's projections. The discounted cash flow was calculated assuming discount rates ranging from 11.0% to 12.0% and was comprised of the sum of the present values of: 1. the projected unlevered free cash flows for the years 1999 through 2003; and 2. the 2003 terminal value based upon a range of multiples from 11.0x to 12.0x estimated 2003 EBITDA. Frontier's Local Telephony Business Segment Using the analyses described below, Global Crossing's financial advisors calculated an estimated enterprise valuation for Frontier's local telephony business segment. Comparable Public Companies Analysis. Global Crossing's financial advisors reviewed publicly available information to compare financial and operating information and multiples of firm value to 1999 estimated EBITDA for Frontier's local telephony business segment with the corresponding financial and operating information and multiples for the local telephony business segments of a group of publicly traded companies that Global Crossing's financial advisors deemed to be comparable to Frontier's local telephony business segment. Global Crossing's financial advisors determined the relevant range of these public company multiples was 9.0x to 10.0x. The companies reviewed in this analysis included the following: 1. Aliant Communications Inc.; 2. ALLTEL Corporation; 3. Ameritech Corporation; 4. Bell Atlantic Corporation; 5. BellSouth Corporation; 6. Century Telephone Enterprises, Inc.; 7. Cincinnati Bell Inc.; 8. Commonwealth Telephone Enterprises, Inc.; 9. GTE Corporation; 10. SBC Communications Inc.; 11. Telephone & Data Systems, Inc.; and 12. U S WEST, Inc. Comparable Transaction Analysis. Global Crossing's financial advisors reviewed publicly available information to compare the merger with business combinations in the local telephony industry that they deemed relevant. Global Crossing's financial advisors compared the transaction value of each of these transactions to the forward EBITDA of the acquired company. Global Crossing's financial advisors determined the relevant range of these comparable transaction multiples was 9.0x to 10.0x. These transactions included the following: 1. ALLTEL Corporation/Aliant Communications Inc.; 2. ALLTEL Corporation/GTE Corporation; 3. Ameritech Corporation/Sprint Corporation; 53
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4. Bell Atlantic Corporation/GTE Corporation; 5. Bell Atlantic Corporation/NYNEX Corporation; 6. Century Telephone Enterprises, Inc./Ameritech Corporation (Wisconsin access lines); 7. Century Telephone Enterprises, Inc./Centel Corporation (Central Telephone Company of Ohio); 8. Century Telephone Enterprises, Inc./Pacific Telecom Inc.; 9. Citizens Utilities Company/ALLTEL Corporation; 10. Citizens Utilities Company/GTE Corporation; 11. Conestoga Enterprises, Inc./Buffalo Valley Telephone Company; 12. Gallatin River Communications, LLC/Sprint Corporation (Illinois access lines); 13. GTE Corporation/Centel Corporation; 14. PacifiCorp/Pacific Telecom Inc.; 15. Rochester Telephone Corporation/Centel Corporation (Iowa and Minnesota access lines); 16. SBC Communications Inc./Ameritech Corporation; 17. SBC Communications Inc./Pacific Telesis Group; 18. SBC Communications Inc./The Southern New England Telephone Company; 19. The Southern New England Telephone Company/The Woodbury Telephone Company; and 20. Sprint Corporation/Centel Corporation. Discounted Cash Flow Analysis. Global Crossing's financial advisors performed a discounted cash flow analysis for Frontier's local telephony business segment using Frontier management's projections. The discounted cash flow was calculated assuming discount rates ranging from 9.0% to 10.0% and was comprised of the sum of the present values of: 1. the projected unlevered free cash flows for the years 1999 though 2003; and 2. the 2003 terminal value based upon a range of multiples from 9.0x to 10.0x estimated 2003 EBITDA. Frontier's Cellular Business Segment Global Crossing's financial advisors calculated an estimated enterprise valuation for Frontier's cellular telephony business segment of approximately $175 per person in each of Frontier's cellular service areas based on information supplied by Frontier's management. Frontier's Internet/Data Business Segment Comparable Public Companies Analysis. Global Crossing's financial advisors reviewed publicly available information to compare certain financial and operating information and multiples of firm value to 1999 estimated revenue for Frontier's Internet/data services business segment with the corresponding financial and operating information and multiples for a group of publicly traded companies that Global Crossing's financial advisors deemed to be comparable to Frontier's Internet/data services business segment. Global Crossing's financial advisors determined the relevant range of these comparable public company multiples was 9.0x to 13.0x. The companies reviewed in this analysis included the following internet service providers: 1. Concentric Network Corporation; 2. Earthlink Network, Incorporated; 3. Globix Corporation; 4. Mindspring Enterprises, Inc.; 5. Network Solutions, Inc.; 54
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6. PSINet, Inc.; 7. Rocky Mountain Internet, Inc.; and 8. Verio Inc. The companies reviewed in this analysis also included the following data service providers: 1. Equant, N.V.; 2. Exodus Communications, Inc.; 3. AboveNet Communications, Inc.; and 4. Covad Communications Group, Inc. Frontier's Excess Fiber Network Global Crossing's financial advisors calculated an estimated valuation for Frontier's excess fiber network business segment by comparing this business segment with companies that Global Crossing's financial advisors deemed relevant. The companies reviewed in this analysis included the following: 1. IXC Communications, Inc.; 2. Level 3 Communications, Inc.; and 3. Qwest Communications International Inc. Using this analysis, Global Crossing's financial advisors calculated an estimated valuation of Frontier's excess fiber network ranging from $5,000 to $10,000 per excess strand mile. Global Crossing Valuation Global Crossing's financial advisors calculated estimated aggregate equity and per share equity valuation ranges for Global Crossing by utilizing a comparable public company analysis and a discounted cash flow analysis. Based upon these analyses, Global Crossing's financial advisors calculated estimated aggregate fully diluted equity valuations for Global Crossing which corresponded to estimated per share equity valuations for Global Crossing ranging from $35.00 to $60.00. Comparable Public Companies Analysis. Global Crossing's financial advisors reviewed publicly available information to compare financial and operating information and multiples of 1999-2001 estimated EBITDA to the compound annual growth rate in estimated EBITDA over the respective periods from 1999 through 2001 and 1999 through 2003 for Global Crossing with the corresponding financial and operating information and multiples for a group of publicly traded companies that Global Crossing's financial advisors deemed to be comparable to Global Crossing. Global Crossing's financial advisors determined the relevant range of these comparable public company multiples was .45x to .90x. The companies reviewed in this analysis included the following: 1. AT&T Corp.; 2. Equant, N.V.; 3. Frontier Corporation; 4. IXC Communications, Inc.; 5. MCI Worldcom, Inc.; 6. Metromedia Fiber Network, Inc.; 7. Qwest Communications International Inc.; and 8. Sprint Corporation. 55
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Using this range of multiples, Global Crossing's financial advisors calculated an implied per share equity valuation for Global Crossing ranging from $35.00 to $60.00. Discounted Cash Flow Analysis. Global Crossing's financial advisors performed a discounted cash flow analysis for Global Crossing using Global Crossing management's projections. The discounted cash flow was calculated assuming weighted average cost of capital rates ranging from 11.0% to 13.0% and was comprised of the sum of the present values of the following: 1. the projected unlevered free cash flows for the years 1999 through 2008; and 2. the 2008 terminal value based upon a range of multiples from 7.0x to 9.0x estimated 2008 EBITDA. Using this analysis, Global Crossing's financial advisors calculated an implied per share equity valuation for Global Crossing ranging from $39.00 to $55.00. Pro Forma Combination Analysis Pro Forma Stock Ownership Analysis. Global Crossing's financial advisors reviewed the original exchange ratio and the number of shares of Global Crossing's common stock to be issued to holders of Frontier common stock based upon the original base exchange ratio of 1.2557x. This analysis indicated that current shareholders of Frontier would own approximately 33% of Global Crossing's common stock after the merger. The summary set forth above does not purport to be a complete description of the analyses performed by Global Crossing's financial advisors in arriving at their respective opinions. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial or summary description. Global Crossing's financial advisors believe that their analyses must be considered as a whole and that selecting portions of their analyses and the factors considered by them, without considering all their factors and analyses, could create a misleading view of the process underlying the analyses set forth in their respective opinions. Global Crossing's financial advisors did not assign relative weights to any of their analyses in preparing their respective opinions. The matters considered by Global Crossing's financial advisors in their analyses were based on numerous macroeconomic, operating and financial assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond Global Crossing's and Global Crossing's financial advisors' control and involve the application of complex methodologies and educated judgment. Any estimates contained in Global Crossing's financial advisors' analyses are not necessarily indicative of actual past or future results or values, which may be significantly more or less favorable than the estimates. Estimated values do not purport to be appraisals and do not necessarily reflect the prices at which businesses or companies may be sold in the future, and the estimates are inherently subject to uncertainty. No company utilized as a comparison in the analyses described above is identical to Frontier or Global Crossing. Also, no transaction utilized in the analyses described above is identical to the merger of Frontier and Global Crossing. In addition, various analyses performed by Global Crossing's financial advisors incorporate projections prepared by research analysts using only publicly available information. These estimates may or may not prove to be accurate. An analysis of comparable transactions and publicly traded comparable companies is not mathematical; rather it involves complex considerations and judgments concerning differences in financial and operating characteristics of the comparable companies and other factors that could affect the public trading value of the comparable companies or company to which they are being compared. The Global Crossing board of directors selected Salomon Smith Barney and Merrill Lynch to act as its financial advisors because of their reputations as internationally recognized investment banking firms with substantial experience in transactions similar to the merger and because they are familiar with Global Crossing and its business. The Global Crossing board of directors did not impose any limitations on the investigation made or the procedures followed by Salomon Smith Barney and Merrill Lynch in rendering their opinions. As part of their respective investment banking businesses, Salomon Smith Barney and Merrill Lynch are 56
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continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, leveraged buyouts, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and other purposes. Recommendation of the Frontier board of directors; Reasons for the merger The board of directors of Frontier believes that the merger offers the Frontier shareholders an opportunity to receive significant value for their shares of Frontier common stock and to participate in a combined organization that will be a larger, more diversified company in the Internet and telecommunications industry and that will be well-positioned to compete effectively in that industry. The Frontier board of directors has carefully considered the terms of the proposed merger and has determined that the merger and the merger agreement are fair to, and in the best interests of, Frontier and the Frontier shareholders, has adopted the merger agreement and approved the merger and the other transactions contemplated by the merger agreement and recommends that the Frontier shareholders vote FOR the adoption of the merger agreement. In reaching its decision, the Frontier board of directors consulted with its financial and legal advisors and with senior management and considered a number of factors, including, without limitation, the following material factors: 1. the information and presentations by management of Frontier and its financial advisor concerning Frontier's and Global Crossing's respective businesses, assets, management, competitive position and prospects, 2. the financial condition, cash flows and results of operations of Frontier and Global Crossing, both on a historical and prospective basis, 3. the original exchange ratio negotiated with Global Crossing, including the related collar provision which gives Frontier shareholders the opportunity to participate in the increased value of the Global Crossing common stock if the value of the stock increases above $56.7813 and which gave Frontier the ability to terminate the merger agreement if the value of the Global Crossing common stock to be received by Frontier shareholders is less than $62.00 (following the amendment to the merger agreement, $63.00 per share) during the measurement period, based on the average trading price, 4. the opportunity for Frontier shareholders to receive Global Crossing common stock, based on the original $62.00 deal value, valued at a significant premium to the recent market price of the Frontier common stock (39% over the closing price on March 16, 1999, the last trading day before public announcement of the merger agreement, 67% over the closing price on March 9, 1999, one week before public announcement of the merger agreement and 80% over the closing price on February 16, 1999, one month before public announcement of the merger agreement), 5. the opportunity for the Frontier shareholders to participate, as holders of Global Crossing common stock, in a larger, more diversified, competitive company in the Internet and telecommunications industry, including participation in the value that may be generated through the combination of the two companies, 6. the fact that the overlap of the markets, capital investment and personnel of Frontier and Global Crossing would allow the combined company to focus on new technology and growth in markets, 7. the opportunity for the facilities of Global Crossing and Frontier to be seamlessly integrated, 8. the strategic and financial alternatives available to Frontier in the rapidly changing industry environment, including remaining an independent company, 9. the written opinion of Morgan Stanley & Co. Incorporated that, subject to the assumptions and limitations set forth in the opinion, the original exchange ratio was fair from a financial point of view to the holders of Frontier common stock, other than Global Crossing and its affiliates, and the financial presentation made by Morgan Stanley & Co. Incorporated to the Frontier board of directors in connection with the delivery of its opinion, 57
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10. the absence of any other firm proposal to engage in a business combination involving Frontier at the time of the board meeting despite various contacts between third parties and Morgan Stanley and members of senior management of Frontier, 11. the ability of Frontier, subject to specified conditions, (a) to provide information to, and negotiate with, a third party which has made an unsolicited acquisition proposal and (b) to terminate the merger agreement if the Frontier board of directors approves a superior proposal, subject to the payment of a termination fee in an amount which the Frontier board of directors and its financial advisor believed would not meaningfully impair the possibility of a competing transaction, 12. the other terms and conditions of the original merger agreement, including (a) the limited number of closing conditions which provides increased certainty that the merger will be completed and (b) the fact that Global Crossing must close the merger without regard to its stock price, while, as noted in 3. above, Frontier may, but is not required to, terminate the merger if the average price of the Global Crossing common stock during a period shortly before closing is below $34.5625 unless Global Crossing elects to increase the consideration to Frontier shareholders so that they will receive total consideration valued at $62.00 per share (following the amendment to the merger agreement, $63.00 per share), based on that average price, 13. the fact that the merger is intended to be a tax-free exchange to Frontier shareholders, 14. the fact that Frontier will be able to designate four directors to the Global Crossing board of directors at the time of the merger and Global Crossing is required to take all action necessary to elect Joseph Clayton as a Vice Chairman of Global Crossing and Rolla Huff as President and Chief Operating Officer of North American Operations of Global Crossing following the merger, 15. the terms and conditions of the stock option agreement, 16. the existence and terms of the agreement of holders of at least 51% of Global Crossing common stock to vote in favor of the Global Crossing merger proposals, 17. historical market prices and trading information with respect to the Frontier common stock and the Global Crossing common stock, and 18. current industry, economic and market conditions. The discussion of the information and factors considered by the Frontier board of directors is not intended to be exhaustive. In view of the variety of material factors considered in connection with its evaluation of the merger, the Frontier board of directors did not find it practicable to, and did not quantify or otherwise assign relative weights to, the specific factors considered in reaching its determination. In addition, individual members of the Frontier board of directors may have given different weights to different factors. For a discussion of the interests of some members of Frontier's management and the Frontier board of directors, see "The Merger--Interests of members of Frontier's board of directors and management in the merger." Opinion of Frontier's financial advisor Under a letter agreement dated January 6, 1999, Frontier retained Morgan Stanley to provide financial advisory services to Frontier. On March 16, 1999, Morgan Stanley delivered its opinion to the Frontier board of directors that, as of such date and based upon and subject to the various considerations in the opinion, the original exchange ratio pursuant to the merger agreement was fair from a financial point of view to holders of shares of Frontier common stock, other than Global Crossing and its affiliates. On May 16, 1999, in connection with the approval of the consent and amendment to the merger agreement, Morgan Stanley delivered its opinion to the Frontier board of directors that, as of such date and based upon and subject to the various considerations in the opinion, the exchange ratio pursuant to the merger agreement was fair from a financial point of view to holders of shares of Frontier common stock, other than Global Crossing and its affiliates. The opinion delivered on March 16, 1999 was substantially the same as the May 16, 1999 opinion. In connection with the opinion delivered on May 16, 1999, Morgan Stanley reviewed certain information regarding U S WEST, which had entered into a merger agreement with Global Crossing on that date, as described below. 58
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On July 18, 1999, U S WEST and Global Crossing agreed to terminate that merger agreement. Morgan Stanley's opinion delivered on May 16, 1999--that as of such date and based upon and subject to the various considerations in the opinion, the exchange ratio pursuant to the merger agreement was fair from a financial point of view to the holders of shares of the Frontier common stock, other than Global Crossing and its affiliates--was not contingent on the consummation of the Global Crossing--U S WEST merger. We have attached as Annex F to this document the full text of the opinion dated May 16, 1999, which describes assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Morgan Stanley in rendering its opinion. Morgan Stanley's written opinion is directed to the Frontier board of directors and only addresses the fairness of the exchange ratio pursuant to the merger agreement from a financial point of view to holders of shares of Frontier common stock, other than Global Crossing and its affiliates, as of the date of the opinion. Morgan Stanley's written opinion does not address any other aspect of the merger and does not constitute a recommendation to any Frontier shareholder as to how to vote at the Frontier special meeting. The following is only a summary of the Morgan Stanley opinion and should not be viewed as a substitute for the Morgan Stanley opinion. Frontier shareholders are urged to read the entire opinion. In arriving at its opinions, Morgan Stanley, among other things: . reviewed certain publicly available financial statements and other information of Frontier, Global Crossing and U S WEST, . reviewed certain internal financial statements and other financial and operating data concerning Frontier, Global Crossing and U S WEST prepared by the managements of Frontier, Global Crossing and U S WEST, respectively, . analyzed certain financial projections for Frontier, Global Crossing and U S WEST prepared by the managements of Frontier, Global Crossing and U S WEST, respectively, . reviewed certain reports prepared by consultants retained by Global Crossing with respect to demand forecasts for certain markets in which Global Crossing currently intends to operate and held discussions regarding such forecasts with one of these consultants, . analyzed certain financial projections for Frontier contained in certain securities analysts' research reports that were recommended for review by the management of Frontier, . discussed the past and current operations and financial condition and the prospects of Frontier, including information relating to certain strategic, financial and operational benefits anticipated from the merger, or, if applicable the alternative merger, with the senior executives of Frontier, . discussed the past and current operations and financial condition and the prospects of Global Crossing, including information relating to certain strategic, financial and operational benefits anticipated from the merger, or, if applicable the alternative merger, and the proposed, and subsequently terminated, Global Crossing-U S WEST merger with the senior executives of Global Crossing, . discussed the past and current operations and financial condition and the prospects of U S WEST, including information relating to certain strategic, financial and operational benefits anticipated from the merger or, if applicable, the alternative merger, and the U S WEST merger with certain senior executives of U S WEST, . reviewed the pro forma impact of the merger or, if applicable the alternative merger, on Global Crossing's cash flow, consolidated capitalization and financial ratios, . reviewed the reported prices and trading activity for the Frontier common stock, the Global Crossing common stock and the U S WEST common stock, . compared the financial performance of Frontier and Global Crossing and the prices and trading activity of the Frontier common stock and the Global Crossing common stock with those of certain other comparable publicly-traded companies and their securities, 59
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. compared the prices and trading activity of U S WEST common stock with those of certain other comparable publicly-traded companies and their securities, . reviewed the financial terms, to the extent publicly available, of certain transactions comparable to the merger, . participated in discussions and negotiations among representatives of Frontier and Global Crossing and their financial and legal advisors in connection with the merger, . discussed certain tax issues with senior executives of Frontier and Global Crossing and with Frontier's legal and tax advisors, . reviewed the merger agreement, the Global Crossing--U S WEST merger agreement and certain related documents, and . performed such other analyses and considered such other factors as deemed appropriate. Morgan Stanley assumed and relied upon, without independent verification, the accuracy and completeness of the information reviewed by it for purposes of its opinions. With respect to the financial and other operating data and discussions relating to the strategic, financial and operational benefits anticipated from the respective transactions, Morgan Stanley assumed that such financial and operating data were reasonably prepared on bases reflecting the best currently available estimates and judgments of the future operating and financial performance of Frontier and Global Crossing. Morgan Stanley relied upon the financial projections for Frontier included in the securities analysts' research reports reviewed by Morgan Stanley based on its own independent evaluation of these reports and indications by management of Frontier that the analyses contained in these reports were reasonably comprehensive and detailed and were based on assumptions about the trends influencing Frontier's financial results that were generally consistent with the assumptions of Frontier's management. Morgan Stanley did not make any independent valuation or appraisal of the assets or liabilities of Frontier, nor was Morgan Stanley furnished with any appraisals. Morgan Stanley further assumed with Frontier's consent that, except as provided below, the transactions contemplated by the merger agreement, including the merger or, if applicable, the alternative merger, will be consummated on the terms set forth in the merger agreement, including, among other things, that the merger or, if applicable, the alternative merger will be treated as a tax-free reorganization or, if applicable, exchange pursuant to the Internal Revenue Code. In addition, with the consent of Frontier, Morgan Stanley relied upon the advice of legal and tax advisors of Frontier as to certain tax matters relating to the alternative merger. Morgan Stanley's opinion does not address the impact, if any, of a determination by Frontier not to exercise its termination rights pursuant to Section 7.1(g) of the merger agreement, which relates to termination by Frontier if the average Global Crossing trading price is below $34.5625. In addition, Morgan Stanley assumed that in connection with the receipt of all necessary regulatory approvals for the merger or, if applicable, the alternative merger, no restrictions will be imposed that would have a material adverse effect on Frontier, Global Crossing or the contemplated benefits expected to be derived in the merger or, if applicable, the alternative merger. Morgan Stanley's opinions were necessarily based on economic, market and other conditions as in effect on, and the information made available to it as of, the dates of the opinions. The following is a summary of the material financial analyses performed by Morgan Stanley in preparing its opinions to the Frontier board of directors on March 16, 1999 and May 16, 1999. Certain of these summaries of financial analyses include information presented in tabular format. In order to fully understand the financial analyses used by Morgan Stanley, the tables must be read together with the text of each summary. The tables alone do not represent a complete description of the financial analyses. Morgan Stanley used financial estimates for Frontier that were based on estimates published by securities research analysts in the investment community in performing some of its analyses. Morgan Stanley used financial estimates for Global Crossing that were provided by Global Crossing management. Historical Public Market Trading Value. Morgan Stanley reviewed the recent stock price performance of Frontier based on an analysis of the historical closing prices and trading volumes during the period from March 60
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12, 1998 through March 12, 1999. The following table summarizes the price performance of Frontier's common stock over that period: [Download Table] Historical Frontier Common Stock Prices ------------------- March 12, 1999........................................... $ 40.63 High Price............................................... $ 40.63 Low Price................................................ $ 24.00 Average Price............................................ $ 33.00 Average Daily Trading Volume (8/14/98-3/15/99)........... 646,000 Morgan Stanley also reviewed the recent stock price performance of Global Crossing based on an analysis of the historical closing prices and trading volumes during the period from the Global Crossing initial public offering on August 14, 1998, through March 15, 1999 and through May 14, 1999. The following table summarizes the price performance of Global Crossing's common stock over that period: [Download Table] Historical Global Crossing Common Stock Prices -------------------------- May 14, 1999..................................... $ 62.29 March 15, 1999................................... $ 56.56 High Price....................................... $ 64.25 Low Price........................................ $ 8.00 Average Daily Trading Volume (8/14/98-3/15/99)... 1,338,000 Comparative Stock Price Performance. As part of its analysis, Morgan Stanley reviewed the recent stock price performance of Frontier and compared this performance with that of groups of the following five competitive telecommunications infrastructure companies, three long distance companies, five local exchange companies and Qwest on a stand-alone basis. [Download Table] Competitive Infrastructure Companies Long Distance Companies Local Exchange Companies -------------- ----------------------- ---------------------------------------- Global Crossing AT&T Corp. Aliant Communications Inc. Ltd. GTS MCI WorldCom, Inc. ALLTEL Corporation IXC Communica- Sprint Corporation Century Telephone Enterprises, Inc. tions, Inc. Level 3 Commu- Cincinnati Bell Inc. nications, Inc. Qwest Commonwealth Telephone Enterprises, Inc. Communications International Inc. Morgan Stanley observed that over the period from March 12, 1998, to March 12, 1999, the closing market prices appreciated as set forth below: [Download Table] % Appreciation -------------- Frontier.................................................... 37.4% Five Competitive Infrastructure Companies (equal-weighted index)..................................................... 124.9% Three Long Distance Companies (equal-weighted index)........ 57.2% Five Local Exchange Companies (equal-weighted index)........ 34.1% Qwest....................................................... 78.8% Morgan Stanley also reviewed the recent stock price performance of Global Crossing and compared this performance with that of a group of comparable companies. Morgan Stanley observed that over the period from Global Crossing's initial public offering on August 14, 1998, to March 12, 1999, the closing market prices appreciated as set forth below: 61
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[Download Table] Global Crossing and Comparative Companies % Appreciation ----------------------------------------- -------------- Global Crossing............................................... 287.3% Allegiance.................................................... 147.7% Qwest......................................................... 82.9% MCI WorldCom.................................................. 71.2% Level 3....................................................... 63.8% Equant........................................................ 50.4% Colt.......................................................... 43.7% Morgan Stanley also observed that over the period from August 14, 1998 to May 14, 1999, the closing price of Global Crossing common stock appreciated 381.4%, as compared to 80.9% for an index of peer companies (composed of MCI WorldCom, Qwest, Level 3 and IXC) and 25.9% for the S&P 500 index. Securities Research Analysts' Future Price Targets. Morgan Stanley reviewed and analyzed future public market trading price targets for Frontier common stock prepared and published by a number of securities research analysts during the periods from July 24, 1998 to January 25, 1999, before the announcement by Frontier of its intention to reduce its dividend on January 26, 1999, and from January 26, 1999 to March 12, 1999, after the dividend announcement. Morgan Stanley also reviewed and analyzed future public market trading price targets for Global Crossing common stock both at the time after Global Crossing's August 14, 1998 initial public offering and during the period from December 1, 1998 to March 12, 1999 and from March 18, 1999 to May 14, 1999. These targets reflected each analyst's estimate of the future public market trading price of Frontier and Global Crossing common stock at the end of the particular time period considered for each time estimate. Morgan Stanley discounted, at a cost of equity rate of 11.1%, each Frontier research analyst's public market price target to March 16, 1999. Morgan Stanley also reviewed and analyzed the future private market value targets for Frontier common stock prepared and published by certain securities research analysts in the period from July 31, 1998 to March 12, 1999, reflecting each analyst's estimate of the future private market value of Frontier common stock at the end of the time period considered in such estimate. [Download Table] Value Range ------------ Low High ----- ------ Present Value of Frontier Public Market Price Target (1/26/99- 3/12/99)...................................................... $ 37 $ 41 Present Value of Frontier Public Market Price Target (7/24/98- 1/25/99)...................................................... 25 51 Frontier Private Market Value Target........................... 40 59 Present Value of Global Crossing Public Market Price Target (3/18/99-5/14/99)............................................. 57 81 Global Crossing Public Market Price Target (12/1/98-3/12/99)... 35 35 Global Crossing Public Market Price Target at IPO.............. 14 15 Morgan Stanley noted that certain securities analysts had their public market price target for Global Crossing common stock under review as of March 12, 1999. Morgan Stanley also noted that the public market trading price and private market value targets published by the securities research analysts do not reflect current market trading prices and private market value targets for Frontier or Global Crossing common stock and that these estimate are subject to uncertainties, including the future financial performance of Frontier and Global Crossing and future financial market conditions. Peer Group Comparison. Morgan Stanley reviewed and analyzed the financial information of four local exchange companies, an index of four Regional Bell Operating Companies, and three competitive long distance and telecommunications infrastructure companies to arrive at a sum-of-the parts value for Frontier based on the implied theoretical public market trading values for Frontier's integrated services and local exchange business segments. 62
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Morgan Stanley derived a theoretical value for Frontier's local exchange business segment based on the financial information for the four local exchange companies and for an average of the four Regional Bell Operating Companies, which are Bell Atlantic, BellSouth, SBC, and U S WEST. Morgan Stanley analyzed, among other things, the current aggregate value, which means equity value adjusted for capital structure, of each company expressed as a multiple of earnings before interest, taxes, and depreciation and amortization expense, which we refer to as "EBITDA," and the current public market price of each company expressed as a multiple of its earnings per share, which we refer to as "EPS." As of March 12, 1999 and based on estimates of EBITDA and EPS taken from selected securities research analysts, the statistics derived from this analysis are set forth below. [Download Table] Regional Bell Operating Cincinnati Company ALLTEL Bell Commonwealth Century Average ------ ---------- ------------ ------- ------------- 1999 EBITDA Multiple....... 8.9x 9.8x 10.9x 10.7x 8.0x Price/1999E EPS............ 22.9x 25.3x NM 28.2x 20.6x NM = not meaningful Morgan Stanley derived a theoretical value for Frontier's Integrated Services Business Segment based on the financial information for the three competitive long distance and infrastructure telecommunications companies. Morgan Stanley analyzed, among other things, the current aggregate value, which means equity value adjusted for capital structure, of each company expressed as a multiple of revenues and as a multiple of EBITDA, and the ratio of the multiple of current aggregate value to estimated EBITDA in the calendar year 1999 to the estimated, long-term EBITDA growth rate. As of March 12, 1999 and based on estimates of revenue, EBITDA and long-term EBITDA growth rates taken from selected securities research analysts, the statistics derived from this analysis are set forth below. [Download Table] MCI IXC WorldCom Qwest ----- -------- ----- 1999 Revenue Multiple.................................. 2.0x 4.7x 7.5x 1999 EBITDA Multiple................................... 12.4x 14.6x 34.7x EBITDA Multiple Growth................................. 0.42x 0.89x 1.21x Based on peer group comparisons and the corresponding implied value of Frontier's local exchange company and Integrated Services business segments, Morgan Stanley derived a theoretical sum-of-the-parts value range for Frontier of $42 to $46 per share. Morgan Stanley also reviewed and analyzed the financial information of seven competitive long distance and telecommunications infrastructure companies and compared the results to financial information relating to Global Crossing. Morgan Stanley analyzed, among other things, the current aggregate value of each company expressed as a multiple of revenues and as a multiple of EBITDA, and the ratio of the multiple of current aggregate value to estimated EBITDA in the calendar year 1999 to the estimated, long-term EBITDA growth rate. As of March 12, 1999 and based on estimates of revenue, EBITDA and long-term EBITDA growth rates taken from selected securities research analysts, the statistics derived from this analysis are set forth below. [Enlarge/Download Table] Global Global Crossing/ Crossing/ MCI Global Frontier Frontier Colt Equant GTS IXC Level 3 WorldCom Qwest Crossing (with LEC) (without LEC) ------ ------ ----- ----- ------- -------- ----- -------- ---------- ------------- 1999 Revenue Multiple... 16.8x 14.6x 6.3x 2.0x 41.6x 4.7x 7.5x 28.2x 9.5x 10.6x 2000 Revenue Multiple... 10.5x 11.0x 3.7x 1.8x 24.0x 4.1x 6.1x 17.8x 7.6x 8.1x 1999 EBITDA Multiple.... NM 66.3x NM 12.4x NM 14.6x 34.7x 62.6x 33.2x 45.9x 2000 EBITDA Multiple.... 116.8x 39.5x 46.6x 8.5x NM 11.3x 22.1x 29.9x 21.5x 25.3x 1999 EBITDA Multiple Growth................. NM 1.76x NM 0.42x NM 0.89x 1.21x 1.18x 0.92x 0.98x 2000 EBITDA Multiple Growth................. NM 1.05x NM 0.29x NM 0.69x 0.77x 0.57x 0.60x 0.54 NM = not meaningful 63
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No company used in the peer group comparisons is identical to Frontier or Global Crossing. In evaluating the peer group companies, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Frontier and Global Crossing such as the impact of competition on Frontier or Global Crossing and the industry generally, industry growth and the absence of any material adverse change in the financial condition and prospects of Frontier or the industry or in the financial markets in general. Analysis of Selected Precedent Transactions. As part of its analysis, Morgan Stanley reviewed the following eight transactions involving emerging growth long distance and telecommunications infrastructure companies since June 1992: . June 1992--LDDS Communications, Inc./Advanced Telecommunications, Inc. . April 1995--Frontier Corporation/ALC Communications Corporation . June 1997--Excel Communications, Inc./Telco Communications Group, Inc. . September 1997--LCI International, Inc./USLD Communications Corp. . November 1997--WorldCom, Inc./MCI Communications Corporation . November 1997--Teleport Communications Group Inc./ACC Corp. . March 1998--Qwest Communications International Inc./LCI International, Inc. . June 1998--Call-Net Enterprises Inc./Fonorola Inc. For each of these, Morgan Stanley reviewed the prices paid and calculated the multiples of one year trailing revenue and EBITDA as well as the premium to unaffected share price. The table below shows the statistics from this analysis. [Download Table] Median High Low ------ ----- ----- Revenue Multiple....................................... 2.7x 4.0x 1.7x EBITDA Multiple........................................ 17.3x 35.7x 10.1x Premium to Unaffected Share Price...................... 52.9% 94.3% 35.2% The precedent transactions analysis implied a range of values for Frontier common stock of $46 to $54 per share. No transaction used in the analysis of selected precedent transactions is identical to the merger. In evaluating these transactions, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Frontier and Global Crossing, such as the impact of competition on Frontier or Global Crossing and the industry generally, industry growth and the absence of any material adverse change in the financial condition and prospects of Frontier or Global Crossing or the industry or in the financial markets in general. Discounted Cash Flow Analysis. Morgan Stanley performed discounted cash flow analyses, which are analyses of the present value of projected cash flows using discount rates and terminal year EBITDA multiples, as specified, of Frontier's businesses. Morgan Stanley analyzed Frontier's business using a forecast for the period beginning January 1, 1999, and ending December 31, 2007, based on estimates published by securities research analysts. Morgan Stanley estimated Frontier's discounted cash flow value using discount rates ranging from 10% to 11% and terminal multiples of estimated 2008 EBITDA ranging from 9x to 10x. The discounted cash flow analysis implied a range of values for Frontier common stock of $48 to $59 per share. Morgan Stanley also performed discounted cash flow analyses of Global Crossing's businesses. Morgan Stanley analyzed Global Crossing's business using a forecast for the period beginning January 1, 1999 and ending December 31, 2007, based on estimates provided to Morgan Stanley by Global Crossing management. Morgan Stanley estimated Global Crossing's discounted cash flow value using discount rates ranging from 11% to 13% and terminal multiples of estimated 2008 EBITDA ranging from 9x to 11x. The discounted cash flow analysis implied a range of values for Global Crossing common stock of $44 to $59 per share. 64
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Morgan Stanley also reviewed and analyzed the sensitivity of Global Crossing's discounted cash flow value to changes in the projected future pricing of STM-1 cable sales and backhaul pricing on the Atlantic Crossing cable. Morgan Stanley reviewed the effect of various annual pricing declines as compared to the pricing declines projected by Global Crossing management. The table below summarizes the discounted cash flow value of Global Crossing's businesses implied by various annual pricing declines: [Download Table] Management Pricing Decline: 15% 20% Case 25% 30% ---------------- ---- ---- ---------- ---- ---- Discount Cash Flow Midpoint ($Billion)... $9.7 $8.0 $7.7 $6.5 $5.2 % Change in Value........................ 28% 4% -- (15%) (32%) Morgan Stanley also reviewed and analyzed the sensitivity of Global Crossing's discounted cash flow value to changes in the projected demand for STM-1 cables on the Atlantic Crossing cable. Morgan Stanley reviewed the effects of STM-1 demand at 75% and 50% of that projected by Global Crossing management. The table below summarizes the discounted cash flow value range implied by various levels of demand for STM-1 cables: [Download Table] Discounted Cash Flow Range ($Billions) -------------------- Management Case......................................... $6.6--$8.7 75% of Demand for STM-1s................................ $5.6--$7.3 50% of Demand for STM-1s................................ $3.9--$5.1 Exchange Ratio Analysis. Morgan Stanley compared the effective exchange ratio to the ratio of the closing market prices of Frontier common stock and Global Crossing common stock on March 12, 1999. Morgan Stanley also compared this ratio to selected average historical ratios of the closing market prices of Frontier common stock and Global Crossing common stock over various periods ending March 12, 1999. The table below shows the results of this analysis: [Download Table] Market Price Ratio ----------- March 12, 1999................................................... 0.82x 5 prior trading days average..................................... 0.93x 30 prior trading days average.................................... 1.18x 60 prior trading days average.................................... 1.35x Average since Global Crossing initial public offering............ 1.94x Morgan Stanley performed a variety of financial and comparative analyses solely for purposes of providing its opinions to the Frontier board of directors as to the fairness from a financial point of view to the holders of Frontier common stock of the exchange ratio pursuant to the merger agreement. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. In arriving at its opinion, Morgan Stanley considered the results of all of its analyses as a whole and did not attribute any particular weight to any analysis or factor considered by it. Furthermore, selecting any portion of its analyses, without considering all analyses, would create an incomplete view of the process underlying its opinion. In addition, Morgan Stanley may have given various analyses and factors more or less weight than other analyses and factors, and may have deemed various assumptions more or less probable than other assumptions, so that the ranges of valuations resulting from any particular analysis described above should not be taken to be Morgan Stanley's view of the actual value of Frontier or Global Crossing. In performing its analyses, Morgan Stanley made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of Frontier and Global Crossing. Any estimates contained herein are not necessarily indicative of future results or actual values, which may be significantly more or less favorable than those suggested by such estimates. The analyses performed were prepared solely as part of Morgan Stanley's analysis of the fairness of the exchange ratio pursuant to the merger agreement from a financial point of view to the holders of Frontier common stock and 65
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were conducted in connection with the delivery of its opinion. The analyses are not intended to be appraisals or to reflect the prices at which Frontier or Global Crossing might actually be sold or the price at which their securities may trade. The merger consideration was determined through arm's-length negotiations between Frontier and Global Crossing and was approved by the Frontier board of directors. Morgan Stanley did not recommend any specific merger consideration to Frontier or that any specific merger consideration constituted the only appropriate merger consideration for the merger. Morgan Stanley's opinion to the Frontier board of directors was one of many factors taken into consideration by the Frontier board of directors in making its determination to approve the merger. Consequently, the Morgan Stanley analyses described above should not be viewed as determinative of the opinion of the Frontier board of directors with respect to the value of Frontier or whether the Frontier board of directors would have been willing to agree to different merger considerations. The Frontier board of directors retained Morgan Stanley based upon Morgan Stanley's qualifications, experience and expertise. Morgan Stanley is an internationally recognized investment banking and advisory firm. Morgan Stanley, as part of its investment banking business, is continuously engaged in the valuation of businesses and securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. In the ordinary course of Morgan Stanley's trading, brokerage and financing activities, Morgan Stanley or its affiliates may at any time hold long or short positions, may trade, make a market or otherwise effect transactions, for its own account or for the accounts of customers, in the securities of Frontier or Global Crossing. In the past, Morgan Stanley and its affiliates have provided financing services for Frontier and Global Crossing and have received fees for the rendering of these services. In addition to acting as Frontier's financial advisor in connection with the merger, Morgan Stanley has within the past two years participated in the commercial paper syndicate for Frontier and has acted as co-manager in Frontier's May 21, 1997 $300 million senior note offering. Under the letter agreement dated as of January 6, 1999, as amended on June 2, 1999, Morgan Stanley has provided advisory services and a financial opinion in connection with the merger and Frontier has agreed to pay a transaction fee to Morgan Stanley in an amount equal to .275% of the aggregate value of the Global Crossing--Frontier transaction. In addition, Frontier has agreed to indemnify Morgan Stanley and its affiliates, their respective directors, officers, agents and employees and each person, if any, controlling Morgan Stanley or any of its affiliates against certain liabilities and expenses, including the fees of its legal counsel and certain liabilities under the federal securities laws, arising out of Morgan Stanley's engagement and the transactions in connection therewith. Morgan Stanley is also providing services relating to various financing or refinancing transactions subsequent to the date of the merger agreement for which Frontier has agreed to pay a customary fee. Interests of members of Frontier's board of directors and management in the merger When you consider the recommendation of the Frontier board of directors that you vote for the adoption of the merger agreement, you should be aware that certain directors and executive officers of Frontier have interests in the merger in addition to their interests solely as Frontier shareholders, as described below. These interests may create potential conflicts of interest. The Frontier board of directors was aware of these interests when it considered and adopted and approved the merger agreement and the merger. Employment Agreements In connection with the merger agreement, Frontier amended its employment agreements with eighteen of its executives, including Messrs. Clayton and Huff. These agreements include change of control provisions. Each of the employment agreements will provide the executives with enhanced severance benefits in specified situations. The executives are entitled to receive enhanced severance benefits if, following a change in control: . they voluntarily terminate their employment for any reason within one year, or 66
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. Frontier terminates the executive's employment without cause or the executive terminates his or her employment for good reason. Pursuant to the employment agreements and the merger agreement, the merger will constitute a change of control of Frontier. The enhanced severance benefits that an executive would receive under the circumstances described above are: . payment of all accrued compensation plus a pro rata bonus equal to the greatest of (1) the premier bonus for the fiscal year of the termination of employment, but no lower than the premier bonus level established and in effect before March 16, 1999, (2) the bonus paid or payable in respect of the year before the year of the termination of employment or (3) the bonus paid with respect to the fiscal year before the year of the change of control; . payment of an amount equal to three times, in the case of Messrs. Clayton, Huff and six other executives, or, in the case of ten other executives, two times or one times, the sum of (a) the executive's base salary, (b) the executive's bonus, except in one agreement, (c) the annual value of the perquisites received by the executive, (d) payment of the annual Frontier contributions which would have been made on the executive's behalf to the 401(k) retirement savings plan, and (e) the value of the annual allocation which would have been made to Frontier's Supplemental Retirement Savings Plan; and . a continuation of general employee benefits, including life insurance, medical and dental plans, vision and hospitalization benefits for 36 months, or, in some cases, 24 months or 12 months, following the date of termination. The employment agreements also contain restrictive covenants, including non- compete and non-solicitation covenants, which are in effect during an executive's employment. The employment agreements, as amended, provide that, following a change of control, these restrictive covenants will no longer be effective following a termination of the executive's employment. In addition, thirteen executives may be entitled to receive "gross-up" payments to offset taxes that may be imposed on the payments and other benefits the executives receive under the employment agreements, and three executives will be entitled to age and service credits under Frontier's pension and retirement plans. Effects of the merger under Frontier stock option plans The merger agreement provides that, at the effective time of the merger, all stock options then held by the employees will vest and become immediately exercisable. In addition, each of the Frontier Corporation Employees' Stock Option Plan, the Frontier Corporation Management Stock Incentive Plan, the Frontier Corporation Directors Stock Incentive Plan and the Frontier Omnibus Incentive Plan provide that upon a change of control, all stock options will become immediately exercisable and all restrictions on restricted stock will immediately lapse. The merger will result in a change of control for purposes of the option plans. See "The Merger Agreement--Stock options and warrants." Although not required under the merger agreement, Global Crossing may purchase or withhold from some executive officers of Frontier that own restricted stock under the Frontier Corporation Management Stock Incentive Plan either some of those shares or the shares of Global Crossing common stock that they will receive in the merger in an amount, estimated at approximately $20 million in the aggregate, sufficient to fund anticipated income tax liabilities that will result from the removal of restrictions on their restricted stock awards. Effects of the merger under other Frontier plans Following a change of control, the participants in the Frontier Corporation Directors Common Stock Deferred Growth Plan and the Frontier Corporation Plan For The Deferral of Directors Fees will have the 67
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choice whether to receive their payouts in cash or in stock of the successor. Participants who join the Global Crossing board of directors may continue their accounts in these two plans. The merger will result in a change of control for purposes of both of these plans. Board of directors and officers of Global Crossing Under the merger agreement, Global Crossing has agreed that, at or before the effective time of the merger, the Global Crossing board of directors will take all action necessary to: . elect four individuals to be designated by Frontier as members of the Global Crossing board of directors to serve in specified classes of directors with staggered terms, . elect Joseph P. Clayton as Vice Chairman of Global Crossing, and . elect Rolla P. Huff as President and Chief Operating Officer of North American Operations of Global Crossing. Indemnification and insurance Under the merger agreement and subject to specified limitations, the surviving corporation of the merger will maintain the current provisions regarding indemnification of officers, directors and employees of Frontier as provided in Frontier's certificate of incorporation or by-laws for a period of six years from the effective time of the merger. In addition, the merger agreement provides that the surviving corporation of the merger will maintain, with specified limitations, the current directors' and officers' liability insurance and fiduciary liability insurance policies of Frontier, or policies no less advantageous to the insured, for a period of six years from the effective time. See "The Merger Agreement--Indemnification and insurance." Certain federal income tax and Bermuda tax consequences Federal income tax consequences The following discussion is a summary of the material U.S. federal income tax consequences to U.S. persons of the exchange of Frontier common stock for Global Crossing common stock in the merger and the ownership of Global Crossing common stock. The discussion which follows is based on the U.S. Internal Revenue Code, applicable Treasury regulations, administrative rulings and pronouncements and judicial decisions as of the date of this document, all of which could change. Any change, which may be retroactive, could alter the tax consequences we discuss in this document. Our discussion of tax consequences is also based on representations made by Global Crossing, Frontier and the acquisition subsidiary of Global Crossing. If any of these representations is inaccurate, the tax consequences of the merger could differ from those described in this document. The discussion below, except where specifically noted, does not address the effects of any state, local or non-United States tax laws. In addition, the discussion below relates to persons who hold Frontier common stock and will hold Global Crossing common stock as capital assets. The tax treatment of a Frontier shareholder may vary depending upon the shareholder's particular situation, and some shareholders may be subject to special rules not discussed below. These shareholders would include, for example . insurance companies, . tax-exempt organizations, . financial institutions, . broker-dealers, . shareholders who are foreign persons and . individuals who received Frontier common stock pursuant to the exercise of employee stock options or otherwise as compensation. 68
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In addition, this discussion does not address all of the tax consequences to any Frontier shareholder who will own 5% or more of either the total voting power or the total value of the outstanding Global Crossing common stock after the merger, determined after we take into account ownership under the applicable attribution rules of the U.S. Internal Revenue Code and applicable Treasury regulations. We will refer to these shareholders as "5% transferee shareholders." Consequences of the merger The obligations of Global Crossing and Frontier to complete the merger are conditioned on the receipt of opinions from their respective counsel, Skadden, Arps, Slate, Meagher & Flom LLP for Global Crossing and Simpson Thacher & Bartlett for Frontier. These opinions, which will be based on facts, representations and assumptions as counsel may reasonably deem relevant, will be to the effect that . the merger will be treated for federal income tax purposes as a reorganization with the meaning of Section 368 of the Internal Revenue Code; . Global Crossing, Frontier and the acquisition subsidiary will each be a party to that reorganization; and . no gain or loss will be recognized by a shareholder of Frontier as a result of the merger, except with respect to any cash received in the merger; provided, that, in the case of any 5% transferee shareholder, the 5% transferee shareholder enters into a "gain recognition agreement" in accordance with applicable Treasury regulations. Based on those conclusions, the following additional federal income tax consequences would arise: . Receipt of Cash. If, in addition to Global Crossing common stock, a Frontier shareholder receives cash in the merger, other than cash received in payment for a fractional share, a Frontier shareholder will realize gain measured by the excess, if any, of (1) the sum of the amount of that cash and the fair market value of the Global Crossing shares received in the merger over (2) the shareholder's tax basis in the Frontier shares. However, any gain realized will be taxable only to the extent of the cash received. Any gain recognized by a Frontier shareholder generally will be capital gain and will be treated as long- term capital gain if the Frontier shares have been held for more than one year. However, the gain could be treated as ordinary dividend income if, taking into account applicable constructive ownership rules, a Frontier shareholder's percentage interest in Global Crossing after the merger is not less than what that Frontier shareholder's percentage interest in Global Crossing would have been had the shareholder received only Global Crossing shares instead of cash in the merger. This could happen, for example, because of a purchase of additional Global Crossing shares by the Frontier shareholder or a related person or because of a share repurchase by Global Crossing from other Global Crossing shareholders. . Tax basis. The tax basis to a Frontier shareholder of the Global Crossing common stock received in exchange for Frontier common stock pursuant to the merger, including any fractional share interest in Global Crossing common stock for which cash is received, will equal the Frontier shareholder's tax basis in the Frontier common stock surrendered in exchange therefor, increased by the amount of taxable gain, if any, on the exchange and decreased by the amount of any cash received, other than cash received in payment for a fractional share. . Holding period. The holding period of a Frontier shareholder for the Global Crossing common stock received pursuant to the merger will include the holding period of the Frontier common stock surrendered in exchange for the Global Crossing shares. . Fractional shares. A Frontier shareholder who receives cash in payment for a fractional share interest in Global Crossing common stock pursuant to the merger will be treated as having received the cash in exchange for the fractional share interest and generally will recognize capital gain or loss 69
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on the deemed exchange in an amount equal to the difference between the amount of cash received and the basis of the Frontier stock allocable to that fractional share. Ownership of Global Crossing common stock Distributions. Distributions made to shareholders on or with respect to Global Crossing common stock will be treated as dividends and be taxable as ordinary income to the extent that those distributions are made out of Global Crossing's current or accumulated earnings and profits as determined for U.S. federal income tax purposes. Subject to the passive foreign investment company rules discussed below, to the extent that the amount of any distribution exceeds Global Crossing's accumulated earnings and profits for a taxable year, the excess will be treated as a tax-free return of capital which reduces the Global Crossing shareholders' tax basis in the Global Crossing common stock to the extent of the tax basis, and thereafter as capital gain from the sale or exchange of property. Global Crossing shareholders that are corporations generally will not be entitled to claim a dividends received deduction with respect to distributions by Global Crossing because Global Crossing is a foreign corporation. Global Crossing does not currently pay dividends on its common stock and does not anticipate paying dividends in the foreseeable future. See "Summary--Market prices and dividends." For so long as Global Crossing is a "United States-owned foreign corporation," distributions with respect to the common stock that are taxable as dividends generally will be treated for United States foreign tax credit purposes as either (1) foreign source "passive income" or, in the case of some Global Crossing shareholders, foreign source "financial services income" or (2) United States source income, in proportion to the earnings and profits of Global Crossing in the year of the distribution allocable to foreign and United States sources, respectively. For this purpose, Global Crossing will be treated as a United States-owned foreign corporation so long as stock representing 50% or more of the voting power or value of Global Crossing is owned, directly or indirectly, by U.S. persons. Disposition. Subject to the passive foreign investment company and controlled foreign corporations rules discussed below, gain or loss realized by a Global Crossing shareholder on the sale, exchange or other taxable disposition of Global Crossing common stock will be subject to U.S. federal income taxation as capital gain or loss in an amount equal to the difference between the amount realized on that sale, exchange or other disposition and the shareholder's adjusted tax basis in the Global Crossing common stock surrendered. The gain or loss will be long term capital gain or loss if the shareholder's holding period for its Global Crossing common stock is more than one year. Any gain or loss so realized generally will be United States source. Passive Foreign Investment Company. In general, Global Crossing will be classified as a "passive foreign investment company" for any taxable year if either (1) at least 75% of Global Crossing's gross income is passive income or (2) at least 50% of the value (determined on the basis of a quarterly average) of Global Crossing's assets produce or are held for the production of passive income. Global Crossing believes that it is not a passive foreign investment company and does not expect to become a passive foreign investment company in the future for U.S. federal income tax purposes, although Global Crossing cannot assure you in this regard. See "Risk Factors--Global Crossing shareholders may be subject to Foreign Personal Holding Company, Passive Foreign Investment Company, Controlled Foreign Corporation and Personal Holding Company rules." This conclusion is a factual determination made annually and is subject to change. In addition, it is based, in part, on interpretations of existing law that Global Crossing believes are reasonable, but which have not been approved by any taxing authority. If Global Crossing is classified as a passive foreign investment company in any year with respect to which a United States person is a shareholder, Global Crossing generally will continue to be treated as a passive foreign investment company with respect to that shareholder in all succeeding years, regardless of whether it continues to meet the income or asset test described above, subject to certain possible shareholder elections that may apply in some circumstances. If Global Crossing is treated as a passive foreign investment company: 70
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. Distributions made by Global Crossing during a taxable year to a shareholder with respect to Global Crossing stock that are "excess distributions", which are defined generally as the excess of the amount received with respect to that stock in any taxable year over 125% of the average received in the shorter of either the three previous years or the shareholder's holding period before the taxable year, must be allocated ratably to each day of the shareholder's holding period. The amounts allocated to the current taxable year and to taxable years before the first year in which Global Crossing was classified as a passive foreign investment company are included as ordinary income in the shareholder's gross income for that current year. The amount allocated to each other prior taxable year is taxed as ordinary income at the highest rate in effect for the shareholder in that prior year and the tax is subject to an interest charge at the rate applicable to deficiencies in income taxes. . The entire amount of any gain realized upon the sale or other disposition, including for these purposes, a pledge of Global Crossing stock will be treated as an excess distribution made in the year of sale or other disposition. As a result, that gain will be treated as ordinary income and, to the extent allocated to years before the year of sale or disposition, will be subject to the interest charge described above. In addition, shareholders who acquire their Global Crossing stock from decedents generally will not receive a "stepped up" basis in the stock. Instead, these shareholders will have a tax basis equal to the lower of the fair market value of the stock or the decedent's basis. The special passive foreign investment company tax rules described above will not apply to a Global Crossing shareholder if 1. The Global Crossing shareholder elects to have Global Crossing treated as a "qualified electing fund," which we refer to as a "qualified electing fund election," and Global Crossing provides certain information to its shareholders. If Global Crossing is treated as a passive foreign investment company, it intends to notify its shareholders and to provide to its shareholders all information that may be required to make the qualified electing fund election effective. A shareholder that makes a qualified electing fund election will be taxable currently on its pro rata share of Global Crossing's ordinary earnings and net capital gain, at ordinary income and capital gain rates, respectively, for each taxable year of Global Crossing during which it is treated as a passive foreign investment company, regardless of whether or not distributions were received. The shareholder's basis in the Global Crossing stock will be increased to reflect taxed but undistributed income. Distributions of income that had previously been taxed will result in a corresponding reduction of basis in the Global Crossing stock and will not be taxed again as a distribution to the shareholder. 2. The shareholder makes a mark to market election. The mark to market election is only available with respect to stock that is regularly traded on specified United States exchanges and other exchanges designated by the United States Treasury. The meaning of the term "regularly traded," for purposes of the mark to market election, is unclear. In general, an electing shareholder will include in each year as ordinary income the excess, if any, of the fair market value of that stock at the end of the taxable year over its adjusted basis and will be permitted an ordinary loss in respect of the excess, if any, of the adjusted basis of that stock over its fair market value at the end of the taxable year, but only to the extent of the net amount previously included in income as a result of the mark to market election. The electing shareholder's basis in the stock will be adjusted to reflect any of these income or loss amounts. Any gain or loss on the sale of the Global Crossing stock will be ordinary income or loss, except that a loss will be ordinary loss only to the extent of the previously included net mark to market gain. A shareholder who owns Global Crossing stock during any year that Global Crossing is a passive foreign investment company must file IRS Form 8621. Shareholders are urged to consult their tax advisors concerning 71
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the U.S. federal income tax consequences of holding stock of Global Crossing if it is a passive foreign investment company, including the advisability and availability of making any of the elections described above. Foreign Personal Holding Company. A foreign corporation will be classified as a foreign personal holding company if . at any time during the corporation's taxable year, five or fewer individuals, who are United States citizens or residents, directly or indirectly own more than 50% of the corporation's stock by either voting power or value; we refer to this as the "shareholder test" and . the corporation receives at least 60% of its gross income (50% after the initial year of qualification), as adjusted, for the taxable year from certain passive sources; we refer to this as the "income test." It is possible that Global Crossing or one of its non-United States subsidiaries will meet the income test in a given year. However, Global Crossing does not expect that the shareholder test will be met after the merger. Accordingly, it is not expected that Global Crossing or any of its non- United States subsidiaries will be treated as a foreign personal holding company, although we cannot assure you in this regard. Global Crossing intends to manage its affairs so as to attempt to avoid or minimize having income imputed to its shareholders under these rules, to the extent this management of its affairs is consistent with its business goals. If Global Crossing or one of its non-United States subsidiaries were classified as a foreign personal holding company, all shareholders, including certain indirect holders, regardless of their percentage ownership, would be required to include in income, as a dividend, their pro rata share of Global Crossing's or its relevant non-United States subsidiary's undistributed foreign personal holding company income if they were holders on the last day of Global Crossing's taxable year or, if earlier, the last day on which Global Crossing satisfied the shareholder test. Foreign personal holding company income is generally equal to taxable income with certain adjustments. In addition, if Global Crossing were classified as a foreign personal holding company, shareholders who acquire their Global Crossing stock from decedents would not receive a "stepped-up" basis in that stock. Instead, these shareholders would have a tax basis equal to the lower of the fair market value of the stock or the decedent's basis. Personal Holding Company. A corporation classified as a personal holding company is subject to a 39.6% tax on its undistributed personal holding company income. Foreign corporations like Global Crossing determine their liability for personal holding company tax by considering only (1) gross income derived from United States sources and (2) gross income that is effectively connected with a United States trade or business. A corporation will be classified as a personal holding company if . at any time during the last half of the corporation's taxable year, five or fewer individuals own more than 50% of the corporation's stock measured by value, directly or indirectly and . the corporation receives at least 60% of its adjusted gross income from certain passive sources. However, if a corporation is a foreign personal holding company or a passive foreign investment company, it cannot be a personal holding company. It is possible that Global Crossing or one of its non-United States subsidiaries will meet the income test in a given year. However, it is not expected that the shareholder test will be met after the merger. Accordingly, it is not expected that Global Crossing or any of its non-United States subsidiaries will be treated as a personal holding company, although we cannot assure you in this regard. Global Crossing intends to manage its affairs so as to attempt to avoid or minimize the imposition of the personal holding company tax, to the extent this management of its affairs is consistent with its business goals. Controlled Foreign Corporations. For purposes of this discussion, when we use the term "10% U.S. Shareholders," we mean United States persons who individually own or are deemed for U.S. federal income tax purposes to own, pursuant to complex attribution and constructive ownership rules 10% or more of the voting stock of Global Crossing or any of its non-United States subsidiaries. 72
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If 10% U.S. Shareholders own, in the aggregate, more than 50%, measured by voting power or value, of the shares of Global Crossing or any of its non- United States corporate subsidiaries, directly, indirectly, or by attribution, Global Crossing or any of its non-United States subsidiaries would be a controlled foreign corporation. If characterized as controlled foreign corporations, then a portion of the undistributed income of Global Crossing and its non-United States subsidiaries may be includible in the taxable income of 10% U.S. Shareholders of those entities, and a portion of the gain recognized by 10% U.S. Shareholders on the disposition of their shares in Global Crossing, which could otherwise qualify for capital gains treatment, may be converted into ordinary dividend income. It is possible that Global Crossing and its non- United States subsidiaries may be controlled foreign corporations or may become controlled foreign corporations in the future. However, as discussed above, controlled foreign corporation status generally only has potentially adverse consequences to 10% U.S. Shareholders. In order to attempt to prevent any United States person from being a 10% U.S. Shareholder of Global Crossing, the bye-laws of Global Crossing generally provide, among other things, that no holder of Global Crossing common stock or any group of holders through whom ownership may be attributed to another holder by the constructive ownership or attribution rules of Section 958 of the Internal Revenue Code will be allowed to cast votes with respect to more than 9.5% of the common stock, and some restrictions have been placed on the transferability of shares. See "Description of Global Crossing Capital Stock-- Voting and transfer restrictions." We cannot assure you that these limitations will prevent the characterization of Global Crossing or any of its non-United States subsidiaries as a controlled foreign corporation or of any shareholder as a 10% U.S. Shareholder. However, a shareholder that owns directly less than 10% of the common stock generally will not be treated as a 10% U.S. Shareholder unless it is attributed common stock owned by other shareholders. Information Reporting and Backup Withholding. In general, information reporting requirements will apply to dividends in respect of the Global Crossing common stock or the proceeds received on the sale, exchange, or redemption of the Global Crossing common stock paid within the United States, and in some cases, outside of the United States, to shareholders other than certain exempt recipients, such as corporations, and a 31% backup withholding may apply to the amounts if the shareholder fails to provide an accurate taxpayer identification number or to report dividends required to be shown on its U.S. federal income tax returns. The amount of any backup withholding from a payment to a shareholder will be allowable as a refund or credit against the shareholder's U.S. federal income tax liability, provided that the required information or appropriate claim for refund is furnished to the Internal Revenue Service. Bermuda tax consequences In the opinions of Conyers Dill & Pearman, special Bermuda tax counsel for Frontier, and Appleby, Spurling & Kempe, Bermuda tax counsel for Global Crossing, there will be no Bermuda . income, corporation or profits tax, . withholding tax, . capital gains tax, . capital transfer tax, . estate duty or . inheritance tax payable in respect of an exchange of Frontier common stock for Global Crossing common stock pursuant to the merger. In addition, as of the date of this document, there is no Bermuda income, corporation or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable in respect of capital gains realized on a disposition of Global Crossing common stock or in respect of distributions by Global Crossing with respect to Global Crossing common stock. Under current Bermuda law, Global Crossing is not subject to tax on income or capital gains. Furthermore, Global Crossing has obtained from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act 1966 an undertaking that, in the 73
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event that Bermuda enacts any legislation imposing tax computed on profits, income, any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of that tax will not be applicable to Global Crossing or to any of its operations or the shares, debentures or other obligations of Global Crossing, until March 28, 2016. This undertaking does not, however, prevent the application of any tax or duty to persons ordinarily resident in Bermuda or of any tax payable pursuant to The Land Tax Act 1967 of Bermuda or otherwise payable in relation to land leased to Global Crossing. Anticipated accounting treatment For accounting and financial reporting purposes, the merger is intended to be treated as a purchase by Global Crossing under generally accepted accounting principles. Under the purchase method of accounting, Frontier's assets and liabilities, as of the effective date of the merger, will be recorded at their respective fair values and added to those of Global Crossing. For purposes of preparing Global Crossing's consolidated financial statements, Global Crossing will establish a new accounting basis for Frontier's assets and liabilities based upon the fair values thereof, the merger consideration and the costs of the transactions. Global Crossing's management believes that any excess of cost over the fair value of the net assets of Frontier will be recorded as goodwill. A final determination of the intangible asset lives and required purchase accounting adjustments, including the allocation of the purchase price to the assets acquired and liabilities assumed based on their respective fair values, has not yet been made. Accordingly, the purchase accounting adjustments made in connection with the development of the unaudited pro forma financial information appearing elsewhere in this document are preliminary and have been made solely for purposes of developing the unaudited pro forma financial information. Global Crossing has undertaken a study to determine the fair value of some of Frontier's assets and liabilities and will make appropriate purchase accounting adjustments upon completion of that study. For financial reporting purposes, the results of operations of Frontier will be included in the Global Crossing consolidated statement of operations following the effective time of the merger and Global Crossing's historical consolidated statements of operations will not be restated. See "Unaudited Pro Forma Condensed Combined Financial Statements." Regulatory approvals Hart-Scott-Rodino Act We cannot complete the merger until we give notification and furnish information to the Federal Trade Commission and the Antitrust Division of the Department of Justice and the specified waiting period requirements have been satisfied. We filed the required notification and report forms with the Federal Trade Commission and the Antitrust Division on April 29, 1999 and the waiting period was terminated on May 11, 1999. At any time before or after the effective time of the merger, and notwithstanding that the waiting period has terminated or the merger may have been consummated, the Federal Trade Commission, the Antitrust Division or any state could take any action under the applicable antitrust or competition laws as it deems necessary or desirable. This action could include seeking to enjoin the completion of the merger. Private parties may also institute legal actions under the antitrust laws under some circumstances. Subsequent to the May 11, 1999 early termination of the waiting period, U S WEST acquired approximately 9.49% of the outstanding common stock of Global Crossing, the acquisition of which the Antitrust Division of the Department of Justice is currently investigating. We do not expect that this investigation will delay the completion of the Global Crossing--Frontier merger. FCC and Public Utility Commission approvals It is a condition to the merger that . the approval of the Federal Communications Commission and . approvals of public utility commissions of the states 74
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be obtained without the imposition of conditions reasonably expected to have a material adverse effect on Global Crossing and some of its subsidiaries, including, following the merger, Frontier, unless the failure to obtain any public utility commission approval would not reasonably be expected to have a material adverse effect on Global Crossing and some of its subsidiaries, including, following the merger, Frontier. See "The Merger Agreement--Conditions to the completion of the merger." Bermuda Monetary Authority The issuance of Global Crossing shares in the merger and the subsequent free transferability of the corresponding shares between non-residents of Bermuda for exchange control purposes must be approved by the Bermuda Monetary Authority. Global Crossing obtained that approval on July 1, 1999. The approval of the Bermuda Monetary Authority is required for the issuance of shares by any Bermuda company to a non-resident of Bermuda for exchange control purposes. Approvals or permissions received from the Bermuda Monetary Authority in connection with this document do not constitute a guarantee by the Bermuda Monetary Authority as to the creditworthiness of Global Crossing. Furthermore, in giving those approvals, the Bermuda Monetary Authority will not be liable for the performance or default of Global Crossing or of the correctness of any opinions or statements expressed in this document. No appraisal rights Since Global Crossing is not party to the merger between Frontier and Global Crossing's wholly owned subsidiary, under Bermuda law, Global Crossing shareholders are not entitled to dissenters' rights of appraisal in connection with the merger. Under the New York Business Corporation Law, Frontier shareholders are not entitled to dissenters' appraisal rights in connection with the merger because the Frontier common stock was listed on the New York Stock Exchange on the record date for the Frontier special meeting. Quotation on the Nasdaq National Market It is a condition to the merger that the shares of Global Crossing common stock to be issued in the merger and the other shares to be reserved for issuance in connection with the merger be approved for trading on the Nasdaq National Market upon official notice of issuance. The merger agreement provides that Global Crossing will use its reasonable best efforts to cause the shares of Global Crossing common stock to be issued in the merger and the shares of Global Crossing common stock to be reserved for issuance in connection with the merger to be approved for trading on the Nasdaq National Market. Litigation On June 18, June 23, July 7 and July 13, 1999, four purported shareholder class action suits were filed in New York State Supreme Court against Frontier, the members of its board and others. These complaints allege, among other things, that the defendants have breached their fiduciary duties in connection with the unsolicited bid by Qwest. These complaints variously seek, among other things, a court order enjoining any proposed transaction with U S WEST or requiring the defendants to take certain actions with respect to a merger or acquisition of Frontier, including, but not limited to, engaging in negotiations with Qwest. Frontier believes that these complaints are without merit and intends to defend them vigorously. Resales of Global Crossing common stock All shares of Global Crossing common stock received by Frontier shareholders in the merger will be registered under the Securities Act of 1933 and will be freely tradeable without restriction by people who will 75
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not be affiliates of Global Crossing after the merger or who were not affiliates of Frontier on the date of the Frontier special meeting. Any of those people may resell the Global Crossing common stock received by him or her in the merger only if the shares are registered for resale under the Securities Act or an exemption from such registration under the Securities Act is available. Those people may be permitted to effect resales under the safe harbor provisions of Rule 145 under the Securities Act, or Rule 144 in the case of persons who become affiliates of Global Crossing, or as otherwise permitted under the Securities Act. People who may be deemed to be affiliates of Frontier or Global Crossing generally include individuals or entities that control, are controlled by, or are under common control with, Frontier or Global Crossing, as applicable, and may include some officers and all directors of that party as well as principal shareholders of Frontier or Global Crossing, as applicable. We recommend that any of those people obtain advice of securities counsel before making any resale. The merger agreement provides that, . on or before the date of the Frontier special meeting, Frontier will deliver to Global Crossing a letter identifying all people who may be deemed to be affiliates of Frontier for purposes of Rule 145 under the Securities Act and . on or before the closing date, Frontier will use all reasonable efforts to cause each of its affiliates to deliver a written agreement to the effect that the affiliate will not offer or sell or otherwise dispose of any shares of Global Crossing common stock received in the merger in violation of the Securities Act or the rules and regulations thereunder. This document does not cover resales of Global Crossing common stock received by any person who may be deemed to be an affiliate of Global Crossing or Frontier. 76
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The Merger Agreement This section is a summary of the material terms of the merger agreement, as amended, a copy of which is attached as Annex A to this document. The following description does not purport to be complete and is qualified in its entirety by reference to the merger agreement. You should refer to the full text of the merger agreement for details of the merger and the terms and conditions of the merger agreement. The merger When the merger occurs, GCF Acquisition Corp., a direct wholly owned subsidiary of Global Crossing, will be merged with and into Frontier in accordance with the New York Business Corporation Law. As a result of the merger, Frontier will be a wholly owned subsidiary of Global Crossing. Each share of Frontier common stock issued and outstanding immediately before the merger, other than shares owned or held directly or indirectly by Global Crossing or directly by Frontier, which will be canceled, will be converted into the right to receive a number of shares of Global Crossing common stock equal to the exchange ratio. See "The Merger--What you will receive in the merger." Each holder of a certificate representing any shares of Frontier common stock will no longer have any rights with respect to the shares of Frontier common stock, except the right to receive Global Crossing common stock and any cash included in the merger consideration. Global Crossing common stock is described beginning on page 135. Under the terms of the merger agreement, at the effective time of the merger: . the certificate of incorporation of the surviving corporation will be amended so that its provisions will be the same as the certificate of incorporation of GCF Acquisition Corp., the acquisition subsidiary, . the by-laws of GCF Acquisition Corp. will be the by-laws of the surviving corporation, and . the officers of Frontier as of the effective time will be the officers of the surviving corporation and the directors of GCF Acquisition Corp. as of the effective time will be the directors of the surviving corporation. Effective time of the merger The merger will become effective when we file a certificate of merger with the New York Department of State. However, we may agree to a later effective time, and specify that time in the certificate of merger. We will file the certificate of merger on the second business day after the satisfaction or waiver of all conditions in the merger agreement, other than conditions that cannot be satisfied until the closing date. See "--Conditions to the completion of the merger." Exchange procedures After the effective time of the merger, EquiServe, as the exchange agent, will mail to each person who held shares of Frontier common stock at the time of the merger a letter of transmittal. Frontier shareholders should use this letter of transmittal in forwarding Frontier stock certificates. This letter will include instructions for the exchange of Frontier stock certificates for Global Crossing stock certificates. After surrendering a Frontier stock certificate together with the letter of transmittal, and any other documents the exchange agent reasonably requires, the holder of a Frontier stock certificate will be entitled to receive a Global Crossing stock certificate. Frontier shareholders should not send in their Frontier common stock certificates until they receive a letter of transmittal. In addition to a certificate representing Global Crossing common stock, the holder of a surrendered Frontier stock certificate will receive a check in the amount of cash the holder is entitled to receive, including 77
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. cash paid instead of fractional shares, . any dividends or other distributions on the shares of Global Crossing common stock that have a record date after the merger, and a payment date before the holder surrenders the Frontier common stock certificate and . any cash payable as a result of the cash top-up described under "-- Termination; Possible exchange ratio increase." However, no cash will be paid until the holder of the Frontier common stock certificate surrenders that certificate. The holder will also receive any dividends or other distributions with a record date after the merger but before the surrender, and a payment date after the surrender. In each case, taxes will be withheld as required. After the merger, there will be no transfers on the transfer books of Frontier of shares of Frontier common stock that were outstanding immediately before the merger. Any Global Crossing stock certificates and any cash deposited by Global Crossing with the exchange agent that remain unclaimed by former Frontier shareholders twelve months after the merger will be delivered to the surviving corporation. Any former Frontier shareholders who have not complied with the exchange procedures before the first anniversary of the merger may look only to Global Crossing and the surviving corporation for payment of the merger consideration and any cash instead of fractional shares and unpaid dividends or distributions on the shares of Global Crossing common stock. Neither Global Crossing, GCF Acquisition Corp., Frontier or the exchange agent will be liable to you for any amount delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. No interest will be paid or accrued on any cash payable instead of fractional shares, as unpaid dividends and distributions with respect to unexchanged shares or otherwise as merger consideration. If your Frontier stock certificates have been lost, stolen or destroyed, you will only be entitled to obtain shares of Global Crossing common stock by making an affidavit and, if required by the surviving corporation, by posting a bond in an amount sufficient to protect the surviving corporation against claims related to your Frontier stock certificate. Frontier preferred stock In the merger agreement, Frontier agreed to redeem all of its outstanding preferred stock before the date of the Frontier special meeting. On July 1, 1999, Frontier redeemed all of its outstanding preferred stock. Stock options and warrants In the merger, each option and warrant to buy shares of Frontier common stock will become an immediately exercisable option or warrant to buy, on the same terms and conditions, the number of shares of Global Crossing common stock as the holder of the option or warrant would have been entitled to receive in the merger if the holder would have exercised the option or warrant in full immediately before the merger. The price per share subject to each option and warrant will be equal to the exercise price for the option or warrant divided by the number of shares of Global Crossing common stock deemed purchasable under the option or warrant, which will not include fractional shares. Representations and warranties The merger agreement contains essentially reciprocal representations and warranties made by each of us to the other, including representations and warranties relating to: . organization, standing and power, . capitalization, 78
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. power and authority to enter into and consummate the transactions under the merger agreement, . absence of conflicts between organizational documents, laws and agreements and the transactions under the merger agreement, . governmental consents in connection with the transactions under the merger agreement, . filings with the Securities and Exchange Commission, financial statements and incurrence of liabilities since December 31, 1998, . information supplied for this document, . board of directors approval and required shareholder vote, . rights agreement, in the case of Frontier only, . brokers and finders fees with respect to the merger, . receipt of fairness opinions, . litigation, . compliance with applicable laws, . tax matters, and . employee benefit plans. The merger agreement also contains representations and warranties relating to GCF Acquisition Corp.'s organization and corporate power, power and authority to enter into and consummate the transactions under the merger agreement, absence of conflicts between its organizational documents and the transactions under the merger agreement and the absence of business activities of GCF Acquisition Corp. other than in connection with the completion of the transactions contemplated by the merger agreement. All representations and warranties of Global Crossing, Frontier and GCF Acquisition Corp. expire at the effective time of the merger. Covenants Conduct of business of Frontier pending the completion of the merger Frontier has agreed that, until the completion of the merger, except as otherwise permitted by the merger agreement or if Global Crossing consents in writing, which consent will not be unreasonably withheld or delayed, it and its subsidiaries will . carry on its business in the usual, regular and ordinary course in all material respects and use all reasonable efforts to preserve intact its present lines of business, maintain its rights, franchises and licenses and preserve its relationships with customers, suppliers and others having business dealings with it to the end that its ongoing business will not be impaired in any material respect, . not (1) enter a new material line of business or (2) incur capital expenditures other than those incurred or committed to in the ordinary course of business consistent with past practice, which together with all expenditures incurred or committed for fiscal year 1999, do not exceed $900 million, . not declare any dividends on its common stock, other than the regular quarterly dividend in the amount of $.05 per share, . not split, combine or reclassify its capital stock or repurchase its capital stock, other than specified permitted exceptions, . not issue additional capital stock or securities convertible into or exercisable for, or any rights, warrants or options to acquire any capital stock, with specified permitted exceptions, including upon the exercise of stock options, 79
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. not amend (in the case of subsidiaries, in any material respect) its organizational documents, . not make any acquisitions, except that Frontier may make acquisitions related to the communications or internet business providing for consideration not in excess of $500 million and Frontier Internet Ventures Inc. may make up to $30 million of acquisitions, . not make any material dispositions of its assets, other than in the ordinary course of business and other specified permitted exceptions, . except in the ordinary course of business consistent with past practice, not make any investments, . not incur any indebtedness except under existing facilities or refinancings of existing facilities, . not take any action that would adversely affect the tax-free nature of the merger, . not (1) increase the compensation of its senior executive officers, except in the ordinary course of business consistent with past practice, or as required by an existing agreement or (2) make any increase in employee benefits, . not take specified other actions that could reasonably be expected to prevent the satisfaction of any of the conditions to the merger, . not change its methods of accounting or income tax elections, except as required by generally accepted accounting principles, and . not modify the rights agreement, other than as expressly provided in the merger agreement. Conduct of business of Global Crossing pending completion of the merger Global Crossing has agreed that, until the completion of the merger or as provided below, except as otherwise permitted by the merger agreement or if Frontier consents in writing, which consent will not be unreasonably withheld or delayed, it and its subsidiaries will . carry on its business in the usual, regular and ordinary course in all material respects and use all reasonable efforts to preserve intact its present lines of business, maintain its rights, franchises and licenses and preserve its relationships with customers, suppliers and others having business dealings with it to the end that its ongoing business will not be impaired in any material respect, . not enter a new material line of business that is not related to the communications business other than incidentally as part of a larger acquisition within an existing line of business, . not declare any dividends on its common stock, . not repurchase its capital stock, subject to specified permitted exceptions, . not issue additional capital stock or securities convertible into or exercisable for, or any rights, warrants or options to acquire any capital stock, except (1) upon the exercise of stock options, (2) issuance of stock options and (3) other issuances so long as the issuances do not cause the shares of Global Crossing common stock subject to the voting agreement described below to constitute less than 51% of the voting power of Global Crossing, . not amend its organizational documents, except for the increase in its authorized share capital and the bye-law amendments discussed in this document, . not make any acquisitions, except that Global Crossing may make acquisitions that provide for consideration of no more than $2.5 billion per acquisition and $8.5 billion in the aggregate, of which no more than $7.5 billion in the aggregate can consist of voting equity securities, and except that Global Crossing may not issue Global Crossing common stock in acquisitions if it would cause the voting power of the shares subject to the voting agreement to constitute less than 51% of the voting power of Global Crossing, . not make any material dispositions of its assets, other than in the ordinary course of business and other specified permitted exceptions, 80
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. other than in the ordinary course of business, not make any investments, . not take any action that would adversely affect the tax-free nature of the merger, including in connection with structuring or completing the U S WEST merger and the transactions contemplated by that merger, . not take specified other actions that could reasonably be expected to prevent the satisfaction of any of the conditions to the merger, . not change its methods of accounting or income tax elections, except as required by generally accepted accounting principles, and . not enter into any merger or similar agreement under which Global Crossing shareholders would receive consideration for their shares unless (1) the transaction will be completed after the merger, (2) the consideration to be received by Global Crossing shareholders would be no less than $34.5625 and (3) the transaction would not result in the merger failing to be tax-free. Global Crossing has also agreed that during the measurement period for determining the exchange ratio, it will not and will not announce an intention to: . acquire Global Crossing common stock in the open market, . sell, issue or redeem any shares of Global Crossing common stock subject to specified exceptions, or take action prohibited by Regulation M under the Securities Act of 1933, . enter into any material acquisition or disposition, or . make any announcement, except as required by applicable law or rules of the Nasdaq National Market, which would reasonably be expected to have the effect of resulting in a change in the trading price of the Global Crossing common stock. No solicitation of transactions In the merger agreement, Frontier has agreed that neither it nor any of its subsidiaries nor any of the officers and directors of it or its subsidiaries will, and that it will direct and use its best efforts to cause its and its subsidiaries' employees, agents and representatives (including any investment banker, attorney or accountant retained by it or any of its subsidiaries) not to, directly or indirectly: . initiate, solicit, encourage or knowingly facilitate, including by way of furnishing information, any inquiries or the making of any proposal or offer with respect to: --a merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving Frontier or any of its subsidiaries, or --any purchase or sale of all or any significant portion of the assets or more than 20% of Frontier or its subsidiaries' common stock, . have any discussion with or provide any confidential information or data to any person relating to any proposals or offers described above which we will refer to as an "acquisition proposal," or . engage in any negotiations concerning any acquisition proposal or accept an acquisition proposal. However, if Frontier receives an unsolicited bona fide written acquisition proposal and the Frontier special meeting has not occurred, the Frontier board of directors may . withdraw or modify in any adverse manner the approval of the merger agreement and the merger or . engage in discussions or negotiations with, or provide any information to, the person making the acquisition proposal, if the Frontier board of directors concludes in good faith that the acquisition proposal, in the case of the first bullet point above would, if completed, constitute a superior proposal or in the case of the second bullet point above, could reasonably be expected to constitute a superior proposal. 81
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We refer to a "superior proposal" as a bona fide written proposal with respect to: . a merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving Frontier, or . any purchase or sale of all or any significant portion of the assets of Frontier and its subsidiaries, taken as a whole, or more than 50% of Frontier's common stock, which the Frontier board of directors concludes in good faith, after consultation with its financial advisors and legal counsel, taking into account all legal, financial, regulatory and other aspects of the proposal and the person making the proposal, . would, if completed, result in a transaction that is more favorable to the Frontier shareholders, in their capacities as shareholders, from a financial point of view, than the transactions contemplated by the merger agreement and . is reasonably capable of being completed. In addition, before providing any information or data to any person making an acquisition proposal, the Frontier board of directors must receive an executed confidentiality agreement from that person on terms substantially similar to those contained in the confidentiality agreement between Frontier and Global Crossing, except as to standstill provisions, in which case Global Crossing will get the benefit of any favorable changes to the standstill provisions. Frontier has also agreed that it will notify Global Crossing of any inquiry, proposal or offer before providing any information or data to any person or entering into discussions or negotiations with any person making the inquiry, proposal or offer and to keep Global Crossing informed, on a current basis, of the status and terms of any proposals, offers, discussions or negotiations. Frontier has also agreed to terminate any existing activities, discussions or negotiations with any parties conducted before the date of the merger agreement with respect to any acquisition proposal. Board of directors' covenant to recommend Subject to the provisions described above under "--No solicitation of transactions" and the right of Frontier to terminate the merger agreement to accept a superior proposal described under "--Termination; Possible exchange ratio increase," Frontier has agreed that its board of directors will recommend adoption of the merger agreement by Frontier shareholders. Global Crossing has agreed that its board of directors will recommend approval of the transactions contemplated by the merger agreement by the shareholders of Global Crossing. Transition planning; Continued operations of Frontier We have agreed to create a committee that will be responsible for coordinating transition planning and implementation relating to the merger. The initial representatives of Global Crossing are Jack M. Scanlon, David L. Lee, Abbott L. Brown and James C. Gorton, and the initial representatives of Frontier are Robert L. Barrett, James G. Dole, Rolla P. Huff and R. Charles Mancini. We have also agreed to maintain the headquarters of Frontier Telephone of Rochester, Inc. in Rochester, New York. Services agreement Frontier and Global Crossing agreed to use reasonable good faith efforts as soon as practicable after the execution of the merger agreement to negotiate a services agreement whereby each party will provide specified services to the other party. Frontier and Global Crossing entered into such an agreement on May 6, 1999, which was amended on May 25, 1999. 82
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Reasonable best efforts We have agreed to use our reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations, including the Hart-Scott- Rodino Antitrust Act and the laws and regulations of the FCC, public utility commissions and local franchising authorities, to complete the merger and the other transactions contemplated by the merger agreement as soon as practicable after the date of the merger agreement. Global Crossing is not required to sell or otherwise dispose of, or permit the sale or other disposition of, any assets of Global Crossing, Frontier or any of their subsidiaries, whether as a condition to obtaining any approval from a governmental entity or any other person or for any other reason, if Global Crossing reasonably determines that the sale or other disposition would have or is likely to have a material adverse effect on Global Crossing and its subsidiaries, including the surviving corporation and its subsidiaries, taken together, after the merger. Employee benefits After the merger, Global Crossing has agreed to cause the surviving corporation and its subsidiaries to, for at least two years after the effective time, provide benefits which, in the aggregate, are no less favorable than the benefits provided, in the aggregate, under the Frontier benefit plans before the merger, but Global Crossing will not be required to continue any particular benefit plan or prevent the amendment or termination of any plan other than the Employee Telecommunications Benefit program, the Educational Assistance Fund, the Educational Assistance Program, the Executive Perquisite program and the Change in Control Severance Plan for Salary Band Levels 25 and Above for a period of two years after the effective time. The parties have also agreed that the transition committee described above will also jointly determine how a retention program of $35 million in the aggregate to Frontier employees will be administered. Indemnification and insurance After the merger, the surviving corporation will maintain for a period of six years after the effective time of the merger: . the current provisions regarding elimination of liability of directors and indemnification of officers, directors and employees contained in the certificate of incorporation and by-laws of Frontier, and . the current policies of directors' and officers' liability insurance and fiduciary liability insurance for acts and omissions occurring before the merger maintained by Frontier; provided, that the surviving corporation may substitute policies of at least the same coverage and amounts containing terms and conditions which are, in the aggregate, no less advantageous to the covered persons, but if the annual premium is more than 200% of the last annual premiums currently paid by Frontier, Global Crossing must obtain a policy with the greatest coverage available for a cost not exceeding that amount. Frontier may satisfy the obligations in the second bullet point above by buying a "tail" policy before the closing covering those matters for a premium that is not more than the total premium stated above. Conditions to the completion of the merger We may complete the merger only if each of the following conditions is met: . the holders of two-thirds of the outstanding shares of Frontier common stock adopt the merger agreement and the holders of a simple majority of the votes of all outstanding shares of Global Crossing common stock approve the increase in authorized shares and the share issuance, . there is no law, order or injunction issued by a court or other governmental entity of competent jurisdiction making the merger illegal or otherwise prohibiting completion of the merger, except that this will not be a condition for any party whose failure to fulfill its obligations described above under "--Reasonable best efforts" is the cause of, or results in, that order or injunction, 83
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. all approvals for the merger from the FCC and from the public utility commissions are obtained without the imposition of conditions that would reasonably be expected to have a material adverse effect on Global Crossing and its subsidiaries, including the surviving corporation and its subsidiaries, other than those approvals the failure of which to be obtained would not reasonably be expected to have a material adverse effect on Global Crossing and its subsidiaries, including the surviving corporation and its subsidiaries, . the waiting period applicable to the merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 terminates or expires, which waiting period was terminated on May 11, 1999, . the registration statement on Form S-4 of which this document is a part continues to be effective under the Securities Act and the shares of Global Crossing common stock to be issued and reserved for issuance in the merger are approved upon official notice of issuance for quotation on the Nasdaq National Market, . the Bermuda Monetary Authority approves the share issuance and the subsequent free transferability of the corresponding shares between nonresident persons for exchange control purposes, which the Bermuda Monetary Authority did on July 1, 1999, . the representations and warranties of the other party in the merger agreement that are qualified as to material adverse effect were true and correct on the date of the merger agreement and as of the closing date, except to the extent they speak as of a specified date, . the representations and warranties of the other party that are not qualified as to material adverse effect were true and correct in all material respects on the date of the merger agreement and on the closing date, except (1) to the extent they speak as of a specified date and (2) this condition will be satisfied so long as all failures to be true and correct, taken together, would not reasonably be expected to have a material adverse effect on that party, . the other party has complied with its agreements and covenants under the merger agreement at or before the closing date that are qualified as to materiality and has complied in all material respects with all its other agreements and covenants that are not so qualified as to materiality, and . each party receives from its counsel a written opinion dated as of the closing date with respect to the tax-free nature of the merger. Global Crossing's obligation to complete the merger is also subject to Frontier redeeming its preferred stock, which Frontier did on July 1, 1999. For purposes of the merger agreement, a "material adverse effect" means any adverse change, circumstance or effect that is or is reasonably likely to be materially adverse to the business, financial condition or results of operations of a person and its subsidiaries, taken as a whole, other than any change, circumstance or effect relating to the economy or securities markets in general or the industries in which Global Crossing or Frontier operate and not specifically relating to them. Termination; Possible exchange ratio increase (1) We may terminate the merger agreement and abandon the merger at any time before we complete the merger by our mutual written consent. (2) Either of us may also terminate the merger agreement if: . the merger does not occur before March 16, 2000, except as described below under "--Alternative Merger," but that the right to terminate the merger agreement will not be available (a) if the party desiring to terminate has failed to fulfill any obligation that has been the cause of, or resulted in, the failure of the merger to occur on or before March 16, 2000 and (b) to Global Crossing if all of the conditions to completing the merger have been satisfied or waived other than (1) those that cannot be satisfied until the closing date so long as it is reasonably apparent that those conditions will be able to 84
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be satisfied and (2) the condition relating to FCC and public utility commission approvals described in the third bullet under "--Conditions to the completion of the merger," . any governmental entity either (1) issues a final and nonappealable order, decree or ruling or takes any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the merger agreement or (2) fails to issue an order, decree or ruling or to take any other action, in each case which is necessary to fulfill the conditions contained in the third and fourth bullets under "--Conditions to the completion of the merger" above, and the denial of a request to issue the order, decree or ruling or take such other action is final and nonappealable; but the right to terminate the merger agreement will not be available if the party desiring to terminate has failed to comply with its obligations described above under "--Reasonable best efforts" that has been the cause of the action or inaction, or . the shareholders of the other party fail to approve the matters required to be approved by them. (3) Global Crossing may terminate the merger agreement if the Frontier board of directors, before the Frontier special meeting, withdraws or modifies in any adverse manner its approval and recommendation of the merger or approves or recommends a superior proposal pursuant to the provisions described under "--No solicitation of transactions." (4) Frontier may terminate the merger agreement if: (a) at any time before the Frontier special meeting, the Frontier board of directors, approves a superior proposal; provided that . Frontier has complied with the provisions described under "--No solicitation of transactions," . the Frontier board of directors concludes in good faith, after considering any changes to the terms of the merger agreement which are offered by Global Crossing during the period described in the next bullet point, on the basis of the advice of its financial advisors and outside counsel, that the proposal is a superior proposal, and . before terminating the merger agreement, Frontier complies with specified notice and waiting periods which give Global Crossing a chance to negotiate with Frontier to adjust the terms of the merger agreement. Frontier may exercise this termination right only if it has paid Global Crossing the $270 million termination fee described below under "-- Termination fees," or (b) the Frontier board of directors so determines by a vote of the majority of the members of the entire Frontier board of directors, at any time during the three business day period beginning on the date before all closing conditions have been satisfied or waived, other than conditions that cannot be satisfied or waived until the closing, if the average trading price of the Global Crossing common stock during the measurement period is less than $34.5625, provided that . Frontier must give Global Crossing written notice of its intention to terminate, which will be effective three business days after delivery and which can be withdrawn by Frontier at any time before it becomes effective . during the two business day period beginning with the delivery of that notice, Global Crossing will have the option of providing additional merger consideration to ensure that Frontier shareholders receive $63.00 in value, based on the average Global Crossing trading price, by either: 1. adjusting the exchange ratio to equal $63.00 divided by the average price during the measurement period, rounded to the nearest 1/10,000, 85
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2. paying merger consideration equal to the exchange ratio as in effect and paying cash to make up the difference between $63.00 and the value based on the average trading price, of the Global Crossing shares to be delivered or 3. using any combination of cash and Global Crossing shares to provide $63.00 of value, based on the average trading price of the Global Crossing common stock during the measurement period. However, Global Crossing can only use cash consideration if the use of the cash will not cause the merger to fail to qualify as a tax-free reorganization. Global Crossing can exercise this option by delivering written notice to Frontier at any time during the two business day period. If Global Crossing elects to adjust the exchange ratio as described above, then the merger agreement will not terminate. It is not possible to know until the date on which we calculate the exchange ratio if the average trading price of the Global Crossing common stock during the measurement period will be less than $34.5625. The Frontier board of directors has not decided whether it would exercise its right to terminate the merger agreement if the average trading price of the Global Crossing common stock were less than $34.5625. The Global Crossing board of directors has not decided whether it would exercise its related right to increase the merger consideration in the event Frontier chooses to terminate the merger agreement. We cannot assure you that the Frontier board of directors would exercise its right to terminate the merger agreement if the average trading price of the Global Crossing common stock were less than $34.5625 and, if the Frontier board of directors does elect to terminate the merger agreement, we cannot assure you that Global Crossing will elect to increase the merger consideration. Since the date of the merger agreement, the Global Crossing common stock has traded within a range from $32.94 to $64.25. Frontier shareholders should be aware that the average trading price will be calculated on the date before the satisfaction and waiver of all of the closing conditions, other than those that cannot be satisfied or waived until the closing date, based on the average of the volume weighted averages of the trading prices of Global Crossing common stock for 15 randomly selected trading days during the 30 trading days ended on the trading day before the date before the satisfaction and waiver of all of the closing conditions, other than those that cannot be satisfied or waived until the closing date. Accordingly, because the market price of Global Crossing common stock will fluctuate and may increase or decrease during the period from the end of the measurement period to the effective time of the merger as well as during the period from the effective time of the merger until the date certificates representing shares of Global Crossing common stock are delivered to Frontier shareholders in exchange for shares of Frontier common stock after the completion of the merger, the value of the Global Crossing common stock actually received by holders of Frontier common stock may be more or less than the average trading price or the value of the Global Crossing common stock at the effective time of the merger resulting from the exchange ratio, including as the exchange ratio may be adjusted as described above. This means that the stated value of $63.00 per share of Frontier common stock may not be the actual value of the shares on the closing date or when you receive the shares. Adoption of the merger agreement by the Frontier shareholders at the Frontier special meeting and approval of the share issuance and the increase in authorized shares by the Global Crossing shareholders at the Global Crossing annual meeting will give the Frontier board of directors and the Global Crossing board of directors, respectively, the power to elect to . complete the merger in the event the average price is less than $34.5625, in the case of the Frontier board of directors, or . increase the exchange ratio in the event Frontier elects to exercise its termination right, in the case of the Global Crossing board of directors, without any further action by, or resolicitation of, the Frontier shareholders or the Global Crossing shareholders, as the case may be. 86
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Termination fees The merger agreement obligates Frontier to pay Global Crossing a termination fee of $270 million if: . Frontier terminates the merger agreement because its board of directors approves a superior proposal under the circumstances described in clause (a) of paragraph (4) under "--Termination; Possible exchange ratio increase," . Frontier or Global Crossing terminate the merger agreement because of the failure of Frontier shareholders to adopt the merger agreement by the required vote and all of the following occur: 1. any time after the date of the merger agreement and before this termination, an acquisition proposal is made with respect to Frontier, and 2. within 12 months of this termination, Frontier enters into a definitive agreement with any third party relating to an acquisition proposal or an acquisition proposal is completed, . Global Crossing terminates the merger agreement because the Frontier board of directors, before the Frontier special meeting, withdraws or modifies in any adverse manner its approval and recommendation of the merger or approves or recommends a superior proposal, or . Global Crossing terminates the merger agreement because the merger does not occur by March 16, 2000 under the terms described in the first bullet point under paragraph (2) under "--Termination; Possible exchange ratio increase" or Frontier or Global Crossing terminate the merger agreement because any governmental entity does not allow the merger as described in the second bullet point under paragraph (2) under "-- Termination; Possible exchange ratio increase" and all of the following occur: 1. at any time after the date of the merger agreement and before this termination, an acquisition proposal is made with respect to Frontier, 2. following the existence of that acquisition proposal and before this termination, Frontier intentionally breaches (and does not cure after notice of the breach) any of its material covenants or agreements in the merger agreement in any material respect and 3. within 12 months of this termination, Frontier enters into a definitive agreement with any third party with respect to an acquisition proposal or an acquisition proposal is completed. Other expenses All expenses incurred in connection with the merger agreement and the transactions contemplated by the merger agreement will be paid by the party incurring the expense. The merger agreement provides that expenses incurred in connection with the filing, printing and mailing of this document will be shared equally by us and that if the merger is completed, the surviving corporation will pay, or cause to be paid, any and all property or transfer taxes imposed on Frontier or its subsidiaries and any real property transfer tax imposed on any holder of shares of capital stock of Frontier resulting from the merger. Amendments and waivers The parties may amend the merger agreement before the merger, if the amendment is in writing signed by the parties. After the shareholder approvals of Frontier and Global Crossing are obtained, the parties cannot make any amendment to the merger agreement which would require further shareholder approval without further approval. The conditions to each party's obligation to complete the merger may be waived by the other party in whole or in part to the extent permitted by applicable law. 87
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Alternative merger structure The merger agreement provides for an alternative merger structure to be used to effect the merger under the circumstances described below. The alternative merger structure provides for the creation of a new United States holding company with two subsidiaries. Frontier would become a wholly owned subsidiary of the new United States holding company by merging with one of the new United States holding company's subsidiaries and Global Crossing would become a wholly owned subsidiary of the new United States holding company through a merger or scheme of arrangement. In connection with the alternative merger structure, each share of Frontier common stock would be converted into a number of shares of the new holding company's common stock equal to the exchange ratio. Each share of Global Crossing common stock would be converted into one share of the new holding company's common stock. The implementation of the alternative merger structure would therefore result in current Frontier shareholders owning the same percentage of the new company as they would own of Global Crossing under the existing structure except that the new company will be incorporated under the laws of a state in the United States rather than Bermuda. The merger will be completed in accordance with the structure described elsewhere throughout this document as long as a trigger event occurs and remains in effect. Under the merger agreement, a trigger event occurs when the following conditions have occurred and remain satisfied: (1) Global Crossing has completed a qualifying acquisition and (2) counsel to Frontier and Global Crossing each confirm that they could render legal opinions as to the tax-free nature of the merger. On July 2, 1999, a trigger event occurred. Based on existing circumstances, we do not currently believe that the alternative merger structure will be required to be effected. If, however, the alternative merger structure is required to be effected, we intend to take any action required by law to effect such structure, including, if necessary, providing you with additional information regarding the alternative merger structure. If we were required to implement the alternative merger structure because the trigger event was no longer in effect, the date described in the second bullet point of paragraph (2) under "--Termination; Possible exchange ratio increase" will be 180 days after the date on which the trigger event is no longer in effect instead of March 16, 2000. 88
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Related Agreements Stock option agreement General Frontier and Global Crossing have entered into a stock option agreement giving Global Crossing the right to acquire shares of Frontier. The stock option agreement may prevent a third party from completing a pooling of interests transaction with Frontier and would make alternative transactions, including a merger with another company, significantly more expensive than would otherwise be the case. Accordingly, the stock option agreement may discourage third parties from proposing alternative transactions that may be more advantageous than the merger for Frontier shareholders. The stock option agreement gives Global Crossing an option to purchase shares of Frontier common stock at an exercise price of $62.00 per share. The maximum number of shares that Global Crossing may purchase under the option is 19.9% of the shares of Frontier common stock outstanding at the time of exercise. Based on the number of shares outstanding on the date of the merger agreement, the option allows Global Crossing to purchase 34,291,944 shares. We have attached the stock option agreement to this document as Annex B. We urge you to read the full text of the stock option agreement. When the option may be exercised The option will become exercisable if the merger agreement is terminated in a circumstance under which Global Crossing would or could be entitled to receive a termination fee from Frontier. These circumstances are described under "The Merger Agreement--Termination fees." If the merger agreement is terminated under circumstances which could result in Global Crossing becoming entitled to receive a termination fee described in the second or fourth bullet points under "The Merger Agreement--Termination fees," the option will not become exercisable unless Frontier enters into a definitive agreement with a third party with respect to an acquisition proposal or completes an acquisition proposal during the twelve months after termination of the merger agreement. Events terminating the right to exercise The right to exercise the option terminates if we complete the merger. The right to exercise the option also terminates in three other circumstances: 1. 15 months after the option first becomes exercisable, 2. termination of the merger agreement under circumstances which do not result in Global Crossing becoming entitled to receive a termination fee from Frontier, and 3. 12 months after termination of the merger agreement under circumstances which would result in Global Crossing becoming entitled to receive a termination fee under the second or fourth bullet points under "The Merger Agreement--Termination fees" unless, during that period, the option becomes exercisable. Repurchase . At the option of Global Crossing. At any time after the termination fee is paid or becomes due and payable from Frontier under the merger agreement, at Global Crossing's request, Frontier will repurchase the option and all, but not less than all, of the shares of Frontier common stock issued upon the exercise of the option. . At the option of Frontier. At any time after the option becomes exercisable, Frontier may, at its election, repurchase the option or all, but not less than all, of the shares of Frontier common stock issued upon the exercise of the option. 89
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The repurchase will be made at a price per share equal to the highest of: . the highest price per share at which a tender or exchange offer for Frontier has been completed, . the highest price per share to be paid by a third party under an agreement with Frontier for an acquisition proposal, and . the highest closing price per Frontier share as reported on the New York Stock Exchange during the 60 business days before the date of repurchase. In each case, the exercise price for the repurchased options will be deducted from the total repurchase price paid. The value of any noncash consideration will be determined in good faith by an independent nationally recognized investment banking firm selected by Global Crossing and reasonably acceptable to Frontier. Limitation on total profit The total profit that Global Crossing can realize from the stock option agreement would be equal to the sum of the following amounts received from: . the sale of shares purchased under the option, less the purchase price for those shares, . the repurchase of the option by Frontier, and . any termination fee received under the merger agreement. The stock option agreement limits Global Crossing's total profit from the option and the termination fee to $275 million. Registration rights Global Crossing may demand on two occasions that Frontier file a registration statement, including a shelf registration statement, to register the shares of Frontier common stock that it may acquire upon the exercise of the option. The registration rights terminate two years after the first exercise of the option. Adjustments The type and number of option securities will be adjusted appropriately if any change in Frontier's common stock occurs involving reclassifications, recapitalizations, stock dividends, dividends, split-ups, combinations, subdivisions, exchanges or similar events. Transfer Global Crossing may not transfer the exercise of rights or the option to any person without Frontier's prior written consent. Voting agreement Principal shareholders of Global Crossing representing over a majority of the voting power of Global Crossing common stock have agreed with Frontier to be present, in person or by proxy, and vote all of the voting securities of Global Crossing which are beneficially owned by them or which these shareholders have, directly or indirectly, the right to vote, in favor of the increase in the number of authorized shares and the share issuance and any action required in furtherance of these matters and the merger and, if applicable, the alternative merger. These shareholders have also agreed to vote against any action or agreement that would reasonably be expected to result in a failure of the conditions relating to representations, warranties and covenants of Global Crossing to be satisfied. In connection with the execution of the U S WEST merger agreement and the amendment to the merger agreement, the shareholders reaffirmed these obligations under the Global Crossing voting agreement. 90
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As of the date of the Global Crossing voting agreement, these shareholders beneficially owned 319,063,570 shares of Global Crossing common stock, representing approximately 72% of the voting power of the outstanding Global Crossing common stock after giving effect to the voting limitations on 9.5% or larger shareholders contained in the Global Crossing bye-laws. The Global Crossing voting agreement permits the shareholders to transfer beneficial or record ownership of the shares subject to the agreement, so long as the transfer does not result in less than 51% of the voting power of the Global Crossing shares to be subject to the Global Crossing voting agreement. In that case, shareholders can only transfer their shares if the transferee agrees to be bound by the Global Crossing voting agreement with respect to the transferred shares. Each shareholder also agreed in the Global Crossing voting agreement that during the period during which the average price of the Global Crossing stock will be determined for purposes of calculating the exchange ratio, the shareholder will not, and will not announce an intention to: . acquire any shares of Global Crossing common stock in the open market, . sell any shares of Global Crossing common stock, . take any other action prohibited by Regulation M under the Securities Act of 1933, or . make any announcement which would reasonably be expected to have the effect of resulting in a change in the trading prices of the Global Crossing common stock. The Global Crossing voting agreement will terminate on the earliest of . the completion of the merger, . the termination of the merger agreement in accordance with its terms, and . the full and irrevocable approval of the increase of authorized shares, the share issuance and the alternative merger. Shareholders that are parties to the Global Crossing voting agreement who together beneficially own approximately 67.57% of the outstanding voting power of the Global Crossing common stock as of July 29, 1999 separately agreed with Global Crossing not to sell any shares of Global Crossing common stock until the earlier of the closing of the Frontier merger and the termination of the merger agreement without Global Crossing's consent which shall not be unreasonably withheld. In addition, U S WEST agreed to vote the 39,259,305 shares it acquired in the tender offer for Global Crossing shares, which was completed on June 18, 1999, in favor of the proposals relating to the merger. U S WEST has since returned to Global Crossing 2,231,076 shares of Global Crossing common stock in connection with the termination of the proposed Global Crossing--U S WEST merger. However, U S WEST remains bound to vote the remaining shares of Global Crossing common stock it acquired in the tender offer in favor of the proposals relating to the merger. As of July 29, 1999, the shareholders that are parties to the Global Crossing voting agreement together beneficially owned 293,995,036 shares of Global Crossing common stock, representing approximately 67.57% of the outstanding voting power of the Global Crossing common stock as of that date (after giving effect to the voting limitations of large shareholders). In addition, as of July 29, 1999, U S WEST owned 37,028,229 shares of Global Crossing common stock, representing approximately 8.97% of the outstanding voting power of the Global Crossing common stock as of that date. Because the shares subject to these voting agreements represent more than a simple majority of the votes of all outstanding shares of Global Crossing common stock, we expect that the proposals relating to the share issuance and the increase in the number of authorized shares will be approved at the Global Crossing annual meeting, even if no other shareholder votes to approve those proposals. The Global Crossing voting agreement is attached as Annex C to this document. You should read it entirely. 91
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Unaudited Pro Forma Condensed Combined Financial Statements The following unaudited pro forma condensed combined financial information of Global Crossing, Global Marine and Frontier, which we refer to as "Pro Forma Global Crossing," has been prepared to demonstrate how these companies or businesses might have looked if the merger and merger related transactions had been completed as of the dates or at the beginning of the periods presented. We have prepared the pro forma financial information using the purchase method of accounting. We expect that we will have reorganization and restructuring expenses and potential synergies relating to our long distance business as a result of combining our companies. The unaudited pro forma information does not reflect these expenses and synergies. The pro forma information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not attempt to predict or suggest future results. The pro forma information also does not attempt to show how the combined company would actually have performed had the companies been combined throughout these periods. Pursuant to the purchase agreement of Global Marine, Global Crossing acquired the net assets of Global Marine for approximately $868 million. The unaudited translations of Global Marine's sterling amounts into U.S. dollars have been translated using convenience translation rates. The convenience translations should not be construed as representations that the sterling amounts have been, could have been, or could in the future be, converted into U.S. dollars at this rate or any other rate of exchange. Pursuant to the terms of the Global Crossing-Frontier merger, each holder of Frontier common stock will be entitled to receive that number of shares of Global Crossing common stock equal to the exchange ratio. The unaudited Pro Forma Global Crossing financial statements have been prepared assuming an exchange ratio of 1.5750 shares of Global Crossing common stock for each share of Frontier common stock outstanding or an estimated purchase price of $11.3 billion assuming a Global Crossing share price of $40.00 per share, the closing price of Global Crossing common stock on August 2, 1999. Fees and expenses related to the merger and merger related transactions totaling $95 million are included in the Pro Forma Global Crossing information. The actual exchange ratio may vary as described in this document. These unaudited pro forma condensed combined financial statements are preliminary and subject to change based on the review of a final study to determine the fair values of Frontier's and Global Marine's net assets. These unaudited pro forma condensed combined financial statements should be read in conjunction with the historical financial statements of Global Crossing, Global Marine and Frontier which, in the case of Global Crossing and Global Marine, are included in this document and, in the case of Frontier, are incorporated by reference in this document. The unaudited pro forma condensed combined financial statements are presented for comparative purposes only and are not intended to be indicative of actual results had the transactions occurred as of the dates indicated above nor do they purport to indicate results which may be attained in the future. 92
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Pro Forma Global Crossing Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 1999 (in thousands) [Enlarge/Download Table] Total Global Crossing Pro Forma Global Crossing Global Pro Forma with Global Frontier Pro Forma Global Historical (1) Marine (1) Adjustments Marine Historical (1) Adjustments Crossing --------------- ---------- ----------- --------------- -------------- ----------- ----------- ASSETS Current Assets: Cash and cash equivalents......... $ 721,342 $ -- $(268,400)(2) $ 412,942 $ 99,453 $ (18,477)(5) $ 318, 918 (35,000)(13) (90,000)(4) (5,000)(4) (85,000)(8) Accounts receivable, net................. 132,652 67,572 -- 200,224 430,576 -- 630,800 Inventories and supplies............ -- 11,756 -- 11,756 7,243 -- 18,999 Deferred directory costs............... -- -- -- -- -- -- -- Deferred tax assets.. -- -- -- -- 13,105 -- 13,105 Prepaid and other.... 51,475 38,284 -- 89,759 27,260 -- 117,019 ---------- -------- --------- ---------- ---------- ---------- ----------- Total current assets.............. 905,469 117,612 (308,400) 714,681 577,637 (193,477) 1,098,841 Restricted cash and cash equivalents..... 367,387 -- -- 367,387 -- -- 367,387 Accounts receivable... 63,128 -- -- 63,128 -- -- 63,128 Capacity available for sale................. 503,878 -- -- 503,878 -- -- 503,878 Property, plant and equipment, net....... 59,853 362,141 -- 421,994 2,038,457 -- 2,460,451 Construction in process.............. 842,439 -- -- 842,439 -- -- 842,439 Goodwill and other intangibles, net..... -- 36,150 (36,150)(2) 829, 330 466,851 (466,851)(3) 11,480,897 829,330 (2) 10,651,567 (3) Other assets, net..... 111,767 155,864 (155,864)(13) 111,767 391,493 -- 503,260 Investment in affiliates........... 184,676 40,357 -- 225,033 -- -- 225,033 ---------- -------- --------- ---------- ---------- ---------- ----------- Total Assets......... $3,038,597 $712,124 $328,916 $4,079,637 $3,474,438 $9,991,239 $17,545,314 ========== ======== ========= ========== ========== ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term debt...... $ -- $155,386 $ -- $ 155,386 $ 10,508 $ -- $ 165,894 Accrued construction costs............... 158,304 -- -- 158,304 16,761 -- 175,065 Accounts payable and accrued expenses.... 95,875 82,396 -- 178,271 498,380 -- 676,651 Other current liabilities......... 47,903 45,371 -- 93,274 42,341 -- 135,615 ---------- -------- --------- ---------- ---------- ---------- ----------- Total current liabilities......... 302,082 283,153 -- 585,235 567,990 -- 1,153,225 Long term debt........ 559,707 -- 600,000 (2) 1,159,707 1,631,199 -- 2,790,906 Senior notes.......... 796,682 -- -- 796,682 -- -- 796,682 Deferred income taxes................ 24,167 41,338 -- 65,505 50,462 (237,599)(6) (121,632) Postretirement and other postemployment benefit obligations.. -- -- -- -- 92,049 -- 92,049 Deferred credits and other................ 75,377 272,413 (155,864)(13) 191,926 -- -- 191,926 ---------- -------- --------- ---------- ---------- ---------- ----------- Total Liabilities.... 1,758,015 596,904 444,136 2,799,055 2,341,700 (237,599) 4,903,156 ---------- -------- --------- ---------- ---------- ---------- ----------- Manditorily Redeemable Preferred Stock...... 484,958 -- -- 484,958 -- -- 484,958 ---------- -------- --------- ---------- ---------- ---------- ----------- Shareholders' equity: Preferred stock...... -- -- -- -- 18,294 (18,294)(5) -- Common stock......... 4,361 89,000 (89,000)(2) 4,361 173,270 (170,541)(3) 7,090 Other shareholders' equity.............. 1,154,816 -- -- 1,154,816 640,409 (608,635)(3) 12,513,663 10,912,591 (3) (31,774)(7) 446,256 (8) Unearned compensation........ (74,145) -- -- (74,145) (31,774) 31,774 (7) (74,145) Treasury stock....... (209,415) -- -- (209,415) (231) 231 (3) (209,415) Retained earnings (accumulated deficit)............ (79,993) 26,220 (26,220)(2) (79,993) 334,325 (183)(5) (79,993) (304,142)(3) (30,000)(4) Accumulated other comprehensive income.............. -- -- -- -- (1,555) 1,555 -- ---------- -------- --------- ---------- ---------- ---------- ----------- Total shareholders' equity.............. 795,624 115,220 (115,220) 795,624 1,132,738 10,228,838 12,157,200 ---------- -------- --------- ---------- ---------- ---------- ----------- Total liabilities and shareholders' equity............. $3,038,597 $712,124 $ 328,916 $4,079,637 $3,474,438 $9,991,239 $17,545,314 ========== ======== ========= ========== ========== ========== =========== 93
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Pro Forma Global Crossing Unaudited Pro Forma Condensed Combined Statement of Operations for the Six Months Ended June 30, 1999 (in thousands, except share and per share information) [Enlarge/Download Table] Global Crossing Global Crossing Global Pro Forma with Global Frontier Pro Forma Historical(1) Marine(1) Adjustments Marine Historical(1) Adjustments --------------- --------- ----------- --------------- ------------- ----------- OPERATING REVENUES...... $ 368,461 $173,498 $ -- $ 541,959 $ 1,321,597 $ -- ----------- -------- -------- ----------- ----------- --------- OPERATING EXPENSES: Operating, selling, general and administrative........ 257,356 127,165 -- 384,521 1,045,999 -- Stock related expense............... 26,074 -- -- 26,074 -- -- Depreciation and amortization.......... 4,200 13,629 (539)(2) 27,657 128,056 (17,279)(3) 10,367 (2) 177,526 (3) ----------- -------- -------- ----------- ----------- --------- 287,630 140,794 9,828 438,252 1,174,055 160,247 ----------- -------- -------- ----------- ----------- --------- OPERATING INCOME (LOSS)................. 80,831 32,704 (9,828) 103,707 147,542 (160,247) EQUITY IN INCOME (LOSS) OF AFFILIATES.......... (5,542) 4,539 -- (1,003) 9,687 -- Other income (expense): Interest expense....... (46,454) (6,869) (24,000)(9) (77,323) (29,850) -- Interest income........ 31,666 511 -- 32,177 3,134 -- Other income (expense)............. (7,683) 143 -- (7,540) 2,173 -- ----------- -------- -------- ----------- ----------- --------- Income (loss) before taxes and cumulative effect of change in accounting principle... 52,818 31,028 (33,828) 50,018 132,686 (160,247) Provision (benefit) for income taxes...... (30,038) (11,885) 10,128 (14) (31,795) (55,411) -- ----------- -------- -------- ----------- ----------- --------- Income (loss) before cumulative effect of change in accounting principle.............. 22,780 19,143 (23,700) 18,223 77,275 (160,247) Preferred stock dividends............. (27,241) -- -- (27,241) (506) 506 (10) Redemption of preferred stock....... -- -- -- -- -- (183)(5) ----------- -------- -------- ----------- ----------- --------- Income (loss) applicable to common shareholders before cumulative change in accounting principle (Basic)...... (4,461) 19,143 (23,700) (9,018) 76,769 (159,924) Diluted earnings adjustment............ -- -- -- -- 180 (180)(11) ----------- -------- -------- ----------- ----------- --------- Income (loss) applicable to common shareholders before cumulative change in accounting principle (Diluted).... $ (4,461) $ 19,143 $(23,700) $ (9,018) $ 76,949 $(160,104) =========== ======== ======== =========== =========== ========= Income (loss) per common share: Income (loss) applicable to common shareholders before cumulative effect of change in accounting principle Basic................ $ (0.01) $ (0.02) $ 0.45 =========== =========== =========== Diluted.............. $ (0.01) $ (0.02) $ 0.43 =========== =========== =========== Shares used in computing information applicable to common shareholders Basic................ 412,000,658 412,000,658 172,047,956 =========== =========== =========== Diluted.............. 412,000,658 412,000,658 177,273,442 =========== =========== =========== Total Pro Forma Global Crossing ---------------- OPERATING REVENUES...... $ 1,863,556 ---------------- OPERATING EXPENSES: Operating, selling, general and administrative........ 1,430,520 Stock related expense............... 26,074 Depreciation and amortization.......... 315,960 ---------------- 1,772,554 ---------------- OPERATING INCOME (LOSS)................. 91,002 EQUITY IN INCOME (LOSS) OF AFFILIATES.......... 8,684 Other income (expense): Interest expense....... (107,173) Interest income........ 35,311 Other income (expense)............. (5,367) ---------------- Income (loss) before taxes and cumulative effect of change in accounting principle... 22,457 Provision (benefit) for income taxes...... (87,206) ---------------- Income (loss) before cumulative effect of change in accounting principle.............. (64,749) Preferred stock dividends............. (27,241) Redemption of preferred stock....... (183) ---------------- Income (loss) applicable to common shareholders before cumulative change in accounting principle (Basic)...... (92,173) Diluted earnings adjustment............ -- ---------------- Income (loss) applicable to common shareholders before cumulative change in accounting principle (Diluted).... $ (92,173) ================ Income (loss) per common share: Income (loss) applicable to common shareholders before cumulative effect of change in accounting principle Basic................ $ (0.13) ================ Diluted.............. $ (0.13) ================ Shares used in computing information applicable to common shareholders Basic................ 684,883,385 (12) ================ Diluted.............. 684,883,385 (12) ================ 94
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Pro Forma Global Crossing Unaudited Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 1998 (in thousands, except share and per share information) [Enlarge/Download Table] Total Global Global Pro Forma Crossing Global Pro Forma Crossing with Frontier Pro Forma Global Historical (1) Marine (1) Adjustments Global Marine Historical (1) Adjustments Crossing -------------- ---------- ----------- ------------- -------------- ----------- ----------- OPERATING REVENUES..... $ 424,099 $347,335 $ -- $ 771,434 $ 2,593,558 $ -- $ 3,364,992 ----------- -------- -------- ----------- ----------- --------- ----------- OPERATING EXPENSES: Operating, selling, general and administrative....... 264,781 233,209 -- 497,990 2,050,356 -- 2,548,346 Termination of Advisory Services Agreement... 139,669 -- -- 139,669 -- -- 139,669 Stock related expense.............. 39,374 -- -- 39,374 -- -- 39,374 Depreciation and amortization......... -- 38,730 (1,318)(2) 58,145 225,806 (36,002)(3) 603,001 20,733 (2) 355,052 (3) ----------- -------- -------- ----------- ----------- --------- ----------- 443,824 271,939 19,415 735,178 2,276,162 319,050 3,330,390 ----------- -------- -------- ----------- ----------- --------- ----------- OPERATING INCOME (LOSS)................ (19,725) 75,396 (19,415) 36,256 317,396 (319,050) 34,602 EQUITY IN INCOME (LOSS) OF AFFILIATES......... (2,508) 4,732 -- 2,224 16,711 -- 18,935 Other income (expense): Interest expense...... (42,880) (11,176) (48,000)(9) (102,056) (55,318) -- (157,374) Interest income....... 29,986 3,793 -- 33,779 5,084 -- 38,863 Other income (expense)............ -- -- -- -- 23,230 -- 23,230 ----------- -------- -------- ----------- ----------- --------- ----------- Income (loss) before taxes, extraordinary item and cumulative effect of change in accounting principle.. (35,127) 72,745 (67,415) (29,797) 307,103 (319,050) (41,744) Provision (benefit) for income taxes..... (33,067) (25,693) 20,256 (14) (38,504) (129,560) -- (168,064) ----------- -------- -------- ----------- ----------- --------- ----------- Income (loss) before extraordinary item and cumulative effect of change in accounting principle............. (68,194) 47,052 (47,159) (68,301) 177,543 (319,050) (209,808) Preferred stock dividends............ (12,681) -- -- (12,681) (1,005) 1,005 (10) (12,681) Redemption of preferred stock...... (34,140) -- -- (34,140) -- (183)(5) (34,323) ----------- -------- -------- ----------- ----------- --------- ----------- Income (loss) applicable to common shareholders before extraordinary item and cumulative change in accounting principle (Basic)............... (115,015) 47,052 (47,159) (115,122) 176,538 (318,228) (256,812) Diluted earnings adjustment........... -- -- -- -- 360 (360)(11) -- ----------- -------- -------- ----------- ----------- --------- ----------- Income (loss) applicable to common shareholders before extraordinary item and cumulative change in accounting principle (Diluted)............. $ (115,015) $ 47,052 $(47,159) $ (115,122) $ 176,898 $(318,588) $ (256,812) =========== ======== ======== =========== =========== ========= =========== Income (loss) per common share: Income (loss) applicable to common shareholders before extraordinary item and cumulative effect of change in accounting principle............ Basic................. $ (0.32) $ (0.32) $ 1.03 $ (0.41) =========== =========== =========== =========== Diluted............... $ (0.32) $ (0.32) $ 1.02 $ (0.41) =========== =========== =========== =========== Shares used in computing information applicable to common shareholders Basic................. 358,735,340 358,735,340 170,625,733 631,618,067 (12) =========== =========== =========== =========== Diluted............... 358,735,340 358,735,340 173,940,531 631,618,067 (12) =========== =========== =========== =========== 95
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Pro Forma Global Crossing Notes to Unaudited Pro Forma Condensed Combined Financial Statements 1. These columns represent the historical results of operations and financial position. With respect to the information included in the Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1998, the Global Marine information is for the twelve months ended March 31, 1999. 2. These adjustments reflect the elimination of Global Marine's shareholder's equity accounts, the excess consideration over the net assets acquired (goodwill) and the related amortization expense. The preliminary goodwill is calculated as follows (in thousands): [Download Table] Purchase price........................................ $868,400 Lease termination fees................................ 35,000 Estimated Global Crossing transaction costs........... 5,000 -------- Estimated total consideration......................... 908,400 Historical net tangible book value of Global Marine: Historical Global Marine net assets at June 30, 1999............................................... $(115,220) Historical goodwill and other intangibles, net...... 36,150 --------- (79,070) -------- Preliminary goodwill.................................. $829,330 ======== Global Crossing paid (Pounds)550 million (approximately $868 million) in connection with the transaction. The Company partially financed the acquisition of Global Marine through the incurrence of debt in the amount of $600 million with an interest rate of approximately 8%. Global Crossing has tentatively considered the carrying value of the acquired assets to approximate fair value, with all excess of such acquisition costs being attributable to goodwill. Global Crossing is in the process of fully evaluating the assets acquired and, as a result, the purchase price allocation among the tangible and intangible (and their related useful lives) assets acquired may change. Goodwill associated with the transaction is currently anticipated to be amortized over a 40-year life. 3. These adjustments reflect the elimination of Frontier's shareholders' equity accounts, the excess consideration over the net assets acquired (goodwill) and the related amortization expense. The preliminary goodwill is calculated as follows (in thousands, except per share amounts): [Download Table] Shares of Frontier common stock outstanding at June 30, 1999................................... 173,270 Less: Treasury shares............................ (11) ----------- Shares of Frontier to be exchanged............... 173,259 Frontier exchange ratio.......................... 1.5750 ----------- Shares of Global Crossing to be issued........... 272,883 Assumed Global Crossing market price at exchange date............................................ $ 40.00 ----------- 10,915,320 Acceleration of stock option vesting and other compensation.................................... 531,256 Tax benefit related to the acceleration of unearned compensation and vesting of stock options......................................... (237,599) Estimated Global Crossing transaction costs...... 60,000 ----------- Estimated total consideration.................... 11,268,977 Historical net tangible book value of Frontier Historical Frontier net assets at June 30, 1999.......................................... $(1,132,738) Historical goodwill and other intangibles, net........................................... 466,851 Estimated Frontier transactions costs.......... 30,000 Preferred stock redemption..................... 18,477 ----------- (617,410) ----------- Preliminary goodwill............................. $10,651,567 =========== 96
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Pro Forma Global Crossing Notes to Unaudited Pro Forma Condensed Combined Financial Statements-- (Continued) Global Crossing will issue 272,883,000 shares of its common stock at an assumed ratio of 1.5750 shares of Global Crossing common stock for each share of Frontier common stock outstanding assuming a market price of Global Crossing common stock of $40.00 per share. The actual exchange ratio may vary as described in this document. Global Crossing has tentatively considered the carrying value of the acquired assets to approximate their fair value, with all of the excess of such acquisition costs being attributable to goodwill. Global Crossing is in the process of fully evaluating the assets to be acquired and, as a result, the purchase price allocation among the tangible and intangible (and their related useful lives) assets acquired may change. Goodwill associated with the transaction is currently anticipated to be amortized over a 40-year life. Based upon a preliminary valuation, the Company estimates that the purchase price allocation among the tangible and intangible assets will result in a composite useful life of approximately 30 years. 4. The pro forma financial statements give effect to an estimated $60 million and $30 million in direct transaction costs on behalf of Global Crossing and Frontier, respectively, in connection with the merger. Also, Global Crossing incurred approximately $5 million of direct transaction costs in connection with the Global Marine acquisition. 5. These adjustments represent the redemption of Frontier's 5.00%, 5.65%, 4.60% and 5.50% Series redeemable preferred stock prior to completion of the merger at their respective premiums of the total amount outstanding. The preferred stock was redeemed on July 1, 1999. 6. This adjustment represents the deferred tax benefit relating to Frontier's unearned compensation and the acceleration of Frontier's stock options based upon Global Crossing's effective tax rate for the year ended December 31, 1998. 7. This adjustment represents the effect of the accelerated vesting of Frontier's unearned compensation as a result of the merger. 8. This adjustment records the excess fair value of vested stock options issued by Global Crossing in exchange for vested and unvested outstanding options of Frontier and other compensation. 9. This amount reflects the assumed interest expense, assuming an 8% interest rate, incurred on the $600 million debt assumed issued as of the earliest date presented in connection with the acquisition of Global Marine. 10. This adjustment assumes that Frontier's preferred stock dividends would not have been incurred, as Frontier's preferred stock would have been redeemed as of the earliest date presented. 11. To eliminate diluted earnings adjustment due to the combined net loss position. 12. Pro forma per share data are based on the number of Global Crossing common shares that would have been outstanding had the merger occurred at the earliest date presented. 13. This adjustment represents the termination of certain lease arrangements due to change of control provisions and related costs. 14. These adjustments represent the tax benefit resulting from the interest expense assumed in connection with the debt issued for the acquisition of Global Marine. 97
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THE COMPANIES Global Crossing Ltd. The following briefly describes the business of Global Crossing. Additional information regarding Global Crossing is contained in its filings with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. See "Where You Can Find More Information" on page 171. Overview Global Crossing is building the world's first independent global network of state-of-the-art Internet and long distance telecommunications facilities utilizing a combination of undersea and terrestrial digital fiber optic cable systems (the "Global Crossing network"). Global Crossing offers "one-stop shopping" for its customers to multiple destinations worldwide and currently operates as a "carriers' carrier", providing tiered pricing and segmented products to licensed providers of international telecommunications services. Capacity on the Global Crossing network is offered to all customers on an open, equal access basis. The systems completed or under development will form a state-of-the-art interconnected worldwide high capacity fiber optic network: Atlantic Crossing ("AC-1") and Atlantic Crossing-2 ("AC-2"), undersea systems connecting the United States and Europe; Pacific Crossing ("PC-1"), an undersea system connecting the United States and Asia; Mid-Atlantic Crossing ("MAC"), an undersea system connecting the eastern United States and the Caribbean; Pan American Crossing ("PAC"), a primarily undersea system connecting the western United States, Mexico, Panama, Venezuela and the Caribbean; South American Crossing ("SAC"), an undersea and terrestrial system connecting the major cities of South America to MAC, PAC and the rest of the Global Crossing network; Pan European Crossing ("PEC"), a primarily terrestrial system connecting 25 European cities to AC-1; and a terrestrial system to be operated by Global Access Ltd. connecting certain cities in Japan to PC-1 ("GAL"). The undersea component of this initial portion of the Global Crossing network totals 74,700 km, and the terrestrial component adds 17,800 km, for a total of 92,500 km. In addition to the Global Crossing--Frontier merger, Global Crossing is in the process of developing several new undersea and terrestrial cable systems and evaluating other business development opportunities which will complement the Global Crossing network. Recent developments On May 16, 1999, Global Crossing entered into an agreement to merge with U S WEST. As part of the transaction, U S WEST made a cash tender offer for approximately 9.49% of Global Crossing common stock. The tender offer was completed, with U S WEST acquiring 39,259,305 shares, on June 18, 1999. On July 18, 1999, Global Crossing and U S WEST agreed to terminate their merger agreement, and U S WEST agreed to merge with Qwest. As a result, U S WEST paid Global Crossing a termination fee of $140 million in cash and returned 2,231,075 shares of Global Crossing common stock purchased in the 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 Global Crossing for this capacity of $140 million over the next two years. On July 5, 1999, Global Crossing announced an agreement with the government of the Republic of Ireland to build an undersea fiber optic cable system that will link two telehouses in Dublin, via two diverse fiber cables, to cities in Europe and North America through the Global Crossing network. The Irish government will be the system's anchor customer under an $80-million capacity purchase agreement. Global Crossing expects to provide installation and maintenance for the undersea portion of the Irish system, which will form part of PEC, through its recently acquired Global Marine subsidiary. On July 2, 1999, Global Crossing acquired the Global Marine business of Cable & Wireless in a transaction valued at approximately $868 million, consisting of a combination of cash and assumed indebtedness. Global Marine currently provides services, including maintenance under a number of long-term contracts, to cables built by more than 100 carriers and is the world's largest undersea cable installation and maintenance company with a fleet of 13 cable ships, representing approximately 33 percent of the world's total, 21 submersible vehicles and 1,200 employees servicing approximately 35 percent of the world's undersea cable miles. Global Crossing initially financed the acquisition with committed bank financing in the amount of approximately $600 million and the remainder with cash on hand. 98
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Also on July 2, 1999, Global Crossing 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 facility will be utilized to finance or refinance construction of some of Global Crossing's cable systems previously anticipated to be financed on a per-system basis, to fund future growth of Global Crossing and for general corporate purposes. On July 7, 1999, Global Crossing, through Global Crossing Holdings, borrowed amounts under this facility sufficient to retire the existing credit facilities for the AC-1 and MAC systems and the facility provided by Lucent relating to the PEC and SAC systems, as well as to replace the initial debt incurred in connection with the acquisition of Global Marine. On June 4, 1999, Global Crossing announced that it had been selected to provide marine operations and to act as project manager of Africa ONE, an estimated $1.6 billion cable system consisting of a self-healing ring around the continent of Africa connecting more than two dozen coastal-country landing points and, through terrestrial fiber, microwave or satellite facilities, additional countries without landing points, including interior countries. Global Crossing will provide marine operations through its new Global Marine subsidiary. Although Global Crossing does not intend to make an equity investment in this system, it expects to receive more than $100 million in revenue for its services. Business activity The business of Global Crossing is designed to meet the varying needs of the global telecommunications market. Global Crossing offers customers the ability to purchase capacity on demand and by doing so (1) eliminating their need to commit the substantial capital which would be required to build cable capacity and (2) decreasing the risks associated with forecasting their future capacity requirements. Compared with traditional cable systems, Global Crossing offers more comprehensive, flexible and low-cost purchasing alternatives designed to meet current market requirements of international carriers and Internet Service Providers ("ISPs"), including direct international city-to-city connectivity, the ability to purchase capacity periodically and discounts based upon aggregate volume purchased on the Global Crossing network. Each of the systems completed or under development is upgradable through the addition of optical and electronic equipment to capacities significantly beyond its initial capacity at a fraction of the original system cost. These upgrades are expected to lead to lower unit cost of capacity and lower prices, resulting in significant growth in market demand for telecommunications capacity. In addition, Global Crossing is currently evaluating other undersea and terrestrial cable projects intended to further its strategy of developing an integrated global network to serve more than 100 of the world's largest metropolitan communications markets. Global Crossing's announced network, including Frontier, will connect 160 cities worldwide. Global Crossing anticipates that future revenues, beyond those obtained from the sale of the initial capacity on its first eight cable systems, from its Global Marine operations and through its merger with Frontier, will come from several sources. First, since each of the systems Global Crossing is building is upgradable, this additional capacity can be sold. Global Crossing also expects to build new systems providing service to additional geographic areas. In addition, if the full upgradable capacity of its initial systems is reached, Global Crossing expects to build or acquire additional systems to meet future demand. As its global network is developed, Global Crossing expects to generate additional revenues by broadening its product line to include many forms of services. For example, Global Crossing anticipates that additional revenue opportunities will be generated by expansion into the U.S. long-distance market, development of a global toll-free calling and calling card market, commencement of web hosting and IP application services and growth of city-to- city connectivity services and local building-to-building services to key customers. Global Crossing's predecessor, Global Crossing Ltd., LDC, which has been renamed as Global Crossing (Cayman) Ltd. ("Old Global Crossing"), was formed in March 1997 to capitalize on the accelerating growth of international voice and data telecommunications traffic. The significant increase in Internet usage and other bandwidth-intensive applications and the growing use of corporate networks have substantially increased the 99
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demand for international fiber optic cable capacity. The proliferation of telecommunications service providers due, in large part, to industry deregulation and privatization of foreign telecommunications companies has further contributed to increased demand for such international cable capacity. Additionally, Global Crossing believes other technological developments, such as improvements in "last mile" access technology, including xDSL, cable modems, broadband wireless technology and the increasing video content of Internet applications, will result in further capacity demand growth. Global Crossing started development of the Global Crossing network in March 1997, when Global Crossing contracted for the construction of AC-1, a 14,300 km digital fiber optic undersea cable system that links New York, the United Kingdom, the Netherlands and Germany. This system offered 40 gigabytes per second ("Gbps") of initial service capacity, upgradable to a minimum of 80 Gbps. AC-1 started service on its United States to United Kingdom segment in May 1998, and the full system, consisting of a four fiber pair self-healing ring, was completed in February 1999. In April 1998, Global Crossing entered into a joint venture which contracted for the construction of PC-1, a 21,000 km digital fiber optic undersea cable system that will link the United States and Japan and will initially offer 80 Gbps of service capacity, upgradable to a minimum of 160 Gbps. PC-1, consisting of a four fiber pair self-healing ring, is scheduled to start initial service in December 1999. In June 1998, Global Crossing contracted for the construction of MAC, a 7,500 km digital fiber optic undersea cable system consisting of a two fiber pair self-healing ring that will connect New York, Florida and the Caribbean and will initially offer 20 Gbps of service capacity, upgradable to a minimum of 40 Gbps. In addition, in July 1998, Global Crossing contracted for the construction of PAC, an 8,900 km two fiber pair digital undersea cable that will connect California, Mexico, Panama, Venezuela and the Caribbean and will initially offer 20 Gbps of service capacity, upgradable to a minimum of 40 Gbps. In March 1999, Global Crossing announced SAC, a 16,000 km, four fiber pair self-healing ring undersea cable and 2,000 km four fiber pair terrestrial system that upon completion will link the major cities of South America to the rest of the Global Crossing network through MAC and PAC and will initially offer 40 Gbps of service capacity upgradable to a minimum of 80 Gbps. In connection with PAC, Global Crossing owns a 49% interest in a joint venture company that will provide approximately 3,000 km of terrestrial connectivity in Mexico. Global Crossing is also developing PEC, an 11,000 km primarily terrestrial system with 24 to 72 fiber pairs that, upon completion, will consist of five self-healing rings linking 25 European cities with AC-1. Global Crossing also obtained a 49% economic interest in Global Access Ltd., which is constructing GAL, a 1,300 km fiber optic terrestrial system that will connect PC-1 at its Japanese landing points in Shima and Ajigaura with Tokyo, Osaka and Nagoya. Finally, in March 1999, Global Crossing announced its intention to develop and construct AC-2, an additional 7,000 km eight fiber pair cable connecting the United States to Europe. AC-2 will be integrated with the two cables of AC-1, adding a third high-capacity cable across the Atlantic for the Global Crossing network and providing AC-2 with self-healing capabilities. Once completed, the undersea and terrestrial segments of the Global Crossing network will form an integrated worldwide network with multiple access points offering low-cost capacity. In addition to the announced segments of the Global Crossing network, Global Crossing has made, and expects to continue to make, acquisitions of fiber capacity which complement the Global Crossing fiber optic network and which address customer demands for global city-to-city connectivity. The Global Crossing network As part of Global Crossing's mission to create an independent, global, state- of-the-art fiber optic cable network, connecting major cities worldwide, the Global Crossing network is being engineered and constructed as an integrated network along the most heavily trafficked international corridors in the world with undersea networks, including AC-1 and AC-2 (United States to Europe) and PC-1 (United States to Asia). Furthermore, Global Crossing plans to build and integrate terrestrial networks into this global network structure, including PEC (trans-Europe), GAL (trans-Japan), SAC (South America) and a terrestrial system in Mexico. MAC, SAC and PAC will directly connect the Caribbean, South America and Central America to the network. Of the fiber optic cable systems currently operational or under development, AC-1, AC-2, MAC, PAC and PEC are wholly-owned projects, while PC-1 and GAL are being developed through joint ventures with one or more partners, principally Marubeni. Global Crossing has a 58% economic interest in PC-1 and a 49% economic interest in 100
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Global Access Ltd., which is constructing GAL. Marubeni will manage the development, sales and operations associated with GAL. The undersea portion of SAC is currently planned to be wholly owned, while parts of the terrestrial portion are expected to be constructed through joint-venture arrangements. Terrestrial connectivity to PAC in Mexico will also be developed through a joint venture. Global Crossing has successfully marketed capacity on its systems to licensed telecommunications providers, including post, telephone and telegraph companies ("PTTs"), ISPs and established and emerging telecommunications companies. Global Crossing customers now total more than 44 international telecommunications carriers, including AT&T, MCI Worldcom Inc., Deutsche Telekom AG, GTE, Cable & Wireless, Equant NV, Qwest, Teleglobe Canada Inc., Swisscom AG, PTT Telecom BV, Telia AB, Level 3 Communications, Inc. and a number of emerging telecommunications companies. The following table contains information regarding the system cost, initial ready for service ("RFS") date and ownership structure of the Global Crossing systems. Information relating to AC-1 is based upon historical results, while information for all other systems is estimated. [Enlarge/Download Table] System Cost(1) System (millions) RFS Date(1) Ownership Structure ------ -------------- -------------------------------------------- ------------------------------- AC-1 $ 975 February 1999 (Complete) Wholly Owned AC-2 750 March 2001 (Complete) Wholly Owned PC-1 1,200 December 1999 (Phase I) Joint Venture March 2000 (Complete) MAC 295 December 1999 (Phase I--New York to Florida) Wholly Owned May 2000 (Complete) PAC 580 February 2000 (Phase I) Wholly Owned (undersea) Joint Venture (some terrestrial portions) SAC 1,130 December 2000 (Phase I) Wholly Owned (undersea) March 2001 (Complete) Joint Venture (some terrestrial portions) PEC 950 December 1999 (Phase I) Wholly Owned December 2000 (Complete) GAL 190 December 1999 (Phase I) Joint Venture ------ $6,070 ====== -------- (1) Total system costs include anticipated financing costs, but exclude the costs of potential future upgrades (other than the initial AC-1 upgrades to 140 Gbps) and any amount capitalized with respect to the warrants issued in exchange for the rights to some of these systems. See Note 10 to the Global Crossing audited consolidated financial statements. Certain factors, such as increases in interest rates and delays in construction, could result in higher actual costs or later RFS dates than currently estimated. Atlantic Crossing AC-1, Global Crossing's first undersea fiber optic cable in the Atlantic region, is a 14,300 km four fiber pair self-healing ring that connects the United States and Europe with landing stations in the United States, the United Kingdom, the Netherlands and Germany. AC-1 is equipped with state-of-the-art DWDM, and the full ring initially offered 40 Gbps of service capacity, upgradable to a minimum of 80 Gbps using DWDM technology. AC-1 started service on its United States to United Kingdom segment during May 1998, and the full system was completed during February 1999. The total cost of AC-1 excluding upgrade payments was approximately $750 million. In October 1998, Global Crossing entered into a $50 million contract with Tyco Submarine System Ltd. ("TSSL") to upgrade AC-1 capacity from 40 Gbps to 80 Gbps, which upgrade is expected to be completed by the end of August 1999. In August 1999, Global Crossing entered into a second contract with TSSL to further upgrade AC-1 capacity to 140 Gbps. In addition to the contracts with TSSL for construction of the system, Global Crossing 101
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has entered into other agreements with TSSL for services and support associated with operations, administration and maintenance of the system. On March 24, 1999, Global Crossing announced its intention to develop and construct AC-2, an additional eight fiber pair cable connecting the United States to Europe. AC-2 will be integrated with the two cables of AC-1, adding a third high-capacity cable across the Atlantic for the Global Crossing network and providing AC-2 with self-healing capabilities. The new cable will cost approximately $750 million and is expected to be in service in March 2001. AC-2 would significantly increase the capacity that Global Crossing would be able to offer customers on the transatlantic route. Pacific Crossing PC-1, Global Crossing's first undersea fiber optic cable in the Pacific region, is being developed as a 21,000 km, four fiber pair self-healing ring. When completed, it will connect California and Washington in the western United States with two landing sites in Japan. PC-1 is designed to operate initially at 80 Gbps of service capacity, upgradable to a minimum of 160 Gbps, using DWDM technology. In April 1998, Global Crossing executed a construction contract with TSSL for the construction of PC-1, which provides for a system completion date of July 2000 (now accelerated to March 2000) at a total cost of approximately $1,200 million, excluding potential future upgrades and amounts capitalized with respect to warrants issued in exchange for the rights to construct PC-1. Equity investments in PC-1 are currently estimated at $400 million of which Global Crossing will provide approximately $231 million, with the remaining $800 million financed through incurrence of non-recourse project indebtedness. The credit agreement for the financing of such indebtedness was executed in July 1998. Mid-Atlantic Crossing MAC is being developed as a 7,500 km two fiber pair self-healing ring that, upon completion, will connect New York, the Caribbean and Florida. MAC will be connected to AC-1 via its cable station in Brookhaven, New York and to SAC and PAC via its cable station anticipated to be constructed in St. Croix, United States Virgin Islands, providing connectivity between Europe, the eastern United States, the Caribbean and South America. This system is being designed to operate initially at 20 Gbps of service capacity, upgradable to a minimum of 40 Gbps using DWDM technology. In June 1998 and November 1998, Global Crossing executed contracts with Alcatel Submarine Networks and TSSL, respectively, for the construction of MAC, which provides for an initial service date of December 1999 at a total cost of approximately $295 million, excluding potential future upgrades and amounts capitalized with respect to warrants issued in exchange for the rights to construct MAC. Pan American Crossing PAC is being developed as an 8,900 km two fiber pair cable that, upon completion, will connect California, Mexico, Panama, Venezuela and the Caribbean. PAC is being designed to interconnect with PC-1 through our landing station anticipated to be constructed in Grover Beach, California, with MAC through our landing station anticipated to be constructed in St. Croix, United States Virgin Islands and with SAC through our landing station anticipated to be constructed in Fort Amador, Panama. PAC will also connect with approximately 3,000 km of terrestrial capacity in Mexico being developed through a joint venture arrangement. Global Crossing anticipates that PAC will cross Panama via an existing terrestrial right-of-way. PAC is being designed to operate initially at 20 Gbps of service capacity, upgradable to a minimum of 40 Gbps using DWDM technology. In July 1998, Global Crossing executed a contract with TSSL for the construction of PAC which provides for an initial service date of February 2000 at an estimated total cost of $580 million, including terrestrial capacity in Mexico but excluding potential future upgrades and amounts capitalized with respect to warrants issued in exchange for the rights to construct PAC. 102
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South American Crossing On March 11, 1999, Global Crossing announced plans for the development of SAC, a 16,000 km undersea and 2,000 km terrestrial fiber optic network directly linking the major cities of South America through MAC and PAC to the United States, Mexico, Central America, the Caribbean, Asia and Europe. Global Crossing expects that SAC will cost over $1 billion to construct and will commence service in 2000. Global Crossing plans to build SAC in three phases. The first two phases, providing Argentina and Brazil with connectivity to the Global Crossing Network, are scheduled to commence service in the fourth quarter of 2000. The final phase, completing the loop around the continent, is scheduled for completion in the first quarter of 2001. The undersea portion of SAC is currently planned to be wholly owned, while parts of the terrestrial portion are expected to be constructed through joint venture arrangements. The undersea portion of SAC will constitute a state-of-the-art four-fiber pair, self-healing ring, built using advanced DWDM technology. Undersea portions of the ring are expected to connect to landing sites at St. Croix (United States Virgin Islands), Fortaleza (Brazil), Rio de Janeiro (Brazil), Santos (Brazil), Las Toninas (Argentina), Valparaiso (Chile), Lurin (Peru), Buenaventura (Colombia) and Fort Amador (Panama). Terrestrial segments are expected to connect to most major South American cities, including Rio de Janeiro, Sao Paulo (Brazil), Buenos Aires (Argentina), Santiago (Chile), Lima (Peru), Cali (Colombia) and Bogota (Colombia). The SAC ring is expected to be completed on its southern-most end by a terrestrial link across the Andes between Las Toninas and Valparaiso. The PAC system from Panama to St. Croix is expected to complete the ring. Initially, SAC is expected to have a capacity of 40 Gbps and to be upgradable, using DWDM technology, to a minimum of 80 Gbps. Terrestrial capacity In addition to the undersea segments of the Global Crossing network, Global Crossing has acquired or constructed, and expects to continue to acquire or construct, including through its merger with Frontier, terrestrial fiber capacity to complement its undersea cable systems and complete a global network to meet customer demands for worldwide city-to-city connectivity. Pan European Crossing. Global Crossing announced plans to build PEC which, upon completion, will consist of five self-healing rings offering connectivity between AC-1 and 25 European cities: London, Paris, Strasbourg, Amsterdam, Rotterdam, Antwerp, Brussels, Berlin, Frankfurt, Munich, Stuttgart, Hamburg, Hanover, Dusseldorf, Cologne, Copenhagen, Dublin, Dresden, Leipzig, Lyons, Marseille, Milan, Nuremberg, Turin and Zurich. Global Crossing also plans to connect additional European cities to this system. PEC is planned as an 11,000 km system with 24 to 72 fiber pairs as well as spare conduits. Global Crossing has contracted with various parties for the acquisition of rights of way and the acquisition or construction of conduits. Furthermore, Lucent Technologies, Inc. will supply fiber and equipment as well as project management and integration services. Based on these arrangements, Global Crossing believes that the construction costs for the system will be approximately $950 million, excluding potential future upgrades. Global Crossing will develop PEC in several phases: Phase I, consisting of 13 cities, has an anticipated completion date during December 1999, with the remaining phases anticipated to be completed by the end of 2000. Global Access Ltd. Global Crossing owns a 49% interest in Global Access Ltd., a company which will own and operate GAL, a fiber optic terrestrial system being developed in Japan that, among other things, will connect the PC-1 cable stations with three cities in Japan. Through GAL, Global Crossing intends to offer terrestrial services to PC-1 customers. GAL is initially planned as a 1,300 km system. Global Access Ltd. is currently negotiating with various parties for the construction of GAL and, based on those negotiations, Global Crossing believes that the construction costs for GAL will be approximately $190 million. The initial expected RFS date for the first phase of GAL's development is December 1999. Global Crossing Landing Mexicana. Global Crossing owns a 49% interest in Global Crossing Landing Mexicana, S. De R.L. de C.V., a joint venture company jointly owned with an affiliate of Bestel, S.A. de C.V., 103
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that will provide approximately 3,000 km of terrestrial connectivity in Mexico, connecting to the PAC system. Dark fiber utilized to complete this terrestrial system will either be acquired or leased. Purchased Capacity. Global Crossing has acquired terrestrial connectivity between AC-1 landing stations in the United States and the United Kingdom to provide city-to-city service from New York City to London and has also entered into arrangements to ensure that its customers will receive terrestrial service in Germany and the Netherlands. Additional network expansion opportunities Global Crossing is in the process of planning several new cable systems and evaluating other business development opportunities which will complement the Global Crossing network. There can be no assurance that Global Crossing will ultimately elect to proceed with such opportunities or, if Global Crossing does so, that such opportunities will help it achieve and sustain operating profitability. The demand for capacity on the routes served by the Global Crossing network and other cable systems are projected to have substantial growth, greatly exceeding current usage and available capacities. To address such demand, Global Crossing plans to evaluate and, as appropriate, build or acquire additional systems on such routes. It is anticipated that such systems, where possible, will be restored on the existing systems and will achieve further cost efficiencies through the use of existing landing stations. Other activities Neptune Acquisition. During November 1998, Global Crossing's indirect subsidiary, GC Pacific Landing Corp., entered into an agreement and plan of merger with Neptune Communications, L.L.C. and its wholly owned subsidiary, Neptune Communications Corp. ("NCC"), whereby, in April 1999, GC Pacific Landing merged with and into NCC in exchange for 2,239,642 shares of Global Crossing common stock (of which 223,965 shares remain to be issued pending transfer of licenses). Prior to its acquisition, Neptune was controlled by The Carlyle Group, an international investment firm, and was formed to pursue opportunities in the undersea cable business. Carlyle's managing director William Conway serves on the Global Crossing board of directors. Possible Investments. The Global Crossing board of directors has approved in principle the making of minority investments in telecommunications companies and ISPs that do not compete with Global Crossing in its core business and that are current or prospective purchasers of capacity on the Global Crossing network. Such investments may consist of purchases of equity securities for either cash or exchanges of capacity on the Global Crossing network. Such investments may be managed either by Global Crossing directly or, if the Global Crossing board of directors deems advisable, by one or more third-party investment advisers so as to minimize potential conflicts of interest and the amount of time allocated by Global Crossing's senior management to such investments. Financing plan On July 2, 1999, Global Crossing 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 Global Marine business from Cable & Wireless and for general corporate purposes. Global Crossing intends to finance the remainder of its announced systems, new projects and working capital needs mainly through the new corporate facility and other corporate financing. As of June 30, 1999, the approximately $750 million initial cost of AC-1 had been fully financed. The first contracted upgrade was funded through cash on hand, as will the second contracted upgrade. All remaining 104
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amounts outstanding under the AC-1 non-recourse project finance credit facility were refinanced in July 1999 through Global Crossing's new senior secured corporate credit facility. Global Crossing estimates the total cost of developing and deploying AC-2, PC-1, MAC, PAC, SAC, PEC and GAL to be approximately $5,095 million, excluding costs of potential future upgrades and the amounts capitalized with respect to warrants issued in exchange for the rights to construct PC-1, MAC and PAC. This total is comprised of $750 million for AC-2, $1,200 million for PC-1, $295 million for MAC, $580 million for PAC, $1,130 million for SAC, $950 million for PEC and $190 million for GAL. PC-1 will be financed by total equity investments of $400 million of which Global Crossing expects to provide approximately $231 million, with the remaining $800 million of estimated costs to be financed through non-recourse project indebtedness at the PC-1 level. Global Crossing has financed its 49% interest in GAL through cash on hand to date, and intends to finance additional system costs through limited or non-recourse debt to be raised at the GAL level. The remaining system costs for MAC and PAC will be financed either through bank indebtedness under Global Crossing's new senior secured corporate credit facility or through other corporate financing. The construction costs for PEC (including costs of acquiring dark fiber) are estimated to be $950 million, a portion of which was paid from the proceeds of the December 1998 issuance by Global Crossing Holdings of 10% Senior Exchangeable Preferred Stock (the "GCH Preferred Stock"). Global Crossing also raised additional capital required to finance this system through a combination of commercial bank borrowings, vendor financing and sales of dark fiber. Financing to complete the system is expected to be obtained from the corporate credit facility or other corporate financing. Global Crossing initially financed the approximately $868 million Global Marine acquisition, which was completed in July 1999, with approximately $600 million in committed bank financing and the remainder with cash on hand. This initial indebtedness was refinanced through borrowings under Global Crossing's new senior secured corporate credit facility. System performance AC-1, AC-2, PC-1, MAC, SAC, PEC and GAL are each designed to be installed with self-healing ring technology to optimize system availability and performance. Both span and ring switching protection are provided. Span switching protects a system against failures which affect individual fibers. Ring switching protects a system against complete failures between terminating landing sites. Because such technology will protect any single system failure in less than 300 milliseconds, no single system failure would have any material effect on customer service. Accordingly, the estimated system availability on any point-to-point link on such systems is 99.995%. The AC-1 system has experienced a number of faults, generally resulting from commercial fishing activity or shipping, causing the system to rely on its ring switching protection capability. Because of the self-healing ring architecture of the AC- 1 system and the proper performance of its ring switching protection capability, which protects and reroutes traffic from single failures, such faults did not result in any loss of customer traffic. Although Global Crossing intends to further enhance system reliability through either construction or acquisition of backup restoration fibers, similar failures could occur in the future and, in the event of simultaneous failures on two or more segments, loss of customer traffic would occur. As undersea and terrestrial cable systems achieve greater capacities, that is as they carry more traffic along their transmission paths, it has become more important to provide a "self-restoration solution" because existing systems do not have enough capacity to provide restoration for these new high performance cable systems. Single span systems must enter into reciprocal arrangements either with other fiber-optic operators or with satellite carriers to pick up and deliver a portion or all of the traffic if a system failure should occur. Providing self-restoration through Global Crossing's ring design with the switching techniques described above offers a distinguishing advantage over single span systems with external restoration. With respect to PAC, which does not employ self-healing ring technology, Global Crossing is exploring options to enter into restoration arrangements with terrestrial fiber optic cable operators to protect against traffic 105
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interruptions. Global Crossing intends to provide backup restoration for the PAC system through utilization of terrestrial capacity in the United States. Global Crossing may enter into similar arrangements to protect against catastrophic system malfunction on its other cable systems. Sales and marketing Global Crossing markets capacity on its systems to telecommunications providers, including PTTs, ISPs and established and emerging telecommunications companies. Its current customers represent a broad array of telecommunications companies. Global Crossing's initial sales strategy has emphasized the sale of capacity on an Indefeasible Right of Use ("IRU") basis, whereby the customer purchases a unit of capacity for the remaining design life of a particular cable system. On AC-1, Global Crossing has sold capacity in an increment of 155 megabits per second (Mbps), known as an STM-1, for the 25-year design life of the system. For the other Global Crossing cable systems, Global Crossing expects to sell capacity to customers at the STM-1 level, as well as in smaller increments, based upon the demand levels along some routes. Global Crossing has instituted a tiered pricing schedule for all of its systems which provides for volume discounts, as well as allowing customers to reduce their average circuit cost as more circuits are purchased. As Global Crossing continues to build and expand its global network, it expects to begin offering to its customers capacity services other than pursuant to IRU capacity sales discussed above. Capacity made available under these service contracts may be offered on either Global Crossing's undersea systems or as point to point capacity between cities connected on the Global Crossing network, once terrestrial capacity in the United States, Europe and Japan becomes available. Global Crossing believes that it will commence offering service contracts to its customers prior to the end of 1999. Global Crossing has made selective wholesale acquisitions of terrestrial capacity, enabling customers to achieve city-to-city connectivity through the Global Crossing network at prices significantly lower than if such customers had attempted to purchase such terrestrial capacity independently. For AC-1 customers, Global Crossing enters into contractual arrangements providing terrestrial capacity between its landing stations in the United States and the United Kingdom, and New York City and London, respectively. In addition, Deutsche Telekom and Royal PTT Nederland ("KPN") provide terrestrial capacity directly to Global Crossing's AC-1 customers in Germany and the Netherlands, respectively. Furthermore, through SAC, PAC, GAL and PEC, Global Crossing plans to provide terrestrial connectivity directly on its own network to cities in South America, Mexico, Japan and Europe. To facilitate sales of capacity on the Global Crossing network as well as to increase market awareness and name recognition, Global Crossing has established regional sales and marketing companies in the United States, the United Kingdom and Asia. Customers are able to purchase capacity anywhere on the Global Crossing network by signing a single capacity purchase agreement with any of the regional sales and marketing companies. Global Crossing has been able to recruit and train a full-service sales and marketing team of professionals who had previously worked at traditional telecommunications companies, emerging telecommunications companies and submarine cable design and construction companies. In total, Global Crossing employed 21 marketing professionals as of December 31, 1998, with offices in: Hamilton, Bermuda; Los Angeles and San Francisco, California; Morristown, New Jersey; Miami, Florida; London, England; Huizen, the Netherlands; Tokyo, Japan; and Buenos Aires, Argentina. During the pre-operational period for AC-1, in which Global Crossing generated significant pre-sales of capacity, Global Crossing held project information meetings, otherwise known as data gathering meetings, in order to better educate potential customers about AC-1 and its other planned cable systems. Attendees of such meetings were affiliated with both existing and prospective customers and represented a variety of sectors of the telecommunications industry. Global Crossing expects to continue to organize at least one major 106
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international conference per year in order to provide customers with updated information on the Global Crossing network. Global Crossing will also continue to host regional project information meetings focusing on specific regions as Global Crossing expands coverage in new geographic areas. Global Crossing plans to reinforce customer awareness through a variety of marketing campaigns, including international conferences and regional marketing events, participation in key industry and user group conferences, trade shows, speaking engagements, press conferences and promotional campaigns. In addition, Global Crossing's marketing team engages in regular visits to current and prospective customers to obtain a greater understanding of their individual needs and promote the advantages of the Global Crossing network. Due to the breadth of the Global Crossing network, Global Crossing is uniquely positioned to offer worldwide capacity to its customers. Many customers acknowledge that their need for large bandwidth is increasing, but they are often doubtful with regard to the precise routes where their particular growth will take place. In order to stimulate customer loyalty and leverage this uncertainty, Global Crossing has developed the Global Crossing Network Offer, which allows customers who can make a multi-year dollar denominated commitment to Global Crossing's network the flexibility to activate capacity where they need it in a "just-in-time" manner in return for volume discounted pricing. As Global Crossing's network continues to expand, Global Crossing is exploring other marketing programs that will provide further benefits to its customers and position Global Crossing as the broadband infrastructure provider of choice. Summary of principal terms of standard contractual documentation Capacity Purchase Agreements (CPAs) In general, a CPA provides for the sale of capacity on an IRU basis, whereby the purchaser acquires a unit of capacity for the remaining design life of a particular system, generally 25 years from the RFS date of the system. Upon execution of a CPA Global Crossing generally receives cash for 10% of the purchase price immediately, with the balance of the purchase price due upon activation of the capacity, which is required to occur by a specified date. Some CPAs provide for payment of the purchase price in installments over two to four years. Performance under CPAs is conditioned upon achieving the RFS date for a system and upon the obtaining of certain approvals, consents, governmental authorizations, licenses and permits. In general, neither party is liable to the other under a CPA for consequential, incidental, indirect or special damages sustained by reason of (1) any failure in or breakdown on the system or the facilities associated with the system, (2) the failure of any inland carrier to perform the terms and conditions of any agreement to which it and the purchaser are parties or (3) any interruption of service, whatever the cause and however long it lasts. CPAs are generally subject to an arbitration clause. Inland Services Agreements (ISAs) Global Crossing has entered into agreements with some terrestrial fiber cable providers to purchase terrestrial capacity for resale to its AC-1 customers. In general, the term of each ISA is 25 years starting in 1998 or until the system is retired, whichever occurs first. In some cases, Global Crossing has the option to extend the term of each ISA for an additional five years. Neither party to an ISA is responsible for any loss, damage, delay or failure of performance resulting from an event of "force majeure." Operations, administration and maintenance support Global Crossing is developing its own worldwide operations, administration and maintenance ("OA&M") support center to serve each of its cable systems. Such support will be handled through three work centers: a Customer Care Center ("CCC"), a Network Operations Center ("NOC") and a Technical Support Center ("TSC"). The CCC is located in Bermuda and the NOC is located in the United Kingdom, which will also be the location of the TSC. 107
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Customer Care Center. The CCC provides capacity purchasers with a single point of contact for service provisioning, interconnect coordination support, billing and billing inquiries and adjustments. Network Operations Center. The NOC handles operations, administrative and maintenance activities for each of the Global Crossing cable systems, including new services provisioning, network performance, repair and restoration activities. Capacity provisioning which relates to activation of overall capacity on our systems, or allocation of capacity to large users, is also performed by the NOC. Management of network performance entails detection and response to system degradation and other performance parameters, as well as preventative activities. Technical Support Center. The TSC will be a 24-hour center managed by highly- trained experts to handle technical inquiries from purchasers regarding project management, status of services provisioning, system performance and interconnection arrangements. Pursuant to the AC-1 Operations, Administration & Maintenance agreement, TSSL will provide OA&M support on behalf of AC-1 for a term of eight years following the commencement of commercial operations. As of December 31, 1998, Global Crossing was committed under the AC-1 OA&M agreement to make payments totaling approximately $247 million. This agreement is extendable at Global Crossing's option for two additional periods of 8 1/2 years each. As a result of Global Crossing's acquisition of Global Marine, Global Crossing expects to be able to provide installation and maintenance services to its own undersea cable systems. Global Marine operates a fleet of 13 cable ships and 21 submersible vehicles and has approximately 1,200 employees in the field. Acquisition of additional marine equipment will be required to enable Global Crossing to fully install and maintain its undersea cable systems. Competition Global Bandwidth Competition In addition to direct competition on Global Crossing's specific undersea cable routes, Global Crossing more generally faces competition in its mission to provide bandwidth to customers worldwide. Competitors, including Qwest, Level 3 and MCI Worldcom, are increasingly expanding their service and product offerings to provide customers with global bandwidth. To the extent that these competitors satisfy global bandwidth demand on competing networks, demand for capacity on the Global Crossing network will be reduced as a result. Existing and Planned Cable Systems The routes addressed by Global Crossing's systems are currently served by several cable systems as well as satellites. Currently, there are several fiber optic transatlantic cable systems, each of which competes directly with AC-1 and AC-2. Primary future sources of transatlantic competition for Global Crossing may result from, among others, (1) TAT-14, a transatlantic cable system which is being developed by its consortium members, including British Telecom, AT&T, France Telecom and Deutsche Telekom, (2) Flag Atlantic-1, a transatlantic system which is being developed by Flag Telecom and Global Telesystems Group Inc., (3) Gemini, a transatlantic cable system being operated and marketed by MCI WorldCom, Inc. and Cable & Wireless, (4) a transatlantic cable system being developed by Level 3 and (5) Hibernia, a transatlantic cable system being developed by Worldwide Fiber Inc. Global Crossing believes that such other cable systems, if completed, will compete directly with Global Crossing's Atlantic capacity and the commitments of the developers and other carriers on these systems could substantially reduce estimated demand for capacity on its systems. Similarly, there are several cable systems currently operating between the United States and Asia, the route to be served by PC-1. PC-1 may face competition in the transpacific market from, among others, (1) the 108
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China-U.S. Cable Network, a transpacific system being developed as a "private cable system" by fourteen large carriers, including SBC Communications Inc., MCI WorldCom Inc., AT&T and Sprint, most of which have traditionally sponsored consortium cables and (2) the Japan-U.S. Cable Network, a transpacific system being developed by a consortium of major telecommunications carriers, including MCI WorldCom Inc., AT&T, Kokusai Denshin Denwa Co. Ltd., Nippon Telegraph and Telephone Corp., Cable & Wireless and GTE. Although Global Crossing believes that such other cable systems will not satisfy the demand for capacity between the United States and Japan and that there is currently enough demand projected to accommodate all such systems, such other cable systems will receive commitments for capacity that PC-1 could have received in their absence. Moreover, while a number of the participants in these cable systems have purchased capacity on the other Global Crossing systems, it is likely that these participants will seek to satisfy their capacity requirements for traffic between the United States and Asia with the systems they are sponsoring and not with PC-1. In addition, Global Crossing will face competition on PEC, its trans-European network. There are several carriers, including Viatel, KPN-Qwest, MCI WorldCom, Inc., a joint venture between Deutsche Telekom and France Telecom, British Telecom, Hermes and a joint venture between Level 3 and COLT Telecom Group plc, which are currently planning or building trans-European network assets. Global Crossing also faces competition for its SAC network in South America. At least six other systems are planned to be completed in the region by the third quarter of 2001, including two consortia cables (Americas-2 and Atlantis- 2); Atlantica-1, a ring network being constructed by GlobeNet connecting Venezuela, Brazil and (through terrestrial cables) Argentina to North America; and SAm-1, a ring system being constructed by Telefonica S.A. and TSSL connecting Brazil, Argentina, Chile, Peru and Colombia to the United States. Other regional and global systems are being considered by developers, including Project Oxygen, a global system being evaluated by the CTR Group, Ltd. In addition, Global Crossing may face competition from existing and planned regional systems and satellites on its MAC and PAC routes, where entrants are vying for purchases from a small but rapidly growing customer base. Satellite Transmission When comparing cable transmission against satellite transmission, Global Crossing believes that cable has a distinct advantage with respect to latency (i.e., transmission delay) bandwidth and voice quality. Cable transmission has a lower cost per circuit, attributable in part to higher capacity and longer expected equipment life than satellite transmission. Satellite transmission is generally considered to have a comparative advantage versus cable transmission only in the area of point-to-multipoint broadcast and "thin route" transmission, as opposed to the more common point-to-point, high volume transmission for which cable usage is considered to be preferable. As newer generation broadband satellite transmission services enter the market, these services will likely complement fiber optic transmission rather than compete against it, due to the comparative economic advantage of optical fiber in delivering broadband services to densely populated metropolitan areas and, conversely, the comparative economic advantage of satellite transmission in sparsely populated rural areas. In early 1997, the FCC granted Ka-band licenses and orbital locations to 13 companies. The firms developing future satellite technology envision a network of satellites that will provide broadband data transmission with data rates of 2 Mbps, 20 Mbps and even 155 Mbps. Potential participants in the field include Astrolink, Skybridge, Teledesic, CyberStar and SpaceWay, which are seeking to provide high bandwidth transmission networks. Due to (1) the significant initial costs related to these systems, (2) the risks relating to satellite launch systems and (3) the significantly lower transmission capacity versus current fiber optic systems, Global Crossing believes that the new satellite systems will not be able to offer competitive cost per unit of transmission capacity in the dense metropolitan markets Global Crossing is targeting. Further, Global Crossing believes it will have at least four years lead time to help it solidify a sustainable competitive market position before true broadband satellite service commences. 109
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Suppliers In addition to Global Marine, there are currently three major supply companies in the undersea cable industry: TSSL, Alcatel and Kokusai Denshin Denwa-Submarine Cable Systems ("KDD-SCS"). Pirelli also has a presence in the industry and there are a number of smaller suppliers which have focused primarily on regional routes or non-repeatered systems. TSSL completed construction of AC-1, is responsible for the design and installation of PAC and, together with KDD-SCS (as a subcontractor), is responsible for design and installation of PC-1. Alcatel and TSSL are responsible for the design and construction of MAC. There are multiple suppliers available for terrestrial systems. As a result of Global Crossing's acquisition of Global Marine, Global Crossing will be a major supplier of installation and maintenance services for its undersea cable systems. Regulation In the ordinary course of development, construction and operation of our fiber optic cable systems, Global Crossing will be required to obtain and maintain various permits, licenses and other authorizations both in the United States and in international jurisdictions where its cables land or in the territories in which terrestrial fiber optic systems are being constructed, and Global Crossing will be subject to applicable telecommunications regulations in such jurisdictions. In particular, submarine cable landing or similar licenses as well as other infrastructure construction authorizations will be required in many of the jurisdictions where Global Crossing's planned undersea cable systems will land or terrestrial segments will be constructed. Global Crossing is both filing applications for cable landing licenses with the FCC and, where necessary, regulatory agencies in other countries, and, where available, is seeking private carriage status for these systems. These licenses are typically issued for a term of years, in the case of the FCC-issued cable landing licenses, 25 years, and are subject to renewal. The law of several international jurisdictions limits foreign ownership, direct or indirect, of entities holding cable landing licenses, or building terrestrial infrastructures. In connection with the implementation of the World Trade Organization ("WTO") Basic Telecommunications Agreement, the FCC adopted regulations establishing an open entry standard for applicants from WTO member countries, including a rebuttable presumption that applications from carriers from WTO member countries do not pose concerns that would justify denial of an application on competitive grounds. In addition, Global Crossing and, in some cases, its joint venture partners, are obtaining licenses from a number of jurisdictions to construct, operate, and sell capacity on terrestrial fiber optic cable systems. Construction of each of Global Crossing's cable systems also requires the acquisition and maintenance of various environmental and other construction related permits and licenses in the ordinary course of business. Global Crossing's undersea construction contracts are generally "turnkey" arrangements, whereby the contractor is obligated to obtain and maintain all such licenses and permits. Although Global Crossing expects that the construction contracts for each of its other planned undersea cable systems will impose the burden of acquiring and maintaining construction licenses and permits on the contractor for each of such systems, there can be no assurance that such contractor will successfully obtain such permits and licenses. Employees As of June 30, 1999, Global Crossing had approximately 350 employees, with an additional 1,200 employees added following its July 1999 acquisition of Global Marine. Global Crossing considers its relations with its employees to be good. Financial information by business segment and geographic area See Note 6 of Global Crossing's condensed consolidated financial statements on page F-7 and Note 3 of Global Crossing's consolidated financial statements on page F-22 for information regarding Global Crossing's revenues and assets by business segment and geographic region. 110
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Frontier Corporation Frontier provides integrated telecommunications services including Internet, Internet Protocol ("IP") and data applications, long distance, local telephone and enhanced services to business, carrier, web-centric and targeted residential customers nationwide and in some international countries. Although a predecessor company dates to 1899, Frontier was incorporated in 1920 under the laws of New York State to take over and unify the properties of a predecessor company and some properties of the New York Telephone Company which were located in the same general territory. Frontier is headquartered in Rochester, New York. Through its integrated services business, Frontier is one of the nation's largest long distance companies. Frontier provides domestic and international voice, data products, video and audio conferencing, digital distribution services, Internet service and other communications products. Frontier's customers for these services are primarily small to mid-size business customers, carrier customers, web-centric customers and targeted consumer markets. Frontier's local communications services business consists of 34 local telephone companies that, as of December 31, 1998, serve over one million access lines in thirteen states. Frontier is one of the largest local exchange service providers in the United States. Frontier also owns a 50% interest in the Upstate Cellular Network, a wireless joint venture with Bell Atlantic Mobile in upstate New York and Pennsylvania that is managed by Frontier and is accounted for using the equity method of accounting. On July 20, 1999, Bell Atlantic Mobile entered into an agreement with Frontier pursuant to which Bell Atlantic Mobile will acquire Frontier's interest in Upstate Cellular Network, together with its 55% interest in New York RSA No. 3 Cellular Partnership and its 15% interest in Orange County- Poughkeepsie MSA Limited Partnership. This transaction is expected to be completed before the end of 1999. Strategy Frontier's strategy is to be the premier provider of integrated telecommunications solutions in its target markets. Frontier markets itself to customers as a single source provider of integrated communications services, such as long distance, local, cellular, paging, data, Internet and enhanced services. Frontier anticipates that public policy will continue to evolve in favor of greater competition and, as a result, Frontier has been positioning itself to compete aggressively in a marketplace with numerous new competitors. Construction of the initial 13,000-mile segment of the Frontier Optronics Network SM, as originally announced in 1996, is expected to be completed on or around August 15, 1999. Frontier made a commitment to extend this network in 1998, and that extension is expected to be completed in late 1999. Through swap agreements with Enron Communications and WTCI, Frontier will add approximately 4,000 additional route miles in the western half of the United States. These agreements will also permit Frontier to establish additional redundant SONET rings, further enhancing the reliability and performance of the network. In addition, in July 1998, Frontier entered into an agreement with Williams Communications, Inc. to construct an extension of the network into the southeastern United States. In aggregate, the Frontier Optronics Network SM will have approximately 20,000 route miles. As of December 31, 1998, approximately 74% of the fiber miles on the original 13,000 route mile network were in service. Continuing network integration efforts involving Frontier subsidiaries are expected to further reduce future network costs as well as provide new revenue opportunities for Frontier. The combined technology of the Frontier Optronics NetworkSM and the Nortel DMS-500 switches installed at strategic locations along the network will enable Frontier to expand its ability to provide integrated local and long distance services nationwide. In 1998, Frontier added ATM and IP capabilities to the network which will provide greater speed and service for data products. In the fourth quarter of 1997, Frontier also introduced a nationwide frame relay product. This product complements Frontier's voice services business with a portfolio of additional data services products. This technology makes Frontier a nationwide facilities-based provider of integrated local, long distance and data services. 111
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Integrated services General Frontier is one of the nation's largest long distance companies. Frontier's integrated services segment provides domestic and international voice, data products, video and audio conferencing, digital distribution services, Internet service and other communications products to primarily small to mid-size business customers, carrier customers and targeted consumer markets. CLEC services are currently available in two-thirds of the United States, plus Washington D.C., providing Frontier with the ability to offer integrated data, local and long distance services to approximately 72% of the United States population. In February 1998, Frontier acquired GlobalCenter, Inc., a leading provider in digital distribution, Internet and data services headquartered in Sunnyvale, California. The acquisition of GlobalCenter and subsequent development and integrative work has assisted Frontier in responding to changes in the nature of calling, expanded use of the Internet and growth of data transmission. Frontier operates its own switches, develops and implements its own products, monitors and deploys its transmission facilities and prepares and designs its own billing and reporting systems. Frontier focuses primarily on commercial accounts and some targeted consumer markets. In this segment, calling volume consists primarily of calls made during normal business hours, which command peak-hour pricing. Frontier's residential subscribers tend to make most of their calls in the evening and on weekends, when business usage is lowest. Products and services Frontier provides a variety of integrated telecommunications products and services to commercial and residential subscribers nationwide designed to meet the customer's total communications needs. The bulk of Frontier's revenue is derived from outbound and inbound long distance services which are generally marketed under the Frontier name. Many of Frontier's integrated products, however, differ from those of competitors due to the level of value-added services Frontier offers and the flexibility of product pricing to maintain competitiveness. The variety of products and services developed and offered are based upon market driven requirements of the customer including an expectation that services can be integrated. They include: digital distribution and data services, CLEC services, and voice and other value-added services. Digital Distribution and Data Services. Frontier's data services products target small to mid-sized businesses and web-centric businesses. Data services currently include digital private lines, frame relay, dial-up Internet, dedicated Internet and web-hosting. The acquisition of GlobalCenter has accelerated Frontier's ability to provide an expanded line of data services. During 1998, after the acquisition of GlobalCenter, Inc., Frontier expanded its data services product set that can be segmented into three product lines: Transport, IP and Application Services. Transport is the means to transfer data from one location to another. Product offerings within this service category include dedicated private lines, frame relay, and managed services. Within the IP product line, Frontier provides the customer with the cost efficiencies of a public Internet network and the security of a private network. Applications Services are outsourced applications hosted by the service provider and integrated into both public and private networks which enable the customer to access the application at all times. Product offerings within this category include digital distribution, integrated messaging, and web site hosting. Digital distribution involves a combination of transport services, consulting services and professional expertise aimed at providing customers with customized Web-based data services. CLEC services. Frontier provides competitive local telephone service bundled with Frontier's other integrated services through its CLEC product offering. The CLEC offering is provided either using Frontier's local switching equipment in locations where it is available or on a resale basis. As of December 31, 1998, 112
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Frontier was providing local services as a CLEC, together with a complete range of long distance products, in 32 states plus Washington, D.C. Most of that coverage was provided via resale of services of incumbent local exchange carriers. Within that footprint, CLEC service was also provided initially from Frontier's own switches in New York, Boston and Minneapolis. Since then, Frontier expanded its coverage to approximately two-thirds of the United States and turned up facilities-based service in a total of thirteen metropolitan areas by the end of 1998. Facilities-based service is being offered in cities that are on the Frontier Optronics Network SM, which will provide Frontier with the opportunity to expand its offerings of combined local and long distance services into additional markets, control access costs, and leverage the network. The number of CLEC lines currently provided by Frontier makes it one of the largest CLEC's in the United States. Value-added services. Frontier's value-added services are aimed primarily at the business subscriber, although Frontier also offers products for residential customers. Value-added services provide cost-effective solutions for both simple and complex communications applications and include calling cards, teleconferencing, broadcast fax, voice mail and cellular and paging services. The calling card is a personal communication tool that can provide access to teleconferencing, voice mail, information services such as stock quotes and weather information, Flexible call routing of toll-free service, call delivery for immediate or future message delivery, directory assistance and travel connections to hotel, car and airline reservation systems. Using a calling card, customers can call to any domestic and most international locations from the U.S. or numerous international locations. In addition, the calling card product enables customers to dial 100 frequently called numbers using their own toll free number and a four-digit preprogrammed PIN. Frontier conferencing provides a way for three or more people at different locations to participate in a joint discussion. Several options are available: 800 meet-me, dial-out or dial-in via a Frontier calling card. Frontier's broadcast fax product enables the user to fax a single document to multiple locations at the same time and is designed for the larger fax user who regularly sends information to an established list. Frontier's Voice Mail Plus with fax mail provides an efficient means of always being accessible, through the use of outcall or pager notification, and never missing important calls. With an individual toll-free number, a customer can save, delete or forward fax and voice messages to other Voice Mail Plus users or change greetings all on one call. Customers can also store a fax or automatically print it at a designated fax machine. Frontier offers nationwide numeric paging through personal toll-free numbers. When coupled with the flexible call routing feature, nationwide paging creates a robust travel application. Local paging service is also available in selected local franchise markets. Frontier's toll-free services are offered primarily to business customers on a single invoice, although several residential products are available. In addition to basic 800/888 toll-free applications, Frontier offers MultiPoint, which allows customers to terminate calls in different locations based on the four-digit personal identification number the caller enters; GlobalPoint international service, which completes calls originating in over 40 countries; and Flex Connect 800, a fractional service which allows multiple residential customers to reach different terminating locations utilizing a four-digit security personal identification number. Frontier also provides a robust line of routing features such as flexible call routing, which allows customers to change where calls terminate based on their need; routing and blocking enhancements determined by the area code, area code and exchange or full ten- digit telephone number of the caller; time of day and day of week routing; and percent call allocation. Toll-free services also include interactive voice response services, including TargetLine, a call prompter that routes callers either by menu options or prompting them to enter digits for extension routing; InstaLink, a dealer locator routing callers based upon their area code and exchange or zip code; and PassPort, a network based host interface interactive voice response solution. 113
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Pricing. Customers subscribe to various products. The nature of the products determines the price per minute that they pay on their outbound or inbound long distance calls. Rates typically vary by the volume of usage, the distance of the calls, the time of day that calls are made, the region that originates the call and whether or not the product is being provided on a promotional basis. Reporting services. Frontier offers a variety of billing options and media aimed primarily at business customers. When a new commercial account is opened, the customer is offered the opportunity to custom design the format of its reports. Frontier also offers customers graphic reports of traffic patterns on a nationwide basis by state, within state by area of dominant influence and within area of dominant influence by zip code. Frontier believes these services are useful to some customers for direct response advertising and customer service applications. Frontier also offers its proprietary personal computer reporting service, known as uCommand, which allows customers to design their own reports, prepare separate itemized bills, do mark-up reporting and generate numerous other customer reports. 800 services. These services include area code blocking and routing; time of day routing; Home Connection 800, a fractional 800 service which allows residential customers to access 800 service utilizing a four-digit security PIN; Multi-Point 800 service, which allows customers to use accounting codes on an 800 number or route a single 800 number to numerous locations simultaneously; Follow-Me 800, which allows customers to change call routing and TargetLine 800, which routes calls to the closest location a customer identifies and provides custom prompts based upon a customer specific database. Transmission Frontier endeavors to have sufficient switching capacity, local access circuits, and integrated services circuits at and between its network switching centers to permit subscribers to obtain access to the switching centers and its integrated services circuits on a basis which exceeds industry standards regarding clarity, busy signals or delays. The network currently utilizes a variety of transmission circuits to complete long distance calls. The Frontier Optronics Network SM will reduce the number of transmission facilities leased and provide for a more dependable and cost- effective transmission system. Currently, Frontier Optronics Network SM facilities have been completed in Texas, California, Nevada, Utah, Colorado, Kansas, Missouri, Ohio, Pennsylvania, New York, Illinois, Wisconsin, New Mexico, Arizona, Oregon, Washington, Nebraska, Iowa, Indiana, Michigan, New Jersey, Maryland, Kentucky, Tennessee, Oklahoma and Massachusetts. Completion of the expanded Frontier Optronics Network SM is expected in late 1999. In addition to the Optronics transmission circuits, the network is comprised of digital microwave systems located in California, New York and Pennsylvania for which Frontier holds FCC licenses, and facilities that have been leased on a fixed price basis under primarily short-term contracts. While Frontier still has a number of longer term lease contracts, a substantial number of these contracts have annual "mark-to-market," "circuit portability," and "commitment buy-out" clauses and Frontier renegotiates contracts when it is appropriate to do so. These provisions function to keep the price Frontier pays at or near current market rates. An important aspect of Frontier's operation is planning the mix of the types of circuits and transmission capacity to be used for each network switching center so that calls are completed on a basis which is cost effective for Frontier without compromising prompt service and high quality to subscribers. Frontier's network switching centers house equipment with varying capacities to meet the anticipated needs of the service origination region or regions served by the center. The equipment used by Frontier is, for the most part, designed to permit expansion of its capacity by the addition of standard components. If the maximum capacity of the equipment in any center is reached, Frontier upgrades it with higher capacity switching equipment in an effort to scale the equipment for growth. Frontier is dependent upon local telephone companies for installing local access circuits and providing related service when establishing a network switching center. International service is provided through both Company owned direct circuits and through contracts with several international long distance companies to provide high quality international service at competitive rates. 114
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It is anticipated that the Frontier Optronics Network SM will continue to lower Frontier's current cost structure and expand Frontier's transmission capabilities. However, Frontier cannot definitively project the change in its cost structure nor assure that the network will be fully completed as scheduled. Local communications services Frontier's local communications services segment comprises one of the largest local exchange service providers in the United States. This segment consists of 34 regulated telephone operating subsidiaries in 13 states, serving in excess of one million access lines. The local exchange carriers provide local, toll, access and resale services, sell, install and maintain customer premises equipment and provide directory services. Over the last decade, Frontier has invested heavily to install advanced digital switching platforms throughout all of its switching network, making Frontier one of the first in the industry to be served by an entirely digital network for its local exchange companies. Frontier has achieved substantial cost reductions through the elimination of duplicative services and procedures and the consolidation of administrative functions. Frontier believes that additional cost reductions may be obtainable from advanced switching platforms and outside plant delivery systems. Frontier intends to pursue additional gains in productivity by investing in these technologies where feasible, and through reengineering customer service processes. Of the approximately 1,024,726 access lines in service on December 31, 1998, 721,039 were residential lines and 303,687 were business lines. Long distance network service to and from points outside of the telephone companies' operating territories is provided by interconnection with the facilities of interexchange carriers. Frontier is pursuing several alternatives to provide expanded broadband capabilities to its customers. To date, Frontier has installed over 31,000 fiber miles of fiber based network facilities, totaling more than 930 sheath miles, in the Rochester, New York area to provide its customers with enhanced capacity and to position Frontier to offer new products. Frontier provides expanded broadband services to select customers, including video-distance learning arrangements for educational institutions, and access to SONET based fiber rings for major business customers. In connection with its integration strategy, Frontier has developed a program known as "Frontier Long Distance," whereby Frontier's local exchange companies resell Frontier's integrated services. Frontier believes that many customers prefer the convenience of obtaining their long distance service through their local telephone company and receiving a single bill. Frontier Long Distance is currently offered in the product lines of most of Frontier's local telephone exchange companies. 115
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Global Crossing's Management Discussion and Analysis of Financial Condition and Results of Operations Overview Global Crossing is an independent provider of global Internet and long distance telecommunication facilities and related services utilizing a network of undersea and terrestrial digital fiber optic cable systems. Global Crossing started development in March 1997, when it entered into a contract with TSSL for the design, development, construction and installation of AC-1 and obtained commitments for its initial financing. AC-1, Global Crossing's first fiber optic cable system, is a four fiber pair self-healing ring connecting (1) the United States to the United Kingdom, (2) the United Kingdom to the Netherlands and Germany, (3) the Netherlands to Germany and (4) Germany to the United States. The first segment of AC-1, the United States to United Kingdom route, was completed and commenced operations in May 1998, and the entire AC-1 system commenced operations in February 1999. Until May 1998, when the United States to United Kingdom segment of AC-1 reached RFS, Global Crossing was a development stage company and since inception has been involved in the planning, financing, marketing, organization, development, design and construction of the AC-1 system and seven other planned systems, which are AC-2, PC-1, MAC, PAC, SAC, PEC and GAL. See "The Companies--Global Crossing Ltd." beginning on page 98. During 1998, Global Crossing achieved a number of significant milestones, including (1) the recruitment of experienced professionals in undersea cable and telecommunications operations, (2) the signing of construction contracts on AC- 1, PC-1, MAC and PAC, (3) the execution of the AC-1, PC-1 and MAC credit facilities and the execution of a financing commitment with respect to PAC, (4) completion of the AC-1 ring, (5) the issuance by Global Crossing Holdings of $800 million in principal amount of senior notes ("GCH Senior Notes"), (6) the initial public offering of Global Crossing common stock, (7) the issuance by Global Crossing Holdings of $500 million in principal amount of preferred stock ("GCH Preferred Stock") and (8) the execution of $1,052 million of CPAs for undersea and terrestrial capacity and dark fiber sales. Revenues and deferred revenues Sales revenue and deferred revenue Customers may enter into CPAs to purchase an IRU in units of capacity on any of Global Crossing's fiber optic cable systems. The purchase price for such capacity is non-refundable once the applicable segment purchased is RFS. The IRU purchased entitles the customer to all rights and obligations of ownership of the capacity for a period of 25 years after the system RFS date. Where available on a specific system, Global Crossing's CPAs generally provide that the system will have self-healing ring capability, which means that, in the event of interruption, capacity on any segment of a system will be instantaneously restored either on another system segment or within the same segment so that the same point-to-point connectivity is maintained. Revenues from the sale of capacity are recognized in the period that the rights and obligations of ownership transfer to the purchaser, which occurs when (1) the purchaser obtains the right to use the capacity, which can only be suspended if the purchaser fails to pay the full purchase price or fulfill its contractual obligations, (2) the purchaser is obligated to pay OA&M costs and (3) the segment of the system related to the capacity purchased is available for service. Customers who have entered into CPAs for capacity have paid deposits toward the purchase price, and such amounts have been included as deferred revenue in the consolidated financial statements. In some CPAs, customers who have purchased capacity on systems prior to the date the system has self-healing ring capacity have contractually required full self-healing ring capability as a legal condition which, if not satisfied, would enable them to terminate the CPA and requires Global Crossing to refund capacity payments. 116
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Operating lease revenue and deferred revenue In addition to sales type leases, Global Crossing may enter into operating lease agreements to lease capacity on its systems. These agreements may grant the customer a right to use capacity for periods of time which may be substantially less than the design life of the capacity, generally 25 years. Global Crossing will amortize revenues from these operating lease agreements over the lives of the agreements, with cash received but not yet recognized as operating revenues, recorded in the consolidated financial statements as deferred revenue. OA&M revenue Pursuant to the terms of its existing CPAs, Global Crossing is obliged to use commercially reasonable efforts to cause the AC-1 system to be maintained in efficient working order and in accordance with industry standards. In exchange for the operating, administration and maintenance services provided by Atlantic Crossing Ltd. ("ACL"), customers are obligated for the term of their IRU to pay for their allocable share of the costs for operating and maintaining the system. Customers appoint members to a system advisory committee, which is charged with the responsibility of directing the operations and maintenance of AC-1. Customers pay 110% of ACL's cost to operate and maintain the system based on their pro rata share of total capacity subject to annual maximum amounts per circuit purchased of $250,000 per transatlantic circuit and $50,000 per European circuit. Each customer's pro rata share is effectively calculated by taking the weighted average of their purchased capacity over total capacity sold multiplied by 110% of actual costs incurred to customers quarterly in advance based on the prior year's actual costs. These amounts are non- refundable, and should a customer fail to make an OA&M payment, ACL may suspend all rights to capacity granted under the IRU. Undersea OA&M revenues are recognized in the period that the related services are provided. On an annual basis, the actual OA&M costs Global Crossing incurs are accumulated and an adjustment is made to true up actual OA&M revenues so that they equal 110% of actual costs incurred, provided specified contractual limits have not been reached. Construction in progress; capacity available for sale; cost of capacity sold Construction costs incurred with respect to each segment of a cable system are reflected as "Construction in Progress" in Global Crossing's consolidated balance sheets until a segment becomes operational, at which time such costs are reflected as Capacity Available for Sale. Capacity Available for Sale is recorded at the lower of cost or fair value less cost to sell and is charged to Cost of Capacity Sold in the period the related revenues are recognized. Fair value of capacity is derived from a third party consultant's market study of expected sales of capacity. Global Crossing records the cost of acquiring terrestrial capacity in Capacity Available for Sale in amounts equal to the present value of future payment obligations associated with the acquisition of such terrestrial capacity, excluding from such payments amounts attributable to operations and maintenance costs. Construction in Progress includes direct expenditures for construction of systems, including advisory, consulting and legal fees, interest during construction and amortized debt issuance costs incurred during the construction phase. Cost of sales Cost of undersea sales in any period is calculated based on the ratio of capacity revenues recognized in the period to total expected capacity revenues over the life of the systems multiplied by the total costs incurred to construct the system. This calculation of the cost of sales amount matches costs with the value of each sale relative to total expected revenues. Until the entire system is completed, for purposes of calculating cost of sales, the total system costs incurred will include an estimate of remaining costs to be incurred to complete the entire system. The calculation of cost of undersea sales is based on total system cost including both the initial 117
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system cost and the cost of system upgrades that management has the intent and ability to complete, provided the need for such upgrades is supported by an independent consultant's revenue forecast. Changes in management's estimate of the total expected revenues to be derived from sales of capacity will result in adjustments to the calculation of cost of sales. These adjustments will be recorded on a prospective basis over future periods commencing with the period during which management revises its estimate. The cost of terrestrial capacity directly related to undersea sales is charged to cost of sales in the period that the related revenue is recognized. Operating type lease cost of sales Costs relating to operating type lease revenue will be classified as a depreciable asset and depreciated over the estimated useful life of the capacity. Operating expenses In addition to cost of capacity sold, Global Crossing's operating expenses principally comprise of sales and marketing, operations and maintenance, general and administrative and network development costs. Costs relating to the evaluation of possible additional systems are expensed as incurred. Results of operations for the three months ended June 30, 1999 and June 30, 1998 Revenues. Global Crossing's revenues on sales of capacity relating to AC-1 increased $82 million (81 percent) to $183 million during the three months ended June 30, 1999 from $101 million during the three months ended June 30, 1998. During the three months ended June 30, 1999 and 1998, operation and maintenance services revenue was $7 million and none, respectively. Cost of capacity sold. For the three months ended June 30, 1999 and 1998, Global Crossing recognized $81 million and $41 million, respectively, in cost of capacity sold, resulting in a gross margin on capacity sales of 56% and 59%, respectively. Non-cash cost of undersea capacity sold was $61 million and $32 million during the three months ended June 30, 1999 and 1998, respectively. Cost of capacity sold also includes the cost of terrestrial capacity sold, a cash expense, during the three months ended June 30, 1999 and 1998, of $20 million and $9 million, respectively. During the three months ended June 30, 1999, Global Crossing calculated costs of undersea capacity sold for AC-1 based on the ratio of the period's actual revenue to total expected future revenues given a minimum projected sales capacity of 1024 circuits times the construction cost of the system. This calculation of cost of sales matches costs with the relative value of each sale. During the three months ended June 30, 1998, Global Crossing calculated costs of undersea capacity sold for AC-1 based upon a minimum projected sales capacity of 512 circuits. Service Contracts. Since the AC-1 system became operational, Global Crossing has offered its capacity pursuant to sales agreements that qualify for sales type lease accounting. Under this method, revenues and cost of capacity sold are recognized in the period the rights and obligations of ownership transfer to the purchaser and the cost of the AC-1 system has been recorded as Capacity Available for Sale. See notes to Global Crossing's consolidated financial statements beginning on page F-6. As Global Crossing continues to build and expand its global subsea and terrestrial network, it expects that it will begin to offer to its customers capacity services that will not qualify as sales-type leases as discussed above. Capacity made available under such contracts (Service Contracts) may be offered on AC-1 (or other subsea systems as they become operational) or as point to point capacity connecting cities in Global Crossing's global network, once terrestrial capacity in the U.S. (i.e., upon completion of the Frontier merger), Europe and Japan become available. Upon the commencement of offering Service Contracts, which Global Crossing believes will occur prior to the end of 1999, the carrying value of the AC-1 system (and the other sub-sea systems as they become 118
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operational) will be depreciated over their remaining economic useful lives and revenues related to these Service Contracts will be recognized as the services are rendered over the terms of the contracts. For capacity sales contracts that meet the requirements of sales-type-lease accounting, revenues will be recognized as described above and cost of capacity sold will be based upon the net book value of the remaining committed to capacity. If Global Crossing had offered Service Contracts beginning on January 1, 1999, it would have incurred additional depreciation expense, offset by reduced cost of capacity sold on sales type leases recorded. During the six months ended June 30, 1999, the impact on results of operations would not have been significant. Operations, administration and maintenance (OA&M). Global Crossing incurred OA&M costs on AC-1 of $14 million and $2 million during the three months ended June 30, 1999 and 1998, respectively. Global Crossing has entered into an agreement with Tyco Submarine Systems Limited (TSSL) relating to operations, administration and maintenance of AC-1 which limits Global Crossing's total OA&M expense for the system. Global Crossing anticipates that its OA&M costs associated with AC-1 will be largely recovered through charges to its customers under the terms of Capacity Purchase Agreements (CPAs). OA&M costs associated with systems under construction are expensed as incurred. General and administrative. General and administrative expenses totaled $22 million and $7 million during the three months ended June 30, 1999 and 1998, respectively, and was comprised principally of salaries, employee benefits and recruiting fees reflecting Global Crossing's staffing for multiple systems, travel, professional fees, insurance costs and occupancy costs. Network development. Global Crossing incurred network development costs during the three months ended June 30, 1999 and 1998 of $5 million and $4 million, respectively. These amounts are comprised principally of salaries and professional fees. Sales and marketing. During the three months ended June 30, 1999, Global Crossing incurred sales and marketing expenses of $13 million, including commissions to TSSL of $7 million incurred on revenues recognized during this period. During the three months ended June 30, 1998, Global Crossing incurred sales and marketing costs of $7 million, including commissions to TSSL of $3 million incurred on revenues recognized during this period. The increase from 1998 was due to additions in headcount, occupancy costs, plus marketing costs, commissions paid and other promotional expenses to support Global Crossing's rapid growth. Stock related expense. Global Crossing recognized $9 million and $23 million of stock compensation expense during the three months ended June 30, 1999 and 1998, respectively, relating to options issued under its Stock Incentive Plan, plus certain stock related expense related to stock options awarded to consultants, accounted for under SFAS No. 123. Depreciation and amortization. For the three months ended June 30, 1999 and 1998, Global Crossing incurred depreciation and amortization of $4 million and $0.4 million, respectively. Provision for doubtful accounts. For the three months ended June 30, 1999 and 1998, Global Crossing recorded a provision for doubtful accounts of $2 million and $1 million, respectively. Termination of advisory services agreement. In connection with the development and construction of AC-1, Global Crossing entered into an advisory services agreement with PCG Telecom Services LLC, an affiliate, providing for the payment by Global Crossing of an advisory fee of 2% of the gross revenues of ACL over a 25 year term. Global Crossing's board of directors also approved similar advisory fees and authorized Global Crossing to enter into similar agreements with respect to other cable systems under development by Global Crossing. In June 1998, Global Crossing acquired the rights of the persons entitled to the fees payable under these agreements in consideration for the issuance to those persons of shares of Global Crossing's common stock, which had an aggregate value of $135 million, and the cancellation of approximately $3 million owed Global Crossing under a related advance agreement. In addition, Global Crossing recognized approximately $2 million of advisory fees incurred prior to termination of the contract. 119
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Equity in loss of affiliates. In April 1998, Global Crossing entered into a joint venture to construct an undersea cable system, PC-1. PC-1 is owned and operated by Pacific Crossing Ltd. (PCL). Global Crossing 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. In December 1998, a wholly-owned subsidiary of Global Crossing entered into a joint venture to construct and operate GAL. The $3 million loss is comprised of a loss of $1 million representing Global Crossing's 58% equity in the loss of PCL and a loss of $2 million representing Global Crossing's 49% equity in Global Access Ltd. for the three months ended June 30, 1999. Interest income. Global Crossing earned interest income of $17 million and $4 million in the three months ended June 30, 1999 and 1998, respectively. Such interest income represents earnings on cash raised from financings and on CPA deposits. Interest expense. During the three months ended June 30, 1999, Global Crossing incurred $32 million in interest costs, including the amortization of finance costs and debt discount. Of this amount, Global Crossing capitalized to construction in progress interest of $9 million, and expensed $23 million. During the three months ended June 30, 1998, Global Crossing incurred $21 million in interest costs, including the amortization of finance costs and debt discount. Of this amount, Global Crossing capitalized to construction in progress interest of $14 million, and expensed $7 million. Other expense, net. During the three months ended June 30, 1999, other expense, net was comprised primarily of a $10 million loss on a foreign currency forward contract in connection with the Global Marine acquisition and $2 million in professional fees associated with the senior notes consent solicitation, offset partially by a $4 million gain on sale of securities available for sale. Provision for income taxes. The income tax provision of $14 million and $9 million for the three months ended June 30, 1999 and 1998, respectively, provides for taxes on profits earned from capacity sales and OA&M revenues where subsidiaries of Global Crossing have a presence in taxable jurisdictions. Extraordinary loss on retirement of senior notes. During May 1998, Global Crossing recognized an extraordinary loss of $20 million in connection with the repurchase of Global Telesystems Holdings' outstanding senior notes, comprising of a premium of $10 million and a write-off of $10 million of unamortized deferred financing costs. Net income (loss). During the three months ended June 30, 1999, Global Crossing reported net income of $10 million compared to a net loss of $155 million in the three months ended June 30, 1998. Preferred stock dividends. Preferred stock dividends for the three months ended June 30, 1999 and 1998 were $14 million and $4 million, respectively. Redemption of preferred stock. The redemption of Global Telesystems Holdings' 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. Net loss applicable to common shareholders. During the three months ended June 30, 1999, Global Crossing reported a net loss applicable to common shareholders of $4 million, resulting in large part from $14 million of dividends on preferred stock. During the three months ended June 30, 1998, Global Crossing reported a net loss applicable to common shareholders of $193 million, resulting in a large part from $140 million in costs associated with the termination of the advisory service agreement, $34 million redemption of preferred stock, $20 million extraordinary loss on retirement of senior notes and $4 million of preferred stock dividends. 120
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Results of operations for the six months ended June 30, 1999 and June 30, 1998 Revenues. Global Crossing's revenues on sales of capacity relating to AC-1 increased to $356 million during the six months ended June 30, 1999 from $101 million during the six months ended June 30, 1998. During the six months ended June 30, 1999 and 1998, operation and maintenance services revenue was $12 million and none, respectively. The increase is primarily due to no sales or related costs recognized in the three months ended March 31, 1998, as Global Crossing was in its development stage. Cost of capacity sold. For the six months ended June 30, 1999 and 1998, the Company recognized $150 million and $41 million, respectively, in cost of capacity sold, resulting in a gross margin on capacity sales of 59%, respectively. Non-cash cost of undersea capacity sold was $114 million and $32 million during the six months ended June 30, 1999 and 1998, respectively. Cost of capacity sold also includes the cost of terrestrial capacity sold, a cash expense, during the six months ended June 30, 1999 and 1998, of $36 million and $9 million, respectively. Operations, administration and maintenance (OA&M). Global Crossing incurred OA&M costs on AC-1 of $26 million and $2 million during the six months ended June 30, 1999 and 1998, respectively. Global Crossing has entered into an agreement with TSSL relating to operations, administration and maintenance of AC-1 which limits Global Crossing's total OA&M expense for the system. Global Crossing anticipates that its recurring OA&M costs will be largely recovered through charges to its customers under the terms of CPAs. General and administrative. General and administrative expenses totaled $45 million during the six months ended June 30, 1999 and were comprised principally of salaries, employee benefits and recruiting fees reflecting Global Crossing's staffing for multiple systems, travel, professional fees, insurance costs and occupancy costs. During the six months ended June 30, 1998, Global Crossing incurred general and administrative expenses of $9 million. Sales and marketing. During the six months ended June 30, 1999, Global Crossing incurred sales and marketing expenses of $23 million, including commissions to TSSL of $15 million incurred on revenues recognized during this period. During the six months ended June 30, 1998, Global Crossing incurred sales and marketing costs of $7 million, including commissions to TSSL of $3 million incurred on revenues recognized during this period. The increase from 1998 was due to additions in headcount, occupancy costs, plus marketing costs, commissions paid and other promotional expenses to support Global Crossing's rapid growth. Network development. Global Crossing incurred network development costs during the six months ended June 30, 1999 and 1998 of $10 million and $4 million, respectively. These amounts are comprised principally of salaries and professional fees. Stock related expense. Global Crossing recognized $26 million and $23 million of stock compensation expense during the six months ended June 30, 1999 and 1998, respectively, relating to options issued under its Stock Incentive Plan, plus certain stock related expense related to stock options awarded to consultants, accounted for under SFAS No. 123. Depreciation and amortization. For the six months ended June 30, 1999 and 1998, Global Crossing incurred depreciation and amortization of $4 million and $0.4 million, respectively. Provision for doubtful accounts. For the six months ended June 30, 1999 and 1998, Global Crossing recorded a provision for doubtful accounts of $4 million and $1 million, respectively. Termination of advisory services agreement. In connection with the development and construction of AC-1, Global Crossing entered into an advisory services agreement with PCG Telecom Services LLC, an affiliate, providing for the payment by Global Crossing of an advisory fee of 2% of the gross revenues of ACL over a 25 year term. Global Crossing's board of directors also approved similar advisory fees and authorized Global Crossing to enter into similar agreements with respect to other cable systems under development by 121
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Global Crossing. In June 1998, Global Crossing acquired the rights of the persons entitled to the fees payable under these agreements in consideration for the issuance to those persons of shares of Global Crossing's common stock, which had an aggregate value of $135 million, and the cancellation of approximately $3 million owed Global Crossing under a related advance agreement. In addition, Global Crossing recognized approximately $2 million of advisory fees incurred prior to termination of the contract. Equity in loss of affiliates. In April 1998, Global Crossing entered into a joint venture to construct an undersea cable system, PC-1. PC-1 is owned and operated by PCL. Global Crossing 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. In December 1998, a wholly- owned subsidiary of Global Crossing entered into a joint venture to construct and operate GAL. The $6 million loss is comprised of a loss of $2 million representing Global Crossing's 58% equity in the loss of PCL and a loss of $4 million representing Global Crossing's 49% equity in Global Access Ltd. for the six months ended June 30, 1999. Interest income. Global Crossing earned interest income of $32 million and $4 million in the six months ended June 30, 1999 and 1998, respectively. This interest income represents earnings on cash raised from financings and on CPA deposits. Interest expense. During the six months ended June 30, 1999, Global Crossing incurred $61 million in interest costs, including the amortization of finance costs and debt discount. Of this amount, Global Crossing capitalized to construction in progress interest of $15 million, and expensed $46 million. During the six months ended June 30, 1998, Global Crossing incurred $32 million in interest costs, including the amortization of finance costs and debt discount. Of this amount, Global Crossing capitalized to construction in progress interest of $25 million, and expensed $7 million. Other expense, net. During the six months ended June 30, 1999, other expense, net was comprised primarily of a $10 million loss on a foreign currency forward contract in connection with the Global Marine acquisition and $2 million in professional fees associated with the senior notes consent solicitation, offset partially by a $4 million gain on sale of securities available for sale. Provision for income taxes. The income tax provision of $30 million and $9 million for the six months ended June 30, 1999 and 1998, respectively, provides for taxes on profits earned from capacity sales and OA&M revenues where subsidiaries of Global Crossing have a presence in taxable jurisdictions. Cumulative effect of change in accounting principle. Global Crossing 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 three months ended March 31, 1999. SOP 98-5 requires that certain start-up expenditures previously capitalized during system development must now be expensed. Global Crossing incurred a one-time charge during the three months ended March 31, 1999 of $15 million (net of tax benefit) that represents start- up costs incurred and capitalized during previous periods. Extraordinary loss on retirement of senior notes. During May 1998, Global Crossing recognized an extraordinary loss of $20 million in connection with the repurchase of Global Telesystems Holdings' outstanding senior notes, comprising of a premium of $10 million and a write-off of $10 million of unamortized deferred financing costs. Net income (loss). During the six months ended June 30, 1999 Global Crossing reported net income of $8 million compared to a net loss of $159 million in the six months ended June 30, 1998. Preferred stock dividends. Preferred stock dividends for the six months ended June 30, 1999 and 1998, were $27 million and $8 million, respectively. 122
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Redemption of preferred stock. The redemption of Global Telesystems Holdings' 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. Net loss applicable to common shareholders. During the six months ended June 30, 1999, Global Crossing reported a net loss applicable to common shareholders of $19 million, resulting in large part from $27 million of dividends on preferred stock and $15 million resulting from a cumulative effect of change in accounting principle. During the six months ended June 30, 1998, Global Crossing reported a net loss applicable to common shareholders of $202 million, resulting in a large part from $140 million in costs associated with the termination of the advisory service agreement and $42 million of dividends on preferred stock. Results of operations for the year ended December 31, 1998 and the period from March 19, 1997 (date of inception) to December 31, 1997 Revenues During the year ended December 31, 1998, Global Crossing executed commitments with its customers to purchase capacity on its systems plus the sale of dark fiber on PEC totaling $911 million, bringing the total since inception to $1,052 million. Of this amount, Global Crossing recognized revenues of $418 million on sales of capacity relating to AC-1 for the year ended December 31, 1998, in addition to revenues from operations and maintenance services of $6 million. The remaining $634 million of capacity sales has not yet been reflected as revenue in the consolidated financial statements because either the segment has not reached RFS or the purchaser has not obtained the right to use the capacity. During the year ended December 31, 1998, Global Crossing entered into CPAs with 33 international telecommunications carriers and sold approximately 35% of the sales capacity of 512 circuits on the AC-1 system. Expenses Cost of capacity sold. For the year ended December 31, 1998, Global Crossing 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 Global Crossing had purchased from third parties. Global Crossing calculates undersea cost of capacity sold for AC-1 based on the ratio of the period's actual revenue to total expected revenues, 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 Global Crossing was in its development stage. Operations, administration and maintenance. Global Crossing incurred OA&M costs of $18 million during the year ended December 31, 1998. Global Crossing entered into an agreement with TSSL relating to operations, administration and maintenance of AC-1, which limits Global Crossings total OA&M expense for the system. Global Crossing anticipates that its OA&M costs will be largely recovered through charges to its customers under the terms of CPAs. There were no OA&M costs during the period from March 19, 1997 (date of inception) to December 31, 1997, as Global Crossing was in its development stage. Sales and marketing. During the year ended December 31, 1998, Global Crossing incurred sales and marketing expenses of $26 million, including selling commissions of $20 million incurred on capacity sales recognized during this period. During the period from March 19, 1997 (date of inception) to December 31, 1997, Global Crossing 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. 123
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Network development. Global Crossing incurred network development costs during the year ended December 31, 1998 of $11 million relating to the development of systems. During the period from March 19, 1997 (date of 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 $27 million during the year ended December 31, 1998 and were comprised principally of salaries, employee benefits and recruiting fees for staffing of multiple systems, travel, insurance costs and rent expenses, plus depreciation and amortization. During the period from March 19, 1997 (date of inception) to December 31, 1997, Global Crossing 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 AC-1, Global Crossing entered into an advisory services agreement with PCG Telecom Services LLC, an affiliate, providing for the payment by Global Crossing of an advisory fee of 2% of the gross revenues of ACL over a 25 year term. Global Crossing's board of directors also approved similar advisory fees and authorized Global Crossing to enter into similar agreements with respect to other cable systems under development by Global Crossing. Global Crossing has 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 Global Crossing common stock, which had at the time of issuance an aggregate value of $135 million, and the cancellation of approximately $3 million owed to Global Crossing under a related advance agreement. In addition, Global Crossing recognized approximately $2 million of advisory fees incurred prior to termination of the contract. Stock related expense. Through December 31, 1998, Global Crossing recorded as a charge to paid-in capital $94 million of unearned compensation relating to awards under Global Crossing's stock incentive plan plus the grant of certain economic rights and options to purchase common stock granted to a senior executive. The unearned compensation is being recognized as an expense over the vesting period of these options and economic rights. For the year ended December 31, 1998, Global Crossing recognized as an expense $31 million of stock related compensation relating to Global Crossing's stock incentive plan and $6 million for the vested economic rights to purchase common stock and $2 million in respect of shares of common stock issued during the year. The remaining $57 million of unearned compensation will be recognized as follows: $28 million in 1999, $21 million in 2000 and $8 million in 2001. Global Crossing's stock incentive plan commenced in January 1998, and therefore no issuances were made during the period from March 19, 1997 (date of inception) to December 31, 1997. Equity in loss of affiliates. During 1998, Global Crossing entered into joint venture agreements to construct and operate PC-1 and GAL. PC-1 is owned and operated by Pacific Crossing Ltd. ("PCL"). Global Crossing has an economic interest in PCL represented by a 50% direct voting interest and, through one of the joint venture partners, a further 8% economic non-voting interest. Global Crossing has a 49% interest in Global Access Ltd., which operates GAL. Global Crossing's equity in the loss of PC-1 for the year ended December 31, 1998 was $3 million. Interest income and interest expense Interest income. Global Crossing reported interest income of $30 million during the year ended December 31, 1998 and $3 million during the period from March 19, 1997 (date of inception) to December 31, 1997. Such interest income represents earnings on cash raised from financings, the IPO, the issuance of the GCH Preferred Stock, operations and CPA deposits. 124
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Interest expense. During the year ended December 31, 1998, Global Crossing incurred $93 million in interest costs, including the amortization of finance costs and debt discount. Of this amount, Global Crossing capitalized to construction in progress interest of $50 million and expensed $43 million. During the period from March 19, 1997 (date of inception) to December 31, 1997, Global Crossing 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 OA&M revenues where Global Crossing's subsidiaries have a presence in taxable jurisdictions. During the period from March 19, 1997 (date of inception) to December 31, 1997, Global Crossing 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, Global Crossing recognized an extraordinary loss of $20 million in connection with the repurchase of outstanding Global Telesystems Holdings senior notes (the "GTH Senior Notes"), comprising of a premium of $10 million and a write-off of $10 million of unamortized deferred financing costs. Preferred stock dividends During the year ended December 31, 1998, Global Crossing recorded preferred stock dividends of approximately $13 million. Preferred stock dividends for the period from March 19, 1997 (date of inception) to December 31, 1997 were $13 million. Of the $13 million recorded in 1998, $4 million relates to the GCH Preferred Stock issued during December 1998. Redemption of preferred stock The redemption of Global Telesystems Holdings outstanding preferred stock (the "GTH 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. Net loss and net loss applicable to common shareholders Global Crossing 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 (date of inception) to December 31, 1997. The net loss for the year ended December 31, 1998 reflects an extraordinary loss on retirement of the GTH Senior Notes of $20 million and a non-recurring charge of $140 million relating to the termination of the advisory services agreement with PCG Telecom Services. Global Crossing's net income before these items was $72 million. During the year ended December 31, 1998, Global Crossing 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 GTH Preferred Stock of $34 million. During the period from March 19, 1997 (date of inception) to December 31, 1997, Global Crossing incurred a net loss applicable to common shareholders of $13 million after GTH Preferred Stock dividends of $13 million. Balance sheet as of December 31, 1998 Restricted cash and cash equivalents, both current and long term. At December 31, 1998, current and long-term restricted cash and cash equivalents included: (1) $231 million restricted for PC-1 construction, (2) 125
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$89 million received pursuant to CPAs on AC-1 which may be used only in accordance with the terms of the AC-1 Credit Facility, (3) $66 million restricted for MAC construction, (4) $38 million reserved for funding future interest payable on the GCH Senior Notes and (5) $21 million restricted for miscellaneous items. Capacity available for sale, construction in progress and investment in affiliates. Global Crossing's investment in capacity available for sale, construction in progress and investment in affiliates totaled approximately $1,180 million as of December 31, 1998. This amount includes the value of system development contributed to Global Crossing by Pacific Capital Group. Upon Global Crossing's IPO, each PCG Warrant then outstanding was converted into a fraction of Global Crossing common stock based upon the ratio of the per share valuation at the time of conversion less the per share exercise price of the warrants, divided by the per share valuation at the time of conversion, together with a new warrant (the "New PCG Warrants") to purchase the remaining fraction of shares at an exercise price equal to $9.50, the price to public per share of the IPO. These amounts increased additional paid-in capital by $275 million and was allocated on a pro rata basis to PCL, PAC and MAC according to the estimated cost of each system. Accordingly, Global Crossing recorded $163 million as an investment in PCL and $64 million and $48 million as Construction in Progress for PAC and MAC, respectively. Long term debt and senior notes. The long term debt of $270 million as of December 31, 1998 represents primarily the long term portion of our outstanding balance on the AC-1 Credit Facility. The senior notes balance of $796 million represents the net proceeds from the issuance of the GCH Senior Notes, adjusted for the unamortized amount of the debt discount. Mandatorily redeemable preferred stock. The mandatorily redeemable preferred stock of $487 million as of December 31, 1998 represents the net proceeds received from the $500 million offering of GCH Preferred Stock during December 1998, less $17 million in fees and issuance costs plus $4 million in accrued dividends. These fees and issuance costs are being amortized over the term of the obligation. During the year ended December 31, 1998, Global Crossing reimbursed an amount of $7 million to Pacific Capital Group, a shareholder, relating to system evaluation costs incurred by Pacific Capital Group. This amount was treated as a dividend and charged against additional paid-in capital. Liquidity and capital resources Restricted cash and investments. At June 30, 1999, restricted cash and investments includes: $231 million for PC-1 construction, $61 million for PEC construction, $10 million for MAC construction and $110 million received pursuant to CPAs restricted under the terms of the AC-1 credit facility. In connection with the Senior Secured Credit Facility, all restrictions under refinanced debt on cash and investments have been removed. On July 2, 1999, Global Crossing 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 Global Marine business from Cable & Wireless and for general corporate purposes. Global Crossing intends to finance the remainder of its announced systems, new projects and working capital needs mainly through the new corporate facility and other corporate financing. As of June 30, 1999, the approximately $750 million initial cost of AC-1 had been fully financed. The first contracted upgrade was funded through cash on hand, as will the second contracted upgrade. All remaining amounts outstanding under the AC-1 non-recourse project finance credit facility were refinanced in July 1999 through Global Crossing's new senior secured corporate credit facility. Global Crossing estimates the total cost of developing and deploying AC-2, PC-1, MAC, PAC, SAC, PEC and GAL to be approximately $5,095 million, excluding costs of potential future upgrades and the amounts 126
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capitalized with respect to warrants issued in exchange for the rights to construct PC-1, MAC and PAC. This total is comprised of $750 million for AC-2, $1,200 million for PC-1, $295 million for MAC, $580 million for PAC, $1,130 million for SAC, $950 million for PEC and $190 million for GAL. PC-1 will be financed by total equity investments of $400 million of which Global Crossing expects to provide approximately $231 million, with the remaining $800 million of estimated costs to be financed through non-recourse project indebtedness at the PC-1 level. Global Crossing has financed its 49% interest in GAL through cash on hand to date, and intends to finance additional system costs through limited or non-recourse debt to be raised at the GAL level. The remaining system costs for MAC and PAC will be financed either through bank indebtedness under Global Crossing's new senior secured corporate credit facility or through other corporate financing. The construction costs for PEC (including costs of acquiring dark fiber) are estimated to be $950 million, a portion of which was paid from the proceeds of the December 1998 issuance by Global Crossing Holdings of 10 1/2% Senior Exchangeable Preferred Stock (the "GCH Preferred Stock"). Global Crossing also raised capital required to finance this system through a combination of commercial bank borrowings, vendor financing and sales of dark fiber. Financing to complete the system is expected to be obtained from the corporate credit facility or other corporate financing. Global Crossing initially financed the approximately $868 million Global Marine acquisition, which was completed in July 1999, with approximately $600 million in committed bank financing and the remainder with cash on hand. This initial indebtedness was refinanced through borrowings under Global Crossing's new senior secured corporate credit facility. The Company has extended financing to customers in connection with certain CPAs. The financing terms provide for installment payments of up to four years. The Company believes that its extension of financing to its customers will not have a material effect on the Company's liquidity. Cash provided by operating activities was $64 million for the six months ended June 30, 1999 and $37 million for the six months ended June 30, 1998, and principally represents cash received from deposits and payments for activated capacity pursuant to signed CPAs, plus interest income received, less sales and marketing, network development and general and administrative expenses paid. Cash provided by operating activities was $209 million for the year ended December 31, 1998 and $5 million for the period from March 19, 1997 (date of inception) to December 31, 1997, which principally represents cash received from deposits and payments for activated capacity pursuant to signed CPAs, plus interest income, less sales and marketing, network development and general and administrative expenses paid. Cash provided by financing activities was $292 million for the six months ended June 30, 1999 and primarily represents borrowings under the Lucent facility, partially offset by repayments of borrowings under long term debt. Cash provided by financing activities was $456 million for the six months ended June 30, 1998 and primarily relates to proceeds from the issuance of senior notes and borrowings under long term debt, less the increase in the restricted cash and cash equivalents, retirement of old senior notes and redemption of preference shares. Cash provided by financing activities was $1,027 million for the year ended December 31, 1998 and primarily represents borrowings under the AC-1 and MAC credit facilities, proceeds from the issuance of GCH Senior Notes, the GCH Preferred Stock and Global Crossing's IPO, less amounts paid for finance and organization costs, the issuance of common and preferred stock, the repayment of long term debt, the redemption of the GTH Preferred Stock, the retirement of the GTH Senior Notes and the increase in amounts held in restricted cash and cash equivalents. At December 31, 1998, Global Crossing's working capital amounted to $750 million. During May 1998, Global Crossing obtained $796 million in net proceeds from the issuance of the GCH Senior Notes due 2008. These proceeds were used (1) to purchase all of the $150 million aggregate principal 127
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amount of outstanding GTH Senior Notes, (2) to redeem all of the $100 million aggregate principal amount of outstanding GTH Preferred Stock, (3) to repay in full the $67 million then outstanding under a bridge credit facility, (4) to make approximately $315 million of equity investments in PC-1, MAC and PAC and (5) for general corporate purposes, including $74 million to fund a one-year interest reserve on the GCH Senior Notes. In August 1998, Global Crossing completed its IPO, from which it received net proceeds of $391 million, and during December 1998, the GCH Preferred Stock was issued, from which net proceeds of approximately $483 million were received. Global Crossing has used these proceeds for (1) construction of the Global Crossing Network, (2) investment in telecommunications companies and ISPs, (3) investments in GAL and (4) general corporate purposes. Cash provided by financing activities of $425 million for the period from March 19, 1997 (date of inception) to December 31, 1997, relates to net proceeds from the issuance of common stock, GTH Preferred Stock and GTH Senior Notes and borrowings under the AC-1 credit facility, less finance and organization costs related to the issuance of common and preferred stock and the increase in proceeds held in restricted cash and cash equivalents. At December 31, 1997, Global Crossing's working capital deficit was $63 million. Cash used in investing activities was $486 million and $191 million for the six months ended June 30, 1999 and 1998, respectively, and represents cash paid for construction in progress, purchases of property, plant and equipment and cash investments in affiliates. Cash used in investing activities was approximately $431 million and $429 million for the year ended December 31, 1998 and the period from March 19, 1997 (date of inception) to December 31, 1997, respectively, and represents cash paid for construction in progress, capacity available for sale and investments in affiliates. Global Crossing has extended financing to a small number of customers in connection with certain CPAs. The financing terms provide for installment payments over a period of up to four years. Global Crossing believes that its extension of financing to its customers will not have a material effect on its liquidity. Global Crossing believes that its current cash and cash equivalents, credit facilities and cash generated from operations will satisfy its expected working capital and capital expenditure requirements through December 31, 1999. Inflation Management does not believe that Global Crossing's business is impacted by inflation to a significantly different extent than the general economy. Year 2000 compliance Global Crossing believes that its computer information systems are Year 2000 ("Y2K") compliant. Global Crossing has established a Y2K compliance task force. The task force has identified no potential material adverse effect on the two core components of it services: (1) transmission of capacity and (2) management and maintenance of the transmission paths. Global Crossing's anticipated worst case scenario is failure of its Network Operations Center. In the event the worst case scenario occurs, management of the network can be performed at the terminal stations with the network element managers or at the equipment bays with the craft interface terminal. No or minimal additional cost would be incurred as Global Crossing has already included the cost for back-up management of the network into the AC-1 business case analysis. Global Crossing is also subject to external forces that generally affect industry and commerce, such as utility, transportation or other infrastructure failures and interruptions. In addition to reviewing its own systems, Global Crossing is submitting requests to third party service providers to obtain information as to their compliance efforts. Global Crossing has received assurances from its major suppliers, TSSL and Lucent, stating 128
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Y2K compliance status of their respective systems regarding AC-1, Global Crossing's only active system at this time. In addition, Global Crossing received assurance from Alcatel, a supplier to MAC, that Alcatel is also Y2K compliant. In the event that any of its material third party service providers do not successfully and timely achieve Y2K compliance, Global Crossing's business or operations could be adversely affected. Global Crossing is developing contingency plans to address any potential Y2K compliance failure due to significant third party failures, although no such failure is expected. To date, response from material third party service providers has not shown any of them to be non-compliant with Y2K readiness plans. Global Crossing believes that costs of addressing its Y2K compliance will not have a material adverse impact on its financial condition or results of operations. 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, called 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, but not later than July 1, 2002. During this transition period, parties may settle transactions using either the Euro or a participating country's legacy currency. As most of Global Crossing's sales and expenditures are denominated in United States dollars, management does not believe that the Euro conversion will have a material adverse impact on its business or financial condition. Global Crossing 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 table below provides information about Global Crossing's market sensitive financial instruments and constitutes a "forward-looking statement." Global Crossing's major market risk exposure is changing interest rates. Global Crossing's policy is to manage interest rates through use of a combination of fixed and floating rate debt. Interest rate swaps may be used to adjust interest rate exposures when appropriate, based upon market condition. [Enlarge/Download Table] Fair Value June 30, Expected maturity dates 1999 2000 2001 2002 2003 Thereafter Total 1999 ----------------------- -------- ------- -------- ---- ---- ---------- -------- ---------- (in thousands) DEBT Non Current--US$ denominated AC-1 Credit Facility.... $ 9,137 $14,298 $127,080 -- -- -- $150,515 $150,515 Average interest rates--variable....... (1) (1) (1) MAC Credit Facility..... -- 9,192 -- -- -- -- 9,192 9,192 Average interest rates--variable....... (2) Lucent Financing........ 400,000 -- -- -- -- -- 400,000 400,000 Average interest rates--variable....... (3) Senior notes............ -- -- -- -- -- 800,000 800,000 836,000 Average interest rates--fixed.......... 9.6% Mandatorily Redeemable Preferred Stock........ -- -- -- -- -- 500,000 500,000 522,500 Average interest rates--fixed.......... 10.5% Obligations under ISAs and capital lease obligations: 129
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[Enlarge/Download Table] Fair Value June 30, Expected maturity dates 1999 2000 2001 2002 2003 Thereafter Total 1999 ----------------------- ------- ------ ----- ----- ----- ---------- ------- ---------- (in thousands) US$ denominated......... 27,371 18,174 1,080 1,081 1,081 20,112 68,899 68,899 Average interest rates--fixed.......... 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% Sterling, German Mark and Dutch Guilder denominated............ 8,223 4,000 4,155 4,316 4,483 134,194 159,371 159,371 Average interest rates--fixed.......... 12.2% 12.2% 12.2% 12.2% 12.2% 12.2% DERIVATIVE INSTRUMENTS Foreign currency forward--Sterling denominated Contract notional amount................ 877,058 -- -- -- -- -- 877,058 (9,653) Fixed conversion rate................ 1.5947 -------- (1) The interest rate is two-week LIBOR plus 2.00%, which was 7.30% as of June 30, 1999. (2) The interest rate is one month LIBOR plus 3.00%, which was 8.00% as of June 30, 1999. (3) The interest rate is one month LIBOR plus 0.25%, which was 5.25% as of June 30, 1999. Foreign Currency Risk For those subsidiaries using the U.S. dollar as their functional currency, translation adjustments are recorded in the accompanying condensed consolidated statements of operations. None of Global Crossing's translation adjustments were material as of and for the three months ended June 30, 1999 and 1998. For those subsidiaries not using the U.S. dollar as their functional currency, assets and liabilities are translated at exchange rates in effect at the balance sheet date and income and expense accounts at average exchange rates during the period. Resulting translation adjustments are recorded directly to a separate component of shareholders' equity. As of and for the three and six months ended June 30, 1999, Global Crossing incurred a foreign currency translation loss of $4 million and $9 million, respectively. As of and for the three and six months ended June 30, 1998, Global Crossing incurred no foreign currency translation gain or loss. 130
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Stock Ownership Of Management, Directors and 5% Shareholders of Global Crossing The following table sets forth, as of July 29, 1999, information regarding the beneficial ownership of Global Crossing common stock by (1) each person or entity who is known to Global Crossing to own beneficially 5% or more voting common stock of Global Crossing, (2) each director and executive officer of Global Crossing and (3) all directors and executive officers of Global Crossing as a group. To Global Crossing's knowledge, each such shareholder has sole voting and investment power with respect to the shares shown, unless otherwise noted. Amounts appearing in the table below include (1) all shares of common stock outstanding as of July 29, 1999, (2) all shares of common stock issuable upon the exercise of options within 60 days of July 29, 1999 and (3) all shares of common stock issuable upon the exercise of warrants within 60 days of July 29, 1999. The warrants described below as "New PCG Warrants" and "Global Crossing Warrants" each represent the right to immediately purchase shares of Global Crossing common stock at an exercise price of $9.50 per share. [Enlarge/Download Table] Beneficial Ownership of Common Stock ------------------------------------------------------------- Shares Subject Shares Subject to to Shares Number of New PCG New GCL Subject to Percentage Shares(1) Warrants Warrants Options of Class ----------- ----------------- --------- ---------- ---------- Pacific Capital Group, 87,591,172 6,050,004 2,515,788 0 21.69% Inc.(2)................ 150 El Camino Drive, Suite 204 Beverly Hills, California 90212 Canadian Imperial Bank of Commerce(3)......... 88,198,248 0 0 375,000 19.98% 161 Bay Street, 8th Floor -- BCE Place P.P. Box 500 M5J258, Toronto, Canada U S WEST, Inc. ......... 37,028,229 0 0 0 8.35% 7800 East Orchard Road Englewood, Colorado 80111 Continental Casualty 36,442,735 0 0 0 8.22% Company................ CNA Plaza, Floor 23 South Chicago, Illinois 60685 MRCo, Inc............... 30,109,522 0 697,934 0 6.95% 111 Massachusetts Avenue NW Washington, DC 20001 Gary Winnick(4)......... 87,591,172 6,050,004 2,515,788 1,200,000 21.96% Lodwrick M. Cook........ 3,324,169 950,002 0 482,000 1.07% Jack M. Scanlon......... 239,520 0 0 1,462,588 * Thomas J. Casey(5)...... 630,412 0 0 0 * Robert Annunziata....... 0 0 0 918,424 * William B. Carter....... 119,760 0 0 1,825,856 * Dan J. Cohrs............ 10,000 0 0 708,668 * David L. Lee(6)......... 18,559,028 1,825,002 663,456 600,000 4.88% Abbott L. Brown(7)...... 10,460,679 1,450,002 367,666 600,000 2.91% Barry Porter(8)......... 17,063,809 1,825,002 610,266 600,000 4.53% James C. Gorton......... 0 0 0 729,606 * Jack Finlayson.......... 59,968 0 0 635,060 * Robert Sheh............. 0 0 0 283,685 * Hillel Weinberger(9).... 38,688,409 0 0 75,000 8.74% Jay R. Bloom(10)........ 88,198,248 0 0 375,000 19.98% Dean C. Kehler(10)...... 88,198,248 0 0 375,000 19.98% Jay R. Levine(10)(11)... 88,198,248 0 0 375,000 19.98% William P. Phoenix(10)(11)........ 88,198,248 0 0 375,000 19.98% Bruce Raben(10)(11)..... 88,198,248 0 0 375,000 19.98% Michael R. Steed(12).... 30,109,522 0 697,934 75,000 6.97% William E. Conway(13)... 2,023,677 0 0 75,000 * Geoffrey J.W. Kent...... 0 0 0 75,000 * All Directors and Executive Officers as a Group.................. 297,023,256 12,100,012 4,855,110 10,720,887 73.25% 131
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-------- * Percentage of shares beneficially owned does not exceed one percent. (1) As of July 29, 1999, 412,732,100 shares of common stock were issued and outstanding. An additional 12,946,366 shares of common stock would have been issuable upon the exercise of options within 60 days of July 29, 1999; an additional 12,500,012 shares of common stock would have been issuable upon the exercise of New PCG Warrants within 60 days of July 29, 1999 and an additional 5,108,358 shares of common stock would have been issuable upon the exercise of Global Crossing Warrants within 60 days of July 29, 1999. (2) Includes shares of common stock and common stock warrants owned by GKW Unified Holdings, a company formed for the benefit of Gary Winnick and members of his family and managed by Pacific Capital Group. (3) Includes shares of common stock issuable upon the exercise of options granted to Global Crossing directors employed by an affiliate of Canadian Imperial Bank of Commerce. (4) Includes (a) all shares of common stock and shares of common stock issuable upon the exercise of warrants owned by GKW Unified Holdings, of which Pacific Capital Group is manager, (b) all shares of common stock and shares of common stock issuable upon the exercise of warrants owned by Pacific Capital Group, of which Mr. Winnick is Chairman and Chief Executive Officer and (c) all shares of common stock held by Casey Pacific Holdings LLC, which Pacific Capital Group controls for purposes of voting. (5) Includes (a) all shares of common stock owned by Casey Pacific Holdings LLC, which is beneficially owned by Mr. Casey and (b) all shares of common stock owned by Casey Global Holdings LLC, which is beneficially owned by Mr. Casey. (6) Includes (a) all shares of common stock and shares of common stock issuable upon the exercise of warrants owned by San Pasqual Corp., of which Mr. Lee and his family are the sole shareholders and (b) all shares of common stock and 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. (7) Includes (a) all shares of common stock and shares of common stock issuable upon the exercise of warrants owned by Ridgestone Corp., of which members of Mr. Brown's family are the sole shareholders and (b) all shares of common stock and shares of common stock issuable upon the exercise of warrants owned by the Brown Living Trust, of which Mr. Brown is a trustee. (8) Includes all shares of common stock and shares of common stock issuable upon the exercise of warrants owned by Galenight Corp., of which Mr. Porter is the sole shareholder. (9) Includes all shares of common stock owned by Continental Casualty Company, an affiliate of Loews/CNA Holdings Corp. Mr. Weinberger is an officer of Loews/CNA Holdings Corp. Includes shares of common stock held by Global Crossing Trust 1998, with respect to which Mr. Weinberger serves as trustee, and shares of common stock held by Global Crossing Partners, of which Mr. Weinberger is a managing partner. (10) Includes all shares of common stock beneficially owned by Canadian Imperial Bank of Commerce. Each of Messrs. Bloom, Kehler, Levine, Phoenix and Raben is employed by an affiliate of Canadian Imperial Bank of Commerce. (11) Beneficial ownership of all shares of common stock indicated is disclaimed. (12) Includes all shares of common stock owned by MRCo, Inc. Mr. Steed is the Senior Vice President of ULLICO and the President of MRCo, Inc., which is a wholly owned subsidiary of ULLICO. (13) Includes all shares of common stock beneficially owned by The Carlyle Group, of which Mr. Conway is managing director. 132
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Stock Ownership of Management, Directors and 5% Shareholders of Frontier The following table sets forth the number of shares of Frontier common stock beneficially owned by each director, by each of the named executive officers and by directors and officers of Frontier as a group as of June 30, 1999. No director or officer beneficially owns more than 1% of Frontier's outstanding shares of common stock. The group's aggregate beneficial holdings constitute approximately 1.7% of Frontier's issued and outstanding common stock. Management and Directors Stock Ownership Table as of June 30, 1999 [Download Table] Total Common Stock Beneficial Name Stock(1) Options(2) Ownership ---- --------- ---------- ---------- Directors: Patricia C. Barron............................ 14,907 19,399 34,306 Raul E. Cesan................................. 10,557 11,999 22,556 Joseph P. Clayton............................. 485,897 399,999 885,896 Brenda E. Edgerton............................ 14,034 18,449 32,483 Jairo A. Estrada.............................. 30,771 19,999 50,770 Michael E. Faherty............................ 100,519 30,833 131,352 Alan C. Hasselwander (3)...................... 41,298 17,265 58,563 Eric Hippeau.................................. 17,321 0 17,321 Robert Holland, Jr............................ 11,256 11,666 22,922 Douglas H. McCorkindale....................... 18,753 19,999 38,752 James F. McDonald............................. 2,608 0 2,608 Dr. Leo J. Thomas............................. 35,994 19,999 55,993 Named Executive Officers: Robert L. Barrett............................. 100,274 258,333 358,607 Joseph P. Clayton............................. 485,897 399,999 885,896 Jeremiah T. Carr.............................. 51,963 266,066 318,029 Rolla P. Huff................................. 154,124 83,332 237,456 Donna L. Reeves-Collins....................... 10,250 108,566 118,816 Directors and Executive Officers as a Group (25 persons)................................. 1,191,893 1,834,101 3,025,994 -------- (1) Includes all shares which each director or officer directly, or through any contract, arrangement, understanding, relationship or otherwise, has or shares the power to vote or to direct the voting of such shares or to dispose or to direct the disposition of such shares. Amounts in this column include both vested and unvested restricted stock granted to selected executive officers. However, these amounts do not include shares which each such person has the right to acquire pursuant to options or other rights. (2) Includes all shares which such persons have the right to acquire within the sixty days following June 30, 1999, pursuant to options or other rights. These amounts do not include shares which such persons have the right to acquire more than sixty days after that date. (3) Includes 1,480 shares owned by Mr. Hasselwander's spouse. Mr. Hasselwander disclaims beneficial ownership of these shares. 133
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Set forth below is the name, address and stock ownership of the only persons or groups of persons known by Frontier to own beneficially more than 5% of the outstanding shares of common stock. 5% Shareholders Stock Ownership Table as of June 30, 1999 [Download Table] Number of Shares of Percent Name and Address Common of of Beneficial Owners Stock Class -------------------- ---------- ------- Scudder Kemper Investments, Inc. (1)....................... 10,379,385 6.10% 345 Park Avenue New York, New York 10154 -------- (1) Scudder Kemper Investments, Inc. filed with the Securities and Exchange Commission a Schedule 13G, dated February 12, 1999, stating that it beneficially owned as of December 31, 1998 in the aggregate 10,379,385 shares of Frontier's common stock. In its Schedule 13G filing, Scudder Kemper Investments, Inc. also disclosed that, with respect to the shares it beneficially owns, it has sole voting power with respect to 4,207,085 shares, shared voting power with respect to 5,706,000 shares, sole dispositive power with respect to 10,270,285 shares and shared dispositive power with respect to 109,100 shares. 134
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Description of Global Crossing Capital Stock The following summary is a description of the material terms of Global Crossing common stock, does not purport to be complete and is subject in all respects to the applicable provisions of Bermuda law and of the constituent documents of Global Crossing and each of its subsidiaries. The Global Crossing memorandum of association and bye-laws are filed as exhibits to the registration statement of which this document is a part. Please note that some of the material terms of the Global Crossing common stock described in this section will change if the proposed amendments to the Global Crossing bye-laws are adopted at the annual meeting. See "Proposals to Global Crossing Shareholders To Be Voted on at the Global Crossing Annual Meeting--Proposals Nos. 3 and 4." General Pursuant to its memorandum of association, the authorized share capital of Global Crossing is $6,000,000, divided into 600,000,000 shares of common stock par value $.01 per share. Voting and transfer restrictions Voting restriction. 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 35% 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 35% 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 shareholders representing at least 75% of the votes of all outstanding shares of common stock 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 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. 135
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Distributions Holders of common stock are treated equally with respect to all distributions to shareholders of Global Crossing. Global Crossing stockholders agreement and registration rights agreement Global Crossing, Pacific Capital Group, GKW Unified Holdings, affiliates of Canadian Imperial Bank of Commerce, Continental Casualty Company, MRCo and some other shareholders of Global Crossing, including some of Global Crossing's officers and directors and their affiliates, have entered into a stockholders agreement and a registration rights agreement, each incorporated by reference as an exhibit to the registration statement of which this document is a part. 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 Global Crossing's initial public offering 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) Pacific Capital Group, GKW Unified Holdings and Canadian Imperial Bank of Commerce 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 the outstanding securities of Global Crossing and (2) Pacific Capital Group, GKW Unified Holdings, Canadian Imperial Bank of Commerce, Continental Casualty Company and MRCo and their affiliates and permitted transferees have the right to participate in any transaction initiated by any of them to transfer any securities of Global Crossing if that transaction would result in a change of control of Global Crossing. In addition, so long as Gary Winnick, Pacific Capital Group and GKW Unified Holdings and certain of their transferees collectively beneficially own, within the meaning of Section 13(d) of the Securities Exchange Act of 1934, at least 15% of the outstanding shares of Global Crossing common stock, they are entitled to seek appraisal of the fair value of the Global Crossing common stock that they beneficially own and the payment of the fair value in cash in connection with any merger or consolidation of Global Crossing or the sale, lease or transfer of all or substantially all of the assets of Global Crossing, if they, in their capacity as shareholders of Global Crossing, did not vote in favor of or consent to that transaction and beneficially own the Global Crossing common stock as to which appraisal is sought immediately before the transaction. Under the registration rights agreement, the Global Crossing shareholders who are parties to that agreement and a number of their transferees have demand and piggyback registration rights and receive indemnification and, in some circumstances, expense reimbursement from Global Crossing in connection with an applicable registration. 136
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Some Differences Between Rights of Shareholders of Frontier and Rights of Shareholders of Global Crossing Upon completion of the merger, holders of Frontier common stock will become entitled to receive Global Crossing common stock. Global Crossing is a company formed under the laws of Bermuda, and Frontier is a corporation incorporated under the laws of New York. The Companies Act 1981 is the statute that governs Bermuda companies, and the New York Business Corporation Law is the statute that governs New York corporations. The following is a summary of some material differences between the rights of holders of Frontier common stock and the holders of Global Crossing common stock. These differences arise from differences between the corporate laws of the State of New York and Bermuda, as well as differences between the Frontier restated certificate of incorporation and the Frontier by-laws, on the one hand, and the Global Crossing memorandum of association and the Global Crossing bye-laws, on the other hand. See "Description of Global Crossing Capital Stock." This discussion is not a complete statement of all differences between rights of holders of Global Crossing common stock and Frontier common stock. This summary discusses material differences between the laws of Bermuda and those of New York. It also discusses material differences between the Global Crossing memorandum of association and bye-laws and the Frontier restated certificate of incorporation and by-laws. This summary is qualified by the full text of each document and the Companies Act and the New York Business Corporation Law. For information as to how to get those documents, see "Where You Can Find More Information" beginning on page 171. Size and classification of the board of directors Global Crossing. Bermuda law permits a company's board of directors to be divided into classes with staggered terms of office. The Global Crossing bye- laws provide for three classes of directors with staggered terms. The Global Crossing bye-laws mandate that Global Crossing have not less than eleven directors and not more than eighteen. The board of directors currently consists of seventeen directors. If the proposed amendments to the Global Crossing bye- laws are adopted, the size of the Global Crossing board of directors will be increased to a maximum of twenty. Frontier. The New York Business Corporation Law provides that a corporations's board of directors may be divided into classes with staggered terms of offices. Neither the Frontier restated certificate of incorporation nor the Frontier by-laws provide for a staggered board of directors. The Frontier certificate of incorporation mandates that Frontier have not less than nine directors. The Frontier by-laws currently provide for twelve directors. Removal of directors; vacancies; alternate directors Global Crossing. The Global Crossing bye-laws provide that shareholders may in a special meeting called for that purpose remove a director, provided notice of the meeting is given to the director not less than 14 days before the meeting, and the director is entitled to be heard at the meeting. Any vacancy created by the removal of a director at a special meeting may be filled at the meeting by the election of another director or, in the absence of an election, by the board of directors. The Global Crossing bye-laws also provide that any director will be removed from office (A) upon resolution of the board, if the director or the director's alternate was absent from board meetings for more than six consecutive months without permission of the board or (B) if, after the initial term, that is, the term for any director commencing on August 13, 1998, no less than three-quarters of the directors request the director to resign. Under Global Crossing's bye-laws, any director may appoint any other director, or any other person approved by resolution of the Global Crossing board of directors, to act as an alternate director to represent that director. A director may remove an alternate director appointed by that director. 137
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Frontier. The New York Business Corporation Law provides that any or all of the directors of a corporation may be removed for cause by a vote of the shareholders and that the certificate of incorporation or by-laws may provide for removal without cause by a vote of the shareholders. Frontier's charter and by-laws do not permit removal without cause. New York law provides that vacancies occurring for any reason other than removal without cause may be filled by vote of the board of directors. If the number of directors then in office is less than a quorum, those vacancies may be filled by vote of a majority of the directors then in office. Under the Frontier by-laws, a director elected to fill a vacancy will hold office until the next annual meeting of the shareholders and until his or her successor has been elected and qualified. Frontier directors are not permitted to appoint alternate directors. Meetings of shareholders Global Crossing. Under Bermuda law, an annual meeting must be held once every calendar year. A special meeting of shareholders may be convened by a majority of the directors at any time and must be convened upon the request of shareholders holding not less than one-tenth of the paid up capital of the company carrying the right to vote at general meetings. In addition, the proposed amendments to the Global Crossing bye-laws, if adopted, will grant authority to the chairman or co-chairman of the board of directors to convene a special shareholder meeting at any time. Frontier. Under New York law, special meetings may be called by the board of directors and by any other person or persons authorized to do so by the corporation's certificate of incorporation or by-laws. The Frontier by-laws provide that a special meeting may be called only by the board of directors. At any special meeting, only business related to the purpose or purposes stated in the notice to shareholders may be transacted. Action by written consent of shareholders; shareholder resolutions Global Crossing. Action by written consent of shareholders is permitted in Bermuda, except for the purpose of removing an auditor or director before the expiration of his or her term of office. A written resolution must be signed by all shareholders entitled to attend and vote at a meeting. In addition, the Global Crossing bye-laws provide that, unless a greater percentage is required by the Companies Act or by a specific bye-law provision, any matter proposed for consideration at any general meeting requires the affirmative vote of a majority of votes that may be cast by all shareholders to be approved. If the proposed amendments to the bye-laws are approved, ordinary shareholder resolutions will require the affirmative vote of a majority of the votes cast at a shareholders' meeting to be adopted. Frontier. The New York Business Corporation Law provides that shareholders may take any action without a meeting by written consent only if the consent is signed by the holders of all the outstanding shares entitled to vote on that action, unless otherwise provided in the certificate of incorporation. The Frontierby-laws also provide that with respect to any corporate action, other than the election of directors, required to be taken by a vote of the shareholders, the action shall, except as otherwise required by law or by the Frontier restated certificate of incorporation, be authorized by a majority of the votes cast at the applicable meeting. Vote required for extraordinary corporate transaction Global Crossing. Bermuda law permits an amalgamation between two or more Bermuda companies or between one or more Bermuda exempted companies and one or more foreign corporations subject, unless the bye-laws otherwise provide, to obtaining a majority vote of three-fourths of the shareholders of each company present and voting in person or by proxy at a meeting called for that purpose at which the quorum shall be two persons holding more than one-third of the issued shares. Short form amalgamations are permitted between a holding company and one or more of its wholly owned subsidiary companies or between two or more wholly 138
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owned subsidiary companies of the same holding company subject to approval of the amalgamation by a resolution of the directors of each amalgamating company. The Global Crossing bye-laws provide that an amalgamation requires the approval of a simple majority of votes cast at any shareholder's meeting, subject to specified quorum requirements. Frontier. The New York Business Corporation Law requires the affirmative vote of two-thirds of all outstanding shares entitled to vote thereon to effect a merger, a consolidation, a share exchange or the sale, lease or disposition of all or substantially all of a corporation's assets. In addition, under some circumstances, holders of shares of a class or series of a class are entitled to vote together and to vote as a separate class on the transaction. Interested director transactions Global Crossing. The Global Crossing bye-laws provide that a director may be a party to, or otherwise interested in, any transaction or arrangement with Global Crossing or in which Global Crossing is otherwise interested. So long as the director declares the nature of his or her interest in writing as required by the bye-laws and the Companies Act, he or she will not be accountable to Global Crossing for any benefit which he or she derives from a similar transaction or arrangement. For the purposes of the bye-laws, a director is deemed to have an interest in a transaction or arrangement with Global Crossing if he or she is the holder of or is beneficially interested in 5% or more of any class of stock of a company, or of the voting rights available to shareholders of a company, with which Global Crossing is proposing to enter into a transaction or arrangement. Frontier. The New York Business Corporation Law provides that no transaction between a corporation and one or more of its directors or an entity in which one or more of its directors are directors or officers or have a financial interest shall be void or voidable solely for that reason. In addition, no such transaction shall be void or voidable solely because the director is present at or votes at the meeting of the board of directors or committee which authorizes the transaction. In order to avoid such a transaction being void or voidable, it must, after disclosure of material facts (unless those facts were known), (1) be approved by the disinterested directors or a committee of disinterested directors by a vote sufficient for such purpose without counting the vote of any interested director, or, if the vote of disinterested directors is insufficient to constitute an act of the board under New York law, by the unanimous vote of the disinterested directors or (2) be approved by a vote of the shareholders. Alternatively, the transaction will not be void or voidable if it is shown to have been fair to the corporation at the time it was approved by the board, a committee or the shareholders. Transfer restrictions Global Crossing. The Global Crossing bye-laws also provide that transfers to a shareholder that result in the shareholder beneficially owning more than a specified percentage of Global Crossing stock will not be registered in the share register of Global Crossing and shall be void and of no effect unless the transfer is duly approved. See "Description of Global Crossing Capital Stock-- Voting and transfer restrictions." Frontier. There are no similar restrictions on transfers of shares under New York law or Frontier's restated certificate of incorporation or by-laws. Business combination statutes Global Crossing. The Companies Act does not contain any business combination statute similar to the New York statue described below. Frontier. Under New York law, a corporation is generally prohibited from engaging in specified business combinations, including specified mergers and consolidations, dispositions of assets and issuances of securities as well as a number of other transactions, with an interested shareholder, unless the business combination, or the purchase of stock by means of which the interested shareholder became an interested person, is either (1) approved by the corporation's board of directors in advance, (2) approved by the affirmative vote of the 139
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holders of a majority of the outstanding voting stock not beneficially owned by the interested shareholder at a meeting called for that purpose no earlier than five years after the interested person's stock acquisition date or (3) a business combination that meets specified conditions. An interested shareholder generally includes holders of 20% or more of the outstanding voting stock of the corporation. Shareholder suits Global Crossing. The Bermuda courts would permit a shareholder to begin a derivative action in the name of the company to remedy a wrong done to the company only (1) where the act complained of is alleged to be beyond the corporate power of the company or illegal; (2) where the act complained of is alleged to constitute a fraud against the minority shareholders by those controlling the company; provided that the majority shareholders have used their controlling position to prevent the company from taking action against the wrongdoers; (3) where an act requires approval by a greater percentage of the company's shareholders than actually approved it; or (4) where there is an absolute necessity to waive the general rule that a shareholder may not bring such an action in order that there not be a violation of the company's memorandum of association or bye-laws. There is also a statutory remedy under Section 111 of the Companies Act, which provides that a shareholder may seek redress of the court as long as he or she can establish that the company's affairs are being conducted, or have been conducted, in a manner oppressive or prejudicial to the interests of some of the shareholders, including himself. Frontier. Under New York law, a shareholder may institute a lawsuit against one or more directors, either on his or her own behalf, or derivatively on behalf of the corporation. The New York Business Corporation Law enables a corporation to eliminate or limit, and the Frontier restated certificate of incorporation does so limit, a director's personal liability to the corporation or the holders of its capital stock for monetary damages for violations of the director's fiduciary duty to the full extent permitted under the New York Business Corporation Law. Dissenters' rights Global Crossing. Under Bermuda law a dissenting shareholder of a company participating in an amalgamation, other than an amalgamation between a company and its wholly owned subsidiary or between two or more wholly owned subsidiaries of the same holding company, may, in specified circumstances, receive cash or other consideration in the amount of the fair value of the shareholder's shares as determined by a court, instead of the consideration he or she would otherwise receive in that amalgamation. Frontier. The New York Business Corporation Law grants dissenters' rights to shareholders, which are rights to receive payment of the fair value of one's shares determined by judicial appraisal, in the case of specified mergers or consolidations, a sale of all or substantially all of the corporation's assets and, in the case of a shareholder whose shares would be adversely affected, specified amendments to the certificate of incorporation. The right to receive payment of the fair value is not available, however, (1) to a shareholder of the surviving corporation in a merger, unless (A) the certificate of amendment alters or abolishes any preferential rights of the shares having preferences; or (B) creates, alters or abolishes any provision or right in respect of the redemption of the shares or any sinking fund for the redemption or purchase of the shares; or (C) alters or abolishes any preemptive right of the holder to acquire shares or other securities; or (D) excludes or limits the right of the holder to vote on any matter, except as that right may be limited by the voting rights given to new shares then being authorized of any existing or new class; (2) to a shareholder of the parent corporation in a merger between the parent and subsidiary corporation of which the parent owns at least 90% of the outstanding shares; or (3) to a shareholder for the shares that were listed on a national securities exchange or designated as a national market system security by the National Association of Securities Dealers, Inc. on the record date for the related meeting. 140
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The New York Business Corporation Law also provides that, in determining the fair value for payment of shares, the court consider the nature of the transaction and its effect on the corporation and its shareholders and the concepts and methods of valuation then customary in the relevant financial and securities markets. Dividends Global Crossing. The Global Crossing bye-laws provide that the board of directors may from time to time declare dividends or distributions out of contributed surplus to be paid to the shareholders according to their rights and interests including any interim dividends that appear to the board of directors to be justified. The board of directors must be satisfied on reasonable grounds that at the time when the dividends are declared and at the time when the dividends are paid, Global Crossing is, and would after the payment be, able to pay its debts as they fall due and that the realizable value of Global Crossing's assets would not be less than the aggregate of its liabilities and its issued share capital and share premium accounts. Frontier. Under the New York Business Corporation Law, a corporation may declare and pay dividends on its outstanding shares except when currently the corporation is insolvent or would be made insolvent upon payment of the dividends or when the declaration, payment or distribution would be contrary to any restrictions contained in the certificate of incorporation. In general, dividends may be declared or paid out of surplus only. Voting Global Crossing. The Global Crossing bye-laws contain restrictions on voting shares if a holder owns more than a specified percentage of the voting power. See "Description of Global Crossing Capital Stock--Voting and transfer restrictions." Frontier. The Frontier restated certificate of incorporation and by-laws contain no similar restriction. Preemptive rights Global Crossing. Bermuda law does not require that preemptive rights be provided for in the bye-laws of the company. Preemptive rights may exist by contractual arrangement or pursuant to the terms of issue of the shares. The Global Crossing bye-laws do not contain any provision concerning preemptive rights, nor has Global Crossing entered into any agreement or arrangement granting preemptive rights. Frontier. The New York Business Corporation Law provides, subject to specified exceptions, preemptive rights to shareholders upon an issuance of securities which would adversely affect specified interests of the shareholders; however, the certificate of incorporation of a corporation may provide otherwise. The Frontier restated certificate of incorporation states that no holders of shares of Frontier of any class or series, now authorized or authorized in the future, will have any preemptive rights. Amendments to corporate governance documents Global Crossing. Amendments to the memorandum of association of a Bermuda company must be submitted to a general meeting of the shareholders and will be effective only to the extent approved by the shareholders at that meeting and, in respect of certain amendments to a company's objects, by the Bermuda Minister of Finance. The Global Crossing bye-laws provide that the bye-laws may be amended by resolution of the board of directors, subject to approval by shareholder resolution at a general meeting. In some circumstances, the vote or consent of the holders of 75% of the outstanding shares of capital stock of Global Crossing and the approval of the majority of the Global Crossing board of directors are required. Frontier. Under New York law, amendments to a certificate of incorporation may be authorized by the vote of a majority of outstanding shares entitled to vote thereon. New York law also provides for approval by vote of the holders of a majority of outstanding shares of a particular class of stock in some circumstances. The 141
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by-laws of Frontier may be amended by a vote of the holders of the shares at the time entitled to vote in the election of any directors. They may also be amended by the board of directors of Frontier, but any by-law adopted by the board of directors may be amended or repealed by the shareholders entitled to vote in the election of any directors. Limitations on directors' liability Global Crossing. Under Bermuda law, a director must observe the statutory duty of care which requires the director to act honestly and in good faith with a view to the best interests of the company and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Directors are also subject to common law fiduciary duties which require directors to act in what they reasonably believe to be the best interests of the company and for a proper purpose. Bermuda law renders void any provision in the bye-laws or any contract between a company and any director exempting him or her from or indemnifying him or her against any liability in respect of any fraud or dishonesty of which he or she may be guilty in relation to the company. The Global Crossing bye-laws contain a number of provisions limiting the liability of directors as permitted under Bermuda law. The Global Crossing bye-laws provide that each shareholder agrees to waive any claim or right of action he or she may have, whether individually or by or in the right of Global Crossing, against any director of Global Crossing on account of any action taken by any director, or the failure of any director to take any action in the performance of his or her duties with or for Global Crossing; provided, however, that this waiver does not apply to any claims or rights of action arising out of the fraud or dishonesty of a director. Frontier. The New York Business Corporation Law permits a corporation to limit or eliminate a director's personal liability to the corporation or the holders of its capital stock for breach of duty. This limitation is generally unavailable for acts or omissions by a director which (1) were in bad faith, (2) involved intentional misconduct or a knowing violation of law, or (3) involved a financial profit or other advantage to which such director was not legally entitled. The New York Business Corporation Law also prohibits limitations on director liability for acts or omissions which resulted in a violation of a statute prohibiting specified dividend declarations, specified payments to shareholders after dissolution and particular types of loans. The Frontier restated certificate of incorporation provides for limitations on directors' liability as permitted by New York law. Rights of inspection Global Crossing. Bermuda law provides the public with a right of inspection of a Bermuda company's public documents at the office of the Registrar of Companies in Bermuda and provides a Bermuda company's shareholders with a right of inspection of the company's bye-laws, minutes of general shareholder meetings and audited financial statements. The register of shareholders is also open to inspection by shareholders free of charge and, upon payment of a small fee, by any other person. A Bermuda company is required to maintain its share register in Bermuda, but if it is a public company, it may establish a branch register outside Bermuda. A Bermuda company is required to keep at its registered office a register of its directors and officers which is open for inspection by members of the public without charge. Bermuda law does not, however, provide a general right for shareholders to inspect or obtain copies of any other corporate records. Frontier. Under the New York Business Corporation Law, any person who has been a shareholder of record of a corporation, upon at least five days' written demand, has the right to examine, in person or by agent or attorney, the corporations minutes of the proceedings of its shareholders and a record of its shareholders and to make extracts from those records for any purpose reasonably related to the person's interest as a shareholder. Upon the written request of any shareholder, the corporation must give or mail to that shareholder an annual balance sheet and profit and loss statement for the preceding fiscal year, and, if any interim balance sheet or profit and loss statement has been distributed to its shareholders or otherwise made available to the public, the most recent such interim balance sheet or profit and loss statement. 142
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Repurchase of untraced shares Global Crossing. The Global Crossing bye-laws provide that Global Crossing will be entitled to sell at the best price reasonably obtainable, or if the shares are listed on a stock exchange, to purchase at the trading price as of the date of purchase, the shares of a shareholder or the shares that a person is entitled to as a result of death, bankruptcy or otherwise by operation of law if: (1) during a period of twelve years, at least three dividends have been declared and all dividends that have been sent in the manner authorized by the bye-laws remained uncashed; (2) after twelve years, advertisements are placed both in a national daily newspaper and a newspaper circulating in the area of the last known address of that shareholder or other person giving notice of Global Crossing's intention to purchase or sell the shares; (3) for three months after the advertisements are placed, no information regarding that shareholder is received; and (4) if the shares are listed on a stock exchange, notice is given to the stock exchange of Global Crossing's intention to sell or purchase those shares prior to the publication of the advertisements. Global Crossing will hold the proceeds of any such sale for a period of six years, during which period the applicable shareholder will be a creditor of Global Crossing and will be entitled, upon request, to payment of the proceeds from the sale of those shares without interest. After the six-year period ends, any unclaimed proceeds will become the property of Global Crossing. Frontier. The Frontier by-laws do not contain any provision regarding untraced shares. Indemnification of Global Crossing by shareholders for some taxes and other impositions Global Crossing. The Global Crossing bye-laws provide that if any law imposes or purports to impose any immediate, future or possible liability on Global Crossing to make any payment in respect of shares held by or distributions payable or paid to any shareholder, then Global Crossing shall be fully indemnified by that shareholder or that shareholder's executor or administrator from that liability. In addition, Global Crossing will have a lien on all dividends and other money payable in respect of the shares held by that shareholder until the applicable liability is paid, plus interest, and may recover as a debt due from that shareholder or his or her administrator any money paid by Global Crossing as a result of that liability. Global Crossing may also refuse to register a transfer of any shares until such money and interest is repaid or set off. Frontier. Frontier does not have similar indemnification rights under its corporate governance documents. Indemnification of officers and directors Global Crossing. Under Bermuda law, a company is permitted to indemnify any officer or director out of the funds of the company against (1) any liability incurred by him or her in defending any proceedings, whether civil or criminal, in which judgment is given in his or her favor, or in which he or she is acquitted, or in connection with any application under relevant Bermuda legislation in which relief from liability is granted to him or her by the court and (2) any loss or liability resulting from negligence, default, breach of duty or breach of trust, save for fraud and dishonesty. The Global Crossing bye-laws contain provisions regarding the indemnification of officers and directors. The Global Crossing bye-laws generally provide for indemnification to the extent permitted under Bermuda law. Frontier. Under the New York Business Corporation Law, indemnification of directors and officers may be provided to whatever extent is authorized by a corporation's certificate of incorporation or a by-law or vote adopted by the shareholders. The New York Business Corporation Law does not permit indemnification with respect to any matter as to which the director or officer has been adjudicated not to have acted in good faith in the reasonable belief that the action taken was in the best interest of the corporation. The Frontier by-laws currently provide for indemnification of directors and officers and advancement of indemnified expenses to the fullest extent permitted under the New York Business Corporation Law. 143
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Indemnification of shareholders by Global Crossing for some taxes Global Crossing. The Global Crossing bye-laws provide that, if the existing voting and transfer restrictions in the bye-laws are amended or the board of directors and shareholders approve a restricted transfer of shares, Global Crossing will indemnify each shareholder that is treated as a "United States Shareholder" under Section 951 et. seq. of the Internal Revenue Code as a result of that amendment from and against all losses, costs, damages, liabilities and expenses arising out of, directly or indirectly, that treatment. Frontier. Frontier does not have similar indemnification obligations under its corporate governance documents because it is a United States corporation. Rights agreement Global Crossing. Global Crossing has not adopted a shareholder rights plan. Frontier. Frontier has adopted a rights agreement, dated April 9, 1995, between Frontier and The First National Bank of Boston which contains provisions that may delay, defer or prevent a takeover of Frontier. In connection with the merger agreement, Frontier and Bank of Boston entered into an amendment to the rights agreement, which provides that the rights would not become exercisable as a result of the approval, execution, delivery or performance of the merger agreement or the stock option agreement. Immediately before the completion of the proposed merger, the rights under the rights agreement will expire. "Anti-Greenmail" Global Crossing. Bermuda law does not contain an anti-greenmail statute. Frontier. The New York Business Corporation Law provides that no domestic corporation may purchase more than 10% of its stock from a shareholder who has held the shares for less than two years at any price which is higher than the market price unless the transaction is approved by both the corporation's board of directors and a majority of the shares entitled to vote or the corporation offers to purchase shares from all the holders on the same terms. Listing Global Crossing. Global Crossing common stock trades on both the Nasdaq National Market and the Bermuda Stock Exchange. Frontier. Frontier common stock is listed on the New York Stock Exchange. 144
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Proposals to Global Crossing Shareholders To Be Voted on at the Global Crossing Annual Meeting Please refer to Annex G to this joint proxy statement/prospectus for the complete text of each proposal to Global Crossing shareholders to be voted on at the Global Crossing annual meeting. Proposal No. 1: Increase in Global Crossing's authorized share capital On June 18, 1999, the Global Crossing board of directors unanimously adopted a resolution approving an increase in Global Crossing's authorized share capital from $6,000,000 to $30,200,000 for the purpose of: . increasing the number of authorized shares of Global Crossing common stock, par value $0.01 per share, from 600,000,000 shares to 3,000,000,000 shares; and . authorizing the future issuance of 20,000,000 shares of Global Crossing preferred stock, par value $0.01 per share. The Global Crossing board of directors is asking shareholders to approve the resolution, which is included in Annex G to this document, at the Global Crossing annual meeting. The Global Crossing bye-laws require that the resolution be approved by a majority of the aggregate votes of all issued and outstanding shares of capital stock of Global Crossing. The merger is conditioned on approval by Global Crossing shareholders of the increase in the authorized share capital of Global Crossing to create shares of Global Crossing common stock, which will be issued in the merger to Frontier shareholders in exchange for shares of Frontier common stock in a number equal to the exchange ratio. See "The Merger--What you will receive in the merger." Without this amendment, Global Crossing will not have enough authorized shares of common stock to issue to Frontier shareholders in the merger. The Global Crossing board of directors has unanimously determined that the merger and the increase in Global Crossing's authorized share capital to effectuate the merger are in the best interests of Global Crossing and its shareholders. See "The Merger--Recommendation of the Global Crossing board of directors; Reasons for the merger." Shareholders who beneficially own shares of Global Crossing common stock representing over a majority of the voting power of Global Crossing have agreed to vote in favor of proposal no. 1. As a result, the vote of these shareholders will be sufficient to approve this proposal without any further vote by any other Global Crossing shareholder. In addition, the Global Crossing board of directors believes that it is desirable to have additional authorized shares of common and preferred stock available for possible future financing and acquisition transactions, stock dividends or splits, employee benefit plans and other general corporate purposes. Having authorized shares of common and preferred stock available for issuance in the future will allow Global Crossing to issue those shares without the expense and delay of a special shareholder meeting. Common stock Of the 2,400,000,000 additional shares of Global Crossing common stock, if authorized: . up to approximately 316,315,144 shares will be issued upon closing of the merger to Frontier shareholders in exchange for their shares of Frontier common stock, with each Frontier shareholder receiving that number of shares of Global Crossing common stock equal to the exchange ratio. See "The Merger--What you will receive in the merger;" . approximately 17,000,000 shares will be reserved for issuance under Frontier stock options and warrants which, in the merger, will become options or warrants to purchase Global Crossing common stock; . 56,784,270 additional shares will be reserved for issuance under the 1998 Global Crossing Ltd. Stock Incentive Plan (the "1998 Plan"); and 145
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. approximately 2,009,900,586 shares will remain available for possible future financing and acquisition transactions, stock dividends or splits, employee benefit plans and other general corporate purposes. The additional authorized but unissued shares of Global Crossing common stock could be issued at the discretion of the Global Crossing board of directors without any further action by the shareholders, except as required by applicable law or regulation, in connection with acquisitions, efforts to raise additional capital for Global Crossing and other corporate purposes. The Global Crossing board of directors has no present plan or intention to issue any shares of Global Crossing common stock authorized by this proposal, other than in connection with the merger and the 1998 Plan. As of July 29, 1999, the total amount of authorized shares of Global Crossing common stock was 600,000,000 shares, and 412,732,100 shares of Global Crossing common stock were issued and outstanding. Preferred stock The preferred stock, if authorized, could be issued at the discretion of the Global Crossing board of directors without any further action by the shareholders, except as required by applicable law or regulation, in connection with acquisitions, efforts to raise additional capital for Global Crossing and other corporate purposes. The Global Crossing board of directors has no present plan or intention to issue any shares of preferred stock authorized by this proposal. This proposal would authorize the Global Crossing 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, including, without limitation, any of the following: (1) the rate of dividends and whether dividends were cumulative or had a preference over the common stock in right of payment; (2) the terms and conditions upon which shares may be redeemed and the redemption price; (3) sinking fund provisions for the redemption of shares; (4) the amount payable in respect of each share upon a voluntary or involuntary liquidation of Global Crossing; (5) the terms and conditions upon which shares may be converted into other securities of Global Crossing, including common stock; (6) limitations and restrictions on payment of dividends or other distributions on, or redemptions of, other classes of Global Crossing capital stock junior to such series, including the common stock; (7) conditions and restrictions on the creation of indebtedness or the issuance of other senior classes of capital stock; (8) the terms on which shares may be redeemed, if any, and (9) voting rights. Any series or class of preferred stock could, as determined by the Global Crossing 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 Global Crossing common stock until the Global Crossing 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. These effects might include, without limitation: (1) reduction of the amount otherwise available for the payment of dividends on common stock to the extent dividends are payable on any issued preferred stock; (2) restrictions on dividends on the common stock; (3) rights of any series or class of preferred stock to vote separately or to vote with the common stock; (4) conversion of the preferred stock into common stock at such prices as the Global Crossing board of directors determines, which could include issuance at below fair market value or original issue price of the common stock, diluting the book value or per share value of the outstanding common stock; and (5) the holders of common stock not being entitled to share in Global Crossing's assets upon liquidation until satisfaction of any liquidation preference granted to holders of the preferred stock. Holders of Global Crossing common stock do not have preemptive rights to purchase shares in future issuances. 146
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Potential antitakeover effect This proposal may have an anti-takeover effect. The flexibility vested in the Global Crossing board of directors to authorize the issuance of common stock and preferred stock in one or more classes or series could enhance the Global Crossing board of directors' bargaining capability on behalf of Global Crossing shareholders in a takeover situation and could, under certain 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 capital stock. For example, the Global Crossing board of directors could issue preferred stock having terms that could discourage an acquisition attempt or other transaction that some, or a majority, of the shareholders might believe to be in their best interests or in which shareholders might receive a premium for their stock over market price. Accordingly, shareholders 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. The Global Crossing board of directors recommends a vote FOR proposal no. 1 Proposal No. 2: Issuance of shares of Global Crossing common stock in the merger On June 18, 1999, the Global Crossing board of directors unanimously adopted a resolution approving the issuance of shares of Global Crossing common stock, par value $0.01 per share, in the merger, subject to completion of the merger. These shares will not be issued unless the merger is completed. This share issuance is being submitted for the approval of the shareholders of Global Crossing pursuant to the requirements of the National Association of Securities Dealers applicable to companies with securities quoted on the Nasdaq National Market. The NASD requirements provide that this share issuance must be approved by a majority of all outstanding shares of Global Crossing common stock, voting as a single class, at the Global Crossing annual meeting. The merger cannot be completed unless Global Crossing shareholders approve the issuance of these shares in the merger. Shareholders who beneficially own shares of Global Crossing common stock representing over a majority of the voting power of Global Crossing have agreed to vote in favor of proposal no. 2. As a result, the vote of these shareholders will be sufficient to approve this proposal without any further vote by any other Global Crossing shareholder. These shares will be issued to Frontier shareholders in exchange for their Frontier common stock in a number per Frontier common stock share equal to the exchange ratio described in this document. See "The Merger--What you will receive in the merger" and "The Merger Agreement--Termination; Possible exchange ratio increase." The Global Crossing board of directors recommends a vote FOR proposal no. 2 Proposals Nos. 3 and 4: Amendment and restatement of Global Crossing bye-laws The Global Crossing board of directors has approved the amendment and restatement of the Global Crossing bye-laws. The existing bye-laws have not been amended since Global Crossing became a public company. The proposed amendments aim to make the Global Crossing bye-laws more suitable for a public company and reflect common corporate practice among United States public companies and public companies that, like Global Crossing, list or trade their equity shares on a United States securities exchange or the Nasdaq National Market. Accordingly, the Global Crossing board of directors is asking shareholders to approve these amendments, which the Global Crossing board has adopted by resolution included in Annex G. Proposal No. 3: Amendment and restatement of Global Crossing bye-laws (other than bye-laws 34(2), 63, 130 and 148) The following discussion of the proposed amendments is qualified in its entirety by the full text of the amended bye-laws set forth in Annex G. You should read Annex G carefully. Under the existing Global 147
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Crossing bye-laws, these amendments require the vote of shares of common stock representing at least a majority of all outstanding shares of common stock. Reducing the minimum shareholder voting requirements for certain corporate actions The existing bye-laws require the approval of a majority of the votes of all outstanding shares of capital stock to: . adopt ordinary shareholder resolutions, . increase or decrease the authorized capital stock, . alter the capital stock, including the creation of several classes of stock, the increase or decrease in par value of capital stock, the authorization and issuance of non-voting capital stock, the cancellation of shares of capital stock not previously allocated and the change of the currency in which the capital stock is denominated, . alter or abrogate the special rights of a class of shares of capital stock by (1) reducing the capital paid up on those shares, (2) creating another class of stock ranking in priority for payment of dividends or in respect of capital over those shares or (3) creating a class of stock with more favorable voting rights than those shares; however, the bye- laws require the approval of at least 75% of the votes of all outstanding shares of capital stock to alter or abrogate the special rights of a class by written consent rather than by shareholder vote, . elect directors, and . amend the bye-laws with some exceptions that require the approval of at least 75% of all outstanding shares of capital stock to be amended. The proposed amendments reduce the minimum shareholder voting requirement to approve the corporate actions specified above to a majority of all votes cast at the shareholder meeting at which these corporate actions are being voted on. These amendments, if adopted, will become effective only if and when the merger is completed. Manner of voting The existing bye-laws provide that shareholders may vote at meetings either on a poll with one vote per share or by a show of hands with one vote per shareholder. The proposed amendments provide that voting by shareholders may be conducted only on a poll. Notice of special meetings and shareholder director nominations The existing bye-laws provide that a special shareholders' meeting may be called by not less than 30 days' notice by the board of directors or by shareholders representing at least 10% of the paid in capital of Global Crossing. In addition, the existing bye-laws provide that notice of shareholder director nominations must be given to Global Crossing not less than 60 nor more than 90 days before the date of the annual or special shareholder meeting at which these nominations will be voted on. The proposed amendments provide that a special shareholders' meeting may be called by not less than 10 days' notice by the chairman or co-chairman of the board of directors, in addition to the board of directors and by shareholders representing at least 10% of the paid in capital of Global Crossing. In addition, the proposed amendments provide that notice of shareholder director nominations in connection with an annual shareholder meeting must be received by Global Crossing not less than 120 nor more than 150 days before the date of the release of Global Crossing's proxy statement in connection with the prior year's annual shareholder meeting. The proposed amendments do not provide for shareholder director nominations in connection with special meetings. 148
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Notice period to shareholders Under the existing bye-laws, when counting the period of any notice to shareholders, the date when the notice is sent, on the one hand, and the date when the notice is received or, if the notice relates to a shareholder meeting, the date of that meeting, on the other hand, are excluded from the period of that notice. The proposed amendments expressly provide that those dates will be counted in the period of any notice to shareholders. Number of directors and casual vacancies The existing bye-laws provide that, at each annual meeting, shareholders will by resolution determine the minimum and maximum number of directors on the Global Crossing board of directors. The bye-laws currently provide that the minimum number of directors is 11 and the maximum number of directors may not exceed 18. In addition, the existing bye-laws provide that the Global Crossing board of directors will have a fixed number of class A, B and C directors. Also, the existing bye-laws provide that the number of casual vacancies, that is vacancies that may be filled by the board, will be determined by shareholder resolution. The proposed amendments fix the maximum number of directors at 20 and the minimum number at 11, until another shareholder resolution is adopted amending those numbers. In addition, the proposed amendments provide that all vacancies on the board of directors will be casual vacancies and that the board of directors will have the authority to determine by resolution the number of class A, B, and C directors that will serve on the board from time to time. Staggered terms Under the existing bye-laws, class A directors elected at the annual meeting will serve until the annual meeting in 2002, class B directors will serve until the annual meeting in 2000 and class C directors will serve until the annual meeting in 2001. If the proposed amendments are adopted, class A directors elected at the annual meeting will serve until the annual meeting in 2000, class B directors elected at the annual meeting will serve until the annual meeting in 2001 and class C directors elected at the annual meeting will serve until the annual meeting in 2002. Outside directors' compensation The existing bye-laws provide that the compensation of Global Crossing's outside directors will be determined by shareholder resolution. The proposed amendments provide that the compensation of outside directors will be determined by the Global Crossing board of directors from time to time. Potential antitakeover effect Some of the proposed amendments in proposal no. 3 may have an antitakeover effect, although this was not the intent of the Global Crossing board of directors in adopting these amendments. In particular, the proposed amendment to remove the ability of shareholders to nominate directors at special meetings may have the effect of delaying consideration of a shareholder director nomination until the next annual meeting. In addition, the proposed amendment granting authority to the board of directors to determine the number of class A, B and C directors from time to time may limit the number of director nominations that shareholders may make or vote on at shareholder meetings. The proposed amendment to the notice requirement for director nominations at annual meetings may have the effect of precluding a director nomination if the proper notice requirement has not been met. The Global Crossing board of directors recommends a vote FOR proposal no. 3 149
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Proposal No. 4: Amendment and restatement of Global Crossing bye-laws 34(2), 63, 130 and 148 The following discussion of the proposed amendments is qualified in its entirety by the full text of the amended bye-laws set forth in Annex G. You should read Annex G carefully. Under the existing Global Crossing bye-laws, these amendments require the vote of shares of common stock representing at least 75% of all outstanding shares of common stock. Record date for shareholder votes The existing bye-laws do not provide for the establishment of a record date for shareholders entitled to vote at shareholder meetings or by written resolution. As a result, under the current bye-laws, shareholders of record at the close of business on the date of a shareholder meeting or on the date when a shareholder resolution is passed by written consent are entitled to vote. The proposed amendments grant authority to the Global Crossing board of directors to establish a record date for shareholders entitled to vote at shareholder meetings and take action by written resolution. Restrictions on transfers of shares The existing bye-laws provide that a transfer of shares to any shareholder that results in a shareholder that is a natural person owning 5% or more of the outstanding shares of common stock or in any other shareholder owning 9.5% or more of the outstanding shares of common stock may not be recorded in the share register unless that transfer is approved by a majority of the directors and by at least 75% of the votes of all outstanding shares of common stock. Pacific Capital Group, GKW Unified Holdings, Canadian Imperial Bank of Commerce, Continental, MRCo and their affiliates are not subject to this restriction on transfers. The proposed amendments reduce the minimum shareholder voting requirement to approve any transfer resulting in any shareholder owning 5% or more, if the shareholder is a natural person, or otherwise 9.5% or more of the outstanding shares of common stock to a majority of the votes cast at the shareholder meeting called to approve that transfer. These amendments, if adopted, will become effective only if and when the merger is completed. Limitation on voting rights The existing bye-laws limit the voting power of large shareholders to 9.5% of the total voting power of the Global Crossing common stock. Any additional votes which these large shareholders would be entitled to cast but for this limitation in the bye-laws are allocated to other shareholders, pro rata based on their number of shares. Canadian Imperial Bank of Commerce and its affiliates are the only shareholders exempt from this limitation on voting rights. Their aggregate voting power is capped under the existing bye-laws at 35% of the total voting power of the Global Crossing capital stock. The proposed amendments limit the voting power of large shareholders to 9.5% of the total votes cast in connection with any shareholder action. In addition, the proposed amendments decrease the cap on the voting power of Canadian Imperial Bank of Commerce and its affiliates to 20% of the total votes cast in connection with any shareholder action. These amendments, if adopted, will become effective only if and when the merger is completed. Correction of typographical error In existing bye-law 34(2)(ii), the reference to "maximum percentage" should read "Maximum Percentage." The proposed amendment makes this correction. 150
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Potential Antitakeover effect The Global Crossing board of directors does not believe that any of the foregoing proposed amendments to the bye-laws in proposal no. 4 have an antitakeover effect. The Global Crossing board of directors recommends a vote FOR proposal no. 4 Proposal No. 5: Election of directors The Global Crossing board of directors has made the following director nominations: . Abbott L. Brown, Thomas J. Casey, William E. Conway and Barry Porter to be elected as class A directors with terms expiring in 2000. Messers. Brown, Casey, Conway and Porter currently serve as directors of Global Crossing; . Robert Annunziata, Lodwrick M. Cook, Geoffrey J.W. Kent, David L. Lee, Bruce Raben and Jack M. Scanlon to be elected as class B directors with terms expiring in 2001. Messers. Annunziata, Cook, Kent, Lee and Raben currently serve as directors of Global Crossing; and . Jay R. Bloom, Dean C. Kehler, Michael R. Steed, Hillel Weinberger and Gary Winnick to be elected as class C directors with terms expiring in 2002. Messers. Bloom, Kehler, Steed, Weinberger and Winnick currently serve as directors of Global Crossing. In addition, the Global Crossing board of directors has made the following director nominations, subject to the closing of the merger and with effect immediately after the closing of the merger: . James F. McDonald to be elected as class A director with a term expiring in 2000; . Eric Hippeau to be elected as class B director with a term expiring in 2001; and . Joseph P. Clayton and Douglas H. McCorkindale to be elected as class C directors with terms expiring in 2002. Messers. Clayton, Hippeau, McCorkindale and McDonald are currently serving as directors of Frontier. The Global Crossing board of directors recommends the election of the nominees Director Nominees Gary Winnick--Mr. Winnick, 51, founder of Global Crossing, has been Co- Chairman of the Global Crossing board of directors since January 1998 and, prior to that date, was Chairman of the Global Crossing board of directors since March 1997. Mr. Winnick is the founder and has been the Chairman and Chief Executive Officer of Pacific Capital Group since 1985, having been in the principal equity investment and merchant banking business since that time. Lodwrick M. Cook--Mr. Cook, 70, has been Co-Chairman of the Global Crossing board of directors since January 1998 and Vice Chairman and Managing Director of Pacific Capital Group since 1997. Prior to joining Pacific Capital Group, Mr. Cook spent 39 years at Atlantic Richfield Co., serving as President and Chief Executive Officer from 1985 to 1995 and as Chairman of the board of directors from 1986 to 1995, when he became Chairman Emeritus. Mr. Cook is also a member of the board of directors of Castle and Cooke, Litex and Ocean Energy, Inc. Thomas J. Casey--Mr. Casey, 46, was elected Vice Chairman of the Global Crossing board of directors in December 1998 and was appointed Managing Director of Global Crossing in September 1998. Prior to 151
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joining Global Crossing, Mr. Casey was co-head of Merrill Lynch & Co.'s Global Communications Investment Banking Group for three years. From 1990 to 1995, Mr. Casey was a partner and co-head of the telecommunications and media group of the law firm of Skadden, Arps, Slate, Meagher and Flom. Jack M. Scanlon--Mr. Scanlon, 57, has been Vice Chairman of the Global Crossing board of directors since February 1999 and has been a director of Global Crossing since April 1998. Mr. Scanlon was Chief Executive Officer of Global Crossing from April 1998 to February 1999. Prior to joining Global Crossing, Mr. Scanlon was President and General Manager of the Cellular Networks and Space Sector of Motorola Inc. and had been affiliated with Motorola Inc. since 1990. Mr. Scanlon was Chief Operating Officer of Cambridge Technology Group from 1988 to 1990 and, prior thereto, spent 24 years with AT&T and Bell Laboratories, rising to Group Vice President at AT&T. Robert Annunziata--Mr. Annunziata, 50, has been Chief Executive Officer of Global Crossing since February 1999 and a director of Global Crossing since March 1999. From September 1998 to February 1999, Mr. Annunziata was President of AT&T's $22 billion business services group, responsible for the AT&T global network. Prior thereto, Mr. Annunziata was Chairman and Chief Executive Officer of the Teleport Communications Group from 1983 to 1998. Prior to joining Teleport, Mr. Annunziata served 17 years at AT&T in a variety of increasingly senior operations, sales and marketing positions. David L. Lee--Mr. Lee, 49, has been President and Chief Operating Officer and a director of Global Crossing since March 1997. He has also been a managing director of Pacific Capital Group since 1989. Prior to joining Pacific Capital Group, Mr. Lee was Group Vice President of Finance and Acquisitions at TRW Information Systems Group. Barry Porter--Mr. Porter, 41, is Senior Vice President, Corporate Development and a director of Global Crossing. Mr. Porter has been a director of Global Crossing since 1997 and has also been a Managing Director of Pacific Capital Group since 1993. From 1986 to 1993, Mr. Porter was affiliated with Bear, Stearns & Co. Inc., rising to Senior Managing Director in the investment banking department. Abbott L. Brown--Mr. Brown, 55, is Senior Vice President, Corporate Affairs and a director of Global Crossing. Mr. Brown has been a director of Global Crossing since 1997 and was a Managing Director and Chief Financial Officer of Pacific Capital Group from 1994 to 1998. From 1990 through 1994, Mr. Brown was Executive Vice President, Chief Financial Officer and a member of the board of directors of Sony Pictures Entertainment Inc., a wholly-owned subsidiary of Sony Corporation. Prior thereto, Mr. Brown was a partner in the international accounting firm of Price Waterhouse LLP. Jay R. Bloom--Mr. Bloom, 43, a director of Global Crossing since March 1997, is a Managing Director of CIBC World Markets Corp., co-head of its High Yield Group and co-head of CIBC World Markets High Yield Merchant Banking Funds. Mr. Bloom also serves on the board of directors of Heating Oil Partners, L.P., Consolidated Advisers Limited, L.L.C. and Morris Material Handling, Inc. Prior to joining CIBC Oppenheimer in August 1995, Mr. Bloom was a founder and Managing Director of The Argosy Group L.P. From 1984 to 1990, Mr. Bloom was a Managing Director in the Mergers and Acquisitions Group of Drexel Burnham Lambert Incorporated. Mr. Bloom was an investment banker associated with Lehman Brothers Kuhn Loeb Incorporated from 1982 to 1984 and, from 1981 to 1982, practiced law at Paul Weiss Rifkind Wharton & Garrison in New York. William E. Conway--Mr. Conway, 49, became a director of Global Crossing in August 1998. Mr. Conway has been a managing director of The Carlyle Group since 1987. Mr. Conway was Senior Vice President and Chief Financial Officer of MCI Communications Corporation from 1984, until he jointly founded The Carlyle Group in August 1987. Mr. Conway serves as director to GTS Duratek, Inc., Nextel Communications, Inc. and Hownet International Corporation. 152
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Dean C. Kehler--Mr. Kehler, 42, a director of Global Crossing since March 1997, is a Managing Director of CIBC World Markets Corp. and co-head of its High Yield Group. In addition, Mr. Kehler is a member of CIBC's Investment Committee and co-head of CIBC World Markets High Yield Merchant Banking Funds. Prior to joining CIBC World Markets Corp. in 1995, Mr. Kehler was a founder and managing director of The Argosy Group. From 1985 to 1990, Mr. Kehler was a managing director in the Mergers and Acquisitions Group, Co-Head of Merchant Banking and a member of the Corporate Finance Executive Committee of Drexel Burnham Lambert Incorporated. From 1979 to 1985, Mr. Kehler was an investment banker at Lehman Brothers. Mr. Kehler serves on the board of directors of Booth Creek Group, Inc., Telebanc Financial Corporation and Heating Oil Partners, L.P. Geoffrey J.W. Kent--Mr. Kent, 56, a director of Global Crossing since August 1998, is Chairman and Chief Executive Officer of the Abercrombie & Kent Group of companies and has been associated with these companies since 1967. Bruce Raben--Mr. Raben, 45, a director of Global Crossing since March 1997, is a Managing Director of CIBC World Markets Corp. Prior to joining CIBC World Markets Corp. in January 1996, Mr. Raben was a founder, managing director and co-head of the Corporate Finance Department of Jefferies & Co., Inc. since 1990. Mr. Raben serves as a director of Optical Security, Inc., Evercom, Inc., Terex Corporation and Equity Marketing, Inc. Michael R. Steed--Mr. Steed, 49, a director of Global Crossing since March 1997, is Senior Vice President of Investments for the Union Labor Life Insurance Company, ULLICO Inc. and its family of companies and President of Trust Fund Advisors, ULLICO's investment management subsidiary. Mr. Steed joined ULLICO in November 1992 after serving seven years as President and Founder of A.F.I.C. Group, Ltd., a financial and investment consulting firm. From 1983 to 1985, Mr. Steed was the Executive Director of the Democratic National Committee. Mr. Steed serves as a director of The Lewis & Clark Snake River Beverage Company. Hillel Weinberger--Mr. Weinberger, 45, a director of Global Crossing since June 1997, has been a Senior Vice President of Loews/CNA Holdings Corp. since 1988. Prior thereto, Mr. Weinberger was a Senior Vice President of Presidential Life from 1982 to 1988. Joseph P. Clayton--Mr. Clayton, 49, is Chief Executive Officer of Frontier and has held this position since March 1999. He also served as Frontier's President from June 1997 to March 1999 and its Chief Operating Officer from June 1997 to August 1997. From March 1992 until December 1996, he was Executive Vice President, Marketing and Sales--Americas and Asia, Thomson Consumer Electronics, a worldwide leader in the consumer electronics industry. He has been a director of Frontier since 1997. Eric Hippeau--Mr. Hippeau, 47, is Chairman and Chief Executive Officer of Ziff-Davis Inc., a publicly-listed company whose majority shareholder is Softbank, Corp. Ziff-Davis Inc. is a leading integrated media and marketing company focused on computing and internet-related technology. Mr. Hippeau has held this position since December 1993. Prior to that he held other senior executive positions within Ziff-Davis. He is a director of Ziff-Davis Inc., Yahoo!, Inc., Herring Communications, Inc. and Starwood Hotels and Resorts Worldwide, Inc. He has been a director of Frontier since 1998. Douglas H. McCorkindale--Mr. McCorkindale, 60, is Vice Chairman and President of Gannett Co., Inc., a nationwide diversified communications company, and has held that position since September 1997. Prior to that he held the position of Vice Chairman and Chief Financial and Administrative Officer. He is a director of Gannett Co., Inc. and Continental Airlines and a director or trustee of a number of investment companies in the family of Prudential Mutual Funds. He has been a director of Frontier since 1980. James F. McDonald--Mr. McDonald, 59, is President and Chief Executive Officer of Scientific-Atlanta, Inc., a leading supplier of broadband communications systems, satellite-based video, voice and data 153
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communications networks and world-wide customer service and support. Mr. McDonald has held that position since July 1993. He is a director of Scientific-Atlanta, Inc., Burlington Resources, Inc. and American Business Products, Inc. He has been a director of Frontier since 1998. Some additional executive officers of Global Crossing In addition to the executive officers who are also directors and are described above, Global Crossing has the following executive officers: Dan J. Cohrs--Mr. Cohrs, 46, has been Senior Vice President and Chief Financial Officer of Global Crossing since May 1998. From 1993 to 1998, Mr. Cohrs was affiliated with GTE Corporation, rising to the position of Vice President and Chief Planning and Development Officer in 1997. From 1990 to 1993, he was at Northwest Airlines and served as Vice President of International Finance (Tokyo, Japan); from 1986 to 1990, he was at the Marriott Corporation and served in such capacities as Vice President of Financial Planning and Acquisitions and Vice President of Project Finance; and from 1983 to 1986, he was a Strategy and Financial Consultant at Marakon Associates. James C. Gorton--Mr. Gorton, 37, became Senior Vice President and General Counsel of Global Crossing in July 1998 and Secretary of Global Crossing in August 1998. From 1994 to 1998, Mr. Gorton was a partner in the New York law firm of Simpson Thacher & Bartlett and had been associated with the firm since 1986. Mr. Gorton received a J.D. degree from New York University Law School. Robert B. Sheh--Mr. Sheh, 59, has been Executive Vice President--Construction & Operations since February 1999. From 1998 to 1999, Mr. Sheh was Chief Executive Officer of Stone & Webster Engineering Ltd. From 1992 to 1998, Mr. Sheh served as President and Chief Executive Officer of International Technology Corporation and as Chairman and Chief Executive of Air & Water Technologies from 1996 to 1997. From 1989 to 1992, Mr. Sheh served as President of The Ralph M. Parsons Company, a worldwide engineering and construction company. Mr. Sheh was associated with The Ralph M. Parsons Company for over 20 years. Board meetings and committees 12 meetings, including regularly scheduled and special meetings, of the Global Crossing board of directors were held during 1998. During this period, Mr. Phoenix attended 66 2/3% of all meetings of the board of directors. Each other director attended 75% or more of all meetings of the board of directors and of the committees on which that director served. The audit committee and the compensation committee are the standing committees of the Global Crossing board of directors. Audit Committee The audit committee, currently composed of directors Weinberger, Conway and Kent, met four times during 1998. The principal functions of the audit committee are to (1) make recommendations concerning the engagement of independent public accountants; (2) review with the Global Crossing management and the independent public accountants the plans for, and scope of, the audit procedures to be utilized and results of audits; (3) approve the professional services provided by the independent public accountants; (4) review the adequacy and effectiveness of Global Crossing's internal accounting controls; (5) review Global Crossing's insurance program; and (6) perform any other duties and functions required by any organization under which Global Crossing's securities may be listed. Compensation Committee The compensation committee, currently composed of directors Cook, Steed and Levine, met six times during 1998. The purpose of the compensation committee is to establish and submit to the Global Crossing 154
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board of directors recommendations with respect to (1) compensation of officers and other key employees of Global Crossing and (2) awards to be made under the 1998 Plan. Proposal No. 6: Amendment of the 1998 Global Crossing Ltd. Stock Incentive Plan On June 18, 1999, the Global Crossing board of directors unanimously adopted a resolution to amend the 1998 Plan for the purpose of increasing the number of authorized shares of Global Crossing common stock, par value $0.01 per share, reserved for issuance under the 1998 Plan from 33,215,730 shares to 90,000,000 shares. The Global Crossing board of directors is asking shareholders to approve the resolution, which is included in Annex G to this proxy statement. Below is a summary of certain important features of the 1998 Plan. This summary is qualified in its entirety by reference to the full text of the 1998 Plan in Annex H. Description of the 1998 Plan The 1998 Plan is administered by the Global Crossing board of directors, which may delegate its duties in whole or in part to any subcommittee solely consisting of at least two individuals who are "non-employee" directors within the meaning of Rule 16b-3 under the Exchange Act and "outside directors" within the meaning of Section 162(m) of the Code. The 1998 Plan allows the board of directors to make awards of stock options, stock appreciation rights, which can be granted either in conjunction with, or independent of, stock options, and other stock based awards to any individual who is selected by the board of directors to participate in the 1998 Plan. The board of directors has the authority to interpret the 1998 Plan, to establish, amend and rescind any rules and regulations relating to the 1998 Plan and to make any other determinations that the board of directors deems necessary or desirable for the administration of the 1998 Plan. The board of directors may also correct any defect or supply any omission or reconcile any inconsistency in the 1998 Plan in the manner and to the extent the board of directors deems necessary or desirable. Any decision of the board of directors in the interpretation and administration of the 1998 Plan lies within its sole and absolute discretion and is final, conclusive and binding on all parties concerned, including participants in the 1998 Plan and their beneficiaries or successors. An aggregate of 33,215,730 shares of Global Crossing common stock is currently authorized for issuance under the 1998 Plan. As of June 3, 1999, 1,310,511 shares of Global Crossing common stock had been issued under the 1998 Plan, 31,826,621 shares were subject to outstanding options granted under the 1998 Plan and no shares were available for additional stock option grants or other stock-based awards. The maximum number of shares for which awards may be granted during a calendar year is determined by the board of directors from time to time. No award may be granted under the 1998 Plan after the tenth anniversary of July 1, 1998, but awards granted prior to that date may extend beyond that date. Stock options. Stock options granted under the 1998 Plan may be non-qualified or incentive stock options for federal income tax purposes. The board of directors will set option exercise prices and terms and will determine the time at which stock options will be exercisable. However, the term of a stock option may not exceed 10 years. The board of directors may also grant stock options that are intended to be incentive stock options, which comply with Section 422 of the Internal Revenue Code. No incentive stock options may be granted to any participant who, at the time of the purported grant, owns more than 10% of the total combined voting power of all classes of capital stock of Global Crossing or any of its subsidiaries, unless (1) the option price for such stock option is at least 110% of the "fair market value," as described below, of a share on the date of the grant and (2) the term of that stock option does not exceed the day preceding the fifth anniversary of the grant date. "Fair market value" is defined as the mean of the per share closing bid price and the per share closing asked 155
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price on that grant date as quoted on the National Association of Securities Dealers Automated Quotation System. Stock appreciation rights. Stock appreciation rights may be granted by the board of directors to participants as a right in conjunction with the number of shares underlying stock options granted to participants under the 1998 Plan or on a stand-alone basis with respect to a number of shares for which a stock option has not been granted. Stock appreciation rights constitute the right to receive payment for each share of the stock appreciation rights exercised in stock or in cash equal to the excess of that share's fair market value on the date of exercise over the exercise price per share, multiplied by the number of shares covered (1) in the case of a stock appreciation right independent of an option, by the stock appreciation right and (2) in the case of a stock appreciation right granted in conjunction with an option, by the option. The board of directors will determine the exercise price per share of stock appreciation rights; however, that price may not be less than the greater of (1) the fair market value, in the case of a stock appreciation right independent of an option, of a share of common stock on the grant date and, in the case of an applicable stock appreciation right granted in conjunction with an option, of the price of that option and (2) an amount permitted by applicable laws, rules, by-laws or policies of regulatory authorities or stock exchanges. The board of directors may also impose, in its discretion, conditions on the exercisability or transferability of stock appreciation rights. The board of directors may also grant limited stock appreciation rights that are exercisable upon the occurrence of special contingent events. Limited stock appreciation rights may provide for a different method of determining appreciation, may specify that payment will be made only in cash and may provide that any related awards are not exercisable while the limited stock appreciation rights are exercisable. Other stock-based awards. The board of directors has the authority to grant other stock-based awards, which may consist of awards of common stock, restricted stock and awards that are valued in whole or in part by reference to, or are otherwise based on the fair market value of, shares of common stock. Other stock-based awards may be granted on a stand-alone basis or in addition to any other awards granted under the 1998 Plan. The board of directors will determine the form of other stock-based awards and the conditions on which they may be