10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-16201

 

 

GLOBAL CROSSING LIMITED

(Exact name of registrant as specified in its charter)

 

 

 

BERMUDA   98-0407042

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

WESSEX HOUSE

45 REID STREET

HAMILTON HM 12, BERMUDA

(Address Of Principal Executive Offices)

(441) 296-8600

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨   Accelerated filer   x   Non-accelerated filer  ¨   Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of the Registrant’s common stock, par value $0.01 per share, outstanding as of August 1, 2011 was 61,280,537.

 

 

 


Table of Contents

GLOBAL CROSSING LIMITED AND SUBSIDIARIES

INDEX

 

          Page  

PART I FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements

     3   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     25   

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     42   

Item 4.

  

Controls and Procedures

     42   

PART II OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     42   

Item 1A.

  

Risk Factors

     42   

Item 6.

  

Exhibits

     44   

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

GLOBAL CROSSING LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share information)

 

     June 30, 2011     December 31, 2010  
     (unaudited)        

ASSETS:

    

Current assets:

    

Cash and cash equivalents

   $ 259      $ 372   

Restricted cash and cash equivalents - current portion

     5        4   

Accounts receivable, net of allowances of $46 and $45

     370        324   

Prepaid costs and other current assets

     110        91   
  

 

 

   

 

 

 

Total current assets

     744        791   
  

 

 

   

 

 

 

Restricted cash and cash equivalents - long term

     5        5   

Property and equipment, net of accumulated depreciation of $1,691 and $1,514

     1,191        1,179   

Intangible assets, net (including goodwill of $217 and $208)

     234        227   

Other assets

     110        108   
  

 

 

   

 

 

 

Total assets

   $ 2,284      $ 2,310   
  

 

 

   

 

 

 

LIABILITIES:

    

Current liabilities:

    

Accounts payable

   $ 273      $ 297   

Accrued cost of access

     90        78   

Short term debt and current portion of long term debt

     48        27   

Obligations under capital leases - current portion

     54        51   

Deferred revenue - current portion

     173        184   

Other current liabilities

     346        376   
  

 

 

   

 

 

 

Total current liabilities

     984        1,013   
  

 

 

   

 

 

 

Long term debt

     1,346        1,311   

Obligations under capital leases

     81        72   

Deferred revenue

     365        338   

Other deferred liabilities

     56        53   
  

 

 

   

 

 

 

Total liabilities

     2,832        2,787   
  

 

 

   

 

 

 

SHAREHOLDERS’ DEFICIT:

    

Common stock, 110,000,000 shares authorized, $.01 par value, 61,187,796 and 60,497,709 shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively

     1        1   

Preferred stock with controlling shareholder, 45,000,000 shares authorized, $.10 par value, 18,000,000 shares issued and outstanding

     2        2   

Additional paid-in capital

     1,448        1,443   

Accumulated other comprehensive income

     6        15   

Accumulated deficit

     (2,005     (1,938
  

 

 

   

 

 

 

Total shareholders’ deficit

     (548     (477
  

 

 

   

 

 

 

Total liabilities and shareholders’ deficit

   $ 2,284      $ 2,310   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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GLOBAL CROSSING LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except share and per share information)

(unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2010     2011     2010  

Revenue

   $ 692      $ 630      $ 1,353      $ 1,278   

Cost of revenue (excluding depreciation and amortization, shown separately below):

        

Cost of access

     (299     (276     (597     (581

Real estate, network and operations

     (121     (103     (229     (202

Third party maintenance

     (23     (26     (47     (53

Cost of equipment and other sales

     (25     (26     (51     (50
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     (468     (431     (924     (886
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     224        199        429        392   

Selling, general and administrative

     (128     (106     (249     (222

Depreciation and amortization

     (82     (82     (162     (170
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     14        11        18        —     

Other income (expense):

        

Interest income

     1        1        1        1   

Interest expense

     (45     (48     (90     (97

Other income (expense), net

     (5     (6     13        (58
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before benefit (provision) for income taxes

     (35     (42     (58     (154

Benefit (provision) for income taxes

     1        (5     (9     (12
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (34     (47     (67     (166

Preferred stock dividends

     (1     (1     (2     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss applicable to common shareholders

   $ (35   $ (48   $ (69   $ (168
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss per common share, basic and diluted:

        

Loss applicable to common shareholders

   $ (0.57   $ (0.79   $ (1.13   $ (2.78
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares

     61,149,087        60,434,227        60,953,305        60,351,317   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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GLOBAL CROSSING LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)

 

     Six Months Ended June 30,  
     2011     2010  

Cash flows provided by (used in) operating activities:

    

Net loss

   $ (67   $ (166

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Gain on sale of property and equipment

     —          (1

Deferred income tax

     6        —     

Non-cash stock compensation expense

     8        10   

Depreciation and amortization

     162        170   

Provision for doubtful accounts

     3        2   

Amortization of prior period IRUs

     (14     (12

Change in long term deferred revenue

     37        8   

Other

     (27     80   

Change in operating working capital:

    

- Changes in accounts receivable

     (40     (24

- Changes in accounts payable and accrued cost of access

     (17     (36

- Changes in other current assets

     (27     (6

- Changes in other current liabilities

     (25     (20
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (1     5   
  

 

 

   

 

 

 

Cash flows provided by (used in) investing activities:

    

Purchases of property and equipment

     (82     (90

Proceeds from sale of property and equipment

     —          1   

Change in restricted cash and cash equivalents

     —          1   
  

 

 

   

 

 

 

Net cash used in investing activities

     (82     (88
  

 

 

   

 

 

 

Cash flows provided by (used in) financing activities:

    

Repayment of capital lease obligations

     (29     (28

Repayment of debt

     (6     (7

Proceeds from exercise of stock options

     2        —     

Proceeds from sales-leasebacks

     4        —     

Finance costs incurred

     (1     (1

Payment of employee taxes on share-based compensation

     (3     (1

Other

     1        —     
  

 

 

   

 

 

 

Net cash used in financing activities

     (32     (37
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     2        (29
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (113     (149

Cash and cash equivalents, beginning of period

     372        477   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 259      $ 328   
  

 

 

   

 

 

 

Non-cash investing and financing activites:

    

Capital lease and debt obligations incurred

   $ 53      $ 30   
  

 

 

   

 

 

 

Accrued dividends converted to debt

   $ 26      $ —     
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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GLOBAL CROSSING LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in millions, except countries, cities, carriers, data centers, share and per share information)

(unaudited)

1. BACKGROUND AND ORGANIZATION

Global Crossing Limited or “GCL” is a holding company with all of its revenue generated by its subsidiaries and substantially all of its assets owned by its subsidiaries. GCL and its subsidiaries (collectively, the “Company”) are a global communications service provider. The Company offers a full range of data, voice and collaboration services and delivers service to approximately 40 percent of the companies in the Fortune 500, as well as 700 carriers, mobile operators and Internet service providers around the world. The Company delivers converged IP services to more than 700 cities in more than 70 countries, and has 17 data centers located in major business centers. The Company’s operations are based principally in North America, Europe, Latin America and a portion of the Asia/Pacific region. The vast majority of the Company’s revenue is generated from monthly services. The Company reports financial results based on three separate operating segments: (i) Global Crossing (U.K.) Telecommunications Ltd (“GCUK”) and its subsidiaries (collectively, the “GCUK Segment”); (ii) GC Impsat Holdings I Plc (“GC Impsat”) and its subsidiaries (collectively, the “GC Impsat Segment”); and (iii) GCL and its other subsidiaries (collectively, the “Rest of World Segment” or “ROW Segment”) (see Note 11, “Segment Reporting”).

See Note 14, “The Plan of Amalgamation”, for information related to the Agreement and Plan of Amalgamation with Level 3 Communications, Inc., a Delaware corporation (“Level 3”).

2. BASIS OF PRESENTATION

Basis of Presentation and Use of Estimates

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s 2010 annual report on Form 10-K as amended by the Company’s Form 10-K/A filed on February 28, 2011. These unaudited condensed consolidated financial statements include the accounts of the Company over which it exercises control. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of interim results for the Company. The results of operations for any interim period are not necessarily indicative of results to be expected for the full year.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the unaudited condensed consolidated financial statements, the disclosure of contingent assets and liabilities in the unaudited condensed consolidated financial statements and the accompanying notes, and the reported amounts of revenue and expenses and cash flows during the periods presented. Actual amounts and results could differ from those estimates. The estimates the Company makes are based on historical factors, current circumstances and the experience and judgment of the Company’s management. The Company evaluates its assumptions and estimates on an ongoing basis and may employ third party experts to assist in the Company’s evaluations.

Venezuelan Currency Risk

In Venezuela, the official bolivares—U.S. Dollar exchange rate established by the Venezuelan Central Bank (“BCV”) and the Venezuelan Ministry of Finance has historically attributed to the bolivar a value significantly greater than the value that prevailed on the former unregulated parallel market. The official rate is the rate used by the Comisión de Administración de Divisas (“CADIVI”), an agency of the Venezuelan government, to exchange bolivares pursuant to an official process that requires application and government approval. The Company uses the official rate to record the assets, liabilities and transactions of its Venezuelan subsidiary. Effective January 12, 2010, the Venezuelan government devalued the Venezuelan bolivar. The official rate increased from 2.15 Venezuelan bolivares to the U.S. Dollar to 4.30 for goods and services deemed “non-essential” and 2.60 for goods and services deemed “essential”. This devaluation reduced the Company’s net monetary assets (including unrestricted cash and cash equivalents) by approximately $27 based on the bolivares balances as of such date, resulting in a corresponding foreign exchange loss, included in other expense, net in the unaudited condensed Company’s consolidated statement of operations for the six months ended June 30, 2010. Effective January 1, 2011, the Venezuela government further increased the official rate for goods and services deemed “essential” to 4.30 Venezuelan bolivares to the U.S. Dollar. This change had no effect on the carrying value of the Company’s net monetary assets.

 

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In an attempt to control inflation, on May 18, 2010, the Venezuelan government announced that the unregulated parallel currency exchange market would be shut down and that the BCV would be given control over the previously unregulated portions of the exchange market. In June 2010, a new regulated currency trading system controlled by the BCV, the Transaction System for Foreign Currency Denominated Securities (“SITME”) commenced operations and established an initial weighted average implicit exchange rate of approximately 5.30 bolivares to the U.S. Dollar. Subject to the limitations and restrictions imposed by the BCV, entities domiciled in Venezuela may access the SITME by buying U.S. Dollar denominated securities through banks authorized by the BCV. The purpose of the new regulated system is to supplement the CADIVI application and approval process with an additional process that allows for quicker and smaller exchanges.

As indicated above, the conversion of bolivares into foreign currencies is limited by the current exchange control regime. Accordingly, the acquisition of foreign currency by Venezuelan companies to honor foreign debt, pay dividends or otherwise expatriate capital is subject to either the limitations and restrictions of the SITME or the CADIVI registration, application and approval process, and is also subject to the availability of foreign currency within the guidelines set forth by the National Executive Power for the allocation of foreign currency. Approvals under the CADIVI process have been less forthcoming at times, resulting in a significant buildup of excess cash in the Company’s Venezuelan subsidiary and a significant increase in the Company’s exchange rate and exchange control risks.

At June 30, 2011, the Company had $9 of obligations registered and subject to approval by CADIVI for the conversion of bolivares into foreign currencies. The Company cannot predict the timing and extent of any CADIVI approvals to honor foreign debt, distribute dividends or otherwise expatriate capital using the official Venezuelan exchange rate. Some approvals have been issued within a few months while others have taken more than one year. During the six months ended June 30, 2011, the Company received $6 of approvals from CADIVI to convert bolivares to U.S. Dollars at both the essential and non-essential official rates. To date, the Company has not executed any exchanges through SITME. If the Company was to successfully avail itself of the SITME process to convert a portion of its Venezuelan subsidiary’s cash balances into U.S. Dollars, the Company would incur currency exchange losses in the period of conversion based on the difference between the official exchange rate and the SITME rate. Additionally, if the Company was to determine in the future that the SITME rate was the more appropriate rate to use to measure bolivar-based assets, liabilities and transactions, reported results would be further adversely affected.

As of June 30, 2011, the Company’s Venezuelan subsidiary had $49 of cash and cash equivalents, of which $4 was held in U.S. Dollars and $45 (valued at the fixed official CADIVI rate of 4.30 Venezuelan bolivares to the U.S. Dollar at June 30, 2011 (the “CADIVI rate”)) was held in Venezuelan bolivares. For the three and six months ended June 30, 2011, the Company’s Venezuelan subsidiary contributed approximately $14 and $28, respectively, of the Company’s consolidated revenue and $8 and $16, respectively, of the Company’s consolidated OIBDA (see Note 11, “Segment Reporting”), in each case based on the CADIVI rate. These amounts do not include any allocated corporate overhead costs or transfer pricing adjustments. As of June 30, 2011, the Company’s Venezuelan subsidiary had $49 of net monetary assets of which $6 were denominated in U.S. Dollars and $43 were denominated in Venezuelan bolivares at the CADIVI rate. As of June 30, 2011, the Company’s Venezuelan subsidiary had $87 of net assets. In light of the Venezuelan exchange control regime, none of these net assets (other than the $4 of cash denominated in U.S. Dollars and held outside of Venezuela) may be transferred to GCL in the form of loans, advances or cash dividends without the consent of a third party (i.e., CADIVI or SITME).

Recently Issued and Recently Adopted Accounting Pronouncement

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05 Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Under the amendments to Topic 220 an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. An entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments eliminate the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments are to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 with early adoption permitted. There is no impact to the Company’s consolidated financial results upon adoption.

 

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In May 2011, the FASB issued ASU No. 2011-04 Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments to Topic 820 provide common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs and do not result in significant changes from existing practice. However, the amendments clarify that a reporting entity should disclose quantitative information about the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy. Such disclosures include the valuation processes used by the reporting entity and the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, if any. The amendments are to be applied prospectively and are effective for interim and annual beginning after December 15, 2011. Early adoption is not permitted. There is no expected impact to the Company’s consolidated financial results upon adoption.

3. FINANCING ACTIVITIES

Financing Activities

During the six months ended June 30, 2011, the Company entered into various debt agreements to finance various equipment purchases and software licenses. The total debt obligation resulting from these agreements was $24. These agreements have terms that range from 6 to 48 months with a weighted average effective interest rate of 9.6%. In addition, the Company entered into various capital leasing arrangements that aggregated $36, including $4 of proceeds from sales-leasebacks. These agreements have terms that range from 12 to 48 months with a weighted average effective interest rate of 9.1%.

In the six months ended June 30, 2011, the Company issued a senior unsecured promissory note to STT Crossing Ltd., the holder of the Company’s convertible preferred stock and controlling shareholder, in principal amount of $26 for payment of dividends accrued from December 9, 2003 through March 31, 2011 on the Company’s convertible preferred stock. See Note 10, “Related Party Transactions” for more information related to the promissory note.

GCUK Notes Tender Offer

As required by the indenture governing the senior secured notes due 2014 (the “GCUK Notes”), within 120 days after the end of each twelve month period ending December 31, GCUK must offer (the “Excess Cash Offer”) to purchase a portion of the GCUK Notes at a purchase price equal to 100% of their principal amount, plus accrued and unpaid interest, if any, to the purchase date, using 50% of “Designated GCUK Cash Flow” from that period. “Designated GCUK Cash Flow” means GCUK’s consolidated net income plus non-cash charges minus capital expenditures, calculated in accordance with the terms of the indenture governing the GCUK Notes. With respect to the 2010 Excess Cash Offer, the Company made an offer in April 2011 of approximately $17, exclusive of accrued but unpaid interest. Such offer expired on May 26, 2011 and no tenders were received by the close of the offer.

If the current year-to-date results were for the full year to December 31, 2011, the Company would be obligated to make an Excess Cash Offer of $2, exclusive of accrued but unpaid interest. Any such offer is required to be made within 120 days of year-end, and the associated purchases are required to be completed within 150 days after year-end.

4. ACQUISITIONS

Genesis Networks Acquisition

On October 29, 2010, the Company acquired 100% of the capital stock of Genesis Networks, a privately held company providing high performance, rich media and video-based applications, serving many of the world’s major broadcasters, producers and aggregators of specialized programming. The Company paid a purchase price for Genesis Networks of approximately $8 and repaid a portion of the debt and other liabilities assumed as part of the acquisition for total consideration including direct costs of $27.

The acquired network connects 70 cities on five continents and links important international media centers through 225 on-net points. The acquisition of Genesis Networks enables us to provide value-added solutions to address specialized video transmission requirements across multiple industries. The results of Genesis Networks’ operations are included in the Company’s consolidated financial statements commencing on October 29, 2010.

For the three and six months ended June 30, 2011, Genesis Networks contributed approximately $9 and $16, respectively, of the Company’s consolidated revenue and nil and $(2), respectively, of the Company’s consolidated net loss.

 

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Pro Forma Financial Information

The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Genesis Networks had occurred at January 1, 2010:

 

     Three Months Ended
June  30, 2010
    Six Months Ended
June  30, 2010
 

Revenue

   $ 637      $ 1,292   

Net loss applicable to common shareholders (1)

   $ (50   $ (177

Net loss applicable to common shareholders per common share - basic and diluted

   $ (0.83   $ (2.93

 

(1)

Net loss applicable to common shareholders was adjusted to include $4 of acquisition-related costs in the six months ended June 30, 2010.

Included in the pro forma consolidated results of operations for the six months ended June 30, 2010 are the following significant items: (i) a $6 property tax refund recorded in the U.K. which is included in real estate, network and operations in the accompanying condensed consolidated statements of operations; and (ii) a $27 foreign exchange loss as a result of the devaluation of the Venezuelan bolivar which is included in other income (expense), net in the accompanying condensed consolidated statements of operations (see Note 2, “Basis of Presentation”).

The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s consolidated results of operations that would have been reported had the Genesis Networks acquisition been completed as of the beginning of the period presented, nor should it be taken as indicative of the Company’s future consolidated results of operations.

5. RESTRUCTURING ACTIVITIES

At June 30, 2011 and December 31, 2010, restructuring liabilities are included in other current liabilities and other deferred liabilities in the Company’s condensed consolidated balance sheets. Below is a description of the Company’s significant restructuring plans:

2007 Restructuring Plans

During 2007, the Company adopted a restructuring plan as a result of the Impsat Fiber Networks, Inc. (“Impsat”) acquisition under which redundant Impsat employees were terminated. As a result, the Company incurred cash restructuring costs of approximately $8 for severance and related benefits. The liabilities associated with this restructuring plan have been accounted for as part of the purchase price of Impsat. As of June 30, 2011 and December 31, 2010, the remaining liability of the 2007 restructuring plan including accrued interest was $5 and $3, respectively, all related to the GC Impsat Segment.

2003 and Prior Restructuring Plans

Prior to the Company’s emergence from bankruptcy on December 9, 2003, the Company adopted certain restructuring plans as a result of the slowdown of the economy and telecommunications industry, as well as its efforts to restructure while under Chapter 11 bankruptcy protection. As a result of these activities, the Company eliminated employees and vacated facilities. All amounts incurred for employee separations were paid as of December 31, 2004 and it is anticipated that the remainder of the restructuring liability, all of which relates to facility closings, will be paid through 2025.

The undiscounted facilities closing reserve, which represents estimated future cash flows, is composed of continuing building lease obligations and broker commissions for the restructured sites (aggregating $72 as of June 30, 2011), offset by anticipated receipts from existing and future third-party subleases. As of June 30, 2011, anticipated third-party sublease receipts were $65, representing $48 from subleases already entered into and $17 from subleases projected to be entered into in the future.

 

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The table below reflects the activity associated with the restructuring reserve relating to the restructuring plans initiated during and prior to 2003 for the six months ended June 30, 2011:

 

     Facility
Closings
 
     (unaudited)  

Balance at December 31, 2010

   $ 10   

Deductions

     (2
  

 

 

 

Balance at June 30, 2011

   $ 8   
  

 

 

 

6. OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:

 

     June 30, 2011      December 31, 2010  
     (unaudited)         

Accrued taxes, including value added taxes in foreign jurisdictions

   $ 100       $ 105   

Accrued payroll, bonus, commissions, and related benefits

     70         58   

Accrued interest

     32         31   

Customer deposits

     22         34   

Accrued real estate and related costs

     15         14   

Accrued capital expenditures

     12         5   

Accrued third party maintenance costs

     10         9   

Accrued restructuring costs - current portion

     8         8   

Accrued professional fees

     7         8   

Income taxes payable

     3         5   

Accrued preferred dividends(1)

     1         26   

Other

     66         73   
  

 

 

    

 

 

 

Total other current liabilities

   $ 346       $ 376   
  

 

 

    

 

 

 

 

(1)

For further information see Note 10, “Related Party Transactions.”

7. COMPREHENSIVE LOSS

The components of comprehensive loss for the periods indicated are as follows:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2010     2011     2010  
     (unaudited)     (unaudited)  

Net loss

   $ (34   $ (47   $ (67   $ (166

Foreign currency translation adjustment

     7        5        (9     32   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (27   $ (42   $ (76   $ (134
  

 

 

   

 

 

   

 

 

   

 

 

 

8. LOSS PER COMMON SHARE

Basic loss per common share is computed as loss applicable to common shareholders divided by the weighted-average number of common shares outstanding for the period. Loss applicable to common shareholders includes preferred stock dividends of $1 for each of the three months ended June 30, 2011 and 2010, and $2 for each of the six months ended June 30, 2011 and 2010, respectively.

Diluted loss per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. However, since the Company had net losses for each of the three and six months ended June 30, 2011 and 2010, diluted loss per common share is the same as basic loss per common share.

 

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Diluted loss per share for the three and six months ended June 30, 2011 and 2010 does not include the effect of the following potential shares, as they are anti-dilutive:

 

Potential common shares excluded from the calculation of

diluted loss per share

   Three Months Ended June 30,      Six Months Ended June 30,  
   2011      2010      2011      2010  
     (in millions)      (in millions)  

Convertible preferred stock

     18         18         18         18   

Employee stock awards

     6         2         6         2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average number of common shares

     24         20         24         20   
  

 

 

    

 

 

    

 

 

    

 

 

 

On May 30, 2006, the Company completed a public offering of $144 aggregate principal amount of 5% convertible senior notes due 2011 (the “5% Convertible Notes”) for total gross proceeds of $144. The 5% Convertible Notes which were convertible into approximately 6.3 million shares at a conversion price of $22.98 per share were not included in the above table for the three and six months ended June 30, 2010 as the conversion price was greater than the average market price per share. The 5% Convertible Notes were retired in the fourth quarter of 2010.

9. CONTINGENCIES

Contingencies

Amounts accrued for contingent liabilities are included in other current liabilities and other deferred liabilities at June 30, 2011 and December 31, 2010. In accordance with the accounting for contingencies as governed by ASC Topic 450, the Company makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Further, with respect to loss contingencies, where it is probable that a liability has been incurred and there is a range in the expected loss and no amount in the range is more likely than any other amount, the Company accrues at the low end of the range. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Although the Company believes it has accrued for the following matters in accordance with ASC Topic 450, litigation is inherently unpredictable and it is possible that cash flows or results of operations could be materially and adversely affected in any particular period by the unfavorable developments in, or resolution or disposition of, one or more of these contingencies. The following is a description of the material legal proceedings and claims involving the Company commenced or pending during the six months ended June 30, 2011. Estimates of reasonably possible losses may change from time to time and actual losses may be materially different from estimated amounts.

CenturyLink, Inc. (Qwest) Rights-of-Way Litigation

A large portion of the Company’s North American network comprises indefeasible rights of use purchased from CenturyLink, Inc. on a fiber-optic communication system constructed by CenturyLink within rights-of-way granted to certain railroads by various landowners. In May 2001, a purported class action was commenced on behalf of such landowners in the U.S. District Court for the Southern District of Illinois against CenturyLink and three of the Company’s subsidiaries, among other defendants. The complaint alleges that the railroads had only limited rights-of-way granted to them that did not include permission to install fiber-optic cable for use by CenturyLink or any other entities. The action seeks actual damages in an unstated amount and alleges that the wrongs done by the Company involve fraud, malice, intentional wrongdoing, willful or wanton conduct and/or reckless disregard for the rights of the plaintiff landowners. As a result, plaintiffs also request an award of punitive damages. The Company made a demand of CenturyLink to defend and indemnify the Company in the lawsuit. In response, CenturyLink has appointed defense counsel to protect the Company’s interests.

The plaintiffs’ claims against the Company relating to periods of time prior to the Company’s January 28, 2002 bankruptcy filing were discharged in accordance with the Company’s Plan of Reorganization. By agreement between the parties, the Plan of Reorganization preserved plaintiffs’ rights to pursue any post-confirmation claims of trespass or ejectment. If the plaintiffs were to prevail, the Company could lose its ability to operate large portions of its North American network. However, the Company believes that it would be entitled to indemnification from CenturyLink for any losses under the terms of the IRU agreement under which the Company originally purchased this capacity, and CenturyLink has reaffirmed this indemnification obligation.

Multiple attempts have been made to settle the above class action lawsuit and many similar class action lawsuits that have been pending against CenturyLink in other courts regarding the rights of way issue. In 2002, a proposed settlement was submitted to the U.S. District Court for the Northern District of Illinois and was preliminarily approved by the District Court, but rejected by the Court of Appeals for the Seventh Circuit in 2004. During 2008, the parties to the various class actions reached preliminary agreement to settle all of the pending cases and the parties submitted to the U.S. District Court for Massachusetts a motion for class certification and for approval of the proposed settlement. The District Court granted preliminary approval of the settlement and a number of objections to the settlement were filed. In a memorandum and order dated September 10, 2009, the District Court concluded that it did not have subject matter jurisdiction over the claims, denied final approval of the settlement and dismissed the case in its entirety. A number of

 

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the plaintiff groups then requested the Court to modify its decision. In a revised memorandum and order dated December 9, 2009, the Court reiterated its holding that the Court lacked subject matter jurisdiction over the claims and dismissed the case. Although the Company is not currently a defendant in any pending class action lawsuits involving the CenturyLink network, if the plaintiffs in such lawsuits were to prevail, CenturyLink could be forced to breach its contractual obligations to provide the Company with the aforementioned indefeasible rights of use.

Peruvian Tax Audit

Beginning in 2005, one of the Company’s Peruvian subsidiaries received a number of assessments for tax, penalty and interest based upon a tax examination conducted during 2004 by the Peruvian tax authorities (SUNAT) for calendar years 2001 and 2002. The SUNAT examiner took the position that the Company incorrectly documented its importations resulting in additional income tax withholding and value-added taxes (VAT). The total amount of the asserted claims, including potential interest and penalties, was $26, consisting of $3 for income tax withholding in connection with the import of services for calendar years 2001 and 2002, $7 in connection with VAT in connection with the import of services for calendar years 2001 and 2002, and $16 in connection with the disallowance of VAT credits for periods beginning in 2005. Due to accrued interest and foreign exchange effects, the total assessments have effectively increased to $71.

The Company challenged the tax assessments during 2005 by filing administrative claims before SUNAT. During August 2006 and June 2007 SUNAT rejected the Company’s administrative claims, thereby confirming the assessments. Appeals were filed in September 2006 and July 2007 in the Tax Court, which is the highest administrative authority. The Tax Court is currently reviewing the September 2006 appeal. At this time the Company cannot estimate the loss or range of loss that could reasonably be expected to result from this matter.

Employee Severance and Contractor Termination Disputes

A number of former employees and third-party contractors have asserted a variety of claims in litigation against subsidiaries within the GC Impsat Segment for separation pay, severance, commissions, pension benefits, unpaid vacation pay, breach of employment contracts, unpaid performance bonuses, property damages, moral damages and related statutory penalties, fines, costs and expenses (including accrued interest, attorneys fees and statutorily mandated inflation adjustments) as a result of their separation from the Company or termination of service relationships. The asserted claims aggregate approximately $56.

The Company has asserted defenses to these claims in the court proceedings denying liability and estimates that the range of loss that could reasonably be expected to result from these claims is between $13 and $17.

Brazilian Tax Claims

In November 2002 and in October 2004, the Brazilian tax authorities of the States of Parana and São Paulo, respectively, issued two tax infraction notices against Impsat’s Brazilian subsidiary for the collection of the Import Duty and the Tax on Manufactured Products, plus fines and interest that amount to approximately $11. The notices informed Impsat Brazil that the taxes were levied because a specific document (Declaração de Necessidade—“Statement of Necessity”) was not provided by Impsat Brazil at the time of importation, in breach of MERCOSUR rules. Objections were filed on behalf of Impsat Brazil arguing that the Argentine exporter (Corning Cable Systems Argentina S.A.) complied with the MERCOSUR rules. In the case of the São Paulo infraction notice, a favorable first instance decision was granted. However, due to the amount involved, the case was remitted to official compulsory review by the Federal Taxpayers Council. In the case of the Parana infraction notice, an unfavorable administrative decision was issued, and the Company will appeal such decision in court.

In December 2004, March 2009 and April 2009, the São Paulo tax authorities issued tax assessments against Impsat Brazil for the collection of Tax on Distribution of Goods and Services (“ICMS”) supposedly due on the lease of movable properties (in the case of the December 2004 and March 2009 assessments) and the sale of internet access services (in the case of the April 2009 assessment) by treating such activities as the provision of communications services, for which ICMS tax actually applies. Including penalties and interest, these assessments amount to approximately $43. Impsat Brazil filed objections to these assessments, arguing that the lease of assets and the provision of internet access are not communication services subject to ICMS. The objection to the December 2004 assessment was rejected in the State Administrative Court, and the Company has appealed such decision. The objections to the March and April 2009 assessments are still pending final administrative decisions.

The Company believes there are reasonable grounds to have all of the Brazilian tax assessments cancelled and estimates that the range of loss that could reasonably be expected to result from these assessments is between nil and $11.

Paraguayan Government Contract Claim

In 2005 and 2003, respectively, the National Telecommunications Commission of Paraguay (“CONATEL”) commenced separate administrative investigations against a joint venture (“JV 1”) between GC Impsat’s Argentine subsidiary and Electro Import S.A. and another joint venture (“JV 2”) between GC Impsat’s Argentine subsidiary and Loma Plata S.A. Both administrative

 

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investigations involve alleged breaches by the joint ventures of their obligations under government contracts relating to the installation and operation of public telephones and/or phone booths in Paraguay and under the regulatory licenses under which they operate. JV 1 and JV 2 have asserted various defenses in pending administrative proceedings relating to these matters. The Company estimates that $10 is the maximum loss that the Company could reasonably be expected to incur as a result of these matters.

Customer Bankruptcy Claim

During 2007 one of the Company’s U.S. subsidiaries commenced default and disconnect procedures against a customer for breach of a sales contract for termination of international and domestic wireless and wireline phone service based on the nature of the customer’s traffic, which rendered the contract highly unprofitable to the Company. After the process was begun, the customer filed for bankruptcy protection, thereby barring the Company from taking further disconnection actions against it. The Company commenced an adversary proceeding in the bankruptcy court, asserting a claim for damages for the customer’s alleged breaches of the contract and for a declaration that, as a result of these breaches, the customer was prohibited from assuming the contract in its reorganization proceedings.

The customer filed several counterclaims against the Company alleging various breaches of contract for attempting improperly to terminate service, for improperly blocking international traffic, for violations of the Communications Act of 1934 and for related tort-based claims. The Company notified the customer that the Company would be raising its rates for certain of the services and filed a motion with the bankruptcy court seeking additional adequate assurance for the rate change, or an order allowing the Company to terminate the customer’s service. The customer amended its counter claims to assert claims for breach of contract based upon the rate increase. On July 3, 2008, the Court issued an opinion holding that the agreement did not permit the Company to increase the rates in the manner it did and that the Company: (a) breached the sales contract in so doing; and (b) was therefore not entitled to additional adequate assurance or an order terminating service. The Court did, however, permit the Company to amend its complaint to plead a rescission claim (which was filed on July 14, 2008) and to assert other defenses.

The Court dismissed the customer’s bankruptcy case by order dated November 25, 2009, retained the adversary proceeding (including the customer’s counterclaim), which is still pending. On December 26, 2009, the Company terminated service to the customer. The Company amended its complaint to include allegations relating to the manipulation of traffic data, so called “ANI stripping,” and the customer filed an amended answer, affirmative defenses and counterclaims.

On January 14, 2011, the Company filed a motion for summary judgment asserting that the customer is not entitled to recover any damages (other than those based on rescission-type theories) by reason of a limitation of liability provision in the contract and applicable law. On July 22, 2011, the Court issued its decision on the motion. Although the Court held that the limitation of liability provision of the contract was valid and enforceable and barred the customer from pursuing all forms of lost profit damages, the Court refused to exclude the customer’s claim for general damages at least at this point, and is permitting that issue to proceed.

Discovery in the action is now concluded and a pre-trial conference is scheduled for September 13, 2011. It is anticipated that the Court will set a firm trial date at the conference. The lower end of the customer’s most recent damage estimate is approximately $150, and it has alleged damages substantially in excess of that amount. While the final outcome of this matter is uncertain, the Company believes it has good defenses to limit substantially the amount of damages recoverable by the customer, including defenses based upon the limitation of liability provisions in the contract.

Brazilian Municipal Telecommunications Services Fees

In April and May 2010, the Company’s Brazilian subsidiaries received collection notifications from the municipality of Rio de Janeiro regarding fees in the amount of approximately $80 for the use of public space (including both air space and underground space) relating to ducts containing telecommunications cables. The Company is challenging the fees on multiple grounds, including the lack of objective criteria for the calculation of the fees, the existence of prior court injunctions barring collection of the fees and the unconstitutionality of the assessment. On August 26, 2010, a justice of the Brazilian Supreme Court ruled unconstitutional a decree of the municipality that purported to tax the use of public air space and subsoil for the installation and passage of equipment utilized to provide telecommunication services. An interlocutory appeal was filed requesting a review by the full Brazilian Supreme Court. The appeal was denied in February 2011. Separately, the Company requested the municipality to suspend collection of the fees until final resolution of the asserted objections. This request was granted as to one of the Company’s Brazilian subsidiaries that had been assessed a fee of $70, and the Company expects the request to be granted as to the other Brazilian subsidiary that had been assessed the remaining $10 fee. Based on subsequent developments and analyses conducted after receipt of the collection notices, the Company does not at this time believe that this matter can reasonably be expected to result in a material loss.

 

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10. RELATED PARTY TRANSACTIONS

Commercial and other relationships between the Company and ST Telemedia

During the three and six months ended June 30, 2011, the Company received approximately $1 and $2, respectively, of collocation services from a subsidiary of ST Telemedia. During the three and six months ended June 30, 2010, the Company received approximately $2 and $3, respectively, of collocation services from a subsidiary and affiliates of ST Telemedia. Additionally, during the three and six months ended June 30, 2011 and 2010, the Company accrued dividends of $1 and $2, respectively, related to preferred stock held by a subsidiary of ST Telemedia.

As of June 30, 2011 and December 31, 2010, the Company had approximately $29 and $27, respectively, due to ST Telemedia and its subsidiaries and affiliates, and in each case nothing due from ST Telemedia and its subsidiaries and affiliates. The amounts due to ST Telemedia and its subsidiaries and affiliates primarily relate to dividends accrued on the Company’s 2% cumulative senior convertible preferred stock, and are included in “short term debt” and “other current liabilities” in the accompanying condensed consolidated balance sheets.

Senior Unsecured Promissory Note

On June 14, 2011, the Company issued a senior unsecured promissory note to STT Crossing Ltd. (an indirect subsidiary of ST Telemedia), the holder of the Company’s convertible preferred stock and the controlling shareholder of the Company, in principal amount of $26 for payment of dividends accrued from December 9, 2003 through March 31, 2011 on the Company’s convertible preferred stock. The note has an interest rate of 9% per annum and is payable on its maturity date of December 14, 2011 or prior to the maturity date: (i) if all conditions to the consummation of the Amalgamation of the Company with Level 3 have been satisfied or waived; (ii) 45 days after any termination of the Amalgamation agreement relating to the Amalgamation of the Company with Level 3 prior to its consummation; or (iii) if a change of control with respect to the Company or an event of default under the note occurs. Regular quarterly dividends on the Company’s convertible preferred stock in the amount of approximately $1 in respect of periods after March 31, 2011 are expected to be paid in cash on the fifteenth day of each July, October, January and April, subject to the satisfaction of certain solvency tests required by Bermuda law.

11. SEGMENT REPORTING

Operating segments are defined in ASC Topic 280 as components of public entities that engage in business activities from which they may earn revenues and incur expenses for which separate financial information is available and which is evaluated regularly by the Company’s chief operating decision makers (“CODMs”) in deciding how to assess performance and allocate resources. The Company’s CODMs assess performance and allocate resources based on three separate operating segments which management operates and manages as strategic business units: (i) the GCUK Segment; (ii) the GC Impsat Segment; and (iii) the ROW Segment.

The GCUK Segment is a provider of managed network communications services providing a wide range of telecommunications services, including data, IP and voice services to government and other public sector organizations, major corporations and other communications companies in the United Kingdom (“U.K.”). The GC Impsat Segment is a provider of telecommunication services including IP, voice, data center and information technology services to corporate and government clients in Latin America. The ROW Segment represents all the operations of Global Crossing Limited and its subsidiaries excluding the GCUK and GC Impsat Segments and comprises operations primarily in North America, with smaller operations in Europe, Latin America, and a portion of the Asia/Pacific region. This segment also includes our subsea fiber network, serving many of the world’s largest corporations and many other telecommunications carriers with a full range of managed telecommunication services including data, IP and voice products. The services provided by all the Company’s segments support a migration path to a fully converged IP environment.

The CODMs measure and evaluate the Company’s reportable segments based on operating income (loss) before depreciation and amortization (“OIBDA”). OIBDA, as defined by the Company, is operating income (loss) before depreciation and amortization. OIBDA differs from operating income (loss), as calculated in accordance with U.S. GAAP and reflected in the Company’s condensed consolidated financial statements, in that it excludes depreciation and amortization. Such excluded expenses primarily reflect the non-cash impacts of historical capital investments, as opposed to the cash impacts of capital expenditures made in recent periods. In addition, OIBDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for reinvestment, distributions or other discretionary uses.

OIBDA is an important part of the Company’s internal reporting and planning processes and a key measure to evaluate profitability and operating performance, make comparisons between periods, and to make resource allocation decisions.

There are material limitations to using non-U.S. GAAP financial measures. The Company’s calculation of OIBDA may differ from similarly titled measures used by other companies, and may not be comparable to those other measures. Additionally, OIBDA does not include certain significant items such as depreciation and amortization, interest income, interest expense, income taxes, other non-operating income or expense items, and preferred stock dividends. OIBDA should be considered in addition to, and not as a substitute for, other measures of financial performance reported in accordance with U.S. GAAP.

 

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The Company believes that OIBDA is a relevant indicator of operating performance, especially in a capital-intensive industry such as telecommunications. OIBDA provides the Company with an indication of the underlying performance of its everyday business operations. It excludes the effect of items associated with the Company’s capitalization and tax structures, such as interest income, interest expense and income taxes, and of other items not associated with the Company’s everyday operations.

 

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The following tables provide operating financial information for the Company’s three reportable segments and a reconciliation of segment results to consolidated results.

 

     Three months ended June 30,     Six months ended June 30,  
     2011     2010     2011     2010  
     (unaudited)     (unaudited)  

Revenues from external customers

        

GCUK

   $ 116      $ 115      $ 230      $ 235   

GC Impsat

     161        135        311        265   

ROW

     415        380        812        778   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated

   $ 692      $ 630      $ 1,353      $ 1,278   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intersegment revenues

        

GC Impsat

   $ 3      $ 2      $ 5      $ 4   

ROW

     3        4        9        8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 6      $ 6      $ 14      $ 12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment operating revenues

        

GCUK

   $ 116      $ 115      $ 230      $ 235   

GC Impsat

     164        137        316        269   

ROW

     418        384        821        786   

Less: intersegment revenues

     (6     (6     (14     (12
  

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated

   $ 692      $ 630      $ 1,353      $ 1,278   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Three months ended June 30,     Six months ended June 30,  
     2011     2010     2011     2010  
     (unaudited)     (unaudited)  

OIBDA

    

GCUK

   $ 17      $ 20      $ 35      $ 50   

GC Impsat

     50        41        99        81   

ROW

     29        32        46        39   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segments

   $ 96      $ 93      $ 180      $ 170   
  

 

 

   

 

 

   

 

 

   

 

 

 

A reconciliation of OIBDA to income (loss) applicable to common shareholders follows:

 

     Three Months Ended June 30, 2011  
     GCUK     GC Impsat     ROW     Eliminations     Total Consolidated  
     (unaudited)  

OIBDA

   $ 17      $ 50      $ 29      $ —        $ 96   

Depreciation and amortization

     (16     (20     (46     —          (82
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     1        30        (17     —          14   

Interest income

     2        —          4        (5     1   

Interest expense

     (13     (3     (34     5        (45

Other expense, net

     (1     —          (4     —          (5

Benefit for income taxes

     —          1        —          —          1   

Preferred stock dividends

     —          —          (1     —          (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) applicable to common shareholders

   $ (11   $ 28      $ (52   $ —        $ (35
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Three Months Ended June 30, 2010  
     GCUK     GC Impsat     ROW     Eliminations     Total Consolidated  
     (unaudited)  

OIBDA

   $ 20      $ 41      $ 32      $ —        $ 93   

Depreciation and amortization

     (15     (20     (47     —          (82
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     5        21        (15     —          11   

Interest income

     2        —          6        (7     1   

Interest expense

     (14     (6     (35     7        (48

Other income (expense), net

     (1     1        (6     —          (6

Benefit (provision) for income taxes

     —          (6     1        —          (5

Preferred stock dividends

     —          —          (1     —          (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) applicable to common shareholders

   $ (8   $ 10      $ (50   $ —        $ (48
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Six Months Ended June 30, 2011  
     GCUK     GC Impsat     ROW     Eliminations     Total Consolidated  
     (unaudited)  

OIBDA

   $ 35      $ 99      $ 46      $ —        $ 180   

Depreciation and amortization

     (32     (40     (90     —          (162
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     3        59        (44     —          18   

Interest income

     4        1        7        (11     1   

Interest expense

     (28     (6     (67     11        (90

Other income, net

     6        1        6        —          13   

Provision for income taxes

     —          (8     (1     —          (9

Preferred stock dividends

     —          —          (2     —          (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) applicable to common shareholders

   $ (15   $ 47      $ (101   $ —        $ (69
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Six Months Ended June 30, 2010  
     GCUK     GC Impsat     ROW     Eliminations     Total Consolidated  
     (unaudited)  

OIBDA

   $ 50      $ 81      $ 39      $ —        $ 170   

Depreciation and amortization

     (32     (44     (94     —          (170
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     18        37        (55     —          —     

Interest income

     4        1        10        (14     1   

Interest expense

     (28     (13     (70     14        (97

Other expense, net

     (14     (27     (17     —          (58

Provision for income taxes

     —          (12     —          —          (12

Preferred stock dividends

     —          —          (2     —          (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss applicable to common shareholders

   $ (20   $ (14   $ (134   $ —        $ (168
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     June 30, 2011     December 31, 2010  
     (unaudited)        

Total Assets

    

GCUK

   $ 523      $ 564   

GC Impsat

     836        845   

ROW

     1,395        1,430   
  

 

 

   

 

 

 

Total segments

     2,754        2,839   

Less: Intercompany loans and accounts receivable

     (470     (529
  

 

 

   

 

 

 

Total consolidated assets

   $ 2,284      $ 2,310   
  

 

 

   

 

 

 
     June 30, 2011     December 31, 2010  
     (unaudited)        

Unrestricted Cash

    

GCUK

   $ 43      $ 76   

GC Impsat

     108        170   

ROW

     108        126   
  

 

 

   

 

 

 

Total consolidated unrestricted cash

   $ 259      $ 372   
  

 

 

   

 

 

 

 

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Table of Contents
     June 30, 2011      December 31, 2010  
Restricted Cash    (unaudited)         

ROW

   $ 10       $ 9   
  

 

 

    

 

 

 

Total consolidated restricted cash

   $ 10       $ 9   
  

 

 

    

 

 

 

Eliminations include intersegment eliminations and other reconciling items.

The Company accounts for intersegment sales of products and services at current market prices.

12. FINANCIAL INSTRUMENTS

The carrying amounts for cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, accrued expenses and obligations under capital leases approximate their fair value (see Note 2, “Basis of Presentation” regarding the January 12, 2010 devaluation of the Venezuelan bolivar by the Venezuelan government). The fair values of the Company’s debt instruments are based on market quotes and management estimates. Management believes the carrying value of other debt approximates fair value as of June 30, 2011 and December 31, 2010, respectively.

The fair values of our debt instruments are as follows:

 

     June 30, 2011      December 31, 2010  
     Carrying      Fair      Carrying      Fair  
     Amount      Value      Amount      Value  
     (unaudited)                

12% Senior Secured Notes

   $ 738       $ 873       $ 737       $ 846   

GCUK Senior Secured Notes

     440         456         431         444   

9% Senior Notes

     150         184         150         150   

Other debt

     66         66         20         20   

13. GUARANTEES OF PARENT COMPANY DEBT

On September 22, 2009, GCL issued $750 in aggregate principal amount of 12% Senior Secured Notes due September 15, 2015 (the “Original 12% Senior Secured Notes”). The Original 12% Senior Secured Notes were guaranteed by a majority of the Company’s direct and indirect subsidiaries (the “Guarantors”), and were not registered under the Securities Act. As required under a registration rights agreement, the Company registered an identical series of notes (the “12% Senior Secured Exchange Notes”) under the Securities Act with the SEC and offered to exchange those 12% Senior Secured Exchange Notes for the Original 12% Senior Secured Notes. All $750 aggregate outstanding principal amount of Original 12% Senior Secured Notes were exchanged for 12% Senior Secured Exchange Notes in the exchange offer. The 12% Senior Secured Exchange Notes are also guaranteed by the Guarantors. In connection with the registration of the 12% Senior Secured Exchange Notes and related guarantees, GCL is required to provide the financial information in respect of those notes set forth under Rule 3-10 of Regulation S-X, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered” (“Rule 3-10”).

On November 16, 2010, GCL issued $150 in aggregate principal amount of the 9% Senior Notes due November 15, 2019 (the “Original 9% Senior Notes”). The Original 9% Senior Notes which are not registered under the Securities Act are guaranteed by the same group of direct and indirect subsidiaries of the Company that guarantee the 12% Senior Secured Exchange Notes. Pursuant to a registration rights agreement to which the Company is a party, the Company is required to register an identical series of notes (the “9% Senior Exchange Notes”) with the SEC and to offer to exchange those registered 9% Senior Exchange Notes for the Original 9% Senior Notes. The 9% Senior Exchange Notes will also be guaranteed by the Guarantors. In connection with the registration of the 9% Senior Exchange Notes and related guarantees, GCL will be required to provide the financial information in respect of those notes set forth under Rule 3-10.

The condensed consolidating financial information below in respect of the obligors on the 12% Senior Secured Exchange Notes has been prepared and presented pursuant to Rule 3-10. Although Rule 3-10 will not apply to the Original 9% Senior Notes until the exchange offer is completed, the below financial information is equally applicable to the obligors on the Original 9% Senior Notes since the obligors on the Original 9% Senior Notes and the 12% Senior Secured Exchange Notes are identical. The column labeled Parent Company represents GCL’s stand alone results and its investment in all of its subsidiaries accounted for using the equity method. The Guarantors and the non-Guarantor subsidiaries are presented in separate columns and represent all the applicable subsidiaries on a combined basis. Intercompany eliminations are shown in a separate column.

During the first quarter of 2011, the Company’s Colombian subsidiary became a Guarantor of the 12% Senior Secured Exchange Notes and the Original 9% Senior Notes and has been reflected in the Guarantor subsidiaries column of the condensed consolidated financial statements as of June 30, 2011 and for the three and six months ended June 30, 2011. For the three months

 

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ended June 30, 2011 and 2010, the Company’s Colombian subsidiary contributed approximately $23 and $20, respectively, of the Company’s consolidated revenue and $1 and $1 of net income. For the six months ended June 30, 2011 and 2010, the Company’s Colombian subsidiary contributed approximately $44 and $40, respectively, of the Company’s consolidated revenue and $1 and nil of net income. As of June 30, 2011 and December 31, 2010, the Company’s Colombian subsidiary had approximately $45 and $45, respectively, of net assets.

Condensed Consolidated Balance Sheet

 

     June 30, 2011  
     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
                 (unaudited)              

ASSETS:

          

Current assets:

          

Cash and cash equivalents

   $ —        $ 204      $ 55      $ —        $ 259   

Restricted cash and cash equivalents - current portion

     —          5        —          —          5   

Accounts receivable, net of allowances

     —          283        87        —          370   

Accounts and loans receivable from affiliates

     326        216        249        (791     —     

Prepaid costs and other current assets

     —          65        46        (1     110   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     326        773        437        (792     744   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restricted cash and cash equivalents - long term

     —          5        —          —          5   

Property and equipment, net of accumulated depreciation

     1        892        298        —          1,191   

Intangible assets, net

     —          206        28        —          234   

Investments in subsidiaries

     (493     (234     —          727        —     

Loans receivable from affiliates

     604        86        51        (741     —     

Other assets

     27        57        26        —          110   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 465      $ 1,785      $ 840      $ (806   $ 2,284   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES:

          

Current liabilities:

          

Accounts payable

   $ 1      $ 197      $ 75      $ —        $ 273   

Accrued cost of access

     —          76        14        —          90   

Accounts and loans payable to affiliates

     33        555        203        (791     —     

Short term debt and current portion of long term debt

     26        20        2        —          48   

Obligations under capital leases - current portion

     —          43        11        —          54   

Deferred revenue - current portion

     —          116        57        —          173   

Other current liabilities

     55        182        109        —          346   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     115        1,189        471        (791     984   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans payable to affiliates

     10        655        76        (741     —     

Long term debt

     888        20        438        —          1,346   

Obligations under capital leases

     —          68        13        —          81   

Deferred revenue

     —          300        66        (1     365   

Other deferred liabilities

     —          46        10        —          56   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     1,013        2,278        1,074        (1,533     2,832   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

SHAREHOLDERS’ DEFICIT:

          

Total shareholders’ deficit

     (548     (493     (234     727        (548
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ deficit

   $ 465      $ 1,785      $ 840      $ (806   $ 2,284   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidated Balance Sheet

 

     December 31, 2010  
     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

ASSETS:

          

Current assets:

          

Cash and cash equivalents

   $ 2      $ 261      $ 109      $ —        $ 372   

Restricted cash and cash equivalents - current portion

     —          4        —          —          4   

Accounts receivable, net of allowances

     —          243        81        —          324   

Accounts and loans receivable from affiliates

     325        184        233        (742     —     

Prepaid costs and other current assets

     —          51        41        (1     91   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     327        743        464        (743     791   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restricted cash and cash equivalents - long term

     —          5        —          —          5   

Property and equipment, net of accumulated depreciation

     —          834        345        —          1,179   

Intangible assets, net

     —          178        49        —          227   

Investments in subsidiaries

     (494     (180     —          674        —     

Loans receivable from affiliates

     653        107        54        (814     —     

Other assets

     29        55        24        —          108   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 515      $ 1,742      $ 936      $ (883   $ 2,310   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES:

          

Current liabilities:

          

Accounts payable

   $ 1      $ 205      $ 91      $ —        $ 297   

Accrued cost of access

     —          66        12        —          78   

Accounts and loans payable to affiliates

     27        537        178        (742     —     

Short term debt and current portion of long term debt

     —          9        18        —          27   

Obligations under capital leases - current portion

     —          36        15        —          51   

Deferred revenue - current portion

     —          123        61        —          184   

Other current liabilities

     68        176        132        —          376   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     96        1,152        507        (742     1,013   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans payable to affiliates

     9        707        98        (814     —     

Long term debt

     887        9        415        —          1,311   

Obligations under capital leases

     —          53        19        —          72   

Deferred revenue

     —          272        67        (1     338   

Other deferred liabilities

     —          43        10        —          53   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     992        2,236        1,116        (1,557     2,787   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

SHAREHOLDERS’ DEFICIT:

          

Total shareholders’ deficit

     (477     (494     (180     674        (477
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ deficit

   $ 515      $ 1,742      $ 936      $ (883   $ 2,310   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidated Statements of Operations

 

     Three Months Ended June 30, 2011  
     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
                 (unaudited)              

Revenue

   $ —        $ 542      $ 150      $ —        $ 692   

Revenue - affiliates

     —          22        28        (50     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     —          564        178        (50     692   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue

     (2     (362     (104     —          (468

Cost of revenue - affiliates

     —          (28     (22     50        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     (2     (390     (126     50        (468
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     (2     174        52        —          224   

Selling, general and administrative

     (4     (95     (29     —          (128

Depreciation and amortization

     —          (60     (22     —          (82
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (6     19        1        —          14   

Other income (expense):

          

Interest income

     —          1        —          —          1   

Interest income - affiliates

     —          1        2        (3     —     

Interest expense

     (28     (4     (13     —          (45

Interest expense - affiliates

     —          (2     (1     3        —     

Other income (expense), net

     (5     1        (1     —          (5

Income (loss) from equity investments in subsidiaries

     5        (12     —          7        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before benefit for income taxes

     (34     4        (12     7        (35

Benefit for income taxes

     —          1        —          —          1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (34     5        (12     7        (34

Preferred stock dividends

     (1     —          —          —          (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) applicable to common shareholders

   $ (35   $ 5      $ (12   $ 7      $ (35
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended June 30, 2010  
     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
                 (unaudited)              

Revenue

   $ —        $ 465      $ 165      $ —        $ 630   

Revenue - affiliates

     —          6        17        (23     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     —          471        182        (23     630   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue

     —          (322     (109     —          (431

Cost of revenue - affiliates

     —          (17     (6     23        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     —          (339     (115     23        (431
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     —          132        67        —          199   

Selling, general and administrative

     (2     (77     (27     —          (106

Depreciation and amortization

     —          (58     (24     —          (82
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (2     (3     16        —          11   

Other income (expense):

          

Interest income

     —          1        —          —          1   

Interest income - affiliates

     —          2        1        (3     —     

Interest expense

     (28     (5     (15     —          (48

Interest expense - affiliates

     —          (1     (2     3        —     

Other expense, net

     —          (5     (1     —          (6

Loss from equity investments in subsidiaries

     (17     (1     —          18        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (47     (12     (1     18        (42

Provision for income taxes

     —          (5     —          —          (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (47     (17     (1     18        (47

Preferred stock dividends

     (1     —          —          —          (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss applicable to common shareholders

   $ (48   $ (17   $ (1   $ 18      $ (48
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

Condensed Consolidated Statements of Operations

 

     Six Months Ended June 30, 2011  
     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
                 (unaudited)              

Revenue

   $ —        $ 1,058      $ 295      $ —        $ 1,353   

Revenue - affiliates

     —          27        40        (67     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     —          1,085        335        (67     1,353   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue

     (8     (714     (202     —          (924

Cost of revenue - affiliates

     —          (40     (27     67        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     (8     (754     (229     67        (924
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     (8     331        106        —          429   

Selling, general and administrative

     (10     (189     (50     —          (249

Depreciation and amortization

     —          (119     (43     —          (162
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (18     23        13        —          18   

Other income (expense):

          

Interest income

     —          1        —          —          1   

Interest income - affiliates

     —          2        4        (6     —     

Interest expense

     (55     (11     (24     —          (90

Interest expense - affiliates

     —          (4     (2     6        —     

Other income (expense), net

     (5     13        5        —          13   

Income (loss) from equity investments in subsidiaries

     11        (4     —          (7     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     (67     20        (4     (7     (58

Provision for income taxes

     —          (9     —          —          (9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (67     11        (4     (7     (67

Preferred stock dividends

     (2     —          —          —          (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) applicable to common shareholders

   $ (69   $ 11      $ (4   $ (7   $ (69
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Six Months Ended June 30, 2010  
     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
                 (unaudited)              

Revenue

   $ —        $ 943      $ 335      $ —        $ 1,278   

Revenue - affiliates

     —          11        30        (41     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     —          954        365        (41     1,278   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue

     (6     (663     (217     —          (886

Cost of revenue - affiliates

     —          (30     (11     41        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     (6     (693     (228     41        (886
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     (6     261        137        —          392   

Selling, general and administrative

     (10     (156     (56     —          (222

Depreciation and amortization

     (1     (118     (51     —          (170
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (17     (13     30        —          —     

Other income (expense):

          

Interest income

     —          1        —          —          1   

Interest income - affiliates

     —          3        3        (6     —     

Interest expense

     (56     (10     (31     —          (97

Interest expense - affiliates

     —          (3     (3     6        —     

Other expense, net

     —          (42     (16     —          (58

Loss from equity investments in subsidiaries

     (93     (18     —          111        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (166     (82     (17     111        (154

Provision for income taxes

     —          (11     (1     —          (12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (166     (93     (18     111        (166

Preferred stock dividends

     (2     —          —          —          (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss applicable to common shareholders

   $ (168   $ (93   $ (18   $ 111      $ (168
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidated Statements of Cash Flows

 

     Six Months Ended June 30, 2011  
     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
                 (unaudited)              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows provided by (used in) operating activities

   $ (58   $ 84      $ (27   $ —        $ (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows provided by (used in) investing activities:

          

Purchases of property and equipment

     (1     (63     (18     —          (82

GC Colombia cash transfer to Guarantor subsidiaries

     —          9        (9     —          —     

Loans made to affiliates

     —          (1     —          1        —     

Loan repayments from affiliates

     55        —          —          (55     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flows provided by (used) in investing activities

     54        (55     (27     (54     (82
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows provided by (used in) financing activities:

          

Repayment of capital lease obligations

     —          (24     (5     —          (29

Repayment debt

     —          (5     (1     —          (6

Finance costs incurred

     (1     —          —          —          (1

Proceeds from sales-leasebacks

     —          —          4        —          4   

Proceeds from exercise of stock options

     2        —          —          —          2   

Payment of employee taxes on share-based compensation

     —          (3     —          —          (3

Other

     —          1        —          —          1   

Proceeds from affiliate loans

     1        —          —          (1     —     

Repayment of loans from affiliates

     —          (55     —          55        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flows provided by (used in) financing activities

     2        (86     (2     54        (32
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —          —          2        —          2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (2     (57     (54     —          (113

Cash and cash equivalents, beginning of period

     2        261        109        —          372   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ —        $ 204      $ 55      $ —        $ 259   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Six Months Ended June 30, 2010  
     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
                 (unaudited)              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows provided by (used in) operating activities

   $ (71   $ 63      $ 13      $ —        $ 5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows provided by (used in) investing activities:

          

Purchases of property and equipment

     —          (67     (23     —          (90

Proceeds from sale of property and equipment

     —          1        —          —          1   

Loans made to affiliates

     (1     (20     —          21        —     

Change in restricted cash and cash equivalents

     —          7        (6     —          1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flows used in investing activities

     (1     (79     (29     21        (88
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows provided by (used in) financing activities:

          

Repayment of capital lease obligations

     —          (20     (8     —          (28

Repayment of debt

     —          (4     (3     —          (7

Finance costs incurred

     (1     —          —          —          (1

Payment of employee taxes on share-based compensation

     —          (1     —          —          (1

Proceeds from affiliate loans

     —          1        20        (21     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flows provide by (used) in financing activities

     (1     (24     9        (21     (37
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —          (28     (1     —          (29
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (73     (68     (8     —          (149

Cash and cash equivalents, beginning of period

     95        293        89        —          477   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 22      $ 225      $ 81      $ —        $ 328   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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14. THE PLAN OF AMALGAMATION

On April 10, 2011, GCL entered into an Agreement and Plan of Amalgamation (the “Plan of Amalgamation”) with Level 3 and Apollo Amalgamation Sub, Ltd., a Bermuda company and wholly-owned subsidiary of Level 3 (“Amalgamation Sub”), pursuant to which GCL and Amalgamation Sub will be amalgamated under Bermuda law with the surviving amalgamated company continuing as a subsidiary of Level 3 (the “Amalgamation”). Under the terms and subject to the conditions of the Plan of Amalgamation, each share of capital stock of GCL will be converted into 16 shares of common stock of Level 3 (and, in the case of GCL’s preferred shares, the right to receive accrued and unpaid dividends thereon). The Plan of Amalgamation contains customary representations and warranties and covenants, including, among others, agreements by each of the Company and Level 3 (i) to continue conducting its respective businesses in the ordinary course, consistent with past practices and in compliance with applicable law, during the interim period between the execution of the Plan of Amalgamation and consummation of the Amalgamation and (ii) not to engage in certain specified kinds of transactions during that period, including equity and debt financings (other than capital leases so long as the Company’s aggregate outstanding capital lease obligations do not at any time exceed $153), capital expenditures, loans, acquisitions, and the repurchase of shares of the Company’s parent’s common stock. The Plan of Amalgamation, which was approved by the stockholders of each of GCL and Level 3 on August 4, 2011, is subject to certain closing conditions, including the receipt of certain regulatory and governmental approvals. Level 3 is continuing its efforts to finalize the necessary arrangements to borrow sufficient funds to refinance certain existing indebtedness of the Company in connection with the Amalgamation. The consummation of the Amalgamation would constitute a “Change of Control” under and as defined in the indentures for the 12% Senior Secured Notes, GCUK Senior Secured Notes and 9% Senior Notes. Pursuant to the indentures, within 30 days following any Change of Control, the Company is required to commence an offer to purchase all of the then outstanding 12% Senior Secured Notes, GCUK Senior Secured Notes and 9% Senior Notes, if any, at a purchase price equal to 101% of the principal amounts thereof, plus accrued interest, if any, thereon to the date of purchase.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of our results of operations and current financial position. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report and the audited consolidated financial statements and related notes included in our annual report on Form 10-K for the year ended December 31, 2010 as amended by our Form 10-K/A filed on February 28, 2011.

As used in this quarterly report on Form 10-Q, references to the “Company,” “we,” “us,” “our” or similar terms include Global Crossing Limited and its consolidated subsidiaries.

Cautionary Note Regarding Forward-Looking Statements

Our disclosure and analysis in this quarterly report on Form 10-Q contains certain “forward-looking statements,” as such term is defined in Section 21E of the Exchange Act of 1934. These statements set forth anticipated results based on management’s plans and assumptions. From time to time, we also provide forward looking statements in other materials we release to the public as well as oral forward-looking statements. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. We have attempted to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will,” “could” and similar expressions in connection with any discussion of future events or future operating or financial performance or strategies. Such forward-looking statements include, but are not limited to, statements regarding:

 

   

the anticipated consummation of the transactions contemplated by the Amalgamation Agreement with Level 3 Communications, Inc. and the impact thereof, including financial and operating results and synergy benefits that may be realized from the transaction and the timeframe for realizing those benefits;

 

   

our services, including the development and deployment of data products and services as well as video transmission and Internet “cloud-based” services based on internet protocol (“IP”) and other technologies and strategies to expand our targeted customer base and broaden our sales channels and the opening and expansion of our data center and collocation services;

 

   

the operation of our network, including with respect to the development of IP-based services, data center and collocation services and video transmission and Internet “cloud-based” services;

 

   

our liquidity and financial resources, including anticipated capital expenditures, funding of capital expenditures, anticipated levels of indebtedness, and the ability to refinance indebtedness and raise capital through financing activities, including capital leases and similar financings;

 

   

trends related to and management’s expectations regarding results of operations, required capital expenditures, integration of acquired businesses, revenues from existing and new lines of business and sales channels, Free Cash Flow, OIBDA, gross margin, order volumes, expenses and cash flows, including but not limited to those statements set forth in this Item 2; and

 

   

sales efforts, expenses, interest rates, foreign exchange rates, and the outcome of contingencies, such as regulatory, legal and tax proceedings and audits.

We cannot guarantee that any forward-looking statement will be realized. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from past results and those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements.

We undertake no obligation to update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Also note that we provide the following cautionary discussion of risks and uncertainties related to our businesses. These are factors that we believe, individually or in the aggregate, could cause our actual results to differ materially from expected and historical results. We note these factors for investors as permitted by Section 21E of the Exchange Act of 1934. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties.

Our forward-looking statements are subject to a variety of factors that could cause actual results to differ significantly from current beliefs and expectations. In addition to the risk factors identified under the captions below, the operation and results of our business are subject to risks and uncertainties identified elsewhere in this quarterly report on Form 10-Q as well as general risks and uncertainties such as those relating to general economic conditions and demand for telecommunications services.

Risks Related to the Plan of Amalgamation and Consummation of the Transactions Contemplated Thereby

 

   

There can be no assurance that the Amalgamation will occur, or will occur on the timetable contemplated, as a result of a variety of factors, including the failure to obtain any required regulatory approval, litigation relating to the

 

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Amalgamation, the failure of Level 3 to obtain the requisite financing to consummate the Amalgamation, or the failure of one or more of the closing conditions set forth in the Plan of Amalgamation. If the Amalgamation is not consummated, our share price will change to the extent that the current market price of our common stock reflects an assumption that the Amalgamation will be completed. A failed Amalgamation may result in negative publicity and a negative impression of us in the investment community. Further, any disruptions to our business resulting from the announcement and pendency of the Amalgamation, including any adverse changes in our relationships with our customers, partners and employees, could continue or accelerate in the event of a failed Amalgamation.

 

   

The Company’s expectations regarding the impact of the Amalgamation, including financial and operating results and synergy benefits that may be realized from the Amalgamation and the timeframe for realizing those benefits, may not be achieved.

 

   

If consummated, the Amalgamation will change the risk profile of the Company (see Level 3’s filings with the SEC for a discussion of some of the new risks that could apply at that time).

 

   

The interim operating covenants in the Plan of Amalgamation limit our financial and operational flexibility unless we obtain Level 3’s consent. These covenants include, among others, agreements by the Company (i) to continue conducting its businesses in the ordinary course, consistent with past practice and in compliance with applicable law, during the interim period between the execution of the Plan of Amalgamation and consummation of the Amalgamation and (ii) not to engage in certain specified kinds of transactions during that period, including equity and debt financings (other than capital leases so long as the Company’s aggregate outstanding capital lease obligations do not at any time exceed $153 million), capital expenditures, loans, acquisitions, and the repurchase of shares of our parent’s common stock. These covenants would require us to obtain Level 3’s consent to raise funding needed for general corporate purposes if such funding becomes necessary during the period prior to the consummation of the Amalgamation, which could be delayed due to the need for regulatory approvals or otherwise. These covenants would also require us to obtain Level 3’s consent in order to take advantage of opportunities to strategically enhance, expand or change our operations or to improve our capital structure and exploit favorable credit market opportunities.

 

   

Some of our customers may delay, reduce or even cease making purchases from us, including IRUs and prepaid services, until they determine whether the Amalgamation will affect our products or services, including, but not limited to, pricing, performance and support. Current and prospective customers may give greater priority to products of our competitors because of uncertainty about our ability to meet their needs. This could negatively impact our revenues, earnings and cash flows regardless of whether the Amalgamation is completed.

 

   

The announcement and pendency of the proposed Amalgamation could cause disruptions in our business in that our current and prospective employees may experience uncertainty about their future roles with Level 3, which might adversely affect our ability to retain key personnel and attract new personnel. Key employees may depart either before or after the Amalgamation because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with Level 3 following the Amalgamation. The pendency of the Amalgamation could divert the time and attention of our management and key personnel from our ongoing business operations and other opportunities that could have been beneficial to us. These disruptions may increase over time until the closing of the Amalgamation.

Risks Related to Liquidity and Financial Resources

 

   

We face a number of risks related to global economic conditions and global credit markets. Turbulence in the U.S. and international markets and economies and declines in business and consumer spending may adversely affect our liquidity and financial condition.

 

   

For most periods since our inception, we have incurred substantial operating losses and there can be no assurance that our business will generate sufficient cash flow from operations, that currently anticipated operating improvements will be realized on schedule, or that future borrowings will be available to us in an amount sufficient to fund our liquidity needs. These risks may be exacerbated by the factors described above under “Risks Related to the Plan of Amalgamation and Consummation of the Transactions Contemplated Thereby.”

 

   

Our substantial indebtedness may have adverse consequences for our business.

 

   

We may not be able to repay our existing indebtedness with cash flows from operations.

 

   

We may not be able to achieve anticipated economies of scale, which could prevent us from realizing necessary improvements in profitability and cash flows.

 

   

The larger dollar amounts and long sales cycles typically associated with IRU sales increase the volatility of our quarter-to-quarter cash flow results. In addition, if customers that traditionally buy long-term IRUs with significant upfront payments were to switch to payment over time lease structures or were to forego or significantly curtail such purchases, our liquidity would be adversely affected.

 

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Cost of access represents our single largest expense and gives rise to material current liabilities. If access vendors demand that we pay for services on a more timely basis to a greater degree than anticipated, our long-term liquidity requirements would be adversely affected.

 

   

The covenants in our major debt instruments limit our financial and operational flexibility. Such debt instruments generally contain covenants and events of default that are customary for high-yield debt facilities. These covenants also impose significant restrictions on the ability of entities in our ROW and GC Impsat Segments from making intercompany funds transfers to entities in our GCUK Segment and vice versa, and, in some cases, the ability of entities in our ROW and GC Impsat segments to make intercompany funds transfers to other entities in those segments. Additionally, the certificate of designations governing our 2% cumulative preferred shares requires the holder’s approval for certain major corporate actions by us and/or our subsidiaries.

 

   

Our international corporate structure limits the availability of our consolidated cash resources for intercompany funding purposes and reduces our financial flexibility. Legal restrictions arising out of our international corporate structure include foreign exchange controls on the expatriation of funds that are particularly prevalent in Latin America. Also see “Risks related to our Operations,” below.

 

   

We cannot predict our future tax liabilities. If we become subject to increased levels of taxation or if tax contingencies are resolved adversely, our results of operations could be adversely affected.

 

   

GCL and its Bermuda incorporated subsidiaries have received an exemption, until March 2016, from the imposition of income and similar taxes under Bermuda law, although such exemption does not apply to Bermuda residents or to taxes payable in relation to land leased in Bermuda. The Ministry of Finance in Bermuda has indicated that the Ministry will extend the term of the assurance beyond 2016. However, we can give no assurance as to the length of any such extension.

 

   

We and certain of our subsidiaries are Bermuda-based companies, and we believe that a significant portion of our income will not be subject to tax in Bermuda or in other countries in which we conduct activities or in which our customers are located. This position is subject to review and possible challenge by taxing authorities and to possible changes in law that may have a retroactive effect.

 

   

Certain North American and European hourly and salaried employees are covered by our defined benefit pension plans that may require additional funding and negatively impact our cash flows.

 

   

Many countries, including the U.K., and various other members of the European Union, have announced austerity measures aimed at reducing costs in a wide range of areas, including telecommunications. The implementation of pricing actions and the reduction of spending by governmental entities could have a negative effect on our future revenue performance, in particular, that of the GCUK Segment.

Risks Related to our Operations

 

   

Our revenue and operating results may vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control. Results in future quarters may be below analysts’ and investors’ expectations, as well as our own forecasts.

 

   

Our rights to the use of the fiber that make up our network may be affected by the financial health of our fiber providers.

 

   

We may not be able to continue to connect our network to incumbent carriers’ networks or maintain Internet peering arrangements on favorable terms.

 

   

The Network Security Agreement imposes significant requirements on us. A violation of the agreement could have severe consequences.

 

   

It is expensive and difficult to switch new customers to our network, and lack of cooperation of incumbent carriers can slow the new customer connection process.

 

   

The operation, administration, maintenance and repair of our systems require significant expenses and are subject to risks that could lead to disruptions in our services and the failure of our systems to operate as intended for their full design life.

 

   

We may not be able to retain our key management personnel or attract additional skilled management personnel which could have a material adverse effect on our business, results of operations and financial condition.

 

   

Our recent capital expenditure levels may not be sustainable in the future, particularly as our business continues to grow. Our ability to fund future capital expenditures may be limited by our ability to generate sufficient cash flow, including raising any necessary financings which could prove to be difficult if conditions in the credit markets deteriorate.

 

   

Intellectual property and proprietary rights of others could prevent us from using necessary technology.

 

   

We may not be successful in making or integrating acquisitions with our business or may not be able to realize the benefits we anticipate from such acquisitions.

 

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We have substantial international operations and face political, legal, tax, regulatory and other risks from our operations in foreign jurisdictions.

 

   

We are subject to the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act 2010 and other anticorruption laws, and our failure to comply therewith could result in penalties which could harm our reputation and have a material adverse effect on our business, results of operations and financial condition.

 

   

We are exposed to significant currency transfer restrictions and currency exchange rate risks and our net loss may suffer due to currency translations as certain of our current and prospective customers derive their revenue in currencies other than U.S. Dollars but are invoiced by us in U.S. Dollars. The obligations of customers with substantial revenue in foreign currencies may be subject to unpredictable and indeterminate increases in the event that such currencies depreciate in value relative to the U.S. Dollar.

 

   

Economic and political conditions in Latin America pose numerous risks to our operations.

 

   

Inflation and certain government measures to curb inflation in some Latin American countries may have adverse effects on their economies, our business and our operations.

 

   

Many of our most important government customers have the right to terminate their contracts with us if a change of control occurs or to reduce the services they purchase from us for any reason.

Risks Related to Competition and our Industry

 

   

The prices that we charge for our services have been decreasing, and we expect that these decreases will continue over time.

 

   

Technological advances and regulatory changes are eroding traditional barriers between formerly distinct telecommunications markets, which could increase the competition we face and put downward pressure on prices.

 

   

Many of our existing and potential competitors have significant competitive advantages, which could place us at a cost and price disadvantage.

 

   

Failure to develop and introduce new services could affect our ability to compete in the industry.

 

   

Our selection of technology could prove to be incorrect, ineffective or unacceptably costly, which would limit our ability to compete effectively.

 

   

Our operations are subject to evolving regulation in each of the countries in which we operate and require us to obtain and maintain a number of governmental licenses and permits. If we fail to comply with regulatory requirements or to obtain and maintain those licenses and permits, we may not be able to conduct our business.

 

   

Terrorist attacks and other acts of violence or war may adversely affect the financial markets and our business and operations.

Risks Related to our Common Stock

 

   

We have a very substantial overhang of common stock and a majority shareholder that owns a substantial portion of our common stock and preferred stock convertible into common stock. Future sales of our common stock by our majority shareholder could significantly increase the market supply of such shares and future acquisitions by our majority shareholder will decrease the liquidity of our common stock, each of which may negatively affect the market price of our shares and impact our ability to raise capital.

 

   

A subsidiary of Singapore Technologies Telemedia Pte. Ltd (“ST Telemedia”) is our majority stockholder and the voting rights of other stockholders are therefore limited in practical effect.

 

   

Other than ownership by ST Telemedia and its affiliates, which cannot exceed 66.25% without prior Federal Communications Commission (“FCC”) approval, federal law generally prohibits more than 25% of our capital stock from being owned by foreign persons.

Other Risks

 

   

We are exposed to legal proceedings and contingent liabilities, including those related to Impsat that could result in material losses that we have not reserved against.

 

   

Our real estate restructuring reserve represents a material liability, the calculation of which involves significant estimation.

For a more detailed description of many of these risks and important additional risk factors, see Item 1A, “Business—Cautionary Factors That May Affect Future Results,” in our annual report on Form 10-K for the year ended December 31, 2010 as amended by our Form 10-K/A filed on February 28, 2011.

 

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Executive Summary

Overview

We are a global communications service provider. We offer a full range of data, voice and collaboration services and deliver service to approximately 40 percent of the companies in the Fortune 500, as well as 700 carriers, mobile operators and Internet service providers around the world. We deliver converged IP services to more than 700 cities in more than 70 countries, and have 17 data centers located in major business centers. Our operations are based principally in North America, Europe, Latin America and a portion of the Asia/Pacific region.

We report our financial results based on three separate operating segments: (i) Global Crossing (U.K.) Telecommunications Ltd (“GCUK”) and its subsidiaries (collectively, the “GCUK Segment”) which provides services to customers primarily based in the U.K.; (ii) GC Impsat Holdings I Plc (“GC Impsat”) and its subsidiaries (collectively, the “GC Impsat Segment”) which provides services to customers in Latin America; and (iii) GCL and its other subsidiaries (collectively, the “Rest of World Segment” or “ROW Segment”) which represents all our operations outside of the GCUK Segment and the GC Impsat Segment and operates primarily in North America, with smaller operations in Europe, Latin America, and a portion of the Asia/Pacific region. This segment also includes our subsea fiber network. See below in this Item 2 and Note 11, “Segment Reporting,” to our condensed consolidated financial statements included in this quarterly report on Form 10-Q for further information regarding our operating segments.

On April 10, 2011, GCL entered into an Agreement and Plan of Amalgamation (the “Plan of Amalgamation”) with Level 3 Communications, Inc., a Delaware corporation (“Level 3”), and Apollo Amalgamation Sub, Ltd., a Bermuda company and wholly-owned subsidiary of Level 3 (“Amalgamation Sub”), pursuant to which GCL and Amalgamation Sub will be amalgamated under Bermuda law with the surviving amalgamated company continuing as a subsidiary of Level 3 (the “Amalgamation”). Under the terms and subject to the conditions of the Plan of Amalgamation, each share of capital stock of GCL will be converted into 16 shares of common stock of Level 3 (and, in the case of GCL’s preferred shares, the right to receive accrued and unpaid dividends thereon). The Plan of Amalgamation contains customary representations and warranties and covenants, and is subject to certain closing conditions including receipt of certain regulatory and governmental approvals.

See “The Plan of Amalgamation” below in this Item 2 for further information about the Plan of Amalgamation.

Second Quarter 2011 Highlights

Revenue from our enterprise, carrier data and indirect sales channel (sometimes referred to as “invest and grow” in our press releases pertaining to financial results), which is the primary focus of our business strategy, increased $67 million, or 12%, to $622 million in the second quarter of 2011 compared to $555 million in the same period in 2010. This increase was primarily driven by additional enterprise, carrier data and indirect channel sales driven by growth in the existing customer base and the acquisition of new customers in specific enterprise and carrier target markets, including $9 million for two individually significant buyouts of certain long term obligations under existing customer contracts. This increase included $22 million of favorable foreign exchange impacts and $9 million as a result of the acquisition of Genesis Networks on October 29, 2010.

Consolidated OIBDA, which is a key measure we use to evaluate our profitability and operating performance, increased $3 million, or 3%, to $96 million in the second quarter of 2011 compared to $93 million in the same period in 2010. Our consolidated OIBDA increased primarily as a result of: (i) revenue growth and improved sales mix, including the aforementioned customer buyouts; and (ii) $3 million of favorable foreign exchange impacts. The increase in our consolidated OIBDA was partially offset by: (i) higher payroll costs primarily related to investment in sales resources, salary increases and restoration of the Company’s matching contribution under its U.S. defined contribution plan; (ii) higher accrued annual incentive compensation; and (iii) $3 million of professional fees related to the Level 3 combination.

Our consolidated Free Cash Flow, which is a relevant indicator of our ability to generate cash to pay debt and a key measure we use to evaluate our liquidity, increased $23 million to $10 million in the second quarter of 2011 compared to negative $13 million in the same period in 2010. This increase was primarily due to higher receipts from the sale of IRUs and prepaid services and an increase in OIBDA.

See “Use of Certain non-U.S. GAAP Measures” below in this Item 2 for further information about OIBDA and Free Cash Flow.

Use of Certain non-U.S. GAAP Measures

OIBDA

The Company’s chief operating decision makers (“CODMs”) measure and evaluate our reportable segments based on operating income (loss) before depreciation and amortization (“OIBDA”). OIBDA differs from operating income (loss), as calculated in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflected in our condensed consolidated financial statements, in that it excludes depreciation and amortization. Such excluded expenses primarily

 

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reflect the non-cash impacts of historical capital investments, as opposed to the cash impacts of capital expenditures made in recent periods. In addition, OIBDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for reinvestment, distributions or other discretionary uses.

OIBDA is an important part of our internal reporting and planning processes and a key measure to evaluate profitability and operating performance, make comparisons between periods, and to make resource allocation decisions.

There are material limitations to using non-U.S. GAAP financial measures. Our calculation of OIBDA may differ from similarly titled measures used by other companies, and may not be comparable to those other measures. Additionally, OIBDA does not include certain significant items such as depreciation and amortization, interest income, interest expense, income taxes, other non-operating income or expense items, and preferred stock dividends. OIBDA should be considered in addition to, and not as a substitute for, other measures of financial performance reported in accordance with U.S. GAAP.

We believe that OIBDA is a relevant indicator of operating performance, especially in a capital-intensive industry such as telecommunications. OIBDA provides us with an indication of the underlying performance of our everyday business operations. It excludes the effect of items associated with our capitalization and tax structures, such as interest income, interest expense and income taxes, and of other items not associated with our everyday operations.

See Note 11, “Segment Reporting,” in the accompanying condensed consolidated financial statements for a reconciliation of OIBDA to income (loss) applicable to common shareholders.

Free Cash Flow

We define Free Cash Flow as net cash provided by (used in) operating activities less purchases of property and equipment as disclosed in the condensed consolidated statements of cash flows. Free Cash Flow differs from the net change in cash and cash equivalents in the condensed consolidated statements of cash flows in that it excludes the cash impact of: (i) all investing activities (other than capital expenditures, which are a fundamental and recurring part of our business); (ii) all financing activities; and (iii) exchange rate changes on cash and cash equivalents balances.

We use Free Cash Flow as a relevant indicator of our ability to generate cash to pay debt. Free Cash Flow also is an important part of our internal reporting and a key measure used by us to evaluate liquidity from period to period. We believe that the investment community uses similar performance measures to compare performance of competitors in our industry.

There are material limitations to using non-U.S. GAAP financial measures. Our calculation of Free Cash Flow may differ from similarly titled measures used by other companies, and may not be comparable to those other measures. Moreover, we do not currently pay a significant amount of income taxes due to net operating losses, and we therefore generate higher Free Cash Flow than comparable businesses that do pay income taxes. Additionally, Free Cash Flow is subject to variability quarter over quarter as a result of the timing of payments related to accounts receivable and accounts payable and capital expenditures. Free Cash Flow also does not include certain significant cash items such as purchases and sales out of the ordinary course of business, proceeds from financing activities, repayments of capital lease obligations and other debt, and the effect of exchange rate changes on cash and cash equivalents balances. Free Cash Flow should be considered in addition to, and not as a substitute for, net change in cash and cash equivalents in the condensed consolidated statements of cash flows reported in accordance with U.S. GAAP.

We believe that Free Cash Flow is useful to our investors as it provides an indication of the underlying cash position of our everyday business operations and the ability to pay debt.

The following table provides a reconciliation of Free Cash Flow, which is considered a non-U.S. GAAP financial measure, to net cash used in operating activities:

 

     Three Months Ended June 30,     $  Increase/
(Decrease)
    %  Increase/
(Decrease)
 
     2011      2010      
     (in millions)        

Free cash flow

   $ 10       $ (13   $ 23        NM   

Purchases of property and equipment

     46         49        (3     (6 %) 
  

 

 

    

 

 

   

 

 

   

Net cash provided by operating activities

   $ 56       $ 36      $ 20        56
  

 

 

    

 

 

   

 

 

   

 

NM—zero balances and comparisons from positive to negative numbers are not meaningful.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon the accompanying unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of financial

 

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statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Although these estimates are based on our knowledge of current events, our actual amounts and results could differ from those estimates. The estimates made are based on historical factors, current circumstances, and the experience and judgment of our management, who continually evaluate the judgments, estimates and assumptions and may employ outside experts to assist in the evaluations.

References to U.S. GAAP in this quarterly report are to the Financial Accounting Standards Board (“FASB”) Accounting Standards CodificationTM, (the “Codification” or “ASC”).

Certain of our accounting policies are deemed “critical,” as they are both most important to the financial statement presentation and require management’s most difficult, subjective or complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. For a full description of our significant accounting policies, see Note 2, “Basis of Presentation and Significant Accounting Policies,” in our annual report on Form 10-K for the year ended December 31, 2010 (as amended by the Company’s Form 10-K/A filed on February 28, 2011), as management believes that there have been no significant changes regarding our critical accounting policies since such time.

Unaudited results of operations for the three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010:

Consolidated Results

 

    Three Months Ended June 30,     $  Increase/
(Decrease)
    %  Increase/
(Decrease)
    Six Months Ended June 30,     $  Increase/
(Decrease)
    %  Increase/
(Decrease)
 
    2011     2010         2011     2010      
    (in millions)           (in millions)        

Revenue

  $ 692      $ 630      $ 62        10   $ 1,353      $ 1,278      $ 75        6

Cost of revenue (excluding depreciation and amortization, shown separately below):

               

Cost of access

    (299     (276     23        8     (597     (581     16        3

Real estate, network and operations

    (121     (103     18        17     (229     (202     27        13

Third party maintenance

    (23     (26     (3     (12 %)      (47     (53     (6     (11 %) 

Cost of equipment and other sales

    (25     (26     (1     (4 %)      (51     (50     1        2
 

 

 

   

 

 

       

 

 

   

 

 

     

Total cost of revenue

    (468     (431         (924     (886    
 

 

 

   

 

 

       

 

 

   

 

 

     

Gross margin

    224        199            429        392       

Selling, general and administrative

    (128     (106     22        21     (249     (222     27        12

Depreciation and amortization

    (82     (82     —          NM        (162     (170     (8     (5 %) 
 

 

 

   

 

 

       

 

 

   

 

 

     

Operating income

    14        11            18        —         

Other income (expense):

               

Interest income

    1        1        —          NM        1        1        —          NM   

Interest expense

    (45     (48     (3     (6 %)      (90     (97     (7     (7 %) 

Other income (expense), net

    (5     (6     (1     (17 %)      13        (58     71        NM   
 

 

 

   

 

 

       

 

 

   

 

 

     

Loss before benefit (provision) for income taxes

    (35     (42         (58     (154    

Benefit (provision) for income taxes

    1        (5     (6     NM        (9     (12     (3     (25 %) 
 

 

 

   

 

 

       

 

 

   

 

 

     

Net loss

    (34     (47         (67     (166    

Preferred stock dividends

    (1     (1     —          NM        (2     (2     —          NM   
 

 

 

   

 

 

       

 

 

   

 

 

     

Loss applicable to common shareholders

  $ (35   $ (48       $ (69   $ (168    
 

 

 

   

 

 

       

 

 

   

 

 

     

Discussion of all significant variances:

Revenue.

 

     Three Months Ended June 30,      $  Increase/
(Decrease)
    %  Increase/
(Decrease)
    Six Months Ended June 30,      $  Increase/
(Decrease)
    %  Increase/
(Decrease)
 
     2011      2010          2011