<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO
RULE 13A-16 OR 15D-16 UNDER THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE THREE MONTHS ENDED JUNE 30, 1998
FLAG LIMITED
(Exact name of Registrant as specified in its charter)
Richmond House
12 Par-la-Ville Road
Hamilton, HM08 Bermuda
(Address of principal executive office)
Indicate by check mark whether the Registrant files or will file annual reports
under cover of Form 20-F or Form 40-F
Form 20-F /X/ Form 40-F / /
Indicate by check mark whether the Registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g-2(b) under the Securities Exchange Act of 1934
Yes / / No /X/
<PAGE>
FLAG Limited
- --------------------------------------------------------------------------------
This report (the "Quarterly Report") sets forth certain information regarding
the financial condition and results of operations of FLAG Limited, a Bermuda
company (the "Company"), for the fiscal quarter ended June 30, 1998. The
Quarterly Report contains a review of the Company's unaudited financial
information and analysis for the second quarter, as well as certain other
information.
The following unaudited financial statements, in the opinion of the Company's
management, reflect all necessary adjustments (which include only normal
recurring adjustments) necessary for a fair presentation of the financial
position, the results of operations and cash flows for the periods presented.
Certain capitalized terms contained herein have the meaning given to them in the
Company's prospectus, dated as of June 30, 1998.
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FORM 6-K Page 1
<PAGE>
FLAG Limited
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FLAG LIMITED
FORM 6-K
INDEX TO UNAUDITED FINANCIAL STATEMENTS
PAGE
PART I FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 1: FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . 3
1.A Consolidated Balance Sheets . . . . . . . . . . . . . . . . . 3
1.B Consolidated Statements of Operations . . . . . . . . . . . . 4
1.C Consolidated Statements of Cash Flows . . . . . . . . . . . . 5
1.D Notes to Consolidated Financial Statements. . . . . . . . . . 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . 10
PART II OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 1: LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 2: CHANGES IN SECURITIES. . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 3: DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . . . . . . 15
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . 15
ITEM 5: OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 6: EXHIBITS AND REPORTS FILED ON FORM 6-K . . . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
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FORM 6-K Page 2
<PAGE>
FLAG Limited
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PART I
ITEM 1.A
- --------
FLAG LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
(unaudited) (audited)
<S> <C> <C>
ASSETS:
Current Assets:
Cash $ 3,628 $ 2,490
Accounts receivable, net of allowance of doubtful accounts of
$10,499 (1997 - $9,054) 19,680 91,102
Due from affiliates and other receivables 479 690
Prepaid expenses and other assets 2,137 2,395
---------- ----------
25,924 96,677
Accounts receivable 29,001 42,023
Funds held by collateral trustee and in escrow 252,800 425,905
Construction in progress 7,342 389
Capacity available for sale 1,183,894 1,208,948
Capitalized organization and financing costs, net of accumulated amortization
of $636 (1997 - $52,669) 12,776 61,848
Fixed assets, net 2,633 1,147
---------- ----------
$1,514,370 $1,836,937
========== ==========
LIABILITIES:
Current Liabilities:
Accounts payable $ 3,530 $ 5,262
Accrued construction costs 140,881 317,058
Accrued liabilities 36,516 21,394
Income taxes payable 4,979 4,391
Due to affiliate 6,340 5,892
Deferred revenue 24,844 16,558
---------- ----------
217,090 370,555
8 1/4% senior notes, due 2008, net of unamortized discount of $5,617 424,383 -
Long-term debt 280,880 615,087
Deferred revenue 139,697 176,221
Deferred taxes 4,737 4,600
---------- ----------
1,066,787 1,166,463
---------- ----------
COMMITMENTS AND CONTINGENCIES
PREFERRED SHARES:
Series A, $100 liquidation value (1997 - net of unamortized discount of $1,905) - 129,445
SHAREHOLDERS' EQUITY:
Class A common shares, $.0001 par value 13 13
Class B common shares, $.0001 par value 57 57
Additional paid-in capital 504,381 514,389
Retained earnings (accumulated deficit) (56,868) 26,570
---------- ----------
447,583 541,029
---------- ----------
$1,514,370 $1,836,937
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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FORM 6-K Page 3
<PAGE>
FLAG Limited
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PART I
ITEM 1.B
- --------
FLAG LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Capacity sales, net of discounts $ 20,463 $ - $ 48,417 $ -
Standby maintenance revenue 5,329 - 10,474 -
------------ ------------ ------------ ------------
25,792 - 58,891 -
SALES AND OTHER OPERATING COSTS:
Cost of capacity sold 12, 146 - 24,706 -
Operations and maintenance 10,104 - 19,174 -
Sales and marketing 810 - 1,574 -
General and administrative 7,563 3,426 12,477 6,794
------------ ------------ ------------ ------------
30,623 3,426 57,931 6,794
OPERATING INCOME ( LOSS) (4,831) (3,426) 960 (6,794)
INTEREST EXPENSE 15,501 - 32,221 -
INTEREST INCOME 4,192 1,438 8,473 2,232
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (16,140) (1,988) (22,788) (4,562)
PROVISION FOR INCOME TAXES 65 - 811 -
------------ ------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (16,205) (1,988) (23,599) (4,562)
EXTRAORDINARY ITEM - LOSS ON REFINANCING - - 59,839 -
NET LOSS (16,205) (1,988) (83,438) (4,562)
CUMULATIVE PAY-IN-KIND PREFERRED DIVIDENDS - 4,016 1,508 7,910
------------ ------------ ------------ ------------
REDEMPTION PREMIUM AND WRITE-OFF OF
DISCOUNT ON PREFERRED SHARES - - 8,500 -
------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS $ (16,205) $ (6,004) $ (93,447) $ (12,472)
============ ============ ============ ============
Basic and diluted loss per common share - Class A $ (0.01) $ (0.01) $ (0.08) $ (0.01)
Basic and diluted loss per common share - Class B $ (0.03) $ (0.03) $ (0.15) $ (0.03)
Weighted average common shares outstanding - Class A 132,000,000 132,000,000 132,000,000 132,000,000
Weighted average common shares outstanding - Class B 565,858,741 329,482,487 565,858,741 281,956,651
</TABLE>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
FORM 6-K Page 4
<PAGE>
FLAG Limited
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PART I
ITEM 1.C
- --------
FLAG LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss applicable to common shareholders $ (93,447) $ (12,472)
Adjustments to reconcile net loss to net cash used in operating activities:
Pay-in-kind preferred dividends 1,508 7,910
Redemption premium and write-off of discount on preferred shares 8,500 -
Amortization of financing costs 2,566 -
Extraordinary item-loss on refinancing 59,839 -
Provision for doubtful accounts 1,445 -
Accretion of discount on 81/4% senior notes 295 -
Depreciation 266 104
Deferred taxes 137 -
Add (deduct) net changes in assets and liabilities:
Accounts receivable, net 82,998 -
Due from affiliates and other receivables 211 42
Prepaid expenses and other assets 258 (3,610)
Capacity available for sale 25,054 -
Accounts payable and accrued liabilities 13,390 (1,371)
Income taxes payable 588 -
Due to affiliate 448 (79)
Deferred revenue (28,238) 2,110
--------- ---------
Net cash used in operating activities 75,818 (7,366)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Financing costs incurred (13,330) (7,680)
Net proceeds from issuance of 81/4% senior notes 424,088 -
Proceeds from long-term debt 320,000 119,768
Repayment of long-term debt (654,207) -
Capital contributions - common shares - 170,000
Redemption of preferred shares (139,454) -
Decrease in funds held by collateral trustee or in escrow 173,105 4,542
--------- ---------
Net cash provided by financing activities 110,202 286,630
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for construction in progress (183,130) (278,872)
Purchase of fixed assets, net (1,752) (352)
--------- ---------
Net cash used in investing activities (184,882) (279,224)
--------- ---------
NET INCREASE (DECREASE) IN CASH 1,138 40
CASH, beginning of period 2,490 310
--------- ---------
CASH, end of period $ 3,628 $ 350
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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FORM 6-K Page 5
<PAGE>
FLAG Limited
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FLAG LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING
ACTIVITIES:
Costs incurred for construction in progress $ 6,953 $ 405,940
Decrease (Increase) in accrued construction costs 176,177 (114,912)
Amortization of capitalized financing costs - (12,156)
-------- ---------
Cash paid for construction in progress $183,130 $ 278,872
======== =========
SUPPLEMENTAL INFORMATION DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 29,262 $ 12,707
</TABLE>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
FORM 6-K Page 6
<PAGE>
FLAG Limited
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PART I
ITEM 1.D
- --------
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND 1997
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. GENERAL
The interim consolidated financial statements presented herein have been
prepared on the basis of U.S. generally accepted accounting principles and
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany transactions have been eliminated in
consolidation. In the opinion of management, the unaudited consolidated
financial statements reflect all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the results of
operations for the three and six month periods ended June 30, 1998 and
1997, the balance sheet as of June 30, 1998 and the cash flows for the six
month periods ended June 30, 1998 and 1997. These interim consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements for the year ended December 31, 1997.
The results of operations for any interim period are not necessarily
indicative of results for the full year.
2. NET INCOME (LOSS) PER COMMON SHARE
The Company has adopted Statement of Accounting Standard No. 128, "Earnings
per Share," which requires dual presentation of basic and diluted earnings
per share. Basic net income (loss) per Class A common share and basic net
income (loss) per Class B common share are based on dividing net income
(loss) applicable to Class A and Class B shareholders by the weighted
average number of common shares and common share equivalents outstanding
during the period. The options which have been granted to the Company's
Chief Executive Officer (the "CEO") to acquire 6,430,239 common shares were
not considered common share equivalents for the first and second quarters
of 1998 since the options were determined to be anti-dilutive.
3. EVENTS SUBSEQUENT
On January 30, 1998, the Company completed a refinancing which resulted in
the repayment of all $615,087 of outstanding borrowings under the Amended
and Restated Participation Agreement (the "Agreement") and the redemption
of the Series A Preferred Shares (the "Preferred Shares"). The refinancing
consisted of $370,000 of bank credit facilities and $430,000 of 81/4%
senior unsecured notes maturing January 30, 2008 (the "Senior Notes"). The
Company has registered the Senior Notes with the Securities Exchange
Commission (the "SEC"). Proceeds received under the Senior Notes were
$424,100, net of a $5,900 underwriters' discount.
The bank credit facilities include a seven-year $320,000 term loan facility
and a $50,000 revolving credit facility (collectively, the "New Credit
Facility"). On January 30, 1998, the Company borrowed $320,000 under the
term loan facility. Under the New Credit Facility, borrowings bear
interest at LIBOR plus 190 to 212.5 basis points and are secured by a
pledge
- --------------------------------------------------------------------------------
FORM 6-K Page 7
<PAGE>
FLAG Limited
- --------------------------------------------------------------------------------
of substantially all of the Company's assets and revenues, other than the
Company's physical assets.
At the end of March 1998, the Company entered into two interest rate swap
agreements to manage the Company's exposure to interest rate fluctuations
on the New Credit Facility. Under the swap agreements, the Company pays a
fixed rate of 5.6% on a notional amount of $60,000 and a fixed rate of
5.79% on a notional amount of $100,000 and the counterparty pays the
floating rate based on LIBOR. The swap agreements terminate in January and
July 2000, respectively, unless extended an additional one year and six
months, respectively, at the option of the counterparty.
Interest on the Senior Notes will accrue at the rate of 81/4% per annum,
payable semi-annually on January 30 and July 30 of each year, commencing on
July 30, 1998. The Senior Notes are redeemable at the Company's option, in
whole or in part, at any time on or after January 30, 2003, at specified
option prices and in the event of any equity offering before January 31,
2001, the Company may use all or a portion of the net proceeds therefrom to
redeem up to 331/3% of the original principal amount of the Senior Notes at
a redemption price of 108.25% plus accrued and unpaid interest. If the
Company has excess cash flow, as defined, for any fiscal year commencing in
2001, the Company is required, subject to certain exceptions and
limitations, to make an offer to purchase the Senior Notes at 100% of the
principal amount thereof plus accrued and unpaid interest, if any, to the
date of purchase. Upon a change in control, the noteholders may require
the Company to purchase all or any portion of the outstanding Senior Notes
at a price equal to 101% of the principal amount plus accrued but unpaid
interest.
In the first quarter of 1998, the Company recognized a loss on refinancing
of $59,839 which has been reflected as an extraordinary item in the
accompanying statement of operations. The loss on refinancing primarily
represents the write-off of the remaining unamortized deferred financing
costs on the outstanding borrowings under the Agreement. In addition, the
Company paid a premium of $6,600 to redeem the Preferred Shares, which,
together with the write-off of the remaining $1,900 of discount and
issuance costs related to the Preferred Shares, was charged to additional
paid-in capital in the quarter ended March 31, 1998.
In connection with the refinancing, certain shareholders were released of
their obligations under the Contingent Sponsor Support Agreements.
On February 2, 1998, FLAG Telecom Limited, a United Kingdom company, was
incorporated as a wholly-owned subsidiary of the Company to provide
management services. On May 27, 1998 and May 22, 1998, respectively, FLAG
Telecom USA Ltd., a Delaware corporation and FLAG Telecom Asia Limited, a
Hong Kong company, were incorporated as wholly-owned subsidiaries of the
Company to provide marketing services.
On March 22, 1998, the Company adopted a Long-Term Incentive Plan under
which the Company may grant up to 25,237,831 shares of common stock to
eligible employees. Under the plan, options to purchase 6,430,239 Class B
common shares were granted to the CEO pursuant to his employment agreement
of December, 1997. In July and August of 1998, the Company granted
employees options to purchase 7,716,000 of the Company's Class B common
shares. The options granted vest over a period of one to two years and are
exercisable in three to four years. All of the options were granted at an
exercise price of $1.07 per share which is management's estimate of the
fair value of the Class B common shares on the date of the grant. Since
the Company accounts for employee options in accordance with APB No. 25,
the Company has not recognized compensation expense with respect to the
options granted since
- --------------------------------------------------------------------------------
FORM 6-K Page 8
<PAGE>
FLAG Limited
- --------------------------------------------------------------------------------
the exercise price did not exceed the fair value of the shares on the date
of the grant (the measurement date).
During the second quarter, the Company repaid $39,120 of its outstanding
borrowings under the term loan facility from available cash flow.
Effective May 21, 1998, under a Marketing Transition Agreement, the Company
and Bell Atlantic Network Systems (Bermuda) Limited ("BANS"), a subsidiary
of Bell Atlantic and the Company's exclusive sales agent around the world,
agreed to terminate the Marketing Services Agreement. Under the Marketing
Transition Agreement, the Company agreed to pay certain of BANS' costs of
closing its operations and certain commissions in connection with their
pre-termination and post-termination activities. The Company will pay BANS
(i) commissions accrued under the Marketing Services Agreement but
remaining unpaid and (ii) up to $3,000 of commissions resulting from
certain sales. Also under the Marketing Transition Agreement, the Company
has agreed to pay BANS or its affiliate a 50% commission where BANS or its
affiliate secures the sale of four whole DS-3s (which equates to 84 whole
MIUs) on the FLAG System. The Company will accrue a liability for the
commissions in the period it becomes probable that BANS or its affiliate
will obtain the sales and that the amount of the commissions can be
reasonably estimated.
Effective May 14, 1998, the Company entered into a Termination and Release
Agreement providing for the termination of the Program Management Services
Agreement since services to be performed under this agreement were
substantially completed.
In May 1998, the Company entered into an Employee Services Agreement with
Bell Atlantic Global Systems Company ("BAGSC"), an affiliate of a common
shareholder of the Company, pursuant to which BAGSC seconds certain
employees to the Company. Under such Employee Services Agreement, the
Company reimburses BAGSC for the actual cost of the employees' compensation
and benefits.
4. CONTINGENCIES
The Company is involved in litigation from time to time in the ordinary
course of business. In management's opinion, the litigation in which the
Company is currently involved, individually and in the aggregate, is not
material to the Company's financial condition, results of operations or
cash flows.
5. COMPREHENSIVE INCOME (LOSS)
The Company adopted Statement of Accounting Standard No. 130 ("SFAS"),
"Reporting Comprehensive Income" as of January 1, 1998. SFAS 130 requires
reporting and disclosure of comprehensive income (loss), as defined. As
the Company has no items of comprehensive income other than net income, the
Company is not required to report comprehensive income for any period
presented.
6. PENDING ACCOUNTING STANDARDS
AICPA Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities," was issued in April 1998 and is effective for fiscal
years beginning after December 15, 1998. SOP 98-5 requires that costs of
start-up activities and organization costs be expensed
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FORM 6-K Page 9
<PAGE>
FLAG Limited
- --------------------------------------------------------------------------------
as incurred. The Company does not have any deferred organizational costs.
Net income after adoption of SOP 98-5 would be the same as reported for
each of the periods presented.
The Financial Accounting Standards Board has also recently issued Statement
of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133") which is effective for
periods beginning after June 15, 1999. Management does not expect the
impact of the adoption of SFAS 133 on the Company's financial position or
results of operations to be material.
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FORM 6-K Page 10
<PAGE>
FLAG Limited
- --------------------------------------------------------------------------------
PART I
ITEM 2
- ------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1998 COMPARED WITH THE QUARTER ENDED JUNE 30, 1997
RESULTS OF OPERATIONS
REVENUES
During the quarter ended June 30, 1998, the Company invoiced approximately $13.1
million in respect of new Capacity Sales Agreements ("CSAs") and Capacity
Purchase Orders ("CPOs") of which $9.7 million was recorded as deferred revenue.
In addition, approximately $16.9 million of revenues were recognized from sales
previously invoiced and recorded as deferred and $0.2 million of revenues were
recognized from supplier credits issued in 1997, resulting in a total of
approximately $20.5 million being recognized as revenue during the quarter. As
of June 30, 1998, the Company had entered into CSAs or CPOs with 74
international telecommunications carriers. Customers who purchase capacity have
a right of ownership in common and undivided shares of the FLAG System jointly
with all other Signatories to the Construction and Maintenance Agreement (the
"C&MA"). Under the C&MA, customers are billed fees to cover standby maintenance
costs. In the quarter ended June 30, 1998, the Company recognized standby
maintenance revenues of $5.3 million.
No revenues were recognized in respect of CSAs, CPOs or standby maintenance
during the quarter ended June 30, 1997.
OPERATING EXPENSES
For the quarter ended June 30, 1998, the Company recorded $12.1 million in
respect of the cost of capacity sold. The corresponding capacity sales revenues
of $20.5 million resulted in a gross profit on capacity sales of 41.0% compared
to a gross profit of 41.6% realized in the period from Provisional System
Acceptance ("PSA"), which occurred on October 8, 1997 to December 31, 1997 and a
gross profit of 55.0% realized in the first quarter of 1998. The decrease in
margin results from the fact that certain segments of the system have a higher
gross margin than others based on the allocated cost of constructing each
segment. There were no sales or cost of capacity sold recognized in the
quarter ended June 30, 1997.
During the quarter ended June 30, 1998 the Company recognized $10.1 million in
operations and maintenance costs relating primarily to the provision of standby
maintenance under Maintenance Zone Agreements. No operations and maintenance
costs were incurred by the Company in respect of the quarter ended June 30, 1997
because prior to PSA, maintenance of the partially constructed system was the
responsibility of the Contractors.
During the quarter ended June 30, 1998, $0.8 million in sales and marketing
costs were recognized, comprising primarily of sales commissions due to BANS
until May 1998 when the Company and BANS agreed to terminate the Marketing
Services Agreement. Sales and
- --------------------------------------------------------------------------------
FORM 6-K Page 11
<PAGE>
FLAG Limited
- --------------------------------------------------------------------------------
marketing activities are now directly undertaken by the Company. No sales
commissions were recognized by the Company in respect of the quarter ended June
30, 1997.
General and administrative expenses increased from $3.4 million in the quarter
ended June 30, 1997 to $7.6 million in the quarter ended June 30, 1998. Most of
the increase is due to a $1.4 million increase in salaries, wages and benefits
reflecting the Company's staffing up for operations, a $1.7 million increase in
recruiting and other professional services costs, a $0.6 million provision for
doubtful accounts and approximately $1.1 million of costs associated with
restructuring the Company, offset by a $0.7 million reduction in insurance and
other costs.
INTEREST EXPENSE AND INTEREST INCOME
During the quarter ended June 30, 1998 the Company incurred $15.5 million in
interest expense on borrowings. Prior to PSA, the Company capitalized interest
costs as a component of construction in progress and, accordingly, no interest
charges were expensed during the quarter ended June 30, 1997.
Interest income of $4.2 million was earned during the quarter ended June 30,
1998 on cash balances and short term investments held by the Collateral Trustee
or in escrow arising from ongoing business operations and the various reserve
accounts established pursuant to the New Credit Facility. Prior to PSA, the
Company's income consisted entirely of interest earned on cash balances received
from equity contributions. During the quarter ended June 30, 1997, such
interest earned on cash balances amounted to $1.4 million.
PROVISION FOR TAXES
The tax expense of $.1 million recorded in the statement of operations for the
quarter ended June 30, 1998 consists of taxes on income derived from capacity
sales and standby maintenance revenue from customers in certain jurisdictions
along the FLAG Route where the Company is deemed to have a taxable presence or
is otherwise subject to tax. There was no taxable income earned by the Company
during the quarter ended June 30, 1997.
NET LOSS AND NET LOSS APPLICABLE TO COMMON SHAREHOLDERS
Net loss increased to $16.2 million for the quarter ended June 30, 1998 compared
to a net loss of $2.0 million for the quarter ended June 30, 1997, an increase
of $14.2 million. The increase is due to an increase in sales and other
operating costs of $27.2 million and net interest expense and taxes of $12.8
million, offset by an increase in operating revenue of $25.8 million arising
from the recognition of capacity sales and standby maintenance revenue.
Net loss applicable to common shareholders increased from a loss of $6.0 million
for the quarter ended June 30, 1997 to a loss of $16.2 million for the quarter
ended June 30, 1998. This increase reflects the $14.2 million increase in net
loss offset by a $4.0 million reduction in PIK dividends as a result of the
redemption of the Preferred Stock during the first quarter of 1998.
- --------------------------------------------------------------------------------
FORM 6-K Page 12
<PAGE>
FLAG Limited
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1997
RESULTS OF OPERATIONS
REVENUES
During the six months ended June 30, 1998, the Company invoiced approximately
$26.6 million in respect of new CSAs and CPOs of which $11.3 million was
recorded as deferred revenue. In addition, approximately $24.9 million of
revenues were recognized from sales invoiced and recorded as deferred revenue
previously and $8.2 million of revenues were recognized from supplier credits
issued in 1997, resulting in a total of approximately $48.4 million being
recognized as revenue during the six months ended June 30, 1998. As of June 30,
1998, the Company had entered into CSAs and CPOs with 74 international
telecommunications carriers. In the six months ended June 30, 1998, the Company
recognized standby maintenance revenues of $10.5 million.
No revenues were recognized in respect of capacity sales or standby maintenance
during the six months ended June 30, 1997
OPERATING EXPENSES
For the six months ended June 30, 1998, the Company recorded $24.7 million in
respect of the cost of capacity sold. The corresponding capacity sales revenues
of $48.4 million resulted in a gross profit on capacity sales of 49.0% compared
to a gross profit of 41.6 % realized in the period from PSA to December 31,
1997. The improved margin results from the fact that the cost of capacity sales
recorded in 1997 included the recognition of $28.9 million in price protection
credits and higher discounts associated with the 1997 net sales of $336.0
million. In addition, certain segments of the FLAG System have a higher gross
margin than others based on the allocated cost of constructing each segment.
There were no sales or cost of capacity sold recognized in the six months ended
June 30, 1997.
During the six months ended June 30, 1998 the Company recognized $19.2 million
in operations and maintenance costs relating primarily to the provision of
standby maintenance under Maintenance Zone Agreements. No operations and
maintenance costs were incurred by the Company in respect of the six months
ended June 30, 1997 because prior to PSA, maintenance of the partially
constructed system was the responsibility of the Contractors.
After PSA, the Company has recognized sales commissions as an expense in the
period in which the revenues are recognized under the related CSAs or CPOs.
During the six months ended June 30, 1998, $1.6 million in sales and marketing
costs were recognized, comprising sales commissions due to BANS. In May 1998 the
Company and BANS agreed to terminate the Marketing Services Agreement. Sales
and marketing activities are now directly undertaken by the Company. No sales
commissions were recognized by the Company in respect of the six months ended
June 30, 1997.
General and administrative expenses increased from $6.8 million in the six
months ended June 30, 1997 to $12.5 million in the six months ended June 30,
1998. Most of the increase is due to a $1.4 million provision for doubtful
accounts, a $1.9 million increase in salaries, wages and benefits reflecting the
Company's staffing up for operations, a $0.7 million increase in travel
expenses, a $2.1 million increase in recruiting and other professional
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FORM 6-K Page 13
<PAGE>
FLAG Limited
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services costs and approximately $1.1 million of costs associated with
restructuring the Company, offset by a $1.4 million reduction in insurance and
other costs.
INTEREST EXPENSE AND INTEREST INCOME
During the six months ended June 30, 1998 the Company incurred $32.2 million in
interest expense on borrowings. Prior to PSA, the Company capitalized interest
costs as a component of construction in progress and, accordingly, no interest
charges were expensed during the six months ended June 30, 1997.
Interest income of $8.5 million was earned during the six months ended June 30,
1998 on cash balances and short term investments held by the Collateral Trustee
or in escrow arising from ongoing business operations and the various reserve
accounts established pursuant to the New Credit Facility. Prior to PSA, the
Company's income consisted entirely of interest earned on cash balances received
from equity contributions. During the six months ended June 30, 1997, such
interest earned on cash balances amounted to $2.2 million.
PROVISION FOR TAXES
The tax expense of $.8 million recorded in the statement of operations for the
six months ended June 30, 1998 consists of taxes on income derived from capacity
sales and standby maintenance revenue from customers in certain jurisdictions
along the FLAG Route where the Company is deemed to have a taxable presence or
is otherwise subject to tax. There was no taxable income earned by the Company
during the six months ended June 30, 1997.
NET LOSS AND NET LOSS APPLICABLE TO COMMON SHAREHOLDERS
Net loss increased to $83.4 million for the six months ended June 30, 1998
compared to a net loss of $4.6 million for the six months ended June 30, 1997.
The increase is due to an increase in sales and other operating costs of $51.1
million , net interest expense and taxes of $26.8 million and the extraordinary
loss on refinancing of $59.8 million offset by an increase in operating income
of $58.9 million arising from the recognition of capacity sales and standby
maintenance revenues.
Net loss applicable to common shareholders increased to a loss of $93.4 million
for the six months ended June 30, 1998 from a loss of $12.5 million for the six
months ended June 30, 1997. This increase reflects the $78.8 million increase
in net loss and the redemption premium and write-off of discount on preferred
shares of $8.5 million offset by a $6.4 million reduction in PIK dividends as a
result of the redemption of the Preferred Stock during the first six months of
1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date through a combination of equity
contributions, shareholder advances and bank debt.
Cash contributions from Class B shareholders totaling $170.0 million were made
during the six months ended June 30, 1997. No cash contribution by shareholders
were made during the six month period ended June 30, 1998.
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FORM 6-K Page 14
<PAGE>
FLAG Limited
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For the six month period ended June 30, 1997 the Company made draw downs on the
Old Credit Facility of $119.8 million. During the six month period ended June
30, 1998, the Company completed the Refinancing and repaid $615.1 million
related to the Old Credit Facility, received proceeds of $320.0 million (of
which $39.1 million has been repaid) from the New Credit Facility and proceeds
of $424.1 million from the issuance of the Senior Notes. As part of the
refinancing the Company redeemed the Preferred Shares through the payment of
$139.5 million.
As of June 30, 1998 and December 31, 1997, the Company had working capital
deficits of $191.2 million and $273.9 million respectively. The working capital
deficits at June 30 1998 and December 31, 1997 are primarily a result of the
current accounts payable to the Contractors which are classified as current
liabilities but for which the associated funds -- held by the Collateral Trustee
- -- are classified as a non-current asset and are hence excluded from the measure
of working capital.
Total cash provided by operating activities during the period ended June 30,
1998 was $75.8 million and cash used in investing activities was $184.9 million.
Total cash used in operating activities and investing activities during the
period ended June 30, 1997 was $7.4 million and $279.2 million respectively. As
of June 30, 1998, cash on deposit with the Collateral Trustee had decreased to
$252.8 million from $425.9 million at December 31, 1997, primarily as a result
of payments to the Contractors.
SAFE HARBOR STATEMENT UNDER
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
With the exception of historical information, certain of the matters discussed
in this report are forward-looking statements that involve risks and
uncertainties, including, without limitation, the risks and uncertainties
described in registration statements, reports and other documents filed by the
Company from time to time with the Securities and Exchange Commission pursuant
to the Securities Act of 1933, as amended, and the Securities Exchange Act of
1934, as amended. Such risks and uncertainties could cause the Company's actual
results for 1998 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
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FORM 6-K Page 15
<PAGE>
FLAG Limited
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PART II
ITEM 1: LEGAL PROCEEDINGS
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The Company is involved in litigation from time to time in the ordinary
course of business. In management's opinion, the litigation in which the
Company is currently involved, individually and in the aggregate, is not
material to the Company's financial condition, results of operations or cash
flows.
ITEM 2: CHANGES IN SECURITIES
- ------
Not Applicable.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
- ------
Not Applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Not Applicable.
ITEM 5: OTHER INFORMATION
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Not Applicable.
ITEM 6: EXHIBITS AND REPORTS FILED ON FORM 6-K
- ------
Not Applicable.
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FORM 6-K Page 16
<PAGE>
FLAG Limited
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FLAG LIMITED
By: /s/ Edward McCormack
--------------------------------
Name: Edward McCormack
Title: Chief Financial Officer
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FORM 6-K Page 17
