<PAGE>
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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 SEPTEMBER 30, 1999
FLAG LIMITED
(Exact name of Registrant as specified in its charter)
EMPORIUM BUILDING
69 FRONT STREET
HAMILTON HM12, 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 12g3-2(b) under the Securities Exchange Act of 1934
Yes [ ] No [X]
This report ("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 September 30, 1999. This Quarterly
Report contains a review of the Company's unaudited financial information and
analysis for the third quarter, as well as certain other information.
Certain capitalized terms contained herein have the meaning given to them in the
Company's Annual Report filed on Form 20-F on March 31, 1999.
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<PAGE>
FLAG LIMITED
FORM 6-K
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION.......................................1
ITEM 1: FINANCIAL STATEMENTS.................................................1
1.A Consolidated Balance Sheets.................................1
1.B Consolidated Statements of Operations.......................2
1.C Consolidated Statements of Comprehensive Income.............3
1.D Consolidated Statements of Cash Flows.......................4
1.E Notes to Consolidated Financial Statements..................6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................7
PART II MORE INFORMATION.....................................................13
ITEM 1: LEGAL PROCEEDINGS....................................................13
ITEM 5: OTHER INFORMATION....................................................13
SIGNATURES....................................................................15
</TABLE>
<PAGE>
PART I
ITEM 1.A
FLAG LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(In thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
(Unaudited) (Audited)
------------------ -----------------
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 2,106 $ 3,024
Accounts receivable, net of allowance for doubtful accounts
of $7,454 (1998 - $8,630) 116,854 70,211
Due from affiliates 1,964 206
Prepaid expenses and other assets 1,335 2,673
----------- -----------
122,259 76,114
Accounts receivable -- 20,854
Funds held by collateral trustee or in escrow 144,183 255,366
Construction in progress -- 11,494
Capacity available for sale 870,181 1,095,099
Capitalized financing costs, net of accumulated
amortization of $2,731 (1998 - $1,498) 11,119 12,352
Fixed assets, net 205,558 4,487
----------- -----------
$ 1,353,300 $ 1,475,766
=========== ===========
LIABILITIES:
Current liabilities:
Accrued construction costs $ 75,604 $ 146,165
Accrued liabilities 17,694 33,214
Accounts payable 4,324 6,018
Income taxes payable 3,855 6,453
Due to affiliates 1,809 1,843
Deferred revenue 17,635 39,121
----------- -----------
120,921 232,814
8 1/4% senior notes, due 2008, net of unamortized
discount of $4,878 (1998 - $5,321) 425,122 424,679
Long-term debt 223,000 271,500
Deferred revenue and other 111,318 84,415
Deferred taxes 3,651 3,562
----------- -----------
884,012 1,016,970
----------- -----------
SHAREHOLDERS' EQUITY:
Class A common shares, $.0001 par value -- 13
Class B common shares, $.0001 par value 64 57
Additional paid-in capital 504,387 504,381
Foreign currency translation adjustment (582) (704)
Accumulated deficit (34,581) (44,951)
----------- -----------
469,288 458,796
----------- -----------
$ 1,353,300 $ 1,475,766
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PART I
ITEM 1.B
FLAG LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In thousands of dollars except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
REVENUES:
Capacity sales, net of discounts $ 38,488 $ 88,602 $ 114,776 $ 137,019
Standby maintenance and
restoration revenue 14,034 8,102 31,828 18,576
------------ ------------ ------------ -------------
52,522 96,704 146,604 155,595
SALES AND OTHER
OPERATING COSTS:
Cost of capacity sold 18,588 47,170 52,093 71,876
Operations and maintenance 6,290 9,583 21,329 28,757
Sales and marketing 4,720 6,718 8,255 8,292
General and administrative 3,449 5,548 14,225 17,759
Depreciation 4,400 264 5,121 530
------------ ------------ ------------ -------------
37,447 69,283 101,023 127,214
OPERATING INCOME 15,075 27,421 45,581 28,381
INTEREST EXPENSE 13,474 14,676 40,960 46,897
INTEREST INCOME 2,083 3,248 6,744 11,721
------------ ------------ ------------ -------------
INCOME (LOSS) BEFORE
INCOME TAXES 3,684 15,993 11,365 (6,795)
PROVISION FOR INCOME
TAXES 346 678 995 1,489
------------ ------------ ------------ -------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 3,338 15,315 10,370 (8,284)
EXTRAORDINARY ITEM -- -- -- 59,839
------------ ------------ ------------ -------------
NET INCOME (LOSS) 3,338 15,315 10,370 (68,123)
CUMULATIVE PAY-IN-KIND
PREFERRED DIVIDENDS -- -- -- 1,508
REDEMPTION PREMIUM AND
WRITE-OFF OF DISCOUNT
ON PREFERRED SHARES -- -- -- 8,500
------------ ------------ ------------ -------------
NET INCOME (LOSS)
APPLICABLE TO COMMON
SHAREHOLDERS $ 3,338 $ 15,315 $ 10,370 $ (78,131)
============ ============ ============ =============
Basic and diluted income
(loss) per common share
- - Class A $ -- $ 0.01 $ -- $ (0.07)
Basic and diluted income
(loss) per common share
- - Class B $ 0.01 $ 0.02 $ 0.02 $ (0.12)
Weighted average common
shares outstanding
- - Class A -- 132,000,000 -- 132,000,000
Weighted average common
shares outstanding
- - Class B 635,796,330 565,858,741 635,796,330 565,858,741
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
PART I
ITEM 1.C
FLAG LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In thousands of dollars except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------- ------- ------- --------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ 3,338 $15,315 $10,370 $(78,131)
Foreign currency translation adjustment (43) -- 122 --
------- ------- ------- --------
COMPREHENSIVE INCOME (LOSS) $ 3,295 $15,315 $10,492 $(78,131)
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PART I
ITEM 1.D
FLAG LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In thousands of dollars except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) applicable to common shareholders $ 10,370 $ (78,131)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Pay-in-kind preferred dividends -- 1,508
Redemption premium and write-off of discount on preferred shares -- 8,500
Amortization of financing costs 1,233 2,976
Extraordinary item-loss on refinancing -- 59,839
Provision for doubtful accounts 1,176 1,445
Senior debt discount 443 443
Depreciation 5,121 530
Deferred taxes 117 740
Add (deduct) net changes in operating assets and liabilities:
Accounts receivable (26,991) 82,794
Due from affiliates (1,758) 511
Prepaid expenses and other assets 1,284 690
Capacity available for sale 58,052 72,861
Accounts payable and accrued liabilities (16,923) (549)
Income taxes payable (2,545) 663
Due to affiliates (34) 243
Deferred revenue and other 5,417 (91,987)
--------- ---------
Net cash provided by operating activities 34,962 63,076
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Financing costs incurred -- (13,330)
Net proceeds from issuance of 8 1/4% senior notes -- 424,088
Proceeds from long-term debt -- 320,000
Repayment of long-term debt (48,500) (658,687)
Redemption of preferred shares -- (139,453)
Decrease in funds held by collateral trustee or in escrow 111,183 184,966
--------- ---------
Net cash provided by financing activities 62,683 117,584
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for construction (100,577) (179,150)
Disposal (purchase) of fixed assets, net 2,043 (3,212)
--------- ---------
Net cash used in investing activities (98,534) (182,362)
--------- ---------
NET DECREASE IN CASH: (889) (1,702)
Effect of foreign currency movements (29) --
CASH, beginning of period 3,024 2,490
--------- ---------
CASH, end of period $ 2,106 $ 788
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
FLAG LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In thousands of dollars except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
SUPPLEMENTAL INFORMATION ON NON-CASH
OPERATING ACTIVITIES:
Decrease in capacity available for sale $ 69,052 $ 72,861
Decrease in accrued construction costs (11,000) --
--------- ---------
Cost of capacity sold $ 58,052 $ 72,861
========= =========
SUPPLEMENTAL INFORMATION ON NON-CASH
INVESTING ACTIVITIES:
Increase in construction in progress $ 41,016 $ 7,158
Decrease in accrued construction costs 59,561 171,992
--------- ---------
Cash paid for construction $ 100,577 $ 179,150
========= =========
SUPPLEMENTAL INFORMATION DISCLOSURE OF CASH
FLOW INFORMATION:
Interest expense for period $ 40,960 $ 46,897
Amortization of financing costs (1,676) (3,419)
Decrease (increase) in accrued
interest payable 9,112 (9,862)
--------- ---------
Interest paid $ 48,396 $ 33,616
========= =========
Interest capitalized $ 1,281 $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PART I
ITEM 1.E
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
(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 and balances 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 nine month periods ended September 30, 1999 and 1998, the balance
sheet as of September 30, 1999, and the cash flows for the nine month periods
ended September 30, 1999 and 1998. These interim consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements for the year ended December 31, 1998. 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
In February 1999, the shareholders of all Class A common shares in the Company
converted their shares into Class B common shares of equivalent value. Basic net
income per Class B common share in 1999 is based on dividing the net income by
the number of Class B common shares outstanding for the period as if the
exchange had occurred on January 1, 1999. The basic net loss per Class A common
share and Class B common share in 1998 are based on dividing net loss applicable
to Class A and Class B shareholders by the weighted average number of common
shares outstanding, respectively, during the period.
The basic net loss per Class A common share and Class B common share before the
extraordinary item for the nine month period ended September 30, 1998 is $(0.02)
and $(0.03) respectively.
3. CONTINGENCIES
The Company is involved in legal proceedings from time to time in the
ordinary course of business. In management's opinion, the legal proceedings
in which the Company is currently involved are not material, individually or
in the aggregate, to the Company's financial condition, results of operations
or cash flows.
4. REORGANIZATION
On September 1, 1999 the common shares of FLAG Telecom Limited and FLAG
Telecom USA Limited, subsidiary undertakings, were transferred to FLAG
Telecom Group Services Limited, an affiliated Company. This transaction was
accounted for using the historical cost at the date of transfer as FLAG
Limited and FLAG Telecom Group Services Limited are entities under common
control. Accordingly, no gain or loss was recorded on the transfer of these
assets.
5. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). Following the amendment made by SFAS No.
137, SFAS No. 133 is effective for periods beginning after June 15, 2000.
Management is currently assessing the impact of the adoption of SFAS 133 on
the Company's financial position or results of operations.
6
<PAGE>
In June 1999, the FASB issued Interpretation No. 43, "Real Estate Sales, an
interpretation of FASB Statement No. 66" ("FIN 43"), which became effective
July 1, 1999. Under this interpretation, sales of capacity on fiber optic
cable systems are required to be accounted for in accordance with the
provisions of FASB Statement No. 66, "Accounting for Sales of Real Estate"
("FASB 66"). The application of this statement will result in a deferral of
revenue for certain capacity sales contracts that do not satisfy the
requirements of FASB 66. To the extent that the Company enters into contracts
in the future that will satisfy the requirements for sales type lease
accounting, the Company will continue to recognize revenues without deferral.
Although the application of FIN 43 will affect the timing of recognition of
revenues and costs, it will have no impact on the Company's cash flow. The
interpretation and application of FIN 43 is still developing within the
telecom industry and the Company expects further clarification within the
next few months.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART I
ITEM 2
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
RESULTS OF OPERATIONS
REVENUES
Total revenue recognized by the Company during the quarter ended September 30,
1999 was $52.5 million compared to $96.7 million in total revenue for the
quarter ended September 30, 1998.
Revenue recognized from capacity sales was $38.5 million for the quarter
ended September 30, 1999 compared to $88.6 million during the quarter ended
September 30, 1998. The change in revenue recognized is due in part to the
Company adopting FIN 43 on July 1 1999. Revenue deferred in the quarter ended
September 30, 1999, as a result of adopting FIN 43 was $12.0 million. This
deferred revenue, which has no impact on the Company's cash flow, will be
recognized over the period of the contracts to which it relates. To the
extent that the Company enters into contracts in the future that will satisfy
the requirements for sales type lease accounting, the Company will continue to
recognize revenues without deferral. As of September 30, 1999, the Company
had entered into sales transactions with 90 international telecommunication
carriers and internet service providers compared to 75 as of September 30,
1998.
Revenue recognized from standby maintenance and restoration services was $14.0
million for the quarter ended September 30, 1999 compared to $8.1 million for
the quarter ended September 30, 1998. The increase in standby maintenance and
restoration revenue of $5.9 million for the quarter ended September 30, 1999 is
a result of the increase in cumulative capacity sales on the FLAG System
combined with an increase in revenue from restoration services provided to
alternate cable systems on a non-reciprocal basis.
SALES AND OTHER OPERATING COSTS
For the quarter ended September 30, 1999, the Company recorded $18.6 million in
respect of the cost of capacity sold compared to $47.2 million recorded in the
quarter ended September 30, 1998. The decrease in the cost of capacity sold in
the quarter ended September 30, 1999 is primarily a result of lower revenue
recognized from capacity sales combined with sales of capacity on segments
7
<PAGE>
having a lower cost of sales percentage than the segments on which capacity
was sold during the quarter ended September 30, 1998. Cost of sales
percentages used are a function of the allocated cost of constructing the
FLAG System and management's current best estimate of future capacity sales
and third party market forecasts of capacity sales. Changes in management's
estimate of future capacity sales revenues, including the expected sales
value per unit, will result in prospective changes to cost of sales.
During the quarter ended September 30, 1999 the Company incurred $6.3 million in
operations and maintenance costs compared to $9.6 million for the quarter ended
September 30, 1998. Operations and maintenance expenses relate primarily to the
provision of standby maintenance under Maintenance Zone Agreements as well as
Company salaries and overheads directly associated with operations and
maintenance activities. The decrease in operations and maintenance costs is
largely a result of lower costs of some maintenance zone agreements.
During the quarter ended September 30, 1999, $4.7 million in sales and marketing
costs were incurred compared to $6.7 million incurred during the quarter ended
September 30, 1998. Sales and marketing costs are comprised of all sales and
marketing activities that are directly undertaken by the Company. The sales and
marketing costs for the three month period ended September 30, 1998 included
commissions due on pre-existing agreements related to revenue recognized in the
period.
During the quarter ended September 30, 1999, $3.4 million of general and
administrative expenses were incurred compared to $5.5 million during the
quarter ended September 30, 1998. The decrease in general and administrative
costs in the quarter ended September 30, 1999 is largely due to a recovery of
certain accounts receivable previously provided for combined with a reduction
in costs associated with the transition of the Company from a development
stage company to an operating company which were incurred in the quarter
ended September 30, 1998.
Depreciation expense for the three months ended September 30, 1999 was $4.4
million compared to $0.2 million for the three months ended September 30,
1998. The increase of $4.2 million is a result of the Company adopting FIN 43
on July 1, 1999, pursuant to which the cost of part of the FLAG System which
does not satisfy the requirements of FASB 66 is being depreciated over its
remaining economic life. Prior to July 1, 1999, the cost of the FLAG System
was wholly accounted for as Capacity Available for Sale for which no
depreciation was recorded but which was expensed as costs of capacity sold as
revenues were recognized.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense on borrowings decreased from $14.7 million for the quarter
ended September 30, 1998 to $13.5 million for the quarter ended September 30,
1999. The decrease in interest expense of $1.2 million is primarily attributable
to a reduction in the Company's long term debt facility from $276.4 million as
at September 30, 1998 to $223.0 million as at September 30, 1999.
Interest income of $2.1 million was earned during the quarter ended September
30, 1999 compared to $3.2 million earned during the quarter ended September 30,
1998. Interest is earned on cash balances and short term investments held by the
Collateral Trustee or in escrow arising from ongoing business operations.
During the quarter ended September 30, 1999 the Company capitalized $0.3 million
of interest costs as a component of construction in progress.
8
<PAGE>
PROVISION FOR TAXES
The provision for taxes was $0.3 million for the quarter ended September 30,
1999 compared to $0.7 million for the quarter ended September 30, 1998. The tax
provisions consist of taxes on income derived from capacity sales and standby
maintenance revenue from customers in certain jurisdictions where the Company
is deemed to have a taxable presence or is otherwise subject to tax. At the
present time, no income, profit, capital or capital gains taxes are levied in
Bermuda. In the event that such taxes are levied, the Company has received an
undertaking from the Bermuda Government exempting it from all such taxes
until March 28, 2016.
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS
For the quarter ended September 30, 1999 the Company recorded net income
applicable to common shareholders of $3.3 million compared to net income
applicable to common shareholders of $15.3 million for the quarter ended
September 30, 1998. This is attributable to the Company recording operating
income of $15.1 million for the quarter ended September 30, 1999 compared to
$27.4 million for the quarter ended September 30, 1998, offset by a decrease
in interest expense and tax expense of $1.2 million and $0.3 million,
respectively, and a reduction in interest income of $1.1 million.
Basic and diluted net income per common share was $0.01 for the quarter ended
September 30, 1999 compared to a net income per Class A common share of $0.01
and net income per Class B common share of $0.02 for the quarter ended
September 30, 1998. The basic and diluted net income per common share for the
quarter ended September 30, 1999 reflects the net income of $3.3 million for
the quarter ended September 30, 1999 compared to a net income of $15.3
million for the quarter ended September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
RESULTS OF OPERATIONS
REVENUES
Total revenue recognized by the Company during the nine months ended September
30, 1999 was $146.6 million compared to $155.6 million in total revenue for
nine months ended September 30, 1998.
Revenue recognized from capacity sales was $114.8 million for the nine months
ended September 30, 1999 compared to $137.0 million during the nine months
ended September 30, 1998. The decline in revenue is due in part to the
Company adopting FIN 43 on July 1 1999. Revenue deferred in the nine months
ended September 30, 1999, as a result of adopting FIN 43 was $12.0 million.
This deferred revenue which has no impact on the Company's cash flow will be
recognized over the period of the contracts to which it relates. To the
extent that the Company enters into contracts in the future that will satisfy
the requirements for sales type lease accounting, the Company will continue to
recognize revenues without deferral. As of September 30, 1999, the Company
had entered into sales transactions with 90 international telecommunication
carriers and internet service providers compared to 75 as of September 30,
1998.
Revenue recognized from standby maintenance and restoration services was $31.8
million for the nine months ended September 30, 1999 compared to $18.6 million
for the nine months ended September 30, 1998. The increase in standby
maintenance and restoration revenue of $13.2 million for the nine months ended
September 30, 1999 is a result of the increase in cumulative capacity sales on
the FLAG System combined with an increase in revenue from restoration services
provided to alternate cable systems on a non-reciprocal basis.
9
<PAGE>
SALES AND OTHER OPERATING COSTS
For the nine months ended September 30, 1999, the Company recorded $52.1 million
in respect of the cost of capacity sold compared to $71.9 million recorded in
the nine months ended September 30, 1998. The decrease in the cost of capacity
sold in the nine months ended September 30, 1999 is primarily a result of lower
revenue from capacity sales combined with sales of capacity on segments having a
lower cost of sales percentage than the segments on which capacity was sold
during the nine months ended September 30, 1998. Cost of sales percentages used
are a function of the allocated cost of constructing the FLAG System and
management's current best estimate of future capacity sales and third party
market forecasts of capacity sales. Changes in management's estimate of future
capacity sales revenues, including the expected sales value per unit, will
result in prospective changes to cost of sales.
During the nine months ended September 30, 1999 the Company incurred $21.3
million in operations and maintenance costs compared to $28.8 million for the
nine months ended September 30, 1998. Operations and maintenance costs relate
primarily to the provision of standby maintenance under Maintenance Zone
Agreements as well as Company salaries and overheads directly associated with
operations and maintenance activities. The decrease in operations and
maintenance costs is largely a result of the termination of the Program
Management Services Agreement with Bell Atlantic Network Systems Company in
May 1998 combined with lower costs of some maintenance zone agreements.
During the nine months ended September 30, 1999, $8.3 million in sales and
marketing costs were incurred compared to $8.3 million incurred during the nine
months ended September 30, 1998. Sales and marketing costs are comprised of all
sales and marketing activities that are directly undertaken by the Company.
During the nine months ended September 30, 1999, $14.2 million of general and
administrative expenses were incurred compared to $17.8 million during the
nine months ended September 30, 1998. The decrease in general and administrative
costs in the nine month period ended September 30, 1999, is largely due to a
recovery of certain accounts receivable previously provided for combined with
a reduction in costs associated with the transition of the Company from a
development stage company to an operating company which were incurred in the
nine month period ended September 30, 1998.
Depreciation expense for the nine months ended September 30, 1999 was $5.1
million compared to $0.5 million for the nine months ended September 30,
1998. The increase of $4.6 million is primarily a result of the Company
adopting FIN 43 on July 1, 1999, pursuant to which the cost of part of the
FLAG System which does not satisfy the requirements of FASB 66 is being
depreciated over its remaining economic life. Prior to July 1, 1999, the cost
of the FLAG System was wholly accounted for as Capacity Available for Sale
for which no depreciation was recorded but which was expensed as cost of
capacity sold as revenues were recognized.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense on borrowings decreased from $46.9 million for the nine months
ended September 30, 1998 to $41.0 million for the nine months ended September
30, 1999. The decrease in interest expense of $5.9 million is attributable to a
reduction in the Company's long term debt facility from $276.4 million as at
September 30, 1998 to $223.0 million as at September 30, 1999 combined with a
$1.7 million reduction in amortized financing costs and a reduction in interest
rates over the same period.
During the nine months ended September 30, 1999 the Company capitalized $1.3
million of interest costs as a component of construction in progress.
10
<PAGE>
Interest income of $6.7 million was earned during nine months ended September
30, 1999 compared to $11.7 million earned during the nine months ended September
30, 1998. Interest is earned on cash balances and short term investments held by
the Collateral Trustee or in escrow arising from ongoing business operations.
PROVISION FOR TAXES
The provision for taxes is $1.0 million for the nine months ended September
30, 1999 compared to $1.5 million for the nine months ended September 30,
1998. The tax provisions consists of taxes on income derived from capacity
sales and standby maintenance revenue from customers in certain jurisdictions
where the Company is deemed to have a taxable presence or is otherwise
subject to tax. At the present time, no income, profit, capital or capital
gains taxes are levied in Bermuda. In the event that such taxes are levied,
the Company has received an undertaking from the Bermuda Government exempting
it from all such taxes until March 28, 2016.
EXTRAORDINARY ITEM
In connection with the refinancing that took place on January 30, 1998, the
Company recorded an extraordinary loss of $59.8 million in the statement of
operations for the nine months ended September 30, 1998. The loss on
refinancing represents the write-off of unamortized deferred financing costs
related to the Old Credit Facility. No refinancing occurred in the nine
months ended September 30, 1999.
In addition, in connection with the refinancing in January 1998, the Company
redeemed the Preferred Stock at a redemption price of 105% of the liquidation
preference. The excess of the redemption value over the carrying value of the
Preferred Stock on the date of the redemption of $8.5 million has been reflected
as a decrease in additional paid-in capital in the nine month period ended
September 30, 1998. There were no costs of this nature recorded in the nine
month period ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
On January 30, 1998, the Company completed a refinancing which resulted in
the repayment of all outstanding borrowings under the Old Credit Facility and
the redemption of the Series A Preferred Shares. The funds raised consisted
of $370.0 million of bank credit facilities and $430.0 million of 8 1/4%
Senior Notes maturing January 30, 2008.
Upon consummation of the refinancing on January 30, 1998, the remaining amount
of unamortized capitalized financing costs related to the Old Credit Facility of
$59.8 million was written off as a component of the loss on refinancing in the
statement of operations. Also in connection with the refinancing, the Company
recorded a reduction to additional paid in capital of $8.5 million representing
the excess of the $139.5 million paid to redeem the Preferred Stock over the
$131.0 million carrying value of the Preferred Stock on the date of redemption.
The bank credit facilities include a seven year $320.0 million term loan
facility and a $50.0 million revolving credit facility. On January 30, 1998,
the Company borrowed $320.0 million under the term loan facility. During the
year ended December 31, 1998, the Company repaid $48.5 million of the term
loan facility, of which $43.6 million was paid during the nine months ended
September 30, 1998. During the nine months ended September 30, 1999 the
Company repaid a further $48.5 million, resulting in a balance remaining of
$223.0 million as of September 30, 1999.
Borrowings under the bank credit facility bear interest at LIBOR plus 190 to
212.5 basis points. At the end of March 1998, the Company entered into two
interest rate swap agreements to manage the
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Company's exposure to interest rate fluctuations on the bank credit facility.
Under the swap agreements, the Company pays a fixed rate of 5.6% on a notional
amount of $60.0 million and a fixed rate of 5.79% on a notional amount of $100.0
million 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.
The net cash amount received or paid on interest rate hedging instruments is
recognized as an adjustment to interest cost on the related debt.
The Company believes that it will have no need for additional borrowing. The
Company intends to finance future operations through proceeds from the sale or
lease of capacity, revenues from billings of standby maintenance charges and
restoration services, investment income on cash and investment balances,
borrowings under the revolving credit facility, if any, and available funds in
reserve accounts.
As of September 30, 1999 the Company had working capital of $1.3 million
compared to a working capital deficit as of December 31, 1998 of $156.7
million. The working capital deficit was primarily a result of the current
accounts payable to the contractors who constructed the FLAG Cable, which is
classified as a current liability but for which the associated funds held in
escrow are classified as a non-current asset and are hence excluded from the
measure of working capital.
Total cash provided by operating activities and used in investing activities
during the nine months ended September 30, 1999 was $35.0 million and $98.5
million respectively. As of September 30, 1999, cash on deposit with the
Collateral Trustee or in escrow had decreased to $144.2 million from $255.4
million at December 31, 1998, primarily as a result of the repayment of a
portion of the term loan facility and payments to contractors.
Total cash provided by operating activities and used in investing activities
during the nine months ended September 30, 1998 was $63.1 million and $182.4
million respectively. Cash on deposit with the Collateral Trustee or in
escrow at September 30, 1998 was $240.9 million.
ASSETS
At September 30, 1999 the Company's major asset is the telecommunications
capacity available for sale or lease on the FLAG System of $870 million and
related fixed assets of $205 million. As of December 31, 1998, capacity
available for sale was $1.095 billion. As a result of the application of FIN
43 noted above, sales on certain parts of the FLAG System will not be able to
satisfy the requirements for sales type lease accounting. Accordingly the
costs of these parts of the system have been reclassified at July 1, 1999
from Capacity Available for Sale to fixed assets and are being depreciated
over their remaining useful life. The Company's other fixed assets consist
primarily of office furniture, leasehold improvements, computer equipment and
autos.
The Company completed construction of new Landing Stations in Saudi Arabia and
Jordan in July 1999.
YEAR 2000
During 1999, the Company has continued its evaluation of the risks created by
the Year 2000 problem. The Company has obtained certificates of Year 2000
compliance from its suppliers for the equipment used in its systems. The live
FLAG Cable System certification has been achieved in the third quarter of 1999.
While the Company believes that it has taken the necessary steps to resolve its
Year 2000 issues in a timely manner, there can be no assurance that the Company
will not have any Year 2000 problems. If any such problems occur, the Company
will work to solve them as quickly as possible. At present, the
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Company does not expect that such problems related to the Company's internal IT
and non-IT systems will have a material adverse effect on its business. The
failure, however, of one or more of the Landing Parties to be Year 2000
compliant could have a material adverse effect on the Company.
SAFE HARBOR STATEMENT UNDER
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements included in this Quarterly Report regarding future financial
performance and results and the other statements that are not historical
facts are forward-looking statements. The words "believes," "intends,"
"expects," "anticipates," "projects," "estimates," "predicts" and similar
expressions are also intended to identify forward-looking statements. Such
statements reflect various assumptions by the Company concerning anticipated
results and are subject to significant business, economic and competitive
risks, uncertainties and contingencies, including, without limitation, the
risks, uncertainties and contingencies 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. Accordingly,
there can be no assurance that such statements will be realized. Such risks,
uncertainties and contingencies could cause the Company's actual results for
the nine months ended September 30, 1999 and beyond to differ materially from
those expressed in any forward-looking statements made by, or on behalf of,
the Company. The Company makes no representation or warranty as to the
accuracy or completeness of such statements contained in this Quarterly
Report.
PART II
ITEM 1: LEGAL PROCEEDINGS
The Company is involved in legal proceedings from time to time in the ordinary
course of business. In management's opinion, the legal proceedings in which the
Company is currently involved are not material, individually or in the
aggregate, to the Company's financial condition, results of operations or cash
flows.
ITEM 5: OTHER INFORMATION
In February 1999, the Company was part of a reorganization pursuant to which
FLAG Telecom Holdings Limited ("FTHL"), a Bermuda company, became the holding
company for the FLAG Telecom group of companies. Pursuant to this
reorganization, all of the Class A common shares of the Company were converted
into Class B common shares and the shareholders of the Company transferred to
FTHL 418,259,688 Class B common shares in exchange for an equal number of
shares of common stock of FTHL. As a result of this reorganization, FTHL
holds 65.79% of the share capital of the Company with the balance of 34.21%
being held by Bell Atlantic Network Systems Company
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On September 1, 1999 the common stock of FLAG Telecom Limited and
FLAG Telecom USA Limited, subsidiary undertakings, were transferred to FLAG
Telecom Group Services Limited, an affiliated company. The transaction was
accounted for using the historical cost at the date of transfer as FLAG
Limited and FLAG Telecom Group Services Limited are entities under common
control. Accordingly, no gain or loss was recorded on the transfer of these
assets.
FTHL also has an indirect 50% interest in FLAG Atlantic Limited ("FAL"), a
joint venture company set up to build, own and operate a transatlantic fiber
optic cable system connecting the United States, United Kingdom and France.
Global Telesystems Group, Inc. owns the other 50% interest in the venture.
The transatlantic cable system will be designed to carry voice, high-speed
data and video traffic. The system will consist of three self-healing rings
including (i) a ring among two Landing Stations on Long Island and two points
of presence in New York City; (ii) a northern Atlantic cable from Long Island
to the United Kingdom and a southern Atlantic cable from Long Island to
France; and (iii) a ring in Europe among the Landing Stations in the United
Kingdom and France and points of presence in London and Paris. The fiber
optic link will be based on Synchronous Digital Hierarchy and use dense wave
division multiplexing technology. The FLAG Atlantic system, which is fully
funded, is expected to be ready for service in the first quarter of 2001.
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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/ James P. Campbell
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James P. Campbell
Chief Financial Officer
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