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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
(MARK ONE)
/ / REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER: 333-8456
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FLAG LIMITED
(Exact name of registrant as specified in its charter)
BERMUDA
(Jurisdiction of incorporation or organization)
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EMPORIUM BUILDING
69 FRONT STREET
HAMILTON HM12, BERMUDA
(Address of principal executive offices)
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SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(D)
OF THE ACT: 8 1/4% Senior Notes Due 2008
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
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Shares of Class A Common Stock, $.0001 value each................... 132,000,000
Shares of Class B Common Stock, $.0001 value each................... 565,858,741
</TABLE>
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 which financial statement item the registrant has elected
to follow. Item 17 / / Item 18 /X/
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TABLE OF CONTENTS
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PAGE
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SAFE HARBOR STATEMENT..................................................................................... 1
GLOSSARY AND PRESENTATION OF FINANCIAL INFORMATION........................................................ 1
PART I.................................................................................................... 1
Item 1. Description of Business....................................................................... 1
Item 2. Description of Property....................................................................... 11
Item 3. Legal Proceedings............................................................................. 11
Item 4. Control of Registrant......................................................................... 11
Item 5. Nature of Trading Market...................................................................... 13
Item 6. Exchange Controls and Other Limitations Affecting Security Holders............................ 13
Item 7. Taxation...................................................................................... 13
Item 8. Selected Financial Data....................................................................... 13
Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................... 15
Item 9A. Quantitative and Qualitative Disclosures About Market Risk................................... 23
Item 10. Directors and Officers of Registrant......................................................... 24
Item 11. Compensation of Directors and Officers....................................................... 26
Item 12. Options to Purchase Securities from Registrant or Subsidiaries* 26
Item 13. Interest of Management in Certain Transactions............................................... 27
PART II................................................................................................... 28
Item 14. Description of Securities to be Registered*.................................................. 28
PART III.................................................................................................. 28
Item 15. Defaults upon Senior Securities*............................................................. 28
Item 16. Changes in Securities and Changes in Security for Registered Securities*..................... 28
PART IV................................................................................................... 28
Item 17. Financial Statements**....................................................................... 28
Item 18. Financial Statements......................................................................... 28
Item 19. Financial Statements and Exhibits............................................................ 29
FINANCIAL STATEMENTS...................................................................................... F-1
GLOSSARY.................................................................................................. G-1
EXHIBITS
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* Omitted because the item is inapplicable or the answer is negative.
** The Registrant has responded to Item 18 in lieu of this Item.
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FLAG Limited ("FLAG" or the "Company") was incorporated under the laws of
Bermuda in January 1993. Its principal executive offices are located at Emporium
Building, 69 Front Street, Hamilton HM12, Bermuda. Its telephone number is (441)
296-0909.
SAFE HARBOR STATEMENT UNDER
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements included in this annual report on Form 20-F ("Form 20-F")
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 1998 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 Form 20-F.
GLOSSARY AND PRESENTATION OF FINANCIAL INFORMATION
Certain industry and other specific terms used in this Form 20-F have the
meanings set forth in the glossary appearing at the end of this Form 20-F. In
this Form 20-F, references to "Dollars," "dollars" and "$" are to United States
dollars, and the terms "United States" and "U.S." mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction. Certain amounts which appear in this Form 20-F may not sum
because of rounding adjustments.
Financial data included herein have been derived, unless otherwise
indicated, from, and should be read in conjunction with, the financial
statements of the Company, which have been prepared in accordance with United
States generally accepted accounting principles. Accordingly, unless otherwise
indicated, the Company has presented certain financial information contained
herein in Dollars. The Company's fiscal year ends on December 31. As used
herein, "fiscal year" refers to the twelve-month period ending December 31,
1998.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
The Company is a facilities-based provider of telecommunications capacity to
licensed international carriers through its ownership of the world's longest
digital fiberoptic undersea cable system (the "FLAG System"). The FLAG System
links the telecommunications markets of Western Europe and Japan through the
Middle East, India, Southeast Asia and China (the "FLAG Route"), along a route
which adjoins countries with approximately 70% of the world's population. The
FLAG System was constructed to address the growing demand for high performance,
secure and cost-effective digital communications for voice, data and video along
the FLAG Route. The Company provides capacity on the FLAG System at market-based
prices to licensed international carriers. The FLAG System, which cost
approximately $1.55 billion to construct, consists of over 17,000 miles of
fiberoptic cable. The Company has over $500 million of invested equity
contributed by a group of Shareholders, which includes subsidiaries of Bell
Atlantic Corporation ("Bell Atlantic") and Marubeni Corporation ("Marubeni").
The FLAG System was placed in commercial service on November 22, 1997 with an
initial group of 62 international carriers,
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including Sprint Corp., AT&T Corp., MCI WorldCom, Cable & Wireless
Communications PLC, China Telecom and Deutsche Telekom AG.
MARKET FOR FIBEROPTIC CAPACITY
The Company is operating in a dynamic market environment. The FLAG System
was developed to address the rapidly growing demand for international
telecommunications services along the FLAG Route. The FLAG System addresses the
following important growth and strategic shifts in international
telecommunications markets:
UNDERSERVED MARKETS. The FLAG System connects two of the most densely
populated and highly developed telecommunications markets, Western Europe
and Japan, through the relatively underserved markets of the Middle East,
India, Southeast Asia and China. The growth rate for communications traffic
in these underserved markets has been and is expected to continue to be
higher than the growth rates in the developed markets.
RAPID GROWTH OF COMMUNICATIONS TRAFFIC. The growth of communications
traffic along the FLAG Route has been driven by three principal factors: (i)
end user demand stimulated by greater competition and price declines, (ii)
the rapid growth in the use of the internet and the emergence of corporate
wide area networks and (iii) the emergence of enterprise networking across
local and global business. The internet, one of the principal factors
driving this growth, has been growing at a rate of more than 100% per annum
for the past decade. With its advanced fiberoptic system, the Company
believes that it is well positioned to take advantage of this rapid growth.
CAPACITY REQUIRED BY NEW ENTRANTS. Competition and deregulation are
bringing new entrants into the telecommunications market. The Company
believes that the opening of various telecommunications markets will lead to
an increase in demand for fiberoptic cable capacity as more international
communications carriers elect to compete. As a carriers' carrier, the
Company believes that many new entrants typically will lease or buy
fiberoptic capacity as a low-cost alternative to building their own
infrastructure.
Several of the countries directly served on the FLAG Route have recently
liberalized the regulations governing their telecommunications markets. The
Company believes that it is well positioned to continue to sell capacity to
Emerging Carriers, who are providing services on a competitive basis with
Established Carriers. The shift in market shares between the Established
Carriers and the Emerging Carriers should provide a comparative advantage to
the Company; since the Emerging Carriers have yet to purchase their
projected capacity requirements, the Company believes that many of these
carriers may turn to the FLAG System to meet their needs.
GROWTH OF OTHER NEW APPLICATIONS. The Company believes that additional
network transmission capacity and faster response times will be required to
accommodate the needs of multimedia (voice, data and video) and other
potential applications, including the deployment of corporate wide area
networks. Because such applications use substantially more capacity than
traditional voice communications, the Company believes that there will be
significant demand for its advanced communications infrastructure.
THE CLUB CABLE SYSTEM
The Company offers its customers the benefit of fiberoptic capacity while
allowing them to avoid the larger up-front costs often associated with other
methods of submarine cable system development and ownership. Traditionally,
submarine cables have been the joint undertakings of groups of international
telecommunications carriers that collectively own the entire cable and are
responsible for the full costs of construction, operation and maintenance. This
approach is known as a "consortium" or "club" cable. Under the traditional club
cable arrangement, carriers who will be acquiring capacity in the cable jointly
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fund the cost of construction, receive a share of the cable capacity
proportionate to their capital contribution, and pay a proportionate share of
operating and maintenance costs. Carriers are represented on the governing body
of the cable system and vote in proportion to their ownership percentage.
In contrast, as a privately funded cable venture, the Company allows its
customers to purchase only the capacity they need, at the time they need it. The
Company bears the risk of selling enough capacity on the cable to recover the
full costs of its construction and operation costs.
BUSINESS STRATEGY
The Company is a leading carriers' carrier, providing access along the FLAG
Route to licensed international carriers. The Company provides capacity in MIUs
on the FLAG System.
The principal elements of the Company's business strategy include:
A LEADING CARRIERS' CARRIER. The Company has established itself as a
leading carriers' carrier by offering its customers fixed-cost, long-term
contracts allowing them to acquire capacity on the FLAG System without
incurring the high capital expenditures and long lead times usually
associated with building undersea cables by a consortium or "club" of
carriers. Typically, capacity is purchased by carriers for the remaining
design life of the cable, being 25 years from PSA in the case of the FLAG
System. As a carriers' carrier, the Company blends traditional industry
characteristics of offering life-of-the-system capacity purchases to
Established Carriers with competitive market characteristics for its product
offerings to Emerging Carriers.
MARKET-BASED FLEXIBLE PRICING STRATEGY. The Company has implemented a
flexible market-based pricing strategy coupled with volume incentives for
carriers that choose to make a sizable capacity investment in the FLAG
System. The Company offers flexibility in the route, the size of Bandwidth,
the period capacity is held for and the payment terms for any route
requested by customers. Capacity purchases come with a number of features
such as portability and drop-and-insert options, offering customers a high
level of flexibility in selecting and managing their Bandwidth requirements.
As well as capacity purchases, the Company offers short-term leasing with a
lease-to-buy option.
The Company provides carriers with predictability in standby maintenance
and repair charges by offering fixed prices for standby maintenance over the
life of the purchased capacity, subject to certain inflation adjustments.
Standby maintenance prices are generally based on a fixed rate per half-MIU
on each Segment. Carriers are billed for standby maintenance annually in
advance with the charges calculated by applying the published prices to the
capacity owned by each carrier.
HIGH SECURITY AND RELIABILITY. The Company has made a substantial
investment in protecting its fiberoptic system with advanced submarine cable
burial and armoring techniques as well as redundancy at its terrestrial
crossings. The Company has installed hardware and software and contracted
for alternative routes to restore service to its customers in the event of a
break or failure in the FLAG System. The restoration plan is a combination
of an in-system restoration plan where parallel routing is available within
the FLAG System and an out-of-system restoration plan created in part by
reciprocal arrangements with other providers. The Company continuously
monitors and maintains control of its system on a 24-hour basis through the
FLAG Network Operations Center ("FNOC"), and the restoration plan will
permit prompt alternate routing in the event of a break or fault. The FNOC
is responsible for system-wide surveillance, pro-active maintenance,
coordination of maintenance and repair operations and for circuit activation
and assignment and configuration of the transmission equipment. The FNOC has
the capability of a system-wide view of all network elements in the FLAG
System through its Integrated Transport Management ("ITM-2000") system.
GLOBAL CONNECTIVITY. Part of the Company's strategy is to facilitate
point-to-point fiberoptic connectivity around the globe for its customers.
In order to enhance such global connectivity, the
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Company negotiates marketing arrangements with other cable systems and
evaluates potential extensions of the FLAG Route. New Landing Stations in
Jordan and Saudi Arabia are expected to be completed in July 1999.
SUPERIOR CUSTOMER SERVICE. The Company has a customer care plan to
focus on quality, reliability and consistent customer support. Under such
plan, regional customer care personnel provide ongoing support to the
Company's present and prospective customers on operational and product
issues. The Company will utilize marketing studies to track the rapid
changes in the telecommunications markets in order to identify customers'
needs and changed preferences.
COMMITMENT OF STRATEGIC SHAREHOLDERS. The Shareholders of the Company,
including wholly-owned subsidiaries of Bell Atlantic and Marubeni, have
invested over $500 million in the Company. The Company has used and will
continue to use its Shareholders' resources and support to enhance the FLAG
System.
THE FLAG SYSTEM
The FLAG System is comprised of over 16,000 miles of undersea fiberoptic
cable with a 360-mile dual land crossing in Egypt and a 280-mile dual land
crossing in Thailand. The FLAG System connects with communication networks in
the United Kingdom, Spain, Italy, Egypt, the United Arab Emirates, India,
Malaysia, Thailand, Hong Kong, China, Korea and Japan, with Jordan and Saudi
Arabia scheduled for July 1999. The domestic connections are provided through
Landing Stations in each of the foregoing countries. Each Landing Station is
constructed, owned and operated by a Landing Party which has agreed to take
responsibility for maintaining the terrestrial portion of the FLAG System in the
Landing Party's country. The Landing Party is compensated for building and
operating the Landing Station by charges to parties entering the FLAG System
through the Landing Station.
The Company's basic product is capacity for digital transmission, which is
offered as separate units between any two Landing Countries comprising a total
of 66 Segments over which capacity is offered (increasing to 91 Segments with
the addition of the Jordan and Saudi Landing Stations). Capacity on each Segment
is offered in MIUs. Typically, a carrier originating traffic at one end of a
Segment will arrange with a correspondent, who will receive that traffic at the
other end of the Segment (and who will originate traffic to be received by the
first party), to share in the purchase of one or more MIUs.
The FLAG System employs the most advanced technology available and proven in
commercial installations at the date of construction. The aggregate system
capacity is 10 Gbps transmitting on two fiber pairs, which together provide
capacity of 120,000 circuits of 64 Kbps, corresponding to a maximum of 600,000
simultaneous voice transmissions. The FLAG System incorporates Synchronous
Digital Hierarchy, which is the current international standard for digital
transmission and management. Proven designs for an ocean cable are incorporated
into the FLAG System, including proven passive branching units, dispersion
shifted fibers and fully redundant laser pumps in the optical amplifiers which
are located at intervals of approximately 50 miles along the undersea route.
Expansion of the transmission capacity of the FLAG System may be effected by
employing additional light sources using the WDM technique. This enhancement can
be added by system modifications at one or more Landing Stations and without
modification of the submerged portion of the FLAG System.
The FLAG System is controlled by the FNOC, which is responsible for
system-wide surveillance, pro-active maintenance, coordination of maintenance
and repair operations, circuit activation and assignment and configuration of
the transmission equipment. The FNOC has the capability of a system-wide view of
all network elements in the FLAG System through its ITM-2000 system. The
ITM-2000 performs real time surveillance and control of the FLAG System
including provisioning and restoration at each of the Landing Stations. Network
performance, system status and management reports are generated through the
ITM-2000. The design specifications for the FLAG System are intended to ensure
continuous, fault-free service with an availability target of at least 99.999%
(approximately five minutes of unavailable
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time per annum) excluding faults caused by external damage or internal system
faults requiring ship repairs. System performance meets or exceeds relevant ITU
recommendations and is consistent throughout the entire system. It is believed
that the FNOC, which is an innovation in system maintenance of undersea cables,
and the hardware and software installed by the Company, will provide a higher
standard of service and continuity than can be met by other international cable
systems. The Company established a back-up FNOC in the United Kingdom in the
third quarter of 1998.
ADDRESSABLE MARKET
The Company is focused on providing capacity to three broad market segments:
ESTABLISHED CARRIERS. Each of the Landing Parties is an Established
Carrier and is either a government enterprise with a monopoly on
international communications in its country or one of the major
international carriers in that country with a substantial market share of
international communications. The Company provides capacity to Landing
Parties and other Established Carriers in the countries in which there are
Landing Stations and in other countries which can route traffic onto the
FLAG System through one of the Landing Stations along the FLAG Route. The
Established Carriers include all of the government-owned and former
government-owned licensed international carriers in Europe, the Middle East
and Asia and also include the large incumbent carriers from the United
States.
EMERGING CARRIERS. The perceived benefits to consumers from increased
communications at lower prices has brought about the liberalization of
market barriers and price controls on international communications service
in the United States, the European Union (particularly the United Kingdom)
and subsequently in Japan. Regulatory liberalization has taken place, or is
expected to take place in the near future, in seven of the 12 Landing
Countries (the United Kingdom, Spain, Italy, Japan, Korea, Malaysia and Hong
Kong). The growth and regulatory liberalization of the telecommunications
market have resulted in the formation of many new companies including a
number of facilities-based carriers (those which have substantial
investments in communications lines and switches) which have or intend to
become licensed international carriers and, therefore, are current or
prospective customers for the Company.
Another important class of Emerging Carriers consists of ISPs with
international licenses. ISPs provide business and residential customers
access to the internet. The internet is the fastest growing segment of
non-switched traffic. Even in "internet mature" countries such as the United
States, the number of internet hosts has been nearly doubling every year.
While e-mail and web access are currently the key contributors to internet
growth, business applications such as electronic commerce are likely to be
the drivers of internet growth in the future.
POTENTIAL CARRIERS. The third segment of the Company's market is made
up of the new entrants to international telecommunications which have not
yet applied to become licensed international carriers but have substantial
economic incentive to become licensed. The recent changes in the
telecommunications market have brought about the formation of many
specialized communications companies.
Currently, many ISPs and other specialized communications companies are
not licensed international carriers and are, therefore, excluded from
directly acquiring capacity on the FLAG System; however, these companies are
potential indirect customers for the Company because they may acquire use of
capacity through licensed carriers. Moreover, highly price-sensitive, these
new entrants in the telecommunications market may apply for international
carrier licenses if this will enable them to buy or lease capacity directly
at lower cost. Connectivity to the United States market will be critical to
development of the Potential Carriers because the U.S. market constitutes
70% of internet traffic. Due to the shortage of capacity, no alternatives
are currently available to Potential and Emerging
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Carriers for trans-Pacific connectivity to the United States; however,
fiberoptic technology permits service to be offered to carriers and ISPs
through the FLAG System and across the Atlantic at prices and with a service
quality comparable to service from Asia across the Pacific to the United
States. End-users of communication services are also Potential Carriers in
this market segment. Large multinational corporations and companies which
lease lines or other facilities for sale as switched traffic in price
competition with the facilities-based carriers could obtain licenses and
become customers of the Company. Furthermore, the Company may establish
arrangements with carriers who may acquire capacity from the Company
specifically for the traffic of end-users or resellers who are not licensed
international carriers.
CERTAIN AGREEMENTS
LANDING PARTIES. In order for the FLAG System to be accessible to carriers,
it comes ashore in various countries along the FLAG Route and connects with
domestic cable systems and other submarine cable systems at Landing Stations in
the countries where the cable lands. The Landing Parties have agreed to provide
and to maintain in operation the Landing Stations and the terrestrial portion of
the FLAG System. Landing Parties recover Landing Station capital and maintenance
costs through "right of use" charges and annual maintenance charges that are
borne by carriers entering the FLAG System at that Landing Station. The Company
reimburses each Landing Party for the cost of maintaining the terrestrial
portion of the FLAG System. Set forth below are the Landing Parties:
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COUNTRY LANDING PARTY
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United Kingdom...................... Cable & Wireless Communications
Spain............................... Telefonica de Espana
Italy............................... Telecom Italia
Egypt............................... Telecom Egypt
Jordan.............................. Jordan Telecommunications Company
(scheduled for July 1999)
Saudi Arabia........................ Saudi Telecommunications Company
(scheduled for July 1999)
United Arab Emirates................ Emirates Telecommunications
India............................... Videsh Sanchar Nigam Limited
Malaysia............................ Telekom Malaysia
Thailand............................ The Communications Authority of Thailand
China............................... China Telecom
Hong Kong........................... Hong Kong Telecom International
Korea............................... Korea Telecom
Japan............................... International Digital Communications and Kokusai
Denshin Denwa
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CAPACITY SALES. Each user of capacity enters into a Capacity Sales
Agreement with the Company setting out the terms under which it acquires
capacity.
CONSTRUCTION AND MAINTENANCE. The Construction and Maintenance Agreement
("C&MA") governs use of the capacity and the rights and obligations of the
Landing Parties, the other licensed international carriers signing the C&MA and
the Company (the "Signatories"). Pursuant to the C&MA, the Company is
responsible for arranging maintenance for the submarine portion of the FLAG
System. The C&MA also restricts the Company from selling, leasing or directly
providing capacity to any party which is not a licensed international carrier
for telecommunications services. Each Signatory correspondingly agrees that it
will not sell or transfer capacity to third parties (with certain exceptions).
The Signatories are given certain rights to vote in the C&MA; for example, the
unanimous vote of the Signatories is required to add a new Landing Station to
the FLAG System. System enhancements which are approved by the Signatories
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must be paid for by the Signatories and the Company in relation to capacity on
the affected Segment of the FLAG System.
MARKETING. Prior to May 1998, the Company had appointed Bell Atlantic
Network Systems (Bermuda) Limited ("BANS") as its exclusive agent for marketing
the capacity of the FLAG System under a marketing services agreement ("Marketing
Services Agreement"). In May 1998, under a transition agreement the Company and
BANS agreed to terminate the Marketing Services Agreement. Under the transition
agreement, the Company agreed to pay certain of BANS' closing down expenses and
certain commissions in connection with its 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 million of
commissions resulting from certain sales. Also under the 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.
PROGRAM MANAGEMENT. Under a management agreement with the Company (the
"Program Management Services Agreement"), Bell Atlantic Network Systems Company
("BANSC") had contracted to manage all aspects of the planning and construction
of the FLAG System. In May 1998, the Company entered into an agreement providing
for the termination of the program management services provided by BANSC. In
June 1998, FLAG made a final payment to BANSC to settle all outstanding
liabilities under the Program Management Services Agreement.
CONSTRUCTION AND COMPLETION
The Company entered into a turnkey construction contract (the "Construction
Contract") with Tyco Submarine Systems Ltd. ("Tyco") (formerly AT&T Submarine
Systems Inc.) and KDD Submarine Cable Systems Inc. ("KDD-SCS") (collectively,
the "Contractors"), two of the world's leading submarine cable contractors. The
Contractors agreed to construct the FLAG System for a fixed price and to satisfy
the completion and acceptance tests. The Contractors also warrant the quality of
manufacture of the cable and all other equipment and software provided by them
for two years and warrant the design sufficiency of the FLAG System for 25
years. Tyco and KDD-SCS are jointly and severally liable for their performance
under the Construction Contract and their performance is in turn guaranteed by
AT&T with respect to Tyco and by Kokusai Denshin Denwa Co., Ltd. ("KDD") with
respect to KDD-SCS.
Construction commenced in January 1996 with a scheduled completion date of
September 6, 1997. Construction was completed within budget and multi-phased
system completion trials commenced in 1997 to measure the performance and
service continuity of all elements of the FLAG System. The Company certified
that PSA was achieved on October 8, 1997. Commercial service commenced on
November 22, 1997.
In connection with PSA, the Contractors and the Company entered into an
agreement relating to the 32-day delay in achieving PSA and certain incomplete
work. A list of supplemental work, primarily upgraded software for improved
monitoring and upgraded hardware to provide additional high-speed restoration
channels, has been agreed to between the Contractors and the Company. Certain
postponements of the remaining payments to the Contractors were agreed to with
the consequence that such payments were made in large part from collections by
the Company of the purchase price due on sales of capacity sold prior to
completion. The Company recorded the approximately $132.7 million due the
Contractors as of December 31, 1998 as capacity available for sale and as
accrued construction costs. The Company is currently negotiating a settlement
with the Contractors for final acceptance and the remaining payments due to the
Contractors. It is anticipated that the final settlement will not be greater
than the liability already accrued.
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OPERATION AND MAINTENANCE
The FLAG System has been designed to provide service continuity at a
standard of 99.999% availability and to ensure error-free service throughout a
design life of 25 years. Design specifications have been supplemented with major
additional investment in armor and burial of the submarine cable and redundancy
at terrestrial crossings. The operational design and maintenance plan for the
FLAG System resulted in the creation of the FNOC, which monitors operations 24
hours a day, 365 days a year. The FNOC is designed to facilitate prompt
identification and location of a system break or outage and initiation of
restoration and dispatch of a cableship for repair.
The maintenance plan for the FLAG System identifies two types of maintenance
expense: standby maintenance charges and repair or "running" expenses. Standby
maintenance includes the measures which are taken to provide a constant
readiness to provide repair service and to conduct routine maintenance. It is
necessary to maintain an inventory of spare cable, optical amplifiers and other
necessary parts and tools for repair of the FLAG System at strategic locations
along the FLAG Route. It is also necessary to provide for standby services for
cable repair; these services are traditionally provided under Maintenance Zone
Agreements, which are cooperative standby agreements among cable operators in
major ocean areas to share the expense of assuring constant availability of
cableships capable of providing repairs to undersea cables. The Company has
entered into four such agreements, which provide maintenance services from the
United Kingdom to Gibraltar in the Mediterranean; from Gibraltar to Djibouti at
the entry to the Red Sea; from India to a point south of Okinawa; and in the
Pacific Ocean north of 25 DEG. latitude. The Maintenance Zone Agreements provide
for a sharing of standby expenses among the signatories to those agreements. In
addition, the Company has entered into a bilateral agreement for maintenance of
the area from the Red Sea to a point south of India. This agreement has been
concluded to facilitate more rapid repairs than would be possible under one of
the foregoing Maintenance Zone Agreements whose area includes the area covered
by the bilateral agreement.
The second type of maintenance expense is running expenses, which are the
direct expenses incurred to repair the FLAG System after a break or outage in
service. The C&MA provides that the actual running expenses will be shared among
the Signatories based on their allocable shares of capacity in the affected part
of the FLAG System (with the Company absorbing 3% of the repair costs for the
second and subsequent repairs on the affected part of the FLAG System during
each one-year period commencing from PSA).
Maintenance of the terrestrial portion of the FLAG System, including the
terrestrial crossings in Egypt and Thailand, is provided by the Landing Parties
in the respective countries. The Landing Parties have responsibility to conduct
routine checks on terminal and connectivity equipment and to perform routine
maintenance on power feed and transmission equipment. The Company reimburses the
Landing Parties for maintenance service provided in accordance with an agreed
schedule. Such terrestrial maintenance expenses are divided into stand-by and
running expenses, and the running expenses are charged back to Signatories as
described above. In the case of carriers who lease or otherwise acquire capacity
from the Company and do not become Signatories to the C&MA, the Company levies
standby and running maintenance charges on a comparable basis.
FACILITY RESTORATION PLAN
The Company has developed a comprehensive restoration plan for the FLAG
System to arrange the availability of alternative routing of traffic in the
event of an outage in transmission. Although the undersea cable is protected by
means of burial and armoring, the cable is nonetheless susceptible to damage
from ships and the elements. The restoration plan was developed on two levels.
In-system restoration routes traffic around faulty equipment or a system break
where parallel routing is available as part of the FLAG System; for example, on
the dual terrestrial crossings in Egypt and Thailand or the temporary outage of
one fiber pair. Out-of-system restoration routes traffic to alternative systems
in
8
<PAGE>
accordance with pre-determined plans and reciprocal arrangements with operators
of other cables, land lines and satellites.
All Segments are covered by restoration alternatives using fiberoptic cable
which is laid undersea or on land, except that the restoration link from Italy
to Asia is provided by a satellite link on an initial basis. Since restoration
through cable-on-cable service is preferable in order to maintain consistency of
service quality, the Company has negotiated with SMW-3 for restoration with
respect to the link from Italy to Asia.
The primary basis for restoration agreements is a reciprocal access to
capacity between operators of two cables with compensation being passed from one
to the other based on any imbalance of the relative capacity required by the two
operators. While the Company undertakes to arrange restoration capacity for its
customers, the Company has no obligation to provide restoration to its customers
on the FLAG System. Each customer decides whether to accept the restoration plan
offered by the Company, and the customers accepting restoration capacity must
share and reimburse the Company for the associated charges. Based on the
substantial excess capacity that the Company will retain, at least in the early
years of operation, it is projected that the Company will provide more capacity
under reciprocal arrangements than it will receive. Such surplus payments will
be retained by the Company as permitted contracts for the utilization of
retained capacity available to the Company.
MARKETING AND SALES
Prior to termination of the Marketing Services Agreement in May 1998, BANS
had been appointed the exclusive sales agent for the Company throughout the
world. The Company now performs its own marketing and sales function and
reinforces its visibility through a variety of marketing campaigns,
participation in key industry and user group conferences, such as the Pacific
Telecom Conference, speaking engagements, press conferences, promotional
campaigns and end-user awareness programs. In addition, the Company intends to
sponsor customer forums on a regional and global basis to meet with customers
and to have customers meet with each other.
The Company has developed pricing schedules which set prices for capacity
purchases on each of the Segments with volume discounts to encourage larger
capacity purchases. In addition, the Company offers a number of contract options
which give much more flexibility than has traditionally been offered by the club
cable systems to non-club carriers. These include portability, drop-and-inserts
and short term leases with options to purchase. The Company markets these
flexible purchase and lease plans to Emerging Carriers and Potential Carriers.
Such new entrants to international telecommunications generally prefer not to
use capital to acquire facilities because they are more sensitive to return on
invested capital and less confident in the continuity of their traffic than the
Established Carriers.
The Company is committed to an ongoing market review in order to determine
for each Segment the alternative costs and structures available to carriers for
capacity competitive to the FLAG System with a view to price adjustments and
incentive discounts which will attract carriers to the FLAG System.
9
<PAGE>
SYSTEM EXPANSION
As part of its objective to expand global connectivity to other cable
systems, the Company has expanded the FLAG System from the original system
design.
CHINA. In 1995, the Company reached an agreement with China Telecom for a
Landing Station at Nan Hui (Shanghai).
JAPAN. In 1996, the Company added a second Landing Station in Japan with
KDD, Japan's largest international carrier, as the Landing Party. The FLAG
System uses the same Landing Station as the TPC-5 Cable across the Pacific
connecting Japan to the United States.
SAUDI ARABIA. On March 22, 1998 the Company entered into a Landing Party
Agreement with the Ministry of Post, Telephone & Telegraph of Saudi Arabia,
whose interests were succeeded by Saudi Telecommunications Company ("STC"),
providing for the addition of Saudi Arabia to the FLAG System. This landing is
scheduled for completion in July 1999.
JORDAN. In November 1997, an additional branching unit was installed in the
Red Sea to accommodate an expansion to Jordan. On May 30, 1998 the Company
entered into a Landing Party Agreement with Jordan Telecommunications Company
("JTC"), providing for the addition of Jordan to the FLAG System. This landing
is scheduled for completion in July 1999.
COMPETITION
The FLAG System faces direct competition from one existing Euro-Asia cable,
one Euro-Asia cable under construction, regional cables, alternate cable systems
connecting Western Europe to Asia via the United States, and satellite
providers. The existing cable serving the FLAG Route is the SMW-2 cable, which
is currently operating at near full capacity, and which has only approximately
one-eighth of the capacity of the FLAG System. The cable under construction is
SMW-3. Like SMW-2, it will be a club cable with approximately 92 licensed
international telecommunications carriers as the signatories. This cable, which
is expected to be operational in the second half of 1999, will have capacity
equal to two times the FLAG System capacity. SMW-3 will have 39 landing points
in 34 countries and will have excess capacity offered in direct competition with
the Company.
FLAG will also face competition from fiberoptic cables either in service or
under construction which will connect Western Europe to Asia by transiting the
United States. Currently the primary cable connection is via the Middle East.
However, existing cables in the Atlantic Ocean connected to terrestrial cables
in the United States will link with cables under construction in the Pacific
Ocean. The ability to link these separate systems will cause direct competition
for some selected segments which FLAG markets.
In addition to the SMW-2 and SMW-3 cable links between Europe and Asia,
carriers have the alternative of transmission by satellite, including existing
geosynchronous satellites, such as INTELSAT, PanAmSat, Orion and AsiaSat, among
others, and low earth orbit systems now under construction. In general,
satellite service is considered to be of inferior quality because the
transmission is affected by time delays (echos), and service interruptions are
more frequent. Furthermore, satellite systems are more expensive to launch and
to maintain per circuit and generally have a shorter useful life and less
capacity. Nonetheless, there are many communications satellites in
Geosynchronous Orbit which are available to provide service between Europe and
Asia, and their capacity places price constraints on the sale of capacity by the
Company. Finally, low-earth orbit systems such as Iridium commenced service in
the fourth quarter of 1998. The Globalstar hybrid satellite-land system and the
Teledesic system will also provide global communications capacity which will
fulfill certain traffic demand that might otherwise be serviced by the FLAG
System's target customers.
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<PAGE>
Direct competition from future fiberoptic cables is significantly mitigated
by formidable barriers to entry. These barriers include the time and investment
required from potential competitors to design, manufacture and install a
comparable system.
EMPLOYEES
At December 31, 1998, the Company had approximately 70 full-time employees
(of which six were seconded from Bell Atlantic). None of the Company's employees
are represented by a union or covered by a collective bargaining agreement. The
Company believes that its relations with its employees are good. In connection
with the construction and maintenance of the FLAG System, the Company has used
third-party contractors, some of whose employees may be represented by unions or
covered by collective bargaining agreements.
RECENT DEVELOPMENTS
On February 26, 1999, the Company was part of a reorganization whereby FLAG
Telecom Holdings Limited ("FTHL"), a Bermuda company, became the holding company
for the FLAG Telecom group of companies. As a result of this reorganization, the
Company became a subsidiary of FTHL. FTHL also has a 50% interest in FLAG
Atlantic Limited, a company set up to build, own and operate a transatlantic
cable system connecting the U.S., U.K. and France.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company maintains executive and administrative offices at Emporium
Building, 69 Front Street, Hamilton HM12, Bermuda, where the Company leases
approximately 2,580 square feet of office space.
The Company or its subsidiaries also lease additional space for its
operations in London, England (4,100 square feet of office space and 7,500
square feet for the backup FNOC and office space), New York City (3,000 square
feet of office space), Thailand (800 square feet), Hong Kong (1,360 square
feet), Dubai (8,500 square feet) and Fujairah, U.A.E. (5,300 square feet for the
FNOC).
ITEM 3. LEGAL PROCEEDINGS.
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 4. CONTROL OF REGISTRANT.
The following table sets forth certain information with respect to the
beneficial ownership of the Class A common stock and the Class B common stock as
of December 31, 1998, by each of the
11
<PAGE>
Shareholders of the Company. Except as otherwise noted below, each of the
Shareholders identified in the table has sole voting and investment power over
the shares beneficially owned by such person.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
OF CLASS A OF CLASS B
COMMON STOCK COMMON STOCK AGGREGATE
------------------------ ------------------------ VOTING POWER
NUMBER NUMBER -------------
NAME AND ADDRESS OF BENEFICIAL OWNER OF SHARES PERCENT OF SHARES PERCENT PERCENT
- ------------------------------------------------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Bell Atlantic Corporation(1)..................... 31,200,000 23.64 223,000,410 39.41 37.68
Dallah Albaraka(2)............................... 62,400,000 47.27 103,341,643 18.26 21.45
Telecom Asia Corporation Public Co. Ltd.(3)...... -- -- 108,780,685 19.23 17.12
Marubeni Corporation(4).......................... 12,000,000 9.09 54,390,342 9.61 9.55
The Asian Infrastructure Fund(5)................. -- -- 54,390,342 9.61 8.55
Gulf Associates Communications, Limited(6)....... 26,400,000 20.00 2.20
AT&T Capital Corporation(7)...................... -- -- 5,488,829 0.97 0.86
GE Capital Corporation(8)........................ -- -- 16,466,490 2.91 2.59
Total........................................ 132,000,000 100.00 565,858,741 100.00 100.00
</TABLE>
- ------------------------
(1) Bell Atlantic Corporation is the ultimate parent of a wholly-owned
subsidiary, BANSC, which as of December 31, 1998 directly owned the shares
in the Company. The business address of BANSC is: 4 West Red Oak Lane, White
Plains, NY 10604, U.S.A.
(2) Dallah Albaraka is the parent of Rathburn Limited, which as of December 31,
1998 directly owned the shares in the Company. The business address of
Rathburn Limited is: Abbott Building, Main Street, P.O. Box 3286, Road Town,
Tortola, BVI.
(3) Telecom Asia Corporation Public Co. Ltd. is the ultimate parent of a
wholly-owned subsidiary, K.I.N. (Thailand) Company Limited, which as of
December 31, 1998 directly owned the shares in the Company. The business
address of K.I.N. (Thailand) Company Limited is: c/o Telecom Holdings
Company Limited, 30th Floor, Telecom Tower, 18 Ratchadaphisak Road, Huai
Khwang, Bangkok 10310, Thailand.
(4) Marubeni Corporation is the ultimate parent of a wholly-owned subsidiary,
Marubeni Telecom Development Limited, which as of December 31, 1998 directly
owned the shares in the Company. The business address of Marubeni Telecom
Development Limited is: Cedar House, 41 Cedar Avenue, Hamilton HM 12,
Bermuda.
(5) The business address of The Asian Infrastructure Fund is: c/o Caledonian
Bank & Trust Limited, Caledonian House, Mary Street, Georgetown, Grand
Cayman, Cayman Islands, BWI.
(6) The business address of Gulf Associates Communications, Limited is: 30
Rockefeller Plaza, New York, NY 10112, U.S.A.
(7) The business address of AT&T Capital Corporation is: c/o New Court Capital
Inc., 32 Gatehall Drive, 1st Floor, Parsippany, NJ 07054, U.S.A.
(8) GE Capital Corporation is the ultimate parent of a wholly-owned subsidiary,
GE Capital Project Finance VI Ltd., which as of December 31, 1998 directly
owned the shares in the Company. The business address of GE Capital Project
Finance VI Ltd. is: Clarendon House, Church Street West, Hamilton HMCX,
Bermuda.
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<PAGE>
ITEM 5. NATURE OF TRADING MARKET.
There is no established trading market for the Company's common stock. As of
December 31, 1998, the Company had eight holders of its common stock of which
three were located in the United States. Approximately 41% of the Company's
issued and outstanding common stock was held by United States holders.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.
Under Bermuda law, there are currently no restrictions on the export or
import of capital, including foreign exchange controls, or that affect the
remittance of dividends, interest or other payments to nonresident holders of
securities. Neither Bermuda law nor the constituent documents of the Company
provide for any limitations on the right of persons who are not citizens or
residents of Bermuda to hold securities of the Company.
ITEM 7. TAXATION.
Under current Bermuda law, no income, withholding or other taxes or stamp or
other duties are imposed upon United States security holders.
There is a limited income tax convention between the United States and
Bermuda, the application of which generally is limited to insurance income.
ITEM 8. SELECTED FINANCIAL DATA.
The following table sets forth selected historical financial data for the
Company. The balance sheet data presented below as of December 31, 1994, 1995,
1996, 1997 and 1998 and the statement of operations data presented below for the
years ended December 31, 1994, 1995, 1996, 1997 and 1998 are derived from the
financial statements of the Company, which have been audited by Arthur Andersen
& Co., independent public accountants, and have been prepared in accordance with
U.S. GAAP. The operating data presented below are derived from the Company's
records. The Company was a development stage company until October 8, 1997, the
date as of which PSA of the FLAG System occurred. The following
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<PAGE>
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," the historical financial
statements of the Company and the notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1994(1) 1995(2) 1996(2) 1997 1998
------------- ------------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
(AS RESTATED) (AS RESTATED) (AS RESTATED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Capacity sales, net of discounts........................ $ -- $ -- $ -- $ 335,982 $ 182,935
Standby maintenance and restoration revenue............. -- -- -- 4,011 25,313
------------- ------------- ------------- ----------- -----------
-- -- -- 339,993 208,248
Sales and other operating expenses:
Cost of capacity sold................................... -- -- -- 196,190 101,288
Operations and maintenance.............................. -- -- -- 4,600 37,931
Sales and marketing(3).................................. -- 10,253 316 6,598 10,680
General and administrative(4)........................... 6,899 10,560 12,466 30,615 22,518
------------- ------------- ------------- ----------- -----------
6,899 20,813 12,782 238,003 172,417
Operating income (loss)................................. (6,899) (20,813) (12,782) 101,990 35,831
Interest expense........................................ -- -- -- 20,193 61,128
Interest income......................................... 110 439 2,408 6,637 14,875
Gulf settlement(1)...................................... (7,600) -- -- -- --
------------- ------------- ------------- ----------- -----------
Income (loss) before income taxes....................... (14,389) (20,374) (10,374) 88,434 (10,422)
Provision for income taxes.............................. -- -- -- 8,991 1,260
Net income (loss) before extraordinary item............. (14,389) (20,374) (10,374) 79,443 (11,682)
Extraordinary item(5)................................... -- -- -- -- (59,839)
------------- ------------- ------------- ----------- -----------
Net income (loss)....................................... (14,389) (20,374) (10,374) 79,443 (71,521)
Cumulative pay-in-kind preferred dividends.............. -- 1,787 14,410 16,324 1,508
Redemption premium and write-off of discount on
preferred shares(6)................................... -- -- -- -- 8,500
------------- ------------- ------------- ----------- -----------
Net income (loss) applicable to common shareholders..... $ (14,389) $ (22,161) $ (24,784) $ 63,119 $ (81,529)
Ratio of earnings to fixed charges...................... -- -- -- 1.60x
Deficiency of earnings to fixed charges................. $ (14,389) $ (22,852) $ (38,802) -- $ (11,930)
BALANCE SHEET DATA:
Current assets.......................................... $ 3,529 $ 3,106 $ 3,759 $ 96,677 $ 76,114
Funds held by collateral trustee........................ -- 46,537 48,194 425,905 255,366
Construction in progress................................ 31,355 167,281 647,805 389 11,494
Capacity available for sale............................. -- -- -- 1,208,948 1,095,099
Total assets............................................ 38,328 286,476 774,447 1,836,937 1,475,766
Current liabilities..................................... 16,550 74,453 206,486 370,555 232,814
Senior notes............................................ -- -- -- -- 424,679
Long-term debt.......................................... -- 50,000 312,543 615,087 271,500
Deferred revenue........................................ -- -- -- 176,221 84,415
Preferred stock(6)...................................... -- 98,711 113,121 129,445 --
Shareholders' equity:
Class A common shares, $.0001 par value............... 13 13 13 13 13
Class B common shares, $.0001 par value............... 3 9 22 57 57
Additional paid-in capital(6)......................... 43,887 99,098 195,135 514,389 504,381
Foreign currency translation adjustment............... -- -- -- -- (704)
Retained earnings (accumulated deficit)................. (22,125) (42,499) (52,873) 26,570 (44,951)
------------- ------------- ------------- ----------- -----------
$ 21,778 $ 56,621 $ 142,297 $ 541,029 $ 458,796
------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ----------- -----------
</TABLE>
- ------------------------------
(1) The 1994 and subsequent financial statements have been restated to reflect
the $7.6 million portion of the $9.0 million payable to Gulf Associates
Communications, Limited under a settlement agreement as an expense as this
amount primarily related to their agreement to discontinue arbitration
proceedings. See Note 2 to the accompanying audited financial statements.
This restatement increased net loss and net loss applicable to common
shareholders as of December 31, 1994 by $7.6 million. This restatement had
no effect on net loss and net loss applicable to common shareholders in
1995, 1996, 1997 or 1998.
(2) The 1996 and 1995 financial statements, as originally issued in March 1997,
were restated to give effect for a $3.1 million discount on the issuance of
the Preferred Shares in 1995 relating to the 3,075,816 Class B common shares
issued to the preferred
14
<PAGE>
shareholders. See Note 2 to the accompanying audited financial statements.
For the years ended December 31, 1996 and 1995, this restatement had no
effect on net loss, increased net loss applicable to common shareholders by
$550 and $70, respectively, and had no effect on basic and diluted loss per
common share for Class A and Class B.
(3) Commissions of $10.6 million incurred for purchase commitments obtained
prior to July 3, 1995 were not contingent upon reaching PSA and have been
expensed in 1995 and 1996. Commissions for purchase commitments obtained
after July 3, 1995 are recognized as an expense upon recognition of the
related revenues.
(4) Included in general and administrative expenses for years ended December 31,
1994 to 1997 are program management expenses which include reimbursements to
BANSC, a Shareholder of the Company, for all costs and out-of-pocket
expenses incurred by BANSC in performing project management services
pursuant to its arrangement with the Company. Costs and out-of-pocket
expenses include payroll costs of BANSC employees and approved Bell Atlantic
employees who work on the FLAG System, rent, professional fees, office
support and other costs. In addition, BANSC receives a fee equal to 16% of
payroll costs and of certain outside contractor and consultant costs.
(5) In connection with the Refinancing, the Company recorded an extraordinary
loss of $59.8 million, representing the write-off of unamortized deferred
financing costs related to the Old Credit Facility.
(6) In connection with the Refinancing, the Company redeemed the Preferred
Shares at a redemption price of 105% of the liquidation preference. The
excess of the redemption value over the carrying value of the Preferred
Shares on the date of the redemption of $8.5 million has been reflected as a
decrease in additional paid-in capital.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the
accompanying audited consolidated financial statements of the Company, including
the notes related thereto appearing elsewhere in this Form 20-F.
OVERVIEW
The Company is a facilities-based provider of telecommunications capacity to
licensed international carriers, resellers and ISPs through its ownership of the
FLAG System, the world's longest digital fiberoptic undersea cable system. The
FLAG System links the telecommunications markets of Western Europe and Japan
through the Middle East, India, Southeast Asia and China along a route adjoining
countries with approximately 70% of the world's population. The Company entered
commercial service in November 1997 with 14 landing points in 11 countries
providing capacity on the FLAG System at market-based prices.
During the year, the Company signed agreements with two new Landing Parties
which will increase the number of landing points on the FLAG System to 16 in 13
countries. The Company reached formal agreements with the STC and the JTC to add
landing points in Jeddah and Aqaba respectively. The estimated cost to construct
these landing points is approximately $53 million and is being funded through
the Company's cash flow and contributions from Landing Parties. These Landing
Stations are expected to enter service in July 1999.
REVENUE
The primary method by which the Company earns revenue is through the sale of
capacity on the FLAG System under Capacity Sale Agreements. The Company's prices
for capacity sales under CSAs are market-based. The Company maintains a
published price list from which certain volume discounts may be allowed.
Capacity prices are generally quoted in terms of a half-MIU of capacity on any
one of the FLAG System's Segments and are generally payable in full within 30
days of invoicing. Customers have options with regard to routing, the period
capacity is held for, portability and drop-and-inserts.
The purchasing carrier becomes responsible for the standby maintenance
charges payable annually to the Company in accordance with a pre-determined
price schedule. The purchasing carrier also becomes responsible for their pro
rata share of the incremental cost incurred in carrying out repairs of the FLAG
System (running costs). The Company also generates revenue from restoration
services provided to third
15
<PAGE>
parties. Revenues from providing standby maintenance and restoration services
are recognized in the period those services are provided.
Revenues are recognized upon the date the risks and rewards of ownership are
transferred to the customer, which is the date the capacity is made available
for activation and the customer becomes responsible for standby maintenance and
repair. This policy applies both to agreements covering the sales of capacity
which are accounted for as sales and to those accounted for as sales-type
leases. Carriers may purchase capacity on either a whole-MIU or half-MIU basis.
Where a half-MIU is purchased, the capacity must be matched with another
correspondent carrier before it can be used to carry traffic. For sales of
half-MIUs where there has been no match of a correspondent carrier the Company
does not recognize the revenue until the period the capacity is matched. Amounts
received or receivable for such sales of half-MIUs are reflected as deferred
revenue in the accompanying balance sheets. The Company is able to offer certain
other more flexible or shorter-term capacity offerings to its customers. In such
circumstances, the Company will structure each transaction as a lease of
capacity for the relevant term, with the Company being responsible for all
associated recurring and non-recurring charges for the duration of the lease.
Within these lease structures the Company is able to offer various flexible
products such as short- or long-term leases, and leases with an option or
obligation to eventually purchase the capacity.
Revenues from operating lease transactions are incidental and as such are
recorded as a reduction of capacity available for sale. Despite the availability
of these flexible alternatives to capacity purchases, the Company anticipates
that such offerings will not represent a material portion of its future
revenues.
Payments due from purchasers of capacity are generally payable within 30
days; however, the Company has receivables outstanding greater than 30 days. The
Company has established an allowance for doubtful accounts based on potentially
uncollectible amounts due from two carriers. As of December 31, 1998, the
Company had an allowance of $8.6 million.
CAPACITY AVAILABLE FOR SALE
The Company capitalized direct and indirect expenditures incurred in
connection with the construction of the FLAG System and such capitalized
expenditures are charged to cost of sales as revenues from sales of capacity are
recognized. Capacity available for sale totalled $1,095.1 million as of December
31, 1998.
YEAR 2000
The "Year 2000" problem results from the use of two digits rather than four
to define the year in computer hardware and software and in electronic
equipment. When electronic systems process dates before and after January 1,
2000, they may recognize a date represented by "00" as indicating the year 1900,
instead of 2000, or may not recognize the date at all. Unless steps are taken to
reprogram affected equipment and rewrite software, this may create processing
ambiguities that can cause errors and system failures. However, the precise
nature and impact of such failures is uncertain and will depend on the computer
chip, system or software, and its location and function. By definition, the
effects of the problem can only be estimated in advance and will not be known
with certainty until into and even after the year 2000 itself.
During 1997, the Company had an independent evaluation undertaken of the
risks created by the Year 2000 problem. In assessing the risks, the Company
focused on (i) its internal information technology ("IT") and non-IT systems,
including, but not limited to, computer hardware and software, printers,
facsimile machines, and other such equipment, (ii) all network equipment,
computers, systems and associated facilities covering the operation and
maintenance of the FLAG System, and (iii) interfaces with third parties with
which the Company has material relationships, such as suppliers, customers and
financial institutions.
16
<PAGE>
The Company has completed its assessment and response planning and has
substantially completed necessary remediation measures with respect to those
internal systems. The Company's remediation has included updating various
computer hardware and software and printers to be Year 2000 compliant. All new
hardware and software purchased since the independent evaluation took place are
Year 2000 compliant and, where possible, Year 2000 certification has been
obtained from the suppliers. The Company has also determined that the Year 2000
problem will not have a material adverse effect on its business. To date, the
Company has expended less than $0.3 million and believes future remediation with
respect to its internal systems to be less than $0.1 million. With respect to
the Company's internal systems, the Company believes it will complete its
planned remediation and any testing in time to ensure the Year 2000 problem will
not have a material adverse effect on the Company or its business.
The Company has also completed its assessment of potential Year 2000
problems which may arise from failures of third parties to be Year 2000
compliant. However, many of the Company's suppliers and customers and the
Landing Parties are still engaged in executing their Year 2000 readiness efforts
and, as a result, the Company cannot fully evaluate the Year 2000 risks it would
be exposed to if the above third parties should fail to be Year 2000 compliant.
The most likely worst case scenario for the Company with respect to the Year
2000 problem is the failure of a Landing Party to be Year 2000 compliant such
that its equipment fails temporarily. This could result in the FLAG System
shutting down temporarily, akin to a break in the cable. A contingency plan has
been developed to mitigate any such impact by arranging for FLAG to continue
service to customers through alternative routing of traffic.
While the Company believes that it is taking 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 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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997
REVENUES
Total revenue recognized by the Company during the year ended December 31,
1998, was $208.2 million compared to $340.0 million in total revenue for the
year ended December 31, 1997.
Revenue recognized from the sale of capacity was $182.9 million for the year
ended December 31, 1998 compared to $336.0 million during the period from
October 8, 1997, the PSA date, to December 31, 1997. The decrease in revenue
recognized from capacity sales of $153.1 million from the period from PSA to
December 31, 1997 compared to the year ended December 31, 1998 is a result of
1997 revenue including sales of capacity entered into prior to PSA of which $316
million was recognized as revenue. As of December 31, 1998, the Company had
entered into sales transactions with 80 international telecommunication carriers
compared to 66 as of December 31, 1997.
Revenue recognized from standby maintenance fee was $23.5 million for the
year ended December 31, 1998 compared to $4.0 million for the period from PSA to
December 31, 1997. The increase in standby maintenance revenue of $19.5 million
for the year ended December 31, 1998 is due to the Company recognizing 12 months
of standby maintenance revenue in 1998 compared to only three months in 1997 as
a result of the Company commencing operations in October of 1997. The Company
also generated revenues from restoration services during the year ended December
31, 1998. Revenues from these services, provided to alternate cable systems on a
non-reciprocal basis, were $1.7 million. No revenues were recognized in respect
of restoration services in 1997.
17
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OPERATING EXPENSES
For the year ended December 31, 1998, the Company recorded $101.3 million in
respect of the cost of capacity sold compared to $196.2 million recorded in
1997. The gross profit on capacity sales of 44.60% for the year ended December
31, 1998 compares to a gross profit of 41.60% realized in the period from PSA to
December 31, 1997. The cost of sales recorded in 1997 included a $28.9 million
provision related to price protection credits, discussed below, compared to no
such provision included in the 1998 cost of sales. The provision for price
protection credits recorded in 1997 contributed to the lower gross margin
experienced in 1997 compared to 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.
In connection with certain sales, the Company has entered into price
protection arrangements entitling the relevant customers to capacity credits if
the Company lowers its list prices prior to December 31, 1999. For periods
during which the Company lowers its prices, the Company records a provision for
cost of sales based on the estimated cost value of the additional capacity
granted. No adjustment was made to the Company's list prices in 1998, and
accordingly no such provision was recorded in the year ended December 31, 1998.
Currently, the Company does not plan to offer price protection on future sales
of capacity.
During the year ended December 31, 1998 the Company incurred $37.9 million
in operations and maintenance costs compared to $4.6 million for the period from
PSA to December 31, 1997. 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. Costs recognized in 1997 represent the portion of
standby operations and maintenance expenses incurred from PSA to December 31,
1997. No maintenance costs were incurred by the Company during construction.
During the year ended December 31, 1998, $10.7 million in sales and
marketing costs were recognized compared to $6.6 million recognized during the
period from PSA to December 31, 1997. Sales and marketing costs comprise sales
commissions due under agreements with the Company's suppliers and BANS plus
costs associated with sales and marketing activities.
In May 1998, the Company and BANS agreed to terminate the Marketing Services
Agreement which appointed BANS as the exclusive sales agent for the Company
throughout the world. Sales and marketing activities are now undertaken directly
by the Company. Sales commissions incurred under the Marketing Services
Agreement prior to its termination are expensed at the time the related revenue
is recognized. Commissions on sales capacity credits or half-MIUs where there
has been no match of a correspondent carrier are reflected as a prepaid expense
at the time incurred and expensed when the related revenue is recognized.
General and administrative expenses decreased from $30.6 million for the
year ended December 31, 1997 to $22.5 million for the year ended December 31,
1998. The decrease is due to the partial reversal of the allowance for doubtful
accounts made in 1997, resulting from collections from customers of amounts
previously provided, partially offset by costs associated with the transition of
the Company from a development stage company to an operating company.
18
<PAGE>
INTEREST EXPENSE AND INTEREST INCOME
During the year ended December 31, 1998 the Company incurred $61.1 million
in interest expense on borrowings compared to $20.2 million incurred during the
period from PSA to December 31, 1997. Prior to PSA, the Company capitalized
interest costs as a component of construction in progress.
Interest income of $14.9 million was earned during the year ended December
31, 1998 compared to $6.6 million earned during the year December 31, 1997. In
1998, interest was earned 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 a new credit facility
entered into by the Company in connection with the Refinancing which occurred on
January 30, 1998 (the "New Credit Facility"). Interest earned in 1997 consisted
primarily of interest earned on cash balances received from equity contributions
during the year.
PROVISIONS FOR TAXES
The provision for taxes was $1.3 million for the year ended December 31,
1998 compared to $9.0 million for the period from PSA to December 31, 1997. The
tax provisions for both years consist 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. 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. The decrease in tax
expense of $7.7 million is due to a greater proportion of sales recorded in 1998
to customers in jurisdictions where the Company does not have a taxable
presence.
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. The loss on refinancing represents the write-off of unamortized
deferred financing costs related to the Company's initial project financing (the
"Old Credit Facility").
In addition, in connection with the Refinancing, the Company redeemed the
Preferred Shares at a redemption price of 105% of the liquidation preference.
The excess of the redemption value over the carrying value of the Preferred
Shares on the date of the redemption of $8.5 million has been reflected as a
decrease in additional paid-in capital.
NET LOSS AND NET LOSS APPLICABLE TO COMMON SHAREHOLDERS
For the year ended December 31, 1998 the Company recorded a net loss of
$71.5 million compared to net income of $79.4 million for the year ended
December 31, 1997, a decrease of $150.9 million. This decrease was attributable
to a reduction in operating income of $66.2 million, an increase in interest
expense of $40.9 million and an extraordinary loss on refinancing of $59.8
million offset by an $8.2 million increase in interest income and a $7.7 million
reduction in tax expense.
The net loss applicable to common shareholders for the year ended December
31, 1998 was $81.5 million compared to a net income for the year ended December
31, 1997 of $63.1 million.
Basic and diluted income (loss) per Class A common shares decreased from
income per share of $0.05 in 1997 to a loss of ($0.07) per share in 1998
reflecting the loss applicable to common shareholders in 1998. Basic and diluted
income (loss) per Class B common share decreased from income per share of $0.14
in 1998 to a loss of ($0.13) per share in 1998 reflecting the loss applicable to
common shareholders in 1998 and an increase in the weighted average Class B
common shares outstanding during the period from 396,890,512 to 565,858,741.
19
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1996
REVENUES
The Company had no revenues in 1996 because the FLAG System was still under
construction.
As of December 31, 1997, the Company had invoiced approximately $432.8
million of capacity of which approximately $336.0 million was recognized as
revenue and approximately $96.8 million was recorded as deferred revenue. As of
December 31, 1997, the Company had 66 international telecommunications carriers
as customers and had sold approximately 5% of the total design capacity of the
FLAG System. Customers are generally responsible for, among other things,
standby maintenance fees. Through December 31, 1997, the Company recognized
standby maintenance revenues of $4.0 million.
In addition, the Company entered into capacity credit agreements pursuant to
which customers commit to acquire capacity at a future date. As of December 31,
1997, the Company had recorded deferred revenues of approximately $96.8 million
related to signed capacity credit agreements, of which approximately $59.1
million was received in cash or recorded as a current receivable and
approximately $37.7 million was recorded as long-term accounts receivable.
In exchange for construction costs incurred, the Company granted
approximately $88.0 million in credits for future capacity acquisition, of which
$77.7 million remains unutilized and has been recorded as deferred revenues as
of December 31, 1997.
Capacity credits will be recognized as revenue in the period the credits are
utilized (i.e. when the purchasers notify the Company of which circuits they are
activating and become responsible for standby maintenance fees as owners of the
capacity). Deferred revenues also include approximately $14.0 million of amounts
invoiced for standby maintenance which are applicable to future periods.
OPERATING EXPENSES
For the year ended December 31, 1997, the Company recorded $196.2 million of
cost of sales on capacity sale revenues of $336.0 million, resulting in a gross
profit on capacity sales of 41.60%. There were no sales or costs of sales
recognized in 1996. The $196.2 million of cost of sales recorded in 1997
includes $28.9 million related to price protection credits discussed below and
$167.3 million related to costs of capacity sold in 1997.
Because capacity sales recognized as revenues in 1997 were generally sold at
a higher price per unit than the price per unit the Company expects to realize
in the future, the Company has recognized a higher cost of sales per unit in
1997 than it expects to recognize in the future based on management's current
best estimate 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.
In connection with certain sales, the Company has entered into price
protection arrangements entitling the relevant customers to capacity credits if
the Company lowers its list prices prior to December 31, 1999. For periods
during which the Company lowers its list prices, the Company records a provision
for cost of sales based on the number of additional units of capacity granted.
Based on declines in the Company's listed prices through December 31, 1997, the
Company recorded a provision for cost of sales of approximately $28.9 million,
which was included in the total cost of sales of $196.2 million recorded in the
year ended December 31, 1997.
Currently, the Company does not plan to offer price protection on future
sales of capacity, and all existing price protection arrangements provide for
additional capacity only if the Company's list prices are reduced before
December 31, 1999. The Company's business plan and sales forecast do not
anticipate further decreases in the Company's list prices through the end of
1999.
20
<PAGE>
During the period from PSA until December 31, 1997, the Company also
recognized $4.6 million in operations and maintenance costs relating primarily
to the provision of standby maintenance costs under Maintenance Zone Agreements.
Of this amount, approximately $4.0 million was recoverable from customers.
Sales and marketing expenses increased from $0.3 million for the year ended
December 31, 1996 to $6.6 million for the year ended December 31, 1997. Sales
and marketing expenses in 1997 consisted primarily of $3.1 million of
commissions on sales paid or payable to BANS and $3.5 million of commission
payable to an unrelated party. In 1995 and 1996, the Company expensed a total of
$10.6 million of commissions ($10.3 million of that in 1995) representing
commissions incurred for purchase commitments obtained prior to July 3, 1995
which were not contingent upon reaching PSA. The purchase commitments obtained
prior to July 3, 1995 are included in the capacity sales recognized as revenues
in 1997. Accordingly, the Company incurred a total of $17.2 million of
commissions through December 31, 1997, representing approximately 5% of revenues
of $336.0 million recognized through December 31, 1997.
General and administrative expenses increased from $12.5 million in 1996 to
$30.6 million in 1997. Most of the increase was due to a $9.1 million provision
for doubtful accounts, a $4.0 million increase in salaries, wages and benefits
reflecting the Company's staffing up for operations and a $2.1 million increase
in recruiting and other professional services costs.
INTEREST EXPENSE AND INTEREST INCOME
Until PSA, the Company capitalized interest costs as a component of
construction in progress. Of total interest incurred of $62.7 million in 1997,
$42.5 million was incurred prior to PSA and capitalized as a component of
construction in progress. The remaining $20.2 million of interest incurred in
1997 has been reflected as interest expense in the statement of operations and
was incurred after PSA.
Interest income of $6.6 million was earned during the year ended December
31, 1997 compared to $2.4 million for the year ended December 31, 1996. Interest
income was derived primarily from the short-term investment of the Company's
cash held by the Collateral Trustee. Since all available funds not held by the
Collateral Trustee were needed to fund construction costs and operating
expenses, the Company maintained minimal cash balances since its inception
through December 31, 1997. Funds held by the Collateral Trustee increased from
$48.2 million as of December 31, 1996 to $425.9 million as of December 31, 1997
primarily resulting from a lender requirement to deposit capacity sale proceeds
received in the fourth quarter of 1997 into the collateral trust account.
PROVISION FOR TAXES
The provision for taxes of $9.0 million recorded in the 1997 statement of
operations consists of taxes incurred on income derived from capacity sales and
standby maintenance revenues 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. 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 (LOSS) AND NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS
Net income increased to $79.4 million for the year ended December 31, 1997
compared to a loss of $10.4 million for the year ended December 31, 1996, an
increase of $89.8 million. This increase was attributable to an increase in
operating income of $114.8 million due to the sale of capacity as discussed
above and the increase in interest income of $4.2 million, offset by $20.2
million in interest expense and the $9.0 million provision for taxes discussed
above.
21
<PAGE>
The Preferred Shares issued by the Company accrued pay-in-kind dividends at
the rate of 13% for the first three years. All dividends recorded to date have
been pay-in-kind dividends. Net income (loss) applicable to common shareholders
increased from a loss of $24.8 million for the year ended December 31, 1996 to
income of $63.1 million for the year ended December 31, 1997, reflecting the
$89.8 million increase in net income, offset by an increase in pay-in-kind
dividends of $1.9 million.
Basic and diluted income (loss) per Class A common share increased from a
loss per share of ($0.02) in 1996 to income per share of $0.05 in 1997,
reflecting the increase in net income applicable to common shareholders. Basic
and diluted income (loss) per Class B common share increased from a loss per
share of ($0.13) in 1996 to income per share of $0.14 in 1997, reflecting the
increase in net income applicable to common shareholders and an increase in the
weighted average Class B common shares outstanding during the period from
164,445,547 shares to 396,890,512 shares.
LIQUIDITY AND CAPITAL RESOURCES
On January 30, 1998, the Company completed the Refinancing which resulted in
the repayment of all $615.1 million of outstanding borrowings as of December 31,
1997 under the Old Credit Facility and the redemption of the Preferred Shares.
The Refinancing consists of $370.0 million of bank credit facilities and $430.0
million of 8 1/4% Senior Notes maturing January 30, 2008 (the "Senior Notes").
Upon consummation of the Refinancing on January 30, 1998, the remaining
amount of unamortized capitalized financing costs related to the Old Credit
Facility (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 Shares over the $131.0 million carrying value of the Preferred Shares
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. 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 Company's exposure to interest rate fluctuations on the
bank credit facility. Under the swap agreements, the Company pays a fixed rate
of 5.60% 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
based on current plans. 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 December 31, 1998, 1997 and 1996, the Company had working capital
deficits of $156.7 million, $273.9 million and $202.7 million, respectively. The
working capital deficit as of December 31, 1998 was primarily a result of the
current accounts payable to the Contractors 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.
The working capital deficits as of December 31, 1997 and 1996 are primarily the
result of: (i) proceeds from equity capital calls and the issuance of the
Preferred Shares held by the Collateral Trustee being classified as a
non-current asset and therefore excluded from working capital; (ii) drawdowns
under the Old Credit Facility not taking place until expenditures for
22
<PAGE>
capacity available for sale are made; and (iii) the Company recording current
accounts payable to the Contractors and to BANSC for costs incurred under the
Construction Contract and the Program Management Services Agreement,
respectively, until such amounts are paid, generally one to two months after the
invoice date.
Total cash provided by operating activities and used in investing activities
during the year ended December 31, 1998 was $88.9 million and $186.1 million,
respectively. As of December 31, 1998, cash on deposit with the Collateral
Trustee or in escrow had decreased to $255.4 million from $425.9 million at
December 31, 1997, primarily as a result of payments to the Contractors.
Total cash provided by operating activities and used in investing activities
during the year ended December 31, 1997 was $285.2 million and $528.7 million,
respectively. Cash was also used to pay for $11.8 million of financing costs in
the year then ended. These expenditures were funded by equity capital calls of
$335.6 million and loans under the Old Credit Facility of $414.9 million, less
repayment of loans under the Old Credit Facility of $112.4 million, less the
increase in funds held by the Collateral Trustee of $377.7 million and less a
settlement payment of $3.0 million to Gulf Associates Telecommunications,
Limited. As of December 31, 1997, cash on deposit with the Collateral Trustee
pending future disbursements had increased to $425.9 million.
During the year ended December 31, 1996 total cash used by the Company in
operating activities was $12.1 million, cash payments for organization and
financing costs were $29.3 million and $329.9 million was expended on investing
activities, primarily for FLAG System construction costs. These cash payments
were funded by equity capital calls of $110.5 million and borrowings under the
Old Credit Facility of $262.5 million, less the $1.7 million increase in funds
held by the Collateral Trustee.
In November and December 1997, the Company entered into interest rate
collars and treasury rate lock agreements with a total notional amount of $400
million to hedge its exposure to interest rate movements occurring between the
date the hedges were entered into and the anticipated date of the closing of the
Company's issuance of the Senior Notes.
ASSETS
The Company's major asset is the telecommunications capacity available for
sale on the FLAG System, which accounts for approximately $1.1 billion of assets
as of December 31, 1998 ($1.2 billion as of December 31, 1997). The Company's
fixed assets consist primarily of office furniture, leasehold improvements,
computer equipment and autos. Other assets are primarily intangibles such as
capitalized organization and financing costs as previously discussed.
The Company is currently constructing Landing Stations in Saudi Arabia and
Jordan to enhance the FLAG System which are expected to cost approximately $53
million.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a result of its trading, the Company is exposed to foreign currency risk,
and as a result of its financing structure, to interest rate risk.
CURRENCY RISK
The Company does not believe that it is exposed to significant risk from
movements in foreign currency exchange rates. All revenues from the disposition
of capacity and billings of standby maintenance and restoration services are
payable in Dollars. All contracts for the provision by third parties of
restoration are invoiced to the Company in Dollars. Certain vendor contracts for
the provision to the FLAG System of operations and maintenance services and
local operating expenses of its overseas subsidiary companies are payable in
currencies other than Dollars. Management believes that these
23
<PAGE>
exposures are not material to the financial position of the Company. Whenever
deemed appropriate, the Company may hedge its exposure to foreign currency
movements.
INTEREST RATE RISK
The Company is exposed to interest rate risk in its financing instruments.
The Company's long-term finance is provided by fixed rate senior notes and
floating rate bank debt. The Company uses derivative financial instruments for
the purpose of reducing its exposure to adverse fluctuations in interest rates.
The Company does not utilize derivative financial instruments for trading or
other speculative purposes. The counterparties to these instruments are major
financial institutions with high credit quality. The Company is exposed to
credit loss in the event of nonperformance by these counterparties.
The Company also receives interest at floating rates on funds held by the
Collateral Trustee and in escrow. See "Liquidity and Capital Resources" above.
LONG-TERM DEBT
<TABLE>
<CAPTION>
PRINCIPAL COMPANY'S
TYPE OF PAYMENTS MATURITY AMOUNT FAIR VALUE OPTION TO
INSTRUMENT DUE DATE INTEREST RATE ($, MILLION) ($, MILLION) REDEEM
- ---------------- ---------------- --------------- -------------------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Senior Notes Semi-annually January 2008 Fixed 8 1/4% 430.0 419.3 Any time after
January 2003
Monthly to January 2005 Floating LIBOR + 190 to 271.5 271.5 At any time
semi-annually 212.5 basis points
Bank Credit
Facility
</TABLE>
INTEREST RATE SWAPS
<TABLE>
<CAPTION>
NOTIONAL COUNTER-PARTY'S
PAYMENTS MATURITY RATE RATE AMOUNT FAIR VALUE OPTION TO
TYPE OF INSTRUMENT DUE DATE PAYABLE RECEIVABLE ($, MILLION) ($, MILLION) EXTEND UNTIL
- ------------------------ ----------- --------------- ----------- ---------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Pay fixed, receive Quarterly January 2000 5.60% LIBOR 60.0 0.9 January 2001
floating
Pay fixed, receive Quarterly July 2000 5.79% LIBOR 100.0 1.7 July 2001
floating
</TABLE>
The LIBOR rate at December 31, 1998 was 5.00%, and at March 26, 1999 was 4.89%.
24
<PAGE>
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT.
The following table sets forth, as of December 31, 1998, certain information
and ages for each of the Company's directors and certain senior managers:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- --------------------------------------------------------------- ----------- -------------------------------------------
<S> <C> <C>
Andres Bande................................................... 54 Chairman and Chief Executive Officer
Daniel Petri................................................... 50 Director
Abdul Latif Ghurab............................................. 56 Director
Adnan Omar..................................................... 46 Director
Craig Racine................................................... 31 Director
Dr. Vallobh Vimolvanich........................................ 57 Director
Fumio Uehara................................................... 49 Director
Judith Collis.................................................. 38 Director
Peter Bubenzer................................................. 44 Director
Edward McCormack............................................... 43 Chief Financial Officer
Stuart Rubin................................................... 51 General Counsel and Secretary
Larry Bautista................................................. 35 Treasurer
</TABLE>
ANDRES BANDE. Mr. Bande has served as Chairman of the Board and Chief
Executive Officer of the Company since January 1998. Before joining the Company,
Mr. Bande was the President of Sprint International from 1996 to the beginning
of 1998. Prior to that, he was President of Ameritech International Corporation
from 1990 to 1996. From 1987 to 1990, Mr. Bande was Executive Vice President of
US West International. From 1976 to 1986, he was President of Teleconsult, an
international telecommunications consulting practice. He holds a law degree from
the University of Chile and a Master's degree in politics and international law
from Oxford University.
DANIEL PETRI. Mr. Petri was the acting Chairman and Chief Executive Officer
of the Company until January 12, 1998. Mr. Petri is also President of Bell
Atlantic Global Systems Company, an affiliate of a Shareholder of the Company.
He also serves on the Board of Directors of the Company and is the Shareholder
representative for Bell Atlantic. Over the past 25 years with NYNEX and most
recently Bell Atlantic, Mr. Petri has held many key positions including Vice
President and General Manager-Customer Services-Central New York, Vice President
and General Manager of Midtown Manhattan, and Managing Director of Worldwide
Operations. Mr. Petri received a Bachelor of Science degree in Mechanical
Engineering from Rutgers University and a Master of Science degree in Management
Science from Long Island University. He has also completed management programs
in General Management, Finance, and Marketing at the Columbia University
Graduate School of Business.
ABDUL LATIF GHURAB. Mr. Ghurab is a director of the Company and is the
Shareholder representative for Dallah Albaraka Group. Mr. Ghurab is the Chairman
of the South East Asia Holding Company (Singapore) and the Transport Sector
Board of Dallah Albaraka. Mr. Ghurab is also a member of the Board of Directors
of Dallah Albaraka Group. Mr. Ghurab received a Bachelor of Science degree in
Geology from Saint Louis University and a Master of Arts degree in Geography
from Saint Louis University.
ADNAN OMAR. Mr. Omar is a director of the Company. Mr. Omar is the
Technical Director of Al-Jazirah Holding Company which is fully owned by Dallah
Albaraka Group. Mr. Omar also serves on the Board of Directors of Basafojagu
Co., South East Asia Holding Co., Dallah Transport Co., Dallah Pilgrimage
Transport Co., and Dallah Lebanon Co. for Tourism and Transport. Prior to
joining Dallah Albaraka Group, Mr. Omar spent over 12 years in construction
management and planning of large infrastructure projects. Mr. Omar received a
Bachelor of Science degree in Civil Engineering from Southampton University in
the United Kingdom.
25
<PAGE>
CRAIG RACINE. Mr. Racine is a director of the Company and heads The Asian
Infrastructure Fund's telecom sector. During 1996-97 he was seconded to the
Peregrine Research Institute where he was a Regional Director, leading the Asian
telecom research initiatives and gaining valuable direct investments and
investment banking experience. Prior to The Asian Infrastructure Fund, Mr.
Racine was a core member of Telstra's international operations closing and
managing projects in Southeast Asia and the Indian sub-continent. He holds
Bachelor of Commerce and Bachelor of Laws degrees and a Post Graduate Diploma in
Finance from the University of Melbourne.
DR. VALLOBH VIMOLVANICH. Mr. Vimolvanich is a director of the Company and
the shareholder representative for Telecom Asia. Mr. Vimolvanich serves on the
Board of Directors of Telecom Asia, Comlink Co., Ltd., UTV Cable Network Public
Co., Ltd., and Siam City Bank Limited. Mr. Vimolvanich holds a Master of Science
and a Ph.D. degree in Electrical Engineering from the University of California
and a Bachelor of Engineering degree in Electrical Engineering from
Chulalongkorn University.
FUMIO UEHARA. Mr. Uehara is a director of the Company and is the
Shareholder representative for Marubeni Telecom Development Ltd. Mr. Uehara is
President of Marubeni Telecom Development Ltd. and also General Manager of
Telecom & Information Network Dept. of Marubeni Corporation. Mr. Uehara has
spent over 25 years in planning and management of telecommunications
infrastructure projects. He received a Bachelor of Commercial Science degree
from Hitotsubashi University in Japan.
JUDITH COLLIS. Ms. Collis is a director of the Company. She has been a
partner in the Bermuda based law firm of Appleby Spurling & Kempe since 1991.
Ms. Collis advises on public and private offerings, mergers and acquisitions,
structuring and offerings of open and closed ended funds and partnerships and
joint ventures for telecommunications, energy and infrastructure projects. In
addition to having written a number of articles, Ms. Collis contributes to
various committees of the International Bar Association. Ms. Collis is a member
of Middle Temple Bar in England as well as the Bermuda Bar Association and she
holds a law degree from King's College, London University.
PETER BUBENZER. Mr. Bubenzer is a director of the Company. Mr. Bubenzer has
spent over 17 years with the Bermuda law firm of Appleby, Spurling & Kempe, as a
partner for the last 11. Mr. Bubenzer has been the head of that firm's Company
Department since 1993. Mr. Bubenzer holds a law degree from Exeter University in
England.
EDWARD MCCORMACK. Mr. McCormack has served as the Chief Financial Officer
of the Company since February 1996. Prior thereto, Mr. McCormack spent 17 years
with Bechtel, an engineering and construction company. In his final position, he
was based in London as Chief Financial Officer of Bechtel Europe, Africa, Middle
East and Southwest Asia. Prior to that time he had assignments at their San
Francisco headquarters and in Saudi Arabia. Mr. McCormack holds a Bachelor of
Commerce degree from University College in Galway, Ireland.
STUART RUBIN. Mr. Rubin has served as the General Counsel of the Company
since January 1996. Prior to joining the Company, Mr. Rubin spent over 20 years
with the law firm of Coudert Brothers, as a partner for the last 12, and two
years with the U.S. Peace Corps in Malaysia. As an international lawyer, Mr.
Rubin worked extensively in Southeast Asia, the U.S., and England, specializing
in cross border financial transactions, joint ventures and other commercial
transactions. Mr. Rubin holds a J.D. degree from Columbia University School of
Law and a Bachelor of Arts degree in Political Science from Union College.
LARRY BAUTISTA. Mr. Bautista has served as the Treasurer of the Company
since December 1995. Prior to joining the Company, Mr. Bautista spent over six
years in various finance and treasury positions at NYNEX. He was a member of the
team that structured and put in place the existing project debt financing for
the Company. Mr. Bautista has an M.B.A. degree with honors from Fordham
University and a
26
<PAGE>
Bachelor of Science degree in Management Engineering from Ateneo de Manila
University in the Philippines. He is a seconded employee from Bell Atlantic.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.
For the year ended December 31, 1998, the aggregate compensation of all
members of the Board of Directors and Executive Officers of the Company was
approximately $4.1 million.
The Company has adopted the 1998 Long-Term Incentive Plan (the "Plan") which
is administered by a committee of the Board of Directors of the Company.
Officers, employees and consultants of the Company are eligible to participate
in the Plan with specific grants and the terms thereof (including exercise
price) being approved by the Board of Directors of the Company, subject to
certain limitations contained in the Plan. The total number of Class B common
shares that may be delivered under the Plan is 25,237,831.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.
There are no options or other rights to purchase the Company's registered
securities, the Senior Notes. For information regarding options to purchase
common shares of the Company, see Note 6 of the Company's financial statements
at page F-15 of this Form 20-F.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
The Company and certain of its Shareholders or affiliates thereof have
entered into agreements for the development, construction, operation, financing
and marketing of the FLAG System. The following paragraphs are a summary of the
material provisions of certain of these agreements and are qualified in their
entirety by reference to the actual agreements, copies of which are available
from the Company.
PROGRAM MANAGEMENT SERVICES AGREEMENT
Under the terms of the Program Management Services Agreement, BANSC, a
Shareholder of the Company, managed all aspects of the planning and construction
of the FLAG System including regulatory aspects, physical layout, development of
specifications, evaluation of contract bids, negotiation of the C&MA and
supplemental arrangements, development of restoration plans, development of an
O&M plan, development of a quality assurance plan and management of the actual
construction and installation of the FLAG System. The Company, in consideration
of such services, agreed to reimburse BANSC for all costs and out-of-pocket
expenses incurred in connection with performing such services plus a fee equal
to 16% of payroll costs and certain outside contractor and consultant costs. In
May 1998, the Company entered into an agreement providing for the termination of
the program management services provided by BANSC. In June 1998, FLAG made a
final payment to BANSC to settle all outstanding liabilities under the Program
Management Services Agreement. The total amount incurred by the Company under
this agreement in 1998 was $2.8 million.
MARKETING SERVICES AGREEMENT
The Company and BANS, a wholly-owned subsidiary of BANSC, a Shareholder of
the Company, entered into a Marketing Services Agreement pursuant to which BANS
was responsible for marketing the assignable capacity of the FLAG System. BANS
was appointed the exclusive sales agent for the Company throughout the world.
BANS bore all marketing expenses and costs it incurred in providing marketing
services under the agreement. For the period from January 1, 1998 to May 21,
1998, BANS invoiced the Company for commissions at the rate of 3% of the
commitments obtained. Effective May 21, 1998, under a transition agreement, the
Company and BANS agreed to terminate the Marketing Services Agreement. Under the
transition agreement, the Company agreed to pay certain of BANS' closing down
expenses and
27
<PAGE>
certain commissions in connection with their pre-termination and
post-termination activities. The Company has paid BANS for all commissions due
under the Marketing Services Agreement and will pay up to $3 million of
commissions resulting from certain sales. Also under the 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 total amount incurred by the Company under these
agreements in 1998 was $2.2 million.
CONTINGENT SPONSOR SUPPORT AGREEMENTS
As a condition to obtaining the Old Credit Facility, each of Bell Atlantic,
Dallah Albaraka, Telecom Asia Corporation Public Co. Ltd. and Marubeni (the
"Sponsors"), all of which are Shareholders of the Company, entered into
Contingent Sponsor Support Agreements under which the Sponsors agreed to provide
up to $500 million of additional equity contributions in the event of certain
defaults by the Company. A portion of the proceeds of the Refinancing was used
to repay amounts outstanding under the Old Credit Facility. The Sponsors
benefitted indirectly from such repayment in the form of a release from their
contingent obligations under the Contingent Sponsor Support Agreements.
REDEMPTION OF THE PREFERRED SHARES
As part of the Refinancing, the Company redeemed all of the outstanding
shares of Preferred Shares at 105% of the liquidation preference upon the
consummation of an offering pursuant to which the Company issued an aggregate of
$430 million in principal amount of its 8 1/4% Senior Notes due 2008. Each of
the former holders of Preferred Shares is also a Class B shareholder of the
Company.
CAPACITY CREDITS
The Company granted approximately $60 million of capacity credits and $9.3
million of cash to an affiliate of a Shareholder of the Company in connection
with the construction of the FLAG System. The capacity credits were utilized
during the year ended December 31, 1998.
EMPLOYEE SERVICES AGREEMENT
In May 1998, the Company has entered into an Employee Services Agreement
with Bell Atlantic Global Services Corporation ("BAGSC") pursuant to which BAGSC
seconds certain employees to the Company. The total amount incurred by the
Company under this agreement in 1998 was $0.4 million.
28
<PAGE>
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.
Not applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES.
Not applicable.
PART IV
ITEM 17. FINANCIAL STATEMENTS.
The Company has responded to Item 18 in lieu of responding to this Item.
ITEM 18. FINANCIAL STATEMENTS.
Reference is made to pages F-1 through F-22 and Item 19.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS.
(a) The following financial statements are filed as part of this Form 20-F:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants (Arthur Anderson & Co.)........................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 (audited)..................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 (audited)....... F-4
Consolidated Statement of Comprehensive Income for the years ended December 31, 1998, 1997 and 1996
(audited)................................................................................................ F-5
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996
(audited)................................................................................................ F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 (audited)....... F-7
Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>
(b) The following documents are filed as Exhibits to this Form 20-F:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Bye-laws of FLAG Limited, as amended through 17 February, 1999.
1.2 Computation of Ratio of Earnings to Fixed Charges.
</TABLE>
29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
FLAG Limited:
We have audited the accompanying consolidated balance sheets of FLAG Limited (a
Bermuda company) and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, comprehensive income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of FLAG Limited
and subsidiaries as of December 31, 1998 and 1997, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998 in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen & Co.
Hamilton, Bermuda
March 31, 1999
F-2
<PAGE>
FLAG LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
ASSETS:
Current assets:
Cash.................................................................................. $ 3,024 $ 2,490
Accounts receivable, net of allowance for doubtful accounts of $8,630
(1997--$9,054)....................................................................... 70,211 91,102
Due from affiliates and other receivables............................................. 206 690
Prepaid expenses and other assets..................................................... 2,673 2,395
--------- ---------
76,114 96,677
Accounts receivable..................................................................... 20,854 42,023
Funds held by collateral trustee........................................................ 255,366 425,905
Construction in progress................................................................ 11,494 389
Capacity available for sale............................................................. 1,095,099 1,208,948
Capitalized financing costs, net of accumulated amortization of $1,498
(1997--$52,669)....................................................................... 12,352 61,848
Fixed assets, net....................................................................... 4,487 1,147
--------- ---------
$1,475,766 $1,836,937
--------- ---------
--------- ---------
LIABILITIES:
Current liabilities:
Accrued construction costs............................................................ $ 146,165 $ 317,058
Accrued liabilities................................................................... 33,214 21,394
Accounts payable...................................................................... 6,018 5,262
Income taxes payable.................................................................. 6,453 4,391
Due to affiliate...................................................................... 1,843 5,892
Deferred revenue...................................................................... 39,121 16,558
--------- ---------
232,814 370,555
8 1/4% Senior Notes, due 2008, net of unamortized discount of $5,321.................... 424,679 --
Long-term debt.......................................................................... 271,500 615,087
Deferred revenue and other.............................................................. 84,415 176,221
Deferred taxes.......................................................................... 3,562 4,600
--------- ---------
1,016,970 1,166,463
COMMITMENTS AND CONTINGENCIES
PREFERRED SHARES:
Series A, $100 liquidation value, net of unamortized discount of $nil (1997--$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
Foreign currency translation adjustment................................................. (704) --
Retained earnings (deficit)............................................................. (44,951) 26,570
--------- ---------
458,796 541,029
--------- ---------
$1,475,766 $1,836,937
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
FLAG LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996
1998 1997 (AS RESTATED)
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Capacity sales, net of discounts.................................. $ 182,935 $ 335,982 --
Standby maintenance and restoration revenue....................... 25,313 4,011 --
------------- ------------- -------------
208,248 339,993 --
SALES AND OTHER OPERATING EXPENSES:
Cost of capacity sold............................................. 101,288 196,190 --
Operations and maintenance........................................ 37,931 4,600 --
Sales and marketing............................................... 10,680 6,598 316
General and administrative........................................ 22,518 30,615 12,466
------------- ------------- -------------
172,417 238,003 12,782
OPERATING INCOME (LOSS)............................................. 35,831 101,990 (12,782)
INTEREST EXPENSE.................................................... 61,128 20,193 --
INTEREST INCOME..................................................... 14,875 6,637 2,408
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES................................... (10,422) 88,434 (10,374)
PROVISION FOR INCOME TAXES.......................................... 1,260 8,991 --
------------- ------------- -------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM............................. (11,682) 79,443 (10,374)
EXTRAORDINARY ITEM.................................................. 59,839 -- --
------------- ------------- -------------
NET INCOME (LOSS)................................................... (71,521) 79,443 (10,374)
CUMULATIVE PAY-IN-KIND PREFERRED DIVIDENDS.......................... 1,508 16,324 14,410
REDEMPTION PREMIUM AND WRITE OFF OF DISCOUNT ON PREFERRED SHARES.... 8,500 -- --
------------- ------------- -------------
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS................. $ (81,529) $ 63,119 $ (24,784)
------------- ------------- -------------
------------- ------------- -------------
Basic and diluted income (loss) per common share--Class A........... $ (0.07) $ 0.05 $ (0.02)
------------- ------------- -------------
------------- ------------- -------------
Basic and diluted income (loss) per common share--Class B........... $ (0.13) $ 0.14 $ (0.13)
------------- ------------- -------------
------------- ------------- -------------
Weighted average common shares outstanding--Class A................. 132,000,000 132,000,000 132,000,000
Weighted average common shares outstanding--Class B................. 565,858,741 396,890,512 164,445,547
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
FLAG LIMITED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1996
(AS
1998 1997 RESTATED)
---------- --------- ------------
<S> <C> <C> <C>
NET INCOME (LOSS)............................................................ $ (81,529) $ 63,119 $ (24,784)
Foreign currency translation adjustment...................................... (704) -- --
---------- --------- ------------
COMPREHENSIVE INCOME (LOSS).................................................. $ (82,233) $ 63,119 $ (24,784)
---------- --------- ------------
---------- --------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
FLAG LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT NUMBERS OF SHARES)
<TABLE>
<CAPTION>
CLASS A CLASS B FOREIGN RETAINED
COMMON SHARES COMMON SHARES ADDITIONAL CURRENCY EARNINGS
----------------------- ----------------------- PAID-IN TRANSLATION (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT)
---------- ----------- ---------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995.................... 132,000,000 $ 13 92,366,742 $ 9 $ 99,098 $ -- $ (42,499)
Preferred share dividends
and accretion........... -- -- -- -- (14,410) -- 14,410
Issuance of Class B shares
for cash................ -- -- 119,000,000 12 110,448 -- --
Issuance of Class B shares
to preferred
shareholders............ -- -- 4,099,204 1 (1) -- --
1996 net loss applicable
to common
shareholders............ -- -- -- -- -- -- (24,784)
---------- --- ---------- --- ----------- ----- -------------
Balance, December 31,
1996.................... 132,000,000 13 215,465,946 22 195,135 -- (52,873)
Preferred share dividends
and accretion........... -- -- -- -- (16,324) -- 16,324
Issuance of Class B shares
for cash................ -- -- 335,612,492 34 335,579 -- --
Issuance of Class B shares
to preferred
shareholders............ -- -- 14,780,303 1 (1) -- --
1997 net income applicable
to common shareholders.. -- -- -- -- -- -- 63,119
---------- --- ---------- --- ----------- ----- -------------
Balance, December 31,
1997.................... 132,000,000 13 565,858,741 57 514,389 -- 26,570
Preferred share dividends
and accretion........... -- -- -- -- (1,508) -- 1,508
Premium on redemption of
preferred shares........ -- -- -- -- (6,641) -- 6,641
Write-off of unamortized
discount on issuance of
preferred shares........ -- -- -- -- (1,859) -- 1,859
Foreign currency
translation
adjustment.............. -- -- -- -- -- (704) --
1998 net loss applicable
to common
shareholders............ -- -- -- -- -- -- (81,529)
---------- --- ---------- --- ----------- ----- -------------
Balance, December 31,
1998.................... 132,000,000 $ 13 565,858,741 $ 57 $ 504,381 $ (704) $ (44,951)
---------- --- ---------- --- ----------- ----- -------------
---------- --- ---------- --- ----------- ----- -------------
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balance, December 31,
1995.................... $ 56,621
Preferred share dividends
and accretion........... --
Issuance of Class B shares
for cash................ 110,460
Issuance of Class B shares
to preferred
shareholders............ --
1996 net loss applicable
to common
shareholders............ (24,784)
-------------
Balance, December 31,
1996.................... 142,297
Preferred share dividends
and accretion........... --
Issuance of Class B shares
for cash................ 335,613
Issuance of Class B shares
to preferred
shareholders............ --
1997 net income applicable
to common shareholders.. 63,119
-------------
Balance, December 31,
1997.................... 541,029
Preferred share dividends
and accretion........... --
Premium on redemption of
preferred shares........ --
Write-off of unamortized
discount on issuance of
preferred shares........ --
Foreign currency
translation
adjustment.............. (704)
1998 net loss applicable
to common
shareholders............ (81,529)
-------------
Balance, December 31,
1998.................... $ 458,796
-------------
-------------
</TABLE>
F-6
<PAGE>
FLAG LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1998 1997
--------- --------- 1996
------------
(AS
RESTATED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income applicable to common shareholders......................... $ (81,529) $ 63,119 $ (24,784)
--------- --------- ------------
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Pay-in-kind preferred dividends......................................... 1,508 16,324 14,410
Amortization of financing costs......................................... 3,427 6,082 --
Provision for doubtful accounts......................................... (424) 9,054 --
Depreciation............................................................ 844 276 121
Deferred taxes.......................................................... (1,038) 4,600 --
Preferred share redemption premium...................................... 8,500 -- --
Loss on debt refinancing................................................ 59,839 -- --
Senior debt discount.................................................... 591 -- --
Add (deduct) net changes in operating assets and liabilities:
Accounts receivable................................................... 42,500 (142,179) --
Due from affiliates and other receivables............................. 484 (371) (294)
Prepaid expenses and other assets..................................... (272) 735 (337)
Capacity available for sale........................................... 113,849 196,190 --
Accounts payable and accrued liabilities.............................. 12,250 26,335 (236)
Income taxes payable.................................................. 2,062 4,391 --
Due to affiliate...................................................... (4,049) (4,179) (983)
Deferred revenue...................................................... (69,711) 104,779 --
--------- --------- ------------
Net cash provided by (used in) operating activities................. 88,831 285,156 (12,103)
CASH FLOWS FROM FINANCING ACTIVITIES:
Organization and financing costs incurred................................... (13,769) (11,769) (29,335)
Proceeds from long-term debt................................................ 320,000 414,914 262,543
Proceeds from 8 1/4% Senior Notes........................................... 424,088 -- --
Repayment of long-term debt................................................. (663,587) (112,370) --
Capital contributions--common shares........................................ -- 335,613 110,460
Redemption of preferred shares.............................................. (139,453) -- --
Gulf settlement payment..................................................... -- (3,000) --
Decrease (increase) in funds held by collateral trustee..................... 170,539 (377,711) (1,657)
--------- --------- ------------
Net cash provided by financing activities........................... $ 97,818 $ 245,677 $ 342,011
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for construction in progress...................................... (181,998) (527,808) (329,372)
Purchase of fixed assets, net............................................... (4,146) (845) (514)
--------- --------- ------------
Net cash used in investing activities............................... (186,144) (528,653) (329,886)
NET INCREASE IN CASH.......................................................... 505 2,180 22
Effect of foreign currency movements........................................ 29 -- --
CASH, beginning of year....................................................... 2,490 310 288
--------- --------- ------------
CASH, end of year............................................................. $ 3,024 $ 2,490 $ 310
--------- --------- ------------
--------- --------- ------------
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING ACTIVITIES:
Costs incurred for construction in progress................................. $ 11,105 $ 757,722 $ 480,524
Increase in deferred revenue for capacity credits........................... -- (88,000) --
Decrease (increase) in accrued liabilities.................................. 170,893 (123,964) (126,562)
Amortization of capitalized financing costs................................. -- (17,950) (24,590)
--------- --------- ------------
Cash paid for construction in progress...................................... $ 181,998 $ 527,808 $ 329,372
--------- --------- ------------
--------- --------- ------------
SUPPLEMENTAL INFORMATION DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................................... $ 39,171 $ 58,286 $ 14,018
--------- --------- ------------
--------- --------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
1. BACKGROUND
The Company is a facilities-based provider of telecommunications capacity to
licensed international carriers through its ownership of the world's longest
digital fiberoptic undersea cable system (the "FLAG System"). The FLAG System
links the telecommunications markets of Western Europe and Japan through the
Middle East, India, Southeast Asia and China (the "FLAG Route"), along a route
which adjoins countries with approximately 70% of the world's population. The
FLAG System was constructed to address the growing demand for high performance,
secure and cost-effective digital communications for voice, data and video along
the FLAG Route. The Company provides capacity on the FLAG System at market-based
prices to licensed international carriers. The FLAG System, which was placed in
commercial service on November 22, 1997, cost approximately $1.55 billion to
construct, and consists of over 17,000 miles of fiberoptic cable. The Company
has over $500 million of invested equity contributed by Shareholders.
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 22, 1998, and May 27, 1998, FLAG Telecom Asia Limited, a Hong Kong
company, and FLAG Telecom USA Ltd., a Delaware company, were incorporated,
respectively. Both companies are wholly-owned subsidiaries of FLAG Limited, and
provide local support services.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States and are expressed in U.S.
Dollars ("Dollars"). The preparation of financial statements in conformity with
U.S. generally accepted accounting principles ("U.S. GAAP") requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The significant accounting policies are summarized as follows:
a) Basis of Consolidation
The financial statements consolidate the financial statements of the Company
and its subsidiary companies after eliminating intercompany transactions and
balances.
b) Sales and Cost of Sales Recognition
Revenues are recognized upon the date the risks and rewards of ownership are
transferred to the purchaser, which is the date the capacity is made available
for activation and the customer becomes responsible for standby maintenance and
repairs.
Because substantially all receivables under agreements qualifying as
sales-type leases are receivable within 75 days of the date the risks and
rewards of ownership are transferred to the customer, the accounts receivable
balance in the accompanying balance sheets, representing the gross future
minimum lease payments due, approximates the present value of future minimum
lease payments. Amounts billed to customers for maintenance and repair services
are invoiced separately from capacity lease payments. There are no guaranteed or
unguaranteed residual values accruing to the benefit of the Company. The Company
has no minimum lease payments due in 1999 and no minimum lease payments for all
subsequent years.
F-8
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
As of December 31, 1998, in exchange for construction costs incurred, the
Company had granted credits to suppliers toward future capacity. In addition,
certain customers have committed to purchase capacity at a future date under
signed capacity credit agreements. Such amounts received or receivable under
these agreements and the capacity credits granted to suppliers are recorded as
deferred revenue until the date the credits are utilized, at which time the
deferred revenue is recognized as earned. Amounts receivable under these
capacity agreements are reflected within accounts receivable in the accompanying
balance sheets. Deferred revenue also includes amounts invoiced for standby
maintenance which are applicable to future periods.
For certain customers, the Company has granted price protection credits
entitling them to additional capacity if the Company lowers its prices prior to
December 31, 1999. In the period that it becomes probable that the Company will
lower its list prices, the Company records a provision for expected cost of
sales for the additional units of capacity granted.
The cost of the FLAG System relating to capacity sold is recognized as cost
of sales upon recognition of revenues. The amount charged to cost of sales is
based on the ratio of capacity sales recognized as revenues in the period to
total expected revenues over the entire life of the FLAG System multiplied by
the total construction costs. This calculation of cost of sales matches costs
with the relative sales value of each sale to total expected revenues.
Management's estimate of total expected revenues over the life of the FLAG
System may change due to a number of factors affecting estimated future revenues
including changes in management's estimate of the units of capacity to be sold
and changes in the expected sales value per unit of capacity to be sold.
Additionally, the cost per unit will decrease in the event the Company elects to
upgrade the capacity of the FLAG System in the future to increase the units of
capacity available for sale. Changes in management's estimate of total expected
revenues over the life of the FLAG System will result in adjustments to the
calculations of cost of sales. These adjustments will be recorded on a
prospective basis over future periods commencing with the period management
revises its estimate. As the revenue from operating lease transactions is
incidental, such transactions are recorded as a reduction of capacity available
for resale and no depreciation is recorded.
Standby maintenance charges are invoiced separately from capacity sales.
Revenue relating to standby maintenance is recognized over the period in which
the service is provided.
c) Commissions
Commissions for purchase commitments are recognized as an expense upon
recognition of the related revenues.
d) Capacity Available for Sale and Construction in Progress
Capacity available for sale is recorded at the lower of cost or fair value
less cost to sell and is charged to cost of sales as capacity is sold.
Construction in progress is transferred to capacity available for sale at the
date it is completed and placed into commercial operation. Construction in
progress includes direct and indirect expenditures which are stated at cost and
includes the accumulated work in progress for construction of the FLAG System.
Capitalized costs include costs incurred under the construction contract,
engineering and consulting fees, legal fees related to obtaining landing right
licenses, costs related to program management, costs for the route surveys and
other costs necessary for developing the FLAG System.
F-9
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
e) Capitalized Financing Costs
Costs incurred by the Company to obtain financing for the FLAG System have
been capitalized and are being amortized over the term of the related
borrowings. Capitalized costs relating to exising financing are written off when
a refinancing occurs.
f) Fixed Assets
Fixed assets are stated at cost, net of accumulated depreciation.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the assets as follows:
<TABLE>
<S> <C>
Computer equipment................... 33 1/3% per annum
Fixtures and fittings................ 20% per annum
Leasehold improvement................ remaining lease term
Motor vehicles....................... 20% per annum
</TABLE>
Fixed assets consist of the following:
<TABLE>
<CAPTION>
LEASEHOLD OFFICE COMPUTER MOTOR
IMPROVEMENTS EQUIPMENT EQUIPMENT VEHICLES TOTAL
--------------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Cost
At beginning of year..................................... 167 500 802 78 1,547
Additions................................................ 2,299 1,214 943 267 4,723
Disposals................................................ (140) (483) (163) (78) (864)
----- ----- ----- --- ---------
At end of year........................................... 2,326 1,231 1,582 267 5,406
Depreciation
At beginning of year..................................... 39 124 207 30 400
Charge for the year...................................... 331 183 315 15 844
Disposals................................................ (53) (137) (98) (37) (325)
----- ----- ----- --- ---------
At end of year........................................... 317 170 424 8 919
Net book value
At beginning of year..................................... 128 376 595 48 1,147
----- ----- ----- --- ---------
At end of year........................................... 2,009 1,061 1,158 259 4,487
----- ----- ----- --- ---------
----- ----- ----- --- ---------
</TABLE>
g) Interest Rate Derivatives
The Company uses derivative financial instruments for the purpose of
reducing its exposure to adverse fluctuations in interest rates. The Company
does not utilize derivative financial instruments for trading or other
speculative purposes. The counterparties to these instruments are major
financial institutions with high credit quality. The Company is exposed to
credit loss in the event of nonperformance by these counterparties.
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
$370,000 bank credit facility undertaken on January 30, 1998 (the "New Credit
Facility"). Under the swap agreements, the Company pays a fixed rate
F-10
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
of 5.60% on a notional amount of $60,000, 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.
The 8 1/4% Senior Notes arising on the Refinancing undertaken on January 30,
1998 (the "Senior Notes") accrue interest at the rate of 8 1/4% per annum paid
semi-annually on January 30 and July 30 of each year, commencing on July 30,
1998 (see Note 3. "Long-term Debt"). Interest is expensed as it accrues. 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. 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 33 1/3% 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 a 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 specified prices. Upon a change in control, the noteholders may require
the Company to purchase all or any portion of the outstanding notes at a price
equal to 101% of the principal amount plus accrued but unpaid interest.
For interest rate derivatives to qualify for hedge accounting, the debt
instrument being hedged must expose the Company to interest rate risk and, at
the inception of the derivative instrument and throughout the period the
derivative is held, there must be a high correlation of changes in the market
value of the derivative and interest expense of the hedged item. Gains and
losses on interest rate derivatives and other derivative instruments which do
not meet this criteria would be recorded in the statement of operations.
If an interest rate derivative instrument were to terminate or be replaced
by another instrument and no longer qualifies as a hedge instrument, then it
would be marked to market and carried on the balance sheet at fair value.
h) Translation of Foreign Currencies
Transactions in foreign currencies are translated into Dollars at the rate
of exchange prevailing at the date of each transaction. Monetary assets and
liabilities denominated in foreign currencies at year end are translated into
Dollars at the rate of exchange at that date. Foreign exchange gains or losses
are reflected in the accompanying statements of operations.
The statements of operations of overseas subsidiary undertakings are
translated into United States Dollars at average exchange rates and the year-end
net investments in these companies are translated at year-end exchange rates.
Exchange differences arising from retranslation at year-end exchange rates of
the opening net investments and results for the year are charged or credited
directly to the cumulative translation adjustment in shareholders' equity.
i) Stock Option Plan
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25") and accordingly, recognizes compensation expense for stock option
grants to the extent that the fair value of the stock exceeds the exercise price
of the option at the measurement date.
F-11
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
j) Income Taxes
Deferred taxes are determined based on the difference between the tax basis
of an asset or liability and its reported amount in the financial statements
using enacted tax rates. A deferred tax liability or asset is recorded using the
enacted tax rates expected to apply to taxable income in the period in which the
deferred tax liability or asset is expected to be settled or realized. Future
tax benefits attributable to these differences, if any, are recognizable to the
extent that realization of such benefits is more likely than not.
k) Net Income (Loss) per Common 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 Class A and
Class B common shares outstanding, respectively, in each period. Diluted net
income (loss) per common share is computed by dividing net income (loss) by the
weighted average number of common shares and common share equivalents
outstanding during the year.
l) Reclassifications/Restatements of Prior Year Financial Statements
U.S. GAAP for entities subject to SEC regulations require that mandatorily
redeemable preferred shares be shown between total liabilities and shareholders'
equity in the balance sheet and that cumulative pay-in-kind dividends on the
Company's Preferred Shares be shown as an increase to the Company's net loss or
decrease to the Company's net income on the statement of operations to arrive at
net income (loss) applicable to common shareholders. As a company not previously
subject to SEC regulations, in its financial statements for the year ended
December 31, 1996, as issued in March 1997, the Company accounted for the
Preferred Shares as a component of shareholders' equity with cumulative
pay-in-kind dividends recorded as a reduction of additional paid-in capital
(given the accumulated deficit during the development stage). The Company has
restated its financial statements for the year ended December 31, 1996,
accordingly.
Upon issuance of the Company's Preferred Shares, the Company issued
3,075,816 Class B common shares to the preferred shareholders. The Company, in
its financial statements for the years ended December 31, 1996 and 1995, as
issued in March 1997, had accounted for the Preferred Shares at the full amount
of the proceeds received and had recorded the Class B common shares at nil
value. The Company has now recorded the Preferred Shares at a discounted value
equal to the amount of proceeds received less the fair value of the Class B
common shares issued. The fair value of the Class B common shares issued to the
preferred shareholders was deemed to be $3,076 based on $1 per Class B common
share paid by other Class B shareholders. This discount was being amortized over
the term of the Preferred Shares and was expensed in the statement of operations
when the Preferred Shares were redeemed. For the year ended December 31, 1996,
this restatement had no effect on net loss, increased net loss applicable to
common shareholders by $550 and had no effect on basic and diluted loss per
common share for Class A and Class B.
The Company entered into a settlement agreement with Gulf Associates
Communications, Limited ("Gulf") in 1994. As a result of this settlement $9,000
was payable by the Company to Gulf of which $1,400 was reflected as a settlement
of loans payable, and the remaining $7,600 was reflected as a reduction in
additional paid-in capital in the year the payments became due. Under generally
accepted accounting principles, the Company should have expensed the $7,600 in
1994 as it was determined that the amount primarily related to Gulf's agreement
to discontinue arbitration proceedings and the accompanying
F-12
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
financial statements reflect this change. This restatement had no effect on net
loss, net loss applicable to common shareholders or basic or diluted net loss
per common share in 1996 or 1997. The effect of the restatement in the
accompanying balance sheets was to increase additional paid-in capital and
decrease retained earnings (increase accumulated deficit) by $7,600 as of
December 31, 1997.
m) 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 as incurred. The Company does not
have any deferred organizational or start-up 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 has not yet assessed the impact of the adoption
of SFAS 133 on the Company's financial position or results of operations,
although it may be material.
3. LONG-TERM DEBT
The Company's long-term debt comprises the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Tranche A Facility........................................................................ $ -- $ 306,380
Tranche B Facility........................................................................ -- 308,707
Bank credit facility...................................................................... 271,500 --
8 1/4% Senior Notes, due 2008, net of unamortized discount of $5,321...................... 424,679 --
---------- ----------
$ 696,179 $ 615,087
---------- ----------
---------- ----------
</TABLE>
On January 30, 1998, the Company completed the 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
Preferred Shares. The Refinancing consisted of $370,000 of bank credit
facilities under the New Credit Facility and $430,000 of the Senior Notes. The
Company has registered the Senior Notes with the SEC. Proceeds received under
the Senior Notes were $424,088, net of a $5,912 underwriters' discount. The
Senior Notes are not secured by any asset of the Company. Accordingly, they are
effectively subordinated to any secured obligation arising from the New Credit
Facility.
The bank credit facilities include a seven-year $320,000 term loan facility
and a $50,000 revolving credit facility. On January 30, 1998, the Company
borrowed $320,000 under the term loan facility. Total borrowings at December 31,
1998 are $271,500. Under the term loan and revolving credit facilities,
borrowings bear interest at LIBOR plus 190 to 212.5 basis points and are secured
by a pledge of substantially all of the Company's assets and revenues, other
than the Company's physical assets.
F-13
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
The New Credit Facility and the indenture under which the Senior Notes were
issued impose certain operating and financial restrictions on the Company. Such
restrictions will affect, and in many respects significantly limit or prohibit,
among other things, the ability of the Company to incur additional indebtedness,
repay indebtedness (including the Senior Notes) prior to stated maturities, sell
assets, make investments, engage in transactions with Shareholders and
affiliates, issue capital stock, create liens or engage in mergers or
acquisitions. These restrictions could also limit the ability of the Company to
effect future financings, make needed capital expenditures, withstand a future
downturn in the Company's business or the economy in general, or otherwise
conduct necessary corporate activities.
In the first quarter of 1998, the Company recognized a loss on refinancing
of approximately $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.
4. PREFERRED SHARES
On January 30, 1998, the Company completed a refinancing which resulted in
the redemption of all the Preferred Shares. In addition, the Company paid a
premium of $6,641 to redeem the Preferred Shares, which, together with the
write-off of the remaining $1,859 of discount related to the Preferred Shares,
was charged to additional paid-in capital during 1998. The shares had a par
value of $.0001 per share and a liquidation value of $100 per share. The
following number of shares were issued and outstanding:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Shares outstanding.......................................................... -- 1,306,429
Share capital............................................................... $ -- $ 129,445
</TABLE>
The holders of such shares were entitled to receive cumulative pay-in-kind
dividends, at an annual rate of 13% of the $100 liquidation value per share from
the issue date through and including the redemption date. The Preferred Shares
ranked senior to all common shares with respect to dividend rights, rights of
redemption or rights on liquidation.
By ownership of their Preferred Shares, the preferred shareholders had the
right to vote 5.22% of the total voting interests of the Company, and to elect
one director and the right to receive additional Class B common shares such that
in total they maintained their 3.88% ownership of Class B common shares.
The preferred shareholders were issued 3,075,816 Class B common shares when
they purchased the Preferred Shares. The Class B common shares had a fair value
of $1 and therefore $3,076 was assigned to the Class B common shares issued and
recorded as a discount on the Preferred Shares issued. The discount was being
amortized over the term of the Preferred Shares and the amortization is included
in cumulative pay-in-kind preferred dividends in the accompanying statements of
operations.
During the years ended December 31, 1998, 1997 and 1996 the Board of
Directors declared Preferred Share pay-in-kind dividends resulting in the issue
of 21,701, 156,885 and 136,988, additional shares, respectively, of Preferred
Shares. In addition, as of December 31, 1997, the Company accrued approximately
$708 for additional pay-in-kind dividends for the period from December 16, 1997
to December 31, 1997.
F-14
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
5. SHAREHOLDERS' EQUITY
a) Class A Common Shares
The authorized Class A common share capital of the Company consists of
132,000,000 shares with a par value of $.0001 per share. As of December 31, 1998
and 1997 132,000,000 Class A common shares were issued and outstanding.
By ownership of their Class A common shares, the Class A shareholders are
entitled to one vote per share at any meeting of Class A shareholders and, at
any general meeting or special meeting of all shareholders, to a vote
representing 11% of the total voting interests of the Company, multiplied by the
percentage of Class A common shares held. Class A shareholders are entitled to
receive 11% of any dividends or distributions declared, paid pro rata in
proportion to the number of Class A common shares held, prior to the payment of
any dividends or distributions to the Class B shareholders.
b) Class B Common Shares
The authorized Class B common shares capital of the Company consists of
1,000,000,000 shares with a par value of $.0001 per share. The following number
of shares were issued and outstanding.
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Shares outstanding........................................... 565,858,741 565,858,741
Share capital................................................ $ 57 $ 57
</TABLE>
By ownership of their Class B common shares, the Class B shareholders are
entitled to one vote per share at each meeting of Class B shareholders and, at
any general meeting or special meeting of all shareholders, to a vote
representing 89% of the total voting interests of the Company, multiplied by the
percentage of Class B common shares held. Class B shareholders are entitled to
receive dividends or distributions declared or paid, pro rata in proportion to
the total number of Class B common shares held, after taking into account the
rights of Class A shareholders to such dividends and distributions.
During the year ended December 31, 1997, the Company issued, in exchange for
cash consideration, 335,612,492 of the Class B common shares. The proceeds of
the 1997 issue were used in funding the construction of the FLAG System. There
were no issues of Class B common shares during 1998. All Class B common shares
were funded at $1 per share.
6. STOCK OPTIONS
In March, 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
members of staff. During the year ended December 31, 1998, options to purchase
14,146,239 Class B common shares were granted under the plan. Generally, the
options vest and are exercisable on the third and fourth anniversaries of their
grant, subject to meeting certain qualifying criteria. All options vest no later
than eight years and expire ten years after the date of grant. The options can
vest, and are exercisable, earlier on the commencement of an initial public
offering of equity in the Company. 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 the
exercise price did not exceed the estimated fair value of the shares on the date
of the grant (the measurement date).
F-15
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
Had the compensation for the Company's Long Term Incentive Plan (see above
in this Note 6) been determined in accordance with SFAS 123, the Company's net
loss and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998
---------------------
CLASS A CLASS B TOTAL
--------- ---------- ----------
<S> <C> <C> <C>
Net loss attributable to common shareholders
--as reported................................................................. $ (8,968) $ (72,561) $ (81,529)
--pro forma................................................................... (9,068) (73,369) (82,437)
Earnings per share
--as reported................................................................. (0.07) (0.13)
--pro forma................................................................... (0.07) (0.13)
</TABLE>
The effects of applying SFAS 123 for disclosing compensation cost may not be
representative of the effects on reported net income for future years.
The fair value of each option grant is estimated on the date of grant using
the Black Scholes option-pricing model using the following weighted average
assumptions.
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
Dividend yield....................................................................................... 0.0%
Expected volatility.................................................................................. 0.59
Risk-free interest rate.............................................................................. 6.0%
Expected lives of the options........................................................................ 5.0 years
</TABLE>
The weighted average remaining contract life of all options is 9.31 years.
7. BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) before extraordinary
item................................. $ (21,847) $ (21,847) $ 63,119 $ 63,119 $ (24,784) $ (24,784)
Extraordinary item..................... $ (59,839) $ (59,839) -- -- -- --
Net income (loss)...................... $ (81,529) $ (81,529) $ 63,119 $ 63,119 $ (24,784) $ (24,784)
Percentage entitlement................. 11% 89% 11% 89% 11% 89%
Net income (loss) per class before
extraordinary item................... $ (2,403) $ (19,444) $ 6,943 $ 56,176 $ (2,726) $ (22,058)
Extraordinary item..................... $ (6,582) $ (53,257) -- -- -- --
Net income (loss) per class............ $ (8,968) $ (72,561) $ 6,943 $ 56,176 $ (2,726) $ (22,058)
Number of shares....................... 132,000,000 565,858,741 132,000,000 396,890,512 132,000,000 164,445,547
Income (loss) per share before
extraordinary item................... $ (0.02) $ (0.03) $ 0.05 $ 0.14 $ (0.02) $ (0.13)
Extraordinary item per share........... $ (0.05) $ (0.10) -- -- -- --
Income (loss) per share................ $ (0.07) $ (0.13) $ 0.05 $ 0.14 $ (0.02) $ (0.13)
</TABLE>
The stock options granted during the year ended December 31, 1998, discussed
in Note 6 did not have a dilutive effect on 1998 loss per common share.
F-16
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
8. FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's financial instruments as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
NOTIONAL CARRYING FAIR NOTIONAL CARRYING FAIR
AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE
---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Funds held by Collateral Trustee................ -- $ 255,366 $ 255,366 -- $ 425,905 $ 425,909
8 1/4% Senior Notes............................. $ 430,000 $ 424,679 $ 419,250 -- -- --
Long-term debt.................................. -- $ 271,500 $ 271,500 -- $ 615,087 $ 615,087
Interest rate swaps............................. $ 160,000 -- $ 2,621 -- -- --
Interest rate collar agreement.................. -- -- -- $ 300,000 -- $ (1,613)
Treasury rate lock agreement.................... -- -- -- $ 100,000 -- $ (1,260)
</TABLE>
The notional amounts of interest rate derivatives do not represent amounts
exchanged by the parties and, thus, are not a measure of the Company's exposure
through its use of derivatives. The amounts exchanged are determined by
reference to the notional amounts and the other terms of the derivatives.
F-17
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments but does not expect
any counterparties to fail to meet their obligations. The Company deals only
with highly rated counterparties.
<TABLE>
<S> <C>
Funds held by Collateral Trustee The carrying amount is a reasonable estimate of fair value
-............................. as the balance includes amounts held in banks and time
deposits with a short-term maturity.
8 1/4% Senior Notes............. The carrying amount of the 8 1/4% Senior Notes is the net
proceeds of the Senior Notes issue. The fair value is
based on the market price of the Senior Notes at December
31, 1998.
Long-term debt.................. The carrying amount of the long term debt is the proceeds
drawn on the New Credit Facility. The debt is subject to
variable interest rates, and therefore, in management's
opinion, the carrying amount approximates the fair value
of the long term debt.
Interest rate swaps............. The interest rate swaps agreements are "zero cost" meaning
that the cost of acquiring the agreement is embedded in
the interest rate spread. As such, the agreement does not
have a carrying value. The fair value is estimated using
an option pricing model and values the changes in interest
rates since inception, and the potential for future
changes over the remaining term.
Interest rate collar The interest rate collar agreement is "zero cost" meaning
agreement..................... that the cost of acquiring the agreement is embedded in
the interest rate spread. As such, the agreement does not
have a carrying value. The fair value is estimated using
an option pricing model and essentially values the
potential for change in interest rates during the
remaining term.
Treasury rate lock agreement The treasury rate lock agreement is "zero cost" meaning
-............................. that the cost of acquiring the agreement is embedded in
the price spread. As such, the agreement does not have a
carrying value. The fair value is estimated using an
option pricing model and essentially values the potential
for change in interest rates during the remaining term.
</TABLE>
9. TAXES
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.
The provision for income taxes reflected in the accompanying 1998 statement
of operations consists of taxes incurred on income derived from capacity sales
and standby maintenance revenues from customers in certain jurisdictions along
the FLAG System where the Company is deemed to have a taxable presence or is
otherwise subject to tax.
F-18
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
Income tax expense, which consists entirely of taxes payable to foreign
governments, is comprised of the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current.......................................................... $ 2,281 $ 4,391 $ --
Deferred......................................................... (1,021) 4,600 --
--------- --------- ---------
$ 1,260 $ 8,991 $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred taxes arise principally because, for tax purposes, in certain
jurisdictions, revenues from capacity sales are deferred and recognized as
taxable income over the estimated life of the FLAG System. The provision for
deferred tax comprises the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Capacity sales revenues deferred for tax purposes............... $ 13,217 $ 7,145 $ --
Deferred commissions for tax purposes........................... (1,911) (197) --
Future depreciation for tax purposes............................ (5,797) (2,362) --
Tax losses carried forward...................................... (1,479) -- --
Other........................................................... (451) 14 --
--------- --------- ---------
$ 3,579 $ 4,600 $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
Since Bermuda does not impose an income tax, the difference between reported
tax expense in the accompanying statements of operations and tax as computed at
statutory rates, is attributable to the provisions for foreign taxes shown
above.
10. RELATED PARTY TRANSACTIONS
The Company and certain of its Shareholders or affiliates thereof have
entered into agreements for the development, construction, operation, financing
and marketing of the FLAG System.
a) Program Management Services Agreement
Under the terms of a Program Management Services Agreement, Bell Atlantic
Network Systems Corporation ("BANSC"), a Shareholder of the Company, managed all
aspects of the planning and construction of the FLAG System. The Company
reimbursed BANSC for all related costs and out-of-pocket expenses plus a fee
equal to 16% of payroll costs and certain outside contractor and consultant
costs.
Effective May 14, 1998, the Company entered into a Termination and Release
Agreement providing for the termination of the Program Management Services
Agreement with BANSC. In June 1998, the Company made a final payment to BANSC to
settle all outstanding liabilities under the Program Management Services
Agreement.
b) Marketing Services Agreement
The Company and Bell Atlantic Network Systems (Bermuda) Limited ("BANS"), a
wholly-owned subsidiary of BANSC, entered into a Marketing Services Agreement
pursuant to which BANS was responsible for marketing the assignable capacity of
the FLAG System. BANS invoiced the Company for commissions at the rate of 3% of
the commitments obtained.
F-19
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
Effective May 21, 1998, under a Marketing Transition Agreement the Company
and BANS agreed to terminate the Marketing Services Agreement. Under the
Marketing Transition Agreement, the Company agreed to pay certain BANS' closing
down expenses 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 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.
c) Employee Services Agreement
In May 1998, the Company entered into an Employee Services Agreement with
Bell Atlantic Global Services Corporation ("BAGSC") pursuant to which BAGSC
seconds certain employees to the Company.
Total amounts incurred for the above services are as follows:
<TABLE>
<CAPTION>
PROGRAM MARKETING BUSINESS EMPLOYEE
MANAGEMENT SERVICES DEVELOPMENT SERVICES
------------ ----------------- --------------- -----------
<S> <C> <C> <C> <C>
1998............................... $ 2,823 $ 2,229 $ 662 $ 411
1997............................... 12,000 3,098 436 --
1996............................... 11,985 316 471 --
</TABLE>
Program management and business development costs directly related to the
construction of the FLAG System have been capitalized. Total program management
and business development costs capitalized through PSA were $49,199. All other
program management and business development costs have been expensed in the
accompanying statements of operations. All marketing services commissions and
employee services in the above table have been expensed in the accompanying
statements of operations.
Marubeni Corporation, the administrative agent for the financing provided
under Tranche B, which was repaid in January 1998, is affiliated with Marubeni
Telecom Development Limited, a Shareholder of the Company. Under the terms of
the Agreement, Marubeni Corporation was entitled to certain arrangement and
commitment fees. Fees incurred payable to Marubeni Corporation for the years
ended December 31, 1998, 1997 and 1996, were $58, $1,280 and $2,240,
respectively. At the end of each year, no amounts were payable. Interest in
relation to financing provided by Marubeni for the years ended December 31,
1998, 1997 and 1996 were $1,953, $14,927 and $3,742, respectively, of which
$nil, $579 and $120 were payable at the end of each year, respectively.
Through March 1996, the Company paid consulting fees to Albaraka
International, an affiliate of Rathburn Limited, a Shareholder of the Company.
Fees paid to Albaraka International during 1996 were $80.
Until the third quarter of 1996, Tyco Submarine Systems Ltd. ("Tyco") was an
affiliate of AT&T Capital Corporation, a holder of Preferred Shares. During the
period in 1996 that Tyco was an affiliate of AT&T Capital Corporation, it was
paid $224,372.
F-20
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
The Company granted approximately $60,000 of capacity credits and $9,250 of
cash to an affiliate of a Shareholder of the Company in connection with the
construction of the FLAG System in the year ended December 31, 1997. The
capacity credits were utilized during the year ended December 31, 1998.
12. COMMITMENTS AND CONTINGENCIES
As of December 31, 1998, the Company was committed under the Contract for a
final payment totaling $132,725. FLAG are currently holding discussions with
Tyco and KDD Submarine Cable Systems Inc. regarding the final payment. Provision
has been made in the Company's financial statements to cover the anticipated
final payment.
During the year, the Company signed agreements with two new Landing Parties.
The Company reached formal agreements with the Saudi Telecommunications Company
and the Jordan Telecommunications Company to add landing points in Jeddah and
Aqaba respectively. The estimated cost to construct these landing points is
approximately $53 million and is being funded through the Company's cash flow
and contributions from one of the Landing Parties. The Landing Stations are
expected to enter service in July 1999.
During 1997 the Company entered into an operations contract for the FLAG
Network Operation Center (the "FNOC") with one of the Landing Parties on the
FLAG System. The terms of the contract require the Landing Party to provide a
permanent facility in which to locate the FNOC along with qualified personnel
and additional support as required to assist in the operations of the FNOC. In
exchange for the services provided under the contract, the Company is committed
to compensate the Landing Party an annual fixed charge for rent of the premises
where the FNOC is located equal to $200 for the first year of the contract
increasing in 5% increments for the following three years. Costs incurred by the
Landing Party to provide qualified personnel and additional support are to be
reimbursed by the Company on a cost plus basis.
The Company has entered into lease agreements for the rental of office
space. Estimated future minimum rental payments under the leases are as follows:
<TABLE>
<S> <C>
1999................................................ $ 1,155
2000................................................ 824
2001................................................ 537
2002................................................ 549
2003................................................ 549
Thereafter.......................................... 2,910
</TABLE>
The Company is also committed to make quarterly payments under standby
maintenance agreements for the period commencing October 8, 1997 and continuing
through December 31, 2007. Estimated future payments under the standby
maintenance agreements are as follows:
<TABLE>
<S> <C>
1999................................................ 22,433
2000................................................ 24,546
2001................................................ 25,105
2002................................................ 25,197
2003................................................ 8,820
Thereafter.......................................... 35,280
</TABLE>
F-21
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
The estimate future payments under the standby maintenance agreements are
based on a number of assumptions, including, among other things, the proportion
of the total FLAG System capacity sold at any point in time and the number of
other cable systems serviced under the agreement.
The Company is subject to legal proceedings and claims in the ordinary
course of business. Based on consultations with legal counsel, management does
not believe that any of these proceedings or claims will have a material effect
on the Company's financial position or results of operations.
13. SUBSEQUENT EVENTS.
On February 26, 1999, the Company was part of a reorganization whereby FLAG
Telecom Holdings Limited ("FTHL"), a Bermuda company, became the holding company
for the FLAG Telecom group of companies. As a result of this reorganization, the
Company became a subsidiary of FTHL.
F-22
<PAGE>
Exhibit 1.1
B Y E - L A W S
of
FLAG Limited
I H E R E B Y C E R T I F Y that the within-written Bye-laws are a true copy of
the Bye-laws of FLAG Limited as subscribed by the subscribers to the Memorandum
of Association and approved at the Statutory Meeting of the above Company on the
19th day of April, 1994, as amended through 17th February 1999.
Director
<PAGE>
INDEX
INTERPRETATION.................................................................3
REGISTERED OFFICE..............................................................7
SHARE RIGHTS...................................................................7
MODIFICATION OF RIGHTS.........................................................7
SHARES.........................................................................7
CERTIFICATES...................................................................8
REGISTER OF SHAREHOLDERS.......................................................9
REGISTER OF DIRECTORS AND OFFICERS.............................................9
DEFAULT.......................................................................10
TRANSFER OF SHARES............................................................12
TRANSMISSION OF SHARES........................................................18
INCREASE OF CAPITAL...........................................................19
ALTERATION OF CAPITAL.........................................................19
REDUCTION OF CAPITAL..........................................................20
MATTERS REQUIRING SPECIAL APPROVAL............................................20
BUSINESS PLAN: MARKETING PLAN.................................................23
GENERAL MEETINGS..............................................................24
NOTICE OF GENERAL MEETINGS....................................................24
PROCEEDINGS AT GENERAL MEETINGS...............................................24
VOTING........................................................................25
PROXIES AND CORPORATE REPRESENTATIVES.........................................27
APPOINTMENT AND REMOVAL OF DIRECTORS..........................................29
RESIGNATION AND DISQUALIFICATION OF DIRECTORS.................................30
ALTERNATE DIRECTORS...........................................................31
DIRECTORS' FEES AND ADDITIONAL REMUNERATION AND EXPENSES......................31
DIRECTORS' INTERESTS..........................................................32
POWERS AND DUTIES OF THE BOARD................................................32
DELEGATION OF THE BOARD'S POWERS..............................................33
PROCEEDINGS OF THE BOARD......................................................34
OFFICERS......................................................................36
MINUTES.......................................................................36
SECRETARY.....................................................................37
THE SEAL......................................................................37
DIVIDENDS AND OTHER PAYMENTS..................................................37
RESERVES......................................................................38
CAPITALISATION OF PROFITS.....................................................38
RECORD DATES..................................................................39
ACCOUNTING RECORDS............................................................39
AUDIT.........................................................................40
SERVICE OF NOTICES AND OTHER DOCUMENTS........................................40
WINDING UP....................................................................41
INDEMNITY.....................................................................41
DIRECTORS AND OFFICERS INSURANCE..............................................42
TRANSFER BY WAY OF CONTINUATION...............................................42
ALTERATION OF BYE-LAWS........................................................42
EXHIBIT A FAIR VALUE..................................................44
EXHIBIT B OWNERSHIP OF SHAREHOLDERS...................................45
EXHIBIT C CONFIDENTIALITY AGREEMENT...................................46
EXHIBIT D IRREVOCABLE PROXY AND POWER.................................48
2
<PAGE>
BYE - LAWS
of
FLAG Limited
INTERPRETATION
1. In these Bye-laws unless the context otherwise requires -
"Affiliate" with respect to any person means any
other person who is a subsidiary of
such person, of whom such person is a
subsidiary or who is a subsidiary of
a third person of whom such person is
also a subsidiary;
"Associated Person" means, in relation to any Shareholder,
(i) any subsidiary or holding company of
such Shareholder or any other subsidiary
of any such holding company, (ii) any
company in which such Shareholder or any
holding company of such Shareholder
holds or controls directly or indirectly
not less than 20% of the issued share
capital and (iii) any other affiliate
of, or other person controlling,
controlled by or under common control
with, such Shareholder (the expressions
"subsidiary company", "holding company",
and "control" having respectively the
meanings given to them in Section 86 of
the Companies Act of 1981 of Bermuda, as
amended);
"Bell Atlantic" means Bell Atlantic Network Systems
Company, a Delaware corporation, with
offices at 4 West Red Oak Lane, White
Plains, New York 10604, USA;
"Bermuda" means the islands of Bermuda;
"Board" means the Board of Directors of the
Company or the Directors present at a
meeting of Directors at which there is a
quorum;
"Business Plan" means, as of any date, the business plan
in effect as of such date in accordance
with the provisions of Bye-laws 40 and
41;
"Chairman" shall have the meaning ascribed thereto
in Bye-law 95;
"Collateral Trustee" means any collateral trustee under any
financing arrangement entered into by
the Company;
"Company" means the company incorporated in
Bermuda under the name of FLAG Limited
on the 4th day of January 1993;
3
<PAGE>
"the Companies Acts" means every Bermuda statute from time to
time in force concerning companies
insofar as the same applies to the
Company;
"Credit Agreement" means the Credit Agreement dated as of
January 28, 1998 among the Company, as
borrower, Barclays Bank plc, as
administrative agent, International
Trust Company of Bermuda Limited, as
collateral trustee, and the Lenders (as
defined therein) from time to time
parties thereto;
"Debt Termination Date" means the date on which all Obligations
(as defined in the Credit Agreement) and
all obligations of the Company arising
out of any other loans or extensions of
credit to the Company shall have been
paid in full and the Commitments (as
defined in the Credit Agreement) and all
commitments of any lenders to make loans
or other extension of credit to the
Company shall have been terminated;
"Director" means any director of the Company (or
his duly appointed alternate);
"Dollar" and "$" means the lawful currency for the time
being of the United States of America;
"Entire Board" means, at any time, all of the Directors
then in office;
"Fair Value" means, in relation to any Shares
transferred, or to be transferred, in
accordance with Bye-law 23(d), the
amount determined by an independent
investment banker retained by the
Company pursuant to the procedures set
forth in these Bye-laws to be the value
attributable to the Relevant Shares (as
defined in Bye-law 23(c)) in accordance
with Exhibit A hereto;
"family member" means, with respect to any person, any
of (i) such person's parents, spouse or
children or grandchildren (in each case
who are not infants or of unsound mind)
and (ii) a trust established for such
person or any of the foregoing (whether
or not infants or of unsound mind);
"Financing Documents" means, collectively, (a) the Financing
Documents as defined in the Credit
Agreement and (b) any other credit,
loan, financing or security
documentation relating to any loans or
other extensions of credit to the
Company;
"FLAG Cable System" means an undersea fiber optic
communication system, constructed and
operated by the Company, linking several
countries in Europe, the Middle East and
Asia;
4
<PAGE>
"FLAG Project" means the project for the development,
construction, operation and maintenance
of, and the ownership and sale of
capacity in, the FLAG Cable System;
"Memorandum of means the Memorandum of Association of
Association" the Company in effect on the date of
adoption of these Bye-laws, as the same
may be amended from time to time;
"Ordinary Shares" shall have the meaning ascribed thereto
in Bye-law 7(a);
"Ordinary Voting At any date means the total number of
Power" votes exercisable by all holders
of Ordinary Shares issued and
outstanding as of such date;
"Paid up" means paid up or credited as paid up;
"person" means any individual, corporation,
partnership, firm, joint venture,
association, joint-stock company,
trust, unincorporated organisation,
governmental body or other entity;
"Pledge Agreement" means any pledge agreement permitted
under Bye-law 23(p)(iv);
"Prime Rate" means the rate of interest
announced from time to time by
Citibank, N.A., New York, New York,
USA, as its prime rate;
"Register" means the Register of Shareholders of
the Company;
"Relevant Proportions" means, in relation to a
holder of any class of Shares as of
any date, a fraction the numerator of
which is the total number or
principal amount of Shares of such
class held by such holder as of such
date and the denominator of which is
the total number or principal amount
of Shares of such class outstanding
as of such date;
"Resolution" means a resolution of the
Shareholders or, where required, of a
separate class or separate classes of
Shareholders, adopted either in
general meeting or by written
resolution in accordance with these
Bye-laws;
"Seal" means the common seal of the Company;
"Secretary" includes a temporary or assistant
Secretary and any person appointed by
the Board to perform any of the duties
of the secretary;
5
<PAGE>
"Security Interest" means any lien, option, security,
mortgage, charge (whether fixed or
floating), pledge, assignment, title
retention arrangement, hypothecation,
encumbrance, or other right by way of
security (and any agreement or
arrangement having substantially the
same economic effect as any of the
foregoing);
"Share" means any B share in the share
capital of the Company, such B share
being designated an ordinary share in
the share capital of the Company from
the 26th February, 1999;
"Shareholder" means any registered holder of one or
more Shares;
"Shareholder shall have the meaning ascribed thereto
Supermajority Vote" in Bye-law 38;
"subsidiary" means, with respect to any Shareholder
or the Company, a corporation or other
entity, 50% or more of whose voting
securities are owned by such Shareholder
or the Company, respectively;
"these Bye-laws" means these Bye-laws, as amended from
time to time;
"Total Voting Power" at any date means the total number of
votes exercisable by all holders of
Shares issued and outstanding as of such
date;
for the purposes of these Bye-laws a corporation shall be deemed to
be present in person if its representative duly authorised pursuant
to the Companies Acts is present;
words importing the singular number only include the plural number
and vice versa;
words importing the masculine gender only include the feminine and
neuter genders, respectively;
words importing persons include companies or associations or bodies
of persons, whether corporate or unincorporate;
reference to writing shall include typewriting, printing,
lithography, photography and other modes of representing or
reproducing words in a legible and nontransitory form; and
any words or expressions defined in the Companies Acts in force at
the date when these Bye-laws or any part thereof are adopted or
amended shall bear the same meaning in these Bye-laws or such part,
as the case may be.
6
<PAGE>
REGISTERED OFFICE
2. The registered office of the Company (the "Registered Office")
shall be at such place in Bermuda as the Board shall from time to
time appoint.
SHARE RIGHTS
3. Subject to (i) any special rights conferred on the holders of any
Share or class of Shares and (ii) Bye-laws 5 and 38, any Share in
the Company may be issued with or have attached thereto such
preferred, deferred, qualified or other special rights or such
restrictions, whether in regard to dividend, voting, return of
capital or otherwise as the Company may by Resolution determine or
may delegate to the Directors for determination.
4. Subject to the Companies Acts and Bye-law 38, any preference shares
may be issued on terms:
(a) that they are to be redeemed on the happening of a
specified event or on a given date; and/or
(b) that they are liable to be redeemed at the option of
the Company; and/or
(c) if authorised by the Memorandum of Association, that
they are liable to be redeemed at the option of the
holder.
The terms and manner of redemption shall be provided for by way of
amendment of these Bye-laws.
MODIFICATION OF RIGHTS
5. Subject to the Companies Acts and Bye-law 38, all or any of the
special rights for the time being attached to any class of Shares
may from time to time (whether or not the Company is being wound
up) be altered or abrogated with the prior approval of Shareholders
holding at least 75% of the total issued and outstanding Shares of
such class. Upon the effective date of any such alteration or
abrogation, the outstanding certificates formerly representing the
Shares of the class being altered or abrogated, shall thereafter
evidence the securities as so altered or abrogated.
6. The special rights conferred upon the holders of any Shares or
class of Shares shall not, unless otherwise expressly provided in
the rights attaching to or the terms of issue of such Shares, be
deemed to be altered by the creation or issue of further Shares
ranking pari passu therewith.
SHARES
7. (a) The Share Capital of the Company shall consist of such
Ordinary Shares as the Shareholders shall determine
from time to time.
7
<PAGE>
(b) Subject to the provisions of these Bye-laws,
including, without limitation, Bye-law 38, the
unissued Shares of the Company (whether forming part
of the original capital or any increased capital)
shall be at the disposal of the Board, which may
offer, allot, grant options over or otherwise dispose
of them to such persons, at such times and for such
consideration and upon such terms and conditions as
the Board may determine.
8. The Board may, in connection with the issue of any Shares, exercise
all powers of paying commission and brokerage conferred or
permitted by applicable law.
9. Except as ordered by a court of competent jurisdiction or as
required by applicable law or as required or permitted by these
Bye-laws, or as required or permitted by any pledge agreements
permitted by these Bye-laws, no person shall be recognised by the
Company as holding any Share upon trust and the Company shall not
be bound by or required in any way to recognise (even when having
notice thereof) any equitable contingent, future or partial
interest in any Share or any interest in any fractional part of a
Share or (except only as otherwise provided in these Bye-laws or by
applicable law) any other right in respect of any Share except an
absolute right to the entirety thereof in the registered holder.
CERTIFICATES
10. The preparation, issue and delivery of certificates shall be
governed by the Companies Acts. In the case of a Share held jointly
by several persons, delivery of a certificate to one of several
joint holders shall be sufficient delivery to all. For so long as
there is in existence a Collateral Trustee, until the Company shall
have received notice from such Collateral Trustee that outstanding
Pledge Agreements in its favour and the Security Interests granted
thereunder have been terminated, the Company shall deliver to such
Collateral Trustee any certificates or other instruments
representing any Shares that are required to be pledged under any
Pledge Agreement that the Company issues to any person for such
Collateral Trustee to hold as collateral pursuant to the applicable
Pledge Agreement.
11. If a certificate representing Shares is defaced, lost or destroyed
it may be replaced without fee but on such terms, if any, as to
evidence and indemnity and to payment of the costs and out of
pocket expenses of the Company in investigating such evidence and
preparing such indemnity as the Board shall determine and, in case
of defacement, on delivery of the old certificate to the Company.
12. All certificates for share or loan capital or other securities of
the Company (other than letters of allotment, scrip certificates
and other like documents) shall, except to the extent that the
terms and conditions relating thereto otherwise provide, be issued
under the Seal. The Board may by resolution determine, either
generally or in any particular case, that any signatures on any
such certificates need not be autographic but may be affixed to
such certificates by some mechanical means or may be printed
thereon or that such certificates need not be signed by any
persons.
13. Each certificate representing Shares, whether issued before or
after the adoption of these Bye-laws, shall bear a legend as
follows:
8
<PAGE>
"The shares represented by this certificate are
issued, accepted and held subject to the terms of the
Company's Bye-laws. A copy of such Bye-laws has been
filed at the registered office of the Company. This
certificate and the shares represented hereby are not
subject to sale, assignment, transfer, mortgage,
pledge, hypothecation, or other encumbrance or
disposition, except as provided in the Company's
Bye-laws, to which Bye-laws the holder hereof, by the
acceptance hereof, agrees. Under such Bye-laws, the
Company is authorised to transfer the shares
represented by this certificate on the books of the
Company in accordance with the terms of such Bye-laws
without regard to the surrender of this certificate."
REGISTER OF SHAREHOLDERS
14. The Secretary shall establish and maintain the Register of
Shareholders in the manner prescribed by the Companies Acts. Unless
the Board otherwise determines, the Register of Shareholders shall
be open to inspection in the manner prescribed by the Companies
Acts between 10:00 a.m. and 12:00 noon on every working day. Unless
(i) permitted by these Bye-laws or any Financing Document or (ii)
the Board otherwise determines, no Shareholder or intending
Shareholder shall be entitled to have entered in the Register any
indication of any trust or any equitable, contingent, future or
partial interest in any Share or any interest in any fractional
part of a Share, and if any such entry exists or is permitted by
the Board it shall not be deemed to abrogate any of the provisions
of Bye-law 9. The preceding provisions of this Bye-law 14
notwithstanding, the Company may, upon resolution by the Board,
enter into a Registrar and Transfer Agent Agreement under which a
registrar and transfer agent will be appointed to maintain the
Register of Shareholders of the Company at the office of such
registrar and transfer agent; under such circumstances, if any
provisions of such Registrar and Transfer Agent Agreement shall be
in conflict with the provisions of this Bye-law 14, the former
shall govern.
REGISTER OF DIRECTORS AND OFFICERS
15. The Secretary shall establish and maintain a register of the
Directors and Officers of the Company as required by the Companies
Acts. The register of Directors and Officers shall be open to
inspection in the manner prescribed by the Companies Acts between
10:00 a.m. and 12:00 noon on every working day.
FINANCE AND ISSUANCE OF SHARES
16. The issuance of any Shares, other than any Shares issued pursuant
to the exercise of a duly authorised share option, shall require
the approval of the Board and a Shareholder Supermajority Vote.
Such Shares may be issued at such prices as are specified in the
resolution approved by the Board and the Shareholders relating to
such issuance; PROVIDED, HOWEVER, that (except for the Shares
referred to in the first sentence of this Bye-law 16) no Shares may
be issued to any person unless all of the then existing
Shareholders are given the right to subscribe for their then
Relevant Proportion of the total number of Shares proposed to be
issued. No Shareholder shall be obligated to provide any such
additional capital.
17. Except as expressly provided in these Bye-laws or otherwise agreed
between a Shareholder and the Company, no Shareholder shall be
obligated to provide any loan or share capital to the Company.
9
<PAGE>
DEFAULT
18. Any Shareholder shall be entitled to serve a notice (a "Notice of
Alleged Default") on the Company requesting that the Company serve
a notice (a "Default Notice") on a Shareholder (the "Defaulting
Shareholder"), with a copy to be served on all other Shareholders,
upon the occurrence of any of the events set forth in this Bye-law
18 in respect of such Shareholder. Upon receipt of a Notice of
Alleged Default, the Company shall call a special meeting of the
Board to consider such request, and, if the Board determines by the
affirmative vote of at least two-thirds of the total voting power
of the Entire Board (excluding the vote of any Director appointed
solely by the alleged Defaulting Shareholder and/or its Associated
Persons) that a default has occurred, the Company shall serve a
Default Notice on the Defaulting Shareholder. A Shareholder shall
be deemed to be in default for the purposes of this Bye-law 18:
(a) if such Shareholder is in breach of any of its
material obligations hereunder (in which case the
Default Notice shall specify the steps required to be
taken to remedy such default);
(b) if a petition is presented or a proceeding is
commenced or an order is made or an effective
resolution is passed for the winding-up, insolvency,
administration, reorganisation, reconstruction,
dissolution or bankruptcy of such Shareholder or for
the appointment of a liquidator, receiver,
administrative receiver, administrator, trustee or
similar officer of such Shareholder or of all or any
substantial part of its business or assets; if such
Shareholder stops or suspends payments to its
creditors generally or is unable or admits its
inability to pay its debts as they fall due or seeks
to enter into any composition or other arrangement
with its creditors or is declared or becomes bankrupt
or insolvent or being an individual commits an act of
bankruptcy; or if a creditor takes possession of all
or substantially all of the business or assets of such
Shareholder or any execution or other legal process is
enforced against all or any substantial portion of the
business or assets of such Shareholder and is not
discharged within 30 days;
(c) if (i) such Shareholder ceases or threatens to cease
to carry on its business or if such Shareholder
disposes of, or threatens to dispose of, all or
substantially all of its business or assets; or (ii)
any governmental or other authority expropriates or
threatens to expropriate, all or substantially all of
such Shareholder's business or assets; or
(d) if at any time there is a change in ownership of such
Shareholder. For the purposes of these Bye-laws, there
shall be deemed to be a change in ownership of a
Shareholder if any change shall occur in the ownership
of the capital stock of such Shareholder, or any
holding company of such Shareholder, as specified on
Exhibit B (other than a change in the ownership of the
capital stock of any company identified in Exhibit B
as the ultimate holding company of such Shareholder).
Notwithstanding the immediately preceding sentence,
persons holding shares in a Shareholder or any such
holding company may transfer any or all of such shares
to any Affiliate of such person or of the ultimate
holding company of such Shareholder, to a family
member, to another shareholder in such Shareholder or
such holding company or to the estate representative
(as defined in Bye-law 29) of the transferor, in each
case without a change of
10
<PAGE>
ownership being deemed to have occurred. Upon a change
in ownership of a Shareholder permitted by this
Bye-law 18(d) or the acquisition of Shares by another
person in accordance with the terms of these Bye-laws,
Exhibit B shall be amended to reflect such change or
the addition of such Shareholder. Notwithstanding
anything to the contrary herein, (i) this Bye-law
18(d) shall not apply to a change in ownership of a
Shareholder which is identified on Exhibit B as having
no controlling shareholder and (ii) commencing six
months after Final System Acceptance (as defined in
the construction contract for the FLAG Cable System,
as amended), this Bye-law 18(d)) shall not apply to a
change in ownership of a Shareholder if, prior to such
change in ownership, such Shareholder gave notice of
such change and the identity of the purchaser or
transferee of such ownership interest to each of the
other Shareholders and Shareholders representing at
least two-thirds of the Total Voting Power (excluding
for this purpose voting power represented by Shares
held by the Shareholder giving the aforesaid notice
and its Associated Persons) shall not have objected to
such change on grounds reasonably related to the
business strategy or operations of the Company.
19. In addition to any other remedies available against a Defaulting
Shareholder, if the Defaulting Shareholder has failed to remedy a
default within the period of 60 days after a Default Notice has
been served, any Shareholder may, within 15 days following
expiration of such 60-day period, serve a further notice on the
Company requiring the Company promptly to serve notice (a "Default
Transfer Notice") on the Defaulting Shareholder requiring the
Defaulting Shareholder to offer to sell to the other Shareholders
all of the Shares held by the Defaulting Shareholder whereupon the
Defaulting Shareholder shall be deemed to have served a Transfer
Notice pursuant to Bye-law 23(d).
20. If a Default Notice is served on a Defaulting Shareholder pursuant
to Bye-law 18, then from the date being 61 days after such Default
Notice is served on such Defaulting Shareholder and until the date
on which the transfer procedures set forth in Bye-law 23 have been
completed or (if no Default Transfer Notice has been served on the
Defaulting Shareholder pursuant to Bye-law 19) the relevant default
is remedied to the reasonable satisfaction of the Board (excluding
the vote of any Director appointed solely by the Defaulting
Shareholder and/or its Associated Persons), the Defaulting
Shareholder shall not, unless all the other Shareholders consent in
writing, be entitled:
(a) to vote at any meeting of Shareholders (and the Shares
held by such Defaulting Shareholder and/or its
Associated Persons shall not be counted for any
purpose in determining the presence or absence of a
quorum at any meeting of Shareholders);
(b) to receive, participate or share in any distribution
or dividend made, declared or proposed to be made by
the Company (it being understood that any such payment
shall be held in suspense until such transfer
procedures have been completed or such default has
been remedied, as the case may be); or
(c) to transfer its Shares in the Company;
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and any Director designated solely by such Defaulting Shareholder
and/or its Associated Persons shall cease to be qualified to serve
on the Board and shall forthwith resign or be removed from the
Board, provided that such Director shall be reinstated when such
default is remedied.
21. Each Shareholder shall give notice to the other Shareholders and to
the Company of the occurrence of any of the events set forth in
Bye-law 18 promptly upon becoming aware of such occurrence whether
such event relates to itself or to any other Shareholder.
TRANSFER OF SHARES
22. The Directors shall not register a transfer of any Shares to a
person who is known to them to be an infant, bankrupt or person of
unsound mind; PROVIDED that the Directors shall not be bound to
enquire into the age or soundness of mind of any transferee or
whether or not he is a bankrupt. For so long as there is in
existence a Collateral Trustee, until the Company shall have
received notice from such Collateral Trustee that the Pledge
Agreements and the Security Interests granted thereunder have been
terminated, the Directors shall not register any transfer of any
Shares subject to any Pledge Agreement unless such transfer is
permitted by the applicable Pledge Agreement and, prior to the Debt
Termination Date, any other applicable Financing Document.
23. (a) Except in compliance with these Bye-laws, (i) no
transfer or disposal of any Shares or any interest in
any Shares shall be made by a Shareholder and (ii) no
Shareholder shall grant any Security Interest over its
Shares or otherwise sell or otherwise dispose of or
assign or otherwise purport to transfer the beneficial
interest therein or any right in relation thereto
separate from the legal interest.
(b) Each Shareholder shall be entitled to create or allow
a Security Interest to subsist over its Shares in
favour of a third party which is not an Associated
Person. The enforcement of any such Security Interest
shall be subject to the provisions of Bye-law 23(d).
(c) Before transferring or disposing of its Shares or any
interest in its Shares (other than a Security Interest
permitted by Bye-law 23(b)) the Shareholder proposing
to transfer or dispose of its Shares ("the
Transferor") shall give notice (a "Transfer Notice")
to the Company that it desires to transfer or dispose
of the Shares. The Transfer Notice shall specify:
(i) the type, class (if applicable) and
number of Shares and/or any interest
therein which the Transferor wishes to
transfer or dispose of which may be all
or part of the Shares then held by the
Transferor (the "Relevant Shares");
(ii) the price per Share at which the
Transferor is willing to sell the
Relevant Shares, which price shall be
(except as otherwise provided herein) the
Prescribed Price for the purposes of
these Bye-laws; and
(iii) whether the Transferor wishes to impose a
condition that, unless all of the
Relevant Shares are sold pursuant to this
Bye-law 23, none shall be sold (a "Total
Transfer Condition").
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In the event that the Transferor shall have received a
bona fide offer to purchase the Relevant Shares and
intends to accept such offer subject to the terms and
provisions of this Bye-law 23, the Transfer Notice may
also contain the name of the person to whom the
Transferor proposes to sell the Shares and the price
per Share at which such sale would be effected, in
which case such price shall be the Prescribed Price.
The Transfer Notice shall constitute the Company the
agent of the Transferor for the sale of the Relevant
Shares at the Prescribed Price during the Prescribed
Period (as hereinafter defined) to the Shareholders
(other than the Transferor) as provided in this
Bye-law 23 and shall be irrevocable except with the
consent of such Shareholders.
(d) If a Shareholder at any time attempts to transfer or
dispose of a Share or Shares or any interest therein
or right attaching thereto otherwise than as permitted
by this Bye-law 23 or if a Default Transfer Notice is
served on it or if any secured party attempts to
enforce a Security Interest in the Shares of such
Shareholder, such Shareholder shall be deemed,
immediately prior to such attempt or service, as the
case may be, to have given a Transfer Notice (a
"Deemed Transfer Notice") in respect of such Share or
Shares, and
(i) the Prescribed Price for such Shares
shall be the Fair Value of the Relevant
Shares;
(ii) the Deemed Transfer Notice shall be
deemed to have been received by the
Company on the date on which all
Directors have actually become aware, or
were given notice by the Company, of the
facts giving rise to the same; and
(iii) a Deemed Transfer Notice shall be deemed
not to contain a Total Transfer Condition
and shall be irrevocable.
(e) Within seven days after the receipt of any Transfer
Notice the Company shall serve a copy of the Transfer
Notice on all the Shareholders (other than the
Transferor). In the case of a Deemed Transfer Notice,
the Company shall similarly serve notice on all the
Shareholders (including the Transferor), notifying
them that such notice has been deemed to have been
given, within 30 days after the later of (i) the date
of the event giving rise to the Deemed Transfer Notice
or (ii) the earlier of the date on which all Directors
(x) have actually become aware of such event and (y)
were given notice of such event.
(f) Simultaneously with the service of a Transfer Notice
or a Deemed Transfer Notice in accordance with Bye-law
23(d), the Company shall by notice offer to sell to
each holder (other than the Transferor) of the same
type and class (if applicable) of Shares as the
Relevant Shares up to its Relevant Proportion
(calculated with respect to Shares of the same type
and class, if applicable, as the Relevant Shares and
on a basis excluding Shares held by the Transferor) of
the Relevant Shares at the Prescribed Price. Such
offer shall be open for acceptance at any time within
the Prescribed Period. As used herein, "Prescribed
Period" means the period commencing on the date of the
notice given by the Company in accordance with this
Bye-law 23(f) and expiring (i) in the case of a
Transfer Notice, one month thereafter and (ii) in the
case of a Deemed Transfer Notice, one month after a
notice containing the results of the
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determination of the Fair Value of the Relevant Shares
shall have been served on each holder of Shares of
such class (other than the Transferor). Every such
offer shall specify (a) the total number of Relevant
Shares, (b) the number of Relevant Shares offered to
such Shareholder ("Pro-Rata Entitlement") and (c)
whether or not the Transfer Notice contained a Total
Transfer Condition, and shall be accompanied by an
application (an "Entitlement Application") for use by
such Shareholder in applying for its Pro-Rata
Entitlement and for any Shares in excess of such
Pro-Rata Entitlement which it wishes to purchase.
(g) Subject to Bye-law 23(k), if there is only one
Shareholder who applies for all or any of the Relevant
Shares, the Company shall give notice thereof to the
Transferor and the Transferor shall be bound upon
payment therefor to transfer to such Shareholder the
number of Relevant Shares which it has applied for.
The purchase shall be completed at a place and time to
be appointed by the Directors not being less than
three days nor more than ten days after the date of
such notice, and the Directors shall be bound to
register the transfer.
(h) Subject to Bye-law 23(k), if more than one Shareholder
applies for all or any of the Relevant Shares, each
such Shareholder shall be allocated the lesser of (a)
its Pro-Rata Entitlement and (b) the number of Shares
set forth in its Entitlement Application; PROVIDED
that if one or more Shareholders does not accept the
offer to purchase its Pro-Rata Entitlement in full and
each other Shareholder's Entitlement Application has
not been satisfied in full, then each Shareholder
shall be allocated the lesser of (a) its Relevant
Proportion (calculated with respect to the Shares of
the same type and class (if applicable) of the
Relevant Shares and on a basis excluding the Shares
held by the Transferor and each Shareholder whose
Entitlement Application has been satisfied in full or
who has elected not to apply for any portion of its
Pro-Rata Entitlement) of the Relevant Shares which
have been applied for but have not been allocated and
(b) the unsatisfied portion of the amount set forth in
its Entitlement Application. Any remaining Relevant
Shares shall be allocated among those Shareholders
whose Entitlement Applications have not been satisfied
in full by applying the procedure set forth in this
Bye-law 23(h) as many times as is necessary until
either all of the Relevant Shares shall have been
allocated or all Shareholders' Entitlement
Applications shall have been satisfied in full. The
Company shall forthwith give notice of such
allocations to the Transferor and the Shareholders to
whom the Relevant Shares have been allocated and shall
specify in the said notice the place and time, being
not less than three days nor more than ten days after
the date of such notice, at which the sale of the
Relevant Shares so allocated shall be completed. The
Transferor shall be bound upon payment to transfer the
Relevant Shares so allocated to the relevant
Shareholders and the Directors shall be bound to
register the transfers.
(i) In the event that the Company does not receive
acceptances for all the Relevant Shares from
Shareholders holding Shares of the same type and class
(if applicable) as the Relevant Shares, the Company
shall offer to sell each Shareholder holding Shares of
any other type or class (if applicable) (other than
Shareholders who also hold Shares of the same type and
class (if applicable)) its Relevant Proportion
(calculated on a basis including all Shares of all
classes held by it, but excluding all Shares held by
the Transferor) of the remaining Relevant Shares and
the provisions of Bye-laws 23(f) through (h)
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<PAGE>
shall apply MUTATIS mutandis to any such offer.
(j) If the Transfer Notice does not contain a Total
Transfer Condition and if by the foregoing procedures
the Company shall have received acceptances from
Shareholders in respect of only a portion of the
Relevant Shares within the Prescribed Period then the
Company shall forthwith give notice of that fact to
the Transferor. The Transferor shall then be entitled
at any time within 90 days after the date of the said
notice, but subject to the rights of the other
Shareholders under Bye-law 23(l), to sell and transfer
in accordance with Bye-law 23(q) all or part of those
Relevant Shares which have not been accepted as
aforesaid to any person at any price, being not less
than the Prescribed Price, and the Directors shall be
bound to register the same; PROVIDED, HOWEVER, that
(i) at any time prior to six months after Final System
Acceptance (as defined in the construction contract
for the FLAG Cable System, as amended), the right of
the Transferor to effect such transfer shall be
conditioned on its having given notice to all
Shareholders other than the Transferor of the name of
the purchaser (either in the Transfer Notice or in a
subsequent notice) at least 30 days prior to the date
of sale and no Shareholder holding Shares representing
at least 10% of the Total Voting Power shall have
objected in writing to the identity of the purchaser,
PROVIDED that any such objection made by any such
Shareholder shall only be made on grounds reasonably
related to the business strategy or operations of the
Company and (ii) commencing six months after Final
System Acceptance, the right of the Transferor to
effect such transfer to any purchaser if, following
such transfer, such purchaser and its Associated
Persons would own 5% or more of the issued and
outstanding Shares shall be conditioned on the
Transferor having given notice as described in clause
(i) above and Shareholders representing at least
two-thirds of the Total Voting Power (excluding for
this purpose voting power represented by Shares held
by the Transferor and its Associated Persons) shall
not have objected to the identity of the purchaser on
grounds reasonably related to the business strategy or
operations of the Company.
(k) If the Transfer Notice contains a Total Transfer
Condition, an offer of sale of the Relevant Shares
made by the Company pursuant to this Bye-law 23 shall
only be capable of acceptance when all of the Relevant
Shares shall have been accepted by the Shareholders.
If by the foregoing procedures the Company shall not
have received acceptances in respect of all of the
Relevant Shares within the Prescribed Period, the
Company shall forthwith give notice of that fact to
the Transferor. The Transferor shall then be entitled
at any time within 90 days after the date of the said
notice, but subject to the rights of the other
Shareholders under Bye-law 23(l), to sell and transfer
in accordance with Bye-law 23(q) all, but not less
than all, of those Relevant Shares to any person at
any price greater than or equal to the Prescribed
Price, and the Directors shall be bound to register
the same, PROVIDED, HOWEVER, that the right of the
Transferor to effect such transfer shall be subject to
the provisions set forth in clauses (i) and (ii) of
Bye-law 23(j).
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<PAGE>
(l) Immediately after entering into a bona fide
conditional sale of any Relevant Shares to a third
party under Bye-law 23(j) or Bye-law 23(k), the
Transferor shall (if it had not already done so)
notify the Company of the name of such third party and
of the terms of sale and the Company shall forthwith
send a copy of such notice to the other Shareholders.
Within 14 days after receipt of such notice any one or
more of such other Shareholders may by notice to the
Transferor and the Company require the Transferor to
sell all, but not less than all, of such Relevant
Shares to it or them on the same terms and, if more
than one such other Shareholder gives such notice,
Bye-law 23(h) shall apply MUTATIS MUTANDIS. The
purchase shall be completed at a place and time to be
determined by the Board not being less than three days
nor more than ten days after the date of the
last-mentioned notice. The Transferor shall be bound
upon payment to transfer such Relevant Shares to the
relevant Shareholders and the Directors shall be bound
to register the transfers. This Bye-law 23(l) shall
not apply if the name of the third party and the terms
of sale were stated by the Transferor in the relevant
Transfer Notice.
(m) If a Transferor, having become bound to transfer any
Relevant Shares pursuant to this Bye-law 23, defaults
in transferring the same, the Company may authorise an
officer of the Company (who is (as security for the
performance of the Transferor's obligations) hereby
irrevocably and unconditionally appointed as the
attorney of the Transferor for such purpose) to
execute the necessary instrument of transfer of such
Relevant Shares and may deliver it on behalf of the
Transferor and the Company may receive the purchase
money and shall thereupon cause the transferee to be
registered as the holder of such Relevant Shares and
shall hold such purchase money on behalf of the
Transferor. The Company shall not be bound to earn or
pay interest on any money so held and shall not pay
such money to the Transferor until it shall have
delivered the certificates for the Relevant Shares (or
an appropriate indemnity in respect of any lost
certificates) to the Company. The receipt of the
Company for such purchase money shall be a good
discharge to the transferee who shall not be bound to
see to the application thereof, and after the name of
the transferee has been entered in the Register of
Shareholders in purported exercise of the aforesaid
power the validity of the proceedings shall not be
questioned by any person.
(n) An obligation to transfer a Share under the provisions
of this Bye-law 23 shall be deemed to be an obligation
to transfer the entire legal and beneficial interest
in such Share free from any Security Interest.
(o) The provisions of this Bye-law 23 may be waived in
whole or in part in any particular case with the prior
written consent of all the Shareholders.
(p) Notwithstanding any other provision of this Bye-law
23, but subject always to Bye-law 22, the following
transfers shall be permitted:
(i) the transfer of any subscriber Shares by
a nominee to the beneficial owner thereof
or by the subscriber to one or more
Shareholders;
(ii) the transfer of Shares to a transferee
who is and remains an Affiliate of the
transferor, provided that:
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(aa) the obligations of the
transferor Shareholder under
these Bye-laws will remain
unaffected by any such
transfer; and
(bb) the Shares will be
re-transferred to the
transferor Shareholder
immediately upon the
transferee ceasing to be an
Affiliate of such transferor
Shareholder;
(iii) transfers by Shareholders to the Company;
(iv) (A) the pledge by any Shareholder of
Shares (or any interests or rights
therein) to secure the repayment of any
loans and extensions of credit to be made
to the Company and the payment and
performance of any other obligations
arising out of any such loan or extension
of credit, (B) any transfer of Shares (or
any interests or rights therein) pursuant
to any judicial foreclosure or the
exercise of any other remedies under any
Pledge Agreement or any exercise of
remedies under applicable law by a
Collateral Trustee under any financing
arrangement entered into by the Company
and (C) any transfer of Shares (or any
interest or rights therein) to and at the
request of a Collateral Trustee under any
such arrangement (including any
registration or recognition thereof);
PROVIDED, that in no event shall any such holder sell,
transfer or assign any of its Shares to any transferee
that is a competitor of either the Company or Bell
Atlantic. For purposes of the foregoing proviso, (A) a
transferee shall include any other person controlling,
controlled by, or under common control with such
transferee and any employee benefit plans for the
benefit of the employees of any such transferee or
other person and (B) a competitor shall be any person
(1) engaged substantially in the business of running
or operating a submarine telecommunications cable
(other than a cable used only for private network
communications of such person and its affiliates), (2)
owning substantial operating assets in the
telecommunications industry, or (3) engaged
substantially in any business in which Bell Atlantic
or the Company is engaged on the date of the proposed
transfer. For purposes of clause (A) of the preceding
sentence, "controlling," "controlled," and "control"
with respect to any person mean the direct or indirect
beneficial ownership of more than 20% of the voting
interest or economic interest in such person.
(q) No transfer of any Share in the Company to any person
shall be registered unless
(i) such transfer is made in compliance with
these Bye-laws;
(ii) the proposed transferee is duly qualified
as a Shareholder under Bermuda law; and
(iii) such transfer is made in compliance with
all applicable Pledge Agreements and all
other applicable Financing Documents.
24. For the purpose of ensuring that a particular transfer of a Share
or of Shares is permitted under these Bye-laws except for any
transfer requested by a Collateral Trustee pursuant to Bye-law
23(p)(iv), the Board may require the transferor or the person named
as transferee in any transfer lodged for registration to furnish
the
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Company with such information and evidence as the Board may, acting
reasonably, deem necessary or relevant. If such information or
evidence is not furnished to the satisfaction of the Board within a
period of 28 days after such request, the Directors shall be
entitled to refuse to register the transfer in question.
25. Subject to the Companies Acts and to such of the restrictions
contained in these Bye-laws as may be applicable, any Shareholder
may transfer all or any of its Shares by an instrument of transfer
in the usual common form or in any other form which the Board may
approve.
26. The instrument of transfer of a Share shall be signed by or on
behalf of the transferor and when registered may be retained by the
Company.
The Board may decline to register any transfer unless:
(i) the instrument of transfer is duly stamped and lodged
with the Company, accompanied by the certificate for
the Shares to which it relates, and, except for any
transfer requested by the Collateral Trustee pursuant
to Bye-law 23(p)(iv), such other evidence as the Board
may reasonably require to show the right of the
transferor to make the transfer;
(ii) the instrument of transfer is in respect of only one
type and class (if applicable) of Share; and
(iii) where applicable, the permission of the Bermuda
Monetary Authority with respect thereto has been
obtained.
If so authorised by the Board, the Secretary may exercise the
powers and discretions of the Board under this Bye-law 26 and
Bye-laws 25 and 27.
27. If the Board declines to register a transfer it shall, within three
months after the date on which the instrument of transfer was
lodged, send to the transferee notice of such refusal.
28. No fee shall be charged by the Company for registering any
transfer, probate, letters of administration, certificate of death
or marriage, power of attorney, distringas or stop notice, order of
court or other instrument relating to or affecting the title to any
Share, or otherwise making an entry in the Register relating to any
Share.
TRANSMISSION OF SHARES
29. In the case of the death of a Shareholder, the survivor or
survivors, where the deceased was a joint holder, and the estate
representative, where he was sole holder, shall be the only person
recognised by the Company as having any title to his Shares. For
the purpose of this Bye-law, estate representative means the person
to whom probate or letters of administration has or have been
granted in Bermuda or, failing any such person, such other person
as the Board may in its absolute discretion determine to be the
person recognised by the Company for the purpose of this Bye-law.
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30. Any person becoming entitled to a Share in consequence of the death
of a Shareholder or otherwise by operation of applicable law may,
subject as hereafter provided and upon such evidence being produced
as may from time to time be required by the Board as to his
entitlement, either be registered himself as the holder of the
Share or elect to have some person nominated by him registered as
the transferee thereof. If the person so becoming entitled elects
to be registered himself, he shall deliver or send to the Company a
notice in writing signed by him stating that he so elects. If he
shall elect to have his nominee registered, he shall signify his
election by signing an instrument of transfer of such Share in
favour of his nominee. All the limitations, restrictions and
provisions of these Bye-laws relating to the right to transfer and
the registration of transfer of Shares shall be applicable to any
such notice or instrument of transfer as aforesaid as if the death
of the Shareholder or other event giving rise to the transmission
had not occurred and the notice or instrument of transfer was an
instrument of transfer signed by such Shareholder.
31. A person becoming entitled to a Share in consequence of the death
of a Shareholder or otherwise by operation of applicable law shall
(upon such evidence being produced as may from time to time be
required by the Board as to his entitlement) be entitled to receive
and may give a discharge for any dividends or other moneys payable
in respect of the Share, but he shall not be entitled in respect of
the Share to receive notices of or to attend or vote at general
meetings of the Company or, save as aforesaid, to exercise in
respect of the Share any of the rights or privileges of a
Shareholder until he shall have become registered as the holder
thereof. The Board may at any time give notice requiring such
person to elect either to be registered himself or to transfer the
Share and if the notice is not complied with within sixty days the
Board may thereafter withhold payment of all dividends and other
moneys payable in respect of the Shares until the requirements of
the notice have been complied with.
32. If so authorised by the Board, the Secretary may exercise the
powers and discretions of the Board under Bye-laws 29, 30 and 31.
INCREASE OF CAPITAL
33. Subject to Bye-laws 5 and 38, the Company may from time to time
increase its authorised capital by such sum to be divided into
Shares of such par value as the Company by Resolution shall
prescribe.
ALTERATION OF CAPITAL
34. Subject to Bye-laws 5and 38, the Company may from time to time by
Resolution:
(a) divide its Shares into several classes and attach
thereto respectively any preferential, deferred,
qualified or special rights, privileges or conditions
or alter, abrogate or convert any of its Shares into
any other class and/or type of Shares;
(b) consolidate and divide all or any of its share capital
into Shares of larger par value than its existing
Shares;
(c) sub-divide its Shares or any of them into Shares of
smaller par value than is fixed by its Memorandum of
Association;
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(d) make provision for the issue and allotment of Shares
which do not carry any voting rights;
(e) cancel Shares which, at the date of the passing of the
resolution in that behalf, have not been taken or
agreed to be taken by any person, and diminish the
amount of its share capital by the amount of the
Shares so cancelled; and
(f) change the currency denomination of its share capital.
Where any difficulty arises in regard to any alteration,
abrogation, division, consolidation, sub-division, exchange or
conversion under this Bye-law, the Board may settle the same as it
deems expedient and, in particular, may arrange for the sale of the
Shares representing fractions and the distribution of the net
proceeds of sale in due proportion amongst the Shareholders who
would have been entitled to the fractions, and for this purpose the
Board may authorise some person to transfer the Shares representing
fractions to the purchaser thereof, who shall not be bound to see
to the application of the purchase money nor shall his title to the
Shares be affected by any irregularity or invalidity in the
proceedings relating to the sale.
35. Subject to the Companies Acts and to any confirmation or consent
required by applicable law or these Bye-laws (including, without
limitation, Bye-law 38), the Company may by Resolution from time to
time convert any preference shares into redeemable preference
shares.
REDUCTION OF CAPITAL
36. Subject to the Companies Acts, its Memorandum of Association and
any confirmation or consent required by applicable law or these
Bye-laws (including, without limitation, Bye-law 38), the Company
may from time to time by Resolution authorise the reduction of its
issued share capital or any capital redemption reserve fund or any
share premium or contributed surplus account in any manner.
37. In relation to any such reduction, the Company may by Resolution
determine the terms upon which such reduction is to be effected
including in the case of a reduction of part of a class of Shares,
those Shares to be affected.
MATTERS REQUIRING SPECIAL APPROVAL
38. The Company shall not take any of the following actions (or permit
any of its subsidiaries to take any of the following actions)
unless such action is approved by resolution validly passed by the
Board and by the affirmative vote of holders of Shares representing
at least two-thirds of the Total Voting Power (a "Shareholder
Supermajority Vote"); PROVIDED, that, prior to the Debt Termination
Date unless the Collateral Trustee shall have otherwise given its
written consent, the Company shall not take the actions specified
in clause (iv) of this Bye-law 38 unless such actions are approved
by an affirmative vote of the holders of shares representing at
least 75% of the Total Voting Power:
(i) adopt or amend fundamental accounting policies;
(ii) appoint or replace the auditors of the Company or any
of its subsidiaries;
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(iii) make or permit any material change to the nature or
scope of the FLAG Project;
(iv) make any composition or arrangement with its
creditors, move for insolvency, receivership or
administration or do or permit or suffer to be done
any act or thing whereby the Company or any of its
subsidiaries may be wound up (whether voluntarily or
compulsorily);
(v) create any Security Interest over the whole or any
material part of the business, property or assets
(tangible or intangible) of the Company or any of its
subsidiaries;
(vi) incur indebtedness exceeding $5,000,000 in the
aggregate;
(vii) subject to Bye-law 39, make any loan or advance or
give any credit (other than normal trade credit) to
any person other than a subsidiary of the Company in
excess of an amount equal to 1% of the total paid up
capital (nominal amount plus share premium) of the
Company from time to time;
(viii) give any guarantee, indemnity or security to secure
the liabilities or obligations of any other person,
other than a subsidiary of the Company;
(ix) sell, transfer, lease, assign, dispose of or part with
control of any interest in all or any material part of
the business, property or assets (tangible or
intangible) of the Company or any of its subsidiaries,
other than the sale or lease of cable capacity on
arm's length terms (whether by a single transaction or
a series of transactions), or contract to do so or
acquire or contract to acquire any business, property
or assets (tangible or intangible) or any interest
therein which would, following such acquisition
constitute a material part of the business, property
or assets of the Company or any of its subsidiaries
(and for the purposes of this Bye-law 38(ix), any such
business, property or assets accounting for, or which
would following such acquisition by the Company or any
of its subsidiaries account for, 5% or more of the net
income or net asset value of the Company shall be
deemed material);
(x) subject in all cases to Bye-law 5 make or agree to
make any change to the authorised share capital from
time to time of the Company or any of its subsidiaries
(including without limitation, the creation of any
class of share capital, any increase in the number of
authorised shares of any class of share capital or any
change in the par value of any class of share capital)
or grant any option over, or issue any investment
carrying rights of conversion into, any share capital
of the Company or any of its subsidiaries;
(xi) repurchase, redeem (otherwise than in accordance with
the terms of redemption established at the time of
issue of the relevant share capital or loan stock),
reorganise, consolidate, subdivide, cancel, reduce or
convert (otherwise than in accordance with the terms
of conversion established at the time of issue of the
relevant share capital or loan stock) any of the share
capital or loan stock of the Company or any of its
subsidiaries or in any way alter the rights attaching
thereto;
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(xii) acquire, purchase or subscribe for any shares, loan
stock, debentures, mortgages or securities (or any
interest therein) or any other interest in any
company, trust or other body or person, other than the
Company or a wholly owned subsidiary, PROVIDED that
this Bye-law 38(xii) shall not apply to the
acquisition of short-term investment grade securities
for cash management purposes;
(xiii) grant any power of attorney (other than special powers
of attorney granted in the ordinary course of
business) or make any general delegation of Directors'
powers, except in accordance with these Bye-laws;
(xiv) subject to Bye-law 39, enter into or make any material
amendment to any contract that provides for aggregate
payments by the Company or any of its subsidiaries in
excess of $5,000,000;
(xv) make any amendment of the Memorandum of Association or
Bye-laws of the Company or any of its subsidiaries;
(xvi) establish the terms and conditions of the issuance of
any Shares or any share in the share capital of any of
the Company's subsidiaries; or
(xvii) declare any dividend on any share capital of the
Company or any of its subsidiaries (other than by way
of any capitalisation of share premium account).
39. The Company shall not (and shall not permit any of its subsidiaries
to) enter into, amend in any material respect or terminate any
agreement or transaction involving aggregate payments or other
consideration with an aggregate value in excess of $1 million with
any person in which a Shareholder or any of its Associated Persons
has an interest unless such action is approved by at least
two-thirds of the votes cast at a meeting of the Board, excluding
for all purposes of such calculation all votes exercisable by the
Director(s) designated by such interested Shareholder, and any such
action with respect to any agreement or transaction involving
payments or other consideration with an aggregate value of $1
million or less shall require approval by the affirmative vote of
the Directors representing a majority of the total voting power of
the Entire Board, excluding for all purposes of such calculation
all votes exercisable by any Director appointed by the interested
Shareholder. The Company shall not (and shall not permit any of its
subsidiaries to) make any loan or advance or give any credit (other
than normal trade credit) to any Shareholder or Director or any
relative or Associated Person of a Shareholder or Director unless
such loan, advance or credit is approved by the affirmative vote of
at least two-thirds of the votes cast at a meeting of the Board,
excluding for all purposes of such calculation all votes
exercisable by any Director appointed by an interested Shareholder.
In case of doubt, the Board shall determine by majority vote,
excluding for all purposes of such calculation all votes
exercisable by the Director appointed by the potentially interested
shareholder whether a Shareholder is an interested Shareholder by
virtue of it or any of its Associated Persons having an interest in
any agreement or transaction of a nature requiring approval as
provided in this Bye-law 39.
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BUSINESS PLAN
40. The Board shall meet at least three months before the end of each
financial year to approve a Business Plan for the following three
financial years. Each such Business Plan shall deal with the
following matters:
(a) the activities to be undertaken by the Company and its
subsidiaries;
(b) a budget setting out the expected revenues, expenses
and capital requirements of the Company;
(c) the manner in which the anticipated capital
requirements of the Company and its subsidiaries will
be funded including the proportions to be funded by
way of external borrowings, Shareholders' loans or
guarantees and/or equity contributions; and
(d) such other matters as the Shareholders may determine
should be dealt with in the Business Plan from time to
time.
41. Business Plans shall be approved, and any Business Plan may be
amended by the affirmative vote of at least a majority of the total
voting power of the Entire Board. If the Board is unable to approve
any Business Plan, the Business Plan then in effect shall continue
to be operative until the earlier to occur of (i) the expiration of
the period covered by such Business Plan and (ii) adoption by the
Board of a subsequent Business Plan.
42. A marketing plan in respect of the sale of capacity in the FLAG
Cable System ("Marketing Plan") shall be adopted concurrently with
the adoption of each Business Plan. Marketing Plans shall be
approved, and any Marketing Plan may be amended, by the affirmative
vote of at least a majority of the total voting power of the Entire
Board. If the Board is unable to approve a new Marketing Plan, the
Marketing Plan then in effect shall continue to be operative until
the earlier to occur of (i) the expiration of the period covered by
such Marketing Plan and (ii) adoption by the Board of a subsequent
Marketing Plan.
43. The Company acknowledges that Bell Atlantic is, and, by virtue of
Bell Atlantic's interest in the Company, the Company may be,
subject to the U.S. Telecommunications Act of 1996 (the "Telecoms
Act"). The Telecoms Act prohibits Bell Atlantic as a participant
and may prohibit the Company from engaging in certain activities
with respect to services sold for use or consumption in the United
States including, without limitation, the provision of
inter-exchange services. So long as Bell Atlantic or any of its
Associated Persons has any interest in the Company, the Company may
not knowingly engage in any activity which in Bell Atlantic's
opinion could contravene the Telecoms Act. If the Company desires
to engage in any such activity, the Company shall, so far as
reasonably possible, work diligently towards constructing the
activity, or the ownership of the activity, so as to avoid
contravention of the Telecoms Act; PROVIDED that the Company shall
not engage in such activity if, in Bell Atlantic's opinion, such
activity, or the ownership of such activity, cannot be constructed
so as to avoid contravention of the Telecoms Act.
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GENERAL MEETINGS
44. The Board shall convene and the Company shall hold general meetings
as annual general meetings in accordance with the requirements of
the Companies Acts and in any event not less than once in every
year.
45. Unless otherwise agreed to by all Shareholders, the annual general
meeting will be held, subject to the notice provisions of Bye-law
46, at the time and place designated by the Board. Special general
meetings and class meetings of the Shareholders may be called by
the Chairman of the Board and shall be called by the Chairman of
the Board upon written request of at least one Director or when
required by the Companies Acts. A special general meeting or class
meeting shall also be called by the Chairman of the Board and shall
be held at a time and place designated by the Board or the Chairman
of the Board and in any event as soon as practicable after any
regular or special meeting of the directors at which action is to
be, or has been, taken by the Directors which, if favourable, will
also require a Shareholder vote or a class vote, as the case may
be. Unless otherwise agreed to by all Shareholders or as specified
above, special general meetings and class meetings shall be held at
the place designated for the next annual general meeting and,
subject to the notice provisions set forth in Bye-law 46, at a date
and time determined by the Chairman of the Board (which date shall
be, in the case of a special general meeting or class meeting
called at the request of at least one Director as provided above,
within ten days of the date specified in such request).
NOTICE OF GENERAL MEETINGS
46. Unless waived by all the Shareholders entitled to vote at such
meeting, not less than seven full days' notice of each meeting of
the Shareholders shall be given to each Shareholder entitled to
vote at such meeting and to each Director, and to any Resident
Representative who or which has delivered a written notice to the
Registered Office requiring that such notice be sent to him or it,
together with an agenda of the business to be transacted at such
meeting and all papers to be circulated or presented to the same.
Notice of each meeting shall be given in any manner permitted by
Bye-law 117 to all Shareholders entitled to attend and vote at such
meeting. As soon as practicable after each such meeting, a copy of
the minutes of that meeting shall be sent to each Shareholder.
PROCEEDINGS AT GENERAL MEETINGS
47. No special general meeting or annual general meeting of the
Shareholders or any class of Shareholders of the Company may
proceed to business unless a quorum is present at such meeting. For
these purposes, a quorum of the Shareholders at such meeting shall
be Shareholders holding Shares representing at least 50% of the
Total Voting Power and a quorum of Shareholders at a class meeting
shall be Shareholders holding at least 50% of the total issued and
outstanding Shares of the relevant class, in any such case being
present in person or by their respective proxies or duly authorised
representatives. Without limiting the generality of the foregoing,
a quorum shall in all cases consist of at least two Shareholders
(in the case of a meeting of the Shareholders) or two Shareholders
of the relevant class (in the case of a class meeting), unless
there is only one holder of Shares or of Shares of the relevant
class.
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48. Shareholders' meetings may be held by means of such telephone,
electronic or other communication facilities as permit all persons
participating in the meeting to communicate with each other
simultaneously and instantaneously, and participation in a meeting
of Shareholders through such means shall constitute presence in
person, by proxy or by representative, as the case may be.
49. If within five minutes (or such longer time as the chairman of the
meeting may determine to wait) after the time appointed for the
meeting, a quorum of the Shareholders is not present at a duly
convened annual general meeting, special general meeting or at a
class meeting, as the case may be, the meeting, if convened on the
requisition of Shareholders, shall be dissolved, and in any other
case, shall be adjourned for two days to the same time and place.
50. Each Director shall be entitled to attend and speak at any general
meeting of the Company and the Resident Representative, if any,
upon giving the notice referred to in Bye-law 46, shall be entitled
to attend any general meeting of the Company.
51. The Chairman of the Board or, in his absence, the Deputy Chairman,
shall preside as chairman at every Shareholders' meeting. If there
is no such Chairman or Deputy Chairman, or if at any meeting
neither the Chairman nor the Deputy Chairman is present within five
minutes after the time appointed for holding the meeting, or if
neither of them is willing to act as chairman, the Directors
present shall choose one of their number to act, or if one Director
only is present, he shall preside as chairman, if willing to act.
If no Director is present, or if each of the Directors present
declines to take the chair, the persons present and entitled to
vote on a poll shall elect one of their number to be chairman. The
chairman of any meeting of Shareholders shall not be entitled, by
virtue of such capacity, to exercise a vote (casting or otherwise)
at such meeting.
52. The chairman of the meeting may, with the consent of any meeting at
which a quorum is present (and shall, if so directed by the
meeting), adjourn the meeting from time to time and from place to
place, but no business shall be transacted at any adjourned meeting
except business which might lawfully have been transacted at the
meeting from which the adjournment took place. When a meeting is
adjourned for three months or more, notice of the adjourned meeting
shall be given as if the adjourned meeting were the original
meeting.
53. Except as expressly provided by these Bye-laws, it shall not be
necessary to give any notice of an adjournment or of the business
to be transacted at an adjourned meeting.
VOTING
54. Notwithstanding the other provisions of these Bye-laws, upon any
voting on a resolution proposed for consideration by the
Shareholders in general meeting, no Shareholder may cast a vote in
person or by proxy or corporate representative in circumstances
where they have executed and delivered a valid and subsisting
Irrevocable Proxy pursuant to Bye-law 67(b) and the holder of such
proxy has delivered such proxy to the Company in accordance with
the terms and conditions specified in such proxy. Except where a
greater majority is required by the Companies Acts or these
Bye-laws, any question proposed for consideration at any general
meeting or class meeting shall be decided on by a simple majority
of votes cast.
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55. Except in the case of removal of auditors and Directors, a
Shareholders' resolution shall be validly passed without a meeting
if the text of the resolution has been approved in writing by or on
behalf of all of the Shareholders who at the date of the resolution
would be entitled to attend the meeting and vote on the resolution.
Such resolution shall be sent by post or facsimile to each
Shareholder entitled to vote on such resolution at its registered
address or such other address for service specified by such
Shareholder in accordance with Bye-law 117. Such resolution shall
take effect at the time when the last of the written approvals
required to approve such resolution is actually received by the
Company.
56. At any meeting of Shareholders, a resolution put to the vote of the
meeting shall be decided on a show of hands unless (before or on
the declaration of the result of the show of hands or on the
withdrawal of any other demand for a poll) a poll is demanded by:
(a) the chairman of the meeting;
(b) at least two Shareholders present in person or by
proxy or duly authorised representative; or
(c) any Shareholder or Shareholders present in person or
by proxy or duly authorised representative, and
holding between them not less than ten percent of the
total voting power of all the Shareholders having the
right to attend and vote at such meeting.
Unless a poll is so demanded and the demand is not withdrawn, a
declaration by the chairman that a resolution has, on a show of
hands, been carried or carried unanimously or by a particular
majority or not carried by a particular majority or lost shall be
final and conclusive, and an entry to that effect in the minute
book of the Company shall be conclusive evidence of the fact
without proof of the number of votes recorded for or against such
resolution.
57. If a poll is duly demanded, the result of the poll shall be deemed
to be the resolution of the meeting at which the poll is demanded.
58. A poll demanded on the election of a chairman, or on a question of
adjournment, shall be taken forthwith. A poll demanded on any other
question shall be taken in such manner and either forthwith or at
such time (being not later than the close of the meeting at which
such poll was demanded) and place as the chairman shall direct.
59. The demand for a poll shall not prevent the continuance of a
meeting for the transaction of any business other than the question
on which the poll has been demanded and it may be withdrawn at any
time before the close of the meeting or the taking of the poll,
whichever is the earlier.
60. On a poll, votes may be cast personally, by proxy or by duly
authorised representative, PROVIDED, that if an Irrevocable Proxy
has been executed and delivered in accordance with the provisions
of Bye-law 67(b) such votes may only be cast by the holder of that
Irrevocable Proxy during the subsistence of that proxy once such
holder has delivered such proxy to the Company in accordance with
the terms and conditions specified in such proxy.
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61. A person entitled to more than one vote on a poll need not use all
his votes or cast all the votes he uses in the same way.
62. In the case of an equality of votes at a general meeting, whether
on a show of hands or on a poll, the chairman of such meeting shall
not be entitled to a second or casting vote.
63. In the case of joint holders of a Share, the vote of the senior who
tenders a vote, whether in person or by proxy, shall be accepted to
the exclusion of the votes of the other joint holders, and for this
purpose seniority shall be determined by the order in which the
names stand in the Register in respect of the joint holding.
64. A Shareholder who is a patient for any purpose of any statute or
applicable law relating to mental health or in respect of whom an
order has been made by any court having jurisdiction for the
protection or management of the affairs of persons incapable of
managing their own affairs may vote, whether on a show of hands or
on a poll, by his receiver, committee, curator bonis or other
person in the nature of a receiver, committee or curator bonis
appointed by such court and such receiver, committee, curator bonis
or other person may vote on a poll by proxy, and may otherwise act
and be treated as such Shareholder for the purpose of Shareholders'
meetings.
65. If (i) any objection shall be raised to the qualification of any
voter or (ii) any votes have been counted which ought not to have
been counted or which might have been rejected or (iii) any votes
are not counted which ought to have been counted, the objection or
error shall not vitiate the decision of the meeting or adjourned
meeting on any resolution unless the same is raised or pointed out
at the meeting or the adjourned meeting, as the case may be, at
which the vote objected to is given or tendered or at which the
error occurs. Any objection or error shall be referred to the
chairman of the meeting and shall only vitiate the decision of the
meeting on any resolution if the chairman decides that the same may
have affected the decision of the meeting. The decision of the
chairman on such matters shall be final and conclusive.
PROXIES AND CORPORATE REPRESENTATIVES
66. The instrument appointing a proxy shall be in writing under the
hand of the appointor or of his attorney authorised by him in
writing or, if the appointor is a corporation, either under its
seal or under the hand of an officer, attorney or other person
authorised to sign the same.
67. (a) Without prejudice to Bye-law 63, any Shareholder may
appoint a standing proxy or, if a corporation,
representative by depositing at the Registered Office
a proxy or, if a corporation, an authorisation and
such proxy or authorisation shall be valid for all
general meetings and adjournments thereof until notice
of revocation is received at the Registered Office.
Where a standing proxy or authorisation exists, its
operation shall be deemed to have been suspended at
any Shareholders' meeting or adjournment thereof at
which the Shareholder is present or in respect to
which the Shareholder has specially appointed a proxy
or representative. The Board may from time to time
require such evidence as it shall deem necessary as to
the due execution and continuing validity of any such
standing proxy or authorisation and the operation of
any such standing
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proxy or authorisation shall be deemed to be suspended
until such time as the Board determines that it has
received the requested evidence or other evidence
satisfactory to it.
(b) Notwithstanding the provisions of Bye-laws 67(a), 68
or 69 or any other provision of these Bye-laws, in the
event that an Irrevocable Proxy and Power (the
"Irrevocable Proxy") in the form set out as Exhibit D
hereto is delivered to the Company by a Collateral
Trustee, its operation shall be treated by the Company
for all purposes as effective in accordance with its
terms and effective to preclude the exercise by the
Shareholder which has granted the Irrevocable Proxy
either to vote directly, to appoint a specific proxy
or to exercise any other rights it may have as a
Shareholder. The exercise by a Collateral Trustee of
any rights under any Irrevocable Proxy shall not be
subject to the payment by any person of any funding or
other obligations of any Shareholder or any other
restrictions imposed by Bye-laws 18, 19, 20 or 21.
68. Subject to Bye-laws 63 and 67, the instrument appointing a proxy,
together with such other evidence as to its due execution as the
Board may from time to time require, shall be delivered at the
Registered Office (or at such place as may be specified in the
notice convening the meeting or in any notice of any adjournment
or, in either case, in any document sent therewith) prior to the
holding of the meeting or adjourned meeting at which the person
named in the instrument proposes to vote and in default the
instrument of proxy shall not be treated as valid.
69. Instruments of proxy shall be in any common form or in such other
form as the Board may approve and the Board may, if it deems
appropriate, send out with the notice of any meeting forms of
instruments of proxy for use at that meeting. The instrument of
proxy shall be deemed to confer authority to demand or join in
demanding a poll and to vote on any amendment of a resolution put
to the meeting for which it is given as the proxy deems
appropriate. The instrument of proxy shall, unless the contrary is
stated therein, be valid as well for any adjournment of the meeting
as for the meeting to which it relates.
70. A vote given in accordance with the terms of an instrument of proxy
shall be valid notwithstanding the previous death or insanity of
the principal, or revocation of the instrument of proxy or of the
authority under which it was executed, provided that no intimation
in writing of such death, insanity or revocation shall have been
received by the Company at the Registered Office (or such other
place as may be specified for the delivery of instruments of proxy
in the notice convening the meeting or other documents sent
therewith) one hour at least before the commencement of the meeting
or adjourned meeting, at which the instrument of proxy is used,
PROVIDED further that an Irrevocable Proxy may not be revoked
except as may be set out therein.
71. Subject to the Companies Acts and Bye-law 67(b), the Board may at
its discretion waive any of the provisions of these Bye-laws
related to proxies or authorisations (other than Bye-law 67(b))
and, in particular, may accept such verbal or other assurances as
it deems appropriate as to the right of any person to attend and
vote on behalf of any Shareholder at any meeting.
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APPOINTMENT AND REMOVAL OF DIRECTORS
72. The number of Directors shall be such number not less than three or
more than fifteen as the Company by Resolution may, subject to
Bye-law 73, from time to time determine and, subject to the
Companies Acts and these Bye-laws, shall serve until re-elected or
their successors are appointed at the next annual general meeting.
73. Subject as is set out below, the Directors of the Company shall be
appointed as set out in this Bye-law 73:
(a) Each Shareholder holding at least 30% of the issued
and outstanding Shares shall have the right from time
to time for each 30% of the issued and outstanding
Shares held by such Shareholder to designate one
Director by notice to the Company (PROVIDED, HOWEVER,
that if two or more Associated Persons each hold
Shares, their respective holdings shall be aggregated
for purposes of this Bye-law 73 and Bye-law 74).
(b) If the procedures set forth above in Bye-law 73(a) do
not result in the appointment of at least two
Directors resident in Bermuda, or if there are not two
individuals ordinarily resident in Bermuda serving as
secretary and as a resident Director or as Secretary
and as a Resident Representative, respectively, of the
Company, the Shareholders shall have the right from
time to time collectively to designate, as necessary
to ensure that there are at all times either (i) a
resident Secretary and a Resident Representative, (ii)
a resident Secretary and a resident Director or (iii)
two resident Directors, one or two additional
Directors (or a Resident Representative) each of whom
is resident in Bermuda. Such designation shall be made
by the affirmative vote of Shareholders holding at
least two-thirds of the Total Voting Power. "Resident
Director," as used in these Bye-laws, means a Director
appointed pursuant to this Bye-law 73(b).
(c) If not otherwise designated as Directors, either (i)
the Chairman and the Deputy Chairman or (ii) the
President and the Vice President, if any, shall be
designated as Directors by the person or persons
holding a majority of the total Shares at the time
outstanding.
(d) Notwithstanding anything to the contrary herein, no
Director shall be permitted to take office until he
has executed and delivered to the Company a
confidentiality agreement in the form set forth in
Exhibit C hereto.
74. (a) Any Shareholder or class of Shareholders designating a
Director may by notice in writing to the Company and
to the other Shareholders request the removal of such
Director and designate another person to be elected in
his place in accordance with Bye-law 73(a). Upon the
sale or transfer of Shares held by a Shareholder with
the result that such Shareholder ceases to hold such
percentage of the issued and outstanding Shares that
entitled it to designate such total number of
Directors calculated pursuant to Bye-law 73(a), there
shall be delivered to the Company, upon the closing of
such sale or transfer, written resignations of such
number of Directors as such Shareholder is no longer
entitled to designate pursuant to Bye-law 73(a). Any
Shareholder may, by notice to the Company, (i) at any
time request the removal of any Resident Director who
ceases to be a resident of Bermuda or (ii) request the
removal of
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any Director or Directors designated pursuant to
Bye-law 73(a) by a Shareholder that, at the time of
such request, does not hold such percentage of the
issued and outstanding Shares that entitled it to
designate such Director or Directors pursuant to
Bye-law 73(a).
(b) The Company shall in a special general meeting or
class meeting called for that purpose remove a
Director whose removal is requested pursuant to
Bye-law 74(a); PROVIDED that notice of any such
meeting shall be served upon the Director concerned
not less than fourteen days before the meeting. Any
vacancy created by the removal of a Director at a
special general meeting or class meeting may be filled
at the meeting by the election of another Director in
his place.
(c) Each Shareholder shall vote or execute a written
consent with respect to all Shares as to which it is
entitled to vote so as to secure the due appointment
as Directors and/or continuation in office of all
persons designated in accordance with Bye-laws 73 and
74.
75. If any Director is removed in accordance with the provisions of
Bye-law 74, the Shareholder (or Shareholders, jointly and
severally, if more than one) who designated such Director shall be
responsible for and shall hold harmless the other Shareholders and
the Company from and against any claim for compensation arising out
of such removal and any reasonable costs and expenses incurred in
defending such proceedings, including, without limitation, the
fees, disbursements and related charges of counsel.
RESIGNATION AND DISQUALIFICATION OF DIRECTORS
76. The office of a Director shall be vacated upon the happening of any
of the following events:
(i) if he resigns his office by notice in writing
delivered to the Registered Office or tendered at a
meeting of the Board;
(ii) if he becomes of unsound mind or a patient for any
purpose of any statute or applicable law relating to
mental health and the Board resolves that his office
is vacated;
(iii) if he becomes bankrupt or compounds with his
creditors;
(iv) if he is prohibited by law from being a Director;
(v) if he ceases to be a Director by virtue of the
Companies Acts;
(vi) if he is removed from office pursuant to these
Bye-laws; or
(vii) if he is no longer qualified to serve as a Director
pursuant to any provision of these Bye-laws.
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ALTERNATE DIRECTORS
77. Each Director may appoint an alternate (an "Alternate Director") to
represent him at meetings of the Board which he is unable to
attend; PROVIDED, HOWEVER, that a Director appointed pursuant to
Bye-law 73(c) may not appoint an Alternate Director. An Alternate
Director may also be a Director in his own right and may act as
alternate to more than one Director.
78. An Alternate Director shall be entitled to receive notices of all
meetings of Directors, to attend, be counted in the quorum and vote
at any such meeting at which any Director to whom he is alternate
is not personally present, and generally to perform all the
functions of any Director to whom he is alternate in such
Director's absence.
79. Every person acting as an Alternate Director shall (except as
regards powers to appoint an alternate and remuneration) be subject
in all respects to the provisions of these Bye-laws relating to
Directors and shall alone be responsible to the Company for his
acts and defaults and shall not be deemed to be the agent of or for
any Director for whom he is alternate. An Alternate Director may be
paid expenses and shall be entitled to be indemnified by the
Company to the same extent MUTATIS MUTANDIS as if he were a
Director. Every person acting as an Alternate Director shall have
the vote(s) of each Director for whom he acts as alternate (in
addition to his own vote(s) if he is also a Director). The
signature of an Alternate Director to any resolution in writing of
the Board or a committee of the Board shall, unless the terms of
his appointment provide to the contrary, be as effective as the
signature of the Director or Directors to whom he is alternate.
DIRECTORS' FEES AND ADDITIONAL REMUNERATION AND EXPENSES
80. The remuneration, if any, of the Directors for their services as
Directors shall be determined from time to time by, and be subject
to the approval of, Shareholders holding a majority of the Total
Voting Power. Each Director shall be paid his reasonable
travelling, hotel and incidental expenses in attending and
returning from meetings of the Board or committees constituted
pursuant to these Bye-laws or general meetings and shall be paid
all expenses properly and reasonably incurred by him in the conduct
of the Company's business or in the discharge of his duties as a
Director. Any such remuneration shall be the same for all Directors
except where a Director has entered into an agreement with the
Company for the provision of executive services, in which event
such Director shall be entitled to remuneration for such executive
services as provided in such agreement (and may, to the extent
provided in such agreement, receive no remuneration, or a lesser
amount of remuneration than that received by other Directors, for
his services as a Director).
81. The Shareholders may from time to time by resolution appoint one of
the Directors to be a managing director and may similarly appoint
one or more of the Directors to hold any other employment or
executive office with the Company (except that of auditor) for such
period and upon such terms as the Shareholders may determine and
may revoke or terminate any such appointments. Any such revocation
or termination as aforesaid shall be without prejudice to any claim
for damages that such Director may have against the Company or the
Company may have against such Director for any breach of any
contract of service between him and the Company which may be
involved in such revocation or termination.
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DIRECTORS' INTERESTS
82. (a) A Director may hold any other office or place of
profit with the Company (except that of auditor) in
conjunction with his office of Director for such
period and upon such terms as the Shareholders may
determine in accordance with Bye-law 81, and may be
paid such remuneration therefor (whether by way of
salary, commission, participation in profits or
otherwise) as the Shareholders may determine in
accordance with Bye-law 80.
(b) A Director may act by himself or his firm in a
professional capacity for the Company (otherwise than
as auditor) and he or his firm shall be entitled to
remuneration for professional services as if he were
not a Director.
(c) Subject to the provisions of the Companies Acts and
Bye-law 39, a Director may notwithstanding his office
be a party to, or otherwise interested in, any
transaction or arrangement with the Company or in
which the Company is otherwise interested, and be a
Director or other officer of, or employed by, or a
party to any transaction or arrangement with, or
otherwise interested in, any body corporate promoted
by the Company or in which the Company is interested
or with which the Company proposes to contract. The
Board may also cause the voting power conferred by the
shares in any other company held or owned by the
Company to be exercised in such manner in all respects
as it deems appropriate, including the exercise
thereof in favour of any resolution appointing the
Directors or any of them to be directors or officers
of such other company, or voting or providing for the
payment of remuneration to the directors or officers
of such other company.
(d) So long as, where it is necessary, he declares the
nature of his interest at the first opportunity at a
meeting of the Board or by writing to the Directors as
required by the Companies Acts, a Director shall not
by reason of his office be accountable to the Company
for any benefit which he derives from any office or
employment to which these Bye-laws allow him to be
appointed or from any transaction or arrangement in
which these Bye-laws allow him to be interested, and,
subject to Bye-law 39, no such transaction or
arrangement shall be liable to be avoided on the
ground of any interest or benefit.
(e) Subject to the Companies Acts and any further
disclosure required thereby, a general notice to the
Directors by a Director or officer declaring that he
is a director or officer or has an interest in a
person and is to be regarded as interested in any
transaction or arrangement made with that person,
shall be a sufficient declaration of interest in
relation to any transaction or arrangement so made.
POWERS AND DUTIES OF THE BOARD
83. Subject to the provisions of the Companies Acts and these Bye-laws,
including, without limitation, Bye-law 38, and to any directions
given by the Company in general meeting, the Board shall manage the
business of the Company and may pay all expenses incurred in
promoting and incorporating the Company and may exercise all the
powers of the Company. No alteration of these Bye-laws and no such
direction shall invalidate any prior act of the Board which would
have been valid if that alteration had not been made or that
direction had not been given. The powers
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given by this Bye-law shall not be limited by any special power
given to the Board by these Bye-laws and, except as otherwise
specifically provided in these Bye-laws, a meeting of the Board at
which a quorum is present shall be competent to exercise all the
powers, authorities and discretions for the time being vested in or
exercisable by the Board.
84. The Board may, subject to Bye-law 38, exercise all the powers of
the Company to borrow money and to mortgage or charge all or any
part of the undertaking, property and assets (present and future)
of the Company and to issue debentures and other securities,
whether outright or as collateral security for any debt, liability
or obligation of the Company or of any other persons.
85. All cheques, promissory notes, drafts, bills of exchange and other
instruments, whether negotiable or transferable or not, and all
receipts for money paid to the Company shall be signed, drawn,
accepted, endorsed or otherwise executed, as the case may be, in
such manner as the Board shall from time to time by resolution
determine.
86. The Board on behalf of the Company may provide benefits, whether by
the payment of gratuities or pensions or otherwise, for any person,
including any Director or former Director, who has held any
executive office or employment with the Company or with any body
corporate which is or has been a subsidiary or affiliate of the
Company or a predecessor in the business of the Company or of any
such subsidiary or affiliate, and to any Shareholder or his family
or any person who is or was dependent on him, and may contribute to
any fund and pay premiums for the purchase or provision of any such
gratuity, pension or other benefit, or for the insurance of any
such person.
DELEGATION OF THE BOARD'S POWERS
87. The Board may, subject to Bye-law 38, by power of attorney appoint
any company, firm or person or any fluctuating body of persons,
whether nominated directly or indirectly by the Board, to be the
attorney or attorneys of the Company for such purposes and with
such powers, authorities and discretions (not exceeding those
vested in or exercisable by the Board under these Bye-laws) and for
such period and subject to such conditions as it may deem
appropriate, and any such power of attorney may contain such
provisions for the protection and convenience of persons dealing
with any such attorney and of such attorney as the Board may deem
appropriate, and may also authorise any such attorney to
sub-delegate all or any of the powers, authorities and discretions
vested in him.
88. The Board may entrust to and confer upon any Director or, subject
to Bye-law 38, any officer any of the powers exercisable by it upon
such terms and conditions with such restrictions as it deems
appropriate, and either collaterally with, or to the exclusion of,
its own powers, and may from time to time revoke or vary all or any
of such powers but no person dealing in good faith and without
notice of such revocation or variation shall be affected thereby.
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89. The Board may delegate, subject to Bye-law 38, to the extent
consistent with applicable law, any of its powers, to the officers
of the Company or to a committee or committees consisting of such
Directors or other persons as the Board shall determine. Any
officer or any committee so formed shall, in the exercise of the
powers so delegated, conform to any regulations that may be imposed
on him or it by the Board. If the Board so authorises or requests,
auditors, consultants, advisers and employees shall be permitted to
attend and speak at meetings of the Board, but not to vote.
PROCEEDINGS OF THE BOARD
90. (a) The Board may meet for the dispatch of business,
adjourn and otherwise regulate its meetings as it
deems appropriate. Meetings of the Board may be called
by the Chairman of the Board and shall be called by
such Chairman upon written request of at least one
Director.
(b) At each meeting of the Board and in respect of each
resolution proposed to the Board, each Director shall
be entitled to exercise one vote. All resolutions
proposed at any meeting of the Board shall be passed
by simple majority of votes cast at such meeting
except where a greater majority is required by these
Bye-laws or the Companies Acts. In the case of an
equality of votes the resolution shall be deemed to
have failed.
91. Unless waived by all the Directors entitled to receive notice of
such meeting, not less than seven full days' notice of all meetings
(or three full days' notice for telephonic meetings) of the Board
or of a committee of the Board shall be given to each Director or
member of such committee, together with an agenda of the business
to be transacted at such meeting and all papers to be circulated or
presented to the same. Matters not included on such agenda may not
be considered at such meeting without the consent of (a) two-thirds
of the Directors then in office or members of such committee, as
the case may be, or (b) Directors holding at least two-thirds of
the total number of votes entitled to be exercised by all Directors
then in office or all members of such committee, as the case may
be. Notice of a Board meeting shall be deemed to be duly given to a
Director if it is given to him personally or sent to him by post,
cable, telex, facsimile or other mode of representing or
reproducing words in a legible and non-transitory form at the
address for notice specified by such Director (or, if none, to the
Shareholder or Shareholders who appointed him). Any notice or
resolution so given or transmitted by commercial courier shall be
deemed to have been delivered on the date of actual delivery
thereof and any notice or resolution given by facsimile or telex
shall be deemed to have been delivered on the date that the
facsimile or telex is dispatched and confirmation of receipt
(electronic or otherwise) is made. A Director may waive notice of
any meeting either prospectively or retrospectively. As soon as
practicable after each such meeting, a copy of the minutes of that
meeting shall be sent to each Director. The Resident
Representative, if any, shall, upon delivering written notice to
the Registered Office, be entitled to receive notice of, attend and
be heard at, and receive minutes of all meetings of the Board.
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92. No meeting of the Board may proceed to business or transact any
business unless a quorum is present at such meeting. For these
purposes, a quorum of the Board shall be two Directors present in
person or represented by an Alternate Director at the relevant
meeting; PROVIDED that if any Director other than a Resident
Director is present at a meeting, a quorum shall be Directors
present in person or represented by an Alternate Director at such
meeting representing at least 51 percent of the total voting power
of the Entire Board. Meetings of Directors may be held by means of
such telephone, electronic or other communication facilities as
permit all persons participating in the meeting to communicate with
each other simultaneously and instantaneously, and participation in
a meeting by a Director or Alternate Director through such means
shall constitute presence in person at such meeting. In the event
that a quorum of the Directors is not so present at a duly convened
Board meeting, that meeting shall be adjourned for two days to the
same time and place.
93. (a) Any Director who ceases to be a Director at a Board
meeting may continue to be present and to act as a
Director and be counted in the quorum until the
termination of the Board meeting if no other Director
objects and if otherwise a quorum of Directors would
not be present.
(b) Except as provided in Bye-law 39, a Director who to
his knowledge is in any way, whether directly or
indirectly, interested in a contract or proposed
contract, transaction or arrangement with the Company
and has complied with the provisions of the Companies
Acts and these Bye-laws with regard to disclosure of
his interest shall be entitled to vote in respect of
any contract, transaction or arrangement in which he
is so interested and if he shall do so his vote shall
be counted, and he shall be taken into account in
ascertaining whether a quorum is present.
94. So long as a quorum of Directors remains in office, the continuing
Directors may act notwithstanding any vacancy in the Board but, if
no such quorum remains, the continuing Directors or a sole
continuing Director may act only for the purpose of calling a
general meeting.
95. The Directors shall elect one of their number to be the Chairman of
the Board (the "Chairman"). The Chairman shall hold office until
his successor is elected by the Board. The Chairman, and in his
absence the Deputy Chairman, shall preside as chairman at every
meeting of the Board. If there is no such Chairman and Deputy
Chairman, or if at any meeting the Chairman and the Deputy Chairman
are not present within five minutes after the time appointed for
holding the meeting, the Directors present may choose one of their
number to be chairman of the meeting. The Chairman and Deputy
Chairman shall not be entitled, by virtue of such capacity, to
exercise a vote (casting or otherwise) at any meeting of the Board.
96. The meetings and proceedings of any committee consisting of two or
more members shall be governed by the provisions contained in these
Bye-laws for regulating the meetings and proceedings of the Board
so far as the same are applicable and are not superseded by any
regulations imposed by the Board.
97. Subject to Bye-law 38, a resolution of the Board or of a committee
of the Board shall be validly passed without a meeting if the text
of the resolution has been unanimously approved in writing by all
the Directors or by all members of such committee, as the case may
be. Such resolution shall be sent by post or facsimile to each
Director
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entitled to receive notice of such meeting in accordance with the
notice provisions of Bye-law 117. Such resolution shall take effect
at the time when the last of the written approvals is actually
received by the Company. Such resolution may be contained in one
document or in several documents in the like form, each signed by
one or more of the Directors or members of the committee concerned.
98. All acts done by the Board or by any committee or by any person
acting as a Director or member of a committee or any person duly
authorised by the Board or any committee, shall, notwithstanding
that it is afterwards discovered that there was some defect in the
appointment of any Director or member of such committee or person
acting as aforesaid or that they or any of them were disqualified
or had vacated their office, be as valid as if every such person
had been duly appointed and was qualified and had continued to be a
Director, member of such committee or person so authorised.
OFFICERS
99. The officers of the Company shall include, at the discretion of the
Board, (i) a Chairman and a Deputy Chairman or (ii) a President and
a Vice President who shall be elected by the Board and who shall be
Directors. In addition, the Board may appoint any person to hold
such other office (including any additional Vice-Presidencies) as
the Board may from time to time determine. Any person elected or
appointed pursuant to this Bye-law shall hold office for such
period and upon such terms as the Board may determine and the Board
may revoke or terminate any such election or appointment. Any such
revocation or termination shall be without prejudice to any claim
for damages that such officer may have against the Company or the
Company may have against such officer for any breach of any
contract of service between him and the Company which may be
involved in such revocation or termination. Except as provided in
the Companies Acts or these Bye-laws, the powers and duties of the
officers of the Company shall be such, if any, as are determined
from time to time by the Board.
MINUTES
100. The Directors shall cause minutes to be made and books kept for the
purpose of recording:
(i) all appointments of officers made by the Directors;
(ii) the names of the Directors and other persons, if any,
present at each meeting of the Board and of any
committee;
(iii) all proceedings at meetings of the Company, of the
Board, of the holders of any class of Shares in the
Company, and of committees; and
(iv) all proceedings of managers, if any.
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SECRETARY AND RESIDENT REPRESENTATIVE
101. The Secretary, and, if required, the Resident Representative, shall
be appointed by the Board at such remuneration, if any, and upon
such terms as it may deem appropriate and any Secretary so
appointed may be removed by the Board.
The duties of the Secretary and Resident Representative shall be
those prescribed by the Companies Acts, together with such other
duties as shall from time to time be prescribed by the Board.
102. A provision of the Companies Acts or these Bye-laws requiring or
authorising a thing to be done by or to a Director and the
Secretary shall not be satisfied by its being done by or to the
same person acting both as Director and as, or in the place of, the
Secretary.
THE SEAL
103. (a) The Seal shall consist of a circular metal device with
the name of the Company around the outer margin
thereof and the country and year of incorporation
across the centre thereof. Should the Seal not have
been received at the Registered Office in such form at
the date of adoption of this Bye-law then, pending
such receipt, any document requiring to be sealed with
the Seal shall be sealed by affixing a red wafer seal
to the document with the name of the Company, and the
country and year of incorporation type-written across
the centre thereof.
(b) The Board shall provide for the custody of every Seal.
A Seal shall only be used by authority of the Board or
of a committee of the Board authorised by the Board in
that behalf. Subject to these Bye-laws, any instrument
to which a Seal is affixed shall be signed by a
Director and by the Secretary or by two Directors or
by any two persons authorised either generally or
specifically by the Board to attest to the use of the
Seal; PROVIDED that the Secretary or a Director or any
such authorised person may affix a Seal over his
signature only to authenticate copies of these
Bye-laws, the minutes of any meeting or any other
documents requiring authentication.
DIVIDENDS AND OTHER PAYMENTS
104. Subject to Bye-law 38, the Board may from time to time declare cash
dividends or distributions out of contributed surplus to be paid to
the Shareholders according to their rights and interests including
such interim dividends as appear to the Board to be justified by
the position of the Company. The Board may also pay any fixed cash
dividend which is payable on any Shares of the Company half yearly
or on such other dates, whenever the position of the Company, in
the opinion of the Board, justifies such payment.
105. No dividend, distribution or other moneys payable by the Company on
or in respect of any Share shall bear interest against the Company.
106. Any dividend, distribution, interest or other sum payable in cash
to the holder of Shares may be paid by cheque or warrant sent
through the post addressed to the holder at his address as
appearing in the Register or, in the case of joint holders,
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addressed to the holder whose name stands first in the Register in
respect of the Shares at his registered address as appearing in the
Register or addressed to such person at such address as the holder
or joint holders may in writing direct. Every such cheque or
warrant shall, unless the holder or joint holders otherwise direct,
be made payable to the order of the holder or, in the case of joint
holders, to the order of the holder whose name stands first in the
Register in respect of such Shares, and shall be sent at his or
their risk and payment of the cheque or warrant by the bank on
which it is drawn shall constitute a good discharge to the Company.
Any one of two or more joint holders may give effectual receipts
for any dividends, distributions or other moneys payable or
property distributable in respect of the Shares held by such joint
holders.
107. Any dividend or distribution out of contributed surplus unclaimed
for a period of six years from the date of declaration of such
dividend or distribution shall be forfeited and shall revert to the
Company and the payment by the Board of any unclaimed dividend,
distribution, interest or other sum payable on or in respect of the
Share into a separate account shall not constitute the Company a
trustee in respect thereof.
108. Subject to Bye-law 38 and upon the Resolution of the Company, the
Board may direct payment or satisfaction of any dividend or
distribution out of contributed surplus wholly or in part by the
distribution of specific assets, and in particular of paid-up
shares or debentures of any other company, and where any difficulty
arises in regard to such distribution or dividend the Board may
settle it as it deems expedient, and in particular, may authorise
any person to sell and transfer any fractions or may ignore
fractions altogether, and may fix the value for distribution or
dividend purposes of any such specific assets and may determine
that cash payments shall be made to any Shareholders upon the
footing of the values so fixed in order to secure equality of
distribution and may vest any such specific assets in trustees as
may seem expedient to the Board.
RESERVES
109. Subject to Bye-law 38, the Board may, before recommending or
declaring any dividend or distribution out of contributed surplus,
set aside such sums as it deems proper as reserves which shall, at
the discretion of the Board, be applicable for any purpose of the
Company and pending such application may, also at such discretion,
either be employed in the business of the Company or be invested in
such investments as the Board may from time to time deem
appropriate. The Board may also without placing the same to reserve
carry forward any sums which it may think it prudent not to
distribute.
CAPITALISATION OF PROFITS
110. Subject to Bye-law 38, the Company may, upon the recommendation of
the Board, at any time and from time to time resolve by Resolution
to the effect that it is desirable to capitalise all or any part of
any amount for the time being standing to the credit of any reserve
or fund which is available for distribution or to the credit of any
share premium account or any capital redemption reserve fund and,
accordingly, that such amount be set free for distribution amongst
the Shareholders or any class of Shareholders who would be entitled
thereto if distributed by way of dividend and in the same
proportions, on the footing that the same be not paid in cash but
be applied in payment in full of unissued Shares, debentures or
other obligations of the
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Company, to be allotted and distributed or credited as fully paid
amongst such Shareholders, and the Board shall give effect to such
Resolution; PROVIDED that for the purposes of this Bye-law, any sum
standing to the credit of a share premium account may only be
applied in crediting as fully-paid Shares of the same class as that
from which the relevant share premium was derived and PROVIDED
FURTHER that, in respect of any capitalisation of any sum standing
to the credit of the share premium account which is required in
order to give effect to the terms on which Shares of any class are
required or entitled to be converted into Shares of any other
class, the Board shall have authority to resolve upon such
capitalisation without the need for a resolution of the Company and
this Bye-law shall not require any shares to be allotted to the
Shareholders or any class of Shareholders proportionately to the
number of Shares, or Shares of the relevant class, held by them
respectively if the terms of conversion otherwise require.
111. Where any difficulty arises in regard to any distribution under the
last preceding Bye-law, the Board may settle the same as it deems
expedient and, in particular, may authorise any person to sell and
transfer any fractions or may resolve that the distribution should
be as nearly as may be practicable in the correct proportion but
not exactly so or may ignore fractions altogether, and may
determine that cash payments should be made to any Shareholders in
order to adjust the rights of all parties, as may seem expedient to
the Board. The Board may appoint any person to sign on behalf of
the persons entitled to participate in the distribution any
contract necessary or desirable for giving effect thereto and such
appointment shall be effective and binding upon the Shareholders.
RECORD DATES
112. Notwithstanding any other provisions of these Bye-laws, the Company
by Resolution or the Board may fix any date as the record date for
any dividend, distribution, allotment or issue and for the purpose
of identifying the persons entitled to receive notices of general
meetings. Any such record date may be on or at any time before or
after any date on which such dividend, distribution, allotment or
issue is declared, paid or made or such notice is dispatched.
ACCOUNTING RECORDS
113. The Board shall cause to be kept accounting records sufficient to
give a true and fair view of the state of the Company's affairs and
to show and explain its transactions in accordance with the
Companies Acts.
114. The records of account shall be kept at the Registered Office or at
such other place or places as the Board deems appropriate, and
shall at all times be open to inspection by the Directors; PROVIDED
that if the records of account are kept at some place outside
Bermuda, there shall be kept at an office of the Company in Bermuda
such records as will enable the Directors to ascertain with
reasonable accuracy the financial position of the Company at the
end of each three month period. No Shareholder (other than an
officer of the Company) shall have any right to inspect any
accounting record or book or document of the Company except as
conferred by law or authorised by the Board or the Company by
Resolution.
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115. A copy of every balance sheet and statement of income and
expenditure, including every document required by law to be annexed
thereto, which is to be laid before the Company in general meeting,
together with a copy of the auditor's report, shall be sent to each
person entitled thereto in accordance with the requirements of the
Companies Acts.
AUDIT
116. Except and to the extent that an audit is waived in the manner
permitted by the Companies Acts, auditors shall be appointed and
their duties regulated in accordance with the Companies Acts, any
other applicable law and such requirements not inconsistent with
the Companies Acts as the Board may from time to time determine.
SERVICE OF NOTICES AND OTHER DOCUMENTS
117. Any notice, communication or other document (including a share
certificate) shall be in writing duly signed by or on behalf of the
person giving it and may be delivered to any Shareholder or the
Company by sending it by commercial courier or by facsimile or
telex to such Shareholder at his address as appearing in the
Register or in any case at such other address as the Shareholder in
question may notify the other Shareholders in accordance with this
Bye-law 117 or to the Company at its Registered Office. In the case
of joint holders of a Share, service or delivery of any notice or
other document on or to one of the joint holders shall for all
purposes be deemed as sufficient service on or delivery to all the
joint holders. A copy of any notice or other communication to a
Shareholder shall also be sent to such specified person at such
address as may be notified by such Shareholder to the other
Shareholders in the manner aforesaid; PROVIDED that a failure to
send such copy shall not invalidate any notice or other
communication to the Shareholder concerned. Any notice given by
commercial courier shall be deemed to have been delivered on the
date of actual delivery thereof and any notice by facsimile or
telex shall be deemed to have been delivered on the date that the
facsimile or telex is dispatched and confirmation of receipt
(electronic or otherwise) is made.
118. Any notice or other document delivered, sent or given to a
Shareholder in any manner permitted by these Bye-laws shall,
notwithstanding that such Shareholder is then dead or bankrupt or
that any other event has occurred, and whether or not the Company
has notice of the death or bankruptcy or other event, be deemed to
have been duly served or delivered in respect of any Share
registered in the name of such Shareholder as sole or joint holder
unless his name shall, at the time of the service or delivery of
the notice or document, have been removed from the Register as the
holder of the Share, and such service or delivery shall for all
purposes be deemed as sufficient service or delivery of such notice
or document on all persons interested (whether jointly with or as
claiming through or under him) in the Share.
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WINDING UP
119. In the event of the Company being wound up by way of a voluntary
winding-up, the Shareholders will select a liquidator who is (i) an
attorney qualified to practice in Bermuda and (ii) acceptable to
all the Shareholders. If the Shareholders are unable in the first
instance to agree on the selection of a liquidator, the
Shareholders agree to discuss such selection in good faith for a
period of 30 days. If the Shareholders are unable to reach
agreement at the conclusion of such 30 day period, the Company
shall require the nomination of a liquidator by the Institute of
Chartered Public Accountants of Bermuda.
120. The Shareholders shall prove in the winding-up of the Company to
the maximum extent permitted by law for all sums due or to fall due
to them respectively from the Company and shall exercise all rights
of set-off and generally do all such other acts and things as may
be available to them in order to obtain the maximum receipts and
recoveries.
121. Subject to these Bye-laws, to the extent that any Shareholder does
not receive satisfaction in full in the winding-up of the Company
of all sums due or to fall due to it as a creditor of the Company
then the aggregate shortfall between the sums due or to fall due to
the Shareholders and the aggregate of all amounts actually
recovered by the Shareholders from the Company or its liquidator
(whether by direct payment or the exercise of any right of set-off
or otherwise) shall be calculated and apportioned between the
Shareholders in proportion to the respective sums due or to fall
due to each Shareholder as a creditor of the Company, and, if
necessary, the Shareholders shall make payments to each other to
ensure that each Shareholder receives its respective share of the
aggregate of all amounts recovered and bears its respective share
of the aggregate amount of such shortfall.
INDEMNITY
122. Subject to the proviso below, every Director, officer of the
Company and member of a committee constituted under Bye-law 89 and
any Resident Representative shall be indemnified out of the funds
of the Company against all civil liabilities, loss, damage or
expense (including but not limited to liabilities under contract,
tort and statute or any applicable foreign law or regulation and
all reasonable legal and other costs and expenses properly payable)
incurred or suffered by him as such Director, officer, committee
member or Resident Representative (whether acting in such capacity
before or after the date of these Bye-laws) and the indemnity
contained in this Bye-law shall extend to any person acting as a
Director, officer, committee member or Resident Representative in
the reasonable belief that he has been so appointed or elected
notwithstanding any defect in such appointment or election,
PROVIDED ALWAYS that the indemnity contained in this Bye-law shall
not extend to any matter which would render it void pursuant to the
Companies Acts or which by virtue of any rule of law would
otherwise attach to the person seeking indemnification pursuant
hereto in respect of any willful negligence, willful default, fraud
or dishonesty of which he may be guilty in relation to his
activities on behalf of the Company.
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123. Every Director, officer and member of a committee duly constituted
under Bye-law 89 and any Resident Representative shall be
indemnified out of the funds of the Company against all liabilities
incurred by him as such Director, officer, committee member or
Resident Representative in defending any proceedings, whether civil
or criminal, in which judgment is given in his favour, or in which
he is acquitted, or in connection with any application under the
Companies Acts in which relief from liability is granted to him by
the court.
124. To the extent that any Director, officer or member of a committee
duly constituted under Bye-law 89 or any Resident Representative is
entitled to claim an indemnity pursuant to these Bye-laws in
respect of amounts paid or discharged by him, the relative
indemnity shall take effect as an obligation of the Company to
reimburse the person making such payment or affecting such
discharge. In addition, the Company will advance to any person who
may be entitled to indemnification hereunder in respect of civil
liabilities, loss, damage or expense, amounts necessary to pay the
reasonable fees and expenses of counsel to such indemnified person
upon presentation of invoices therefor, provided that the Company
need not so advance such amounts unless and until the person
requesting the same shall have delivered to the Company a binding
contract to refund such amounts to the Company if such person
ultimately should be found not to be entitled to indemnification
hereunder.
DIRECTORS AND OFFICERS INSURANCE
125. Notwithstanding section 98 of the Companies Act 1981, the Company
may purchase and maintain insurance for the benefit of any officer
of the Company and any Resident Representative against any
liability incurred by him under section 97(1)(b) of that Act in his
capacity as an officer of the Company or indemnifying such officer
in respect of any loss arising or liability attaching to him by
virtue of any rule of law in respect of any negligence, default,
breach of duty or breach of trust of which the officer or such
Resident Representative may be guilty in relation to the Company or
any subsidiary thereof.
TRANSFER BY WAY OF CONTINUATION
126. If the Company is permitted in accordance with the provisions of
the Companies Acts, it shall, subject to the provisions thereof,
have the power to negotiate by way of continuation as a body
corporate under the laws of any jurisdiction outside Bermuda and to
be discontinued in Bermuda.
ALTERATION OF BYE-LAWS
127. Subject to Bye-laws 5 and 38, these Bye-laws may be amended from
time to time in the manner provided for in the Companies Acts.
128. The Company and each Shareholder acknowledges the various rights
and remedies under the terms of the Financing Documents (as defined
in the Credit Agreement) that have been granted to the lenders
providing financing to the Company thereunder, and the Company and
each Shareholder further acknowledges that such lenders shall have
all rights and remedies set forth therein.
129. (a) Notwithstanding any other provision of these Bye-laws,
none of the restrictions on the transfer of any Shares
or any interests or rights therein (or
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the registration or recognition thereof) contained in
these Bye-laws shall be applicable with respect to any
transfer permitted by Bye-law 23(p)(iv), and any
transferee (including any Collateral Trustee) of any
such permitted transfer of Shares or any interests or
rights therein shall hold such Shares free and clear
of any transfer restrictions imposed by these
Bye-laws.
(b) No action which is taken or is to be taken by any
Collateral Trustee (or any secured party under any
Financing Document) pursuant to or in accordance with
the terms of any Pledge Agreement (including any such
permitted transfer or the registration or recognition
thereof and any exercise of any voting right) shall be
subject to the payment by any person of any funding or
other obligations of any Shareholder or to any
restrictions imposed by Bye-laws 18, 19, 20 or 21.
130. If one or more of the provisions contained in these Bye-laws, or
any part thereof, hereafter are construed to be invalid or
unenforceable, the same shall not affect the remainder of these
Bye-laws, which shall be given full effect, without regard to the
invalid or unenforceable portions.
43
<PAGE>
Exhibit 1.2
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
$'000 31-DEC-98 31-DEC-97 31-DEC-96
<S> <C> <C> <C>
EARNINGS
Pre tax income from continuing operations (10,422) 88,434 (10,374)
Fixed charges 62,636 79,046 53,018
Amortization of capitalized interest 0 0 0
LESS:
Interest capitalized 0 (24,579) (14,018)
Preference dividends (1,508) (16,324) (14,410)
------- -------- -------
======= ======== =======
Total earnings 50,706 126,577 14,216
FIXED CHARGES
Interest expensed 57,012 14,111 0
Interest capitalized 0 24,579 14,018
Amortization of debt expense capitalized 17,950 24,590
Amortized premiums, discounts and capitalized
expenses relating to debt 4,116 6,082
Preference dividends 1,508 16,324 14,410
------- -------- -------
======= ======== =======
Total fixed charges 62,636 79,046 53,018
Ratio of earnings to fixed charges n/a 1.60 n/a
Deficiency of earnings to fixed charges 11,930 n/a 38,802
</TABLE>
