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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO
RULE 13a-16 OR 15d-16 UNDER THE SECURITIES
EXCHANGE ACT OF 1934
For the three months ended June 30, 1999
FLAG Limited
(Exact name of Registrant as specified in its charter)
Emporium Building
69 Front Street
Hamilton HM12, Bermuda
(Address of principal executive office)
Indicate by check mark whether the Registrant files or will file annual reports
under cover of Form 20-F or Form 40-F
Form 20-F |X| Form 40-F |_|
Indicate by check mark whether the Registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g-2(b) under the Securities Exchange Act of 1934
Yes |_| No |X|
This report ("Quarterly Report") sets forth certain information regarding the
financial condition and results of operations of FLAG Limited, a Bermuda company
(the "Company"), for the fiscal quarter ended June 30, 1999. This Quarterly
Report contains a review of the Company's unaudited financial information and
analysis for the second quarter, as well as certain other information.
The following unaudited financial statements, in the opinion of the Company's
management, reflect all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of the financial position, the
results of operations and cash flows for the periods presented.
Certain capitalized terms contained herein have the meaning given to them in the
Company's Annual Report filed on Form 20-F on March 31, 1999.
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<PAGE>
FLAG LIMITED
FORM 6-K
INDEX
Page
----
PART I FINANCIAL INFORMATION ..............................................1
ITEM 1: FINANCIAL STATEMENTS................................................1
1.A Consolidated Balance Sheets...................................1
1.B Consolidated Statements of Operations.........................2
1.C Consolidated Statement of Comprehensive Income................3
1.D Consolidated Statements of Cash Flows.........................4
1.E Notes to Consolidated Financial Statements....................6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...........................................8
PART II MORE INFORMATION...................................................15
ITEM 1: LEGAL PROCEEDINGS..................................................15
ITEM 2: CHANGES IN SECURITIES..............................................15
ITEM 3: DEFAULTS UPON SENIOR SECURITIES....................................15
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................15
ITEM 5: OTHER INFORMATION..................................................15
ITEM 6: EXHIBITS AND REPORTS FILED ON FORM 6-K.............................16
SIGNATURES ...................................................................17
<PAGE>
PART I
Item 1.A
FLAG LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
(Expressed in thousands of Dollars except per share amounts)
<TABLE>
<CAPTION>
1999 1998
(unaudited) (audited)
----------- -----------
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 846 $ 3,024
Accounts receivable, net of allowance for doubtful accounts
of $8,630 (1998 - $8,630) 72,943 70,211
Prepaid expenses and other assets 3,344 2,879
----------- -----------
77,133 76,114
Accounts receivable 20,827 20,854
Funds held by collateral trustee or in escrow 170,804 255,366
Construction in progress 43,271 11,494
Capacity available for sale 1,046,117 1,095,099
Capitalized financing costs, net of accumulated
amortization of $2,303 (1998 - $1,498) 11,530 12,352
Fixed assets, net 4,558 4,487
----------- -----------
$ 1,374,240 $ 1,475,766
=========== ===========
LIABILITIES:
Current liabilities:
Accounts payable $ 4,265 $ 6,018
Accrued construction costs 78,713 146,165
Accrued liabilities 28,706 33,214
Income taxes payable 5,268 6,453
Due to affiliate 904 1,843
Deferred revenue 20,867 39,121
----------- -----------
138,723 232,814
8 1/4% senior notes, due 2008, net of unamortized
discount of $5,026 (1998 - $5,321) 424,974 424,679
Long-term debt 241,500 271,500
Deferred revenue and other 99,516 84,415
Deferred taxes 3,534 3,562
----------- -----------
908,247 1,016,970
----------- -----------
SHAREHOLDERS' EQUITY:
Class A common shares, $.0001 par value -- 13
Class B common shares, $.0001 par value 64 57
Additional paid-in capital 504,387 504,381
Foreign currency translation adjustment (539) (704)
Deficit (37,919) (44,951)
----------- -----------
465,993 458,796
----------- -----------
$ 1,374,240 $ 1,475,766
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PART I
Item 1.B
FLAG LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Expressed in thousands of Dollars except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Capacity sales, net of discounts $ 49,074 $ 20,463 $ 76, 288 $ 48,417
Standby maintenance and restoration revenue 10,427 5,329 17,794 10,474
------------- ------------- ------------- -------------
59,501 25,792 94,082 58,891
SALES AND OTHER OPERATING COSTS:
Cost of capacity sold 24,748 12,146 33,505 24,706
Operations and maintenance 7,771 10,104 15,039 19,174
Sales and marketing 1,625 810 3,535 1,574
General and administrative 6,729 7,563 11,497 12,477
------------- ------------- ------------- -------------
40,873 30,623 63,576 57,931
OPERATING INCOME (LOSS) 18,628 (4,831) 30,506 960
INTEREST EXPENSE 12,982 15,501 27,486 32,221
INTEREST INCOME 2,013 4,192 4,661 8,473
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES 7,659 (16,140) 7,681 (22,788)
PROVISION FOR INCOME TAXES 392 65 649 812
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 7,267 (16,205) 7,032 (23,600)
EXTRAORDINARY ITEM -- -- -- 59,839
------------- ------------- ------------- -------------
NET INCOME (LOSS) 7,267 (16,205) 7,032 (83,439)
CUMULATIVE PAY-IN-KIND PREFERRED
DIVIDENDS -- -- -- 1,508
REDEMPTION PREMIUM AND WRITE-OFF
OF DISCOUNT ON PREFERRED SHARES -- -- -- 8,500
------------- ------------- ------------- -------------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $ 7,267 $ (16,205) $ 7,032 $ (93,447)
============= ============= ============= =============
Basic and diluted income (loss) per common share
- - Class A $ -- $ (0.01) $ --85 $ (0.08)
Basic and diluted income (loss) per common share
- - Class B $ 0.01 $ (0.03) $ 0.01 $ (0.15)
Weighted average common shares outstanding
- - Class A -- 132,000,000 -- 132,000,000
Weighted average common shares outstanding
- - Class B 635,796,330 565,858,741 635,796,330 565,858,741
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
PART I
Item 1.C
FLAG LIMITED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Expressed in thousands of Dollars except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ 7,267 $(16,205) $ 7,032 $(93,447)
Foreign currency translation adjustment 5 -- 165 --
-------- -------- -------- --------
COMPREHENSIVE INCOME (LOSS) $ 7,272 $(16,025) $ 7,197 $(93,447)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PART I
Item 1.D
FLAG LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Expressed in thousands of Dollars except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) applicable to common shareholders $ 7,032 $ (93,447)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Pay-in-kind preferred dividends -- 1,508
Redemption premium and write-off of discount on preferred shares -- 8,500
Amortization of financing costs 822 2,566
Extraordinary item-loss on refinancing -- 59,839
Provision for doubtful accounts -- 1,445
Senior debt discount 295 295
Depreciation 721 266
Deferred taxes -- 137
Add (deduct) net changes in operating assets and liabilities:
Accounts receivable (2,731) 82,998
Prepaid expenses and other assets (519) 469
Capacity available for sale 37,982 25,054
Accounts payable and accrued liabilities (5,929) 13,390
Income taxes payable (1,132) 588
Due to affiliate (939) 448
Deferred revenue and other (3,153) (28,238)
--------- ---------
Net cash provided by operating activities 32,449 75,818
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Financing costs incurred -- (13,330)
Net proceeds from issuance of 8 1/4% senior notes -- 424,088
Proceeds from long-term debt -- 320,000
Repayment of long-term debt (30,000) (654,207)
Redemption of preferred shares -- (139,454)
Decrease in funds held by collateral trustee or in escrow 84,562 173,105
--------- ---------
Net cash provided by financing activities 54,562 110,202
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for construction (88,229) (183,130)
Purchase of fixed assets (933) (1,752)
--------- ---------
Net cash used in investing activities (89,162) (184,882)
--------- ---------
NET INCREASE (DECREASE) IN CASH: (2,151) 1,138
Effect of foreign currency movements (27) --
CASH, beginning of period 3,024 2,490
--------- ---------
CASH, end of period $ 846 $ 3,628
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
FLAG LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Expressed in thousands of Dollars except per share amounts)
(UNAUDITED)
1999 1998
--------- ---------
SUPPLEMENTAL INFORMATION ON NON-CASH
OPERATING ACTIVITIES:
Decrease in capacity available for sale $ 48,982 $ 25,054
Decrease in accrued construction costs (11,000) --
--------- ---------
Cost of capacity sold $ 37,982 $ 25,054
========= =========
SUPPLEMENTAL INFORMATION ON NON-CASH
INVESTING ACTIVITIES:
Increase in construction in progress $ 31,777 $ 6,953
Decrease in accrued construction costs 56,452 176,177
--------- ---------
Cash paid for construction $ 88,229 $ 183,130
========= =========
SUPPLEMENTAL INFORMATION DISCLOSURE OF CASH
FLOW INFORMATION:
Interest expense for period $ 27,486 $ 32,221
Amortization of financing costs (1,117) (2,861)
Increase in accrued interest payable (34) (18,876)
--------- ---------
Interest paid $ 26,335 $ 10,484
========= =========
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PART I
ITEM 1.E
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 1999 and 1998
(Expressed in thousands of Dollars except per share amounts)
(Unaudited)
1. GENERAL
The interim consolidated financial statements presented herein have been
prepared on the basis of U.S. generally accepted accounting principles and
include the accounts and balances of the Company and its wholly-owned
subsidiaries. All significant intercompany transactions have been
eliminated in consolidation. In the opinion of management, the unaudited
consolidated financial statements reflect all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of the
results of operations for the three and six month periods ended June 30,
1999 and 1998, the balance sheet as of June 30, 1999, and the cash flows
for the six month periods ended June 30, 1999 and 1998. These interim
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements for the year ended December 31,
1998. The results of operations for any interim period are not necessarily
indicative of results for the full year.
2. NET INCOME (LOSS) PER COMMON SHARE
In February 1999, the shareholders of all Class A common shares in the
Company converted their shares into Class B common shares of equivalent
value. Basic net income per Class B common share in 1999 is based on
dividing the net income by the number of Class B common shares outstanding
for the period as if the exchange had occurred on January 1, 1999. The
basic net loss per Class A common share and Class B common share in 1998
are based on dividing net loss applicable to Class A and Class B
shareholders by the weighted average number of common shares outstanding,
respectively, during the period.
The basic net loss per Class A common share and Class B common share
before the extraordinary item for the six month period ended June 30, 1998
is $(0.03) and $(0.05) respectively.
3. CONTINGENCIES
The Company is involved in litigation from time to time in the ordinary
course of business. In management's opinion, the litigation in which the
Company is currently involved, individually and in the aggregate, is not
material to the Company's financial condition, results of operations or
cash flows.
6
<PAGE>
4. PENDING ACCOUNTING STANDARD
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities", ("SFAS 133"). Following the amendment made by SFAS
No. 137, SFAS No. 133 is effective for periods beginning after June 15,
2000. Management does not expect the impact of the adoption of SFAS 133 on
the Company's financial position or results of operations to be material.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART I
ITEM 2
QUARTER ENDED JUNE 30, 1999 COMPARED WITH THE QUARTER ENDED JUNE 30, 1998
RESULTS OF OPERATIONS
Revenues
Total revenue recognized by the Company during the quarter ended June 30, 1999,
was $59.5 million compared to $25.8 million in total revenue for the quarter
ended June 30, 1998.
Revenue recognized from the sale of capacity was $49.1 million for the quarter
ended June 30, 1999 compared to $20.5 million during the quarter ended June 30,
1998. As of June 30, 1999, the Company had entered into sales transactions with
88 international telecommunication carriers compared to 74 as of June 30, 1998.
Revenue recognized from standby maintenance fees was $7.1 million for the
quarter ended June 30, 1999 compared to $5.3 million for the quarter ended June
30, 1998. The increase in standby maintenance revenue of $1.8 million for the
quarter ended June 30, 1999 is a result of the increase in cumulative capacity
sales on the FLAG System. The Company also generated revenues from restoration
services during the quarter ended June 30, 1999. Revenues from these services,
provided to alternate cable systems on a non-reciprocal basis, were $3.3
million. No revenues were recognized in respect of restoration services in the
quarter ended June 30, 1998.
Operating Expenses
For the quarter ended June 30, 1999, the Company recorded $24.7 million in
respect of the cost of capacity sold compared to $12.1 million recorded in the
quarter ended June 30, 1998. The gross profit on capacity sales of 49.6% for the
quarter ended June 30, 1999, compares to a gross profit of 40.6% realized in the
quarter ended June 30, 1998. The increase in margin is a result of sales of
capacity in the quarter ended June 30, 1999 on segments having a higher gross
margin than the segments on which capacity was sold during the quarter ended
June 30, 1998. Cost of sales percentages used are a function of the allocated
cost of constructing the FLAG System and management's current best estimate of
future capacity sales and third party market forecasts of capacity sales.
Changes in management's estimate of future capacity sales revenues, including
the expected sales value per unit, will result in prospective changes to cost of
sales.
During the quarter ended June 30, 1999 the Company incurred $7.8 million in
operations and maintenance costs compared to $10.1 million for the quarter ended
June 30, 1998. Operations and maintenance expenses relate primarily to the
provision of standby maintenance under Maintenance Zone Agreements as well as
Company salaries and overheads directly associated with operations and
maintenance activities. The decrease in operations and maintenance costs are
largely a result of the termination of the Program Management Services Agreement
with Bell Atlantic Network Systems Company ("BANSC") in May 1998 combined with a
decrease in some cable maintenance costs.
8
<PAGE>
During the quarter ended June 30, 1999, $1.6 million in sales and marketing
costs were incurred compared to $0.8 million incurred during the quarter ended
June 30, 1998. Sales and marketing costs are comprised of all sales and
marketing activities that are directly undertaken by the Company. The increase
in sales and marketing costs in the quarter ended June 30, 1999 over the quarter
ended June 30, 1998 is due to employment and related costs associated with the
Company fully undertaking all sales and marketing activities which were
previously managed by Bell Atlantic Network Systems (Bermuda) Limited ("BANS")
under a Marketing and Services Agreement until May 1998.
In May 1998, the Company and BANS agreed to terminate the Marketing and Services
Agreement which appointed BANS as the exclusive sales agent for the Company
throughout the world. Sales commissions incurred under the Sales and Marketing
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.
During the quarter ended June 30, 1999, $6.7 million of general and
administrative expenses were incurred compared to $7.6 million during the
quarter ended June 30, 1998. The decrease in general and administrative costs in
the quarter ended June 30, 1999, is largely due to a reduction in costs
associated with the transition of the Company from a development stage company
to an operating company which were incurred in the quarter ended June 30, 1998.
Interest Expense and Interest Income
Interest expense on borrowings decreased from $15.5 million for the quarter
ended June 30, 1998 to $13.0 million for the quarter ended June 30, 1999. The
decrease in interest expense of $2.5 million is attributable to a reduction in
the Company's long term debt facility from $280.9 million as at June 30, 1998 to
$241.5 million as at June 30, 1999 combined with a reduction in interest rates
over the same period.
Interest income of $2.0 million was earned during the quarter ended June 30,
1999 compared to $4.2 million earned during the quarter ended June 30, 1998.
Interest was earned on cash balances and short term investments held by the
Collateral Trustee or in escrow arising from ongoing business operations.
During the quarter ended June 30, 1999 the Company capitalized $1.0 million of
interest costs as a component of construction in progress.
Provision for Taxes
The provision for taxes was $0.4 million for the quarter ended June 30, 1999
compared to $0.1 million for the quarter ended June 30, 1998. The tax provisions
for periods 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.
Net Income (Loss) Applicable to Common Shareholders
For the quarter ended June 30, 1999 the Company recorded net income applicable
to common shareholders of $7.3 million compared to net loss applicable to common
shareholders of $16.2 million for the quarter ended June 30, 1998. This is
attributable to the Company recording operating income of $18.6 million for the
quarter ended June 30, 1999 compared to an operating loss of $4.8 million for
the quarter ended June 30, 1998, a decrease in interest expense of $2.5 million,
9
<PAGE>
offset by a $0.3 million increase in tax expense and a reduction in interest
income of $2.2 million.
Basic and diluted income per common share was $0.01 for the quarter ended June
30, 1998 compared to a net loss per Class A common share of $(0.01) and a net
loss per Class B common share of $(0.03) for the quarter ended June 30, 1998.
The improvement in the basic and diluted loss per common share reflects the net
income of $7.3 million for the quarter ended June 30, 1999 compared to a net
loss of $16.2 million for the quarter ended June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
RESULTS OF OPERATIONS REVENUES
Total revenue recognized by the Company during the six months ended June 30,
1999, was $94.1 million compared to $58.9 million in total revenue for six
months ended June 30, 1998.
Revenue recognized from the sale of capacity was $76.3 million for the six
months ended June 30, 1999 compared to $48.4 million during the six months ended
June 30, 1998. As of June 30, 1999, the Company had entered into sales
transactions with 88 international telecommunication carriers compared to 74 as
of June 30, 1998.
Revenue recognized from standby maintenance fees was $13.8 million for the six
months ended June 30, 1999 compared to $10.5 million for the six months ended
June 30, 1998. The increase in standby maintenance revenue of $3.3 million for
the six months ended June 30, 1999 is a result of the increase in cumulative
capacity sales on the FLAG System. The Company also generated revenues from
restoration services during the six months ended June 30, 1999. Revenues from
these services, provided to alternate cable systems on a non-reciprocal basis,
were $4.0 million. No revenues were recognized in respect of restoration
services in the six months ended June 30, 1998.
OPERATING EXPENSES
For the six months ended June 30, 1999, the Company recorded $33.5 million in
respect of the cost of capacity sold compared to $24.7 million recorded in the
six months ended June 30, 1998. The gross profit on capacity sales of 56.1% for
the six months ended June 30, 1999, compares to a gross profit of 49.0% realized
in the six months ended June 30, 1998. The increase in margin is a result of
sales of capacity in the six months ended June 30, 1999 on segments having a
higher gross margin than the segments on which capacity was sold during the six
months ended June 30, 1998. Cost of sales percentages used are a function of the
allocated cost of constructing the FLAG System and management's current best
estimate of future capacity sales and third party market forecasts of capacity
sales. Changes in management's estimate of future capacity sales revenues,
including the expected sales value per unit, will result in prospective changes
to cost of sales.
During the six months ended June 30, 1999 the Company incurred $15.0 million in
operations and maintenance costs compared to $19.2 million for the quarter ended
June 30, 1998. Operations and maintenance expenses relate primarily to the
provision of standby maintenance under Maintenance Zone Agreements as well as
Company salaries and overheads directly associated with operations and
maintenance activities. The decrease in operations and maintenance costs are
largely a result of the termination of the Program Management Services Agreement
with BANSC in May 1998 combined with a decrease in some cable maintenance costs.
10
<PAGE>
During the six months ended June 30, 1999, $3.5 million in sales and marketing
costs were incurred compared to $1.6 million incurred during the six months
ended June 30, 1998. Sales and marketing costs are comprised of all sales and
marketing activities that are directly undertaken by the Company. The increase
in sales and marketing costs in the six months ended June 30, 1999 over the six
months ended June 30, 1998 is due to employment and related costs associated
with the Company fully undertaking all sales and marketing activities which were
previously managed by BANS under a Marketing and Services Agreement until May
1998.
In May 1998, the Company and BANS agreed to terminate the Marketing and Services
Agreement which appointed BANS as the exclusive sales agent for the Company
throughout the world. Sales commissions incurred under the Sales and Marketing
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.
During the six months ended June 30, 1999, $11.5 million of general and
administrative expenses were incurred compared to $12.5 million during the
quarter ended June 30, 1998. The decrease in general and administrative costs in
the six month period ended June 30, 1999, is largely due to a reduction in costs
associated with the transition of the Company from a development stage company
to an operating company which were incurred in the six month period ended June
30, 1998.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense on borrowings decreased from $32.2 million for the six months
ended June 30, 1998 to $27.5 million for the six months ended June 30, 1999. The
decrease in interest expense of $4.7 million is attributable to a reduction in
the Company's long term debt facility from $280.9 million as at June 30, 1998 to
$241.5 million as at June 30, 1999 combined with a $1.7 million reduction in
amortized financing costs and a reduction in interest rates over the same
period.
During the six months ended June 30, 1999 the Company capitalised $1.0 million
of interest costs as a component of construction in progress.
Interest income of $4.7 million was earned during the six months ended June 30,
1999 compared to $8.5 million earned during the six months ended June 30, 1998.
Interest was earned on cash balances and short term investments held by the
Collateral Trustee or in escrow arising from ongoing business operations.
PROVISION FOR TAXES
The provision for taxes was $0.6 million for the six months ended June 30, 1999
compared to $0.8 million for the six months ended June 30, 1998. The tax
provisions for periods consists of taxes on income derived from capacity sales
and standby maintenance revenue from customers in certain jurisdictions along
the FLAG Route where the Company is deemed to have a taxable presence or is
otherwise subject to tax. At the present time, no income, profit, capital or
capital gains taxes are levied in Bermuda. In the event that such taxes are
levied, the Company has received an undertaking from the Bermuda Government
exempting it from all such taxes until March 28, 2016.
EXTRAORDINARY ITEM
In connection with the Refinancing that took place on January 30, 1998, the
Company recorded an extraordinary loss of $59.8 million in the statement of
operations for the six months ended June 30, 1998. The loss on refinancing
11
<PAGE>
represents the write-off of unamortized deferred financing costs related to the
Old Credit Facility. No Refinancing occurred in the six months ended June 30,
1999.
In addition, in connection with the Refinancing in January 1998, the Company
redeemed the Preferred Stock at a redemption price of 105% of the liquidation
preference. The excess of the redemption value over the carrying value of the
Preferred Stock on the date of the redemption of $8.5 million has been reflected
as a decrease in additional paid-in capital in the six month period ended June
30, 1998. There were no costs of this nature recorded in the six month period
ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
On January 30, 1998, the Company completed a refinancing which resulted in the
repayment of all outstanding borrowings under the Old Credit Facility and the
redemption of the Series A Preferred Shares. The refinancing consisted of $370.0
million of bank credit facilities and $430.0 million of 8 1/4% Senior Notes
maturing January 30, 2008.
Upon consummation of the Refinancing on January 30, 1998, the remaining amount
of unamortized capitalized financing costs related to the Old Credit Facility of
$59.8 million was written off as a component of the loss on refinancing in the
statement of operations. Also in connection with the Refinancing, the Company
recorded a reduction to additional paid in capital of $8.5 million representing
the excess of the $139.5 million paid to redeem the Preferred Stock over the
$131.0 million carrying value of the Preferred Stock on the date of redemption.
The bank credit facilities include a seven year $320.0 million term loan
facility and a $50.0 million revolving credit facility. On January 30, 1998, the
Company borrowed $320.0 million under the term loan facility. During the year
ended December 31, 1998, the Company repaid $48.5 million of the term loan
facility, of which $39.1 million was paid in the six months ended June 30, 1998.
During the six months ended June 30, 1999 the Company repaid a further $30.0
million, resulting in a balance remaining of $241.5 million as of June 30, 1999.
Borrowings under the bank credit facility bear interest at LIBOR plus 190 to
212.5 basis points. At the end of March 1998, the Company entered into two
interest rate swap agreements to manage the Company's exposure to interest rate
fluctuations on the bank credit facility. Under the swap agreements, the Company
pays a fixed rate of 5.6% on a notional amount of $60.0 million and a fixed rate
of 5.79% on a notional amount of $100.0 million and the counterparty pays the
floating rate based on LIBOR. The swap agreements terminate in January and July
2000 respectively, unless extended an additional one year and six months
respectively at the option of the counterparty.
The net cash amount received or paid on interest rate hedging instruments is
recognized as an adjustment to interest cost on the related debt.
The Company believes that it will have no need for additional borrowing. The
Company intends to finance future operations through proceeds from the sale or
lease of capacity, revenues from billings of standby maintenance charges and
restoration services, investment income on cash and investment balances,
borrowings under the revolving credit facility, if any, and available funds in
reserve accounts.
As of June 30, 1999 and December 31, 1998, the Company had working capital
deficits of $61.6 million and $156.7 million respectively. The working capital
deficit was primarily a result of the current accounts payable to the
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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.
Total cash provided by operating activities and used in investing activities
during the six months ended June 30, 1999 was $32.4 million and $89.2 million
respectively. As of June 30, 1999, cash on deposit with the Collateral Trustee
or in escrow had decreased to $170.8 million from $255.4 million at December 31,
1998, primarily as a result of the repayment of a portion of the term loan
facility and payments to the Contractors.
Total cash provided by operating and used in investing activities during the six
months ended June 30, 1998 was $75.8 million and $184.9 million respectively.
Cash on deposit with the Collateral Trustee or in escrow at June 30, 1998 was
$255.4 million.
Assets
The Company's major asset is the telecommunications capacity available for sale
on the FLAG System, which accounts for approximately $1.046 billion of assets as
of June 30, 1999 ($1.095 billion as of December 31, 1998). The Company's fixed
assets consist primarily of office furniture, leasehold improvements, computer
equipment and autos. Other assets are primarily intangible such as capitalized
financing costs.
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.
YEAR 2000
During 1999, the Company has continued its evaluation of the risks created by
the Year 2000 problem. The Company is currently in the process of obtaining
certificates of Year 2000 compliance from its suppliers for the equipment used
in its systems. In addition, overall system tests have been successfully
conducted under laboratory conditions during the second quarter of 1999. The
live FLAG Cable System certification is expected to be achieved in the third
quarter of 1999.
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.
SAFE HARBOR STATEMENT UNDER
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements included in this Quarterly Report regarding future financial
performance and results and the other statements that are not historical facts
are forward-looking statements. The words "believes," "intends," "expects,"
"anticipates," "projects," "estimates," "predicts" and similar expressions are
also intended to identify forward-looking statements. Such statements reflect
various assumptions by the Company concerning anticipated results and are
subject to significant business, economic and competitive risks, uncertainties
and contingencies, including, without limitation, the risks, uncertainties and
contingencies described in registration statements, reports and other documents
filed by the Company from time to time with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended, and the
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Securities Exchange Act of 1934, as amended. Accordingly, there can be no
assurance that such statements will be realized. Such risks, uncertainties and
contingencies could cause the Company's actual results for the six months ends
June 30, 1999 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. The Company
makes no representation or warranty as to the accuracy or completeness of such
statements contained in this Quarterly Report.
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PART II
ITEM 1: 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 2: CHANGES IN SECURITIES
Not Applicable.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a meeting of the Company held by way of a conference call on February 15,
1999, the shareholders of the Company unanimously approved the amended Bye-Laws
of the Company. On February 26, 1999, the shareholders of the Company
unanimously passed a resolution appointing John Hossenlopp and Steven Smith to
serve, and Andres Bande to continue to serve, on its Board of Directors until
re-elected or their successors are appointed at the next annual general meeting.
John Hossenlopp subsequently resigned as a Director on April 22, 1999.
ITEM 5: OTHER INFORMATION
In February 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. Pursuant to this reorganization, all of the
Class A common shares of the Company were converted to Class B common shares and
the shareholders of the Company transferred to FTHL 418,259,688 Class B common
shares in exchange for an equal number of shares in FTHL. As a result of this
reorganization, FTHL held 65.79% of the share capital of the Company with the
balance of 34.21% being held by Bell Atlantic Network Systems Company
FTHL also has an indirect 50% interest in FLAG Atlantic Limited ("FAL"), a joint
venture company set up to build, own and operate a transatlantic fiber optic
cable system connecting the U.S., U.K. and France. Global Telesystems Group,
Inc. owns the remaining interest in the venture. The transatlantic cable system
will be designed to carry voice, high-speed data and video traffic. The system
will consist of three self-healing rings including (i) a ring among two Landing
Stations on Long Island and two points of presence in New York City; (ii) a
northern Atlantic cable from Long Island to England and a southern Atlantic
cable from Long Island to France; and (iii) a ring in Europe among the Landing
Stations in England and France and points of presence in London and Paris. The
fiber optic link will be based on Synchronous Digital Hierarchy and use dense
wave division multiplexing technology. The project is subject to financing, the
execution of related agreements and other conditions.
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ITEM 6: EXHIBITS AND REPORTS FILED ON FORM 6-K
Not Applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FLAG LIMITED
By: /s/ James P. Campbell
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James P. Campbell
Chief Financial Officer
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