<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-35474
PROSPECTUS
OFFER TO EXCHANGE ALL OUTSTANDING 11 5/8% SENIOR DOLLAR NOTES DUE 2010 AND ALL
OUTSTANDING 11 5/8% SENIOR EURO NOTES DUE 2010 FOR REGISTERED 11 5/8% SENIOR
DOLLAR NOTES DUE 2010 AND REGISTERED 11 5/8% SENIOR EURO NOTES DUE 2010
FLAG TELECOM HOLDINGS LIMITED
[LOGO]
TERMS OF THE EXCHANGE OFFER
- We are offering to exchange the notes that we sold in a private offering
for new registered exchange notes.
- The exchange offer expires at 5:00 p.m., New York City time on June 12,
2000, or, for initial notes held through Euroclear or Clearstream,
Luxembourg, 5:00 p.m., London time on June 12, 2000, unless extended.
- Tenders of outstanding notes may be withdrawn any time prior to the
expiration of the exchange offer.
- All outstanding notes that are validly tendered and not validly withdrawn
will be exchanged.
- We believe that the exchange of notes will not be a taxable exchange for
U.S. federal income tax purposes.
- We will not receive any proceeds from the exchange offer.
- The terms of the exchange notes to be issued are identical to the
outstanding notes, except for the transfer restrictions and registration
rights relating to the outstanding notes.
- No public market currently exists for the notes.
WE ARE NOT MAKING AN OFFER TO EXCHANGE NOTES IN ANY JURISDICTION WHERE THE
OFFER IS NOT PERMITTED.
INVESTING IN THE NOTES ISSUED IN THE EXCHANGE OFFER INVOLVES CERTAIN RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 10.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NOTES TO BE DISTRIBUTED IN THE
EXCHANGE OFFER, NOR HAVE ANY OF THESE ORGANIZATIONS DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is May 12, 2000
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS.
TABLE OF CONTENTS
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PAGE
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Certain Regulatory Issues................................... i
Presentation of Financial Information....................... i
Summary..................................................... 1
Risk Factors................................................ 10
Terms of the Exchange Offer................................. 19
Use of Proceeds............................................. 32
Capitalization.............................................. 33
Selected Consolidated Financial Data........................ 34
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 36
Business.................................................... 47
Service of Process and Enforcement of Liabilities........... 66
Management.................................................. 67
Principal Shareholders...................................... 73
Certain Transactions........................................ 74
Description of Existing Indebtedness........................ 76
Description of Exchange Notes............................... 79
Tax Considerations.......................................... 125
Plan of Distribution........................................ 129
Legal Matters............................................... 130
Experts..................................................... 130
Available Information....................................... 130
General Information......................................... 131
Financial Statements........................................ F-1
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<PAGE>
CERTAIN REGULATORY ISSUES
Persons in the United Kingdom will be eligible to receive new notes to be
issued in this exchange offer only if the ordinary activities of such persons
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which do not constitute an offer to the public in the United
Kingdom for purposes of the U.K. Public Offers of Securities Regulation 1995.
This prospectus is being distributed on the basis that each person in the
United Kingdom to whom this prospectus is issued is reasonably believed to be a
person falling within an exemption to Section 57 of the Financial Services Act
1986, as amended, as set out in the Financial Services Act 1986 (Investment
Advertisements) (Exemptions)(No. 2) Order 1995 (as amended by the Investment
Services Regulations 1995) and the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 (as amended by the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1997).
PRESENTATION OF FINANCIAL INFORMATION
We report our financial statements in U.S. dollars and prepare our financial
statements in accordance with generally accepted accounting principles in the
United States. FLAG Telecom has adopted a fiscal year end of December 31.
In this prospectus, except where otherwise indicated, references to "$" or
"U.S. dollars" are to the lawful currency of the United States.
In this prospectus, Euro amounts have been translated into U.S. Dollars at
$0.9618 = [EURO]1.00, which was the noon buying rate in New York City for cable
transfers in Euro as certified for customs purposes by the Federal Reserve Bank
of New York on March 17, 2000, the date of issuance of the initial notes.
-i-
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SOME INFORMATION FROM THIS PROSPECTUS. IT MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THIS
OFFERING FULLY, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE
RISK FACTORS AND THE FINANCIAL STATEMENTS. IN THIS PROSPECTUS REFERENCES TO
"FLAG TELECOM," "WE," "US" AND SIMILAR TERMS REFER TO FLAG TELECOM HOLDINGS
LIMITED, THE ISSUER OF THE EXCHANGE NOTES. ALSO, REFERENCES TO: (1) "FLAG
LIMITED" REFER TO FLAG LIMITED, A BERMUDA COMPANY WHICH IS OUR WHOLLY OWNED
SUBSIDIARY, AND (2) "FLAG ATLANTIC LIMITED" REFER TO FLAG ATLANTIC LIMITED, A
BERMUDA COMPANY IN WHICH WE HOLD A 50% OWNERSHIP INTEREST. THIS PROSPECTUS
CONTAINS SOME MARKS, TRADEMARKS AND TRADE NAMES OF FLAG TELECOM HOLDINGS
LIMITED, INCLUDING OUR NAME AND LOGO.
THE EXCHANGE OFFER
On March 17, 2000, we issued $300,000,000 aggregate principal amount of
11 5/8% Senior Notes due 2010 (Dollar Notes) and [EURO]300,000,000 aggregate
principal amount of 11 5/8% Senior Notes due 2010 (Euro Notes) to Salomon Smith
Barney, Morgan Stanley Dean Witter, Deutsche Banc Alex. Brown and Bear
Stearns & Co. Inc. These initial purchasers placed the notes with institutional
investors in transactions exempt from the registration requirements of the
Securities Act of 1933 (the Securities Act) pursuant to Rule 144A and
Regulation S under the Securities Act and applicable state securities laws.
EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
When we issued the initial notes, we entered into Registration Agreements in
which we agreed to use our best efforts to complete an exchange offer for the
initial notes on or prior to September 13, 2000.
THE EXCHANGE OFFER
Under the terms of the exchange offer, you are entitled to exchange the
initial Dollar Notes for registered exchange Dollar Notes and the initial Euro
Notes for registered exchange Euro Notes with substantially identical terms. You
should read the discussion under the heading "Description of the Exchange Notes"
for further information regarding the exchange notes. As of this date, there are
$300.0 million aggregate principal amount of the initial Dollar Notes and
[EURO]300.0 million aggregate principal amount of the initial Euro Notes
outstanding. The initial notes may be tendered only in integral multiples of
$1,000 or [EURO]1,000, as applicable.
RESALE OF EXCHANGE NOTES
We believe that the exchange notes issued in the exchange offer may be
offered for resale, resold or otherwise transferred by you without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that:
- you are acquiring the exchange notes in the ordinary course of your
business;
- you are not participating, do not intend to participate, and have no
arrangement or understanding with any person to participate, in the
distribution of the exchange notes; and
- you are not an "affiliate" of ours.
If any of the foregoing are not true and you transfer any exchange note
without delivering a prospectus meeting the requirements of the Securities Act
or without an exemption from the registration requirements of the Securities
Act, you may incur liability under the Securities Act. We do not assume or
indemnify you against that liability.
If you are a broker-dealer and receive exchange notes for your own account
in exchange for initial notes that you acquired as a result of market making or
other trading activities, you must acknowledge that you will deliver a
prospectus meeting the requirements of the Securities Act upon any resale of the
<PAGE>
exchange notes. A broker-dealer may use this prospectus in connection with an
offer to resell, resale or other transfer of the exchange notes. We will take
steps to ensure that the issuance of the exchange notes will comply with state
securities or "blue sky" laws.
CONSEQUENCES OF FAILURE TO EXCHANGE INITIAL NOTES
If you do not exchange your initial notes for exchange notes, subject to
some exceptions, you will no longer be able to require us to register the
initial notes under the Securities Act. In addition, you will not be able to
offer or sell the initial notes unless:
- they are registered under the Securities Act (and we will have no
obligation to register them, except for some limited exceptions), or
- you offer or sell them under an exemption from the requirements of, or in
a transaction not subject to, the Securities Act.
EXPIRATION DATE
The exchange offer will expire at 5:00 p.m., New York City time on June 12,
2000, or, for initial notes held through Euroclear or Clearstream, Luxembourg,
5:00 p.m., London time, on June 12, 2000, unless we decide to extend the
expiration date.
INTEREST ON THE EXCHANGE NOTES
The exchange notes will accrue interest at 11 5/8% per year, beginning on
the last date we paid interest on the initial notes exchanged. We will pay
interest on the exchange notes on March 30 and September 30 of each year.
CONDITIONS TO THE EXCHANGE OFFER
We will proceed with the exchange offer, so long as:
- the exchange offer does not violate any applicable law or applicable
interpretation of law of the staff of the Securities and Exchange
Commission (SEC) or any other applicable laws,
- no litigation materially impairs our ability to proceed with the exchange
offer, and
- we obtain all governmental approvals we deem necessary for the exchange
offer.
PROCEDURES FOR TENDERING INITIAL NOTES
If you wish to accept the exchange offer, you must:
- complete, sign and date the letter of transmittal, or a facsimile of it,
and
- send the letter of transmittal and all other documents required by it,
including the initial notes to be exchanged, for initial notes not held
through Euroclear or Clearstream, Luxembourg, to The Bank of New York, as
exchange agent, and for initial notes held through Euroclear or
Clearstream, Luxembourg, to The Bank of New York, London branch, as
exchange agent, at the address set forth on the cover page of the letter
of transmittal. Alternatively, you can tender your initial notes by
following the procedures for book-entry transfer, as described in this
document.
GUARANTEED DELIVERY PROCEDURE
If you wish to tender your initial notes and you cannot get your required
documents to the exchange agent by the expiration date, you may tender your
initial notes according to the guaranteed delivery procedure described under the
heading "The Exchange Offer--Guaranteed Delivery Procedure."
2
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WITHDRAWAL RIGHTS
You may withdraw the tender of your initial notes at any time prior to
5:00 p.m., New York City time, or, if the initial notes are held through
Euroclear or Clearstream, Luxembourg, 5:00 p.m., London time on the expiration
date of the exchange offer. To withdraw, you must send a written or facsimile
transmission notice of withdrawal to the exchange agent at its address set forth
herein under "The Exchange Offer--Exchange Agent" by 5:00 p.m., New York City
time, or London time, as applicable, on the expiration date.
ACCEPTANCE OF INITIAL NOTES AND DELIVERY OF EXCHANGE NOTES
If all the conditions to the exchange offer are satisfied or waived, we will
accept any and all initial notes that are properly tendered in the exchange
offer prior to 5:00 p.m., New York City time, or London time, as applicable, on
the expiration date. We will deliver the exchange notes promptly after the
expiration date.
TAX CONSIDERATIONS
We believe that the exchange of initial notes for exchange notes will not be
a taxable exchange for federal income tax purposes. You should consult your tax
adviser about the tax consequences of the exchange as they apply to your
individual circumstances.
EXCHANGE AGENT
The Bank of New York is serving as exchange agent for the exchange offer.
FEES AND EXPENSES
We will bear all expenses related to consummating the exchange offer and
complying with the Registration Agreements.
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes. We intend to use the proceeds from the sale of the initial notes (1) to
fund expansion of the FLAG Telecom network, including possible new cable systems
such as a trans-Pacific cable system, (2) to fund development of wholesale and
bundled product and service offerings and (3) for working capital purposes.
3
<PAGE>
FLAG TELECOM
We are a global carriers' carrier that develops and offers a broad range of
innovative telecommunications products and services to licensed international
carriers, Internet service providers and other telecommunications companies. We
have an established customer base of approximately 90 customers, many of which
are among the world's leading telecommunications and Internet companies. Our
customers include 17 of the top 20 international carriers based on traffic
volume which, together, accounted for approximately 48% of our sales to date. We
believe we have succeeded in attracting this customer base primarily as the
result of the diversity, flexibility and high quality of our product and service
offerings. Our goal is to establish FLAG Telecom as the leading global carriers'
carrier by offering a wide range of cost-effective capacity use options and
wholesale products and services across our global network. We also plan to
develop an extensive range of innovative products and services which will use a
state-of-the-art Internet Protocol-based network infrastructure.
THE FLAG TELECOM NETWORK
Our network, the FLAG Telecom network, currently consists of:
- the FLAG Europe-Asia cable system, which is the world's longest
independent, privately-owned digital fiberoptic undersea cable system with
a length of 28,000 kilometers;
- the FLAG Atlantic-1 cable system, which we are currently constructing
through a 50/50 joint venture with GTS TransAtlantic and which, when
completed, will connect London and Paris to New York and will have
potential capacity 15 times the maximum capacity of the most advanced
cable system in service on the Atlantic route today; and
- terrestrial connections between our landing stations in the United Kingdom
and Spain to the city centers of London and Madrid and intra-European
connections from London to Paris, Brussels, Frankfurt, Amsterdam, Berlin,
Zurich, Milan and several other major European metropolitan areas which we
have acquired the right to obtain through contractual arrangements with
other facilities-based bandwidth capacity providers.
Where economically feasible, we expect to extend the FLAG Telecom network to
additional countries by developing new cable systems, building extensions from
our existing cable systems or by building additional terrestrial capacity. Where
rapid access to a market is required or where it is not economically feasible to
expand our network on our own, we may enter into arrangements with other parties
to develop network extensions or to acquire rights to use their existing
networks. We may also consider acquiring companies with networks that complement
our own.
4
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OUR CORPORATE STRUCTURE
We were formed in February 1999 to serve as the holding company for the FLAG
Telecom group of companies, as part of the restructuring of a group of companies
originally organized in 1993. Our corporate structure is as set forth below. For
clarity, we have included only our principal companies in the following chart.
[LOGO]
We are a Bermuda company. Our corporate offices are located at Cedar House,
41 Cedar Avenue, Hamilton HM12, Bermuda. Our telephone number is
(441) 296-0909. Our web sites are http:/ / www.flagtelecom.com and
http://www.flagatlantic.com. None of the information on our web sites is a part
of this prospectus.
5
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DESCRIPTION OF THE EXCHANGE NOTES
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Issuer................................. FLAG Telecom Holdings Limited.
Notes Offered.......................... $300,000,000 aggregate principal amount of 11 5/8% Senior
Notes due 2010 and [EURO]300,000,000 aggregate principal
amount of 11 5/8% Senior Notes due 2010.
Maturity............................... The exchange notes will mature on March 30, 2010 at a
price equal to 100% of the principal amount of the
exchange notes.
Interest............................... The exchange Dollar Notes will accrue interest from the
date of their issuance at the rate of 11 5/8% per year.
The exchange Euro Notes will accrue interest from the date
of their issuance at the rate of 11 5/8% per year. In both
cases, the interest on the exchange notes will be payable
semi-annually in arrears on March 30 and September 30 of
each year, commencing September 30, 2000.
Sinking Fund........................... None.
Optional Redemption.................... Except as set forth below and under "Change of Control,"
we may not redeem the exchange notes prior to March 30,
2005. After March 30, 2005, we may redeem the exchange
notes, in whole or in part, at any time, at the redemption
prices set forth below under the section entitled
"Description of Exchange Notes" together with accrued and
unpaid interest, if any, to the redemption date. In
addition, at any time and from time to time prior to March
30, 2003, we may redeem up to 35% of the aggregate
principal amount of each of the Dollar Notes and the Euro
Notes, determined separately, at a redemption price equal
to 111.625% of the principal amount thereof, plus accrued
and unpaid interest, if any, through the date of
redemption, if:
- we use the net cash proceeds of any public equity
offering resulting in gross proceeds of at least $50
million; and
- at least 65% of the aggregate principal amount of the
Dollar Notes and the Euro Notes, determined separately,
originally issued pursuant to the relevant indenture
remain outstanding immediately after giving effect to
such redemption.
Change of Control...................... Upon a "Change of Control," you as a holder of exchange
notes will have the right to require us to repurchase all
of your exchange notes at a repurchase price equal to 101%
of the aggregate principal amount, plus accrued and unpaid
interest, if any, through the date of repurchase.
Optional Tax Redemption................ We may redeem the exchange notes at any time, in whole but
not in part, at a redemption price equal to the principal
amount thereof plus accrued but unpaid interest to the
redemption date, in the event of certain changes in tax
law which would require us to pay certain additional
amounts with respect to the exchange notes. Please refer
to the sections of this prospectus entitled
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6
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"Description of Exchange Notes--Additional Amounts" and
"Description of Exchange Notes--Optional Redemption--
Optional Tax Redemption."
Ranking................................ The exchange notes will be general unsecured obligations,
will rank equal in right of payment with all our other
existing and future senior unsecured indebtedness and will
be effectively subordinated to all of our existing and
future secured indebtedness to the extent of the assets
that secure such indebtedness and to all of our
subsidiaries' existing or future indebtedness, whether or
not secured.
Restrictive Covenants.................. The indentures under which the exchange notes will be
issued may limit:
- the incurrence of additional indebtedness or preferred
stock by us and our subsidiaries;
- the payment of dividends on, and repurchase or
redemption of, our capital stock and our subsidiaries'
capital stock and the repurchase or redemption of our
subordinated obligations;
- investments and sales of assets and subsidiary stock;
- transactions with affiliates; and
- the incurrence of additional liens.
In addition, the indentures limit our ability to engage in
consolidations, mergers and transfers of substantially all
of our assets and also contain limitations on restricting
distributions from our subsidiaries. All of these
limitations and prohibitions are subject to a number of
important qualifications and exceptions. Please refer to
the sections of this prospectus entitled "Description of
Exchange Notes" and "Risk Factors--Risk Related to the
Exchange Notes."
Absence of a Public Market The initial Dollar Notes were designated for trading by
for the Notes.......................... QIBs in the PORTAL market. The exchange Euro Notes are
expected to be listed on the Luxembourg Stock Exchange.
However, the exchange notes are a new issue of securities
and there is currently no established market for them.
Accordingly, there can be no assurance as to the
development or liquidity of any market for the exchange
notes.
Use of Proceeds........................ We will not receive any cash proceeds from the issuance of
the exchange notes. We intend to use the proceeds from the
sale of the initial notes (1) to fund expansion of the
FLAG Telecom network, including possible new cable systems
such as trans-Pacific cable system, (2) to fund
development of wholesale and bundled product and service
offerings and (3) for working capital purposes.
</TABLE>
RISK FACTORS
POTENTIAL INVESTORS SHOULD CONSIDER CAREFULLY CERTAIN FACTORS RELATING TO AN
INVESTMENT IN THE EXCHANGE NOTES. SEE "RISK FACTORS."
7
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND NOTES)
The following table presents summary consolidated statements of operations
and balance sheet data of FLAG Telecom and FLAG Limited for the periods
indicated. The financial data for the periods ended December 31, 1996, 1997 and
1998 and for the period from January 1, 1999 to February 26, 1999 has been
derived from FLAG Limited's audited consolidated financial statements included
elsewhere in this prospectus. The financial data as of December 31, 1999 and for
the period from incorporation to December 31, 1999 has been derived from FLAG
Telecom's audited consolidated financial statements included elsewhere in this
prospectus.
You should read the summary consolidated financial information in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," FLAG Limited's consolidated financial statements and
FLAG Telecom's consolidated financial statements and notes thereto included
elsewhere in this prospectus.
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FLAG LIMITED FLAG TELECOM
----------------------------------------------- --------------
PERIOD FROM
JANUARY 1,
1999 PERIOD FROM
TO INCORPORATION
YEAR ENDED AS OF DECEMBER 31,
-------------------------------
FEBRUARY 26, TO
DECEMBER 31,
1996(1) 1997 1998 1999 1999
--------- -------- -------- ------------- --------------
(AS
RESTATED)
STATEMENT OF OPERATIONS DATA:
Revenues:
Capacity sales, net of discounts.... $ -- $335,982 $182,935 $ 25,554 $ 94,603
Standby maintenance and restoration
revenue........................... -- 4,011 25,313 4,458 37,827
-------- -------- -------- -------- --------
-- 339,993 208,248 30,012 132,430
-------- -------- -------- -------- --------
Sales and other operating expenses:
Cost of capacity sold............... -- 196,190 101,288 8,294 41,349
Operations and maintenance(2)....... -- 4,600 37,931 5,114 26,201
Sales and marketing(2).............. 316 6,598 10,680 637 11,096
General and administrative(2)(3).... 12,345 30,339 21,674 2,870 22,901
Depreciation and amortization....... 121 276 844 233 11,133
-------- -------- -------- -------- --------
.................................... 12,782 238,003 172,417 17,148 112,680
-------- -------- -------- -------- --------
Operating income (loss)............. (12,782) 101,990 35,831 12,864 19,750
-------- -------- -------- -------- --------
Income from affiliate............... -- -- -- -- 361
Interest expense.................... -- 20,193 61,128 9,758 45,062
Interest income..................... 2,408 6,637 14,875 1,825 7,188
-------- -------- -------- -------- --------
Income (loss) before minority
interest and income taxes......... (10,374) 88,434 (10,422) 4,931 (17,763)
Minority interest................... -- -- -- -- (3,826)
Provision for income taxes.......... -- 8,991 1,260 171 1,549
-------- -------- -------- -------- --------
Net income (loss) before
extraordinary item................ (10,374) 79,443 (11,682) 4,760 (15,486)
Extraordinary item(4)............... -- -- (59,839) -- --
-------- -------- -------- -------- --------
Net income (loss)................... (10,374) 79,443 (71,521) 4,760 (15,486)
Cumulative pay-in-kind preferred
dividends......................... 14,410 16,324 1,508 -- --
-------- -------- -------- -------- --------
Redemption premium and write-off of
discount on preferred shares(5)... -- -- 8,500 -- --
-------- -------- -------- -------- --------
Net income (loss) applicable to
common shareholders............... $(24,784) $ 63,119 $(81,529) $ 4,760 $(15,486)
======== ======== ======== ======== ========
EBITDA(6)........................... $(12,661) $298,456 $137,963 $ 21,391 $ 81,032
Adjusted EBITDA(7).................. (12,661) 403,335 68,720 234 127,878
</TABLE>
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND NOTES)
<TABLE>
<CAPTION>
FLAG LIMITED FLAG TELECOM
------------------------------------------------------- -----------------
PERIOD FROM
YEAR ENDED AS OF DECEMBER 31, JANUARY 1, 1999 PERIOD FROM
----------------------------------- TO INCORPORATION TO
1996(1) 1997 1998 FEBRUARY 26, 1999 DECEMBER 31, 1999
------------- -------- -------- ----------------- -----------------
(AS RESTATED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF CASH FLOW DATA:
Cash flow from operating
activities........................ (12,103) 285,156 88,831 (23,104) 115,782
Cash flow from financing
activities........................ 342,011 245,677 97,818 21,230 17,598
Cash flow from investing
activities........................ (329,886) (528,653) (186,144) 588 (132,127)
</TABLE>
<TABLE>
<CAPTION>
FLAG LIMITED FLAG TELECOM
---------------------------------------------------- --------------
AS OF
AS OF DECEMBER 31, DECEMBER 31,
-------------------------------- AS OF 1999FLAG
1996 1997 1998 FEBRUARY 26, 1999 TELECOM
-------- --------- --------- ----------------- --------------
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BALANCE SHEET DATA:
Total assets................... 774,447 1,886,937 1,475,766 1,435,369 1,325,731
Shareholders' equity........... 142,297 541,029 458,796 463,734 298,545
</TABLE>
- ------------------------
(1) FLAG Limited restated its 1996 financial statements, as originally issued in
March 1997, to give effect to a $3.1 million discount on FLAG Limited's
issuance of 3,075,816 shares of preferred stock in 1995. For the year ended
December 31, 1996, this restatement had no effect on net loss, but increased
net loss applicable to common shareholders by $0.55 million.
(2) Included in operating expenses for FLAG Telecom are the following non-cash
compensation expenses: $2.6 million in operations and maintenance expenses;
$1.5 million in sales and marketing expenses; and $4.6 million in general
and administrative expenses.
(3) Included in general and administrative expenses for the years ended
December 31, 1996, 1997 and 1998 are program management expenses which
include reimbursements to Bell Atlantic Network Systems Company, a
shareholder of FLAG Telecom, for all costs and out-of-pocket expenses
incurred by Bell Atlantic Network Systems Company in performing project
management services for FLAG Limited. In addition, Bell Atlantic Network
Systems Company received a fee equal to 16% of payroll costs and of certain
outside contractor and consultant costs.
(4) In connection with FLAG Limited's issuance of 8 1/4% Senior Notes due 2008
and its entry into its existing credit facility, FLAG Limited recorded an
extraordinary loss of $59.8 million, representing the write-off of
unamortized deferred financing costs related to its old credit facility.
(5) In connection with FLAG Limited's issuance of 8 1/4% Senior Notes due 2008
and its entry into its existing credit facility, FLAG Limited redeemed its
then outstanding 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.
(6) Operating income plus cost of capacity sold, depreciation and amortization
and non-cash stock compensation.
(7) EBITDA plus change in deferred revenue.
9
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISKS BEFORE YOU DECIDE TO MAKE
AN INVESTMENT IN THE EXCHANGE NOTES. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
ARE NOT THE ONLY ONES THAT OUR COMPANY FACES. ADDITIONAL RISKS AND UNCERTAINTIES
NOT PRESENTLY KNOWN TO US MAY ALSO ADVERSELY IMPACT OUR BUSINESS OPERATIONS.
IF YOU DO NOT PARTICIPATE IN THE EXCHANGE OFFER, YOU WILL CONTINUE TO BE
SUBJECT TO TRANSFER RESTRICTIONS.
We will only issue exchange notes in exchange for initial notes that are
timely and properly tendered. Therefore, you should allow sufficient time to
ensure timely delivery of the initial notes and you should carefully follow the
instructions on how to tender your initial notes. Neither we nor the exchange
agent are required to tell you of any defects or irregularities with respect to
your tender of the initial notes. If you do not exchange your initial notes for
exchange notes pursuant to the exchange offer, the initial notes you hold will
continue to be subject to the existing transfer restrictions. In general, the
initial notes may not be offered or sold, unless registered under the Securities
Act, or exempt from registration under the Securities Act and applicable state
securities laws. We do not anticipate that we will register initial notes under
the Securities Act.
After the exchange offer is consummated, if you continue to hold any initial
notes of either series, you may have trouble selling them because there will be
fewer initial notes of such series outstanding. In addition, if a large number
of initial notes of either series are not tendered or are tendered improperly,
the limited amount of exchange notes of such series that would be issued and
outstanding after we consummate the exchange offer could lower the market price
of such exchange notes.
RISKS RELATED TO OUR BUSINESS
BECAUSE MANY OF OUR PRODUCTS AND SERVICES ARE IN THE EARLY STAGES OF
DEVELOPMENT OR OPERATION, WE CANNOT ASSURE YOU THAT WE WILL SUCCESSFULLY
INTEGRATE THEM WITH OUR EXISTING NETWORK AND, AS A RESULT, WE MAY NOT ACHIEVE
THE REVENUES FROM THESE PRODUCTS AND SERVICES THAT WE EXPECT.
We are at an early stage in the construction of the FLAG Atlantic-1 cable
system and the introduction of a variety of new telecommunications products and
services, such as managed bandwidth services and Internet point-to-point
services. In order to transition from a business primarily involved in the
operation of an undersea cable network with a target market consisting mainly of
large operators to one that also operates the FLAG Atlantic-1 cable system and
markets new products and services to an expanded target market (including
resellers and Internet service providers), we must undergo substantial changes
in our operations. These changes are expected to be a significant challenge to
our managerial, administrative, marketing and operational resources. We are in
the process of developing the management, marketing and operational capabilities
and financial and accounting systems and controls necessary for this transition.
We cannot assure you that we will succeed in developing all or any of these
capabilities.
BECAUSE ACHIEVEMENT OF OUR BUSINESS OBJECTIVES DEPENDS UPON THE SUCCESSFUL
COMPLETION OF THE FLAG ATLANTIC-1 CABLE SYSTEM, WE MUST COMPLETE THE FLAG
ATLANTIC-1 CABLE SYSTEM WITHIN BUDGET AND ON TIME.
We have embarked upon an aggressive plan to build the FLAG Atlantic-1 cable
system, with GTS TransAtlantic, our joint venture partner. We cannot guarantee
completion of the FLAG Atlantic-1 cable system in the time planned, within
budget, or at all. Successful completion of the FLAG Atlantic-1 cable system
will be affected by a variety of factors, many of which we cannot control,
including:
- our ability to acquire satisfactory landing sites, rights-of-way and
permits from governmental authorities and private third parties;
- our management of construction costs and, if cost overruns occur, our
ability to obtain any needed additional financing;
- timely performance by our contractors;
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- technical performance of the fiber and equipment used in the FLAG
Atlantic-1 cable system;
- our ability to attract and retain qualified personnel;
- effective management of our relationship with GTS TransAtlantic; and
- GTS TransAtlantic's successful design and development of the terrestrial
portion of the FLAG Atlantic-1 cable system.
Failure to complete the FLAG Atlantic-1 cable system by September 30, 2001
could result in a default under FLAG Atlantic Limited's credit facility and an
acceleration of its indebtedness. If the FLAG Atlantic-1 cable system does not
go into service by December 31, 2001, some of FLAG Atlantic Limited's customers
may cancel their obligation to purchase capacity. While we would not have any
direct liability as a result of FLAG Atlantic Limited's failure to complete the
FLAG Atlantic-1 cable system on time, we could lose our investment in FLAG
Atlantic Limited.
BECAUSE THE SUCCESS OF FLAG ATLANTIC LIMITED DEPENDS UPON THE EFFORTS OF GTS
TRANSATLANTIC AND THE SUCCESSFUL MANAGEMENT OF OUR RELATIONSHIP WITH THEM, WE
CANNOT ASSURE THE SUCCESS OF THE FLAG ATLANTIC-1 PROJECT.
Under the FLAG Atlantic Limited Shareholders Agreement, GTS TransAtlantic
has agreed to manage the construction (or acquisition), installation, operation
and maintenance of most of the terrestrial portion of the FLAG Atlantic-1 cable
system. While GTS TransAtlantic has significant experience in the development of
terrestrial telecommunications systems, we cannot assure you that it will
perform its obligations under the shareholders agreement in a timely fashion, or
at all.
We will need to maintain a cooperative relationship with GTS TransAtlantic,
since we share management and control of FLAG Atlantic Limited with it. Under
the shareholders agreement, disagreements concerning operational matters,
including the selection of suppliers, and pricing issues may be referred to
independent experts for binding determination, while deadlocks concerning other
matters may be referred to binding arbitration under the rules of the
International Chamber of Commerce. Despite these dispute resolution mechanisms,
failure to maintain a cooperative relationship with GTS TransAtlantic could
hamper FLAG Atlantic Limited's operations.
BECAUSE GTS TRANSATLANTIC AND WE MAY ACQUIRE CAPACITY ON THE FLAG ATLANTIC-1
CABLE SYSTEM FOR OUR OWN ACCOUNT AND RESELL THIS CAPACITY FOR OUR SOLE RISK AND
BENEFIT, WE MAY NOT BENEFIT FROM GTS TRANSATLANTIC'S MARKETING EFFORTS AND MAY
FIND OURSELVES IN DIRECT COMPETITION WITH IT.
Under the FLAG Atlantic Limited Shareholders Agreement, we and GTS
TransAtlantic are both entitled to acquire capacity on the FLAG Atlantic-1 cable
system for own account, to bundle this capacity with our respective other
products, and to sell these bundled products for our own account. Because GTS
TransAtlantic has acquired a significant amount of capacity on the FLAG
Atlantic-1 cable system for its own account, it may concentrate its marketing
efforts on making sales from its inventory, rather than sales on behalf of FLAG
Atlantic Limited. While FLAG Atlantic Limited will benefit directly from amounts
paid by GTS TransAtlantic to purchase capacity for its inventory, neither FLAG
Atlantic Limited nor we will otherwise benefit from the sales GTS TransAtlantic
makes out of its inventory. If GTS TransAtlantic elects to focus its marketing
efforts on making sales from its inventory, then the success of our investment
in FLAG Atlantic Limited will solely depend on our own marketing efforts.
Depending on the type of products which GTS TransAtlantic elects to sell, this
may also place us in direct competition with it. In such event, we may actually
be harmed by GTS TransAtlantic's marketing efforts.
IF WE ARE UNABLE TO DEPLOY SOPHISTICATED TECHNOLOGIES ON A GLOBAL BASIS, WE
MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
The operation of our systems requires the coordination and integration of
sophisticated and highly specialized hardware and software technologies and
equipment located throughout the world. We cannot assure you that, even if built
to specifications, our systems will function as expected in a cost-effective
manner.
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In addition, our business plan calls for the use of state-of-the-art
technology which is currently under development. In particular, the FLAG
Atlantic-1 cable system is designed to employ technology currently under
development by Alcatel Submarine Networks. While Alcatel Submarine Networks has
successfully tested this technology, this technology has not yet been
successfully deployed. Failure to deploy this technology on time could have a
material adverse effect on FLAG Atlantic Limited's operations and on our
financial results.
Our business plan also calls for the upgrade of capacity on the FLAG
Europe-Asia cable system by adding wavelength division multiplexing equipment.
We have received technical evaluations from potential suppliers indicating that
such upgrades can be achieved. However, we cannot assure you that these upgrades
can be successfully implemented. Failure to achieve these upgrades could
materially impact the amount of capacity which we will be able to sell, and the
types of services that we will be able to offer.
BECAUSE WE HAVE SUBSTANTIAL INDEBTEDNESS, WE MAY BE UNABLE TO PAY INTEREST
ON THE EXCHANGE NOTES AND OUR ABILITY TO RAISE OR GENERATE CAPITAL REQUIRED TO
MAINTAIN OUR OPERATING FLEXIBILITY MAY BE IMPAIRED.
We estimate that, when the initial notes were issued, we had approximately
$1.17 billion of long-term debt consisting of the $150 million outstanding under
the credit facility of FLAG Limited, $430 million of 8 1/4% Senior Notes issued
by FLAG Limited and $589 million of the initial notes. In addition, FLAG
Atlantic Limited, at that time, had borrowed approximately $62 million under its
credit facility. If we pursue a trans-Pacific cable project, or any of the other
projects that we are considering, we might incur substantial additional debt.
The degree to which we are leveraged could have important consequences to
holders of the exchange notes, including the following:
- we will have significant cash interest expense and principal repayment
obligations with respect to outstanding indebtedness, including our credit
facilities, the 8 1/4% Senior Notes issued by FLAG Limited and the
exchange notes;
- we could be vulnerable to changes in general economic conditions or
increases in prevailing interest rates;
- our ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes
may be impaired;
- the indebtedness outstanding under our credit facilities is secured by,
among other things, a pledge of substantial assets and revenues and
matures prior to the maturity of the exchange notes (see "Description of
Existing Indebtedness"); and
- our substantial degree of leverage may limit our flexibility to adjust to
changing market conditions, reduce our ability to withstand competitive
pressures and make us more vulnerable to a downturn in general economic
conditions or our business. See "Description of Exchange Notes."
Our ability to make payments with respect to the exchange notes and to
satisfy our other debt obligations will be dependent upon our future
performance, which is subject to prevailing economic conditions and financial,
business, regulatory and other factors, including factors beyond our control. We
cannot assure you that our operating cash flow will be sufficient to meet our
debt service requirements or to repay the exchange notes or other indebtedness
at maturity in connection with any mandatory prepayment or otherwise. See
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
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IF WE FAIL TO OBTAIN THE RESOURCES REQUIRED TO ADAPT, UPGRADE OR EXPAND OUR
NETWORK, WE MAY NOT BE ABLE TO KEEP UP WITH DEMANDS FROM OUR CUSTOMERS OR
CHANGES IN OUR INDUSTRY.
We may need to upgrade, expand or adapt the components of the FLAG
Europe-Asia cable system and the FLAG Atlantic-1 cable system in the future to
respond to the following:
- demand for greater transmission capacity;
- changes in our customers' service requirements;
- technological advances; and
- government regulation.
Any upgrade, expansion or adaptation of these networks could require
substantial additional financial, operational and managerial resources which may
not be available to us.
IF WE FAIL TO MAINTAIN COOPERATIVE RELATIONSHIPS WITH OUR LANDING PARTIES,
OUR OPERATIONS MAY BE IMPAIRED.
We depend upon fifteen different landing parties to provide access to the
origination and termination points for the FLAG Europe-Asia cable system. Our
ability to offer city-to-city services is dependent on our landing parties'
willingness to provide cost-effective terrestrial services, and/or to agree to
connect other terrestrial networks to the FLAG Europe-Asia cable system. Each of
these landing parties has entered into a construction and maintenance agreement
with us and some of our customers under which each of the landing parties
commits to provide access, to charge reasonable and uniform rates to all
customers accessing the FLAG Europe-Asia cable system through the landing
party's landing station and to maintain the terrestrial portion of the FLAG
Europe-Asia cable system in the landing party's country. Despite these
commitments, we cannot assure you that the landing parties will perform their
contractual obligations or that there will not be political events or changes in
relation to the landing parties which have adverse effects on us.
In addition, the construction and maintenance agreement restricts our
ability to install further equipment into cable landing facilities without the
consent of our landing parties. While none of our landing parties has ever
withheld its consent, we cannot assure you that we will be able to obtain the
consent of our landing parties to proposed future modifications of our landing
facilities that may be advantageous to us or necessary to operate the FLAG
Europe-Asia cable system.
IF USE OF THE INTERNET DOES NOT GROW AS EXPECTED, OUR BUSINESS AND FINANCIAL
PERFORMANCE MAY SUFFER.
We believe Internet Protocol is emerging as the platform of choice for the
next generation of communication networks. Therefore, as part of our business
strategy, we have developed and are developing products and services which
target the specific needs of Internet service providers. However, wide-scale
interest in and use of the Internet for commerce and by individuals is a recent
phenomenon. This growth may not continue. If continued acceptance and growth of
the Internet does not occur, demand for telecommunication services may decline
generally, with our products and services tailored to Internet service providers
being particularly affected, and our business and financial performance will
suffer.
IF ADVERSE FOREIGN ECONOMIC OR POLITICAL EVENTS OCCUR, OUR NETWORK AND
CUSTOMER BASE MAY BE ADVERSELY AFFECTED AND OUR FINANCIAL RESULTS COULD SUFFER.
We derive substantially all of our revenues from international operations.
We have substantial physical assets in several jurisdictions along the FLAG
Europe-Asia cable route and expect to have substantial physical assets along the
FLAG Atlantic-1 cable route. International operations are subject to political,
economic and other uncertainties, including, risk of war, revolution,
expropriation, renegotiation or modification of existing contracts, labor
disputes and other uncertainties arising out of foreign government sovereignty
over our international operations. Some regions of the world along our routes
have a history of
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political and economic instability. This instability could result in new
governments or the adoption of new policies that are hostile to foreign
investment.
BECAUSE MANY OF OUR CUSTOMERS DEAL PREDOMINANTLY IN FOREIGN CURRENCIES, WE
MAY BE EXPOSED TO EXCHANGE RATE RISKS AND OUR NET INCOME MAY SUFFER DUE TO
CURRENCY TRANSLATIONS.
We invoice all capacity sales and maintenance charges in U.S. dollars;
however, most of our customers and many of our prospective customers derive
their revenues in currencies other than U.S. dollars. The obligations of
customers with substantial revenues in foreign currencies may be subject to
unpredictable and indeterminate increases in the event that such currencies
devalue relative to the U.S. dollar. Furthermore, such customers may become
subject to exchange control regulations restricting the conversion of their
revenue currencies into U.S. dollars. In such event, the affected customers may
not be able to pay us in U.S. dollars.
In addition, we derive, and expect to continue to derive, a significant
portion of our revenues from customers located throughout Asia. As a result of
the recent currency and economic crisis in the region, including the imposition
of exchange controls, we may experience collection delays or nonpayment and we
have experienced, and may continue to experience, deferrals of capacity
purchases from our Asian customers.
BECAUSE OUR COMPANY AND OUR INDUSTRY ARE HIGHLY REGULATED, OUR ABILITY TO
COMPETE IN SOME MARKETS IS RESTRICTED.
The telecommunications industry is highly regulated. The regulatory
environment varies substantially from country to country and restricts our
ability to compete in some markets. For example, in jurisdictions where we
desire to extend the FLAG Telecom network or offer new services, we may be
required to obtain landing licenses, operator licenses and other permits. We
cannot assure you that we will be able to obtain the authorizations that we need
to implement our business plan and enter new markets or that these
authorizations, if obtained, will not be later revoked. Regulation of the
telecommunications industry is also changing rapidly, with effects on our
opportunities, competition and other aspects of our business. Our operations may
be subject to risks such as the imposition of governmental controls and changes
in tariffs.
IF THERE IS ANY CHANGE IN OUR TAX STATUS OR INCOME TAX REGULATIONS OF THE
COUNTRIES WHERE WE OPERATE, OUR FINANCIAL RESULTS COULD BE NEGATIVELY AFFECTED.
We believe that a significant portion of our income will not be subject to
tax by Bermuda, which currently has no corporate income tax, or by other
countries in which we conduct activities or in which our customers are located,
including the United States. However, we base this belief upon the anticipated
nature and conduct of our business, which may change, and upon our understanding
of our position under the tax laws of the various countries in which we have
assets or conduct activities. Our tax position is subject to review and possible
challenge by taxing authorities and to possible changes in law which may have
retroactive effect. We cannot determine in advance the extent to which certain
jurisdictions may require us to pay tax or to make payments in lieu of tax. In
addition, payments due to us from our customers may be subject to withholding
tax or other tax claims in amounts that exceed the taxation that we expect based
on our current and anticipated business practices and current tax regimes.
BECAUSE WE FACE SIGNIFICANT COMPETITION IN THE ATTRACTION AND RETENTION OF
SKILLED PERSONNEL, WE MAY NOT BE ABLE TO HIRE AND RETAIN THE PERSONNEL NECESSARY
TO ACHIEVE OUR BUSINESS OBJECTIVES AND OPERATE THE FLAG TELECOM NETWORK
SUCCESSFULLY.
We believe that a critical component for our success will be the attraction
and retention of qualified professional and technical personnel. We expect
further growth in the number of our personnel, particularly in connection with
the FLAG Atlantic-1 cable system and the new wholesale services we are offering.
We face significant competition in the attraction and retention of personnel who
possess the technical skill sets and regional expertise that we seek. If we lose
key personnel or qualified technical staff, or are unable
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to recruit qualified personnel, our ability to manage the day-to-day aspects of
our complex network will be weakened.
IF OUR SYSTEMS PROVE NOT TO BE YEAR 2000 COMPLIANT, WE MAY INCUR UNEXPECTED
EXPENSES AND DELAYS IN PAYMENT FOR OUR SERVICES AND IN OUR ABILITY TO CONDUCT
NORMAL OPERATIONS.
The Year 2000 problem arises from the fact that many computer programs
indicate the year by only two digits, rather than four. As a result, computer
systems and software in a wide variety of industries may produce some erroneous
results or fail unless they have been modified or upgraded to process date
information correctly. Prior to December 31, 1999, we conducted an investigation
into Year 2000 compliance covering all network equipment and financial systems
used to provide services to our customers, network operations support systems
used to support the operations of our network, and all administrative support
systems. As of the date of this prospectus, we have not encountered Year 2000
related problems. We continue to monitor developments in this area. We believe
our most significant Year 2000 risk lies with our landing parties, customers and
major suppliers. We have developed a contingency plan to minimize operational
problems if Year 2000 related problems arise. If our network equipment or
financial systems or those of our landing parties, customers and major suppliers
are not Year 2000 compliant, we could experience unexpected expenses and delays,
including delays in our ability to conduct normal business operations and to
sell our products and services.
RISKS RELATED TO OUR INDUSTRY
BECAUSE OUR PRODUCT OFFERINGS ARE EXPANDING AND THE TELECOMMUNICATIONS
INDUSTRY IS CHANGING SIGNIFICANTLY, WE FACE COMPETITION AND PRICING PRESSURE
FROM A WIDE VARIETY OF SOURCES.
Along the FLAG Europe-Asia cable route and the FLAG Atlantic-1 cable route,
we face competition and pricing pressure from existing cables, planned cables,
and satellite providers, including existing geosynchronous satellites and
low-earth orbit systems now under construction. As we expand our range of
available products and services, we expect to face competition from various
carriers offering comparable products and services.
Many of our competitors have, and some potential competitors are likely to
enjoy, substantial competitive advantages, including the following:
- greater name recognition;
- greater financial, technical, marketing and other resources;
- larger installed bases of customers; and
- well-established relationships with current and potential customers.
Significant new and potentially larger competitors could also enter our
market as a result of regulatory changes or the establishment of cooperative
relationships. In addition, recent technological advances may greatly expand the
capacity of existing and new fiberoptic cables. Although such technological
advances may enable us to increase our capacity, an increase in the capacity of
our competitors could lead to even greater competition. Increased competition
could lead to price reductions, fewer large-volume sales, under-utilization of
resources, reduced operating margins and loss of market share.
BECAUSE WE FACE RAPID TECHNOLOGICAL CHANGES, OUR INFRASTRUCTURAL INVESTMENTS
AND TECHNOLOGIES COULD BECOME OBSOLETE BEFORE WE CAN ACHIEVE ADEQUATE
UTILIZATION OF THESE ASSETS.
The telecommunications industry is subject to rapid and significant changes
in technology. If we do not replace or upgrade technology and equipment that
becomes obsolete, we will be unable to compete effectively because we will not
be able to meet the expectations of our customers. Additionally, in recent
years, the useful economic life of telecommunications equipment has declined
significantly. Although we believe that, for the foreseeable future,
technological changes will not materially affect the use of our
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fiberoptic system, we cannot predict the effect of technological changes on our
business. The FLAG Europe-Asia cable system has a warranted design life of
25 years and the FLAG Atlantic-1 cable system will have a warranted design life
of 25 years; however, we cannot assure you that technological developments will
not render the infrastructure and technologies in which we invest obsolete
before we can adequately utilize them. The failure of the FLAG Europe-Asia cable
system or the FLAG Atlantic-1 cable system to achieve their warranted design
life could have a material adverse effect on us.
RISKS RELATED TO THE EXCHANGE NOTES
WE ARE SUBJECT TO CERTAIN COVENANT RESTRICTIONS IN DOCUMENTS RELATING TO OUR
INDEBTEDNESS WHICH MAY LIMIT THE OPERATION OF OUR BUSINESS AND OUR ABILITY TO
REPAY INDEBTEDNESS.
The existing credit facilities of FLAG Limited and FLAG Atlantic Limited,
the indenture relating to the 8 1/4% Senior Notes of FLAG Limited and the
indentures relating to the initial notes and the exchange notes impose certain
operating and financial restrictions on us. These restrictions will affect, and
in many respects significantly limit or prohibit, among other things, our
ability to:
- incur additional indebtedness;
- repay indebtedness prior to stated maturities;
- sell assets;
- make investments;
- engage in transactions with shareholders and affiliates;
- issue capital stock;
- create liens;
- engage in mergers or acquisitions;
- effect future financings;
- make needed capital expenditures;
- withstand a future downturn in business or the economy in general; or
- otherwise conduct necessary corporate activities.
In addition, the credit facilities and the indenture for the 8 1/4% Senior
Notes of FLAG Limited contain restrictions on the ability of FLAG Atlantic
Limited and FLAG Limited to pay dividends to us. Because our cash flows from
operations arise at the subsidiary level, these restrictions could affect our
ability to make payments on the exchange notes.
Our ability to comply with the covenants and restrictions under the credit
facilities, the indenture relating to the 8 1/4% Senior Notes of FLAG Limited
and the indentures relating to the initial notes and the exchange notes may be
affected by events beyond our control, including prevailing economic and
financial concerns. Our failure to comply with these restrictions could lead to
a default under the terms of the credit facilities of FLAG Limited or FLAG
Atlantic Limited, the indenture relating to the 8 1/4% Senior Notes of FLAG
Limited and the indentures relating to the initial notes and the exchange notes
notwithstanding our ability to meet our debt service obligations. In the event
of a default, the lenders under either credit facility or the trustee under the
indenture relating to the 8 1/4% Senior Notes of FLAG Limited could elect to
declare all such indebtedness outstanding under the credit facilities or the
8 1/4% Senior Notes of FLAG Limited to be due and payable together with accrued
and unpaid interest and the commitments of the lenders under the credit
facilities to make loans thereunder could be terminated. If this occurs, a
significant portion of our other indebtedness (including the exchange notes) may
become immediately due
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and payable and there can be no assurance that we would be able to make the
payments or borrow sufficient funds from alternative sources to make the
payments. See "Description of Exchange Notes."
ALTHOUGH YOUR DOLLAR NOTES AND EURO NOTES ARE REFERRED TO AS "SENIOR NOTES,"
THEY WILL BE EFFECTIVELY SUBORDINATED TO ANY OF OUR SECURED DEBT AND ANY DEBT OF
OUR SUBSIDIARIES.
The exchange notes will be our senior obligations and will rank PARI PASSU
in right of payment to all existing and future unsecured senior indebtedness.
The exchange notes are not secured by any of our assets. Accordingly, the
exchange notes will be effectively subordinated to any secured obligation to the
extent of the value of the assets securing the obligation. In addition, because
our cash flows from operations are at the subsidiary level, all of our exchange
notes are structurally subordinated to the debt of our subsidiaries, including
the credit facilities of FLAG Limited and FLAG Atlantic Limited and the 8 1/4%
Senior Notes of FLAG Limited. Creditors of any of our subsidiaries, including
trade creditors, have and will have claims that will be senior to the exchange
notes with respect to the assets of that subsidiary.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE
PURCHASE OF THE EXCHANGE NOTES UPON A CHANGE OF CONTROL.
We must offer to purchase the exchange notes upon the occurrence of a change
of control at a purchase price equal to 101% of the principal amount thereof,
plus accrued interest to the date of purchase. See "Description of Exchange
Notes--Change of Control."
The credit facility of FLAG Limited prohibits us from prepaying the exchange
notes, including prepayments pursuant to a change of control offer. Prior to
commencing an offer to purchase, we would be required to (1) repay in full all
indebtedness that would prohibit the purchase of the exchange notes, including
indebtedness under the credit facility, or (2) obtain any requisite consent to
permit the purchase. If we are unable to repay all of the indebtedness or are
unable to obtain the necessary consents, we will be unable to offer to purchase
the exchange notes and such failure to purchase will constitute an event of
default under the indentures. We cannot assure you that we will have sufficient
funds available at the time of any change of control offer to make any debt
payment (including purchases of exchange notes).
The events that constitute a change of control under the indentures may also
be events of default under the credit facilities. These events may permit the
lenders under the credit facility to accelerate the debt and, if the debt is not
paid, to enforce security interests in our assets, thereby limiting our ability
to raise cash to purchase the exchange notes and reducing the practical benefit
of the offer to purchase provisions to the holders of the exchange notes.
IF AN ACTIVE TRADING MARKET DOES NOT DEVELOP FOR THE EXCHANGE NOTES, YOU MAY
NOT BE ABLE TO RESELL THE EXCHANGE NOTES.
There is no existing market for the exchange notes. The initial Dollar Notes
were designated for trading in PORTAL by qualified institutional buyers (QIBs)
and the exchange Euro Notes are expected to be listed on the Luxembourg Stock
Exchange. We cannot assure you that this listing will be obtained or as to the
liquidity of any markets that may develop for the exchange notes, the ability of
holders to sell the exchange notes or the price at which holders would be able
to sell the exchange notes. Future trading prices of the exchange notes will
depend on many factors including, among other things, prevailing interest rates,
our operating results and the market for similar securities. Historically, the
market for securities similar to the exchange notes, including non-investment
grade debt, has been subject to disruptions that have caused substantial
volatility in the prices of the securities. We cannot assure you that any market
for the exchange notes, if a market develops, will not be subject to similar
disruptions.
SINCE MOST OF OUR ASSETS ARE LOCATED OUTSIDE OF THE UNITED STATES, IT MAY BE
DIFFICULT TO BRING AND ENFORCE SUITS AGAINST US.
We are incorporated in Bermuda. Most of our directors and officers are not
residents of the United States. All or a substantial portion of the assets of
those directors and officers are or may be located
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outside of the United States. In addition, a substantial portion of our assets
are located outside of the United States. As a result, it may be difficult for
holders of the exchange notes to serve notice of a lawsuit on us or our non-U.S.
directors and officers within the United States. Because most of our assets are
located outside of the United States, it may be difficult for holders of the
exchange notes to enforce in the United States judgments of United States
courts. Appleby Spurling & Kempe, our counsel in Bermuda, has advised us that
there is some doubt as to the enforcement in Bermuda, in original actions or in
actions for enforcement of judgments of United States courts, of liabilities
predicated upon U.S. federal securities laws.
BECAUSE WE ARE AT AN EARLY STAGE IN THE DEVELOPMENT OF OUR NETWORK, OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS.
We are at an early stage in the development and expansion of our products
and services. Accordingly, all statements in this prospectus that are not
clearly historical in nature are forward-looking. Discussions containing
forward-looking statements are found in the material set forth under "Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as in this prospectus generally.
When used in this prospectus, the words "anticipate," "believe," "expect,"
"estimate" and similar expressions are generally intended to identify
forward-looking statements. Examples of forward-looking statements include the
statements concerning our operations, prospects, size and growth of world
telecommunications traffic, size and growth of addressable market, technological
and customer support capabilities, pricing, new product and services
development, potential expansions to our network, potential customers and
liquidity and working capital needs, estimated demand forecast, and information
concerning characteristics of competing systems. These forward-looking
statements are inherently predictive and speculative and we cannot assure you
that any of such statements will prove to be correct. Actual results and
developments may be materially different from those expressed or implied by such
statements. You should carefully review the other risk factors set forth in this
section of this prospectus for a discussion of factors which could result in any
of such forward-looking statements proving to be inaccurate.
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TERMS OF THE EXCHANGE OFFER
GENERAL
In connection with the issuance of the initial notes pursuant to a Purchase
Agreement, dated as of March 14, 2000, by and among us and the initial
purchasers, the initial purchasers and their respective assignees became
entitled to the benefits of the Registration Agreements, each dated as of
March 17, 2000, by and among us and the initial purchasers relating to,
respectively, the Dollar Notes and the Euro Notes.
The Registration Agreements require us to file the registration statement of
which this prospectus is a part for a registered exchange offer relating to an
issue of exchange notes identical in all material respects to the initial notes
but containing no restrictive legend. Under the Registration Agreements, we are
required to:
- file the registration statement not later than 60 days following the date
of original issuance of the initial notes (the Issue Date);
- use our best efforts to cause the registration statement to be declared
effective by the SEC not later than 150 days after the Issue Date;
- use our best efforts to consummate the exchange offer not later than
180 days after the Issue Date;
- mail, or cause to be mailed, to each holder of record entitled to
participate in the exchange offer a copy of the prospectus forming part of
the exchange registration statement, together with an appropriate letter
of transmittal and related documents;
- utilize the services of a depositary for the exchange offer with an
address in the Borough of Manhattan, The City of New York;
- permit holders to withdraw validly tendered notes at any time prior to the
close of business, New York time, on the last business day on which the
exchange offer shall remain open; and
- otherwise comply in all material respects with all applicable laws, rules
and regulations.
The exchange offer being made hereby, if commenced and consummated within
the time periods described in this paragraph, will satisfy those requirements
under the Registration Agreements.
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, all initial notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time or, if you hold your position
through Euroclear or Clearstream, Luxembourg, 5:00 p.m., London time, on the
expiration date will be accepted for exchange. Exchange notes of the same class
will be issued in exchange for an equal principal amount of outstanding initial
notes accepted in the exchange offer. Initial notes may be tendered only in
integral multiples of $1,000 or [EURO]1,000, as applicable. This prospectus,
together with the letter of transmittal, is being sent to all record holders of
initial notes as of May 11, 2000. The exchange offer is not conditioned upon any
minimum principal amount of initial notes being tendered in exchange. However,
our obligation to accept initial notes for exchange is subject to certain
conditions as set forth herein under "--Conditions."
Initial notes will be deemed accepted when, as and if we have given oral or
written notice to the exchange agent. The exchange agent will act as agent for
the tendering holders of initial notes for the purposes of receiving the
exchange notes and delivering them to the holders.
Based on interpretations by the staff of the SEC, as set forth in no-action
letters issued to other issuers, we believe that the exchange notes issued in
the exchange offer may be offered for resale, resold or
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otherwise transferred by each holder without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that:
- the holder is not a broker-dealer who acquires the exchange notes directly
from us for resale pursuant to Rule 144A under the Securities Act or any
other available exemption under the Securities Act;
- the holder is not our "affiliate", as that term is defined in Rule 405
under the Securities Act; and
- the exchange notes are acquired in the ordinary course of the holder's
business and the holder is not engaged in, and does not intend to engage
in, a distribution of the exchange notes and has no arrangement or
understanding with any person to participate in a distribution of the
exchange notes.
By tendering the initial notes in exchange for exchange notes, each holder,
other than a broker-dealer, will represent to us that:
- any exchange notes to be received by it will be acquired in the ordinary
course of its business;
- it is not engaged in, and does not intend to engage in, a distribution of
the exchange notes and has no arrangement or understanding to participate
in a distribution (within the meaning of the Securities Act) of the
exchange notes; and
- it is not our affiliate, as defined in Rule 405 under the Securities Act,
or if it is our affiliate, it will comply with the registration and
prospectus delivery requirements of the Securities Act, to the extent
applicable.
If, prior to consummation of the exchange offer, an initial purchaser holds
any notes acquired by it, which have, or are reasonably likely to be determined
to have, the status of an unsold allotment in the initial distribution, or any
other holder of notes is not entitled to participate in the exchange offer, we,
upon the request of that initial purchaser or any holder shall, simultaneously
with the delivery of the exchange notes in the exchange offer, issue and deliver
to that initial purchaser and any such holder, in exchange (the "private
exchange") for such notes held by that initial purchaser and any such holder, a
like principal amount of our debt securities that are identical in all material
respects to the exchange notes (the "private exchange notes") (and that are
issued pursuant to the same indentures as the exchange notes). The private
exchange notes will bear the same CUSIP number as the exchange notes.
If a holder of initial notes is engaged in or intends to engage in a
distribution of the exchange notes or has any arrangement or understanding with
respect to the distribution of the exchange notes to be acquired pursuant to the
exchange offer, the holder may not rely on the applicable interpretations of the
staff of the SEC and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Each broker-dealer that receives exchange notes for its own account
in the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such exchange notes. The letter of transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to have admitted that it is an "underwriter" within the
meaning of the Securities Act.
This prospectus, as it may be amended or supplemented from time to time, may
be used by a broker-dealer to satisfy their prospectus delivery obligations
under the Securities Act in connection with resales of exchange notes for their
own accounts. We have agreed that we will keep the registration statement of
which this prospectus is a part effective for a period of up to six months or
such earlier date as each participating broker-dealer shall have notified us in
writing that it has resold all exchange notes acquired in the exchange offer.
See "Plan of Distribution."
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As soon as practicable after the close of the exchange offer, we will:
- accept for exchange all registrable initial notes validly tendered and not
validly withdrawn as part of the exchange offer; and
- deliver to the trustee for cancellation all registrable initial notes so
accepted for exchange and cause the trustee to authenticate and deliver
promptly to each holder of registrable initial notes, exchange notes or
private exchange notes, as the case may be, equal in principal amount to
the securities of such holder so accepted for exchange.
In the event that:
a) we are not permitted to effect the exchange offer because the exchange
offer is not permitted by applicable law or SEC policy;
b) any holder of any private exchange notes so requests in writing to us
within 30 days after the consummation of the exchange offer; or
c) in the case of any holder that participates in the exchange offer, the
holder does not receive exchange notes on the date of the exchange that
may be sold without restriction under state and federal securities laws
(other than due solely to the status of such holder as our affiliate
within the meaning of the Securities Act):
then we shall:
1) use our best efforts to file a shelf registration statement with the SEC
on or before the 45(th) day after the occurrence of any one of the events
specified in the Registration Agreements and summarized above which gives
rise to our obligation to file a shelf registration statement; and
2) use our best efforts to cause the shelf registration statement to be
declared effective under the Securities Act on or before the 90th day
after the occurrence of any one of the events specified in the
Registration Agreements and summarized above which gives rise to our
obligation to file a shelf registration statement.
We will, in the event that a shelf registration statement is filed, provide
to each holder of the initial notes copies of the prospectus that is a part of
the shelf registration statement, notify each holder when the shelf registration
statement has become effective and take certain other actions as are required to
permit unrestricted resales of the exchange notes. A holder that sells initial
notes pursuant to the shelf registration statement will be required to be named
as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with its sales and will be
bound by the provisions of the Registration Agreements that are applicable to
that holder (including certain indemnification rights and obligations).
We will pay liquidated damages if:
- we fail to file the exchange offer registration statement by the 60th day
after the Issue Date;
- the exchange offer registration statement is not declared effective by the
SEC by the 150th day after the Issue Date;
- we fail to consummate the exchange offer by 180th day after the Issue
Date;
- the exchange offer registration statement is declared effective but
thereafter ceases to be effective or usable in connection with resales of
exchange notes in accordance with and during the periods specified in the
Registration Agreements;
- we fail to file a shelf registration statement by the 45th day following
the date of the occurrence of one of the events specified in the
Registration Agreements which gives rise to our obligation to file a shelf
registration statement;
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- the shelf registration statement is not declared effective by the SEC by
the 90th day following the initial shelf registration filing date; or
- the shelf registration statement is declared effective and thereafter
ceases to be effective or usable in connection with resales of Transfer
Restricted Securities (described below) in accordance with and during the
periods specified in the Registration Agreements.
Each event described above is a "Registration Default." The term "Transfer
Restricted Securities" means each initial note, or exchange note, until:
- the date on which the initial note has been exchanged by a person other
than a broker-dealer for a new note in the exchange offer;
- following the exchange by a broker-dealer in the exchange offer of an
initial note for an exchange note, the date on which the exchange note is
sold to a purchaser who receives from the broker-dealer on or prior to the
date of sale a copy of the exchange offer prospectus;
- the date on which the initial note has been effectively registered of the
Securities Act and disposed of under the shelf registration statement; or
- the date on which the initial note is publicly sold under Rule 144 of the
Securities Act.
If a Registration Default occurs, we will be obligated to pay, as liquidated
damages, additional interest on the initial notes equal to 0.25% per annum of
the aggregate principal amount of the initial notes held by such holder, during
the 30-day period immediately following the occurrence of the first Registration
Default. The amount of the additional interest will increase by an additional
0.25% per annum at the end of each subsequent 30-day period until all
Registration Defaults have been cured, up to a maximum aggregate amount of
additional interest equal to 1.50% per annum. Following the cure of all
Registration Defaults, the accrual of additional interest will cease.
Upon completion of the exchange offer, subject to certain exceptions,
holders of initial notes who do not exchange their initial notes for exchange
notes in the exchange offer will no longer be entitled to registration rights
and will not be able to offer or sell their initial notes, unless the initial
notes are subsequently registered under the Securities Act (which, subject to
certain limited exceptions, we will have no obligation to do), except pursuant
to an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. See "Risk Factors--If you do not participate
in the exchange offer, you will continue to be subject to transfer
restrictions."
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EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
The term "expiration date" shall mean June 12, 2000, unless the exchange
offer is extended if and as required by applicable law, in which case the term
"expiration date" shall mean the latest date to which the exchange offer is
extended.
In order to extend the expiration date, we will notify the exchange agent of
any extension by oral or written notice and may notify the holders of the
initial notes by mailing an announcement or by means of a press release or other
public announcement prior to 10:00 A.M., New York City time, on the next
business day after the previously scheduled expiration date.
We reserve the right to delay acceptance of any initial notes, to extend the
exchange offer or to terminate the exchange offer and not permit acceptance of
initial notes not previously accepted if any of the conditions set forth herein
under "--Conditions" shall have occurred and shall not have been waived by us
(if permitted to be waived), by giving oral or written notice of such delay,
extension or termination to the exchange agent. We also reserve the right to
amend the terms of the exchange offer in any manner deemed by us to be
advantageous to the holders of the initial notes. If any material change is made
to terms of the exchange offer, the exchange offer shall remain open for a
minimum of an additional five business days, if the exchange offer would
otherwise expire during such period. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice of the delay to the exchange agent. If the exchange offer is
amended in a manner determined by us to constitute a material change, we will
promptly disclose the amendment in a manner reasonably calculated to inform the
holders of the initial notes of the amendment including providing public
announcement, or giving oral or written notice to the holders of the initial
notes. A material change in the terms of the exchange offer could include, among
other things, a change in the timing of the exchange offer, a change in the
exchange agent, and other similar changes in the terms of the exchange offer.
Without limiting the manner in which we may choose to make a public
announcement of any delay, extension, amendment or termination of the exchange
offer, we will have no obligation to publish, advertise, or otherwise
communicate any such public announcement.
INTEREST ON THE EXCHANGE NOTES
The exchange notes will accrue interest payable in cash at 11 5/8% per
annum, from the later of:
- the last interest payment date on which interest was paid on the initial
notes surrendered in exchange therefor; or
- if the initial notes are surrendered for exchange on a date subsequent to
the record date for an interest payment date to occur on or after the date
of such exchange and as to which interest will be paid, the date of such
interest payment.
PROCEDURES FOR TENDERING
DOLLAR NOTES AND EURO NOTES NOT HELD THROUGH EUROCLEAR OR CLEARSTREAM,
LUXEMBOURG
To tender in the exchange offer, a holder of initial notes must complete,
sign and date the letter of transmittal, and mail or otherwise deliver the
letter of transmittal or facsimile, or an agent's message, together with the
initial notes and any other required documents, to the exchange agent prior to
5:00 p.m., New York City time, on the expiration date. In addition:
- certificates for the initial notes must be received by the exchange agent
along with the letter of transmittal;
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- a timely confirmation of a book-entry transfer (Book-Entry Confirmation)
of the initial notes, if such procedure is available, into the exchange
agent's account at The Depository Trust Company (the Book-Entry Transfer
Facility or DTC) pursuant to the procedure for book-entry transfer
described below, must be received by the exchange agent prior to the
expiration date; or
- the holder must comply with the guaranteed delivery procedures described
below.
THE METHOD OF DELIVERY OF INITIAL NOTES, LETTERS OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. INSTEAD OF
DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR
HAND-DELIVERY SERVICE. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO
LETTERS OF TRANSMITTAL OR INITIAL NOTES SHOULD BE SENT TO US.
Delivery of all documents must be made to the exchange agent at its address
set forth below. Holders of initial notes may also request their respective
brokers, dealers, commercial banks, trust companies or nominees to tender
initial notes for them.
The term "agent's message" means a message, transmitted by the Book-Entry
Transfer Facility to, and received by, the exchange agent and forming a part of
a Book-Entry Confirmation, which states that the Book-Entry Transfer Facility
has received an express acknowledgment from the participant in the Book-Entry
Transfer Facility tendering initial notes that are the subject of the Book-Entry
Confirmation that the participant has received and agrees to be bound by the
terms of the letter of transmittal, and that we may enforce this agreement
against the participant.
The tender by a holder of initial notes will constitute an agreement between
such holder and us in accordance with the terms and subject to the conditions
set forth herein and in the letter of transmittal.
Only a holder of initial notes may tender the initial notes in the exchange
offer. The term "holder" for this purpose means any person in whose name initial
notes are registered on our books or any other person who has obtained a
properly completed bond power from the registered holder.
EURO NOTES HELD THROUGH EUROCLEAR OR CLEARSTREAM, LUXEMBOURG
If you hold your position through Euroclear or Clearstream, Luxembourg, any
letter of transmittal for a tender for exchange with respect to the initial
notes held at Euroclear or Clearstream, Luxembourg must be completed by the
direct accountholder in Euroclear or Clearstream, Luxembourg. In lieu of
delivery of a letter of transmittal to the exchange agent, the direct
accountholder in Euroclear or Clearstream, Luxembourg may deliver to Euroclear
or Clearstream, Luxembourg, in accord with Euroclear's and Clearstream,
Luxembourg's standard procedures, a computer-generated message in which the
direct accountholder of the initial notes agrees to be bound by the terms of the
letter of transmittal.
In addition, the direct accountholder may either:
- instruct Euroclear and Clearstream, Luxembourg to accept the Exchange
Offer according to the normal procedures of Euroclear or Clearstream,
Luxembourg, who will arrange for the letter of transmittal to be completed
on their behalf;
- complete the letter of transmittal and deliver to Euroclear or
Clearstream, Luxembourg, as the case may be, by tested telex or according
to their normal procedures; or
- deliver irrevocable instructions to:
- block any attempt to transfer the initial notes tendered on or prior to
the settlement date and
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- debit its account on the expiration date in respect of all the initial
notes (or in respect of such lesser portion of the initial notes as
shall be accepted for exchange by us), upon receipt of the issuer's
instruction by the exchange agent to have such initial notes delivered
to the exchange agent for cancellation (but subject to the automatic
withdrawal of the relevant portion of such irrevocable instruction in
the event that the exchange offer is terminated by us or the letter of
transmittal is withdrawn or revised by the direct accountholder prior
to the expiration date, in each case as notified to Euroclear or
Clearstream, Luxembourg, as the case may be, by the exchange agent on
or before the settlement date), and an irrevocable authorization to
disclose the name of the direct accountholder and information about the
foregoing instructions.
If you submit a tender for exchange you must ensure that the instructions
transmitted through the Euroclear or Clearstream, Luxembourg, accountholder can
be allocated to its tender for exchange. Holders should transmit a separate set
of instructions for each letter of transmittal submitted, and the instructions
so transmitted must cover the entire aggregate principal amount tendered
pursuant to such letter of transmittal, notwithstanding any reduction in the
aggregate principal amount of initial notes accepted as a result of proration.
To the extent that instructions cannot be reconciled with the tender for
exchange, the tender for exchange may, at our discretion be deemed to have been
properly submitted.
If you intend to use the guaranteed delivery procedure, you must comply with
the guaranteed delivery procedures described below.
Neither we nor the exchange agent will be responsible for the communication
of tenders by holders to the acountholders in Euroclear or Clearstream,
Luxembourg through which they hold initial notes or by such accountholders to
the exchange agent, Euroclear or Clearstream, Luxembourg.
Holders will not be responsible for the payment of any fees or commissions
to the exchange agent for the initial notes.
Holders may contact the exchange agent for assistance in filling out and
delivering letters of transmittal and for additional copies of the exchange
offer materials.
To be tendered effectively, a letter of transmittal and other required
documents must be received by The Bank of New York, London Branch, at its
address set forth under "--Exchange Agent" prior to the expiration date.
If you do not withdraw your tender before the expiration date, it will
constitute an agreement between you and us in accordance with the terms and
conditions in this prospectus and in the letter of transmittal.
THE METHOD OF DELIVERY OF YOUR INITIAL NOTES, A LETTER OF TRANSMITTAL, AND
ALL OTHER REQUIRED DOCUMENTS TO BE DELIVERED TO THE EXCHANGE AGENT IS AT YOUR
ELECTION AND RISK. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT YOU USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT
TIME TO ENSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR INITIAL NOTES SHOULD BE SENT TO US. YOU MAY REQUEST
YOUR BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES, OR NOMINEES TO EFFECT
THESE TRANSACTIONS ON YOUR BEHALF.
INITIAL NOTES GENERALLY
Any beneficial owner whose initial notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on his or her behalf. If the beneficial owner wishes
to tender on his or her own behalf, such beneficial owner must, prior to
completing and executing the letter of transmittal and delivering his or her
initial notes, either make appropriate arrangements to register
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ownership of the initial notes in such owner's name or obtain a properly
completed bond power from the registered holder. The transfer of registered
ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or an "eligible guarantor" institution within the meaning of
Rule 17Ad-15 under the Securities Exchange Act of 1934 (each, an "Eligible
Institution"), unless the initial notes tendered pursuant thereto are tendered:
- by a registered holder (or by a participant in DTC whose name appears on a
security position listing as the owner) who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the letter of transmittal and the exchange notes are
being issued directly to such registered holder (or deposited into the
participant's account at DTC); or
- for the account of an Eligible Institution.
If the letter of transmittal is signed by the recordholder(s) of the initial
notes tendered thereby, the signature must correspond with the name(s) written
on the face of the initial notes without alteration, enlargement or any change
whatsoever. If the letter of transmittal is signed by a participant in DTC, the
signature must correspond with the name as it appears on the security position
listing as the holder of the initial notes.
If the letter of transmittal is signed by a person other than the registered
holder of any initial notes listed therein, those initial notes must be endorsed
or accompanied by bond powers and a proxy that authorize such person to tender
the initial notes on behalf of the registered holder, in each case as the name
of the registered holder or holders appear on the initial notes.
If the letter of transmittal or any initial notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by us, evidence
satisfactory to us of their authority to so act must be submitted with the
letter of transmittal.
A tender will be deemed to have been received as of the date when the
tendering holder's duly signed letter of transmittal accompanied by initial
notes, or a timely confirmation received of a book-entry transfer of initial
notes into the exchange agent's account at DTC with an agent's message, or a
notice of guaranteed delivery from an Eligible Institution is received by the
exchange agent. Issuances of exchange notes in exchange for initial notes
tendered pursuant to a notice of guaranteed delivery by an Eligible Institution
will be made only against delivery of the letter of transmittal and any other
required documents, and the tendered initial notes or a timely confirmation
received of a book-entry transfer of initial notes into the exchange agent's
account at DTC with the exchange agent.
All questions as to the validity, form, eligibility, time of receipt,
acceptance and withdrawal of the tendered initial notes will be determined by us
in our sole discretion, which determination will be final and binding. We
reserve the absolute right to reject any and all initial notes not properly
tendered or any initial notes which, if accepted, would, in our opinion or that
of our counsel, be unlawful. We also reserve the absolute right to waive any
conditions of the exchange offer or irregularities or defects in tender as to
particular initial notes. Our interpretation of the terms and conditions of the
exchange offer (including the instructions in the letter of transmittal) will be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of initial notes must be cured within such time as we
will determine. None of us, the exchange agent and any other person shall be
under any duty to give notification of defects or irregularities with respect to
tenders of initial notes, and none of them shall incur any liability for failure
to give such notification. Tenders of initial notes will not be deemed to have
been made until such irregularities have been cured or waived. Any initial notes
received by the exchange agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived
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will be returned without cost by the exchange agent to the tendering holders of
such initial notes, unless otherwise provided in the letter of transmittal, as
soon as practicable following the expiration date.
In addition, we reserve the right in our sole discretion, subject to the
provisions of the indentures, to:
- purchase or make offers for any initial notes that remain outstanding
subsequent to the expiration date or, as set forth under "--Expiration
Date; Extensions; Amendments; Termination," to terminate the exchange
offer in accordance with the terms of the Registration Agreements; and
- to the extent permitted by applicable law, purchase initial notes in the
open market, in privately negotiated transactions or otherwise.
The terms of any such purchases or offers could differ from the terms of the
exchange offer.
ACCEPTANCE OF INITIAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the exchange offer,
all initial notes properly tendered will be accepted, promptly after the
expiration date, and the exchange notes will be issued promptly after acceptance
of the initial notes. See "--Conditions" below. For purposes of the exchange
offer, initial notes shall be deemed to have been accepted as validly tendered
for exchange when, as and if we have given oral or written notice thereof to the
exchange agent.
In all cases, issuance of exchange notes for initial notes that are accepted
for exchange pursuant to the exchange offer will be made only after timely
receipt by the exchange agent of certificates for such initial notes, a timely
Book-Entry Confirmation of such initial notes into the exchange agent's account
at the Book-Entry Transfer Facility, a properly completed and duly executed
letter of transmittal or agent's message and all other required documents or
pursuant to Euroclear's or Clearstream, Luxembourg's customary procedures. If
any tendered initial notes are not accepted for any reason set forth in the
terms and conditions of the exchange offer or if initial notes are submitted for
a greater principal amount than the holder desires to exchange, such unaccepted
or non-exchanged initial notes will be returned without expense to the tendering
holder as promptly as practicable after the expiration or termination of the
exchange offer. In the case of initial notes tendered by the book-entry transfer
procedures described below, the non-exchanged initial notes will be credited to
an account maintained with the Book-Entry Transfer Facility.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the initial notes at the Book-Entry Transfer Facility for purposes of the
exchange offer within two business days after the date of this prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of initial notes by causing the
Book-Entry Transfer Facility to transfer such initial notes into the exchange
agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of initial notes may be effected through book-entry transfer into the
exchange agent's account at the Book-Entry Transfer Facility, an agent's message
or the letter of transmittal or facsimile thereof with any required signature
guarantees and any other required documents must, in any case, be transmitted to
and received by the exchange agent at one of the addresses set forth below under
"--Exchange Agent" on or prior to the expiration date or the guaranteed delivery
procedures described below must be complied with. DELIVERY OF DOCUMENTS TO DTC
DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. All references in the
prospectus to deposit of initial notes shall be deemed to include the Book-Entry
Transfer Facility's book-entry delivery method.
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GUARANTEED DELIVERY PROCEDURE
If a registered holder of the initial notes desires to tender the notes, and
the notes are not immediately available, or time will not permit the holder's
initial notes or other required documents to reach the exchange agent before the
expiration date, or the procedures for book-entry transfer cannot be completed
on a timely basis and an agent's message delivered, a tender may be effected if:
1. the tender is made through an Eligible Institution;
2. prior to the expiration date, the exchange agent receives from such
Eligible Institution a properly completed and duly executed letter of
transmittal or facsimile thereof and notice of guaranteed delivery,
substantially in the form provided by us, by facsimile transmission, mail
or hand delivery, setting forth the name and address of the holder of the
initial notes and the amount of initial notes tendered, stating that the
tender is being made thereby and guaranteeing that within five business
days after the expiration date, the certificates for all physically
tendered initial notes, in proper form for transfer, a Book-Entry
Confirmation, or a confirmation from Euroclear or Clearstream,
Luxembourg, as the case may be, and any other documents required by the
letter of transmittal will be deposited by the Eligible Institution with
the exchange agent;
3. the initial notes are held through Euroclear or Clearstream, Luxembourg,
Euroclear or Clearstream, Luxembourg, receives an electronic transmission
which contains the character by which the direct account holder
acknowledges the receipt of and agrees to be bound by the guaranteed
delivery herein; and
4. the certificates for all physically tendered initial notes, in proper
form for transfer, a Book-Entry Confirmation, or a confirmation from
Euroclear or Clearstream, Luxembourg, as the case may be, and all other
documents required by the letter of transmittal are received by the
exchange agent within five business days after the expiration date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of initial notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, or, if the initial
notes are held through Euroclear or Clearstream, Luxembourg, 5:00 p.m., London
time, on the expiration date.
For a withdrawal to be effective, a written or, for a Euroclear or
Clearstream, Luxembourg, participant, electronic transmission in accordance with
the standard operating procedures of Euroclear or Clearstream, Luxembourg,
notice of withdrawal must be received by the exchange agent prior to 5:00 p.m.,
New York City time or, if the initial notes are held through Euroclear or
Clearstream, Luxembourg, 5:00 p.m., London time, on the expiration date at the
address set forth below under "--Exchange Agent" and prior to acceptance for
exchange thereof by the Company. Any such notice of withdrawal must:
1 specify the name of the person having tendered the initial notes to be
withdrawn (the "Depositor");
2. identify the initial notes to be withdrawn, including, if applicable,
the registration number or numbers and total principal amount of such
initial notes;
3. where certificates for initial notes have been transmitted, specify the
name in which such certificates were registered, if different from the
holder;
4. be signed by the Depositor in the same manner as the original signature
on the letter of transmittal by which such initial notes were tendered
(including any required signature guarantees) or be accompanied by
documents of transfer sufficient to permit the trustee with respect to
the initial notes to register the transfer of such initial notes into the
name of the Depositor withdrawing the tender;
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5. specify the name in which any such initial notes are to be registered,
if different from that of the Depositor; and
6. if the initial notes have been tendered pursuant to the book-entry
procedures, specify the name and number of the participant's account at
DTC to be credited, if different than that of the Depositor.
All questions as to the validity, form and eligibility, time of receipt of
such notices will be determined by us, which determination shall be final and
binding on all parties. Any initial notes so withdrawn will be deemed not to
have been validly tendered for exchange for purposes of the exchange offer. Any
initial notes that have been tendered for exchange and that are not exchanged
for any reason will be returned to the holder thereof without cost to such
holder (or, in the case of initial notes tendered by book-entry transfer, such
initial notes will be credited to an account maintained with the Book-Entry
Transfer Facility, Euroclear or Clearstream, Luxembourg for the initial notes)
as soon as practicable after withdrawal, rejection of tender or termination of
the exchange offer. Properly withdrawn initial notes may be re-tendered by
following one of the procedures described under "--Procedures for Tendering" and
"--Book-Entry Transfer" above at any time on or prior to the expiration date.
CONDITIONS
Notwithstanding any other term of the exchange offer, initial notes will not
be required to be accepted for exchange, nor will exchange notes be issued in
exchange for any initial notes, and we may terminate or amend the exchange offer
as provided herein before the acceptance of such initial notes if:
1. because of any change in law, or applicable interpretations thereof by
the SEC, we determine that we are not permitted to effect the exchange
offer;
2. an action or proceeding is commenced or threatened that would materially
impair our ability to proceed with the exchange offer; or
3. not all government approvals that we deem necessary for the consummation
of the exchange offer have been received.
We have no obligation to, and will not knowingly, permit acceptance of
tenders of initial notes:
- from our affiliates within the meaning of Rule 405 under the Securities
Act;
- from any other holder or holders who are not eligible to participate in
the exchange offer under applicable law or interpretations by the SEC;
or
- if the exchange notes to be received by such holder or holders of
initial notes in the exchange offer, upon receipt, will not be tradable
by such holder without restriction under the Securities Act and the
Securities and Exchange Act of 1934 (the Exchange Act) and without
material restrictions under the "blue sky" or securities laws of
substantially all the states of the United States.
ACCOUNTING TREATMENT
The exchange notes will be recorded at the same carrying value as the
initial notes, as reflected in our accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by us. The costs of the exchange offer and the unamortized expenses
related to the issuance of the initial notes will be amortized over the term of
the exchange notes which is identical to the term of the initial notes.
29
<PAGE>
EXCHANGE AGENT
The Bank of New York has been appointed as exchange agent for the exchange
offer. Questions and requests for assistance and requests for additional copies
of this prospectus or of the letter of transmittal should be directed to the
exchange agent addressed as follows:
If tendering a Dollar Note or requesting information with respect to the
exchange of a Dollar Note:
By Mail, Overnight Mail or Courier:
The Bank of New York
101 Barclay Street
7 East
New York, New York 10286
ATTN: Mr. Duong Nguyen
Reorganization Department
Facsimile Transmission: (212) 815-6339
Confirm by Telephone: (212) 815-5788
If tendering a Euro Note that has been deposited with a custodian for, and
registered in the name of, The Depository Trust Company or requesting
information with respect to the exchange of a Euro Note deposited with The
Depository Trust Company:
By Mail, Hand Delivery or Overnight Carrier:
If tendering a Euro Note (except a Euro Note deposited with The Depository
Trust Company) or requesting information with respect to the exchange of a Euro
Note (except a Euro Note deposited with The Depository Trust Company):
By Mail, Hand Delivery or Overnight Carrier:
If a EuroNote is held through Euroclear or Clearstream, Luxembourg, or
requesting information with respect to the exchange of a Euro Note held through
Euroclear or Clearstream, Luxembourg,
By Mail, Hand Delivery or Overnight Carrier:
The Bank of New York
London branch
30 Cannon Street
London EC4M 6XH
United Kingdom
ATTN: Ms. Emma Wilkes
Reorganization Department
Fax: 44 20 7964 6399
Confirm by telephone: 44 20 7893 7235
FEES AND EXPENSES
We will pay the expenses of soliciting tenders under the exchange offer. The
principal solicitation for tenders pursuant to the exchange offer is being made
by mail; however, additional solicitations may be made by telegraph, telephone,
telecopy or in person by our officers and regular employees.
We will not make any payments to brokers, dealers or other persons
soliciting acceptances of the exchange offer. We, however, will pay the exchange
agent reasonable and customary fees for its services and will reimburse the
exchange agent for its reasonable out-of-pocket expenses in connection
therewith. We may also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of the prospectus, letters of transmittal and
30
<PAGE>
related documents to the beneficial owners of the initial notes, and in handling
or forwarding tenders for exchange.
The expenses to be incurred in connection with the exchange offer will be
paid by us, including fees and expenses of the exchange agent and trustee and
accounting, legal, printing and related fees and expenses.
We will pay all transfer taxes, if any, applicable to the exchange of
initial notes pursuant to the exchange offer. If, however:
- certificates representing exchange notes or initial notes for principal
amounts not tendered or accepted for exchange are to be delivered to,
or are to be registered or issued in the name of, any person other than
the registered holder of the initial notes tendered; or
- tendered initial notes are registered in the name of any person other
than the person signing the letter of transmittal; or
- a transfer tax is imposed for any reason other than the exchange of
initial notes pursuant to the exchange offer,
then the amount of any such transfer taxes, whether imposed on the
registered holder or any other persons, will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the letter of transmittal, the amount of the transfer taxes will
be billed directly to the tendering holder.
31
<PAGE>
USE OF PROCEEDS
There will be no cash proceeds payable to us from the issuance of the
exchange notes under the exchange offer. In consideration for issuing the
exchange notes as contemplated in this prospectus, we will receive initial notes
in like principal amount, the terms of which are identical in all material
respects to the exchange notes. The initial notes surrendered in exchange for
the exchange notes will be retired and canceled and cannot be reissued.
Accordingly, the issuance of the exchange notes will not result in any increase
in our indebtedness.
We intend to use the net proceeds which were received from the sale of the
initial notes (1) to fund expansions of the FLAG Telecom network, including a
trans-Pacific cable and other possible new cable systems, (2) to fund
development of wholesale and bundled product and service offerings and (3) for
working capital purposes.
We have not determined how much of the net proceeds we will use for each of
the purposes identified above. We are currently in the preliminary stages of
evaluating various network expansion projects, in addition to the trans-Pacific
cable system, and the development of additional product and service offerings.
We cannot assure you that we will proceed with any of those projects. In
addition, we anticipate that the proceeds from the offering of the initial notes
would not be sufficient to fully fund the network expansion projects and product
and service offering development initiatives that we are currently considering,
in the event we determine to proceed with one or more of those projects. We
expect to fund such projects, if undertaken, from a combination of sources,
which may include:
- the proceeds from the offering of the initial notes;
- the remaining proceeds from our initial public offering of common shares;
- presales of capacity;
- joint venture arrangements; and
- additional financing arrangements, such as general borrowings under credit
facilities, additional debt and equity issuances, vendor financings and
other borrowings on a project finance basis.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
32
<PAGE>
CAPITALIZATION
The following table sets forth the actual and adjusted capitalization of
FLAG Telecom at December 31, 1999. You should read this table in conjunction
with FLAG Telecom's consolidated financial statements and notes which are
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS FURTHER
ADJUSTED
AS ADJUSTED(1) FOR THE OFFERING
ACTUAL DECEMBER 31, 1999 OF THE INITIAL NOTES
---------- ----------------- --------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Cash............................................. $ 3,191 $ 612,770 $1,188,539
========== ========== ==========
Current portion of long-term obligations......... -- -- --
Long-term obligations, net:
8 1/4% Senior Notes due 2008................... $ 425,270 $ 425,270 $ 425,270
Notes of this offering......................... -- -- 576,769
Other long-term debt............................. 190,000 165,000 165,000
Minority interest................................ 154,621 -- --
Shareholders' equity:
Common shares 189,833,333 shares authorized;
69,709,935 issued and outstanding actual;
300,000,000 shares authorized; 133,930,056
shares issued and outstanding as adjusted.... 42 80 80
Other shareholders' equity..................... 313,848 1,103,206 1,103,206
Foreign currency translation adjustment........ 141 141 141
Accumulated deficit............................ (15,486) (15,486) (15,486)
---------- ---------- ----------
Total shareholders' equity....................... 298,545 1,087,941 1,087,941
---------- ---------- ----------
Total capitalization............................. $1,068,436 $1,678,211 $2,254,980
========== ========== ==========
</TABLE>
- ------------------------
(1) Gives effect to our initial public offering, the amendment to FLAG Limited's
existing credit facility and the January 4, 2000 exchange by Bell Atlantic
of its common shares in FLAG Limited for our common shares.
Note: Except for the events described in footnote (1) above and reflected in the
"As Adjusted" column, there has been no material change in our
capitalization since December 31, 1999.
33
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND NOTES)
The following table presents selected consolidated statements of operations and
balance sheet data of FLAG Telecom and FLAG Limited for the periods indicated.
The financial data for the periods ended December 31, 1996, 1997 and 1998 and
for the period from January 1, 1999 to February 26, 1999 has been derived from
FLAG Limited's audited consolidated financial statements included elsewhere in
this prospectus. The financial data as of December 31, 1999 and for the period
from incorporation to December 31, 1999 has been derived from FLAG Telecom's
audited consolidated financial statements included elsewhere in this prospectus.
You should read the selected consolidated financial information in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," FLAG Limited's consolidated financial statements and
FLAG Telecom's consolidated financial statements and notes thereto included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
FLAG LIMITED FLAG TELECOM
---------------------------------------------------------- ------------
PERIOD
FROM
JANUARY 1,
1999 TO PERIOD FROM
FEBRUARY INCORPORATION
TO
DECEMBER 31,
YEAR ENDED AS OF DECEMBER 31,
---------------------------------------------
26, 1999
1999
1995(1) 1996(2) 1997 1998
---------- ---------- -------- -------- ---------- ------------
(AS (AS
RESTATED) RESTATED)
STATEMENT OF OPERATIONS DATA:
Revenues:
Capacity sales, net of discounts............. $ -- $ -- $335,982 $182,935 $25,554 $ 94,603
Standby maintenance and restoration
revenue.................................... -- -- 4,011 25,313 4,458 37,827
-------- -------- -------- -------- ------- --------
-- -- 339,993 208,248 30,012 132,430
-------- -------- -------- -------- ------- --------
Sales and other operating expenses:
Cost of capacity sold........................ -- -- 196,190 101,288 8,294 41,349
Operations and maintenance(3)................ -- -- 4,600 37,931 5,114 26,201
Sales and marketing(3)....................... 10,253 316 6,598 10,680 637 11,096
General and administrative(3)(4)............. 10,179 12,345 30,339 21,674 2,870 22,901
Depreciation and amortization................ 381 121 276 844 233 11,133
-------- -------- -------- -------- ------- --------
20,813 12,782 238,003 172,417 17,148 112,680
-------- -------- -------- -------- ------- --------
Operating income (loss)...................... (20,813) (12,782) 101,990 35,831 12,864 19,750
-------- -------- -------- -------- ------- --------
Income from affiliate........................ -- -- -- -- -- 361
Interest expense............................. -- -- 20,193 61,128 9,758 45,062
Interest income.............................. 439 2,408 6,637 14,875 1,825 7,188
-------- -------- -------- -------- ------- --------
Income (loss) before minority interest and
income taxes............................... (20,374) (10,374) 88,434 (10,422) 4,931 (17,763)
Minority interest............................ -- -- -- -- -- (3,826)
Provision for income taxes................... -- -- 8,991 1,260 171 1,549
-------- -------- -------- -------- ------- --------
Net income (loss) before extraordinary
item....................................... (20,374) (10,374) 79,443 (11,682) 4,760 (15,486)
Extraordinary item(5)........................ -- -- -- (59,839) -- --
-------- -------- -------- -------- ------- --------
Net income (loss)............................ (20,374) (10,374) 79,443 (71,521) 4,760 (15,486)
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............................... $(22,161) $(24,784) $ 63,119 $(81,529) $ 4,760 $(15,486)
======== ======== ======== ======== ======= ========
Net income (loss) per share(7)
Class A.................................... $ (0.02) $ (0.02) $ 0.05 $ (0.07) $ -- $ --
Class B.................................... $ (0.30) $ (0.13) $ 0.14 $ (0.13) $ 0.01 $ (0.22)
Ratio of earnings to fixed charges........... -- -- 1.60x -- 1.51x --
Deficiency of earnings to fixed charges...... $(22,852) $(38,802) -- $(11,930) -- $(17,763)
</TABLE>
34
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND NOTES)
<TABLE>
<CAPTION>
FLAG LIMITED FLAG TELECOM
---------------------------------------------------------------------- ------------
AS OF DECEMBER 31, AS OF AS OF
------------------------------------------------------- FEBRUARY 26, DECEMBER 31,
1995(1) 1996(2) 1997 1998 1999 1999
------------- ------------- ---------- ---------- ------------ ------------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF CASH FLOW DATA:
Cash flow from operating activities....... (14,155) (12,103) 285,156 88,831 (23,104) 115,782
Cash flow from financing activities....... 84,206 342,011 245,677 97,818 21,230 17,598
Cash flow from investing activities....... (70,635) (329,886) (528,653) (186,144) 588 (132,127)
BALANCE SHEET DATA:
Current assets............................ $ 3,106 $ 3,759 $ 96,677 $ 76,114 $ 73,941 $ 98,716
Funds held by collateral trustee.......... 46,537 48,194 425,905 255,366 219,136 134,066
Construction in progress.................. 167,281 647,805 389 11,494 18,471 --
Capacity available for sale............... -- -- 1,208,948 1,095,099 1,086,435 774,366
Total assets.............................. 286,476 774,447 1,836,937 1,475,766 1,453,369 1,325,731
Current liabilities....................... 74,453 206,486 370,555 232,814 203,226 152,402
Senior notes.............................. -- -- -- 424,679 424,777 425,270
Long-term debt............................ 50,000 312,543 615,087 271,500 256,500 190,000
Minority interest......................... -- -- -- -- 154,817
Deferred revenue.......................... -- -- 176,221 84,415 83,570 100,724
Preferred Stock(])........................ 98,711 113,121 129,445 -- -- --
Shareholders' equity:
Common shares, $.0001 par value........... -- -- -- -- 64 42
Class A common shares, $.0001 par
value................................. 13 13 13 13 -- --
Class B common shares, $.0001 par
value................................. 9 22 57 57 -- --
Other shareholders' equity(6)............. 99,098 195,135 514,389 504,381 504,387 313,848
Foreign currency translation adjustment... -- -- -- (704) (526) 141
Retained earnings (accumulated deficit)... (42,499) (52,873) 26,570 (44,951) (40,191) (15,486)
Shareholders' equity...................... $ 56,621 $142,297 $ 541,029 $ 458,796 $ 463,734 $ 298,545
======== ======== ========== ========== ========== ==========
</TABLE>
- ------------------------------
(1) FLAG Limited restated its 1995 financial statements, as originally issued in
March 1997, to give effect to a $3.1 million discount on FLAG Limited's
issuance of 3,075,816 shares of preferred stock in 1995. For the year ended
December 31, 1995, this restatement had no effect on net loss, increased net
loss applicable to common shareholders by $0.07 million, and had no effect
on basic and diluted loss per common share for Class A and Class B.
(2) FLAG Limited restated its 1996 financial statements, as originally issued to
give effect to a $3.1 million discount on FLAG Limited's issuance of
3,075,816 shares of preferred stock in 1995. For the year ended
December 31, 1996, this restatement had no effect on net loss, but increased
net loss applicable to common shareholders by $0.55 million.
(3) Included in operating expenses for FLAG Telecom are the following non-cash
compensation expenses: $2.6 million in operations and maintenance expenses;
$1.5 million in sales and marketing expenses; $4.6 million in general and
administrative expenses.
(4) Included in general and administrative expenses for the years ended
December 31, 1996, 1997 and 1998 are program management expenses which
include reimbursements to Bell Atlantic Network Systems Company, a
shareholder of FLAG Telecom, for all costs and out-of-pocket expenses
incurred by Bell Atlantic Network Systems Company in performing project
management services for FLAG Limited. In addition, Bell Atlantic Network
Systems Company received a fee equal to 16% of payroll costs and of certain
outside contractor and consultant costs.
(5) In connection with FLAG Limited's issuance of 8 1/4% Senior Notes due 2008
and its entry into its existing credit facility, FLAG Limited recorded an
extraordinary loss of $59.8 million, representing the write-off of
unamortized deferred financing costs related to its old credit facility.
(6) In connection with FLAG Limited's issuance of 8 1/4% Senior Notes due 2008
and its entry into its existing credit facility, FLAG Limited redeemed its
then outstanding 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 other shareholders equity.
(7) The net loss per share in 1998, excluding the extraordinary item, was $0.02
and $0.03 for Class A and Class B shares, respectively.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THIS DISCUSSION IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO AND OTHER FINANCIAL INFORMATION INCLUDED
ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
VARIOUS FACTORS, INCLUDING THOSE SET FORTH IN "RISK FACTORS" AND THE MATTERS SET
FORTH IN THIS PROSPECTUS GENERALLY.
FLAG TELECOM GROUP OF COMPANIES
FLAG Telecom was formed on February 3, 1999 to be the parent company for the
FLAG Telecom group of companies. The principal companies which comprise the FLAG
Telecom group of companies are FLAG Limited, FLAG Atlantic Limited and FLAG
Wholesale Services Limited. Pursuant to a restructuring on February 26, 1999,
FLAG Limited became our 66% owned subsidiary and the other companies then
comprising the FLAG Telecom group of companies became our wholly owned
subsidiaries, other than FLAG Atlantic Limited in which we have a 50% ownership
interest. On January 4, 2000, we acquired the remaining 34% ownership interest
in FLAG Limited and FLAG Limited became our wholly owned subsidiary. The
financial information presented in this prospectus comprises the consolidated
results of FLAG Limited for the accounting periods to February 26, 1999 and the
FLAG Telecom consolidated results for the period from incorporation to
December 31, 1999. On February 16, 2000 FLAG Telecom completed an initial public
offering of common shares. On March 17, 2000 FLAG Telecom completed the offering
of the initial notes.
REVENUE RECOGNITION
Our primary business to date has been to sell capacity on the FLAG
Europe-Asia cable system. The primary method by which we have sold capacity has
been through agreements providing for an outright sale of, or the sale of a
right of use of, the capacity for the lifetime of this system. Each agreement
provides that, in return for payment of the purchase price, the customer
receives beneficial ownership of the relevant capacity. In addition, the
customer becomes responsible for paying the agreed maintenance charges.
We have recognized revenues from capacity sales on the FLAG Europe-Asia
cable system upon the date the risks and rewards of ownership of the relevant
capacity are transferred to the customer, which is the date the capacity is made
available for activation and the customer becomes responsible for maintenance
charges. The Financial Accounting Standards Board issued a recent pronouncement
(FASB Interpretation No. 43), as a result of which sales of fiber-optic cable
capacity after June 30, 1999 are to be accounted for in the same manner as sales
of real estate with property improvements or integral equipment. The application
of this pronouncement will result in a deferral of revenue recognition for US
GAAP purposes for certain capacity sale contracts that do not satisfy the
necessary requirements of FASB Interpretation No. 43. This accounting treatment
will not affect our cash flows from customers, who will continue to be liable
for payments in accordance with the signed agreements.
As a result of extending our range of products and services, we expect the
greater part of our future sales to be under agreements which will require us to
recognize revenues over the relevant term of these agreements. To the extent
that we enter into contracts in the future that satisfy the requirements for
sales type lease accounting, we will recognize revenues without deferral.
We recognize revenues from providing maintenance and restoration services in
the period in which we provide these services.
We have previously considered revenues from operating lease transactions to
be incidental. We have therefore recorded these revenues as reductions of the
capacity available for sale. However, as noted
36
<PAGE>
above, the magnitude of these transactions has increased such that we will now
recognize revenues from lease transactions over the term of the leases.
Payments due from purchasers of capacity are generally payable within
30 days; however, we have receivables outstanding greater than 30 days. We have
established an allowance for doubtful accounts based on historical industry
experience with potential uncollectible receivables and our expectations as to
payments. As of December 31, 1999, we had an allowance of $6.8 million which
principally relates to potential uncollectible amounts due from two carriers.
All revenues from capacity sales agreements and billings of standby
maintenance and restoration services are payable in U.S. dollars. All contracts
for the provision by third parties of restoration are invoiced to us in U.S.
dollars. Some vendor contracts for the provision to the FLAG Europe-Asia cable
system of operations and maintenance services are payable in Japanese Yen,
British Pounds, French Francs and Singapore Dollars in addition to U.S. dollars.
Whenever deemed appropriate, we have hedged, and may continue to hedge, our
exposure to foreign currency movements.
ACCOUNTING FOR THE CAPITAL COSTS OF THE FLAG TELECOM NETWORK
We capitalized direct and indirect expenditures incurred in connection with
the construction of the FLAG Telecom network. When a system was ready for
commercial service we transferred such expenditures to capacity available for
sale and charged a proportion of these expenditures to cost of sales as we
recognized revenues from sales of capacity. In the case of the FLAG Europe-Asia
cable system, the amount charged as cost of sales was a function of the
allocated costs of construction for each segment and management's estimate of
revenues from future capacity sales. As a result of the application of FASB
Interpretation No. 43, sales on certain segments of the FLAG Europe-Asia cable
system will not be able to satisfy the requirements for sales type lease
accounting. The costs of these segments have been reclassified at July 1, 1999
and during the six months ended December 31, 1999 from capacity available for
sale to fixed assets and are being depreciated over their remaining useful life.
As a result of extending our range of products and services, we expect the
greater part of our future revenue to be under agreements that will be accounted
for as operating leases or service contracts and will require us to recognize
revenues over the relevant term of the agreements. We have therefore
reclassified the remaining cost of the FLAG Europe-Asia cable from capacity
available for sale to fixed assets in the first quarter of 2000. This cost will
be depreciated over the remaining estimated economic life of the system. The
construction costs of the FLAG Atlantic-1 cable system will be amortized over
its economic life from the date it is ready for commercial service or will be
written off as cost of sales against revenues from any transactions whose terms
satisfy the requirements of sales-type lease accounting. Capital costs
associated with development of the other elements of the FLAG Telecom network
will be amortized over their respective economic lives.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
ADJUSTED CONSOLIDATED RESULTS
The table below shows the significant income statement amounts, in
thousands, for the year ended December 31, 1999, being a combination of the
results of FLAG Limited for the period from January 1, 1999 to February 26, 1999
and the results of FLAG Telecom for the period from incorporation to
December 31, 1999. These results have been adjusted to eliminate minority
interests in order to enable a
37
<PAGE>
better comparison with the results for the year ended December 31, 1998. These
adjustments will not be reflected in our current and future financial
statements.
<TABLE>
<CAPTION>
ADJUSTED
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
Revenue:
Capacity sales.............................................. $120,157
Standby maintenance and restoration revenues................ 42,285
--------
............................................................ $162,442
Sales and other operating costs:
Cost of capacity sold....................................... $ 49,643
Operations and maintenance (including non-cash compensation
expense of $2,647)........................................ 31,315
Sales and marketing (including non-cash compensation expense
of $1,534)................................................ 11,733
General and administrative (including non-cash compensation
expense of $4,620)........................................ 25,771
Depreciation and amortization............................... 11,366
Interest expense............................................ 54,820
Interest income............................................. 9,013
Income from Affiliates...................................... 361
--------
Loss before income taxes.................................... $(12,832)
Provision for taxes......................................... 1,720
EBITDA...................................................... $102,423
Adjusted EBITDA............................................. $128,112
</TABLE>
REVENUES
We recognized total revenue during the year ended December 31, 1999 of
$162.4 million compared to $208.2 million in total revenue for the year ended
December 31, 1998.
We recognized revenue from the sale of capacity of $120.2 million for the
year ended December 31, 1999 compared to $182.9 million during the year ended
December 31, 1998. The reduction in revenue is partly attributable to our
deferring the recognition of some revenues to subsequent periods as the result
of our adoption of FASB Interpretation No. 43 with effect from July 1, 1999 and
partly as a result of accounting revenues in 1998 including certain non-cash
items. As of December 31, 1999, we had entered into sales transactions with over
90 international telecommunication carriers and internet service providers
compared to 80 as of December 31, 1998.
We recognized revenue from standby maintenance and restoration services of
$42.3 million for the year ended December 31, 1999 compared to $25.3 million for
the year ended December 31, 1998. The increase of $17.0 million for the year
ended December 31, 1999 is primarily a result of the increase in cumulative
capacity sales on the FLAG Europe-Asia cable system combined with an increase in
revenue from restoration services. Restoration services refer to receipts from
third party cable systems in respect of traffic routed on the FLAG Europe-Asia
cable system during periods when these cable systems are temporarily out of
service.
OPERATING EXPENSES
For the year ended December 31, 1999, we recorded $49.6 million in respect
of the cost of capacity sold compared to $101.3 million recorded in the year
ended December 31, 1998. The decrease in the cost of capacity sold in the year
ended December 31, 1999 is primarily a result of lower revenue recognized from
capacity sales combined with sales of capacity on segments having a lower cost
of sales percentage, computed as described above for that segment, compared to
the cost of sales for the segments on which capacity was sold during the year
ended December 31, 1998.
38
<PAGE>
During the year ended December 31, 1999, we incurred $31.3 million in
operations and maintenance costs compared to $37.9 million for the year ended
December 31, 1998. Operations and maintenance costs relate primarily to the
provision of standby maintenance under maintenance zone agreements as well as
salaries and overhead expenses directly associated with operations and
maintenance activities. The decrease in operations and maintenance costs is
largely a result of the termination of the program management services agreement
with Bell Atlantic Network Systems in May 1998 combined with lower costs of some
maintenance zone agreements.
During the year ended December 31, 1999, we incurred $11.7 million in sales
and marketing costs compared to $10.7 million incurred during the year ended
December 31, 1998. Sales and marketing costs are comprised of all sales and
marketing activities that are directly undertaken by us.
During the year ended December 31, 1999, we incurred $25.8 million of
general and administrative expenses compared to $21.7 million during the year
ended December 31, 1998. The increase in general and administrative costs in the
year ended December 31, 1999, is largely due to non-cash compensation expense in
the amount of $4.6 million.
Costs for the year ended December 31, 1999 noted above include charges for
non-cash compensation expense in respect of awards under our long-term incentive
plan. These charges are required under US accounting standards and are purely
accounting charges having no effect on cash flows.
Depreciation expense for the year ended December 31, 1999 was $11.4 million
compared to $0.8 million for the year ended December 31, 1998. The increase of
$10.6 million is primarily a result of us adopting FASB Interpretation No. 43
which is effective from July 1, 1999, pursuant to which the cost of part of the
FLAG Europe-Asia cable system which does not satisfy the requirements of sales
type lease accounting is being depreciated over its remaining economic life.
Prior to July 1, 1999, the cost of the FLAG Europe-Asia cable system was wholly
accounted for as capacity available for sale for which no depreciation was
recorded but which was expensed as cost of capacity sold as revenues were
recognized.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense on borrowings decreased from $61.1 million for the year
ended December 31, 1998 to $54.8 million for the year ended December 31, 1999.
The decrease in interest expense of $6.3 million is attributable to a reduction
in long-term debt facility from $271.5 million as at December 31, 1998 to
$190.0 million as at December 31, 1999 combined with a $1.8 million reduction in
amortized financing costs.
During the year ended December 31, 1999, we capitalized $1.3 million of
interest costs as a component of construction in progress.
We earned interest income of $9.0 million during the year ended
December 31, 1999 compared to $14.9 million earned during the year ended
December 31, 1998. Interest was earned on cash balances and short-term
investments held by the collateral trustee for FLAG Limited's credit facility or
in escrow arising from ongoing business operations.
PROVISION FOR TAXES
The provision for taxes was $1.7 million for the year ended December 31,
1999 compared to $1.3 million for the year ended December 31, 1998. The tax
provisions for these periods consist of taxes on income derived from capacity
sales and standby maintenance revenue from customers in certain jurisdictions
along the FLAG Europe-Asia cable system route where we are deemed to have a
taxable presence or are 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, we have received an undertaking from the
Bermuda Government exempting us from all such taxes until March 28, 2016.
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EXTRAORDINARY ITEM
In connection with a refinancing that took place on January 30, 1998, we
recorded an extraordinary loss of $59.8 million in the statement operations for
the year ended December 31, 1998. The loss on refinancing represents the
write-off of unamortized deferred financing costs related to FLAG Limited's
prior credit facility. No refinancing occurred in the year ended December 31,
1999.
In addition, in connection with the refinancing in January 1998, FLAG
Limited redeemed its outstanding preferred stock at a redemption price of 105%
of the liquidation preference. We reflected the $8.5 million excess of the
redemption value over the carrying value of the preferred stock on the date of
the redemption as a decrease in additional paid-in capital in the year ended
December 31, 1998. There were no costs of this nature recorded in the year ended
December 31, 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997
REVENUES
We recognized total revenue during the year ended December 31, 1998 of
$208.2 million compared to $340.0 million in total revenue for the year ended
December 31, 1997.
We recognized revenue from the sale of capacity of $182.9 million for the
year ended December 31, 1998 compared to $336.0 million during the period from
October 8, 1997, the provisional system acceptance date of the FLAG Europe-Asia
cable system, to December 31, 1997. The decrease in revenue recognized from
capacity sales of $153.1 million from the period from provisional system
acceptance 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
provisional system acceptance of which we recognized $316 million as revenue. As
of December 31, 1998, we had entered into sales transactions with 80
international telecommunication carriers compared to 66 as of December 31, 1997.
We recognized revenue from standby maintenance fees of $25.3 million for the
year ended December 31, 1998 compared to $4.0 million for the period from
provisional system acceptance to December 31, 1997. The increase in standby
maintenance revenue of $21.3 million in 1998 is due to our recognizing
12 months of standby maintenance revenue in 1998 compared to only three months
in 1997 as a result of our commencing operations in October 1997. We 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. We had no revenues in respect of
restoration services in 1997.
OPERATING EXPENSES
For the year ended December 31, 1998, we recorded $101.3 million in respect
of the cost of capacity sold compared to $196.2 million recorded in 1997. The
gross profit margin on capacity sales of 44.60% for the year ended December 31,
1998 compares to a gross profit margin of 41.60% realized in the period from
provisional system acceptance 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 profit margin experienced in 1997 compared to 1998.
In connection with certain sales, we entered into price protection
arrangements entitling the relevant customers to capacity credits if we lower
our list prices prior to December 31, 1999. For periods during which we lower
our prices, we record a provision for cost of sales based on the estimated cost
value of the additional capacity granted. No adjustment was made to our list
prices in 1998, and accordingly no such provision was recorded in the year ended
December 31, 1998. Based on declines in our list prices through December 31,
1997, we 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.
40
<PAGE>
During the year ended December 31, 1998, we incurred $37.9 million in
operations and maintenance costs compared to $4.6 million for the period from
provisional system acceptance to December 31, 1997. Operations and maintenance
expenses relate primarily to the provision of standby maintenance under
maintenance zone agreements, as well as salaries and overhead directly
associated with operations and maintenance activities. Costs recognized in 1997
represent the portion of standby operations and maintenance expenses incurred
from provisional system acceptance to December 31, 1997. We did not incur
maintenance costs during construction. Maintenance zone agreements are
cooperative standby agreements among all cable operators in major ocean areas to
share the expense of assuring constant availability of cable ships capable of
providing repairs to undersea cables. We entered into four zone agreements. We
have also entered into a bilateral agreement for maintenance of the area from
the Red Sea to a point near the southern tip of India to facilitate more rapid
repairs than would be possible under one of our maintenance zone agreements.
During the year ended December 31, 1998, we recognized $10.7 million in
sales and marketing costs compared to $6.6 million recognized during the period
from provisional system acceptance to December 31, 1997. Sales and marketing
costs comprise sales commissions due under agreements with our suppliers and
Bell Atlantic Network Systems, plus costs associated with sales and marketing
activities.
In May 1998, we and Bell Atlantic Network Systems agreed to terminate a
Marketing Services Agreement which appointed them as FLAG Limited's exclusive
sales agent throughout the world. We expense sales commissions that we incurred
under the marketing and services agreement prior to its termination at the time
we recognize the related revenue.
General and administrative expenses decreased from $30.3 million for the
year ended December 31, 1997 to $21.7 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 our transition
from a development stage company to an operating company.
INTEREST EXPENSE AND INTEREST INCOME
During the year ended December 31, 1998 we incurred $61.1 million in
interest expense on borrowings compared to $20.2 million incurred during the
period from provisional system acceptance of the FLAG Europe-Asia cable system
to December 31, 1997. Prior to provisional system acceptance, we capitalized
interest costs as a component of construction in progress. We incurred
$38.1 million in interest costs in 1997 prior to provisional system acceptance,
out of total interest payments that year of $58.3 million.
We earned interest income of $14.9 million during the year ended
December 31, 1998 compared to $6.6 million earned during the year December 31,
1997. In 1998, we earned interest on cash balances and short-term investments
held by the collateral trustee for FLAG Limited's existing credit facility or in
escrow arising from ongoing business operations. 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 provisional system acceptance
of the FLAG Europe-Asia cable system 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 Europe-Asia cable system route where we are deemed to have a taxable
presence or are 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, we have received an undertaking from the Bermuda
Government exempting us from all such taxes until March 28, 2016. The decrease
in tax expense of $7.7 million is due to
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a greater proportion of sales recorded in 1998 to customers in jurisdictions
where we do not have a taxable presence.
EXTRAORDINARY ITEMS
In connection with the refinancing that took place on January 30, 1998, we
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 our initial project refinancing.
In addition, in connection with the refinancing of FLAG Limited's original
credit facility, we redeemed preferred shares at a redemption price of 105% of
the liquidation preference. We reflected the excess of the redemption value over
the carrying value of the preferred shares on the date of the redemption of
$8.5 million as a decrease in additional paid-in capital.
NET LOSS AND NET LOSS APPLICABLE TO COMMON SHAREHOLDERS
For the year ended December 31, 1998, we 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 primarily
attributable to the results for the year ending December 31, 1997, including
$316 million of revenue recognized from sales of capacity entered into prior to
our commencing operations resulting in 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 as discussed above offset by
an $8.2 million increase in interest income and a $7.7 million reduction in tax
expense further contributed to the net loss for the year ended December 31,
1998.
The net loss applicable to common shareholders for the year ended
December 31, 1998 was $81.5 million compared to 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 FLAG Limited's 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 FLAG Limited's 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.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations to date through a combination of equity
contributions, shareholder advances, bank debt, the proceeds of a debt offering
and the proceeds of an initial public offering of our common shares. On
January 30, 1998, FLAG Limited completed a refinancing which resulted in the
repayment of all outstanding borrowings under its then existing credit facility
and the redemption of its Series A preferred shares. The refinancing consisted
of $320.0 million of bank loans (and a revolving credit facility of
$50 million) maturing January 30, 2005 and $430 million of 8 1/4% Senior Notes
maturing January 30, 2008.
Subsequent to the refinancing, FLAG Limited made principal prepayments to
reduce the bank loans to approximately $175 million. On February 16, 2000, FLAG
Limited repaid a further $25 million using proceeds of the initial public
offering of our common shares, and FLAG Limited amended its existing credit
facilities to consist of a $150 million six-year term loan facility (all of
which is outstanding) and a $10 million revolving credit facility (none of which
is outstanding). Dresdner Kleinwort Benson and Barclays Capital acted as joint
lead arrangers. These facilities bear interest at a rate of 225 basis points
over LIBOR for the first six months and thereafter at a rate of between 150 and
250 basis points over LIBOR, depending on the credit rating of the 8 1/4% Senior
Notes of FLAG Limited. The facilities are secured by a pledge by us of all of
the capital stock of FLAG Limited and by assignment of FLAG
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Limited's contracts and a security interest in its bank accounts and intangible
property. In connection with this amendment, FLAG Limited paid fees and expenses
to the joint lead arrangers totaling approximately $3.5 million.
At the end of March 1998, we entered into two interest rate swap agreements
to manage our exposure to interest rate fluctuations on FLAG Limited's credit
facilities. Under the swap agreements, we pay a fixed rate of 5.6% on a notional
amount of $60 million and a fixed rate of 5.79% on a notional amount of
$100 million and the swap counterparty pays the floating rate based on LIBOR.
One swap agreement terminated in January 2000 and the other swap agreement
terminates in July 2000, unless extended for an additional six months at the
option of the swap counterparty. Under the bank loan facility as now in effect,
we are obligated to hedge interest rate risk to the extent of 50% of the
outstanding principal amount of the loans for three years. We recognize the net
cash amount received or paid on interest rate hedging instruments as an
adjustment to interest cost on the related debt.
FLAG Atlantic Limited has financed the $1.1 billion in construction costs
for the FLAG Atlantic-1 cable system through a $600 million bank financing,
$100 million in capital contributions from each of its shareholders and presales
in excess of $750 million. The financing consists of a $575 million
construction/ term loan facility and a $25 million revolving credit facility.
These facilities have a term of 7.5 years. FLAG Atlantic Limited does not
anticipate that it will need to draw down the full amount available under the
bank financing.
The loans under these facilities bear interest at LIBOR plus 125 basis
points for that portion of the loans (not to exceed 50% of the outstanding
loans) which are backed by investment grade receivables and LIBOR plus 300 basis
points for the balance of the loans. Commitment fees accrue on the undrawn
balance of the loans at between 37.5 basis points and 75 basis points.
FLAG Atlantic Limited's bank facility is secured by an assignment of all of
FLAG Atlantic Limited's assets, a pledge of all of the stock in FLAG Atlantic
Limited and a commitment by each of its shareholders to contribute $100 million
in equity. The loan agreement contains customary provisions for non-recourse
project financings regarding restrictions on additional indebtedness, the
payment of dividends and other distributions, additional investments and sales
of assets.
Each of the FLAG Limited credit facilities, the FLAG Atlantic Limited credit
facilities and the FLAG Limited 8 1/4% Notes due 2008 contain covenants that
could affect our liquidity, including our ability to access capital and our
ability to service our debt. See "Description of Existing Indebtedness."
On February 16, 2000 we completed an initial public offering of our common
shares. We received approximately $634.6 million in net proceeds from that
offering. On March 17, 2000 we completed the private placement of the initial
notes. We received approximately $576 million in net proceeds from that
offering. We intend to finance future operations through proceeds from our
initial public offering and this offering, revenues generated from the sale or
lease of capacity, revenues generated from our wholesale product offerings and
bundled services, revenues from billings of standby maintenance charges and
restoration services, investment income on cash and investment balances,
borrowings under our existing credit facilities and vendor financing. FLAG
Telecom or its subsidiaries may also make additional debt or equity offerings,
subject to market conditions.
We recently announced plans for the construction of a new trans-Pacific
cable project. We expect the costs required to complete the project may exceed
$2 billion. Funding for the project would include proceeds from the initial note
offering and the remaining proceeds from our initial public offering, project
and, we anticipate, other debt financings and presales. We recently announced
the lead banks who have agreed to provide underwritten loan financing to help
fund the construction of the project. We are also evaluating various other
projects and may need additional funds in order to proceed. We cannot assure you
that the trans-Pacific cable project or any of the other projects that we are
considering will proceed or, if we do proceed with any of these projects, that
we will complete them. The impact of the trans-Pacific cable
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project, or any of the other projects that we are considering, on our liquidity
and financing needs will depend on the scope of the project, the actual
arrangements we make for financing and ownership and the timetable for the
project.
As of December 31, 1999, we had a working capital deficit of $53.7 million.
The working capital deficit was primarily a result of the current accounts
payable to the contractors for the FLAG Europe-Asia cable system 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
as of December 31, 1999 was $115.8 million and $132.1 million, respectively. As
of December 31, 1999, cash on deposit with the collateral trustee or in escrow
had decreased to $134.1 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 operations and used in investing activities during
the year ended December 31, 1998 was $88.8 million and $186.1 million,
respectively.
ASSETS
Our major asset is the telecommunications capacity available for sale on the
FLAG Europe-Asia cable system of $774 million and related fixed assets of
$300 million. As a result of the application of FASB Interpretation No. 43 noted
above, sales on certain parts of the FLAG Europe-Asia cable system will not be
able to satisfy the requirements for sales type lease accounting. Accordingly
the costs of these parts of the system have been reclassified with effect from
July 1, 1999 from capacity available for sale to fixed assets and are being
depreciated over their remaining economic life. As noted earlier, we expect the
greater part of our future sales will preclude the application of sales type
lease accounting. Accordingly we have reclassified the remaining cost of the
FLAG Europe-Asia cable from capacity available for sale to fixed assets during
the first quarter of 2000. Our other fixed assets consist primarily of office
furniture, leasehold improvements, computer equipment and motor vehicles.
INFLATION
In management's view, inflation in operating, maintenance and general and
administrative costs will not have a material effect on our financial position
over the long term.
IMPACT OF YEAR 2000
Some computer systems or software used by many companies may be unable to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by some companies in a wide variety of industries will
produce some erroneous results or fail unless they have been modified or
upgraded to process date information correctly. Prior to December 31, 1999, we
conducted an inventory and issue assessment of the Year 2000 issue for our
computer systems, communications equipment and other potentially date-sensitive
equipment to identify the systems and equipment, if any, that could be affected
by the Year 2000 issue. We obtained certificates of Year 2000 compliance from
our major suppliers for the equipment used in our systems. The live FLAG
Europe-Asia cable system certification was achieved in the third quarter of
1999.
As of the date of this prospectus, we have not encountered Year 2000 related
problems. We continue to monitor developments in this area. In assessing our
exposure to Year 2000 issues, we believe our biggest risks lie with our landing
parties, customers and major suppliers. If these landing parties, customers or
major suppliers experience Year 2000 related problems, we could experience
unanticipated expenses and delays, including delays in our ability to conduct
normal business operations and sell our products and services. We believe,
however, that in the most likely worst case scenario, the effects of Year 2000
issues on
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our operations would be brief and small relative to our overall operations. Our
costs to date associated with the Year 2000 issue have not exceeded $1 million,
which we have paid out of internally generated funds. If our landing parties,
customers or major suppliers experience Year 2000 related problems, we will put
in place our contingency plan to address operations and financial disruptions to
FLAG Telecom which could be caused by their non-compliance. This plan includes
the following components:
- An increase in staffing at the FLAG Telecom network operations centers;
- Requesting that our landing parties staff the landing stations; and
- Having a task force ready to support both the FLAG Telecom network
operations centers and our landing parties in the landing stations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
CURRENCY RISK. We do not believe that we are 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 U.S. dollars. All contracts for the provision by third
parties of restoration are invoiced to us in U.S. dollars. Some vendor contracts
for the provision to the FLAG Europe-Asia cable system of operations and
maintenance services and local operating expenses of our subsidiary companies
are payable in currencies other than U.S. dollars. Management believes that
these exposures are not material to our financial position. Whenever deemed
appropriate, we may hedge our exposure to foreign currency movements.
INTEREST RATE RISK. We are exposed to interest rate risk in our financing
instruments. Our long-term finance is provided by fixed rate senior notes and
floating rate bank debt. We use derivative financial instruments for the purpose
of reducing our exposure to fluctuations in interest rates. We do not utilize
derivative financial instruments for trading or other speculative purposes. The
counterparties to these instruments are major financial institutions with high
credit quality. We are exposed to credit loss in the event of nonperformance by
these counterparties.
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LONG-TERM DEBT AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
PRINCIPAL AMOUNT FAIR VALUE FLAG OPTION
TYPE OF INSTRUMENT PAYMENTS DUE MATURITY DATE INTEREST RATE ($, MILLION) ($, MILLION) TO REDEEM
- ------------------ ------------- ------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
8 1/4% Senior Notes... Semi-annually January 2008 Fixed 8 1/4% 430.0 395.6 Any time
after
January 2003
FLAG Limited credit
facility(1)......... Quarterly January 2005 Floating 190.0 190.0 At any time
three-month
LIBOR +
190 to 212.5
basis points
</TABLE>
- ------------------------
(1) The credit facility was amended and restated on February 16, 2000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
INTEREST RATE SWAPS AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
NOTIONAL COUNTERPARTY'S
TYPE OF PAYMENTS RATE RATE AMOUNT FAIR VALUE OPTION TO
INSTRUMENT DUE MATURITY DATE PAYABLE RECEIVABLE ($, MILLION) ($, MILLION) EXTEND UNTIL
- ---------- --------- --------------------- -------- ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Pay fixed, receive
floating........... Quarterly January 2000(1) 5.6% three-month 60.0 0.1 January 2001
LIBOR
Pay fixed, receive
floating........... Quarterly July 2000 5.79% three-month 100.0 0.3 January 2001
LIBOR
</TABLE>
The three-month LIBOR rate at December 31, 1999 was 6.00125%.
- ------------------------
(1) This interest rate swap was not extended.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Interpretation
No. 43, "Real Estate Sales, an interpretation of FASB Statement No. 66." This
Interpretation clarifies that sales of real estate with property improvements or
integral equipment that cannot be removed and used separately from the real
estate without incurring significant costs should be accounted for under FASB
Statement No. 66, "Accounting for Sales of Real Estate" ("FAS 66"). The
provisions of this Interpretation are effective for all sales of real estate
with property improvements or integral equipment entered into after June 30,
1999. The application of this statement resulted in a deferral of revenue for
certain capacity sales contracts that do not satisfy the requirements of FAS 66.
We expect the greater part of our future revenues will be under agreements that
will require us to recognize revenues over the term of the agreements. However,
to the extent that we enter into contracts in the future that will satisfy the
requirements for sales type lease accounting, we will recognize revenues without
deferral.
The interpretation and application of FASB Interpretation No. 43 and also
the accounting for sales of capacity are evolving within the telecom industry. A
number of questions and issues are being taken to the accounting standard
setting boards and different accounting treatments may ultimately be approved,
which may change the timing and methods of the recognition of revenues and the
related costs. We expect further clarification over the next few months but any
changes to the accounting treatment will have no impact on our cash flows.
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BUSINESS
GENERAL
We are a global carriers' carrier that develops and offers a broad range of
innovative telecommunications products and services to licensed international
carriers, Internet service providers and other telecommunications companies. Our
network, the FLAG Telecom network, is currently comprised of (1) the FLAG
Europe-Asia cable system, which is the world's longest independent,
privately-owned digital fiberoptic undersea cable system, (2) the FLAG
Atlantic-1 cable system, which we are currently constructing and, when
completed, will connect London and Paris to New York and (3) terrestrial
connections between our landing stations in the United Kingdom and Spain to the
city centers of London and Madrid and intra-European connections from London to
Paris, Brussels, Frankfurt, Amsterdam, Berlin, Zurich, Milan and several other
major European metropolitan areas, which we have acquired the right to obtain
through contractual arrangements with other facilities-based bandwidth capacity
providers. We have an established customer base of approximately 90 customers,
many of which are the world's leading telecommunications and Internet companies.
Our customers include 17 of the top 20 international carriers based on traffic
volume which, together, accounted for approximately 48% of our sales to date. We
believe we have succeeded in attracting this customer base primarily as the
result of the diversity, flexibility and high quality of our product and service
offerings.
The FLAG Europe-Asia cable system links the telecommunications markets of
Western Europe and Japan through the Middle East, India, Southeast Asia and
China along a route which adjoins countries with approximately 75% of the
world's population. The FLAG Europe-Asia cable system consists of approximately
28,000 kilometers of technologically advanced undersea digital fiberoptic cable
which comes ashore at 16 operational landings in 13 countries. It has an
aggregate capacity of 10 gigabits per second transmitting on two fiber pairs.
The system incorporates synchronous digital hierarchy, which is the current
international standard for digital transmission and management. Expansion of the
transmission capacity of the segments of the FLAG Europe-Asia cable system may
be accomplished by employing additional light sources using the wavelength
division multiplexing technique of operating at more than one wavelength. The
transmission capacity of the segments of the FLAG Europe-Asia cable system is
upgradeable to between 20 and 40 gigabits per second depending on the location
of the segment. The FLAG Europe-Asia cable system cost approximately
$1.6 billion to complete. We placed the FLAG Europe-Asia cable system in
commercial service on November 22, 1997 with an initial group of 62 customers.
FLAG Atlantic Limited has contracted with Alcatel Submarine Networks for the
construction of the subsea portion of a new 12,000 kilometer trans-Atlantic
digital fiberoptic cable system called FLAG Atlantic-1. The FLAG Atlantic-1
cable system will use a six fiber pair configuration with 10 gigabit per second
technology and up to a maximum of 40 wavelengths of light per fiber. The FLAG
Atlantic-1 cable system is designed to have an initial fully redundant capacity
of at least 160 gigabits per second, with potential for future upgrade to 2.4
terabits of fully redundant capacity, more than 15 times the maximum capacity of
the most advanced cable in service on the Atlantic route today. By "redundant
capacity" we mean that there will be two cables, each with the indicated
capacity configured as a self-healing ring. We have designed FLAG Atlantic-1 so
that if one of the cables fails, we can re-route traffic to the other cable in
order to avoid any service failure. One cable will span from Porthcurno in the
United Kingdom to the north shore of Long Island, New York, and the other cable
will be routed from northern France to the south shore of Long Island. The
system's European landing points will be connected to city centers in London and
Paris. The European city centers will be connected to one another via a fiber
ring including two English Channel crossings. The landing points in Long Island
will connect to two telecommunication centers in New York City, which will also
connect to each other via a fiber ring. The system's design is intended to
permit seamless interconnection with the FLAG Europe-Asia cable system (via the
landing station in Porthcurno) and with a range of existing European
city-to-city networks in London and Paris. The FLAG Atlantic-1 cable system will
use company owned landing stations and city-center connection points. Alcatel
Submarine Networks has contracted to deliver the first loop of the subsea
portion of FLAG
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Atlantic-1 in operational service by March 31, 2001 and to complete the full
loop system by June 30, 2001. We expect FLAG Atlantic-1's initial capacity of at
least 160 gigabits to cost approximately $1.1 billion to complete. We are
constructing FLAG Atlantic-1 under a 50/50 joint venture between FLAG Atlantic
Holdings Limited, our subsidiary, and GTS TransAtlantic Holdings Limited, a
subsidiary of Global Telesystems Group, Inc.
We intend to extend the reach of the FLAG Telecom network. Where
economically feasible, we expect to extend our network to additional countries
by developing new cable systems, building extensions from our existing cable
systems or by building additional terrestrial capacity. Where rapid access to a
market is required or where it is not economically feasible to expand our
network on our own, we may enter into arrangements with third parties to develop
network extensions or to acquire rights to use their existing networks. We may
also consider acquiring companies with networks that complement our own. We
recently announced plans to begin construction of a new trans-Pacific cable
project that would link the telecommunications markets of the United States and
Japan. FLAG Pacific-1 will offer connectivity initially between Tokyo,
Vancouver, Seattle, San Francisco and Los Angeles and potentially other cities.
The system is expected to enter service as a single loop during early 2002, and
as a full loop by mid 2002. We recently entered into a supply agreement for the
construction of the subsea portion of the proposed cable project and announced
the lead banks providing underwritten loan financing to help fund the
construction of the project. We cannot assure you, however, that we will
successfully complete the project.
We maintain the FLAG Telecom network through our network operations centers
in Fujairah, U.A.E. and a location near Heathrow, United Kingdom. These
operations centers provide for system-wide surveillance, maintenance and circuit
activation 24 hours a day, 365 days per year.
We are developing an extensive range of innovative products and services
which will use a state-of-the-art Internet Protocol-based network infrastructure
and are designed to meet the needs of a wide range of licensed international
carriers, Internet service providers and other telecommunications companies. Our
product and service offerings consist of four principal groups:
- TRADITIONAL CARRIER SERVICES. Our traditional carrier service offerings
include "lifetime of system" right-of-use products, with which operators
have traditionally built their networks, and services designed to assist
carriers in managing their network capacity needs in a flexible way, such
as through our global portability program which permits carriers to move
purchased bandwidth around the FLAG Europe-Asia cable system on an as
needed basis.
- FLAG ATLANTIC-1 SERVICES. Our FLAG Atlantic-1 services include packages
structured to provide staged delivery of capacity over a period of several
years; optical wavelength services, which are designed to support the next
generation of IP networks by eliminating the need to route traffic through
slower intermediate protocol layers and switches; and fiber pair services,
which are designed to meet the needs of major global carriers that require
substantial amounts of bandwidth at low unit costs. Because the FLAG
Atlantic-1 cable system is still under construction, we are selling the
FLAG Atlantic-1 services on a future delivery basis.
- WHOLESALE SERVICES. Our wholesale service offerings will include managed
bandwidth services through which customers can lease international
connectivity for one, three or five year terms on a city-to-city or
customer site-to-customer site basis; IP point-to-point services designed
for private use by customers running such applications as voice-over-IP
services; and IP transit services which provide a connection to the
Internet. We recently introduced our first wholesale service, a managed
bandwidth service on the London-to-Madrid route. We expect to extend these
service offerings to other service routes during the next 12 to
18 months.
- BUNDLED SERVICES. Our bundled services are designed to maximize the
combined benefits of the FLAG Europe-Asia cable system and the FLAG
Atlantic-1 cable system by offering services that combine the two systems
and allow us to package our own network capacity with that of other
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providers to extend our network reach. One of our initial bundled products
is "Middle East Direct" which will provide direct connectivity from Middle
Eastern markets to the United States. We have also introduced European
leased capacity services which extend our connectivity into key European
cities. We are actively evaluating opportunities to add additional
services to our wholesale and bundled service offerings.
OUR MARKET OPPORTUNITY
We developed and are enhancing the FLAG Telecom network and our product and
service offerings to participate in the following important growth and strategic
shifts in the international telecommunications markets:
ADVANCES IN TELECOMMUNICATIONS AND NETWORKING TECHNOLOGY. Recent advances
in telecommunications and networking technology have dramatically lowered the
unit cost of carrying voice, data and video signal traffic. Through dense
wavelength division multiplexing (DWDM), a technology that transmits multiple
light signals through a single optical fiber, the bandwidth of submarine
fiberoptic cables can be increased by up to 40 times that of non-DWDM systems.
Several advances in switching, the process of interconnecting circuits to
form a transmission path between users, and electronics have further increased
the bandwidth, or transmission capacity, of telecommunications networks.
Historically, carriers built telecommunications networks optimized for voice
traffic. These are based on circuit switching, which establishes and keeps open
a dedicated path until a call is terminated. While circuit switching has worked
well for decades, it does not efficiently use transmission capacity, because
once a circuit is dedicated, it is unavailable to transmit any other
information, even when the particular users of that circuit are not speaking or
otherwise transmitting information. Packet switching networks optimized for data
traffic are replacing circuit based networks. Packet switching divides signals
into small "packets" which are then independently transmitted to their
destination via the quickest path. Upon their arrival, the packets are
reassembled. Packet switching provides more efficient use of the capacity in a
network because the network does not establish inefficient dedicated circuits,
which waste unused capacity. Packet switching networks can achieve lower unit
costs than circuit networks. New packet networking technologies include IP,
Asynchronous Transfer Mode (ATM) and frame relay. ATM's quality of service
features support high-quality voice and video signals over packet networks.
Similar quality of service features are being developed for IP.
CONVERGENCE OF VOICE AND DATA SERVICES. Telecommunications network designs
have traditionally created separate networks using separate equipment for voice,
data and video signals. The evolution from circuit switched networks to
packet-switched networks erases the traditional distinctions between voice, data
and video transmission services. High-bandwidth packet-switched networks can
transmit mixed digital voice, data and video signals over the same network with
a high level of frequency. This capability lowers the cost to operators of
building and operating networks providing a strong economic incentive for the
implementation of unified networks. Since the Internet is the major driver of
growth, we believe it is likely that IP will emerge as the network platform of
choice.
RAPID GROWTH OF TELECOMMUNICATIONS TRAFFIC. According to an August 1999
research report published by Ovum Ltd., total world telecommunications traffic
demand is expected to grow more than 50-fold between 1999 and 2005, with
Internet and data traffic accounting for 98% of total traffic by 2005. Several
key factors are expected to drive growth in worldwide telecommunications
traffic, including (1) the worldwide growth in the use of bandwidth-intensive
applications, such as video conferencing, video-on-demand and corporate
intranets which has resulted, in part, due to the convergence of voice and data
services, and (2) increased globalization of commerce, particularly electronic
commerce.
IMPACT OF GLOBAL DEREGULATION. The continued deregulation of the global
telecommunications industry has resulted in a significant increase in the number
of competitors, including traditional carriers, wireless operators, Internet
service providers and new local exchange service providers. This change in the
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global competitive landscape is generating significant demand for broadband
telecommunications capacity as carriers seek to secure sufficient capacity for
their expansion plans. As of July 1998, Telegeography estimated that there were
over 1,000 facilities based international telecommunications operators
worldwide, representing a 184% increase since July 1995. In addition, further
telecom privatization is expected over the next few years, which in turn is
expected to generate increased global competition. Global deregulation has also
resulted in increased demand for city-to-city services, as new entrants to the
telecommunication industry seek to take advantage of the economic benefits of
controlling facilities on an end-to-end basis.
INCREASING CHALLENGES FOR CONSORTIA SYSTEMS AND ACCEPTANCE OF PRIVATELY
SPONSORED CABLE SYSTEMS. Historically, the planning and ownership of undersea
cable systems has been conducted through large consortia typically led by the
monopoly telecommunications providers. We believe that the consortium approach
to constructing, owning and operating undersea cable systems is becoming far
less effective as:
- carriers increasingly view significant long term capital investments in
capacity to be a suboptimal utilization of resources;
- deregulation of international telecommunications markets leads to direct
competition among consortia members for customers;
- competition from new entrants makes carriers' market share and capacity
requirements increasingly difficult to predict;
- the rapid pace of technological change creates difficulties in the ability
of carriers to accurately forecast the growth of telecommunications
traffic; and
- the complex management structure of consortia systems renders these
systems increasingly less effective in responding to rapid market changes.
We believe that telecommunications service providers have become
increasingly receptive to the advantages of independent, privately-owned cable
systems. In connection with the marketing of capacity on the FLAG Telecom
network, carriers have responded positively to our ability to offer:
- capacity as and when needed without the incurrence of significant initial
capital investments;
- a wide range of capacity purchasing options appealing to both established
carriers and new market entrants; and
- state-of-the-art system quality combined with cost-effective high quality
operations, administration and maintenance support.
OUR BUSINESS STRATEGY
Our goal is to establish FLAG Telecom as the leading global carriers'
carrier by offering a wide range of cost-effective, capacity use options and
wholesale products and services across our own global network. The principal
elements of our business strategy to achieve these objectives include:
PURSUING A FLEXIBLE APPROACH TO DEVELOPING OUR NETWORK. We have adopted a
flexible approach to the development and expansion of the FLAG Telecom network.
We developed the FLAG Europe-Asia cable system independently, and have joined
with GTS TransAtlantic to construct the FLAG Atlantic-1 cable system. We have
also established alliances with other facilities-based bandwidth capacity
providers that provide us with intra-European connectivity to many of the
largest cities in Europe. We expect that the strong regional ties of our
marketing and sales team will greatly enhance our ability to identify
appropriate opportunities for, and to enter into, other such strategic
alliances. We believe that this flexible approach allows us to benefit from the
strengths of our partners, while also reducing the capital expenditures required
to develop the leading global carriers' carrier network. It also increases the
speed with which we can add new destinations to our network. In the future, we
intend to remain flexible as we seek additional
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opportunities to expand our network. We will consider further opportunities for
the development of infrastructure ourselves, for the lease or acquisition of
existing infrastructure from third parties and for the provision of additional
services. We may also consider the acquisition of other companies with networks
complementary to our own. We believe that our approach will enable us to expand
our network more rapidly than if we were to adopt a build-only strategy, and to
focus on increasing the types and quality of services we offer.
- BUILDING-OUT OUR OWN INFRASTRUCTURE WHEN ECONOMICALLY ATTRACTIVE. As part
of our network expansion strategy, we intend to leverage our experience in
constructing the FLAG Europe-Asia cable system on time and within budget
to build out our network infrastructure to reach as many of the world's
major business destinations as possible when economically advantageous
opportunities exist to do so. We believe owning network infrastructure
offers significant competitive advantages in the global carriers' carrier
market because it (1) secures end-to-end control of both capacity and cost
structure and (2) provides access to low unit costs. Through our FLAG
Europe-Asia cable system, which is the largest independent privately-owned
digital fiberoptic undersea cable system in the world with approximately
28,000 kilometers of operational fiber, we have 16 operational landings in
13 countries. Upon completion of our 12,000 kilometer FLAG Atlantic-1
cable system, we will be able to offer highly reliable, low unit cost
city-to-city links between London and Paris and New York. In 1999, we
added two new landing stations, in Saudi Arabia and Jordan, to our FLAG
Telecom network. We also intend to add additional countries to the FLAG
Telecom network over time.
- OFFERING CITY-TO-CITY CONNECTIVITY. We will pursue multiple approaches to
obtaining city-to-city connectivity to increase the attractiveness of the
FLAG Telecom network and to meet increasing customer demand for
connectivity into the cities our customers and prospective customers
serve. We expect to acquire and package terrestrial capacity we obtain
from third parties. We intend to acquire dark fiber capacity on cables
laid by third parties. We also intend to build our own terrestrial
networks in key markets as they deregulate and when cost-effective
opportunities exist. We have designed the FLAG Atlantic-1 cable system
with a city-to-city architecture using terrestrial capacity which FLAG
Atlantic Limited will own and operate. In connection with our introduction
of managed bandwidth services on our London-to-Madrid route, we have
entered into arrangements to lease terrestrial capacity in the United
Kingdom and Spain. We also have entered into collaborative arrangements
with facilities-based managed bandwidth capacity providers pursuant to
which we have acquired access to intra-European capacity and connectivity.
Through this combined approach, we expect to be able to provide our
customers with international city-to-city connectivity through the FLAG
Telecom network at prices significantly lower than if such customers had
attempted to gain connectivity by separately purchasing required
terrestrial capacity.
PROVIDING A DIVERSE SET OF WHOLESALE AND BUNDLED PRODUCTS AND SERVICES TO
MEET THE NEEDS OF OUR CUSTOMERS. We intend to capitalize on the expanding
customer base for telecommunications services resulting from deregulation and
technological advances. We have developed and intend to introduce a diverse set
of traditional carrier, wholesale and bundled products and services designed to
meet the varying needs of a wide range of established and emerging
telecommunications carriers and Internet service providers. Our traditional
carrier service offerings include "lifetime of system" right-of-use products,
with which operators have traditionally built their networks, and services
designed to assist carriers in managing their network capacity needs in a
flexible way, such as through our global portability program which permits
carriers to move purchased bandwidth around the FLAG Europe-Asia cable system on
an as needed basis. We are offering purchasers of capacity on the FLAG
Atlantic-1 cable system a range of staged capacity delivery options and optical
wavelength services. In the area of wholesale services, we initially will offer
our customers managed bandwidth services which will permit them to lease
international connectivity for one, three or five year terms on a fully
redundant, point-to-point basis. This connectivity can be offered either
city-to-city, between our existing points of presence, or from customer
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site-to-customer site. We currently offer these services on our London-to-Madrid
route and expect to extend these service offerings to other service routes
during the next 12 to 18 months. We will also offer point-to-point IP services
using high-speed routers and IP transit services to provide a connection to the
Internet. As part of our bundled service offerings, we expect to bundle capacity
between the FLAG Europe-Asia cable system and the FLAG Atlantic-1 cable system
to provide, for example, connections between the Middle East and the United
States. We also intend to continue to evaluate opportunities to develop
additional value added services within our wholesale product and service
offerings.
FOCUSING ON THE NEEDS OF THE INTERNET COMMUNITY. We intend to capitalize on
the significant growth in the use of the Internet in recent years by focusing on
the specialized needs of Internet service providers, the fastest growing segment
of the telecommunications industry. Internet service providers, which are
subject to demands by their customers to move data from one part of the world to
another extremely quickly, often do not have the resources necessary to manage
the purchase of pure "raw" bandwidth. As a result, they typically seek
telecommunications service providers which are capable of providing end-to-end
services and guaranteed performance levels. We are developing a broad range of
managed, city-to-city services, including a range of IP services, designed to
meet the needs of these customers. We intend to deliver these services over our
own IP-based network infrastructure.
EMPLOYING A FLEXIBLE AND COMPREHENSIVE FINANCING PLAN. We intend to
continue to follow the flexible and successful approach to financing our
infrastructure extension and product development that we have employed in
connection with the FLAG Europe-Asia cable system and the FLAG Atlantic-1 cable
system. We financed the construction of the FLAG Europe-Asia cable system on a
project finance basis through borrowings and equity contributions. We also are
financing the construction of the FLAG Atlantic-1 cable system on a project
finance basis, in collaboration with our joint venture partner, through
borrowings under FLAG Atlantic Limited's existing credit facility, equity
contributions to be made by us and our joint venture partner and advance
capacity sales, in excess of $750 million of which have already been committed.
We expect that a significant portion of our wholesale product development
initiatives will be vendor financed. We anticipate that other extensions of our
infrastructure will be financed on a project finance basis and we may partner
with regional service providers in connection with some of these projects.
OUR PRODUCTS AND SERVICES
We offer a variety of traditional telecommunications capacity products and
services to our existing customers and have taken steps to expand the range of
products and services which we intend to make available in the future.
Originally, our products and services were primarily tailored to the needs of
the traditional carriers which continue to form the bulk of our existing
customer base. We have also begun to offer managed and other value-added
services and intend to expand the range of these services. By doing so, we have
attracted, and intend to continue to attract, an expanded range of customers,
including resellers, Internet service providers and systems integrators. Our
four main product groups are described below.
TRADITIONAL CARRIER SERVICES. Through the FLAG Europe-Asia cable system, we
offer competitively priced, point-to-point connectivity, often purchased on a
lifetime right-of-use basis. Presently, our customers can purchase the right to
connect between any of our sixteen landing points in China, India, Korea, Hong
Kong, Thailand, Malaysia, Japan, Egypt, Saudi Arabia, Jordan, the United Arab
Emirates, Italy, Spain and the United Kingdom. Once FLAG Atlantic-1 begins
commercial operations, our customers will also be able to connect to the points
of presence which FLAG Atlantic-1 is scheduled to maintain in New York, London
and Paris. We have already begun selling capacity on the FLAG Atlantic-1 cable
system, with service expected to commence in the first quarter of 2001. If a
customer requires connectivity between any of our landing points (or points of
presence) and a market not currently on the FLAG Europe-Asia cable system, we
can often arrange connectivity by bundling our network capacity with other
systems. We recently entered into an agreement with a facilities-based bandwidth
capacity provider that allows our
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customers to connect to city-center locations in London, Paris, Brussels,
Frankfurt, Amsterdam, Berlin, Zurich, Milan and several other major European
metropolitan areas.
We believe our customers are finding it increasingly difficult to predict
their future needs for bandwidth capacity. We have responded by offering our
customers products that help them manage their network capacity in a flexible
way. For example, our global portability program allows customers to purchase
bandwidth capacity on one segment of the FLAG Europe-Asia cable system and then
to move the purchased capacity to another segment of the FLAG Europe-Asia cable
system on an as needed basis.
Capacity leases are another means by which we offer our customers
flexibility. While most of our customers have tended to purchase capacity for
the entire life of the relevant system, many of our customers and potential
customers have expressed an interest in shorter-term arrangements to help them
manage demand uncertainty. To meet these needs, we offer capacity leases with
terms ranging from a few months to as long as five years. These customers can
convert a capacity lease into a lifetime right-of-use at any time during the
term of the lease on payment of a conversion charge.
Our "drop & insert" product also offers flexibility to the customers of the
FLAG Europe-Asia cable system. This product allows our customers to take a
single STM-1 circuit and drop traffic off at multiple locations along the FLAG
Europe-Asia cable system route. (One STM-1 unit carries 155,500 kilobits per
second of capacity.) By offering a United Kingdom-Japan circuit with drop-off
points in the Middle East and Asia, we can offer a product that cannot be
replicated by routing traffic between the United Kingdom and Japan through the
United States (the most cost-effective way to route traffic between the United
Kingdom and Japan). We believe this flexibility strengthens our market position
in the Europe-Asia long haul market.
FLAG ATLANTIC-1 SERVICES. With an upgradeable capacity of up to 2.4
terabits on a fully redundant basis, the FLAG Atlantic-1 cable system is
designed to have the highest maximum capacity of any transoceanic system ever
constructed. The range of products offered on the FLAG Atlantic-1 cable system
is intended to take advantage of this high capacity. We offer packages of
circuits with delivery staged over time; this allows our customers' capacity to
grow in time with anticipated demand growth. We also offer optical wavelength
services which are designed to support the trend in Internet architecture
towards connecting traffic transmitted on one fiberoptic system to another
fiberoptic system through high speed routers directly over fiber (which is
sometimes referred to as IP over DWDM). This eliminates the need to route the
traffic through slower intermediate protocol layers and switches. This product
is designed to appeal to top tier Internet service providers, as well as
established carriers. We believe that the FLAG Atlantic-1 cable system will be
the first submarine cable network in the world to offer optical wavelength
services. We are also marketing, and have sold, fiber pair services to major
global carriers that seek substantial amounts of bandwidth capacity at low unit
costs. By acquiring all of the capacity on a fiber pair, a customer can obtain
up to 800 gigabits per second (structured as 2 X 400 gigabits per second) of
capacity.
WHOLESALE SERVICES. We have designed our wholesale services with a focus on
the needs of resellers, Internet service providers, systems integrators and
emerging carriers. Our goal is to develop IP capabilities that allow
connectivity on a city-to-city basis. Presently, we are providing managed
bandwidth services between London and Madrid. We intend to provide these
services, as well as IP services between additional major cities (including
Tokyo and New York), over the next 12 to 18 months. Our managed bandwidth
services offer our customers fully protected, point-to-point connectivity
between our own city-center points of presence or from customer site-to-customer
site. We offer service level guarantees as a part of this product. Our IP
point-to-point services are similar to the managed bandwidth services, except
that we will provide the interface through our own high-speed routers. This
product is designed for use by customers that use voice-over-IP services, which
require service quality that is higher than that which typically is possible
over the Internet. Our IP transit services provide high speed connections to the
Internet. We are also evaluating opportunities to launch additional wholesale
services in the next 12 to 24 months. Among the possible services we are
considering is a voice-over-IP service.
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BUNDLED SERVICES. Our bundled services are designed to maximize the
combined benefits of the FLAG Europe-Asia cable system and the FLAG Atlantic-1
cable system by offering services that combine the two systems and allow us to
package our own network capacity with that of other providers to extend our
network reach. One of our initial bundled products is "Middle East Direct" which
will provide direct connectivity from Middle Eastern markets to the United
States. We have also introduced European leased capacity which extends our
connectivity into key European cities.
We offer transmission capacity on the various portions of the FLAG Telecom
network in the units listed below:
<TABLE>
<CAPTION>
AVAILABILITY
TRANSMISSION -----------------------------------------------------------------------------
PRODUCT SPEED EUROPE-ASIA CABLE EUROPEAN TERRESTRIAL CONNECTIONS FLAG ATLANTIC-1 CABLE*
- ------- ------------ ----------------- -------------------------------- ----------------------
<S> <C> <C> <C> <C>
E1................... 2 Mbps X X
DS3.................. 45 Mbps X X
STM-1................ 155 Mbps X X X
STM-4................ 620 Mbps X X X
STM-16............... 2.5 Gbps X
STM-64............... 10 Gbps X
Optical wavelength... 10 Gbps X
Fiber Pair........... 10-400 Gbps X
</TABLE>
- ------------------------
(*) Currently available for future delivery only.
OUR COMPETITIVE ADVANTAGES.
We believe we have several competitive advantages that will facilitate the
achievement of our business goals. These competitive advantages include:
WE HAVE AN EXTENSIVE EXISTING NETWORK AND CUSTOMER BASE. We currently
operate the largest independent, privately-owned fiberoptic submarine cable
network in the world. We have an established customer base of approximately 90
customers, many of whom are among the world's leading telecommunications and
Internet companies, including 17 of the top 20 international carriers based on
traffic volume. We have established a global organization with coverage in most
of the world's largest telecommunications markets. We have regional sales and
customer support offices in the Americas (New York), Europe (London), the Middle
East (United Arab Emirates) and Asia/Pacific (Hong Kong) and local sales and
customer support offices in Spain, India, China and Japan. We also have network
operations centers in the United Arab Emirates and the United Kingdom through
which we monitor the operations of, and can provide maintenance and repairs to,
the FLAG Telecom network, 365 days per year, 24 hours per day. We believe this
existing network organizational infrastructure and customer base will
significantly facilitate our sales of additional capacity and our introduction
of additional product and service offerings.
WE FOLLOW A FLEXIBLE MARKET-BASED STRATEGY. We have implemented a
market-based pricing strategy for our products and services. In order to
maintain market-based pricing, we analyze, among other things, currently
available alternatives for carriers along segments on our cable and terrestrial
systems. We provide carriers with predictability in standby maintenance and
repair charges by offering fixed prices for standby maintenance over the life of
purchased capacity, subject to certain inflation adjustments. This feature
differs from club cable maintenance charges which vary based on the capacity
share of the actual maintenance expenses incurred in a particular period. We
have also developed flexible payment terms and short-term commitment
arrangements, such as leases and lease to buy contracts, which are attractive to
emerging carriers facing uncertainty with respect to growth patterns of their
traffic and potential regulatory obstacles. We have developed a global
portability program option that allows carriers to change segments within a
cable system as often as they wish. We have also developed a "drop & insert"
feature for
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our STM-1 product that allows customer to drop-off traffic for long haul
circuits at various intermediate points on our network. We believe our flexible
market-based approach enables us to be highly responsive to the individual
requirements of our customers.
OUR NETWORK IS SECURE AND RELIABLE. We have made a substantial investment
in protecting our fiberoptic systems with advanced submarine cable burial and
armoring techniques, as well as redundancy at our terrestrial crossings. We have
installed hardware and software and contracted for alternative routes to restore
service to our customers in the event of a break or failure in the FLAG
Europe-Asia cable system and have built similar features into the design of our
FLAG Atlantic-1 cable system. Our restoration plan is a combination of an
in-system restoration plan, where parallel routing is available within the FLAG
Europe-Asia cable system and the FLAG Atlantic-1 cable system, and an
out-of-system restoration plan created in part by reciprocal arrangements with
other providers. We continuously monitor and maintain control of our systems on
a 24-hour basis through the FLAG Telecom network operations centers and our
restoration plans permit prompt alternate routing in the event of a break or
fault.
WE PROVIDE SUPERIOR CUSTOMER SERVICE. We have developed a customer care
approach focused on providing quality, reliability and consistency of customer
support. Through the FLAG Telecom network operations centers, we are able to
provide circuit activation and transmission capacity within hours of a
customer's determination to use our products and services. We have regionally
based sales personnel who are available to provide ongoing support to our
present and prospective customers on operational and product issues. We utilize
marketing studies to track the rapid changes in the telecommunications markets
in order to identify customers' needs and changing preferences. Our marketing
and sales personnel and those of GTS TransAtlantic, our joint venture partner in
the FLAG Atlantic-1 cable system, which will co-market products and services for
the FLAG Atlantic-1 cable system, will seek to maintain ongoing communication
with customers and market sources in order to adapt pricing and product
structures to changed conditions and changed competitive pressures. We believe
the fact that over half of our original 62 customers have made multiple
purchases from us is indicative of the success of this approach to customer
service.
OUR MANAGEMENT TEAM HAS SIGNIFICANT INDUSTRY EXPERIENCE AND REGIONAL
EXPERTISE. Our management team has a proven track record. We constructed the
FLAG Europe-Asia cable system on time and within budget. We have assembled and
will continue to build a strong management team comprised of executives and key
employees with extensive operating experience in the global telecommunications
industry and significant project management and international commercial
experience. We have a network of senior executives and senior advisors who are
based in the regions for which they have management responsibility and who have
acquired much of their professional experience in these regions. We believe that
as a result of this emphasis on both industry experience and regional expertise,
our management team:
- has developed a better understanding of customers' needs in the regions it
serves;
- is better able to anticipate and react to developments in these regions,
such as deregulation, that may impact our network and future expansion
plans; and
- can more effectively implement our business initiatives as a result of the
regional contacts it has established and its enhanced understanding of
local cultural, political and legal matters.
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THE FLAG TELECOM NETWORK
We have adopted a flexible approach to the development and expansion of the
FLAG Telecom network. We developed the FLAG Europe-Asia cable system
independently and have joined with GTS TransAtlantic to construct the FLAG
Atlantic-1 cable system. We have also established alliances with other
facilities-based bandwidth capacity providers that provide us with
intra-European connectivity to many of the largest cities in Europe. We believe
that our approach allows us to benefit from the strengths of our partners, while
also reducing the capital expenditures required to develop the leading global
carriers' carrier network. In the future, we intend to remain flexible as we
seek additional opportunities to expand our network. Our present plans call for
the establishment of additional points of presence in major metropolitan areas,
as well as the addition of IP network capabilities that will allow us to offer
high value-added services. We recently announced plans to begin construction of
a new trans-Pacific cable project that would link the telecommunications markets
of the United States and Japan. FLAG Pacific-1 will offer connectivity initially
between Tokyo, Vancouver, Seattle, San Francisco and Los Angeles and potentially
other cities. The system is expected to enter service as a single loop during
early 2002, and as a full loop by mid 2002. We recently entered into a supply
agreement for the construction of the subsea portion of the proposed cable
project and announced the lead banks providing underwritten loan financing to
help fund the construction of the project. We cannot assure you that we will
successfully complete the trans-Pacific cable project. We will consider further
opportunities for the development of infrastructure ourselves, for the lease or
acquisition of existing infrastructure from third parties and for the provision
of additional services. We believe that our flexible approach will significantly
facilitate our efforts to expand our existing network into the leading global
private carriers' carrier network. In contrast to some of our competitors which
are attempting to develop their global networks exclusively on an independent
basis, we believe that our approach will enable us to expand our network more
rapidly and to focus on increasing the types and quality of services we offer.
THE FLAG EUROPE-ASIA CABLE SYSTEM
The FLAG Europe-Asia cable system consists of approximately 28,000
kilometers of undersea digital fiberoptic cable with a 580-kilometer dual land
crossing in Egypt and a 450-kilometer dual land crossing in Thailand. The FLAG
Europe-Asia cable system connects with communication networks in the United
Kingdom, Spain, Italy, Egypt, Jordan, Saudi Arabia, the United Arab Emirates,
India, Malaysia, Thailand, Hong Kong, China, Korea and Japan.
We offer capacity for digital transmission over the FLAG Europe-Asia cable
system. Typically, each party that purchased capacity on the FLAG Europe-Asia
cable system prior to September 1998 became a signatory to the construction and
maintenance agreement relating to the FLAG Europe-Asia cable system. This
agreement sets forth the rights and obligations of FLAG Limited, the landing
parties and these other signatories with respect to the ownership, operation,
maintenance and expansion of the FLAG Europe-Asia cable system. Commencing in
late 1998, we began leasing capacity and selling capacity on a right of use
basis.
The FLAG Europe-Asia cable system employs the most advanced technology
available and proven in commercial installations at the date of construction of
the FLAG Europe-Asia cable system. The aggregate system capacity is 10 gigabits
per second transmitting on two fiber pairs. The FLAG Europe-Asia cable 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 Europe-Asia cable system including passive
branching units, non-zero dispersion shifted fibers and fully redundant laser
pumps in the optical amplifiers which are located at intervals of approximately
80 kilometers along the undersea route. Expansion of the transmission capacity
of the segments of the FLAG Europe-Asia cable system can be accomplished by
employing additional light sources using the wavelength division multiplexing
technique of operating at more than one wavelength. This enhancement can be
added by system modifications at one or more landing stations and without
modification of the submerged
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portion of the FLAG Europe-Asia cable system. The transmission capacity of the
segments of the FLAG Europe-Asia cable system is upgradeable to between 20 and
40 gigabits per second depending on the location of the segment.
SYSTEM EXPANSIONS. We have expanded the FLAG Europe-Asia cable system from
its original system design to include landing stations in China, Japan, Saudi
Arabia and Jordan. We completed additional landing stations in China and Japan
prior to putting the FLAG Europe-Asia cable system in operation in 1997. We
completed the landing stations in Saudi Arabia and Jordan in July 1999. As part
of our efforts to extend our network, we are actively evaluating a number of
potential expansions to the FLAG Europe-Asia cable system.
LANDING PARTIES. In order for the FLAG Europe-Asia cable system to be
accessible to carriers, it comes ashore in various countries along the FLAG
Europe-Asia route and connects with domestic cable systems and other submarine
cable systems at landing stations in the countries where the cable lands. Our
landing parties have agreed to provide and to maintain in operation the landing
stations and the terrestrial portion of the FLAG Europe-Asia cable 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 Europe-Asia cable system at that landing station. We reimburse
each landing party for the cost of maintaining the terrestrial portion of the
FLAG Europe-Asia cable system. Set forth below are the landing parties for the
FLAG Europe-Asia cable system:
<TABLE>
<CAPTION>
COUNTRY LANDING PARTY
- ------- -------------
<S> <C>
United Kingdom............................... Cable & Wireless Communications
Spain........................................ Telefonica de Espana
Italy........................................ Telecom Italia
Egypt........................................ Telecom Egypt
Jordan....................................... Jordan Telecommunications
Saudi Arabia................................. Saudi Telecom
United Arab Emirates......................... Etisalat
India........................................ VSNL
Malaysia..................................... Telekom Malaysia
Thailand..................................... The Communications Authority of Thailand
China........................................ China Telecom
Cable & Wireless HKT International
Korea........................................ Korea Telecom
Japan........................................ IDC
KDD
</TABLE>
CAPACITY SALES. Each user of capacity on the FLAG Europe-Asia cable system
enters into an agreement with us to acquire capacity. We entered into agreements
to acquire capacity with 62 carriers prior to commencement of service of the
FLAG Europe-Asia cable system. We now have approximately 90 customers.
CONSTRUCTION AND MAINTENANCE. The construction and maintenance agreement
for the FLAG Europe-Asia cable system governs use of the capacity and the rights
and obligations of the landing parties, purchasers of capacity who have become
signatories to the construction and maintenance agreement and FLAG Limited.
Under the construction and maintenance agreement, we are responsible for
arranging maintenance for the submarine portion of the FLAG Europe-Asia cable
system. The construction and maintenance agreement also restricts us from
selling, leasing or directly providing capacity to any entity which is not
authorized or permitted under the laws of its country to acquire and use
facilities for the provision of international telecommunication services. Each
signatory to the construction and maintenance agreement correspondingly agrees
that it will not sell or transfer capacity to third parties, with certain
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exceptions relating to transfers to affiliates, transfers to other carriers in a
signatory's country and transfers to which we consent. The construction and
maintenance agreement gives limited rights to vote to the signatories; for
example, the unanimous vote of the signatories is required to add a new landing
station to the FLAG Europe-Asia cable system. System enhancements which are
approved by the signatories must be paid for by the signatories and us in
relation to capacity on the affected segment. At September 30, 1999, there were
75 signatories to the construction and maintenance agreement.
OPERATION AND MAINTENANCE. The FLAG Europe-Asia cable system is designed to
provide service continuity at a standard of 99.999% availability (exclusive of
cable cuts) and to ensure error-free service throughout a design life of
25 years. During the period from its inception to December 31, 1999 the FLAG
Europe-Asia cable system's actual availability was 99.994%. The FLAG Europe-Asia
cable system performance has met or exceeded relevant International
Telecommunications Union recommendations consistently throughout the entire
system since it went into commercial service. The FLAG Europe-Asia cable system
is controlled by the FLAG Telecom network operations center in Fujairah, U.A.E.,
which is responsible for system-wide surveillance, proactive maintenance,
coordination of maintenance and repair operations, circuit activation and
assignment and configuration of the transmission equipment 24 hours a day,
365 days a year. Most other submarine cable systems maintain monitoring services
at their landing stations and do not maintain full-time, around-the-clock
surveillance. The FLAG Telecom network operations center has the capability of a
system-wide view of all network elements in the FLAG Europe-Asia cable system
through its integrated transport management (ITM2000) system. The ITM2000
performs real-time surveillance and control of the FLAG Europe-Asia cable system
including provisioning and restoration at each of the landing stations. We
believe that the FLAG Telecom network operations center, which is an innovation
in system maintenance of undersea cables, and the hardware and software
installed by FLAG Telecom provide a higher standard of service and continuity
than can be met by other international cable systems. Given the importance of
redundancy within the telecommunications industry, we established a backup FLAG
Telecom network operations center in a location near Heathrow, United Kingdom in
1998.
We have entered into four zone 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. Maintenance zone agreements
are cooperative standby agreements among all cable operators in major ocean
areas to share the expense of assuring constant availability of cable ships
capable of providing repairs to undersea cables. In addition, we have entered
into a bilateral agreement for maintenance of the area from the Red Sea to a
point south of India. We have entered into this agreement to facilitate more
rapid repairs than would be possible under a zone agreement whose area includes
the area covered by the bilateral agreement.
FACILITY RESTORATION PLAN. We have developed a comprehensive restoration
plan for the entire FLAG Europe-Asia cable 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 fishing activities, ships and
the elements. We developed the restoration plan 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 Europe-Asia cable 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 accordance with predetermined plans and arrangements with
operators of other cables, land lines and satellites. All segments of the FLAG
Europe-Asia cable system are covered by restoration alternatives using
fiberoptic cable which is laid undersea or on land except that restoration from
Italy to Malaysia is, in part, currently provided by a satellite link. Since
restoration over another cable is preferable in order to maintain consistency of
service quality, we are arranging with Sea MeWe3 (SMW3) for restoration with
respect to the link from Italy to Malaysia. While we undertake to arrange
restoration capacity for our customers, we have no obligation to provide
restoration to our customers on the FLAG Europe-Asia cable system. Each customer
decides
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whether to accept the restoration plan offered by us, and the customers
accepting restoration capacity must share and reimburse us for the associated
charges.
THE FLAG ATLANTIC-1 JOINT VENTURE
We are developing the FLAG Atlantic-1 cable system under a 50/50 joint
venture between GTS TransAtlantic and FLAG Atlantic Holdings. GTS TransAtlantic
is a subsidiary of Global Telesystems Group, Inc. FLAG Atlantic Limited will not
have its own staff for project management in the development stage or for
marketing and operations after completion. Instead, the joint venture is
designed to capitalize on each of its shareholders' strengths by dividing the
responsibility for managing FLAG Atlantic Limited's activities between FLAG
Atlantic Holdings and GTS TransAtlantic.
RESPONSIBILITIES OF FLAG ATLANTIC HOLDINGS. Under the Further Restated
Shareholders Agreement between FLAG Atlantic Holdings and GTS TransAtlantic,
FLAG Atlantic Holdings is responsible for managing the construction and
implementation of the subsea portion of the FLAG Atlantic-1 cable system,
arranging project financing for the project, providing accounting and
administrative services and, jointly with GTS TransAtlantic, marketing FLAG
Atlantic-1's capacity. Following construction, FLAG Atlantic Holdings will also
be responsible for monitoring, maintaining and operating the FLAG Atlantic-1
cable system through our FLAG Telecom network operations center at a location
near Heathrow, United Kingdom. In carrying out these responsibilities, FLAG
Atlantic Holdings successfully arranged for the $600 million financing under the
FLAG Atlantic Limited credit agreement. FLAG Atlantic Holdings was responsible
for negotiating the construction contract for the subsea portion of the FLAG
Atlantic-1 cable system with Alcatel Submarine Networks. Alcatel Submarine
Networks has undertaken to deliver the first loop of the subsea portion of the
project in operational service by no later than March 31, 2001. Failure to
deliver the system by that time may trigger liquidated damages, the payment of
which is to be supported by a bank letter of credit and a performance guarantee
provided by Alcatel S.A., Alcatel Submarine Networks' parent company.
RESPONSIBILITIES OF GTS TRANSATLANTIC. Under the Further Restated
Shareholders Agreement, GTS TransAtlantic is responsible for managing the
construction (or acquisition), installation, operation and maintenance of the
majority of the terrestrial element of the FLAG Atlantic-1 cable system. GTS
TransAtlantic will provide a fully operational back-up network operations center
in addition to its existing facility in Hoeilaart, Belgium. GTS TransAtlantic is
also responsible, jointly with FLAG Atlantic Holdings, for marketing FLAG
Atlantic-1's capacity.
MANAGEMENT OF THE JOINT VENTURE. Control of FLAG Atlantic Limited is evenly
shared between GTS TransAtlantic and FLAG Atlantic Holdings. FLAG Atlantic
Limited is governed by a board of directors consisting of 14 directors, half of
whom are selected by each shareholder. The FLAG Atlantic Limited board of
directors has also designated an executive committee which is comprised of four
members, half of whom are selected by each shareholder. The executive committee
is authorized to act on behalf of the board of directors on all matters except
(1) the declaration and distribution of dividends, (2) the execution of
agreements with related parties, having terms exceeding 15 years or imposing
liabilities on FLAG Atlantic Limited exceeding $25 million, generally, (3) the
initiation or settlement of significant litigation, (4) grants of liens on
assets and (5) the appointment and removal of officers. The committee must act
by unanimous approval. Except as provided in the following sentences, all board
decisions must be supported by a majority of FLAG Atlantic Limited's directors
who are present at a board meeting, including at least two directors nominated
by each shareholder. In the case of litigation between FLAG Atlantic Limited and
a shareholder, however, the directors nominated by the affected shareholder do
not have voting rights. In addition, the Further Restated Shareholders Agreement
provides that certain decisions, such as new share issues, capital calls,
changes to the business plan, and approvals of new shareholders, must be
approved directly by both shareholders. As a result of the foregoing, each
shareholder maintains significant influence over FLAG Atlantic Limited's
operations, activities and strategy, since virtually all actions by FLAG
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Atlantic Limited require the endorsement of both shareholders directly or, where
no shareholder approval is required, by at least two directors nominated by each
shareholder. Under the Further Restated Shareholders Agreement, disagreements
concerning operational matters (including the selection of suppliers) and
pricing issues may be referred to independent experts for binding determination,
while deadlocks concerning other matters may be referred to binding arbitration
under the rules of the International Chamber of Commerce.
TRANSFER OF SHARES. Under the Further Restated Shareholders Agreement, the
transfer of shares to unaffiliated parties is restricted. In such instances, the
non-transferring shareholder enjoys a right of first refusal to acquire the
other shareholder's shares in FLAG Atlantic Limited.
FINANCING. As of December 31, 1999, FLAG Atlantic Limited had incurred
$82 million of construction related expenses which have been funded with
$20 million of proceeds from pre-sales and $62 million of construction loans
provided under a credit facility arranged by Barclays Bank plc under a credit
agreement among FLAG Atlantic Limited, Barclays, as administrative agent, and
the lenders party thereto. An additional $513 million of construction loans and
$25 million of revolving loans remain available to be drawn under this credit
facility. The construction loans convert to term loans once the FLAG Atlantic-1
cable system is ready for service (and certain other conditions are satisfied),
with quarterly principal installments and a final maturity date of April 30,
2007. The revolving credit facility is available to be drawn through
April 2006, and must be repaid by April 30, 2007. This senior debt has been
provided on a project finance basis, with recourse limited to a pledge of the
shares in FLAG Atlantic Limited, a security interest over all of the contract
rights and other assets of FLAG Atlantic Limited and its subsidiaries, a
commitment by each of FLAG Atlantic Holdings and GTS TransAtlantic to provide a
$100 million capital contribution no later than October 31, 2000 (which, in the
case of FLAG Atlantic Holdings, will be financed with a portion of the proceeds
from the initial public offering which will be segregated for these purposes),
and a commitment by each of FLAG Atlantic Holdings and GTS TransAtlantic to
purchase (or arrange for the purchase of) capacity from FLAG Atlantic-1, the
proceeds of which are to be used to fund a portion of FLAG Atlantic Limited's
construction costs. FLAG Atlantic Holdings has fulfilled this commitment by
arranging for the purchase of over $100 million in capacity by various entities.
GTS TransAtlantic has also agreed to purchase capacity from FLAG Atlantic
Limited. In the event that the FLAG Atlantic-1 cable system does not go into
service by December 31, 2001, some of FLAG Atlantic Limited's customers may
cancel their existing contracts for the purchase of capacity.
CABLE DESIGN. The FLAG Atlantic-1 cable system will use a six fiber pair
configuration using multiple wavelengths, each with a capacity of 10 gigabits
per second up to a maximum of 40 wavelengths per fiber. The FLAG Atlantic-1
cable system is designed to have an initial fully redundant capacity of at least
160 gigabits per second, with potential for future upgrade to 2.4 terabits of
redundant capacity, more than 15 times the maximum capacity of the most advanced
cable in service on the Atlantic route today. The system will consist of a
self-healing ring comprised of two trans-Atlantic cables, one spanning from
Porthcurno in the United Kingdom to the north shore of Long Island, New York,
the other from northern France to the south shore of Long Island. The system's
European landing points will be connected to city centers in London and Paris.
The European city centers will be connected to one another via a fiber ring
including two English Channel crossings. The landing points in Long Island will
connect to two telecommunication centers in New York City, which will connect to
each other via a fiber ring. The system's design is intended to permit seamless
interconnection with the FLAG Europe-Asia cable system (via the landing station
in Porthcurno) and with other existing European city-to-city networks in London
and Paris. The FLAG Atlantic-1 cable system will use company owned landing
stations and city center connection points. Alcatel Submarine Networks has
contracted to complete fully the cable system by June 30, 2001. The FLAG
Atlantic-1 cable system will be controlled by the FLAG Telecom network
operations center in the United Kingdom which will be responsible for
system-wide surveillance, proactive maintenance, coordination of maintenance and
repair operations, circuit activation, assignment and configuration of the
transmission equipment and general network administration such as legal and
billing. The network operations centers of
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GTS TransAtlantic located in Hoeilaart and Brussels will provide back-up
maintenance and repair services to the FLAG Atlantic-1 cable system and will
manage the terrestrial DWDM equipment for the system.
TERRESTIAL CONNECTIONS
In connection with our introduction of managed bandwidth services on our
London-to-Madrid route, we have entered into arrangements to lease terrestrial
capacity in the United Kingdom and Spain. In order to extend the reach of the
FLAG Telecom network, we have entered into arrangements with other
telecommunications services providers to bundle our network capacity with their
systems. We recently entered into an agreement with a facilities-based bandwidth
capacity provider that allows our customers to connect to city-center locations
in London, Paris, Brussels, Frankfurt, Amsterdam, Berlin, Zurich, Milan and
several other major European metropolitan areas.
MARKETING AND SALES
We market our network capacity and telecommunications products and services
globally through a sales force of 29 people located in the following offices:
- regional sales offices in the United States (New York), the United Kingdom
(London), United Arab Emirates (Dubai) and China (Hong Kong);
- local sales offices in Spain (Madrid), India (Delhi), China (Beijing) and
Japan (Tokyo); and
- representatives in Belgium, Greece, Hungary, Italy and Singapore.
Each of our sales offices is led by a team of senior sales representatives
or advisors who are based locally in the region. Our marketing and sales team
has extensive experience in the telecommunications industry and the carriers'
carrier sector and has very strong ties to the regions in which our offices are
located. Prior to joining us, members of our marketing and sales team held key
management positions within organizations such as Global One, Sprint
International, Ameritech International, IBM Corporation, MCI International
(Japan) Co., Ltd., Telstra, Palestine Telecom Corporation (PALTEL), Emirates
Telecommunications Corporation (Etisalat), o.tel.o Communications/Vebacom,
British Telecom and Singapore Telecom. Our marketing and sales representatives
each have an average of 19 years of telecom experience.
Our regional and local offices are our primary points of customer contact.
The sales representatives in these offices are responsible for promoting
regional sales, providing customer information, facilitating customer purchases
on our network and ensuring customer satisfaction. To enhance this regional
focus to our marketing and sales efforts, and to address the special needs of
our global customers, we have also adopted a global customer support strategy.
This strategy is designed to provide multiple points of contact and support for
our customers in the FLAG Telecom organization, at both the regional and senior
executive level, so that we can efficiently and conveniently meet the global
telecommunications needs of these customers. Our senior management, including
our Chairman and Chief Executive Officer, Chief Financial Officer, General
Counsel and Vice President of Strategy and Marketing participate in such
strategic sales relationships.
We reinforce our brand visibility through a variety of marketing campaigns,
participation in key industry and user group conferences, such as the Pacific
Telecom Conference and the International Telecommunications Union global telecom
conferences, speaking engagements, press conferences, promotional campaigns and
end-user awareness programs. In addition, we intend to sponsor customer forums
on a regional and global basis to meet with customers and to have customers meet
with each other.
We are committed to an ongoing market review in order to determine the
alternative costs and structures available to carriers and other
telecommunications companies for capacity and products and services competitive
to FLAG Telecom with a view to price adjustments and incentive discounts which
will attract carriers and other telecommunications companies to the FLAG Telecom
network.
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OUR CUSTOMERS
Our top 50 customers are the telecommunications and Internet companies
listed below. These customers have accounted for approximately 95% of our
revenues to date.
THE AMERICAS
- ------------
AT&T
Axistel
Infonet
MCI WorldCom
PSINet
Sprint
Teleglobe
Viatel
EUROPE
- ------
Belgacom (Belgium)
British Telecom
C&W (UK)
Deutsche Telekom
Infostrada (Italy)
KPN (The Netherlands)
MATAV (Hungary)
OTE (Greece)
Rostelcom (Russia)
Swisscom
Telecom Italia
Telefonica de Espana
Telia (Sweden)
TPSA (Poland)
UKRTELECOM (Ukraine)
ASIA/PACIFIC
- ----------
Cable & Wireless HKT International
China Telecom
Chunghwa Telecom (Taiwan)
Communications Authority of Thailand
DACOM (Korea)
IDC (Japan)
KDD (Japan)
Korea Telecom
NTT (Japan)
ONSE Telecom (Korea)
Optus (Australia)
Telekom Malaysia
VSNL (India)
MIDDLE EAST/AFRICA
- ----------------
Batelco (Bahrain)
Etisalat (UAE)
General Telecom Org. of Oman
Golden Lines (Israel)
Jordan Telecommunications
Ministry of Communications (Kuwait)
Office of National Posts & Telecoms (Morocco)
Qatar Public Telecom. Corp.
Saudi Telecom
Syrian Telecommunications Establishment
Telecom Egypt
Telecommunications Co. of Iran
Telkom S.A. (South Africa)
Turk Telekomunikayon
OUR COMPETITION
As a global carriers' carrier, we compete in a wide variety of different
geographic markets, in each of which we face and expect in the future to face
specific regional competitors. We also compete against a small number of other
carriers' carriers that aspire to build global networks. We compete or expect to
compete in six key markets:
- global services;
- trans-Atlantic services;
- intra-European services;
- Middle Eastern services;
- Asia/Pacific regional transit services; and
- Europe-Asia long haul services.
GLOBAL SERVICES COMPETITORS
A number of companies are presently engaged in building global carriers'
carrier networks. We believe that because of the high cost of building truly
global networks this is a market in which there will always be a limited number
of players.
Two other companies at present propose to build global carriers' carrier
networks: Global Crossing and Level 3 Communications. Global Crossing is a
Bermuda based telecommunications company which currently has three operational
cable systems: Atlantic-Crossing-1 (AC-1), Pacific-Crossing (PC-1) and
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Pan-European Crossing (PEC). Global Crossing is currently building a number of
other systems covering Asia (Asia Global Crossing) and Latin America (SAC, MAC
and PAC). We believe we compete with Global Crossing on quality, as well as on
the coverage and cost effectiveness of our network. Level 3 Communications
currently operates a United States city-to-city cable network based on
company-owned infrastructure and is building a European city-to-city network.
Level 3 Communications has announced the construction of a single, high capacity
cable cross the Atlantic Ocean. Level 3 has made investments in a trans-Pacific
cable system (US-Japan) in addition to its own facilities.
Over time, as we develop our wholesale services offerings, we expect to
compete with major global telecommunications operators such as MCI WorldCom and
British Telecom/AT&T. These companies primarily focus on offering services to
multinational corporations, although they also offer carriers' carrier services.
Such companies often participate in consortium cable projects, as well as in
private network systems, such as those we own and operate. We also expect to
face competition from carriers' carriers and incumbent regional
telecommunications providers with respect to our wholesale service offerings.
In addition, in January 2000, Tyco International Ltd., a manufacturing and
service company, announced that its undersea fiber optics business will design,
build, operate and maintain its own global undersea fiber optics communications
network. Tyco announced that the trans-Atlantic portion of the first phase will
be completed and operational by the end of 2001 and the remainder of the first
phase, consisting of trans-Pacific and European systems, will be completed and
operational by the end of 2002.
TRANS-ATLANTIC SERVICES COMPETITORS
We believe our key competitors in the trans-Atlantic services market are as
follows:
- TAT-14--This loop cable system is a consortium system cable sponsored by
British Telecom, AT&T and other incumbent telecommunications operators in
the United States and Europe. It has a maximum design capacity of 640
gigabits per second. TAT-14 provides services on a coast-to-coast basis.
It does not presently provide city-to-city services.
- LEVEL 3 COMMUNICATIONS--Level 3 Communications is building a single cable
system based on IP only technology, running at 1.28 terabits per second.
The system provides city-to-city service.
- GLOBAL CROSSING AC-1--AC-1 is a loop system across the Atlantic. AC-1 is
fully operational at 80 gigabits per second and may subsequently be
upgraded to 160 gigabits per second. Global Crossing has announced that it
will participate in the proposed Level-3 Communications single cable
system.
- HIBERNIA--This is a proposed 1.92 terabits per second system which is
sponsored by Worldwide Fiber, a subsidiary of Ledcor Industries, a
Canadian mining company. Worldwide Fiber principally offers dark fiber
connectivity on terrestrial networks on a carriers' carrier basis in the
North American markets.
INTRA-EUROPEAN SERVICES COMPETITORS
We believe that the intra-European market will become very competitive in
the next 12-18 months as a result of the large number of proposed pan-European
operators. At least eight pan-European networks have been announced or commenced
operations, including: GTS, BT Farland, MCI WorldCom Ulysses, Alcatel/The
Petabit Network, iaxis, Global Crossing PEC, Viatel Circe and KPN/Qwest.
MIDDLE EASTERN TRANSMISSION SERVICES COMPETITORS
We expect to compete against two primary competitors in this market:
- SEA ME WE 3 (SMW3)--This is a consortium cable system that connects the
Asia/Pacific region via the Middle East to Western Europe along a similar
route to the FLAG Europe-Asia cable system. SMW3 was originally planned to
be in service in late 1997; however, it was significantly delayed and
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only recently entered commercial service. SMW3 has an initial capacity of
20 gigabits per second and is upgradeable to 40 gigabits per second. SMW3
has major investors that include many of the incumbent telecommunications
operators along its route.
- SATELLITE--In addition to the SMW3 cable, carriers have the alternative of
transmission by satellite, including existing geosynchronous satellites
and low earth orbit systems now under construction. In general, satellite
service is considered to be of inferior quality, because time delays and
echos affect transmission, 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.
ASIA/PACIFIC REGIONAL TRANSIT COMPETITORS
At present, two other systems compete in the Asia/Pacific market, SMW3 and
APCN. Both are consortium systems.
- SMW3--In Asia, this system connects from Singapore north through Asia to
Japan, and also south to Australia.
- APCN--This consortium system is an established regional transit system
around Asia. Many of the region's traditional operators are participants.
In addition, several further systems are planned that may come into service
between 2001-2003. These include APCN2, backed by incumbent Asian operators,
PA-1, backed by NTT and US and European operators, and a system proposed by
Global Crossing.
EUROPE-ASIA LONG HAUL SERVICES COMPETITORS
We also participate in the Europe-Asia long haul market through the FLAG
Europe-Asia cable system. SMW3 is the primary direct competitor along this
route. However, we expect the strongest competition in the future to come from
an alternative routing from Europe to Asia across the Atlantic Ocean, trans-US,
and across the Pacific Ocean to Japan.
REGULATION
We will, in the ordinary course of development, construction and operation
of our fiberoptic cable systems, be required to obtain and maintain various
permits, licenses and other authorizations in both the United States and in
foreign jurisdictions where our cables land, and we will be subject to
applicable telecommunications regulations in such jurisdictions.
We will be required to obtain numerous permits in connection with the FLAG
Atlantic-1 cable system. These permits include:
US LANDING LICENSE. Under the Act Relating to the Landing and Operation of
Submarine Cables in the United States of May 27, 1921 (Cable Landing Act), all
submarine cable systems that connect to the United States must obtain a landing
license granted by the President of the United States. Presidential authority
for such licenses has been delegated to the Federal Communications Commission
(FCC). FLAG Atlantic Limited obtained its landing license to land and operate a
private fiber optic submarine cable extending between the United States and the
United Kingdom and France on October 1, 1999.
UK PUBLIC TELECOMMUNICATIONS OPERATOR LICENSE. In November 1999, FLAG
Atlantic Limited received a UK Public Telecommunications Operator License
permitting it to operate a telecommunications network in the United Kingdom.
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FRENCH ARTICLE L33.1 LICENSE. FLAG Atlantic Limited must obtain this
license in order to build and operate a telecommunications network in France.
FLAG Atlantic Limited submitted an application in July 1999 and anticipates a
license being awarded by May 2000.
FLAG Atlantic Limited will be required to obtain a substantial number of
other permits, mostly relating to local permission to land at the specific
landing sites chosen and local permissions to build those segments of FLAG
Atlantic-l's terrestrial networks that cannot be obtained on dark fiber leases.
FLAG Atlantic Limited is in discussions with all the relevant entities regarding
these permits.
In addition, because we intend to offer wholesale services on a city-to-city
basis, we will be required to acquire operator and other licenses and submit
notifications in the various jurisdictions in which we intend to offer such
services.
Consistent with the cable landing license issued by the FCC, we plan to
operate the FLAG Atlantic-1 cable system on a private or non-common carrier
basis. Once the FLAG Atlantic-1 cable system becomes operational, we will be
required to pay annual regulatory fees to the FCC based on certain international
circuits sold on the FLAG Atlantic-1 cable system. In addition, if we offer
trans-Atlantic services to or from the United States on a common carrier basis
we will be subject to additional regulatory and licensing requirements.
As a result of the January 4, 2000 exchange by Bell Atlantic of its common
shares in FLAG Limited for our common shares, we will be deemed an affiliate of
Bell Atlantic under the Communications Act of 1934, as amended. As an affiliate
of Bell Atlantic, we may be subject to increased regulation by the FCC.
Specifically, under Section 271 of the Communications Act, neither Bell
Atlantic nor any of its affiliates may provide or market long distance
telecommunications services originating in a state (in-region state) in which
Bell Atlantic is an incumbent provider of local telephone service until the FCC
approves an application of Bell Atlantic to provide long distance services
originating in that state. Once constructed, the FLAG Atlantic-1 cable system
will carry trans-Atlantic long distance traffic that originates in New York,
which is a Bell Atlantic in-region state. Bell Atlantic has obtained the
necessary regulatory approval from the FCC to provide long distance services
originating in New York, effective as of January 3, 2000. As an affiliate of
Bell Atlantic, we will be subject to additional regulatory prohibitions on the
provision and marketing of trans-Atlantic services via the FLAG Atlantic-1 cable
system to prospective customers located in the in-region states for which
Bell-Atlantic has not obtained necessary regulatory approvals.
We will also be required to obtain numerous permits in connection with the
trans-Pacific cable project, FLAG Pacific-1. These permits include a "Type 1"
authorization from the Japanese Ministry of Post and Telecommunications to
operate a telecommunications network in Japan. This authorization was awarded to
us in March 2000. We will also be required to obtain other permits, mostly
relating to local permission to land at the specific landing sites chosen and
local permission to build the terrestrial segments of FLAG Pacific-1.
PROPERTIES
We maintain corporate offices at Cedar House, 41 Cedar Avenue, Hamilton
HM12, Bermuda. We also lease additional office space for our operations in
London, England (10,500 square feet and 2,000 square feet for the backup network
operations center), New York City (2,000 square feet), Bangkok (900 square
feet), Hong Kong (2,000 square feet), Dubai (8,500 square feet), Fujairah,
U.A.E. (5,300 square feet for the network operations center), Delhi (220 square
feet), Beijing (650 square feet), Tokyo (1,900 square feet), Madrid (300 square
feet) and Rome (2,000 square feet).
EMPLOYEES
At January 1, 2000, we had approximately 109 full-time employees. (Of these,
three are employed at the FLAG Telecom Holdings Limited level.) We intend to
hire additional personnel as we begin
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commercial operations of the FLAG Atlantic-1 cable system and roll-out new
wholesale product and service offerings. None of our employees are represented
by a union or covered by a collective bargaining agreement. We believe that our
relations with our employees are good. In connection with the construction and
maintenance of the FLAG Atlantic-1 cable system, we will use third party
contractors, some of whose employees may be represented by unions or covered by
collective bargaining agreements.
LEGAL PROCEEDINGS
We are involved in litigation from time to time in the ordinary course of
business. In management's opinion, the litigation in which we are currently
involved, individually and in the aggregate, is not material to us.
EXCHANGE CONTROLS
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
the exchange notes.
SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES
We are a Bermuda company. Most of our directors and officers, and some of
the experts named in this prospectus, are not residents of the United States.
All or a substantial portion of our assets and the assets of these persons are
or may be located outside the United States. As a result, it may not be possible
for investors to effect service of process within the United States upon these
persons or to enforce against them judgments obtained in the United States
courts. We have been advised by our legal counsel in Bermuda, Appleby,
Spurling & Kempe, that there is doubt as to the enforcement in Bermuda, in
original actions or in actions for enforcement of judgments of United States
courts, of liabilities predicated upon U.S. federal securities laws (including
civil liabilities under such laws), although Bermuda courts will enforce foreign
judgments for liquidated amounts in civil matters subject to certain conditions
and exceptions.
We have expressly submitted to the jurisdiction of the U.S. federal and New
York state courts sitting in the City of New York for the purpose of any suit,
action or proceeding arising out of this offering, and we have appointed FLAG
Telecom USA Ltd. to accept service of process in any such action.
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MANAGEMENT
The following table sets forth, as of April 1, 2000, information for each of
our directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
Andres Bande.............................. 55 Chairman and Chief Executive Officer
Edward McCormack.......................... 45 Chief Operating Officer, Chief Financial
Officer and Director
Stuart Rubin.............................. 52 General Counsel and Assistant Secretary
Michael Fitzpatrick....................... 50 Director
Edward McQuaid............................ 44 Director
Adnan Omar................................ 47 Director
Daniel Petri.............................. 51 Director
Philip Seskin............................. 36 Director
Umberto Silvestri......................... 67 Director
Jonathan Solomon.......................... 60 Director
Dr. Vallobh Vimolvanich................... 58 Director
</TABLE>
At our first annual general meeting after the initial public offering, we
intend to implement a staggered Board of Directors comprised of ten persons. At
that meeting, the term of each of our directors will expire and, at each annual
general meeting thereafter, the term of approximately one-third of our directors
will expire.
ANDRES BANDE. Mr. Bande has served as Chairman of the Board and Chief
Executive Officer since January 1998. Before joining us, 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 Telecomsult, an
international telecommunications consulting practice. Mr. Bande holds a law
degree from the University of Chile and a Master's degree in politics and
international law from Oxford University.
EDWARD MCCORMACK. Mr. McCormack has been a member of the Board since
October 1999. Mr. McCormack has served as Chief Operating Officer since
February 2000 and as the Chief Financial Officer since February 1996. Prior to
that time, Mr. McCormack spent seventeen years with Bechtel, an engineering and
construction company. His final position was based in London as Chief Financial
Officer of Bechtel Europe, Africa, Middle East and South West Asia. Prior to
then, 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 since
January 1996. Prior to joining us, Mr. Rubin spent over twenty years with the
law firm of Coudert Brothers, as a partner for the last twelve, 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.
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MICHAEL FITZPATRICK. Mr. Fitzpatrick has been a member of our Board since
January 2000. Mr. Fitzpatrick is Chairman of the Board, President and Chief
Executive Officer of E-TEK Dynamics, Inc., a fiber optic manufacturer.
Mr. Fitzpatrick was previously President and Chief Executive Officer of Pacific
Telesis Enterprises, where he had responsibilities for the exploration and
development of new emerging technology products and services and for the
following Pacific Bell subsidiaries: Yellow Pages, Payphones, Voicemail, Mobile
Services (PCS) and Video and Internet Media. Additionally, Mr. Fitzpatrick had
responsibilities for corporate marketing and advertising for all of Pacific Bell
and Pacific Telesis. Mr. Fitzpatrick joined Pacific Bell in September 1993 as
Executive Vice President. In January 1994, he became Executive Vice President,
Marketing and Sales and managed approximately 15,000 employees. Prior to joining
Pacific Bell, Mr. Fitzpatrick served as President and Chief Executive Officer of
Network Systems Corporation, a public company specializing in high speed data
communications between computers and local area networks. Mr. Fitzpatrick
currently serves as a director of NorthPoint Communications Group, Inc., a
national provider of local data network services, and Adva Optical Networking, a
worldwide optical networking solutions provider located in Germany.
EDWARD MCQUAID. Mr. McQuaid has been a member of our Board since
February 2000. Mr. McQuaid is a director designee of Bell Atlantic Corporation.
Mr. McQuaid is an Executive Director in charge of financial planning and
analysis for Bell Atlantic Corporation. Mr. McQuaid is responsible for
establishing Bell Atlantic Corporation's portfolio financial targets and
coordinating the development of integrated five-year business plans. He also
supervises the International Wireline Controller and ensures compliance with all
regulatory rules related to transactions between Bell Atlantic Corporation
subsidiaries. Since joining Bell Atlantic Corporation in July 1977, Mr. McQuaid
has held various positions of increasing responsibility in a variety of
financial disciplines. Mr. McQuaid is a Certified Management Accountant and has
over 22 years of financial experience in the telecommunications industry.
ADNAN OMAR. Mr. Omar was a director of FLAG Limited from April 1994 until
the corporate restructuring in February 1999 and has since been a member of our
Board. He is the director designee of Dallah Albaraka Holding Company. Mr. Omar
is the Executive 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., Al-Sham Shipping Co. Syria, Dallah Transport Co. Saudi Arabia,
Dallah Pilgrimage Transport Co., and Dallah Lebanon Tourism & Transport Co.
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.
DANIEL PETRI. Mr. Petri was FLAG Limited's acting Chairman and Chief
Executive Officer from June 1997 to January 1998. Mr. Petri was a director of
FLAG Limited from September 1995 until the corporate restructuring in
February 1999 and has since been a member of our Board. Mr. Petri is a director
designee of Bell Atlantic Corporation. Mr. Petri is President of Bell Atlantic
International Telecommunications and of Bell Atlantic Network Systems. 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.
PHILIP SESKIN. Mr. Seskin has been a member of our Board since
February 2000. Mr. Seskin is a director designee of Bell Atlantic Corporation.
Mr. Seskin is currently the Vice President-Strategy & Corporate Development for
Bell Atlantic Corporation. He is responsible for strategic business initiatives,
as well as merger and acquisition activity worldwide. Since joining Bell
Atlantic Corporation in 1987, Mr. Seskin has been involved in numerous major
mergers, acquisitions and joint ventures, including the
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formation of Bell Atlantic Nynex Mobile, Cable & Wireless Communications and the
merger of Bell Atlantic and Nynex.
UMBERTO SILVESTRI. Mr. Silvestri has been a member of the Board since
October 1999. Mr. Silvestri is Chairman of STET International Netherlands and
formerly was the Chief Executive Officer of STET and Chairman of Telecom Italia.
Mr. Silvestri also sits on the Board of Meie Assicuratrice and was previously a
member of the Board of the Italian Banking Association, Italtel, Sirti, CSELT
(Telecom Italia Group Laboratories) and was Vice Chairman of ELSAG--Elettronica
S Giorgio--Genoa.
JONATHAN SOLOMON. Mr. Solomon has been a member of the Board since
October 1999. Mr. Solomon currently serves on the boards of Millicom
International Cellular, THUS, the new name for Scottish Telecom, and Societe
Europeene de Communications. Until 1997, Mr. Solomon was Executive Director,
Strategy and Corporate Business Development at Cable & Wireless plc and
non-Executive Director of Hong Kong Telecom, IDC Japan, Nakhodka and Sakhalin
Telecom Russia and Tele2 in Sweden.
DR. VALLOBH VIMOLVANICH. Dr. Vallobh was a director of FLAG Limited from
July 1995 until the corporate restructuring in February 1999 and has since been
a member of our Board. Dr. Vallobh is the director designee of K.I.N. (Thailand)
Co. Ltd. Dr. Vallobh is Chairman of Telecom Holding Co., Ltd. and Vice Chairman
of Telecom Asia Corporation PCL. Dr. Vallobh 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.
KEY MANAGEMENT.
LARRY BAUTISTA. Mr. Bautista has served as Deputy Chief Financial Officer
since February 2000 and as Vice President-Finance and Treasurer since
December 1995. Prior to joining us, Mr. Bautista spent over six years in various
finance and treasury positions at NYNEX. He structured, negotiated and closed
several financings for FLAG Telecom, including the non-recourse debt of the FLAG
Atlantic-1 cable system and the refinancing of the FLAG Europe-Asia cable
system. Mr. Bautista has an M.B.A. degree with honors from Fordham University
and a Bachelor of Science degree in Management Engineering from Ateneo de Manila
University in the Philippines.
ANDREW EVANS. Mr. Evans has served as Executive Vice President--Strategy
since February 2000. He was previously Vice President of Strategy and Marketing
since April 1998. Mr. Evans started his career with British Telecom in 1982,
subsequently becoming an Executive Engineer and leading the development of BT's
real-time network traffic management systems. In 1990, he joined McKinsey &
Company as a Senior Telecommunications Specialist. Mr. Evans holds an MA in
Engineering and Electrical Sciences with First Class Honors from the University
of Cambridge, England, and an MBA with High Distinction (Baker Scholar) from the
Harvard Business School.
PETER MARTINS DA SILVA. Mr. Martins joined us in September 1999 as Vice
President of Business Development. As Vice President of Sprint's Latin American
operations, Mr. Martins led their winning bid to acquire Brazil's second long
distance carrier license and subsequently directed the set-up of the new company
to exploit the license. Previously, as Vice President of Business Development
for Ameritech International, Mr. Martins led the Ameritech consortium's winning
bid for Belgacom, and held responsibility for Ameritech's privatization efforts
in the Czech Republic, Ireland and Portugal, as well as being involved in the
privatization of MATAV, the Hungarian PTT. Mr. Martins majored in Economics at
the University of California at Berkeley and holds an MBA in international
business from the Harvard Business School.
DR. EBERHARD PLATTFAUT. Dr. Plattfaut has served as Vice President for
Special Projects since February 2000. He was previously Vice President of Europe
based in London since July 1998. Dr. Plattfaut was a director with o.tel.o
Communications/Vebacom, where he held a number of management positions in sales,
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marketing and strategy. Previously he was a senior manager with McKinsey &
Company, where he was responsible for client projects in the telecom/IT area, as
well as sales, marketing and strategy projects across industries with a focus on
European franchises. Dr. Plattfaut is a Fulbright Scholar and has studied
business, mechanical engineering and computer sciences. Dr. Plattfaut received
his MBA from the University of Southern California and his Doctorate from the
University of Erlangen.
OWEN BEST. Mr. Best has served as Vice President of Asia Pacific based in
Hong Kong since June 1998. Prior to joining us, Mr. Best was Vice President of
Telstra Japan and Regional Director for Telstra Korea. He has over 17 years
experience in the telecommunications industry, working extensively in the Asia
Pacific region in various technical and operational positions with Telecom
Australia and Telecom International. Mr. Best received his Bachelor's of
Engineering (Electronics/Communications) and his MBA from the University of
Queensland.
SORAYA TARRANT. Ms. Tarrant has served as Vice President of Americas based
in New York since March 1999. Ms. Tarrant was employed by Global One where over
an 11-year period she served in several key management positions including
Director of Carrier Services Sales, Director of Global Data Services and most
recently, as Director of Global Internet Solutions. Previously, she was with
Cable & Wireless Hong Kong serving major multinational clients. Ms. Tarrant
holds a Bachelor's of Science degree in Electronic Communications from the
University of Salford in Manchester, and a postgraduate degree in
Telecommunications Systems from the University of Aston in Birmingham, U.K.
WALID IRSHAID. Mr. Irshaid has served as Vice President of Middle East
based in Dubai since July 1998. Mr. Irshaid was the Director General of
Palestine Telecom Corporation, the emerging telecom service provider in
Palestine. Mr. Irshaid's experience in the Middle East was acquired from his
previous 17-year assignment with the Emirates Telecommunications Corporation as
Corporate Manager. Mr. Irshaid was actively involved in the deployment and
development of several major projects and key services within the Middle Eastern
region, including cellular, data, value added services and multimedia.
LOUIS ESLAMI Mr. Eslami joined us in February 2000 as Vice President of
Europe. Mr. Eslami was most recently Vice President--Sales and Marketing at GTS
Group and previously was Vice President/ General Manager--International at APEX
Global Internet Services from 1998 until 1999 and Managing
Director--ASEAN/Malaysia & Indonesia from 1996 until 1998. He holds a BS in
Electrical Engineering from the University of Akron, an MS in Electrical
Engineering from the Virginia Polytechnic Institute and has attended an
Executive Management Program at the University of Pennsylvania.
DR. CHIA CHOON WEI. Dr. Chia joined us in August 1998 as Senior Advisor
(Asia Pacific) based in Singapore. He was most recently Chief Executive Officer,
International Investments of Hutchison Telecom International Limited from
April 1997 to the end of June 1998. He has 27 years telecommunication
experience, first with British Telecom and then with Singapore Telecom, where he
spent twenty-two years. In his last position there, he was Vice President,
International Network Services. Dr. Chia holds a Ph.D. in Electrical Engineering
(Control Systems), and an M.Sc. and a B.Sc. (Engineering) from Imperial College,
London University.
WILSON WANG. Mr. Wang joined us in February 1999 as our resident
representative in China. He was Senior Vice President and China General Manager
of Sprint International from June 1997 to November 1998. Prior to that, he was
Senior VP and China General Manager of Ameritech International from
October 1994 to June 1997. Mr. Wang holds a BA from National Taiwan University
and an MBA from University of Washington.
KIMIAKI UENO. Mr. Ueno joined us in July 1999 as Vice President for Japan
based in Tokyo. Before joining the Company, Mr. Ueno was Representative
Director & Chief Executive of MCI International (Japan) Co., Ltd. from 1991 to
March, 1999 and Director of Marketing/Technical Support for MCI
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International (Japan) Co., Ltd. from 1988 to 1991. Prior to that, Mr. Ueno was
Assistant General Manager of General Administration of Mitsui & Co.,
(U.S.A.) Inc. from 1982 to 1988.
ADOLFO CASTILLA. Mr. Castilla joined us in June 1998 as our resident
representative in Spain and special advisor for Southern European Countries.
Previously, he was Sprint International's General Manager in Spain, and a member
of the Steering Committee of Lince, the third Spanish fixed license winner.
Prior to this, he was a member of the steering committee of the OPERA
consortium, and also the Airtel steering committee, a consortium he helped
create for Ameritech. Mr. Castilla has also been the General Manager of Roland
Berger in Spain, and worked for 8 years at the Telefonica Group of companies.
SAMIH KAWAR. Mr. Kawar has served as Executive Vice President--Operations
since February 2000. He was previously Vice President--Construction and
Operations and joined the FLAG Europe-Asia Cable system project in 1995. Prior
to joining us and for more than 17 years, Mr. Kawar worked in development/
project management of various international projects and management control
systems. Mr. Kawar has a degree in Engineering from the American University of
Beirut.
FRANK DENNISTON. Mr. Denniston is our Chief Technical Officer. Previously,
he was Vice President and Chief Engineer of Bell Atlantic Global Systems
Company, where he served as Project Manager for the construction of the FLAG
Europe-Asia cable system. With over 38 years experience, Mr. Denniston has
served in various technical and operations positions with NYNEX, AT&T and the
New York Telephone Company. Mr. Denniston holds a Bachelor's and a Master's
degree in Electrical Engineering from Rensselaer Polytechnic Institute.
JOHN DRAHEIM. Mr. Draheim has served as Vice President--Administration and
Communications since February 2000. He was previously Project Manager of the
FLAG Atlantic-1 cable system project since January 1999. Prior to this,
Mr. Draheim was Vice President of Operations at Ameritech International during
which time he also served as General Manager and a member of the Board of
Directors of Ameritech's joint venture in China, and Executive Director of the
MATAV. Before joining us, Mr. Draheim spent 35 years in the telecommunications
industry, having served in various technical, operations and management
positions at Ameritech, Bellcore, AT&T and the Ohio Bell Telephone Company.
Mr. Draheim holds a Bachelor's Degree in Electrical Engineering from Valparaiso
University and a Master's Degree in Management from Pace University.
COMMITTEES OF THE BOARD
In connection with the initial public offering, we established an Audit
Committee, all of the members of which will be non-employee directors. The Audit
Committee will be responsible for recommending to the Board of Directors the
engagement of our independent auditors and reviewing with our independent
auditors the conduct and results of the audits, our internal accounting
controls, audit practices and the professional services furnished by our
independent auditors.
We also currently have a Compensation Committee. Among other
responsibilities, our Compensation Committee reviews and approves all
compensation agreements for our officers and administers our long term incentive
plan.
COMPENSATION
For the year ended December 31, 1999, the aggregate compensation of all
members of our Board of Directors and all of our executive officers was
approximately $3.7 million. We anticipate that compensation levels in the future
will be greater than they have been to date. For the fiscal year ended
December 31, 1999, we granted to our Board of Directors and executive officers
options to acquire 325,002 of our common shares. At March 1, 2000 these persons
collectively held options to acquire 2,057,710 of our
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common shares. These options have exercise prices ranging from $6.42 to $24.00
with a weighted average exercise price of $6.96 and generally vest over two
years and terminate after 10 years.
LONG-TERM INCENTIVE PLAN
In 1999, our Board of Directors and our shareholders adopted the FLAG
Limited 1998 Long-Term Incentive Plan, originally adopted in 1998 by the Board
of Directors and shareholders of FLAG Limited. The purpose of the Plan is to
allow us to attract, retain and reward officers, employees, consultants and
certain other individuals and to compensate them in a way that provides
additional incentives and enables such individuals to increase their ownership
interests. Individual awards under the Plan may take the form of:
- incentive stock options ("ISOs") or non-qualified stock options ("NQSOs");
- stock appreciation rights ("SARs");
- restricted or deferred stock;
- dividend equivalents;
- bonus shares and awards in lieu of our obligations to pay cash
compensation; and
- other awards the value of which is based in whole or in part upon the
value of the common shares.
The Plan is administered by a committee, whose members were appointed by our
Board of Directors. The committee is empowered to select the individuals who
will receive awards and the terms and conditions of those awards, including
exercise prices for options and other exercisable awards, vesting and forfeiture
conditions (if any), performance conditions, the extent to which awards may be
transferable and periods during which awards will remain outstanding. Awards may
be settled in cash, shares, other awards or other property, as determined by the
committee.
The maximum number of common shares that may be subject to awards under the
Plan may not exceed 6,763,791.
The Plan may be amended by the Board of Directors without the consent of our
shareholders, except that any amendment, although effective when made, will be
subject to shareholder approval if required by any Federal or state law or
regulation or by the rules of any stock exchange or automated quotation system
on which our common shares may then be listed or quoted. The number and kind of
shares reserved or deliverable under the Plan and the number and kind of shares
subject to outstanding awards are subject to adjustment in the event of stock
splits, stock dividends and other extraordinary corporate events. Following
completion of the initial public offering, we filed a registration statement on
Form S-8 to register the issuance of our common shares under the Plan.
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PRINCIPAL SHAREHOLDERS
The following table sets forth information known to FLAG Telecom with
respect to the beneficial ownership of our common shares as of April 1, 2000 by:
(1) each shareholder known by us to be the beneficial owner of at least 5% of
our common shares, (2) each of our directors, (3) each of our executive officers
and (4) all of our executive officers and directors as a group. Except as
otherwise noted below, each of the shareholders identified in the table has sole
voting and investment power over the shares it beneficially owns.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENTAGE
- ------------------------ ------------------- ----------
<S> <C> <C>
PRINCIPAL SHAREHOLDERS
Bell Atlantic Corporation(1)............................... 39,922,276 29.42%
Dallah Albaraka Holding Company(2)......................... 20,790,157 15.32%
Telecom Asia Corporation Public Co. Ltd.(3)................ 14,630,114 10.78%
Marubeni Corporation(4).................................... 9,297,330 6.85%
The Asian Infrastructure Fund(5)........................... 7,600,515 5.60%
EXECUTIVE OFFICERS AND DIRECTORS
Andres Bande(6)............................................ 1,071,707 *
Edward McCormack(6)........................................ 268,000 *
Stuart Rubin(6)............................................ 268,000 *
Michael Fitzpatrick(6)..................................... 8,333 *
Edward McQuaid............................................. -- --
Adnan Omar(6).............................................. 41,667 *
Daniel Petri(7)............................................ 41,667 *
Philip Seskin.............................................. -- --
Umberto Silvestri(6)....................................... 8,333 *
Jonathan Solomon(6)........................................ 8,333 *
Dr. Vallobh Vimolvanich(6)................................. 41,667 *
All directors and executive officers as a group (11
persons)(6).............................................. 1,757,707 1.30%
Total...................................................... 93,998,099 69.27%
</TABLE>
- ------------------------
* Less than one percent (1%)
(1) Bell Atlantic Corporation is the ultimate parent of a wholly owned
subsidiary, Bell Atlantic Network Systems Company, which directly owns our
shares. The business address of the direct owner is: Bell Atlantic Network
Systems Company, 4 West Red Oak Lane, White Plains, NY 10604, U.S.A.
(2) Dallah Albaraka Holding Company is the parent of a wholly-owned subsidiary,
Rathburn Limited, which directly owns our shares. The business address of
the direct owner is: Rathburn Limited, Abbott Building, Main Street,
P.O. Box 3186, Road Town, Tortola, BVI.
(3) Telecom Asia Corporation Public Co. Ltd. is the ultimate parent of a wholly
owned subsidiary, K.I.N. (Thailand) Co., Ltd., which directly owns our
shares. The business address of the direct owner is: K.I.N. (Thailand)
Co., Ltd., c/o Telecom Holdings Company Limited, 30th Floor, Telecom Tower,
18 Ratchadaphisak Road, Huai Khwang, Bangkok 10310, Thailand. Bell Atlantic
holds approximately 19% of the shares of Telecom Asia Corporation Public
Co. Ltd.
(4) Marubeni Corporation is the ultimate parent of a wholly owned subsidiary,
Marubeni Telecom Development Limited, which directly owns our shares. The
business address of the direct owner is: Marubeni Telecom Development
Limited, 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 beneficial share ownership of our directors and executive officers
consists solely of shares that may be acquired within sixty days of the date
of this prospectus by exercising options. Those shares are also deemed to be
outstanding for purposes of calculating the percentage ownership of these
persons.
(7) Pursuant to a written agreement, Mr. Petri's options are held, and therefore
may be deemed to be beneficially owned, by Bell Atlantic Corporation.
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CERTAIN TRANSACTIONS
There exist various agreements between our subsidiaries and our shareholders
(or their affiliates) for the development, construction, operation, financing
and marketing of the FLAG Europe-Asia cable system and the FLAG Atlantic-1
system. The following paragraphs are a summary of the material provisions of
certain of these agreements.
PROGRAM MANAGEMENT SERVICES AGREEMENT
Under the terms of the Program Management Services Agreement, Bell Atlantic
Network Systems, one of our shareholders, managed all aspects of the planning
and construction of the FLAG Europe-Asia cable system including the regulatory
aspects, physical layout, development of specifications, evaluation of contract
bids, negotiation of the construction and maintenance agreement and supplemental
arrangements, development of restoration plans, development of an operations and
maintenance plan, development of a quality assurance plan and management of the
actual construction and installation of the FLAG Europe-Asia cable system. FLAG
Limited, in consideration of such services, agreed to reimburse Bell Atlantic
Network Systems 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, FLAG Limited
entered into a Termination and Release Agreement providing for the termination
of the program management services provided by Bell Atlantic Network Systems.
The total payments made under these agreements to settle all outstanding
liabilities were $70 million.
MARKETING SERVICES AGREEMENT
FLAG Limited and Bell Atlantic Network Systems entered into a Marketing
Services Agreement pursuant to which Bell Atlantic Network Systems was
responsible for marketing the assignable capacity of the FLAG Europe-Asia cable
system. Bell Atlantic Network Systems was appointed the exclusive sales agent
for FLAG Limited throughout the world and bore all marketing expenses and costs
it incurred in connection with these marketing services. FLAG Limited agreed to
pay commissions at the rate of 4% of commitments obtained prior to July 3, 1995
and 3% of the commitments obtained thereafter. From inception through
September 1999, FLAG Limited incurred commissions and other costs in the amount
of $18.4 million. In May 1998, under a Marketing Transition Agreement, FLAG
Limited and Bell Atlantic Network Systems agreed to terminate the Marketing
Services Agreement. Under the Marketing Transition Agreement, FLAG Limited
agreed to pay certain closing down expenses, certain commissions in connection
with their pre-termination activities, and up to $3 million in commissions
resulting from certain post-termination sales. In this regard, FLAG Limited
incurred $0.5 million in closing down expenses, $15.9 million related to
commissions in connection with pre-termination sales activity and $2 million in
connection with post-termination sales activity. No further commissions are due
in relation to post-termination sales activity. As at September 30, 1999,
$1.7 million of the above remained unpaid and fully accrued by FLAG Limited.
Also, under the Marketing Transition Agreement, FLAG Limited agreed to pay a 50%
commission in the event that Bell Atlantic Network Systems or an affiliate
secures the sale of four whole DS3s on the FLAG Europe-Asia cable system. No
such sales have occurred to date.
CONSTRUCTION CONTRACT
Under FLAG Limited's previous credit facility, in order to obtain political
risk insurance through the Ministry of International Trade and Industry of
Japan, FLAG Limited named Marubeni, one of our indirect beneficial shareholders,
as a nominal contractor under the construction contract. The construction
contract provided that payments for substantially all of the goods and services
that were sourced from outside of the United States were to be remitted through
Marubeni to the relevant contractor. FLAG Limited made no payments to Marubeni
in connection with its acting as nominal contractor.
PREVIOUS CREDIT FACILITY
Marubeni was the administrative agent for Tranche B of FLAG Limited's
previous credit facility and was paid a customary agency fee. FLAG Limited has
retired all amounts outstanding under this credit
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facility, including the Tranche B indebtedness. From inception to March 31,
1998, $15.5 million in fees were paid to Marubeni.
CONTINGENT SPONSOR SUPPORT AGREEMENTS
As a condition to obtaining FLAG Limited's previous credit facility, certain
of FLAG Limited's then-existing shareholders entered into Contingent Sponsor
Support Agreements to provide up to $500 million of additional equity
contributions in the event of certain defaults. FLAG Limited's previous credit
facility has been repaid, which benefitted the affected shareholders by
releasing them from their contingent obligations under the Contingent Sponsor
Support Agreements.
EMPLOYEE SERVICES AGREEMENT
FLAG Limited has entered into an Employee Services Agreement with Bell
Atlantic Global Systems under which Bell Atlantic Global Systems has seconded
certain employees to FLAG Limited. As of September 1, 1999, two Bell Atlantic
Global Systems employees were seconded to FLAG Limited. FLAG Limited incurred
total costs of $217,000 for this service from February 27, 1999 to
September 30, 1999.
CAPACITY PURCHASE AGREEMENTS
Bell Atlantic has agreed to purchase $15 million of capacity on the FLAG
Atlantic-1 cable system under a Capacity Purchase Agreement. GTE has agreed to
purchase $7.5 million of capacity on the FLAG Atlantic-1 cable system pursuant
to a separate Capacity Purchase Agreement. On June 27, 1998, Bell Atlantic
Corporation and GTE Corporation entered into an Agreement and Plan of Merger.
PRIMARY SUPPLIER AGREEMENT
We recently entered into a Primary Supplier Agreement with Bell Atlantic
Global Systems under which Bell Atlantic Global Systems has agreed to purchase
from us 50% of the undersea facilities based communications capacity in any
fiber optic cable needed by Bell Atlantic Global Systems or certain of its
affiliates in each of the four calendar years beginning on January 1, 2000. The
purchase of capacity may be on the FLAG Europe-Asia cable system, the FLAG
Atlantic-1 cable system or any additional system constructed or acquired in the
future and may be effected by executing Capacity Purchase Agreements with us or
any of our affiliates.
EXCHANGE AGREEMENT AND PLAN OF REORGANIZATION; TAX AGREEMENT
On February 26, 1999, FLAG Limited's shareholders other than Bell Atlantic
Network Systems exchanged all their common shares in FLAG Limited for common
shares in FLAG Telecom. Bell Atlantic Network Systems, however, exchanged only a
limited portion of its common shares in FLAG Limited for 3,666,155 common shares
in FLAG Telecom. At the same time, Bell Atlantic Network Systems and FLAG
Telecom entered into an Exchange Agreement and Plan of Reorganization providing
that Bell Atlantic Network Systems' remaining common shares in FLAG Limited
would be exchanged for common shares in FLAG Telecom in the event that, prior to
February 26, 2002, Bell Atlantic received certain regulatory approvals from the
Federal Communications Commission allowing Bell Atlantic to offer long distance
service. Effective January 4, 2000, Bell Atlantic Network Systems exchanged the
remaining 36,256,121 common shares it held in FLAG Limited for an equivalent
number of common shares in FLAG Telecom.
The initial transfer by Bell Atlantic Network Systems of some of its common
shares in FLAG Limited and the subsequent transfer by Bell Atlantic Network
Systems of its remaining shares in FLAG Limited are intended to be treated as
tax-free transactions for United States federal income tax purposes. Under a tax
agreement between FLAG Telecom and Bell Atlantic Network Systems, FLAG Telecom
agreed (1) to make customary representations that are designed to ensure that
each exchange is treated as a tax-free transaction and (2) not to dispose of any
shares in FLAG Limited or to permit FLAG Limited to dispose of substantially all
of its assets for a five-year period following the initial or any subsequent
exchange of shares. Any breach of this agreement would require FLAG Telecom to
indemnify Bell Atlantic and Bell Atlantic Network Systems against any resulting
United States federal, state or local tax consequences.
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DESCRIPTION OF EXISTING INDEBTEDNESS
DESCRIPTION OF THE 8 1/4% SENIOR NOTES OF FLAG LIMITED
GENERAL. On January 30, 1998, FLAG Limited issued $430 million of 8 1/4%
Senior Notes pursuant to an indenture between FLAG Limited and IBJ Schroder Bank
and Trust Company (which has been succeeded by The Bank of New York), as
trustee. FLAG Limited subsequently consummated an offer to exchange those notes
for $430 million of 8 1/4% Senior Notes due 2008 that had been registered under
the Securities Act of 1933.
PRINCIPAL, MATURITY AND INTEREST. The 8 1/4% Senior Notes are limited in
aggregate principal amount to $430 million and will mature on January 30, 2008.
Interest on the 8 1/4% Senior Notes accrues at 8 1/4% per annum and is payable
semi-annually in arrears on January 30 and July 30 of each year.
RANKING. The 8 1/4% Senior Notes are FLAG Limited's unsecured senior
obligations, that rank equally in right of payment with all of its existing and
future senior unsecured obligations and rank senior in right of payment to all
of FLAG Limited's future subordinated obligations. The 8 1/4% Senior Notes,
however, are effectively subordinated to all of FLAG Limited's existing and
future secured indebtedness to the extent of the assets that secure that
indebtedness.
REDEMPTION. The 8 1/4% Senior Notes are redeemable on or after January 30,
2003, at FLAG Limited's option, in whole or in part, at the following redemption
prices (expressed as percentages of principal amount) described below plus
accrued interest, if redeemed during the twelve-month period beginning on
January 30 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003........................................................ 104.125%
2004........................................................ 102.750%
2005........................................................ 101.375%
2006 and thereafter......................................... 100.000%
</TABLE>
In addition, at any time on or before January 30, 2001, FLAG Limited may
redeem up to 33 1/3% of the original aggregate principal amount of the 8 1/4%
Senior Notes with the net proceeds of a sale of common equity at a redemption
price equal to 108.25% of the principal amount thereof, plus accrued interest,
provided that at least 66 2/3% of the original aggregate principal amount of
8 1/4% Senior Notes remains outstanding after such redemption. Except in
connection with a change of control or an asset sale, as defined in the
indenture relating to the 8 1/4% Senior Notes, FLAG Limited is not required to
make mandatory redemption or sinking fund payments with respect to the 8 1/4%
Senior Notes.
COVENANTS. The indenture relating to the 8 1/4% Senior Notes restricts,
among other things, FLAG Limited's ability to incur additional indebtedness; pay
dividends or make certain other restricted payments; incur certain liens; sell,
assign, transfer, lease, convey or otherwise dispose of substantially all of its
assets; enter into certain transactions with affiliates; or incur certain
indebtedness. The indenture relating to the 8 1/4% Senior Notes permits, under
certain circumstances, FLAG Limited's subsidiaries to be deemed unrestricted and
thus not subject to the restrictions of the indenture.
EVENTS OF DEFAULT. The indenture relating to the 8 1/4% Senior Notes
contains standard events of default, including:
- defaults in the payment of principal, premium or interest;
- defaults in the compliance with covenants contained in the indenture;
- cross-defaults on more than $5 million of other indebtedness;
- failure to pay more than $5 million of judgments; and
- certain events of FLAG Limited's subsidiaries.
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DESCRIPTION OF FLAG LIMITED'S CREDIT FACILITIES
GENERAL. On February 16, 2000, FLAG Limited amended its existing credit
facilities to provide for a $160 million bank financing for a six-year term.
PRINCIPAL, MATURITY AND INTEREST. FLAG Limited's credit facilities now
consist of a $150 million term loan facility (all of which is outstanding) and a
$10 million revolving credit facility (none of which is outstanding). Final
maturity of the term loans and the revolving credit facility is on January 30,
2006. These facilities bear interest at a rate of 225 basis points over LIBOR
for the first six months and thereafter at a rate of between 150 and 250 basis
points over LIBOR, depending on the credit rating of the 8 1/4% Senior Notes of
FLAG Limited. Commitment fees accrue on the undrawn portion of the revolving
credit facility at 50 basis points.
SECURITY. Obligations under the credit facilities are senior obligations,
and are secured by a pledge by us of all of the capital stock of FLAG Limited
and by assignment of all of FLAG Limited's contracts, a security interest in
investment property, intellectual property, bank accounts and intangible
property.
MANDATORY PREPAYMENT. FLAG Limited must prepay the term loans and amounts,
if any, outstanding under the revolving credit facility (to be applied in that
order) with 100% of the net proceeds of any incurrence of debt, asset sales,
warranty payments, insurance recoveries, condemnation and expropriation
proceeds, and 50% of the net proceeds of any equity offerings of FLAG Limited
and 50% of quarterly excess cash flow (100% in the event a financial covenant is
breached). Upon an event of default, the administrative agent for the lenders
may elect to require FLAG Limited to prepay 50% to 100% of the amounts held in
certain reserve accounts.
COVENANTS. The credit agreement contains customary provisions for
non-recourse project financings regarding restrictions on additional
indebtedness, dividends and other distributions, additional investments and
sales of assets.
EVENTS OF DEFAULT. The credit agreement contains customary events of
default, including: default by us or FLAG Limited in the payment of principal or
interest; failure to perform covenants; material falsity of a representation or
warranty; failure to pay a final judgment ($5 million or more); bankruptcy; the
termination or legal suspension of pledges or other security for the loans or of
the performance bond or performance guaranties of the project contractor;
failure to obtain or maintain material permits or rights of way for the
operation of the project; a change in control (less than 51% ownership by us) of
FLAG Limited; and a mandatory prepayment by FLAG Limited of material
indebtedness other than the loans under the FLAG Limited credit facilities.
DESCRIPTION OF FLAG ATLANTIC LIMITED'S CREDIT FACILITIES
GENERAL. On October 8, 1999, our joint venture company, FLAG Atlantic
Limited, entered into bank credit facilities providing for a $600 million bank
financing for a term of 7.5 years.
PRINCIPAL, MATURITY AND INTEREST. The FLAG Atlantic Limited credit facility
consists of a $575 million construction/term loan facility ($62 million of which
is outstanding) and a $25 million revolving credit facility (none of which is
outstanding). Final maturity of principal on the term loans and any amounts
outstanding under the revolving credit facility is on April 30, 2007. The loans
under these facilities bear interest at LIBOR plus 125 basis points for that
portion of the loans (not to exceed 50% of the outstanding loans) which are
backed by investment grade receivables and LIBOR plus 300 basis points for the
balance of the loans. Commitment fees accrue on the undrawn balance of the loans
at between 37.5 basis points and 75 basis points.
SECURITY. Obligations under the credit facilities are senior obligations
and are secured by a pledge by us of the shares representing one-half of the
ownership of FLAG Atlantic Limited and a commitment to
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invest $100 million as equity, which commitment is secured by a bank letter of
credit and a limited guarantee by us (and a parallel pledge of stock and equity
investment commitments secured by a bank letter of credit from GTS TransAtlantic
in respect of its one-half ownership of FLAG Atlantic Limited). The loans are
also secured by an assignment of all of FLAG Atlantic Limited's contracts, a
security interest in investment property, intellectual property, goods,
equipment and inventory, bank accounts and intangible property.
MANDATORY PREPAYMENT. FLAG Atlantic Limited must prepay the construction
loans out of amounts available from certain pre-sales of capacity on the date
the loans are converted to term loans and the term and revolving loans with 100%
of the net proceeds of any incurrence of debt, asset sales, warranty payments,
insurance recoveries, condemnation and expropriation proceeds and sale
leasebacks, and 50% of the net proceeds of any equity offerings of FLAG Atlantic
Limited or either of its direct shareholders (but not of us) and 75% of
quarterly excess cash flow (100% in the event a financial covenant is breached).
COVENANTS. The credit agreement contains customary provisions for
non-recourse project financings regarding restrictions on additional
indebtedness, dividends and other distributions, additional investments and
sales of assets.
EVENTS OF DEFAULT. The credit agreement contains standard events of
default, including: defaults in the payment of principal or interest; failure to
perform covenants contained in the credit agreement and related financing
documents; material falsity of a representation or warranty made in the loan
agreement or related financing documents; failure to pay a final judgment
($5 million or more); bankruptcy; the termination or legal suspension of pledges
or other security for the loans or of the performance bond or performance
guaranties of the project contractor; failure to obtain or maintain material
permits or rights of way for the operation of the project; a change in control
(less than 50% direct or indirect ownership by us or less than 50% ownership by
GTS TransAtlantic) of FLAG Atlantic Limited; and prepayment by FLAG Atlantic
Limited of material indebtedness.
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DESCRIPTION OF EXCHANGE NOTES
The initial Dollar Notes and the initial Euro Notes were issued under
separate indentures, each dated as of March 17, 2000. The Bank of New York is
the trustee under each indenture. The exchange Dollar Notes will be issued under
the Dollar indenture and the exchange Euro Notes will be issued under the Euro
indenture. The indentures have been filed as exhibits to the registration
statement of which this prospectus is a part. They are available as set forth
under the heading "Where You Can Find More Information." The terms of the
exchange notes of a series are identical to the terms of the initial notes of
such series, except that the exchange notes will be registered under the
Securities Act and will not contain restrictions on transfer or include
provisions relating to additional interest and will contain different
administrative terms. Exchange notes will otherwise be treated as notes for
purposes of the indentures.
The following is a summary of the material provisions of the indentures.
This summary does not contain all of the information that may be important to an
investor in the Notes. It is subject to, and is qualified in its entirety by
reference to, all the provisions of the indentures, including terms defined in
the indentures and provisions of the Trust Indenture Act of 1939 (TIA). Whenever
particular defined terms of the indentures not otherwise defined here are
referred to, such defined terms are incorporated here by reference.
Key terms used in this section are defined under "Certain Definitions." When
we refer to:
- the Company in this section, we mean FLAG Telecom Holdings Limited and not
its Subsidiaries, and
- the Notes in this section, we mean the initial notes originally issued on
the Issue Date and exchange notes issued therefor.
BRIEF DESCRIPTION OF THE EXCHANGE NOTES
The exchange Dollar Notes will:
- mature on March 30, 2010,
- be limited to $300,000,000 aggregate principal amount, and
- bear interest at the rate of 11 5/8% per annum, payable semi-annually.
The exchange Euro Notes will:
- mature on March 30, 2010,
- be limited to [EURO]300,000,000 aggregate principal amount, and
- bear interest at the rate of 11 5/8% per annum, payable semi-annually.
The exchange notes will:
- be general unsecured obligations of the Company,
- rank equal in right of payment with all other existing and future Senior
Indebtedness of the Company,
- rank senior in right of payment to all existing and future Subordinated
Indebtedness of the Company, if any,
- be effectively subordinated to all existing and future secured
Indebtedness of the Company, and
- not be guaranteed by any Subsidiary of the Company and therefore will be
effectively subordinated to all existing and future obligations of the
Company's Subsidiaries.
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As of December 31, 1999, on a pro forma basis after giving effect to the
offering of the initial notes and the related transactions as described
elsewhere in this prospectus:
- the Company and its Subsidiaries would have had consolidated long-term
indebtedness of $1.18 billion,
- the Company would have had long-term indebtedness of $589 million, none of
which would have been secured, and
- the Company's Subsidiaries would have had long-term indebtedness of
$595 million.
The Company is a holding company that conducts substantially all of its
operations through subsidiaries and joint ventures and therefore depends upon
cash flow from its subsidiaries and joint ventures to meet its obligations,
including its obligations in respect of the exchange notes. See "Risk
Factors--Risks Related to this Offering."
PRINCIPAL, MATURITY AND INTEREST
The exchange Dollar Notes will be issued in denominations of $1,000 and
integral multiples of $1,000. The exchange Euro Notes will be issued in
denominations of [EURO]1,000 and integral multiples of [EURO]1,000. The exchange
notes will mature on March 30, 2010. The exchange notes will not be entitled to
the benefit of any mandatory sinking fund.
Interest on the exchange notes will accrue at the rate of 11 5/8% per annum
and will be payable semi-annually in arrears on each March 30 and September 30,
commencing on September 30, 2000. Payments will be made to the persons who are
registered Holders ("Holders") at the close of business on March 15 and
September 15, respectively, immediately preceding the applicable interest
payment date.
Interest on the exchange notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from and
including the Issue Date. Interest on the exchange notes will be computed on the
basis of a 360-day year comprised of twelve 30-day months. The redemption of
exchange notes with unpaid and accrued interest to the date of redemption will
not affect the right of Holders of record on a record date to receive interest
due on an interest payment date. When we refer to the Company's obligation to
pay interest upon the redemption, repurchase, maturity or acceleration of the
exchange notes, we are including additional interest under the Registration
Agreements and Additional Amounts.
Initially, the trustee will act as principal Paying Agent and Registrar for
the exchange notes. The Company may change the Paying Agent and Registrar
without notice to Holders. The Euro Notes are listed on the Luxembourg Stock
Exchange. As long as the Euro Notes are listed on the Luxembourg Stock Exchange
and as long as the rules of this exchange require, the Company will also
maintain a Paying Agent and a transfer agent in Luxembourg.
OPTIONAL REDEMPTION
OPTIONAL REDEMPTION. Except as stated below, the Company may not redeem the
exchange notes prior to March 30, 2005. The Company may redeem the exchange
Dollar Notes or the exchange Euro Notes, as the case may be, at its option, in
whole at any time or in part from time to time, on and after March 30, 2005, at
the following redemption prices, expressed as percentages of the principal
amount
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thereof, plus accrued and unpaid interest to the date of redemption, if redeemed
during the twelve-month period commencing on March 30 of any year set forth
below:
<TABLE>
<CAPTION>
DOLLAR NOTE EURO NOTE
YEAR PERCENTAGE PERCENTAGE
- ---- ----------- ----------
<S> <C> <C>
2005........................................................ 105.813% 105.813%
2006........................................................ 103.875% 103.875%
2007........................................................ 101.938% 101.938%
2008 and thereafter......................................... 100.000% 100.000%
</TABLE>
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At any time, or from time
to time, on or prior to March 30, 2003 the Company may, at its option, use the
net cash proceeds of one or more Public Equity Offerings to redeem in the
aggregate up to 35% of the aggregate principal amount of the:
(1) exchange Dollar Notes originally issued at a redemption price equal to
111.625% of the principal amount thereof, plus accrued and unpaid
interest thereon to the date of redemption; or
(2) exchange Euro Notes originally issued at a redemption price equal to
111.625% of the principal amount thereof, plus accrued and unpaid
interest thereon to the date of redemption;
PROVIDED, that:
(1) after giving effect to any such redemption at least 65% of the aggregate
principal amount of the exchange Dollar Notes or the exchange Euro Notes,
as the case may be, originally issued remains outstanding; and
(2) the Company shall make such redemption not more than 90 days after the
consummation of such Public Equity Offering.
OPTIONAL TAX REDEMPTION. The exchange notes will be subject to redemption
at the option of the Company or a successor corporation at any time, in whole
but not in part, upon not less than 30 nor more than 60 days' notice, at a
redemption price equal to the principal amount thereof plus accrued and unpaid
interest to the redemption date if, as a result of any change in or amendment to
the laws or any regulations or rulings promulgated thereunder of:
(1) Bermuda or any political subdivision or governmental authority thereof or
therein having power to tax,
(2) any jurisdiction, other than the United States, the United Kingdom or
Luxembourg, from or through which payment on the exchange notes is made by
the Company or a successor corporation, or its paying agent in its capacity
as such, or any political subdivision or governmental authority thereof or
therein having the power to tax, or
(3) any other jurisdiction, other than the United States, in which the Company
or a successor corporation is organized, or any political subdivision or
governmental authority thereof or therein having the power to tax,
or any change in the official application or interpretation of such laws,
regulations or rulings, or any change in the official application or
interpretation of, or any execution of or amendment to, any treaty or treaties
affecting taxation to which any such jurisdiction (or any such political
subdivision or taxing authority) is a party (a "Change in Tax Law"), which
becomes effective on or after the date of this prospectus, the Company or a
successor corporation is or would be required on the next succeeding Interest
Payment Date to pay Additional Amounts with respect to the exchange notes (as
described under "Additional Amounts"), and the payment of such Additional
Amounts cannot be avoided by the use of any reasonable measures available to the
Company or the successor corporation.
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In addition, if the Person formed by a consolidation or amalgamation of the
Company or into which the Company is merged or to which the Company conveys,
transfers or leases its properties and assets substantially as an entirety, is
required, as a consequence of such consolidation, amalgamation, merger,
conveyance, transfer or lease and as a consequence of a Change in Tax Law
occurring after the date of such consolidation, amalgamation, merger,
conveyance, transfer or lease, to pay Additional Amounts with respect to the
exchange notes, such Person may redeem the exchange notes at any time, in whole
but not in part, upon the notice and at the redemption price described in the
immediately preceding paragraph, if the payment of such Additional Amounts
cannot be avoided by the use of any reasonable measures available to such
person.
OPTIONAL REDEMPTION PROCEDURES. In the event that less than all of the
exchange notes are to be redeemed at any time, selection of exchange notes for
redemption will be made by the trustee in compliance with the requirements of
the principal national securities exchange, if any, on which exchange notes are
listed or, if the exchange notes are not then listed on a national securities
exchange, on a PRO RATA basis, by lot or by any other method as the trustee
shall deem fair and appropriate. No exchange Dollar Notes of $1,000 or less or
exchange Euro Notes of [EURO]1,000 or less shall be redeemed in part and
exchange notes in excess of $1,000 or [EURO]1,000, as the case may be, may be
redeemed in part in multiples of $1,000 or [EURO]1,000, as the case may be,
only. If a partial redemption is made with the proceeds of a Public Equity
Offering, selection of the exchange notes or portions thereof for redemption
shall, subject to the preceding sentence, be made by the trustee only on a PRO
RATA basis or on as nearly a PRO RATA basis as is practicable (subject to the
procedures of DTC, Euroclear or Clearstream, Luxembourg, as the case may be),
unless the method is otherwise prohibited.
Notice of any redemption shall be mailed by first-class mail, postage
prepaid, at least 30 but not more than 60 days before the redemption date to
each Holder of exchange notes to be redeemed at its registered address. For so
long as the Euro Notes are listed on the Luxembourg Stock Exchange, notices of
redemption of the Euro Notes will also be published in accordance with the
procedures described under "--Notices." If exchange notes are to be redeemed in
part only, the notice of redemption shall state the portion of the principal
amount to be redeemed. A new exchange note in a principal amount equal to the
unredeemed portion thereof (if any) will be issued in the name of the Holder
thereof upon cancellation of the original exchange note (or appropriate
adjustments to the amount and beneficial interests in a Global Note will be
made, as appropriate) and, if applicable, delivered to the Holder by the Paying
Agent (including, for so long as the Euro Notes are listed on the Luxembourg
Stock Exchange, the paying agent in Luxembourg).
The Company will pay the redemption price for any exchange note together
with accrued and unpaid interest thereon through the date of redemption. On and
after the redemption date, interest will cease to accrue on exchange notes or
portions thereof called for redemption as long as the Company has deposited with
the Paying Agent funds in satisfaction of the applicable redemption price
pursuant to the relevant indenture.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of exchange Dollar
Notes or exchange Euro Notes, as the case may be, will have the right to require
that the Company purchase all or a portion (in integral multiples of $1,000 or
[EURO]1,000, as the case may be) of the Holder's exchange notes at a purchase
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest through the date of purchase (the "Change of Control Payment").
Within 30 days following the date upon which the Change of Control occurred,
the Company must send, by first-class mail, a notice to each Holder of exchange
Dollar Notes and exchange Euro Notes, with a copy to the trustee, offering to
purchase such exchange notes as described above (a "Change of Control Offer").
For so long as the exchange Euro Notes are listed on the Luxembourg Stock
Exchange, notice of a
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Change of Control Offer with respect to the exchange Euro Notes will also be
published in accordance with the procedures described under "--Notices." The
Change of Control Offer shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 60 days from the date the
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date").
On the Change of Control Payment Date, the Company will, to the extent
lawful:
(1) accept for payment all exchange notes or portions thereof properly tendered
with the form of election to redeem attached to the reverse of the exchange
notes for such purposes to the Paying Agent (which may include, for so long
as the exchange Euro Notes are listed on the Luxembourg Stock Exchange, the
paying agent in Luxembourg) pursuant to a Change of Control Offer (or, if
the trustee is acting as agent for the Company, direct the trustee to so
accept);
(2) deposit with the Paying Agent funds in an amount equal to the Change of
Control Payment in respect of all exchange notes or portions thereof so
tendered; and
(3) deliver or cause to be delivered to the trustee (including by designating
the trustee as its agent for acceptance of exchange notes) the exchange
notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of exchange notes or portions thereof being
purchased by the Company.
If only a portion of an exchange note is purchased pursuant to a Change of
Control Offer, a new such exchange note in a principal amount equal to the
portion thereof not purchased will be issued in the name of the Holder thereof
upon cancellation of the original exchange note (or appropriate adjustments to
the amount and beneficial interests in the applicable Global exchange note will
be made, as appropriate) and, if applicable, delivered to the Holder by the
Paying Agent (including, for so as the Euro Notes are listed on the Luxembourg
Stock Exchange, the paying agent in Luxembourg).
Indebtedness of the Company may contain prohibitions on the occurrence of
events that would constitute a Change of Control or require that Indebtedness to
be repurchased upon a Change of Control. Moreover, the exercise by the Holders
of their right to require the Company to repurchase exchange notes upon a Change
of Control could cause a default under other Indebtedness even if the Change of
Control itself does not.
If a Change of Control Offer occurs, there can be no assurance that the
Company will have available funds sufficient to make the Change of Control
Payment for all the exchange notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding exchange notes pursuant to a Change of Control Offer, the
Company expects that it would seek third-party financing to the extent it does
not have available funds to meet its purchase obligations and any other
obligations in respect of Senior Indebtedness. However, there can be no
assurance that the Company would be able to obtain necessary financing.
Holders will not be entitled to require the Company to purchase their
exchange notes in the event of a takeover, recapitalization, leveraged buyout or
similar transaction which is not a Change of Control.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other applicable securities laws and regulations in
connection with the purchase of exchange notes in connection with any Change of
Control Offer. To the extent that the provisions of any securities laws or
regulations conflict with the "Change of Control" provisions of either
indenture, the Company will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under such
indenture by doing so.
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ADDITIONAL AMOUNTS
If any deduction or withholding for any present or future taxes, assessments
or other governmental charges of:
(1) Bermuda or any political subdivision or governmental authority thereof or
therein having power to tax,
(2) any jurisdiction, other than the United States, the United Kingdom or
Luxembourg, from or through which payment on the exchange notes is made by
the Company or a successor corporation, or its paying agent in its capacity
as such, or any political subdivision or governmental authority thereof or
therein having the power to tax, or
(3) any other jurisdiction, other than the United States, in which the Company
or a successor corporation is organized, or any political subdivision or
governmental authority thereof or therein having the power to tax
shall at any time be required by such jurisdiction (or any such political
subdivision or taxing authority) in respect of any amounts to be paid by the
Company or a successor corporation under the exchange Dollar Notes or the
exchange Euro Notes, as the case may be, the Company or a successor corporation
will pay each holder of such a Note as additional interest, such additional
amounts ("Additional Amounts") as may be necessary in order that the net amounts
paid to such Holder who, with respect to any such tax, assessment or other
governmental charge, is not resident in, or a citizen of, such jurisdiction,
after deduction or withholding, shall be not less than the amount specified in
such exchange Note to which such Holder is entitled; PROVIDED, HOWEVER, the
Company or a successor corporation shall not be required to make any payment of
Additional Amounts for or on account of:
(a) any tax, assessment or other governmental charge which would not have
been imposed but for:
(x) the existence of any present or former connection between such Holder
(or between a fiduciary, settlor, beneficiary, member or shareholder
of, or possessor of a power over, such Holder, if such Holder is an
estate, trust, partnership, limited liability company or corporation)
and the taxing jurisdiction or any political subdivision or territory
or possession thereof or area subject to its jurisdiction (other than
the mere receipt of such payment or the ownership or holding of such
exchange Note), including, without limitation, such Holder (or such
fiduciary, settlor, beneficiary, member, shareholder or possessor)
being or having been a citizen or resident thereof or being or having
been present or engaged in trade or business therein or having or
having had a permanent establishment therein,
(y) the presentation of an exchange Note (where presentation is required)
for payment on a date more than 30 days after (A) the date on which
such payment became due and payable or (B) the date on which payment
thereof is duly provided for, whichever occurs later, or
(z) the presentation of an exchange Note for payment in Bermuda or any
political subdivision thereof or therein, unless such Note could not
have been presented for payment elsewhere;
(b) any estate, inheritance, gift, sales, transfer, personal property or
similar tax, assessment or other governmental charge;
(c) any tax, assessment or other governmental charge which is payable
otherwise than by withholding from a payment of the principal of,
premium, if any, or any interest on, the exchange notes;
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(d) any tax, assessment or other governmental charge that is imposed or
withheld by reason of the failure by the Holder or the beneficial owner
of the exchange Note to comply with a request of the Company addressed to
the Holder:
(x) to provide information, documents or other evidence concerning the
nationality, residence or identity of the Holder or such beneficial
owner, or
(y) to make and deliver any declaration or other similar claim (other
than a claim for refund of a tax, assessment or other governmental
charge withheld by the Company) or satisfy any information or
reporting requirements,
which, in the case of (x) or (y), is required or imposed by a statute,
treaty, regulation or administrative practice of the taxing jurisdiction as
a precondition to exemption from all or part of such tax, assessment or
other governmental charge; or
(e) any combination of items (a), (b), (c) and (d) above,
nor shall Additional Amounts be paid with respect to any payment of the
principal of, or any premium or interest on, any exchange Note to any Holder
who is a fiduciary or partnership or limited liability company or other than
the sole beneficial owner of such payment to the extent such payment would
be required by the laws of:
(1) Bermuda or any political subdivision or governmental authority thereof or
therein having the power to tax;
(2) any jurisdiction, other than the United States, the United Kingdom or
Luxembourg, from or through which payment on the exchange notes is made by
the Company or a successor corporation, or its paying agent in its capacity
as such, or any political subdivision or governmental authority thereof or
therein having the power to tax; or
(3) any other jurisdiction, other than the United States, in which the Company
or a successor corporation is organized, or any political subdivision or
governmental authority having the power to tax
to be included in the income for tax purposes of a beneficiary or settlor with
respect to such fiduciary or a member of such partnership or limited liability
company or a beneficial owner who would not have been entitled to such
Additional Amounts had it been the holder of such exchange Note.
The Company shall provide the trustee with the official acknowledgment of
the relevant taxing authority (or, if such acknowledgment is not available, a
certified copy thereof) evidencing the payment of the withholding taxes, if any,
by the Company. Copies of such documentation shall be made available to the
holders of the exchange notes or the Paying Agents, as applicable, upon request
therefor.
CERTAIN COVENANTS
The indentures contain, among others, the following covenants:
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND PREFERRED STOCK.
(1) The Company will not, and will not cause or permit any Restricted
Subsidiaries to, directly or indirectly, Incur any Indebtedness, including
Acquired Indebtedness, or permit any Restricted Subsidiary to Incur
Preferred Stock, except that the Company may Incur Indebtedness, including
Acquired Indebtedness, and any Restricted Subsidiary may Incur Acquired
Indebtedness or Acquired Preferred Stock, if, at the time of and immediately
after giving pro forma effect to the Incurrence thereof and the application
of the proceeds therefrom:
(a) the Consolidated Leverage Ratio is less than 6.0 to 1.0, or
(b) the Consolidated Capital Ratio is less than 2.5 to 1.0.
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(2) Clause (1) will not prohibit the Incurrence of any of the following items of
Indebtedness or Preferred Stock of Restricted Subsidiaries (collectively,
"Permitted Indebtedness"):
(a) the initial notes and the exchange notes;
(b) Indebtedness Incurred by the Company to any Restricted Subsidiary or
Indebtedness or Preferred Stock Incurred or issued by any Restricted
Subsidiary to the Company or any Restricted Subsidiary (provided,
however, that (x) upon a Disposition by a Restricted Subsidiary or the
Company of any Indebtedness so Incurred to a Person other than the
Company or another Restricted Subsidiary or (y) if for any reason a
Restricted Subsidiary that is either an issuer or lender of such
Indebtedness ceases to be a Restricted Subsidiary, the provisions of this
clause (b) shall no longer be applicable to such Indebtedness); provided
that any such Indebtedness of the Company shall be unsecured and
subordinated in all respects to the Company's obligations pursuant to the
exchange notes;
(c) Indebtedness of the Company in an aggregate amount outstanding at any
time of up to $50 million;
(d) Indebtedness of the Company or any Restricted Subsidiary pursuant to any
Permitted Credit Facility in an aggregate amount outstanding at any time
pursuant to this clause (d) of up to $350 million, minus the amount of
any such Indebtedness:
(x) permanently repaid with the Net Cash Proceeds from any Asset Sale
pursuant to the covenant "Limitation on Asset Sales," or
(y) assumed by a transferee in an Asset Sale;
(e) (x) Purchase Money Indebtedness of the Company in respect of
Telecommunications Assets, or
(y) Purchase Money Indebtedness of any Restricted Subsidiary in respect
of Telecommunications Assets Incurred pursuant to any Permitted
Credit Facility or Vendor Facility;
(f) Hedging Obligations of the Company or any Restricted Subsidiary in
respect of Indebtedness that is permitted by the terms of the relevant
indenture to be outstanding; provided that the notional amount of any
such Hedging Obligation does not exceed the amount of Indebtedness to
which such Hedging Obligation relates;
(g) Indebtedness of the Company or any Restricted Subsidiary solely in
respect of bankers acceptances, letters of credit and performance bonds,
in each case Incurred in the ordinary course of business;
(h) Permitted Refinancing Indebtedness; and
(i) Indebtedness outstanding on the Issue Date ("Existing Indebtedness"),
other than Indebtedness described in clause 2(d) of this covenant.
(3) For purposes of determining compliance with, and the outstanding principal
amount of any particular Indebtedness Incurred pursuant to, and in
compliance with, this covenant, the amount of Indebtedness issued at a price
that is less than the principal amount thereof will be equal to the amount
of the liability in respect thereof determined in accordance with GAAP.
Accrual of interest, the accretion or amortization of original issue
discount, the payment of regularly scheduled interest in the form of
additional Indebtedness of the same instrument or the payment of regularly
scheduled dividends on Disqualified Stock in the form of additional
Disqualified Stock with the same terms will not be deemed to be an
Incurrence of Indebtedness for purposes of this covenant.
(4) The Company will not, directly or indirectly, Incur any Indebtedness that is
subordinate in right of payment to any other Indebtedness, unless such
Indebtedness is expressly subordinate in right of
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payment to the exchange notes to the same extent and on the same terms as
such Indebtedness is subordinate to such other Indebtedness.
LIMITATION ON RESTRICTED PAYMENTS.
The Company will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, take any of the following actions
(each, a "Restricted Payment"):
(a) declare or pay any dividend or return of capital or make any other
payment or distribution on or in respect of shares of Capital Stock of
the Company or any Restricted Subsidiary to holders of such Capital
Stock, other than:
(x) dividends or distributions payable in Qualified Capital Stock of the
Company, or
(y) dividends or distributions payable to the Company and/or a Restricted
Subsidiary;
(b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any direct or indirect parent of the Company;
(c) make any principal payment on, purchase, defease, redeem, prepay,
decrease or otherwise acquire or retire for value, prior to the Stated
Maturity thereof, any Subordinated Indebtedness; or
(d) make any Restricted Investment;
if at the time of the Restricted Payment immediately after giving effect
thereto:
(1) a Default or an Event of Default shall have occurred and be continuing;
(2) the Company is not able to Incur at least $1.00 of additional Indebtedness
pursuant to clause (1) of the "Limitation on Incurrence of Additional
Indebtedness and Preferred Stock" covenant; or
(3) the aggregate amount (the amount expended for these purposes, if other than
in cash, being the Fair Market Value of the relevant property) of Restricted
Payments, including the proposed Restricted Payment, made subsequent to the
Issue Date shall exceed the sum of:
(A) the excess (or deficit) of:
- the Cumulative Consolidated Cash Flow of the Company OVER (or UNDER)
- 150% of the cumulative Consolidated Interest Expense of the Company,
accrued during the period, treated as one accounting period, beginning on
the first full fiscal quarter after the Issue Date to the end of the most
recent fiscal quarter for which consolidated financial information of the
Company is available; PLUS
(B) 100% of the aggregate net cash proceeds received by the Company from any
Person from any:
(x) contribution to the equity capital of the Company not representing an
interest in Disqualified Capital Stock or issuance and sale of
Qualified Capital Stock of the Company, in each case, subsequent to
the Issue Date, or
(y) issuance and sale subsequent to the Issue Date of any Disqualified
Stock or debt securities of the Company that have been converted into
or exchanged for Qualified Capital Stock of the Company plus the
amount of net cash proceeds received by the Company upon such
conversion or exchange,
excluding, in each case, any net cash proceeds:
(a) received from a Subsidiary of the Company, or
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(b) used to redeem exchange notes under "--Optional Redemption--Optional
Redemption Upon Public Equity Offerings," or
(c) applied in accordance with clause (2) or (3) of the second paragraph
of this covenant below; PLUS
(C) without duplication of any amounts included in clause (A) above or
(D) below, in the case of any Restricted Investment made after the Issue
Date:
(x) the disposition of such Restricted Investment (other than to a
Subsidiary of the Company) by, or repayment of such Restricted
Investment to, the Company or a Restricted Subsidiary, or
(y) the receipt by the Company or any Restricted Subsidiary of any
dividends or distributions from such Restricted Investment, or
(z) if such Investment was a Guarantee, the release in full of the
Guarantee,
an amount equal to the lesser of:
- the amount of such Investment treated as a Restricted Payment pursuant to
clause (d) above, and
- the amount in cash received by the Company or any Restricted Subsidiary
upon such disposition, repayment, dividend or distribution or, in the case
of a released Guarantee, the amount of such Guarantee less any payments
made in respect thereof; PLUS
(D) so long as the Designation of an Unrestricted Subsidiary was treated as
a Restricted Payment made after the Issue Date, in the case of a
Revocation with respect to any Unrestricted Subsidiary after the Issue
Date in accordance with "--Limitation on Designation of Unrestricted
Subsidiaries," an amount equal to the lesser of:
(x) the Company's Investment in such Unrestricted Subsidiary at the time
of such Revocation;
(y) that portion of the Fair Market Value of the net assets of such
Unrestricted Subsidiary at the time of such Revocation that is
proportionate to the Company's equity interest in such Unrestricted
Subsidiary at the time of the Revocation; and
(z) the Designation Amount with respect to such Unrestricted Subsidiary
upon its Designation which was treated as a Restricted Payment plus
any Investment made after Designation and prior to Revocation that
was treated as a Restricted Payment, in each case less any amounts
included in clause (A) or (C) above.
Notwithstanding the preceding, this covenant does not prohibit:
(1) the payment of any dividend within 60 days after the date of declaration of
such dividend if the dividend would have been permitted on the date of
declaration;
(2) if no Default or Event of Default shall have occurred and be continuing, the
acquisition of any shares of Capital Stock of the Company,
(a) in exchange for Qualified Capital Stock of the Company, or
(b) through the application of the net cash proceeds received by the Company
from a substantially concurrent sale of Qualified Capital Stock of the
Company or a contribution to the equity capital of the Company not
representing an interest in Disqualified Capital Stock, in each case not
received from a Subsidiary of the Company;
PROVIDED, that the value of any such Qualified Capital Stock issued in
exchange for such acquired Capital Stock and any such net cash proceeds
shall be excluded from clause (3)(B) of the first paragraph of this
covenant;
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(3) if no Default or Event of Default shall have occurred and be continuing, the
voluntary prepayment, purchase, defeasance, redemption or other acquisition
or retirement for value of any Subordinated Indebtedness solely in exchange
for, or through the application of net cash proceeds of a substantially
concurrent sale, other than to a Subsidiary of the Company, of:
(x) Qualified Capital Stock of the Company, or
(y) Permitted Refinancing Indebtedness for such Subordinated
Indebtedness;
PROVIDED, that the value of any Qualified Capital Stock issued in
exchange for Subordinated Indebtedness and any net cash proceeds referred
to above shall be excluded from clause (3)(B) of the first paragraph of
this covenant;
(4) the payment of any dividend or other distribution by a Restricted Subsidiary
to the holders of its Capital Stock on a pro rata basis;
(5) the repurchase, redemption or other acquisition or retirement for value of
any Capital Stock (other than Disqualified Stock) of the Company or any of
its Restricted Subsidiaries held by any member of the Company's or such
Restricted Subsidiary's management; PROVIDED, that the aggregate price paid
for all such repurchased, redeemed, acquired or retired Capital Stock shall
not exceed $5 million in any fiscal year (with unused amounts being carried
over to succeeding fiscal years, subject to a maximum of $10 million in any
fiscal year);
(6) Investments in any Permitted Joint Venture; and
(7) Investments in any Person engaged, except to a DE MINIMIS extent, in a
Telecommunications Business, the aggregate Fair Market Value of which
(measured on the date each such Investment was made or returned, as
applicable), when taken together with all other Investments made pursuant to
this clause (7) that are at any time outstanding, does not exceed the sum
of:
(x) $50 million, plus
(y) the amount then available for the making of Restricted Payments
pursuant to clause (3) of the preceding paragraph without giving
effect to subclause (A) thereof.
Each Restricted Payment permitted pursuant to clauses (1), (4), (5),
(6) and (7) of this paragraph shall be included, and each Restricted Payment
permitted pursuant to clauses (2) and (3) of this paragraph shall be excluded
(except as specifically set forth in each such clause), for all purposes when
performing the calculation set forth in clause (3) of the first paragraph of
this covenant.
LIMITATION ON DESIGNATION OF UNRESTRICTED SUBSIDIARIES.
The Board of Directors may not designate a Subsidiary of the Company (other
than a newly created Subsidiary in which no Investment has previously been made
(other than any de minimus amount required to capitalize such Subsidiary in
connection with its organization)) as an Unrestricted Subsidiary (a
"Designation") if:
(a) a Default or Event of Default shall have occurred and be continuing at
the time of or after giving effect to such Designation, and
(b) the Company would be prohibited under the indentures from making a
Restricted Investment at the time of such Designation (assuming the
effectiveness of such Designation for purposes of this covenant) in an
amount equal to the Designation Amount (as defined below).
Any Designation shall be made by Board Resolution.
In the event of any such Designation, all outstanding Investments owned by
the Company and its Restricted Subsidiaries in the Subsidiary at Designation
will be deemed to be a Restricted Investment made as of the time of such
Designation and will reduce the amount available for Restricted Payments under
the first or second paragraph of this covenant. All such outstanding Investments
will be deemed to
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constitute Restricted Payments in an amount equal to the Fair Market Value of
such Investments at the time of such Designation (the "Designation Amount").
A Designation may be revoked and an Unrestricted Subsidiary may thus be
redesignated as a Restricted Subsidiary (a "Revocation") by Board Resolution,
PROVIDED that the Company will not make any Revocation unless after giving pro
forma effect to such Revocation:
(a) no Default or Event of Default shall have occurred and be continuing;
(b) all Liens of such Unrestricted Subsidiary outstanding immediately
following such Revocation would, if Incurred at such time, have been
permitted to be Incurred at such time for all purposes under the
indentures; and
(c) the Company could Incur $1 of additional Indebtedness pursuant to
clause (1) of the "Limitation on Incurrence of Additional Indebtedness
and Preferred Stock" covenant.
Neither the Company nor any Restricted Subsidiary will at any time:
(1) provide credit support for, subject any of its property or assets (other
than the Capital Stock of any Unrestricted Subsidiary) to the satisfaction
of, or guarantee, any Indebtedness of any Unrestricted Subsidiary (including
any undertaking, agreement or instrument evidencing such Indebtedness);
(2) be directly or indirectly liable for any Indebtedness of any Unrestricted
Subsidiary; or
(3) be directly or indirectly liable for any Indebtedness which provides that
the holder thereof may (upon notice, lapse of time or both) declare a
default thereon or cause the payment thereof to be accelerated or payable
prior to its final scheduled maturity upon the occurrence of a default with
respect to any Indebtedness of any Unrestricted Subsidiary, except for any
non-recourse guarantee given solely to support the pledge by the Company or
any Restricted Subsidiary of the Capital Stock of any Unrestricted
Subsidiary.
LIMITATION ON LIENS.
The Company will not, and will not cause or permit any Restricted Subsidiary
to, directly or indirectly, Incur or suffer to exist or become effective any
Liens of any kind (except for Permitted Liens) against or upon any of their
respective properties or assets, whether owned on the Issue Date or acquired
after the Issue Date, or any income, profits or proceeds therefrom, unless
contemporaneously therewith effective provision is made by the Company to secure
the exchange notes and all other amounts due under the relevant indenture
equally and ratably with such Indebtedness with a Lien on the same properties
and assets securing such Indebtedness for so long as such Indebtedness is
secured by such Lien; provided that no such Lien may secure Subordinated
Indebtedness except as permitted by clause 3(a) of the definition of "Permitted
Liens."
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES.
(a) Except as provided in clause (b) below, the Company will not, and will
not cause or permit any of its Restricted Subsidiaries to, directly or
indirectly, create or otherwise cause or permit to exist or become
effective any encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on or in respect of its
Capital Stock or with respect to any other interest or participation, or
measured by its profits, to the Company or any other Restricted Subsidiary
or pay any Indebtedness owed to the Company or any other Restricted
Subsidiary;
(2) make loans or advances to, or guarantee any Indebtedness or other
obligations of, or make any Investment in, the Company or any other
Restricted Subsidiary; or
(3) transfer any of its property or assets to the Company or any other
Restricted Subsidiary.
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(b) Clause (a) will not apply to encumbrances or restrictions existing under
or by reason of:
(1) Existing Indebtedness as in effect on the Issue Date;
(2) the indentures and the exchange notes;
(3) any Permitted Credit Facility or Vendor Facility, PROVIDED that:
(a) the outstanding Indebtedness under such Permitted Credit Facility or
Vendor Facility does not exceed the amounts permitted under clause 2(d)
or 2(e)(y), as the case may be, of the "Limitation on Incurrence of
Additional Indebtedness and Preferred Stock" covenant, and
(b) the Chief Financial Officer of the Company determines in good faith
that:
(x) such encumbrances or restrictions are no more restrictive, taken as a
whole, than those that would be contained in a credit agreement with
terms that are commercially reasonable for a borrower engaged in a
business comparable to the Company that has substantially comparable
Indebtedness, and
(y) any such restrictions will not materially affect the Company's
ability to make principal, premium or interest payments on the
exchange notes pursuant to the terms of the indentures,
(4) applicable law,
(5) any instrument governing Indebtedness or Capital Stock of a Person or assets
acquired by the Company or any of its Restricted Subsidiaries as in effect
at the time of such acquisition (except to the extent such Indebtedness was
Incurred in connection with or in contemplation of such acquisition), which
encumbrances or restrictions are not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the property
or assets of the Person, so acquired, PROVIDED that any such Indebtedness or
Preferred Stock was permitted by the terms of the indentures to be incurred,
(6) customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices,
(7) any agreement for the sale or other disposition of a Restricted Subsidiary
that restricts distributions by that Restricted Subsidiary pending its sale
or other disposition, PROVIDED that the consummation of such transaction
would not result in a Default or Event of Default, that such restriction
terminates if such transaction is not consummated and that the consummation
or abandonment of such transaction occurs within one year of the date such
agreement was entered into,
(8) Permitted Refinancing Indebtedness, PROVIDED that the restrictions contained
in the agreements governing such Permitted Refinancing Indebtedness are no
more restrictive, taken as a whole, than those contained in the agreements
governing the Indebtedness being Refinanced,
(9) limitations on the right to dispose of assets subject to a Lien securing
Indebtedness to the extent that such Lien is permitted to be Incurred
pursuant to the "--Limitation on Liens" covenant, and
(10) provisions with respect to the disposition or distribution of assets or
property in joint venture agreements and other similar agreements entered
into in the ordinary course of business.
LIMITATION ON ASSET SALES.
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, consummate an Asset Sale unless:
(a) the Company or the applicable Restricted Subsidiary, as the case may be,
receives consideration at the time of the Asset Sale at least equal to
the Fair Market Value of the assets sold or otherwise disposed of, and
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(b) at least 75% of the consideration received for the assets disposed of by
the Company or the Restricted Subsidiary, as the case may be, in the
Asset Sale shall be in the form of:
(1) cash or Cash Equivalents or
(2) (A) tangible or intangible assets to be used by the Company or any
Restricted Subsidiary in the Telecommunications Business, or
(B) Capital Stock of a Person engaged, except to a DE MINIMIS extent,
solely in a Telecommunications Business that will become, upon
purchase, a Restricted Subsidiary (collectively, "Replacement
Assets").
The Company or such Restricted Subsidiary, as the case may be, may apply the
Net Cash Proceeds of any such Asset Sale within 360 days of receipt thereof to:
(a) permanently repay or repurchase outstanding (without Refinancing and
including a permanent reduction in commitments in the case of a revolving
credit facility) (x) Indebtedness of the Company (other than Subordinated
Indebtedness or Disqualified Stock) that is secured Indebtedness or which
has a final maturity date prior to the final maturity date of the
exchange notes or (y) Indebtedness (other than Disqualified Stock) of any
Restricted Subsidiary, or
(b) purchase Replacement Assets from a Person other than the Company and its
Subsidiaries.
The balance of the Net Cash Proceeds that are not applied or invested as
described in the immediately preceding clauses (a) and (b), shall constitute
"Excess Proceeds."
When the aggregate amount of Excess Proceeds equals or exceeds $25 million,
taking into account income earned on such Excess Proceeds, the Company will be
required to make a pro rata offer (an "Asset Sale Offer") to all holders of
exchange notes and of PARI PASSU Indebtedness with comparable provisions
requiring such Indebtedness to be purchased with the proceeds of such Asset Sale
to purchase the maximum principal amount (or accreted value in the case of
Indebtedness issued with original issue discount) of exchange notes and such
PARI PASSU Indebtedness that may be purchased with the Excess Proceeds, at a
purchase price in cash in an amount equal to 100% of the principal amount
thereof (or the accreted value thereof in the case of Indebtedness issued with
original issue discount) plus accrued and unpaid interest or accretion thereon
to the date of purchase, in accordance with the procedures set forth in the
indentures and the agreements governing such PARI PASSU Indebtedness. To the
extent that any Excess Proceeds remain after consummation of an Asset Sale
Offer, the Company may use such Excess Proceeds for any purpose not otherwise
prohibited by the indentures. If the aggregate principal amount (or accreted
values) of exchange notes and PARI PASSU Indebtedness tendered into such Asset
Sale Offer surrendered by holders thereof exceeds the amount of Excess Proceeds,
the trustee shall select the exchange notes and PARI PASSU Indebtedness to be
purchased on a pro rata basis in proportion to the respective principal amounts
(or accreted values) of the exchange notes and such other Indebtedness. Upon
completion of such Asset Sale Offer, the amount of Excess Proceeds shall be
reset at zero for purposes of the first sentence of this paragraph.
Pending application in accordance with this covenant, Net Cash Proceeds may
be applied to temporarily reduce revolving credit borrowings which can be
reborrowed or invested in Cash Equivalents.
Each notice of an Asset Sale Offer will be mailed first class, postage
prepaid, to the record holders as shown on the register of Holders within
30 days following such 360th day, with a copy to the trustee offering to
purchase the exchange notes as described above. Each notice of an Asset Sale
Offer shall state, among other things, the purchase date, which must be no
earlier than 30 days nor later than 60 days from the date the notice is mailed,
other than as may be required by law (the "Asset Sale Offer Payment Date"). Upon
receiving notice of an Asset Sale Offer, Holders may elect to tender their
exchange notes in whole or in part in integral multiples of $1,000 or
[EURO]1,000, as the case may be, in exchange for cash.
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On the Asset Sale Offer Payment Date, the Company will, to the extent
lawful:
(1) accept for payment all exchange notes or portions thereof properly tendered
pursuant to the Asset Sale Offer (or, if the trustee is acting as agent for
the Company, direct the trustee to so accept);
(2) deposit with the Paying Agent funds in an amount equal to the Asset Sale
Offer Amount in respect of all exchange notes or portions thereof so
tendered; and
(3) deliver or cause to be delivered to the trustee (including by designating
the trustee as its agent for acceptance of exchange notes) the exchange
notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of exchange notes or portions thereof being
purchased by the Company.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other applicable securities laws in connection with the
purchase of exchange notes pursuant to an Asset Sale Offer. To the extent that
the provisions of any applicable securities laws or regulations conflict with
the "Asset Sale" provisions of the indentures, the Company shall comply with
these laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the indentures by doing so.
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "--Limitation on Merger,
Consolidation and Sale of Assets," the surviving entity shall be deemed to have
sold the properties and assets of the Company and its Restricted Subsidiaries
not so transferred for purposes of this covenant, and shall comply with the
provisions of this covenant with respect to the deemed sale as if it were an
Asset Sale. In addition, the Fair Market Value of properties and assets of the
Company or its Restricted Subsidiaries so deemed to be sold shall be deemed to
be Net Cash Proceeds for purposes of this covenant.
If at any time any non-cash consideration received by the Company or any
Restricted Subsidiary, as the case may be, in connection with any Asset Sale is
converted into or sold or otherwise disposed of for cash (other than interest
received with respect to any non-cash consideration), the conversion or
disposition shall be deemed to constitute an Asset Sale hereunder and the Net
Cash Proceeds thereof shall be applied in accordance with this covenant within
360 days of conversion or disposition.
LIMITATION ON TRANSACTIONS WITH AFFILIATES.
(1) The Company will not, and will not permit any of its Restricted Subsidiaries
to, make any payment to, or sell, lease, transfer or otherwise dispose of
any of its properties or assets to, or purchase any property or assets from,
or enter into or make or amend any transaction, contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction"), unless:
(a) such Affiliate Transaction is on terms that are not materially less
favorable to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction on an arm's
length basis by the Company or such Restricted Subsidiary with a Person
that is not an Affiliate, and
(b) with respect to any Affiliate Transaction or series of related Affiliate
Transactions:
(x) involving aggregate consideration in excess of $10 million, the
Company delivers to the trustee a resolution of the Board of
Directors set forth in an Officers' Certificate that such Affiliate
Transaction is approved by a majority of the disinterested members of
the Board of Directors and certifying that such Affiliate Transaction
complies with clause (a) above and is in the best interests of the
Company or such Restricted Subsidiary, or
(y) if involving aggregate consideration in excess of $25 million, a
favorable written opinion as to the fairness to the Company of such
Affiliate Transaction from a financial point of view is
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also obtained by the Company from an independent accounting,
appraisal or investment banking firm of national standing and
delivered to the trustee.
(2) Clause (1) will not apply to the following:
(a) the entering into, maintaining or performance of any employment
contract, collective bargaining agreement, benefit plan, program or
arrangement, related trust agreement or any other similar arrangement for
or with any employee, officer or director of the Company or any
Restricted Subsidiary heretofore or hereafter entered into in the
ordinary course of business, including vacation, health, insurance,
deferred compensation, retirement, savings or other similar plans;
(b) the payment of compensation, performance of indemnification or
contribution obligations, or an issuance, grant or award of stock,
options, or other equity-related interests or other securities, to
employees, officers or directors of the Company or any Restricted
Subsidiary in the ordinary course of business;
(c) transactions between or among the Company and/or its Restricted
Subsidiaries;
(d) payment of reasonable fees to directors of the Company;
(e) any sale or other issuance of Capital Stock (other than Disqualified
Stock) of the Company;
(f) Affiliate Transactions in effect or approved by the Board of Directors
on the Issue Date, including any amendments thereto; PROVIDED that the
terms of such amendments are not materially less favorable to the Company
than the terms of such agreement prior to such amendment;
(g) Restricted Payments that are permitted by the "Limitation on Restricted
Payments" covenant; and
(h) (x) the Primary Supplier Agreement dated January 18, 2000 between Bell
Atlantic Global Systems Company and the Company, including any amendments
thereto, provided that the terms of such amendments are not materially
less favorable to the Company than the terms of such agreements prior to
such amendment, or
(y) any transaction with respect to capacity and/or the provision of
telecommunications services between the Company or any Restricted
Subsidiary and any Affiliates, PROVIDED that such transaction complies
with clause (1)(a) of this covenant.
LIMITATION ON MERGER, CONSOLIDATION AND SALE OF ASSETS.
The Company will not, directly or indirectly, consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell, assign,
transfer, convey or otherwise dispose of all or substantially all of its
properties or assets, in one or more related transactions, to another Person
unless:
(1) the Company is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, conveyance or other disposition shall
have been made is a corporation organized or existing under the laws of
Bermuda or an Approved Jurisdiction;
(2) the Person formed by or surviving any such consolidation or merger (if other
than the Company) or the Person to which such sale, assignment, transfer,
conveyance or other disposition shall have been made assumes all the
obligations of the Company under the Registration Agreements, the exchange
notes and the indentures pursuant to supplemental indentures in a form
reasonably satisfactory to the trustee;
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(3) no Default or Event of Default shall exist or shall occur immediately after
giving effect on a pro forma basis to such transaction;
(4) except in the case of a merger of the Company with or into a Wholly Owned
Restricted Subsidiary of the Company, the Company or the Person formed by or
surviving any such consolidation or merger (if other than the Company), or
to which such sale, assignment, transfer, conveyance or other disposition
shall have been made will immediately after such transaction and after
giving pro forma effect thereto and any related financing transactions as if
the same had occurred at the beginning of the applicable period, be
permitted to incur at least $1.00 of additional Indebtedness pursuant to
paragraph (1) of the "Limitation on Incurrence of Additional Indebtedness
and Preferred Stock" covenant;
(5) if, as a result of any such transaction, property or assets of the Company
or any Restricted Subsidiary would become subject to a Lien (other than a
Permitted Lien), the Company or the successor entity to the Company shall
have secured the exchange notes as required by said covenant; and
(6) the Company shall have delivered to the trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger or
transfer and such supplemental indentures (if any) comply with the
indentures.
The indentures also provide that the Company may not, directly or
indirectly, lease all or substantially all of its properties or assets, in one
or more related transactions, to any other Person. The provisions of this
covenant will not be applicable to a sale, assignment, transfer, conveyance or
other disposition of assets solely between or among the Company and its Wholly
Owned Restricted Subsidiaries.
LIMITATION ON BUSINESS ACTIVITIES.
The Company will not, and will not permit any of its Restricted Subsidiaries
to, engage, to more than a de minimus extent, in any business other than a
Telecommunications Business.
REPORTS TO HOLDERS.
Whether or not the Company is subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, so long as any exchange notes remain
outstanding, the Company will:
(1) provide the trustee and the Holders with the annual reports and information,
documents and other reports as are specified in Sections 13 and 15(d) of the
Exchange Act subject to such Sections within 15 days after the times
specified for the filing of the information, documents and reports under
such Sections; provided that, whether or not required under such Sections,
the Company shall provide quarterly financial statements (including a
balance sheet, income statement and cash flow statement and notes thereto)
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations" satisfying the requirements therefor established by the
Commission; and
(2) file with the Commission, to the extent permitted, the information,
documents and reports referred to in clause (1) within the periods specified
under such Sections; provided that the quarterly information specified in
clause (1) shall be filed within 45 days after the end of the relevant
fiscal quarter or such shorter time established by the Commission.
At any time when the Company is not subject to or is not current in its
reporting obligations under clause (2) of the preceding paragraph, the Company
will make available, upon request, to any holder and any prospective purchaser
of exchange notes the information required pursuant to Rule 144A(d)(4) under the
Securities Act.
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EVENTS OF DEFAULT
The following are "Events of Default" under each indenture:
(1) default in the payment when due of the principal of or premium, if any, on
any exchange notes issued under that indenture, including the failure to
make a required payment to purchase any such exchange notes tendered
pursuant to an optional redemption, Change of Control Offer or an Asset Sale
Offer;
(2) default for 30 days or more in the payment when due of interest on any
exchange notes issued under that indenture (including additional interest
payable under the Registration Agreements and Additional Amounts);
(3) the failure to perform or comply with any of the provisions described under
"Certain Covenants--Limitation on Merger, Consolidation and Sales of Assets"
in that indenture;
(4) the failure by the Company or any Restricted Subsidiary to comply with any
other covenant or agreement contained in the applicable indenture or
exchange notes, for 60 days or more after written notice is sent to the
Company from the trustee or the Holders of at least 25% in aggregate
principal amount of the Dollar Notes or Euro Notes, as the case may be;
(5) default by the Company or any Restricted Subsidiary under any Indebtedness
which:
(a) is caused by a failure to pay principal of or premium, if any, or
interest on such Indebtedness when due within any applicable grace
period; or
(b) results in the acceleration of such Indebtedness prior to its Stated
Maturity,
and the principal amount of Indebtedness covered by (a) or (b) at the
relevant time, aggregates $15 million or more;
(6) failure by the Company or any of its Restricted Subsidiaries to pay one or
more final judgments against any of them or any of their respective
properties (which are not covered by adequate insurance by a solvent insurer
of national or international reputation which has acknowledged its
obligations in writing), aggregating $15 million or more, which judgment(s)
are not paid, discharged or stayed for a period of 60 days or more; or
(7) certain events of bankruptcy affecting the Company or any of its Significant
Subsidiaries or group of Subsidiaries that, taken together, would constitute
a Significant Subsidiary.
If an Event of Default (other than an Event of Default specified in
clause (7) above with respect to the Company) shall occur and be continuing, the
trustee or the Holders of at least 25% in principal amount of outstanding Dollar
Notes or Euro Notes, as the case may be, may declare the unpaid principal of and
accrued and unpaid interest on all the Dollar Notes or Euro Notes, as the case
may be, to be immediately due and payable by notice in writing to the Company
and the trustee specifying the Event of Default and that it is a "notice of
acceleration." If an Event of Default specified in clause (7) above occurs with
respect to the Company, then the unpaid principal of and accrued and unpaid
interest on all the Dollar Notes or Euro Notes, as the case may be, will become
immediately due and payable without any declaration or other act on the part of
the trustee or any Holder.
At any time after a declaration of acceleration with respect to the Dollar
Notes or Euro Notes, as the case may be, as described in the preceding
paragraph, the Holders of a majority in principal amount of such exchange notes
may rescind and cancel such declaration and its consequences:
(1) if the rescission would not conflict with any judgment or decree;
(2) if all existing Events of Default have been cured or waived, except
nonpayment of principal or interest that has become due solely because of
the acceleration;
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(3) to the extent the payment of such interest is lawful, interest on overdue
installments of interest and overdue principal, which has become due
otherwise than by such declaration of acceleration, has been paid; and
(4) if the Company has paid the trustee its reasonable compensation and
reimbursed the trustee for its reasonable expenses, disbursements and
advances.
No rescission shall affect any subsequent Default or impair any rights relating
thereto.
The Holders of a majority in principal amount of the Dollar Notes or Euro
Notes, as the case may be, may waive any existing Default or Event of Default
under the indentures, and its consequences, except a default in the payment of
the principal of, premium, if any, or interest on such exchange notes.
Subject to the provisions of the indentures relating to the duties of the
trustee, the trustee is under no obligation to exercise any of its rights or
powers under the applicable indenture at the request, order or direction of any
of the Holders of the Dollar Notes or Euro Notes, as the case may be, unless
such Holders have offered to the trustee reasonable indemnity. Subject to all
provisions of the applicable indenture and applicable law, the Holders of a
majority in aggregate principal amount of the then outstanding Dollar Notes or
Euro Notes, as the case may be, have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the trustee or
exercising any trust or power conferred on the trustee.
No Holder of any Dollar Notes or Euro Notes, as the case may be, will have
any right to institute any proceeding with respect to the applicable indenture
or for any remedy thereunder, unless:
(1) such Holder gives to the trustee written notice of a continuing Event of
Default;
(2) Holders of at least 25% in principal amount of the then outstanding Dollar
Notes or Euro Notes, as the case may be, make a written request to pursue
the remedy;
(3) such Holders of the Dollar Notes or Euro Notes, as the case may be, provide
to the trustee satisfactory indemnity;
(4) the trustee does not comply within 60 days; and
(5) during such 60-day period the Holders of a majority in principal amount of
the outstanding Dollar Notes or Euro Notes, as the case may be, do not give
the trustee a written direction which, in the opinion of the trustee, is
inconsistent with the request.
Otherwise, no Holder of any Dollar Notes or Euro Notes, as the case may be,
will have any right to institute any proceeding with respect to the applicable
indenture or for any remedy thereunder, except:
(1) a Holder of Dollar Notes or the Euro Notes, as the case may be, may
institute suit for enforcement of payment of the principal of and premium,
if any, or interest on such Note held by it on or after the respective due
dates expressed in such Note, or
(2) for the institution of any proceeding with respect to such indenture or any
remedy thereunder, including, without limitation, acceleration, by the
Holders of a majority in principal amount of the outstanding Dollar Notes or
Euro Notes, as the case may be; PROVIDED, that upon institution of any
proceeding or exercise of any remedy, such Holder or Holders provide the
trustee with prompt notice thereof.
The Company is required to deliver to the trustee written notice of any
event which would constitute certain Defaults, their status and what action the
Company is taking or proposes to take in respect thereof. In addition, the
Company is required to deliver to the trustee, within 100 days after the end of
each fiscal year, an Officers' Certificate indicating whether the signers
thereof know of any Default that occurred during the previous fiscal year. The
indentures provide that if a Default occurs, is continuing and is actually known
to the trustee, the trustee must mail to each Holder notice of the Default
within 90 days after the
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occurrence thereof. For so long as the Euro Notes are listed on the Luxembourg
Stock Exchange, notice of a Default with respect to the Euro Notes will also be
published in accordance with the procedures described under "--Notices." Except
in the case of a Default in the payment of principal of, premium, if any, or
interest on any Note, the trustee may withhold notice if and so long as a
committee of its trust officers in good faith determines that withholding notice
is in the interests of the Holders.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding exchange Dollar Notes or
exchange Euro Notes, as the case may be ("Legal Defeasance"). Such Legal
Defeasance means that the Company shall be deemed to have paid and discharged
the entire indebtedness represented by the outstanding exchange notes on the
91st day after the deposit specified in paragraph (1) of the second following
paragraph, except for:
(1) the rights of Holders to receive payments in respect of the principal of,
premium, if any, and interest on such exchange notes when such payments are
due;
(2) the Company's obligations with respect to such exchange notes concerning
issuing temporary exchange notes, registration of such exchange notes,
mutilated, destroyed, lost or stolen exchange notes and the maintenance of
an office or agency for payments;
(3) the rights, powers, trust, duties and immunities of the trustee and the
Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the applicable indenture.
In addition, the Company may, at its option and at any time, elect to have
its obligations released with respect to certain covenants that are described in
either indenture ("Covenant Defeasance") and thereafter any omission to comply
with such obligations shall not constitute a Default or Event of Default with
respect to the exchange Dollar Notes or exchange Euro Notes, as the case may be.
In the event Covenant Defeasance occurs, certain events (not including
non-payment, bankruptcy, receivership, reorganization and insolvency events)
described under "Events of Default" will no longer constitute an Event of
Default with respect to the exchange Dollar Notes or exchange Euro Notes, as the
case may be.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the trustee, in trust, for the
benefit of the Holders of the exchange Dollar Notes or exchange Euro Notes,
as the case may be, (a) in the case of the exchange Dollar Notes, cash in
U.S. dollars, certain direct non-callable obligations of, or guaranteed by,
the United States, or a combination thereof, and (b) in the case of the
exchange Euro Notes, cash in Euros, certain direct non-callable obligations
of or guaranteed by the government of a member of the European Union, or a
combination thereof, in such amounts as will be sufficient without
reinvestment, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest
on such exchange notes on the stated date for payment thereof or on the
applicable redemption date, as the case may be;
(2) in the case of Legal Defeasance, the Company shall have delivered to the
trustee an Opinion of Counsel in the United States reasonably acceptable to
the trustee to the effect that:
(a) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling; or
(b) since the Issue Date, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
Opinion of Counsel shall state that, such Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such
Legal
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Defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Company shall have delivered to the
trustee an Opinion of Counsel in the United States reasonably acceptable to
the trustee to the effect that such Holders will not recognize income, gain
or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be continuing on the
date of the deposit pursuant to paragraph (1) above (except any Default or
Event of Default resulting from the failure to comply with "Certain
Covenants--Limitation on Indebtedness" as a result of the borrowing of the
funds required to effect such deposit) and, insofar as Events of Default
from bankruptcy or insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit, and the trustee
shall have received Officers' Certificates to such effect on the date of
such deposit and, in the case of Legal Defeasance, on such 91st day;
(5) the trustee shall have received an Officers' Certificate stating that such
Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under the applicable indenture or any
other material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound;
(6) the Company shall have delivered to the trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring such Holders over any other creditors of the Company or any
Subsidiary of the Company or with the intent of defeating, hindering,
delaying or defrauding any other creditors of the Company or others;
(7) the Company shall have delivered to the trustee an Officers' Certificate and
an Opinion of Counsel, each stating that all conditions precedent provided
for or relating to the Legal Defeasance or the Covenant Defeasance have been
complied with;
(8) the Company shall have delivered to the trustee an Opinion of Counsel to the
effect that after the 91st day following the deposit, the trust funds will
not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; and
(9) certain other customary conditions precedent are satisfied.
SATISFACTION AND DISCHARGE
Each indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
exchange notes, as expressly provided for in the applicable indenture) as to all
outstanding exchange Dollar Notes or exchange Euro Notes, as the case may be,
when:
(1) either:
(a) all such exchange notes theretofore authenticated and delivered (except
lost, stolen or destroyed exchange notes which have been replaced or paid
and exchange notes for whose payment money has theretofor been deposited
in trust or segregated and held in trust by the Company and thereafter
repaid to the Company or discharged from such trust) have been delivered
to the trustee for cancellation; or
(b) all such exchange notes not theretofore delivered to the trustee for
cancellation have become due and payable, and the Company has irrevocably
deposited or caused to be deposited with the trustee (a) in the case of
the Dollar Notes cash in U.S. dollars, certain direct non-callable
obligations of, or guaranteed by, the United States, or a combination
thereof, and (b) in the case of the Euro Notes, cash in Euros, certain
direct non-callable obligations of or guaranteed by the
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government of a member of the European Union, or a combination thereof,
in each case, in such amounts as will be sufficient without reinvestment,
in the opinion of a nationally recognized firm of independent public
accountants to pay and discharge the principal of, premium, if any, and
interest on such exchange notes not theretofor delivered to the trustee
for cancellation to the date of deposit, together with irrevocable
instructions from the Company directing the trustee to apply such funds
to the payment;
(2) the Company has paid all other sums payable under the applicable indenture
and such exchange notes by it; and
(3) the Company has delivered to the trustee an Officers' Certificate stating
that all conditions precedent under the applicable indenture relating to the
satisfaction and discharge of the applicable indenture have been complied
with.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the trustee, without the consent of the
Holders, may amend each indenture or the exchange Dollar Notes or exchange Euro
Notes, as the case may be, for certain specified purposes, including curing
ambiguities, defects or inconsistencies, adding guarantees in respect of the
exchange notes or covenants, issuing exchange notes, and making other changes
which do not, in the opinion of the trustee, adversely affect the rights of any
of the Holders thereof in any material respect. In formulating its opinion on
such matters, the trustee will be entitled to rely on such evidence as it deems
appropriate, including solely on an Opinion of Counsel and Officers'
Certificate. Other modifications and amendments of either indenture or the
applicable exchange notes may be made with the consent of the Holders of a
majority in principal amount of the then outstanding exchange Dollar Notes or
exchange Euro Notes, as the case may be, issued under the applicable indenture,
except that, without the consent of each Holder affected thereby, no amendment
may:
(1) reduce the amount of such exchange notes whose Holders must consent to an
amendment or waiver;
(2) reduce the rate of or change or have the effect of changing the time for
payment of interest, including defaulted interest, on any such exchange
notes;
(3) reduce the principal of or change or have the effect of changing the fixed
maturity of any such exchange notes, or change the date on which any such
exchange notes may be subject to redemption, or reduce the redemption price
therefor;
(4) make any such exchange notes payable in money other than that stated in such
exchange notes;
(5) make any change in provisions of the applicable indenture entitling each
Holder to receive payment of principal of, premium, if any, and interest on
such exchange notes on or after the due date thereof or to bring suit to
enforce such payment, or permitting Holders of a majority in principal
amount of such exchange notes to waive Defaults or Events of Default;
(6) amend, change or modify in any material respect the obligation of the
Company to make and consummate a Change of Control Offer in respect of a
Change of Control that has occurred or make and consummate a Asset Sale
Offer with respect to any Asset Sale that has been consummated; or
(7) amend, change or modify the seniority of such exchange notes or eliminate
release or modify any guarantee or security for such exchange notes except
in accordance with the terms thereof.
GOVERNING LAW
Each indenture provides that such indenture and the exchange Dollar Notes or
exchange Euro Notes, as the case may be, will be governed by, and construed in
accordance with, the law of the State of New York but without giving effect to
applicable principles of conflicts of law to the extent that the application of
the law of another jurisdiction would be required thereby.
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THE TRUSTEE
Each indenture provides that, except during the continuance of an Event of
Default, the trustee will perform only such duties as are specifically set forth
in such indenture. During the existence of an Event of Default, the trustee will
exercise such rights and powers vested in it by such indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
Each indenture and the provisions of the TIA contain certain limitations on
the rights of the trustee, should it become a creditor of the Company to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
trustee will be permitted to engage in other transactions; PROVIDED, that if the
trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
NO PERSONAL LIABILITY
Each indenture provides that an incorporator, director, officer, employee,
stockholder or controlling person, as such, of the Company shall not have any
liability for any obligations of the Company under the exchange notes or such
indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Note, each Holder waives and
releases all such liability.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
indentures. Reference is made to the indentures for a full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary or
at the time it merges with or into or consolidates with the Company or any of
its Restricted Subsidiaries or is assumed in connection with the acquisition of
assets from such Person and in each case not Incurred in connection with, or in
anticipation or contemplation of, such acquisition, merger or consolidation.
Such Indebtedness shall be deemed to have been Incurred at the time such Person
becomes a Restricted Subsidiary or at the time it merges or consolidates with
the Company or a Restricted Subsidiary or at the time such Indebtedness is
assumed in connection with the acquisition of assets from such Person.
"ACQUIRED PREFERRED STOCK" means Preferred Stock of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary or
merges with or into or consolidates with a Restricted Subsidiary, in each case
not issued in connection with, or in anticipation or contemplation of, such
acquisition, merger or consolidation. Such Preferred Stock shall be deemed to
have been issued at the time such Person becomes a Restricted Subsidiary or at
the time it merges or consolidates with a Restricted Subsidiary.
"AFFILIATE" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; PROVIDED,
that for purposes of the "Limitation on Transactions with Affiliates" covenant
only, beneficial ownership of 10% or more of the Voting Stock of a Person shall
be deemed to be control. For purposes of this definition, the terms
"controlling", "controlled by" and "under common control with" have correlative
meanings.
"APPROVED JURISDICTION" means any state of the United States or the District
of Columbia or any Member State of the European Union in respect of which the
Company delivers an Opinion of Counsel to the effect that the laws of such
jurisdiction will not adversely affect the Holders of the exchange notes.
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"ASSET ACQUISITION" means:
(1) an Investment by the Company or any Restricted Subsidiary in any other
Person pursuant to which such Person shall become a Restricted Subsidiary,
or shall be merged with or into the Company or any Restricted Subsidiary;
(2) the acquisition by the Company or any Restricted Subsidiary of the assets of
any Person (other than a Subsidiary of the Company) which constitute all or
substantially all of the assets of such Person or comprises any division or
line of business of such Person or any other properties or assets of such
Person other than in the ordinary course of business; or
(3) any Revocation with respect to an Unrestricted Subsidiary.
"ASSET SALE" means any direct or indirect sale, disposition, issuance,
conveyance, transfer, lease, assignment or other transfer, including a Sale and
Leaseback Transaction (each, a "Disposition") by the Company or any Restricted
Subsidiary of:
(a) any Capital Stock other than any Capital Stock of the Company and
Capital Stock issued by Subsidiaries pursuant to employee benefit plans,
stock option plans or similar arrangements; or
(b) any property or assets (other than cash, Cash Equivalents or Capital
Stock) of the Company or any Restricted Subsidiary.
Notwithstanding the preceding, the following items shall not be deemed to be
Asset Sales:
(1) the Disposition of all or substantially all of the assets of the Company and
its Restricted Subsidiaries as permitted under "Certain Covenants--Merger,
Consolidation and Sale of Assets";
(2) a Disposition of inventory or obsolete or worn-out equipment, in each case
in the ordinary course of business;
(3) Dispositions of assets in any fiscal year with a Fair Market Value not to
exceed $5 million in the aggregate;
(4) for purposes of "Certain Covenants--Limitation on Asset Sales" only, the
making of a Restricted Payment permitted under "Certain
Covenants--Limitation on Restricted Payments;" and
(5) a Disposition to the Company or a Restricted Subsidiary, including a Person
that is or will become a Restricted Subsidiary immediately after the
Disposition;
(6) a Disposition in the ordinary course of business of capacity, fiber, space,
minutes, packets or other related facilities or services on any fiber optic
cable system or telecommunications network owned, controlled, resold or
operated by the Company or any Restricted Subsidiary or of
telecommunications capacity, transmission rights, conduit or rights-of-way
acquired by the Company or any Restricted Subsidiary for use in a
Telecommunications Business of the Company or any Restricted Subsidiary or
of telecommunications services on any property owned, controlled or operated
by the Company or any Restricted Subsidiary; and
(7) a Disposition to a landing party pursuant to and in accordance with the
provisions of the Construction and Maintenance Agreement, dated as of
December 14, 1994, among FLAG Limited and each of the landing parties
signatory thereto.
"ASSET SALE OFFER" has the meaning set forth under "Certain
Covenants--Limitation on Asset Sales."
"BOARD OF DIRECTORS" means, as to any Person, the board of directors,
management committee or similar governing body of such Person or any duly
authorized committee thereof.
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"BOARD RESOLUTION" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have been
duly adopted by the Board of Directors of such Person and to be in full force
and effect on the date of such certification, and delivered to the trustee.
"CAPITALIZED LEASE OBLIGATIONS" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP. For purposes of this definition, the
amount of such obligations at any date shall be the capitalized amount of such
obligations at such date, determined in accordance with GAAP.
"CAPITAL STOCK" means:
(1) with respect to any Person that is a corporation, any and all shares,
interests, participations or other equivalents (however designated and
whether or not voting) of corporate stock, including each class of Common
Stock and Preferred Stock of such Person;
(2) with respect to any Person that is not a corporation, any and all
partnership, limited liability or other equity or ownership interests of
such Person; and
(3) any warrants, rights or options to purchase any of the instruments or
interests referred to in clause (1) or (2) above;
provided that Capital Stock does not include debt instruments convertible
into Capital Stock.
"CASH EQUIVALENTS" means:
(1) marketable direct obligations issued by, or unconditionally guaranteed by,
the government of the United States, the United Kingdom, France or Germany
or any European Union central bank or issued by any agency of any such
government and backed by the full faith and credit of such government, in
each case maturing within six months from the date of acquisition thereof;
(2) marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within six months from the date of
acquisition thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from either Standard & Poor's Corporation ("S&P")
or Moody's Investors Service, Inc. ("Moody's");
(3) commercial paper maturing within 270 days from the date of creation thereof
and, at the time of acquisition, rated at least "A-2" or the equivalent
thereof or "P-2" or the equivalent thereof by S&P and Moody's, respectively;
(4) certificates of deposit or bankers' acceptances maturing within six months
from the date of acquisition thereof issued by any bank organized under the
laws of the United States of America or any state thereof or the District of
Columbia or any country of the European Union or any U.S. branch of a
foreign bank having at the date of acquisition thereof combined capital and
surplus of not less than $500 million (or the equivalent) and Thompson Bank
Rating Watch of "B" or better;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered
into with any bank meeting the qualifications specified in clause (4) above;
and
(6) investments in money market funds which invest substantially all their
assets in securities of the types described in clauses (1) through
(5) above.
"CHANGE OF CONTROL" means the occurrence of one or more of the following
events:
(1) any "person" or "group" other than a Permitted Holder is or becomes the
"beneficial owner" (as such terms are used in Section 13(d)(3) of the
Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to acquire,
whether such right is
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exercisable immediately or only after the passage of time), directly or
indirectly, of 50% or more of the Voting Stock (measured by voting power
rather than number of shares) of the Company,
(2) during any period of two consecutive years, individuals who at the beginning
of such period constituted the Board of Directors of the Company, together
with any new directors whose election by such Board of Directors or whose
nomination for election by the shareholders of the Company was approved by a
vote of a majority of the directors of the Company then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved or is a designee of any
one of the Permitted Holders or any combination thereof or was so nominated
or elected by any such Permitted Holder or Permitted Holders or any of their
designees, cease for any reason to constitute a majority of the Board of
Directors of the Company then in office; or
(3) the Company consolidates or merges with or into any other Person or sells,
assigns, conveys, transfers leases or otherwise disposes of all or
substantially all of its assets to any other Person, other than a
consolidation or merger or disposition of assets:
(a) of or by the Company into or to a Wholly Owned Restricted Subsidiary of
the Company,
(b) into or to a Permitted Holder, or
(c) pursuant to a transaction in which the outstanding Voting Stock of the
Company is changed into or exchanged for securities or other property
with the effect that the beneficial owners of the outstanding Voting
Stock of the Company immediately prior to such transaction, beneficially
own, directly or indirectly, at least a majority of the Voting Stock
(measured by voting power rather than number of shares) of the surviving
corporation or the Person to whom the Company's assets are transferred
immediately following such transaction.
"COMMISSION" means the Securities and Exchange Commission, or any successor
agency thereto with respect to the regulation or registration of securities.
"COMMON STOCK" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common equity interests, whether outstanding on
the Issue Date or issued after the Issue Date, and includes, without limitation,
all series and classes of such common equity interests and any warrants, rights
or options to purchase any such common equity interests.
"CONSOLIDATED CAPITAL RATIO" means, as of any date of determination, the
ratio of:
(1) the aggregate amount of Consolidated Indebtedness outstanding as of such
date to
(2) the Consolidated Net Worth for such date.
"CONSOLIDATED CASH FLOW" means, for any period, Consolidated Net Income for
such period, plus or minus the following, as the case may be:
(1) to the extent deducted in calculating such Consolidated Net Income,
Consolidated Income Tax Expense for such period; PLUS
(2) to the extent deducted in calculating such Consolidated Net Income,
Consolidated Interest Expense for such period; PLUS OR MINUS
(3) any change in Deferred Revenues; PLUS
(4) to the extent deducted in calculating such Consolidated Net Income,
Consolidated Non-cash Charges for such period; and MINUS
(5) (a) all non-cash credits and gains increasing Consolidated Net Income for
such period (excluding non-cash credits and gains excluded in the
determination of Consolidated Net Income for such
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period) and (b) all cash payments during such period relating to non-cash
charges that were added back in determining Consolidated Cash Flow in any
prior period.
Notwithstanding the foregoing, Consolidated Income Tax Expense, Consolidated
Non-cash Charges and change in Deferred Revenues of a Restricted Subsidiary of
the Company shall be added to Consolidated Net Income to compute Consolidated
Cash Flow of the Company only to the extent that a corresponding amount would be
permitted at the date of determination to be dividended to the Company by such
Restricted Subsidiary without prior governmental approval (that has not been
obtained), and without direct or indirect restriction pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that Restricted
Subsidiary or its shareholders.
"CONSOLIDATED INCOME TAX EXPENSE" means, for any period, the provision for
Federal, state, local and foreign income taxes payable by the Company and its
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP.
"CONSOLIDATED INDEBTEDNESS" means, as of any date of determination, an
amount equal to the aggregate amount of all Indebtedness of the Company and the
Restricted Subsidiaries and Preferred Stock of the Restricted Subsidiaries,
other than Preferred Stock held by the Company or by any Restricted Subsidiary,
outstanding at such time.
"CONSOLIDATED INTEREST EXPENSE" means, for any period, the sum of, without
duplication determined on a consolidated basis in accordance with GAAP:
(1) the aggregate of cash and non-cash interest expense of the Company and its
Restricted Subsidiaries for such period determined on a consolidated basis
in accordance with GAAP, including, without limitation (whether or not
classified as interest expense in accordance with GAAP):
(a) any amortization or accretion of debt discount or any interest paid on
Indebtedness of the Company in the form of additional Indebtedness,
(b) any amortization of deferred financing costs,
(c) the net costs under Hedging Obligations (including amortization of
fees),
(d) all capitalized interest,
(e) the interest portion of any deferred payment obligation,
(f) commissions, discounts and other fees and charges Incurred in respect of
letters of credit or bankers' acceptances, and
(g) any interest expense on Indebtedness of another Person that is
guaranteed by such Person or one of its Restricted Subsidiaries or
secured by a Lien on the assets of such Person or one of its Restricted
Subsidiaries (whether or not such guarantee or Lien is called upon);
(2) the interest component of Capitalized Lease Obligations paid, accrued and/or
scheduled to be paid or accrued by the Company and its Restricted
Subsidiaries during such period;
(3) the amount of all cash and non-cash dividend payments or distributions on
any series of Preferred Stock or Disqualified Capital Stock of any
Restricted Subsidiary (other than dividends payable to the Company or any
Restricted Subsidiary) paid, accrued or scheduled to be paid or accrued
during such period; and
(4) the cash contributions to any employee stock ownership plan or similar trust
to the extent such contributions are used by such plan or trust to pay
interest or fees to any Person (other than the Company) in connection with
Indebtedness Incurred by such plan or trust.
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"CONSOLIDATED LEVERAGE RATIO" means, as of any date of determination, the
ratio of the aggregate amount of Consolidated Indebtedness as of such date to
Consolidated Cash Flow for the four most recent full fiscal quarters for which
financial statements are available ending prior to the date of such
determination (the "Four Quarter Period"). For purposes of this definition,
"Consolidated Indebtedness" and "Consolidated Cash Flow" shall be calculated
after giving effect on a pro forma basis in accordance with Regulation S-X under
the Securities Act for the period of such calculation to:
(1) the Incurrence or repayment or redemption of any Indebtedness of the Company
or any of its Restricted Subsidiaries (and the application of the proceeds
thereof), including the Incurrence of any Indebtedness (and the application
of the proceeds thereof) giving rise to the need to make such determination,
occurring during such Four Quarter Period or at any time subsequent to the
last day of such Four Quarter Period and on or prior to such date of
determination, to the extent, in the case of an Incurrence, such
Indebtedness is outstanding on the date of determination, as if such
Incurrence or repayment, as the case may be (and the application of the
proceeds thereof), occurred on the first day of such Four Quarter Period;
and
(2) any Asset Sale or Asset Acquisition (including, without limitation, any
Asset Acquisition giving rise to the need to make such determination as a
result of the Company or one of its Restricted Subsidiaries (including any
Person who becomes a Restricted Subsidiary as a result of the Asset
Acquisition) Incurring Acquired Indebtedness and including, without
limitation, by giving pro forma effect to any Consolidated Cash Flow
(provided that such pro forma Consolidated Cash Flow shall be calculated in
a manner consistent with the exclusions in the definition of "Consolidated
Net Income") attributable to the assets which are the subject of the Asset
Sale or Asset Acquisition during the Four Quarter Period) occurring during
the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to such date of determination, as if
such Asset Sale or Asset Acquisition (including the Incurrence of any such
Acquired Indebtedness) occurred on the first day of the Four Quarter Period.
In addition, the amount of Indebtedness under any revolving credit facility
will be computed based on:
(a) the average daily balance of such Indebtedness during such Four Quarter
Period, or
(b) if such facility was created after the end of such Four Quarter Period,
the average daily balance of such Indebtedness during the period from the
date of creation of such facility to the date of such calculation,
in each case giving pro forma effect to any borrowings related to any
transaction referred to in clause (2) above.
"CONSOLIDATED NET INCOME" means, for any period, the aggregate net income
(or loss) of the Company and its Restricted Subsidiaries for such period on a
consolidated basis, determined in accordance with GAAP; PROVIDED, that there
shall be excluded therefrom:
(1) net after-tax gains or losses from Asset Sales or abandonments or reserves
relating thereto;
(2) net after-tax items classified as extraordinary gains or losses;
(3) for purposes of calculating Consolidated Cash Flow pursuant to clause (3) of
the first paragraph of "Certain Covenants--Limitations on Restricted
Payments" only, the net income of any Person acquired in a "pooling of
interests" transaction accrued prior to the date it becomes a Restricted
Subsidiary or is merged or consolidated with the Company or any Restricted
Subsidiary;
(4) the net income (but not loss) of any Restricted Subsidiary to the extent
that the declaration of dividends or similar distributions by that
Restricted Subsidiary of that income is restricted by contract, operation of
law or otherwise;
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(5) the net income (or loss, but only in the case of Unrestricted Subsidiaries)
of any Person, other than the Company or a Restricted Subsidiary, except to
the extent of cash dividends or distributions paid to the Company or to a
Restricted Subsidiary by such Person which are not included pursuant to
clause (C) of the first paragraph of "Certain Covenants--Limitation on
Restricted Payments;"
(6) any increase (but not decrease) in net income attributable to minority
interests in any Restricted Subsidiary;
(7) any restoration to income of any contingency reserve, except to the extent
that provision for such reserve was made out of Consolidated Net Income
accrued at any time following the Issue Date;
(8) the cumulative effect of changes in accounting principles; and
(9) for purposes of calculating Consolidated Cash Flow pursuant to clause 3(A)
of the first paragraph of "Certain Covenants--Limitation on Restricted
Payments" only, any earnings of a Surviving Entity prior to assuming the
Company's obligations under the indentures and the exchange notes pursuant
to "Certain Covenants--Limitation on Merger, Consolidation and Sales of
Assets".
"CONSOLIDATED NET WORTH" means, as of any date of determination, the excess
(if any) of:
(1) the total amounts shown on the balance sheet of the Company and its
Restricted Subsidiaries, determined on a consolidated basis in accordance
with GAAP, as of the end of the most recent fiscal quarter for which
financial statements are available ending prior to such date as the
aggregate paid-in capital relating to the Company's Capital Stock (excluding
Disqualified Stock), after giving pro forma effect to any issuance,
repurchase or redemption of the Company's Capital Stock since the end of
such most recent fiscal quarter, over
(2) the amount of Restricted Investments (including Designation Amounts, but
excluding Restricted Investments in Permitted Joint Ventures) made by the
Company or its Restricted Subsidiaries since the Issue Date.
"CONSOLIDATED NON-CASH CHARGES" means, for any period, the aggregate
depreciation, amortization (including amortization of goodwill and other
intangibles and the amount of capacity available for sale charged to cost of
sales, but excluding amortization of prepaid cash expenses that were paid in a
prior period) and other non-cash expenses or losses (including non-cash charges
related to any employee stock ownership or option plan) of the Company and its
Restricted Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP (excluding any such charge which constitutes an accrual of
or a reserve for cash charges for any future period or the amortization of a
prepaid cash expense paid in a prior period).
"COVENANT DEFEASANCE" has the meaning set forth under "Legal Defeasance and
Covenant Defeasance."
"CURRENCY AGREEMENT" means, in respect of any Person, any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party relating to foreign currency denominated Indebtedness.
"DEFAULT" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"DEFERRED REVENUE" means amounts appearing as a liability on the balance
sheet of the Company and its Restricted Subsidiaries (determined on a
consolidated basis in accordance with GAAP) classified as deferred revenues to
the extent of cash received in connection therewith or to the extent a
receivable with terms customary in the industry or otherwise commercially
reasonable is recorded on the balance sheet, as of the end of the most recent
fiscal quarter for which financial statements are available ending prior to the
date of determination.
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"DESIGNATION" and "DESIGNATION AMOUNT" have the meanings set forth under
"Certain Covenants--Limitation on Restricted Payments."
"DISQUALIFIED CAPITAL STOCK" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or is redeemable at the sole option of the
holder thereof, in any case, on or prior to the 91st day after the final
maturity date of the exchange notes; PROVIDED, HOWEVER, that any Capital Stock
that would constitute Disqualified Stock solely because the holders thereof have
the right to require the Company to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such provisions
unless such repurchase or redemption complies with the covenant described above
under "--Certain Covenants--Limitation on Restricted Payments" and until such
time as the Company has satisfied its obligations to the Holders of exchange
notes as described under "Change of Control."
"EURO" or "[EURO]" means the currency adopted by the European Union.
"EUROPEAN UNION" means the member nations to the third stage of European
Monetary Union pursuant to the Treaty of Rome establishing the European
Community, as amended by the Treaty on European Union, signed at Maastricht on
February 7, 1992.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"FAIR MARKET VALUE" means, with respect to any asset, the price (after
taking into account any liabilities relating to such assets) which could be
negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing and able buyer, neither of which is under any
compulsion to complete the transaction; PROVIDED, that the Fair Market Value of
any such asset or assets shall be determined conclusively by the Board of
Directors of the Company acting in good faith, and shall be evidenced by a Board
Resolution.
"FLAG LIMITED CREDIT AGREEMENT" means the credit agreement, dated as of
January 28, 1998, among FLAG Limited, the Term Lenders thereto, the Revolving
Lenders thereto, Barclays Bank plc and International Trust Company of Bermuda,
as amended.
"FOUR QUARTER PERIOD" has the meaning set forth in the definition of
"Consolidated Leverage Ratio" above.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"GUARANTEE" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person:
(a) to purchase or pay, or advance or supply funds for the purchase or
payment of, such Indebtedness of such other Person, whether arising by
virtue of partnership arrangements, or by agreement to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, or to
maintain financial statement conditions or otherwise, or
(b) entered into for purposes of assuring in any other manner the obligee of
such Indebtedness of the payment thereof or to protect such obligee
against loss in respect thereof, in whole or in part,
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PROVIDED that the term "Guarantee" shall not include endorsements for collection
or deposit in the ordinary course of business. The term "Guarantee" used as a
verb has a corresponding meaning.
"HEDGING OBLIGATIONS" means the obligations of any Person pursuant to any
Interest Rate Agreement or Currency Agreement.
"HOLDERS" means a holder from time to time of the Dollar Notes and/or the
Euro Notes, as appropriate.
"INCUR" means, with respect to any Indebtedness, Lien or other obligation of
any Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, Guarantee or otherwise become liable in respect of such
Indebtedness or other obligation on the balance sheet of such Person or Lien
(and "Incurrence," "Incurred" and "Incurring" shall have meanings correlative to
the preceding); PROVIDED, HOWEVER, that a change in GAAP that results in an
obligation of such person that exists at such time becoming Indebtedness shall
not be deemed an Incurrence of such Indebtedness and that neither the accrual of
interest nor the accretion of original issue discount shall be deemed an
Incurrence of Indebtedness. Any Indebtedness or Lien of any Person outstanding
at the time such Person becomes a Restricted Subsidiary (including upon
Revocation) or is merged with or into or consolidates with the Company or a
Restricted Subsidiary, whether or not such Indebtedness or Lien was Incurred in
connection with or in anticipation thereof, shall be deemed Incurred at the time
it becomes a Restricted Subsidiary.
"INDEBTEDNESS" means with respect to any Person, without duplication:
(1) the principal amount (or, if less, the accreted value) of all obligations of
such Person for borrowed money;
(2) the principal amount (or, if less, the accreted value) of all obligations of
such Person evidenced by bonds, debentures, notes or other similar
instruments;
(3) all Capitalized Lease Obligations of such Person;
(4) all obligations of such Person issued or assumed as the deferred purchase
price of property, all conditional sale obligations and all obligations
under any title retention agreement (but excluding trade accounts payable
and other accrued liabilities arising in the ordinary course of business
that are not overdue by 90 days or more or are being contested in good faith
by appropriate proceedings promptly instituted and diligently conducted);
(5) all letters of credit, banker's acceptances or similar credit transactions,
including reimbursement obligations in respect thereof;
(6) Guarantees of such Person in respect of Indebtedness referred to in clauses
(1) through (5) above and clauses (8) and (9) below;
(7) all Indebtedness of any other Person of the type referred to in clauses
(1) through (6) which is secured by any Lien on any property or asset of
such Person, the amount of such Indebtedness being deemed to be the lesser
of the Fair Market Value of such property or asset or the amount of the
Indebtedness so secured;
(8) all obligations under Hedging Obligations of such Person; and
(9) all Disqualified Capital Stock issued by such Person with the amount of
Indebtedness represented by such Disqualified Capital Stock being equal to
the greater of its voluntary or involuntary liquidation preference and its
maximum fixed repurchase price, but excluding accrued dividends, if any;
PROVIDED, that:
(a) if the Disqualified Capital Stock does not have a fixed repurchase
price, such maximum fixed repurchase price shall be calculated in
accordance with the terms of the Disqualified Capital
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Stock as if the Disqualified Capital Stock were purchased on any date on
which Indebtedness shall be required to be determined pursuant to the
indentures, and
(b) if the maximum fixed repurchase price is based upon, or measured by, the
fair market value of the Disqualified Capital Stock, the fair market
value shall be the Fair Market Value thereof.
"INDEPENDENT FINANCIAL ADVISOR" means an accounting firm, appraisal firm,
investment banking firm or consultant of nationally recognized standing that is,
in the judgment of the Company's Board of Directors, qualified to perform the
task for which it has been engaged and which is independent in connection with
the relevant transaction.
"INTEREST RATE AGREEMENT" of any Person means any interest rate protection
agreement (including, without limitation, interest rate swaps, caps, floors,
collars, derivative instruments and similar agreements) and/or other types of
interest hedging agreements.
"INVESTMENT" means, with respect to any Person, any:
(1) direct or indirect loan or other extension of credit (including, without
limitation, a guarantee),
(2) capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or
(3) any purchase or acquisition by such Person of any Capital Stock, bonds,
notes, debentures or other securities or evidences of Indebtedness issued
by, any other Person.
"Investment" shall exclude (A) accounts receivable or deposits arising in the
ordinary course of business; (B) payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses for accounting purposes and that are made in the ordinary course of
business; (C) loans or advances to employees made in the ordinary course of
business consistent with past practices of the Company or such Restricted
Subsidiary; and (D) stock, obligations or securities received in settlement of
debts created in the ordinary course of business and owing to the Company or any
Restricted Subsidiary or in satisfaction of judgments. Any property transferred
to or from an Unrestricted Subsidiary will be valued at its Fair Market Value at
the time of such transfer. If the Company or any Restricted Subsidiary sells or
otherwise disposes of any Common Stock of a Restricted Subsidiary (including any
issuance and sale of Capital Stock by a Restricted Subsidiary) such that, after
giving effect to any such sale or disposition, such Restricted Subsidiary would
cease to be a Subsidiary of the Company, the Company shall be deemed to have
made an Investment on the date of any such sale or disposition equal to sum of
the Fair Market Value of the Capital Stock of such former Restricted Subsidiary
held by the Company or any Restricted Subsidiary immediately following such sale
or other disposition and the amount of any Indebtedness of such former
Restricted Subsidiary Guaranteed by the Company or any Restricted Subsidiary or
owed to the Company or any other Restricted Subsidiary immediately following
such sale or other disposition.
"ISSUE DATE" means the date of issuance of initial notes under the
indentures.
"LEGAL DEFEASANCE" has the meaning set forth under "Legal Defeasance and
Covenant Defeasance."
"LIEN" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents, including payments in respect of deferred
payment obligations when received in the form of
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cash or Cash Equivalents received by the Company or any of its Restricted
Subsidiaries from such Asset Sale, net of:
(1) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking
fees and sales commissions);
(2) taxes paid or payable in respect of such Asset Sale after taking into
account any reduction in consolidated tax liability due to available tax
credits or deductions and any tax sharing arrangements;
(3) repayment of Indebtedness secured by a Lien on the asset disposed of in such
Asset Sale permitted under the indentures that is required to be repaid in
connection with such Asset Sale; and
(4) appropriate amounts to be provided by the Company or any Restricted
Subsidiary, as the case may be, as a reserve, in accordance with GAAP,
against any liabilities associated with such Asset Sale and retained by the
Company or any Restricted Subsidiary, as the case may be, after such Asset
Sale, including, without limitation, pension and other post-employment
benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such Asset
Sale.
"OFFICER" means, when used in connection with any action to be taken by the
Company, the Chairman of the Board, the Chief Executive Officer, the Chief
Operating Officer, the Chief Financial Officer, the General Counsel or the
Treasurer of the Company.
"OFFICERS' CERTIFICATE" means, when used in connection with any action to be
taken by the Company, a certificate signed by two Officers of the Company and
delivered to the trustee.
"OPINION OF COUNSEL" means a written opinion of counsel, who may be an
employee of or counsel for the Company and who shall be reasonably acceptable to
the trustee.
"PERMITTED CREDIT FACILITY" means one or more credit agreements, loan
agreements or similar facilities in the bank credit market (which may include
institutional investor participation), secured or unsecured, providing for
revolving credit loans, term loans and/or letters of credit, including the FLAG
Limited Credit Agreement, entered into from time to time by the Company and its
Restricted Subsidiaries, and including any related notes, Guarantees, collateral
documents, instruments and agreements executed in connection therewith, as the
same may be amended, supplemented, modified, restated or replaced from time to
time.
"PERMITTED HOLDERS" means Bell Atlantic Corporation, Dallah Albaraka Holding
Company and their respective Affiliates.
"PERMITTED INVESTMENTS" means:
(1) Investments by the Company or any Restricted Subsidiary in any Person that
is, or that result in any Person becoming, immediately after such
Investment, a Restricted Subsidiary or constituting a merger or
consolidation of such Person into the Company or with or into a Restricted
Subsidiary;
(2) Investments by any Restricted Subsidiary in the Company;
(3) Investments in cash and Cash Equivalents;
(4) any extension, modification or renewal of any Investments existing as of the
Issue Date (but not Investments involving additional advances, contributions
or other investments of cash or property or other increases thereof, other
than as a result of the accrual or accretion of interest or original issue
discount or payment-in-kind pursuant to the terms of such Investment as of
the Issue Date);
(5) Investments received as a result of the bankruptcy or reorganization of any
Person or taken in settlement of or other resolution of claims or disputes,
and, in each case, extensions, modifications and renewals thereof; and
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(6) Investments made by the Company or its Restricted Subsidiaries as a result
of non-cash consideration permitted to be received in connection with an
Asset Sale made in compliance with the covenant described under "Certain
Covenants--Limitation on Asset Sales."
"PERMITTED JOINT VENTURE" means a Person engaged in the Telecommunications
Business as to which the Company exercises no less than a veto right over
material operating, financial and strategic actions and owns at least 30% of the
Voting Stock and Capital Stock and no more than 50% of the Voting Stock and
Capital Stock; PROVIDED, HOWEVER, that neither the Company nor any Restricted
Subsidiary will at any time:
(1) provide credit support for, subject any of its property or assets (other
than the Capital Stock of any Permitted Joint Venture) to the satisfaction
of, or guarantee, any Indebtedness of any Permitted Joint Venture (including
any undertaking, agreement or instrument evidencing such Indebtedness);
(2) be directly or indirectly liable for any Indebtedness of any Permitted Joint
Venture; or
(3) be directly or indirectly liable for any Indebtedness which provides that
the holder thereof may (upon notice, lapse of time or both) declare a
default thereon or cause the payment thereof to be accelerated or payable
prior to its final scheduled maturity upon the occurrence of a default with
respect to any Indebtedness of any Permitted Joint Venture;
except, in the case of (1), (2) or (3), (x) Guarantees provided on a
several, but not joint, basis, or loans, in each case, in proportion to the
Company's ownership interest in the relevant Permitted Joint Venture or
(y) any non-recourse guarantee given solely to support the pledge by the
Company or any Restricted Subsidiary of the Capital Stock of any Permitted
Joint Venture.
"PERMITTED LIENS" means any of the following:
(1) Liens securing Indebtedness Incurred in accordance with clause 2(d), (e) or
(f) of "Certain Covenants--Limitation on Additional Indebtedness and
Preferred Stock", PROVIDED that:
(a) Liens securing Indebtedness Incurred pursuant to such
clause 2(e)(x) shall cover only the assets acquired with the proceeds of
such Indebtedness and shall be created within 180 days of such
acquisition; and
(b) Liens securing Indebtedness pursuant to such clause 2(f) shall only
cover the property securing the Indebtedness to which the relevant
Hedging Obligations relate;
(2) Liens in favor of the Company or any Restricted Subsidiary;
(3) Liens:
(a) on property of a Person existing at the time such Person is merged with
or into or consolidated with the Company or any of its Restricted
Subsidiaries (including Liens securing Acquired Indebtedness), PROVIDED
that such Liens were in existence prior to the contemplation of such
merger or consolidation and do not extend to any assets other than those
of the Person merged into or consolidated with the Company or such
Restricted Subsidiary and if such Liens secure Subordinated Indebtedness,
such Liens shall be junior and subordinate to Liens on the same property
securing the exchange notes;
(b) Liens on property existing at the time of acquisition thereof by the
Company or any of its Restricted Subsidiaries, PROVIDED that such Liens
were in existence prior to the contemplation of such acquisition;
(4) Liens to secure the performance of statutory obligations, surety or appeal
bonds, performance bonds or other obligations of a like nature incurred in
the ordinary course of business;
(5) Liens existing on the Issue Date and Liens to secure any Permitted
Refinancing Indebtedness which is Incurred to Refinance any Indebtedness
which has been secured by a Lien permitted under the
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covenant described under "Certain Covenants--Limitation on Liens" and which
Indebtedness has been Incurred in accordance with "Certain
Covenants--Limitation on Incurrence of Additional Indebtedness and Preferred
Stock"; PROVIDED, that such new Liens:
(a) are no less favorable to the Holders of exchange notes and are not more
favorable to the lienholders with respect to such Liens than the Liens in
respect of the Indebtedness being Refinanced and
(b) do not extend to any property or assets other than the property or
assets securing the Indebtedness Refinanced by such Refinancing
Indebtedness;
(6) Liens for taxes, assessments or governmental charges or claims that are not
yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, PROVIDED that any
reserve or other appropriate provision as shall be required in conformity
with GAAP shall have been made therefor;
(7) zoning restrictions, rights-of-way, easements and similar charges or
encumbrances incurred in the ordinary course which in the aggregate do not
detract from the value of the property thereof;
(8) Liens arising by reason of operation of law in favor of mechanics,
materialmen, laborers, employees or suppliers, Incurred in the ordinary
course of business for sums which are not yet delinquent or are being
contested in good faith by appropriate proceedings which suspend the
collection thereof; and
(9) Liens incurred in the ordinary course of business of the Company or any of
its Restricted Subsidiaries with respect to obligations that do not exceed
$15 million at any one time outstanding and that:
(a) are not Incurred in connection with the borrowing of money or the
obtaining of advances or credit (other than trade credit in the ordinary
course of business) and
(b) do not in the aggregate materially detract from the value of the
property or materially impair the use thereof in the operation of
business by the Company or such Restricted Subsidiary.
"PERMITTED REFINANCING INDEBTEDNESS" means Refinancing Indebtedness in
respect of:
(1) Indebtedness (other than Indebtedness owed to the Company or any Subsidiary)
Incurred pursuant to paragraph (1) of "Certain Covenants--Limitation on
Incurrence of Additional Indebtedness and Preferred Stock," or
(2) Indebtedness Incurred pursuant to paragraph 2(a) or 2(i) of "Certain
Covenants--Limitation on Incurrence of Additional Indebtedness and Preferred
Stock".
"PERSON" means an individual, partnership, corporation, limited liability
company, unincorporated organization, trust or joint venture, or a governmental
agency or political subdivision thereof.
"PREFERRED STOCK" of any Person means any Capital Stock of such Person that
has preferential rights over any other Capital Stock of such Person with respect
to profits, dividends, distributions or redemptions or upon liquidation.
"PUBLIC EQUITY OFFERING" means an underwritten public offering of Common
Stock of the Company (other than Disqualified Stock) for cash resulting in gross
proceeds to the Company of at least $50 million.
"PURCHASE MONEY INDEBTEDNESS" means Indebtedness (including Acquired
Indebtedness and Acquired Preferred Stock) of the Company or any Restricted
Subsidiary Incurred for the purpose of financing all or any part of the purchase
price, or other cost of construction, development, leasing or improvement of any
property (excluding a Sale and Leaseback Transaction involving property
previously owned by the Company or any Restricted Subsidiary); PROVIDED that the
aggregate principal amount of such Indebtedness or liquidation value of such
Preferred Stock does not exceed the lesser of the Fair Market Value of such
property or such purchase price or cost at the time of purchase, construction,
development, lease or
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improvement, as determined in accordance with GAAP in good faith by the Board of
Directors of the Company, including any Refinancing Indebtedness for such
Indebtedness.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Capital Stock and any warrants, rights or options to purchase or acquire Capital
Stock that is not Disqualified Capital Stock and that is not convertible into or
exchangeable into Disqualified Capital Stock.
"REFINANCE" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"REFINANCING INDEBTEDNESS" means any Refinancing by the Company or any
Restricted Subsidiary, to the extent that such Refinancing does not:
(1) result in an increase in the aggregate principal amount (or accreted value,
if less) of the Indebtedness of such Person as of the date of such proposed
Refinancing (plus the amount of any premium required to be paid under the
terms of the instrument governing such Indebtedness and plus the amount of
reasonable expenses incurred by the Company in connection with such
Refinancing); or
(2) create Indebtedness with:
(a) a Weighted Average Life to Maturity that is less than the Weighted
Average Life to Maturity of the Indebtedness being Refinanced or
(b) a final maturity earlier than the final maturity of the Indebtedness
being Refinanced; PROVIDED, that:
(x) if such Indebtedness being Refinanced is Indebtedness of the Company,
then such Refinancing Indebtedness shall be Indebtedness of the
Company, and
(y) if such Indebtedness being Refinanced is Subordinated Indebtedness,
then such Refinancing Indebtedness shall be subordinate to the
exchange notes at least to the same extent and in the same manner as
the indebtedness being Refinanced.
"REPLACEMENT ASSETS" has the meaning set forth under "Certain
Covenants--Limitation on Asset Sales."
"RESTRICTED INVESTMENT" means any Investment (other than a Permitted
Investment).
"RESTRICTED PAYMENT" has the meaning set forth under "Certain
Covenants--Limitation on Restricted Payments."
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company which at the
time of determination is not an Unrestricted Subsidiary.
"SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement
with any Person or to which any such Person is a party providing for the leasing
to the Company or a Restricted Subsidiary of any property, whether owned by the
Company or any Restricted Subsidiary at the Issue Date or later acquired, which
has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person by whom funds have been or are
to be advanced on the security of such Property.
"SENIOR INDEBTEDNESS" means the exchange notes and any other Indebtedness of
the Company which ranks equal in right of payment with the exchange notes.
"SIGNIFICANT SUBSIDIARY" shall mean a Restricted Subsidiary of the Company
constituting a "Significant Subsidiary" in accordance with Rule 1-02(w) of
Regulation S-X under the Securities Act.
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"STATED MATURITY" means, with respect to any security, the date specified in
such security as the fixed date on which payment of principal of such security
is due and payable, including pursuant to any mandatory redemption provision
(but excluding any provision providing for the repurchase of such security at
the option of the holder thereof upon the happening of any contingency).
"SUBORDINATED INDEBTEDNESS" means any Indebtedness of the Company which is
expressly subordinated in right of payment to the exchange notes.
"SUBSIDIARY," with respect to any Person, mean any other Person of which
such Person owns, directly or indirectly, more than 50% of the voting power of
the other Person's outstanding Voting Stock.
"TELECOMMUNICATIONS ASSETS" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used by the Company
and its Restricted Subsidiaries in the Telecommunications Business owned and
operated by the Company and its Restricted Subsidiaries; provided that Capital
Stock shall constitute Telecommunications Assets only to the extent it
represents Capital Stock of a Person engaged in a Telecommunications Business
and such Person becomes a Restricted Subsidiary as a result of the acquisition
of such Capital Stock by the Company or another Restricted Subsidiary.
"TELECOMMUNICATIONS BUSINESS" means the business of:
(1) transmitting, or providing services relating to the transmission of, voice,
video or data through owned or leased transmission facilities,
(2) constructing, creating, developing or marketing communications networks,
related network transmission equipment, software and other devices for use
in a telecommunications business,
(3) maintaining, operating or repairing communications networks, including
ownership of the assets necessary to engage in the aforementioned
activities,
(4) providing data center management or co-location services, or
(5) evaluating, participating or pursuing any other activity or opportunity that
is primarily related to those identified in (1) through (4) above, PROVIDED
that the determination of what constitutes a Telecommunications Business
shall be made in good faith by the Board of Directors of the Company.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of the Company designated as
such pursuant to "Certain Covenants--Limitation on Restricted Payments." Any
such Designation may be revoked by a Board Resolution of the Company, subject to
the provisions of such covenant.
"VENDOR FACILITY" means any agreements between the Company or any Restricted
Subsidiary and one or more vendors or lessors of equipment or other capital
assets (or their affiliated financial providers) to the Company or any
Restricted Subsidiary for use by them in the Telecommunications Business
providing financing to the Company or any Restricted Subsidiary for the lease or
purchase of such equipment or other capital assets.
"VOTING STOCK" with respect to any Person, means securities of any class of
Capital Stock of such Person entitling the holders thereof (whether at all times
or only so long as no senior class of stock has voting power by reason of any
contingency) to vote in the election of members of the Board of Directors (or
equivalent governing body) of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the then outstanding aggregate principal amount or liquidation preference,
as the case may be, of such Indebtedness into
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(2) the sum of the total of the products obtained by multiplying:
(a) the amount of each then remaining installment, sinking fund, serial
maturity or other required payment of principal or liquidation
preference, as the case may be, including payment at final maturity, in
respect thereof, by
(b) the number of years (calculated to the nearest one-twelfth) which will
elapse between such date and the making of such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of the Company means any Restricted
Subsidiary of which all the outstanding Capital Stock (other than in the case of
a foreign Restricted Subsidiary, directors' qualifying shares or an immaterial
amount of shares required to be owned by other Persons pursuant to applicable
law) are owned by the Company or any Wholly Owned Restricted Subsidiary.
BOOK ENTRY; DELIVERY AND FORM
GENERAL
Except as set forth below, the exchange notes will be issued in registered,
global form in minimum denominations of $1,000 or [EURO]1,000, as applicable,
and integral multiples of $1,000 or [EURO]1,000, as applicable, in excess
thereof. The exchange notes will be issued at the closing of the exchange offer.
The initial Dollar Notes and the initial Euro Notes were offered and sold,
- to QIBs in reliance on Rule 144A ("Dollar 144A Notes" and "Euro 144A
Notes", respectively, and, collectively, "144A Notes"), or
- in offshore transations in reliance on Regualtion S ("Dollar Regulation S
Notes" and "Euro Regulation S Notes", respectively, and, collectively,
"Regulation S Notes").
FORM
The exchange Dollar 144A Notes and the exchange Dollar Regulation S Notes
will each be represented by one or more global notes in definitive, fully
registered form without interest coupons (the "Dollar 144A Global Notes" and the
"Dollar Regulation S Global Notes", respectively, and, collectively, "Dollar
Global Notes") and will be deposited with or on behalf of The Depository Trust
Company ("DTC") and registered in the name of a nominee of DTC.
The exchange Euro 144A Notes and the exchange Euro Regulation S Notes will
each be represented by one or more global notes in definitive, fully registered
form without interest coupons (the "Euro 144A Global Notes" and the "Euro
Regulation S Global Notes", respectively, and, collectively, "Euro Global
Notes"). The Euro Global Notes will be deposited with a common depositary (the
"Common Depositary") for Morgan Guaranty Trust Company of New York as operator
of the Euroclear System (Euroclear) and Clearstream Banking S.A. ("Clearstream,
Luxembourg," formerly Cedelbank) and registered in the name of a nominee of the
Common Depositary.
We refer to the Dollar 144A Global Notes and the Euro 144A Global Notes
collectively herein as the "144A Global Notes" and we refer to the Dollar
Regulation S Global Notes and the Euro Regulation S Global Notes collectively
herein as the "Regulation S Global Notes." We refer to the Dollar Global Notes
and the Euro Global Notes collectively as the "Global Notes."
BOOK-ENTRY PROCEDURES
GLOBAL NOTES. The following description of the operations and procedures of
DTC, Euroclear and Clearstream, Luxembourg are provided solely as a matter of
convenience. These operations and procedures are solely within the control of
the respective settlement systems and are subject to changes by them from time
to time. We take no responsibility for these operations and procedures and we
urge investors to contact the system or their participants directly to discuss
these matters.
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DOLLAR GLOBAL NOTES. Ownership of beneficial interests in a Dollar Global
Note will be limited to participants or persons who hold interests through its
participants. Ownership of beneficial interests in the Dollar Global Notes will
be shown on, and the transfer of that ownership will be effected only through,
records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants).
EURO GLOBAL NOTES. Ownership of beneficial interests in a Euro Global Note
will be limited to participants or persons who hold interests through
participants in Euroclear or Clearstream, Luxembourg. Ownership of beneficial
interests in the Euro Global Notes will be shown on, and the transfer of that
ownership will be effected only through records maintained by Euroclear and
Clearstream, Luxembourg or their respective nominees (with respect to interests
of participants) and the records of participants (with respect to interests of
persons other than participants).
AS LONG AS DTC OR THE COMMON DEPOSITARY, OR THEIR RESPECTIVE NOMINEES, IS
THE REGISTERED HOLDER OF A GLOBAL NOTE, DTC OR THE COMMON DEPOSITARY OR SUCH
NOMINEE, AS THE CASE MAY BE, WILL BE CONSIDERED THE SOLE OWNER AND HOLDER OF THE
EXCHANGE NOTES REPRESENTED BY SUCH GLOBAL NOTE FOR ALL PURPOSES AND UNDER THE
INDENTURES AND THE EXCHANGE NOTES.
Unless:
(1) in the case of a Dollar Global Note DTC notifies us that it is unwilling or
unable to continue as depositary for a Global Note or ceases to be a
"Clearing Agency" registered under the Exchange Act;
(2) in the case of a Euro Global Note, Euroclear and Clearstream, Luxembourg
notify us that they are unwilling or unable to continue as clearing agency;
(3) in the case of a Euro Global Note, the Common Depositary notifies us that
they are unwilling or unable to continue as Common Depositary and a
successor Common Depositary is not appointed within 120 days of such notice;
or
(4) in the case of any exchange Note, an event of default has occurred and is
continuing with respect to such Note,
owners of beneficial interests in a Global Note will not be entitled to have any
portions of such Global Note registered in their names, will not receive or be
entitled to receive physical delivery of exchange notes in certificated form and
will not be considered the owners or holders of the Global Note (or any exchange
notes represented thereby) under the indentures or the exchange notes. In
addition, no beneficial owner of an interest in a Global Note will be able to
transfer that interest except in accordance with DTC's and/or Euroclear's and
Clearstream, Luxembourg's applicable procedures (in addition to those under the
indentures referred to herein).
Investors in the Euro Global Notes may hold their interests therein through
Clearstream, Luxembourg or Euroclear, if they are participants in such systems,
or indirectly through organizations which are participants in such systems.
Clearstream, Luxembourg and Euroclear will hold interests in the Euro Global
Notes on behalf of their participants through customers' securities accounts in
their respective names on the books of the Common Depositary. Investors in the
Dollar 144A Global Notes may hold their interests therein directly through DTC,
if they are participants in such system, or indirectly through organizations
(including Euroclear and Clearstream, Luxembourg) which are participants in such
system. Investors in the Dollar Regulation S Global Notes must initially hold
their interests therein through Euroclear or Clearstream, Luxembourg, if they
are participants in such systems, or indirectly through organizations that are
participants in such systems. Investors may also hold interests in the Dollar
Regulation S Global Notes through organizations other than Euroclear or
Clearstream, Luxembourg that are participants or indirect participants in DTC.
All interests in a Global Note may be subject to the procedures and requirements
of DTC and/or Euroclear and Clearstream, Luxembourg.
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PAYMENTS ON THE EXCHANGE NOTES
Payments of the principal of and interest on Dollar Global Notes will be
made to DTC or its nominee as the registered owner thereof. Payments of the
principal of and interest on Euro Global Notes will be made to the order of the
Common Depositary or its nominee as the registered owner thereof. Neither we,
the trustee, the Common Depositary nor any of their respective agents will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining supervision or reviewing any records relating to such
beneficial ownership interests.
We expect that DTC or its nominee, upon receipt of any payment of principal
or interest in respect of a Global Note representing any exchange notes held by
it or its nominee, will immediately credit participants' accounts with payments
in amounts proportionate to their respective beneficial interests in the
principal amount of such Global Note for such exchange notes as shown on the
records of DTC or its nominee.
We expect that the Common Depositary, in its capacity as paying agent, upon
receipt of any payment of principal or interest in respect of a Global Note
representing any exchange notes held by it or its nominee, will immediately
credit the accounts of Euroclear and Clearstream, Luxembourg which in turn will
immediately credit accounts of participants in Euroclear and Clearstream,
Luxembourg with payments in amounts proportionate to their respective beneficial
interest in the principal amount of such Global Note for such exchange notes as
shown on the records of Euroclear and Clearstream, Luxembourg.
We also expect that payments by participants to owners of beneficial
interests in such Global Note held through such participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in "street name." Such
payments will be the responsibility of such participants.
Because DTC, Euroclear and Clearstream, Luxembourg can only act on behalf of
their respective participants, who in turn act on behalf of indirect
participants and certain banks, the ability of a holder of a beneficial interest
in Global Notes to pledge such interest to persons or entities that do not
participant in the DTC, Euroclear or Clearstream, Luxembourg systems, or
otherwise take actions in respect of such interest, may be limited by the lack
of a definitive certificate for such interest. The laws of some countries and
some U.S. states require that certain persons take physical delivery of
securities in certificated form. Consequently, the ability to transfer
beneficial interests in a Global Note to such persons may be limited.
Except for trades involving only Euroclear and Clearstream, Luxembourg
participants, interests in the Dollar Global Notes will trade in DTC's Same-Day
Funds Settlement System and secondary market trading activity in such interests
will therefore settle in immediately available funds, subject in all cases to
the rules and procedures of DTC and its participants. Transfers of interests in
Dollar Global Notes between participants in DTC will be effected in accordance
with DTC's procedures, and will be settled in same-day funds. Transfers of
interests in Euro Global Notes and Dollar Global Notes between participants in
Euroclear and Clearstream, Luxembourg will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Cross-market transfers of Dollar Notes between DTC participants, on the one
hand, and Euroclear or Clearstream, Luxembourg participants, on the other hand,
will be effected in DTC in accordance with DTC's rules on behalf of Euroclear or
Clearstream, Luxembourg, as the case may be, by its respective depositary;
however, such cross-market transactions will require delivery of instructions to
Euroclear or Clearstream, Luxembourg, as the case may be, by the counterparty in
such system in accordance with the rules and procedures and within the
established deadlines (Brussels time) of such system. Euroclear or Clearstream,
Luxembourg, as the case may be, will, if the transaction meets its settlement
requirements, deliver instructions to its respective depositary to take action
to effect final settlement on its behalf by delivering or receiving interests in
the relevant Global Notes in DTC, and making or receiving payments in
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accordance with normal procedures for same-day funds settlement applicable to
DTC Euroclear participants and Clearstream, Luxembourg participants may not
deliver instructions directly to the depositories for Euroclear or Clearstream,
Luxembourg.
Because of time zone differences, the securities account of a Euroclear or
Clearstream, Luxembourg participant purchasing an interest in a Dollar Global
Note from a DTC participant will be credited, and any such crediting will be
reported to the relevant Euroclear or Clearstream, Luxembourg participant,
during the securities settlement processing day (which must be a business day
for Euroclear and Clearstream, Luxembourg immediately following the DTC
settlement date). Cash received in Euroclear or Clearstream, Luxembourg as a
result of sales of interests in a Global Note by or through a Euroclear or
Clearstream, Luxembourg participant to a DTC participant will be received with
value on the DTC settlement date but will be available in the relevant Euroclear
or Clearstream, Luxembourg cash account only as of the business day for
Euroclear or Clearstream, Luxembourg following the DTC settlement date.
DTC, Euroclear and Clearstream, Luxembourg have advised us that they will
take any action permitted to be taken by a holder of exchange notes (including
the presentation of exchange notes for exchange as described below) only at the
direction of one or more participants to whose account with DTC or Euroclear or
Clearstream, Luxembourg, as the case may be, interests in the Global Notes are
credited and only in respect of such portion of the aggregate principal amount
of the exchange notes as to which such participant or participants has or have
given such direction. However, if there is an event of default under the
exchange notes, DTC, Euroclear and Clearstream, Luxembourg reserve the right to
exchange the Global Notes for exchange notes in certificated form, and to
distribute such exchange notes to their respective participants.
If the exchange notes are issued in certificated form, holders of such
certificated exchange notes will be able to receive payments of principal and
interest on their exchange notes in accordance with the procedures described
under "--Certificated Notes."
DEPOSITARY PROCEDURES
DTC. DTC has advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "Clearing Agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical transfer
and delivery of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and may include
certain other organization. Indirect access to the DTC system is available to
other entities such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a participant directly or
indirectly ("indirect participants").
EUROCLEAR AND CLEARSTREAM, LUXEMBOURG. Euroclear and Clearstream,
Luxembourg have advised us as follows: Euroclear and Clearstream, Luxembourg
each hold securities for their account holders and facilitate the clearance and
settlement of securities transactions by electronic book-entry transfer between
their respective account holders, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfer of
securities.
Euroclear and Clearstream, Luxembourg each provide various services
including safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Euroclear and Clearstream, Luxembourg each also deal with domestic securities
markets in several countries through established depository and custodial
relationships. The respective systems of Euroclear and Clearstream, Luxembourg
have established an electronic bridge between their two systems across which
their respective account holders may settle trades with each other.
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Account holders in both Euroclear and Clearstream, Luxembourg are world-wide
financial institutions including underwriters, securities brokers and dealers,
trust companies and clearing corporations, indirect access to both Euroclear and
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of either system.
An account holder's overall contractual relations with either Euroclear or
Clearstream, Luxembourg are governed by the respective rules and operating
procedures of Euroclear or Clearstream, Luxembourg and any applicable laws. Both
Euroclear and Clearstream, Luxembourg act under such rules and operating
procedures only on behalf of their respective account holders, and have no
record of or relationship with persons holding through their respective account
holders.
Although DTC, Euroclear and Clearstream, Luxembourg currently follow the
foregoing procedures to facilitate transfers of interests in Global Notes among
participants of DTC, Euroclear and Clearstream, Luxembourg, they are under no
obligation to do so, and such procedures may be discontinued or modified at any
time. Neither we nor the trustee will have any responsibility for the
performance by DTC, Euroclear or Clearstream, Luxembourg or their respective
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
CERTIFICATED NOTES
If any depositary is at any time unwilling or unable to continue as a
depositary for the exchange notes for the reasons set forth above under "Book
Entry Procedures," we will issue certificates for such exchange notes in
definitive, fully registered, non-global form without interest coupons in
exchange for the Global Notes. Certificates for exchange notes delivered in
exchange for any Global Note or beneficial interests therein will be registered
in the names, and issued in any approved denominations, requested by DTC,
Euroclear, Clearstream, Luxembourg or the Common Depositary (in accordance with
their customary procedures) and will bear the applicable restrictive legend
referred to in "Notice to Investors" unless the Company determines otherwise in
accordance with the indentures and in compliance with applicable law.
In the event definitive exchange notes are issued, the holders of definitive
exchange notes will be able to receive payments of principal and interest on
their exchange notes at the office of the Company's paying agent maintained in
the Borough of Manhattan, and, if the definitive Euro Notes are listed on the
Luxembourg Stock Exchange, at the offices of the paying agent in Luxembourg. All
payments of interest may be received at the offices of a paying agent upon
presentation of certificated exchange notes and all payments of principal may be
received at such offices upon surrender of the exchange notes. The Company also
has the option of mailing checks to the registered holders of the exchange
notes.
The Company's paying agent with respect to the Dollar Notes in the Borough
of Manhattan is currently the corporate trust office of The Bank of New York,
located at 101 Barclay Street, Floor 21 West, New York, New York. The Company's
paying agent with respect to the Euro Notes in London, United Kingdom is
currently the corporate trust office of The Bank of New York, London Branch, at
1 Canada Square, London E14 5AL, United Kingdom. The Company's paying agent and
transfer agent with respect to the Euro Notes in Luxembourg is Kredietbank S.A.
Luxembourgeoise, currently located at 43 boulevard Royal, L-2955 Luxembourg. As
long as the Euro Notes are listed on the Luxembourg Stock Exchange, the Company
will maintain a paying agent and transfer agent in Luxembourg. Any change in the
Luxembourg paying agent and transfer agent will be published in Luxembourg. See
"--Notices."
In the event definitive exchange notes are issued, the holders of definitive
exchange notes will be able to transfer their exchange notes, in whole or in
part, by surrendering the exchange notes for registration of transfer at the
offices of The Bank of New York and, so long as definitive Euro Notes are listed
on the Luxembourg Stock Exchange, at the offices of the paying agent in
Luxembourg, duly endorsed by or accompanied by a written instrument of transfer
in form satisfactory to the Company and the securities registrar. Upon
surrender, the Company will execute, and the trustee will authenticate and
deliver new exchange notes to the designated transferee in the amount being
transferred, and a new Note for any
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amount not being transferred will be issued to the transferor. Any new exchange
notes so issued may be obtained through the offices of the Paying Agent
(including, for so long as the Euro Notes are listed on the Luxembourg Stock
Exchange, the paying agent in Luxembourg). The Company will not charge any fee
for the registration of transfer or exchange, except that the Company may
require the payment of a sum sufficient to cover any applicable tax or other
governmental charge payable in connection with the transfer. Notwithstanding any
statement herein, we and the trustees reserve the right to impose such transfer,
certification, exchange or other requirements, if any, as they may determine are
necessary to ensure compliance with applicable laws or as DTC, Euroclear or
Clearstream, Luxembourg may require.
SAME-DAY SETTLEMENT AND PAYMENT
The indentures require that payment in respect of the exchange notes
represented by the Global Notes, including principal, and premium, if any, be
made by wire transfer of immediately available funds to the accounts specified
by the Global Note holder. With respect to exchange notes in certificated form,
we will make all payments of principal, and premium, if any, by wire transfer of
immediately available funds to the accounts specified by the holders thereof,
or, if no such account is specified, by mailing a check to each such holder's
registered address. The Dollar Notes represented by the Dollar Global Notes will
be eligible to trade in DTC's Same-Day Funds Settlement System, and any
permitted secondary market trading activity in such Dollar Notes will,
therefore, be required by DTC to be settled in immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
Clearstream, Luxembourg participant purchasing an interest in a Global Note from
a participant in DTC will be credited and any such crediting will be reported to
the relevant Euroclear or Clearstream, Luxembourg participant, during the
securities settlement processing day (which must be a business day for Euroclear
and Clearstream, Luxembourg) immediately following the settlement date of DTC.
Cash received in Euroclear or Clearstream, Luxembourg as a result of sales of
interests in a Global Note by or through a Euroclear or Clearstream, Luxembourg
participant to a participant in DTC will be received with value on the
settlement date of DTC but will be available in the relevant Euroclear or
Clearstream, Luxembourg cash account only as of the business day for Euroclear
or Clearstream, Luxembourg following DTC's settlement date.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
We entered into the Registration Agreements with the initial purchasers. You
may obtain a copy of the agreements from us. Under the agreements, we agreed to
file with the SEC an exchange offer registration statement with respect to an
offer to exchange the initial notes for the exchange notes with terms
substantially identical to the initial notes. If the exchange offer registration
statement becomes effective, we will offer to noteholders who are able to make
certain representations the opportunity to exchange their initial notes for
exchange notes. We will also file a shelf registration statement to cover
resales of initial notes or exchange notes by holders who provide us with
certain information if:
- we are not required to file the exchange offer registration statement or
permitted to consummate the exchange offer because the exchange offer is
not permitted by applicable law or SEC policy; or
- any holder notifies us within the specified time period that: it is
prohibited by law or SEC policy from participating in the exchange offer
(other than due solely to the status of such holder as one of our
affiliates); it may not resell the exchange notes acquired by it in the
exchange offer to the public without delivering a prospectus, and the
prospectus contained in the exchange offer registration statement is not
appropriate or available for such resales during the 30-day period
immediately following the consummation of the exchange offer; or it is a
broker-dealer and owns existing Notes acquired directly from us or one of
our affiliates.
We will use our best efforts to obtain effectiveness of the applicable
registration statement as promptly as possible.
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UNDER EXISTING INTERPRETATIONS OF THE STAFF OF THE DIVISION OF CORPORATION
FINANCE OF THE SEC, THE EXCHANGE NOTES WOULD IN GENERAL BE FREELY TRADABLE AFTER
THE COMPLETION OF THE EXCHANGE OFFER WITHOUT FURTHER COMPLIANCE WITH THE
REGISTRATION AND DELIVERY REQUIREMENTS OF THE SECURITIES ACT. HOWEVER, THE SEC
INDICATED THAT IT MAY REPEAL THESE INTERPRETATIONS. FURTHERMORE, THE SEC MAY
ADOPT CERTAIN PROPOSED RULE CHANGES UNDER THE SECURITIES ACT. IF THE
INTERPRETATIONS REFERRED TO ABOVE ARE REPEALED BEFORE THE EXCHANGE OFFER IS
CONSUMMATED SO THAT THE EXCHANGE OFFER WOULD NO LONGER BE PERMISSIBLE, THEN
HOLDERS OF THE INITIAL NOTES WILL NOT BE ABLE TO RECEIVE EXCHANGE NOTES PURSUANT
TO AN EXCHANGE OFFER. RATHER, THE INITIAL NOTES WILL ONLY BE REGISTERED IN
CONNECTION WITH RESALES BY THE HOLDERS. IN CONNECTION WITH THE RESALES, THE
HOLDERS WILL BE REQUIRED TO DELIVER A PROSPECTUS TO THE PURCHASERS AND WILL BE
SUBJECT TO CERTAIN OF THE CIVIL LIABILITY PROVISIONS UNDER THE SECURITIES ACT.
Under the Registration Agreements we agreed to:
- file this exchange offer registration statement with the SEC by the 60(th)
day after the closing for the offering of the initial notes;
- use our best efforts to obtain effectiveness of this exchange offer
registration statement by the 150(th) day after the closing for the
offering of the initial notes;
- unless the exchange offer would not be permitted by applicable law or SEC
policy, commence the exchange offer and use our best efforts to issue by
the 180(th) day after the closing for the offering of the initial notes
the exchange notes in exchange for all initial notes tendered in the
exchange offer;
- if obligated to file the shelf registration statement, use our best
efforts to file the shelf registration statement with the SEC by the
45(th) day following the date of the occurrence of one of the events
specified in the Registration Agreements which gives rise to our
obligation to file a shelf registration statement; and
- if obligated to file the shelf registration statement, use our best
efforts to obtain effectiveness of the shelf registration statement by the
90(th) day following the date of the occurrence of one of the events
specified in the Registration Agreements which gives rise to our
obligation to file a shelf registration statement.
We have agreed to pay liquidated damages if:
- we fail to file this exchange offer registration statement by the 60(th)
day after the closing for the offering of the initial notes;
- this exchange offer registration statement is not declared effective by
the SEC by the 150( th) day after the closing for the offering of the
initial notes;
- we fail to consummate the exchange offer by the 180(th) day after the
closing for the offering of the initial notes;
- this exchange offer registration statement is declared effective but
thereafter ceases to be effective or usable in connection with resales of
exchange notes in accordance with and during the periods specified in the
Registration Agreements;
- we fail to file the shelf registration statement by the 45(th) day
following the date of the occurrence of one of the events specified in the
Registration Agreements which gives rise to our obligation to file a shelf
registration statement;
- the shelf registration statement is not declared to be effective by the
SEC by the 90(th) day following the date of the occurrence of one of the
events specified in the Registration Agreements which gives rise to our
obligation to file a shelf registration statement; or
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- the shelf registration statement is declared effective but thereafter
ceases to be effective or usable in connection with resales of Transfer
Restricted Securities in accordance with and during the periods specified
in the Registration Agreements.
Each event described above is a registration default. "Transfer Restricted
Securities" means each initial note, or exchange note, until:
- the date on which the initial note has been exchanged by a person other
than a broker-dealer for an exchange note in the exchange offer;
- following the exchange by a broker-dealer in the exchange offer of an
initial note for an exchange note, the date on which the exchange note is
sold to a purchaser who receives from the broker-dealer on or prior to the
date of sale a copy of the exchange offer prospectus;
- the date on which the initial note has been effectively registered under
the Securities Act of 1933 and disposed of under the shelf registration
statement; or
- the date on which the initial note is publicly sold under Rule 144.
If a registration default occurs, we will pay to each holder of initial
notes, as liquidated damages and not as a penalty, additional interest equal to
0.25% per annum of the aggregate principal amount of the initial notes held by
such holder, during the 30-day period immediately following the occurrence of
the first registration default. The amount of the liquidated damages will
increase by an additional 0.25% per annum at the end of each subsequent 30-day
period until all registration defaults have been cured, up to a maximum
aggregate amount of liquidated damages equal to 1.50% per annum. All accrued
liquidated damages with respect to initial notes held in global form will be
paid by wire transfer of immediately available funds or by federal funds check.
All accrued liquidated damages with respect to initial notes held in
certificated form will be paid by wire transfer to the accounts specified by the
relevant holder or by mailing checks to their registered addresses if no such
accounts have been specified. Following the cure of all registration defaults,
the accrual of liquidated damages will cease.
Noteholders must make certain representations to us (as described in the
Registration Agreements) to participate in the exchange offer. Holders of the
initial notes and holders of exchange notes must also deliver information
required to be included in the shelf registration statement and provide comments
on the shelf registration statement within the time periods set forth in the
Registration Agreements in order to have their initial notes and/or exchange
notes included in the registration statement and receive liquidated damages as
described above.
If the initial Euro Notes are listed on the Luxembourg Stock Exchange at the
time this exchange offer registration statement becomes effective, we will apply
to have the exchange Euro Notes listed on the Luxembourg Stock Exchange also.
Notice will be given to the Luxembourg Stock Exchange and published in a
newspaper having a general circulation in Luxembourg (which is expected to be
the LUXEMBURGER WORT) announcing the relevant common code and international
securities identification numbers (ISIN) relating to the exchange Euro Notes to
be issued in exchange for initial Euro Notes. The exchange of the initial Euro
Notes for the exchange Euro Notes may be done through the office of the paying
agent in Luxembourg (initially Kredietbank S.A. Luxembourgeoise) to whom we will
provide all necessary documentation regarding the exchange offer and from whom
all such documentation will be made available. We will cause the publication of
a notice in a daily leading newspaper with general circulation in Luxembourg and
will submit such notice to the Luxembourg Stock Exchange: (1) before the
exchange offer, announcing the offer and indicating procedures to be followed,
(2) after the exchange offer, giving the results of the exchange, and
(3) noting the payment of any liquidated damages or any other increase in the
interest rate in connection with the initial Euro Notes.
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NOTICES
Notices to holders of the exchange notes will be made by first class mail,
postage prepaid, to the addresses that appear on the register of the Company. So
long as the Euro Notes are listed on the Luxembourg Stock Exchange, notices to
holders of the Euro Notes will be made by publication in authorized newspapers
in Luxembourg. It is expected that publication will be made in Luxembourg in the
LUXEMBURGER WORT. Any notice will be deemed to have been given on the date of
publication or, if published more than once, on the date of the first
publication.
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TAX CONSIDERATIONS
TAXATION OF FLAG TELECOM
We believe that a significant portion of our income will not be subject to
tax by Bermuda, which currently has no corporate income tax, or by other
countries in which we conduct activities or in which our customers are located,
including the United States. However, this belief is based upon the anticipated
nature and conduct of our business, which may change, and upon our understanding
of our position under the tax laws of the various countries in which we have
assets or conduct activities, which position is subject to review and possible
challenge by taxing authorities and to possible changes in law, which may have
retroactive effect. The extent to which certain taxing jurisdictions may require
us to pay tax or to make payments in lieu of tax cannot be determined in
advance. In addition, payments due to us from our customers may be subject to
withholding tax or other tax claims in amounts that exceed the taxation that we
anticipate based upon our current and anticipated business practices and the
current tax regime.
BERMUDA TAX CONSIDERATIONS
Under current Bermuda law, we are not subject to tax on income or capital
gains. Furthermore, we have obtained from the Minister of Finance of Bermuda,
under the Exempted Undertakings Tax Protection Act 1966, an undertaking that, in
the event that Bermuda enacts any legislation imposing tax computed on profits
or income or computed on any capital asset, gain or appreciation, or any tax in
the nature of estate duty or inheritance tax, then the imposition of such tax
will not be applicable to us or to any of our operations, or to the shares,
capital or common stock of FLAG Telecom, until March 28, 2016. This undertaking
does not, however, prevent the imposition of property taxes on any company
owning real property or leasehold interests in Bermuda. We pay an annual
government fee on our authorized share capital and share premium, which for 1999
is $1,695.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
FLAG Telecom and its non-United States subsidiaries will be subject to
United States federal income tax at regular corporate rates, and possibly to
United States branch profits tax, on any income that is effectively connected
with the conduct of a trade or business within the United States, and will be
required to file federal income tax returns with respect to that income. We
intend to conduct our operations so as to minimize the amount of effectively
connected income. However, no assurance can be given that the Internal Revenue
Service (IRS) will agree with the positions that we take in this regard. Our
United States subsidiaries will be subject to United States federal income tax
on their worldwide income regardless of its source, subject to reduction by
allowable foreign tax credits, and distributions that our United States
subsidiaries make to FLAG Telecom or to our non-United States subsidiaries
generally will be subject to United States withholding tax.
TAXATION OF NOTEHOLDERS
BERMUDA TAX CONSIDERATIONS
Under current Bermuda Law, no income, withholding or other taxes stamp or
other duties are imposed upon the issue, transfer or sale of the exchange notes
or on any payments thereunder. See "Taxation of FLAG Telecom--Bermuda Tax
Considerations" above for a description of the undertaking on taxes obtained by
us have the Minister of Finance of Bermuda.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material United States federal income tax
considerations arising from the exchange offer and the purchase, ownership and
disposition of the Notes to a United States holder. A United States holder is:
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- an individual citizen or resident of the United States;
- a corporation created or organized in or under the laws of the United
States or any of its political subdivisions; or
- an estate or trust the income of which is subject to United States federal
income taxation regardless of its source.
This summary deals only with Notes that are held as capital assets by United
States holders that purchased Notes pursuant to their original issue at their
issue price, and does not address tax considerations applicable to United States
holders that may be subject to special tax rules, including:
- dealers or traders in securities or currencies;
- financial institutions or other United States holders that treat income in
respect of the Notes as financial services income;
- insurance companies,
- tax-exempt entities;
- United States holders that hold Notes as a part of a straddle or
conversion transaction or other arrangement involving more than one
position;
- United States holders that own (or are deemed for United States tax
purposes to own) ten percent or more of the total combined voting power of
all classes of our voting stock;
- United States holders that have a principal place of business or "tax
home" outside the United States; or
- United States holders whose functional currency is not the United States
dollar.
The discussion below is based upon the provisions of the United States
Internal Revenue Code of 1986, as amended, and regulations, rulings and judicial
decisions thereunder as of the date of this prospectus; any such authority may
be repealed, revoked or modified, perhaps with retroactive effect, so as to
result in federal income tax consequences different from those discussed below.
BECAUSE UNITED STATES TAX CONSEQUENCES MAY DIFFER FROM ONE HOLDER TO THE
NEXT, THE DISCUSSION SET OUT BELOW DOES NOT PURPORT TO DESCRIBE ALL OF THE TAX
CONSIDERATIONS THAT MAY BE RELEVANT TO YOU AND YOUR PARTICULAR SITUATION.
ACCORDINGLY, YOU ARE ADVISED TO CONSULT YOUR OWN TAX ADVISOR AS TO THE UNITED
STATES FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES OF THE EXCHANGE OFFER
AND THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES. THE STATEMENTS OF
UNITED STATES TAX LAW SET OUT BELOW ARE BASED ON THE LAWS AND INTERPRETATIONS IN
FORCE AS OF THE DATE OF THIS PROSPECTUS, AND ARE SUBJECT TO ANY CHANGES
OCCURRING AFTER THAT DATE.
EXCHANGE OFFER
The exchange of the initial notes for the exchange notes pursuant to the
exchange offer will not constitute a taxable event to United States holders.
Consequently, (1) no gain or loss will be realized by a United States holder
upon receipt of an exchange note; (2) the holding period of the exchange note
will include the holding period of the initial note exchanged therefor; and (3)
the adjusted tax basis of the exchange note will be the same as the adjusted tax
basis of the initial note exhcanged therefor immediately before the exchange.
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PAYMENTS OF INTEREST
Interest on the Dollar Notes will be taxable to a United States holder as
ordinary interest income at the time that the interest accrues or is received,
in accordance with the United States holder's regular method of accounting for
federal income tax purposes.
A United States holder of a Euro Note that uses the cash method of
accounting and that receives a payment of interest will recognize ordinary
interest income on the date of receipt in an amount equal to the U.S. dollar
value of the Euro payment, translated at the spot currency exchange rate on the
date of receipt, regardless of whether the payment in fact is converted to U.S.
dollars at that time. The United States holder will not realize any separate
foreign currency gain or loss, except to the extent that such gain or loss
arises on the actual disposition of the Euros received.
A United States holder that is required to accrue interest income on a Euro
Note prior to the receipt thereof will recognize ordinary interest income in an
amount equal to the U.S. dollar value of the amount of interest income that has
accrued and is required to be taken into account with respect to the Euro Note
during each accrual period. The amount of the accrual will be determined in
Euros, and the U.S. dollar value of the accrual will be determined by
translating the accrued income at the average rate of exchange for the accrual
period or, with respect to an accrual period that spans two taxable years, at
the average rate of exchange for the partial period within each taxable year.
The United States holder will recognize additional foreign currency gain or
loss, treated as ordinary income or loss, on the date that the accrued interest
income actually is received, in an amount equal to the difference between the
U.S. dollar value of the Euros received, translated at the spot exchange rate on
the date that such payment is received, and the U.S. dollar amount previously
accrued into income. Alternatively, a United States holder may elect to
translate accrued interest income into U.S. dollars at the spot rate on the last
day of the accrual period (or, in the case of a partial accrual period, at the
spot rate on the last day of the taxable year) or, if the date of receipt is
within five business days of the last day of the accrual period, at the spot
rate on the date of receipt. A United States holder that makes this election
must apply it consistently to all debt instruments held at the beginning of the
first taxable year to which the election applies or thereafter acquired by the
United States holder and cannot change the election without the consent of the
IRS.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
A United States holder's tax basis in a Note generally will be its cost. A
United States holder's cost for a Euro Note will be the U.S. dollar value of the
Euro amount paid for the Euro Note, determined on the date of such purchase. A
United States holder that purchased a Euro Note with previously owned Euros
recognized ordinary income or loss in an amount equal to the difference, if any,
between its tax basis in the Euros and the value of the Euros on the date of
purchase.
A United States holder generally will recognize gain or loss on the sale,
exchange or retirement of a Note in an amount equal to the difference between
the amount realized on the sale, exchange or retirement (excluding amounts
received in respect of accrued interest) and the adjusted tax basis of the Note.
Except to the extent of foreign curency gain or loss on a Euro Note, any gain or
loss will be treated as capital gain or loss and will be long-term capital gain
or loss if the United States holder has held the Note for more than one year.
Gain realized by a United States holder on the sale, exchange or retirement
of a Euro Note will be treated as ordinary income to the extent of the foreign
curency gain realized by the United States holder on the sale, exchange or
retirement; similarly, loss realized by a United States holder on the sale,
exchange or retirement of a Euro Note will be treated as ordinary loss to the
extent of the foreign curency loss realized by the United States holder on the
sale, exchange or retirement. In general, the amount of foreign currency gain or
loss realized by the United States holder on the sale, exchange or retirement of
a Euro Note will be the sum of (1) the foreign currency gain or loss realized by
the United States holder with respect to any interest accrued by the United
States holder prior to, and received by the United States
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holder in connection with, the sale, exchange or retirement, calculated in the
manner described above and (2) the foreign currency gain or loss realized by the
United States holder with respect to the principal amount of the Euro Note. For
purposes of computing foreign currency gain or loss, the principal amount of a
Euro Note generally will be the United States holder's purchase price for the
Euro Note, determined in Euros. The amount of foreign currency gain or loss
realized by the United States holder with respect to the principal amount will
be determined by translating the principal amount into U.S. dollars at the spot
rate on the date of sale, exchange or retirement and subtracting from that
amount the amount computed by translating the principal amount into U.S. dollars
at the spot rate on the date that the United States holder acquired the Euro
Note. However, the aggregate foreign currency gain realized on a sale, exchange
or retirement of a Euro Note may not exceed the total gain, if any, realized on
the sale, exchange or retirement; similarly, the aggregate foreign currency loss
realized on a sale, exchange or retirement of a Euro Note may not exceed the
total loss, if any, realized on the sale, exchange or retirement.
A United States holder will have a tax basis in any Euros received as
interest or on the sale, exchange or retirement of a Euro Note equal to the U.S.
dollar value of the Euros received, determined at the time such interest is
received or at the time of such sale, exchange or retirement. Regulations issued
under Section 988 of the Internal Revenue Code provide a special rule for
purchases and sales of Euro Notes traded on an established securities market by
a cash method taxpayer, under which Euros paid or received are translated into
U.S. dollars at the spot rate on the settlement date of the purchase or sale.
Accordingly, no foreign currency gain or loss will result from currency
fluctuations between the trade date and settlement date of such a purchase or
sale. An accrual method taxpayer may elect the same treatment required of cash
method taxpayers with respect to the purchase and sale of Euro Notes traded on
an established securities market, provided that the election is applied
consistently. Such election cannot be changed without the consent of the IRS.
Any gain or loss realized by a United States holder on a sale or other
disposition of Euros, including an exchange for U.S. dollars, will be treated as
ordinary income or loss.
FOREIGN TAX CREDIT
In general, in computing its United States federal income tax liability, a
United States holder may elect for each taxable year to claim a deduction or,
subject to the limitations on foreign tax credits generally, a credit for
foreign income taxes paid or accrued by it. For United States foreign tax credit
purposes, interest on the Notes generally will be treated as foreign-source
income and as passive income, subject to the separate foreign tax credit
limitation for passive income. Gain or loss realized on the sale, exchange or
retirement of a Note and any foreign currency gain or loss derived by a United
States holder generally will be treated as United States-source gain or loss for
foreign tax credit purposes.
The availability of foreign tax credits depends on your particular
circumstances. You are advised to consult your own tax advisor.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
In general, information reporting requirements may apply to payments of
principal and interest on a Note, and to the payment of the proceeds of the sale
of a Note, to non-corporate United States holders. Backup withholding tax at a
31 percent rate will apply to these payments if the United States holder fails
to provide its taxpayer identification number or otherwise fails to comply with
applicable requirements of the backup withholding tax rules. Any amounts
withheld under the backup withholding tax rules will be allowed as a credit
against the United States holder's United States federal income tax liability
and may entitle the holder to a refund, provided that the required information
is furnished to the IRS.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account in
exchange for initial notes pursuant to the exchange offer, where such initial
notes were acquired by such broker-dealer as a result of market making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of exchange notes received in
exchange for initial notes where such initial notes were acquired as a result of
market-making activities or other trading activities. We have agreed that, for a
period of up to six-months, we will make this prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such exchange notes. Any broker-dealer
that resells exchange notes that were received by it for its own account
pursuant to the exchange offer and that participates in a distribution of such
exchange notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of exchange notes and any
commission or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of up to six months, the Company will promptly send additional
copies of this prospectus and any amendment or supplement to this prospectus to
any broker-dealer that requests such documents in the letter of transmittal. The
Company has agreed to pay all expenses incident to the exchange offer, other
than commissions or concessions of any broker-dealers.
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LEGAL MATTERS
The validity of the issuance of the exchange notes offered in this
prospectus will be passed on by Appleby, Spurling & Kempe, Hamilton, Bermuda,
counsel to FLAG Telecom.
EXPERTS
The financial statements of FLAG Telecom Holdings Limited as of and for the
period from incorporation to December 31, 1999 and of FLAG Limited as of
February 26, 1999, December 31, 1998 and December 31, 1997, and for the period
from January 1, 1999 to February 26, 1999 and for the years ended December 31,
1998, 1997 and 1996 included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
AVAILABLE INFORMATION
We have filed a registration statement on Form F-4 to register with the SEC
the exchange notes to be issued in exchange for the initial notes. This
prospectus is part of that registration statement. As allowed by the SEC's
rules, this prospectus does not contain all of the information you can find in
the registration statement or the exhibits to the registration statement.
Upon completion of our initial public offering, we became subject to the
informational requirements of some U.S. federal securities laws and, therefore,
we are required or have agreed to file periodic reports and other information
with the SEC, except as described below. As a foreign private issuer, FLAG
Telecom is exempt from the rules under the Exchange Act prescribing the
furnishing and content of proxy statements. Additionally, our officers,
directors and principal shareholders are exempt from the reporting and
short-swing profit recovery provisions contained in Section 16 of the Exchange
Act. In addition, under the Exchange Act, we are not required to publish
financial statements as frequently, as promptly or containing the same
information as United States companies. However, we have agreed to provide our
shareholders with reports on Form 10-Q and 10-K and to comply with the United
States proxy rules. In addition, we will furnish to holders of the exchange
notes and the initial notes annual reports in English containing consolidated
financial statements, prepared in accordance with U.S. GAAP, examined by our
independent public auditors and including their report thereon. We also will
make available quarterly reports containing condensed unaudited financial
information for the first three fiscal quarters of each year, prepared in
accordance with U.S. GAAP. We will generally furnish annual reports within
90 days after the end of each fiscal year, and make available quarterly reports
within 45 days after the end of each of the first three fiscal quarters of each
year.
The SEC maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC. The address of the SEC's web-site is
http://www.sec.gov.
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GENERAL INFORMATION
LISTING
In connection with the listing of the Euro Notes on the Luxembourg Stock
Exchange, a notice relating to the issue of the Euro Notes and a copy of the
charter of our company have been filed with the Chief Registrar of the District
Court of Luxembourg (GREFFIER EN CHEF DU TRIBUNAL D' ARRONDISSEMENT DE ET A
LUXEMBOURG) where such documents are available for inspection and where copies
of such documents will be obtainable upon request.
CLEARING SYSTEMS
The Dollar Notes have been accepted for clearance by DTC. The Euro Notes
have been accepted for clearance by Clearstream Banking S.A. and by Morgan
Guaranty Trust Company of New York, Brussels office as operator of the Euroclear
System.
AUTHORIZATION
The issue of the initial notes and the exchange notes was authorized by our
Board of Directors on February 23, 2000.
DOCUMENTS
Copies of our charter and by-laws will be available for inspection so long
as any Euro Notes are outstanding at the specified office of the paying agent in
Luxembourg.
Copies of our latest annual report and quarterly interim consolidated
financial statements will be available at the specified office of the paying
agent in Luxembourg, so long as any Euro Notes are outstanding. We do not
prepare stand-alone (unconsolidated) financial statements.
Copies of the indenture relating to the Euro Notes and all agreements in
connection with the issuance of the Euro Notes will be available at the
specified office of the paying agent in Luxembourg, so long as any Euro Notes
are outstanding.
MATERIAL ADVERSE CHANGE
Except as disclosed in this prospectus, there has been no material adverse
change in our financial position since December 31, 1999.
LITIGATION
Except as disclosed in this prospectus, we are not involved in any
litigation or arbitration proceedings relating to claims or amounts which are
material in the context of the issue of the exchange notes nor, so far as we are
aware, is any such litigation or arbitration pending or threatened.
131
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
FLAG Telecom Holdings Limited
Report of Independent Public Accountants (Arthur
Andersen)................................................. F-2
Consolidated Balance Sheet as of December 31, 1999
(audited)................................................. F-3
Consolidated Statement of Operations for the period from
incorporation to December 31, 1999 (audited).............. F-4
Consolidated Statement of Comprehensive Income for the
period from incorporation to December 31, 1999
(audited)................................................. F-5
Consolidated Statement of Shareholders' Equity for the
period from incorporation to December 31, 1999
(audited)................................................. F-6
Consolidated Statement of Cash Flows for the period from
incorporation to December 31, 1999 (audited).............. F-7
Notes to Consolidated Financial Statements.................. F-8
FLAG Limited
Report of Independent Public Accountants (Arthur
Andersen)................................................. F-21
Consolidated Balance Sheets as of February 26, 1999 and
December 31, 1998 and 1997 (audited)...................... F-22
Consolidated Statements of Operations for the period from
January 1, 1999 to February 26, 1999 and the years ended
December 31, 1998, 1997 and 1996 (audited)................ F-23
Consolidated Statements of Comprehensive Income for the
period from January 1, 1999 to February 26, 1999 and the
years ended December 31, 1998, 1997 and 1996 (audited).... F-24
Consolidated Statements of Shareholders' Equity for the
period from January 1, 1999 to February 26, 1999 and the
years ended December 31, 1998, 1997 and 1996 (audited).... F-25
Consolidated Statements of Cash Flows for the period from
January 1, 1999 to February 26, 1999 and the years ended
December 31, 1998, 1997 and 1996 (audited)................ F-26
Notes to Consolidated Financial Statements.................. F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of FLAG Telecom Holdings Limited:
We have audited the accompanying consolidated balance sheet of FLAG Telecom
Holdings Limited (a Bermuda company) and subsidiaries (the "Group") as of
December 31, 1999, and the related consolidated statement of operations,
comprehensive income, shareholders' equity and cash flows for the period from
incorporation to December 31, 1999. These financial statements are the
responsibility of FLAG Telecom Holdings Limited's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides 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 Telecom
Holdings Limited and subsidiaries as of December 31, 1999, and the consolidated
results of their operations and their cash flows for the period from
incorporation to December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen
Hamilton, Bermuda
March 3, 2000
F-2
<PAGE>
FLAG TELECOM HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999
----------
<S> <C>
ASSETS:
Current assets:
Cash...................................................... $ 3,191
Accounts receivable, net of allowance for doubtful
accounts of $6,827...................................... 90,065
Due from affiliate........................................ 2,000
Prepaid expenses and other assets......................... 3,460
----------
98,716
Funds held by collateral trustee............................ 134,066
Capacity available for sale................................. 774,366
Capitalized financing costs, net of accumulated amortization
of $2,731................................................. 11,678
Investment in associated companies.......................... 7,162
Fixed assets, net........................................... 299,743
----------
$1,325,731
==========
LIABILITIES:
Current liabilities:
Accrued construction costs................................ $ 52,411
Accrued liabilities....................................... 39,152
Accounts payable.......................................... 7,807
Income taxes payable...................................... 4,531
Deferred revenue and other.................................. 48,501
----------
152,402
8 1/4% Senior Notes, due 2008, net of unamortized discount
of $4,878................................................. 425,270
Long-term debt.............................................. 190,000
Deferred revenue and other.................................. 100,724
Deferred taxes.............................................. 3,973
----------
872,369
MINORITY INTEREST........................................... 154,817
SHAREHOLDERS' EQUITY:
Common shares, $.0006 par value............................. 42
Additional paid-in capital.................................. 313,848
Foreign currency translation adjustment..................... 141
Accumulated deficit......................................... (15,486)
----------
298,545
----------
$1,325,731
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
FLAG TELECOM HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
REVENUES:
Capacity sales, net of discounts.......................... $ 94,603
Standby maintenance and restoration revenue............... 37,827
-----------
132,430
SALES AND OTHER OPERATING EXPENSES:
Cost of capacity sold..................................... 41,349
Operations and maintenance (including non-cash
compensation expense of $2,647)......................... 26,201
Sales and marketing (including non-cash compensation
expense of $1,534)...................................... 11,096
General and administrative (including non-cash
compensation expense of $4,619)......................... 22,901
Depreciation and amortization............................. 11,133
-----------
112,680
OPERATING INCOME............................................ 19,750
INCOME FROM AFFILIATE....................................... 361
INTEREST EXPENSE............................................ 45,062
INTEREST INCOME............................................. 7,188
-----------
LOSS BEFORE MINORITY INTEREST AND INCOME TAXES.............. (17,763)
MINORITY INTEREST........................................... (3,826)
-----------
LOSS BEFORE INCOME TAXES.................................... (13,937)
PROVISION FOR INCOME TAXES.................................. 1,549
-----------
NET LOSS.................................................... $ (15,486)
===========
Basic income per common share............................... $ (0.22)
Diluted income per common share............................. $ (0.21)
Weighted average common shares outstanding.................. 69,709,935
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
FLAG TELECOM HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1999
--------
<S> <C>
NET LOSS.................................................... $(15,486)
Foreign currency translation adjustment..................... 141
--------
COMPREHENSIVE INCOME........................................ $(15,345)
--------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
FLAG TELECOM HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOREIGN
COMMON SHARES ADDITIONAL CURRENCY TOTAL
---------------------- PAID-IN STOCK RETAINED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS ADJUSTMENT EQUITY
---------- --------- ---------- ------------ -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Opening balance........... -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of shares in
exchange for shares in
FLAG Limited............ 69,709,935 42 305,048 -- -- -- 305,090
Stock compensation
accrued................. -- -- 18,088 (18,088) -- --
Stock compensation current
year charge............. -- -- -- 8,800 -- -- 8,800
Foreign currency
translation
adjustment.............. -- -- -- -- -- 141 141
Net loss for period....... -- -- -- -- (15,486) -- (15,486)
---------- --------- -------- ------- -------- ---- --------
Balance, December 31,
1999.................... 69,709,935 $ 42 $323,136 $(9,288) $(15,486) $141 $298,545
========== ========= ======== ======= ======== ==== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
FLAG TELECOM HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1999
---------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss applicable to common shareholders.................. $ (15,486)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Minority interest......................................... (3,826)
Amortization of financing costs........................... 1,370
Provision for doubtful accounts........................... (1,803)
Accretion of discount on 8 1/4% senior notes.............. 493
Stock compensation........................................ 8,800
Depreciation and amortization............................. 11,133
Deferred taxes............................................ 625
Add (deduct) net changes in operating assets and
liabilities:
Accounts receivable..................................... 1,078
Due from affiliate...................................... (2,000)
Prepaid expenses and other assets....................... 86
Capacity available for sale............................. 47,463
Accounts payable and accrued liabilities................ 24,972
Income taxes payable.................................... (2,793)
Due to affiliate........................................ (1,175)
Deferred revenue and other.............................. 46,845
---------
Net cash provided by operating activities............. 115,782
CASH FLOWS FROM FINANCING ACTIVITIES:
Financing costs incurred.................................... (970)
Repayment of long-term debt................................. (66,500)
Decrease in funds held by collateral trustee................ 85,068
---------
Net cash provided by financing activities............. $ 17,598
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for construction.................................. (123,558)
Investment in affiliate..................................... (7,162)
---------
Purchase of fixed assets.................................... (1,407)
---------
Net cash used in investing activities................. (132,127)
NET INCREASE IN CASH........................................ 1,254
Effect of foreign currency movements........................ 21
CASH, beginning of period................................... 1,916
---------
CASH, end of year........................................... $ 3,191
=========
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING ACTIVITIES:
Decrease in capacity available for sale..................... $ 59,463
Decrease in accrued construction costs...................... (12,000)
---------
Cost of capacity sold....................................... $ 47,463
---------
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING ACTIVITIES:
Increase in construction in progress........................ $ 34,039
Decrease in accrued construction costs...................... 89,519
---------
Cash paid for construction in progress...................... $ 123,558
---------
SUPPLEMENTAL INFORMATION DISCLOSURE OF CASH FLOW
INFORMATION:
Interest expense for period................................. $ 45,062
Amortization of financing costs............................. (1,863)
Decrease (increase) in accrued interest payable............. (4,170)
---------
Interest paid............................................... $ 39,029
---------
Interest capitalized........................................ $ 1,281
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
FLAG TELECOM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BACKGROUND
FLAG Telecom was incorporated on February 3, 1999 to serve as the holding
company for the FLAG Telecom group of companies. On February 26, 1999 FLAG
Telecom acquired approximately 65.79% of FLAG Limited by exchanging 69,709,935
shares of FLAG Limited common stock for the same number of shares of FLAG
Telecom common stock. The minority shareholder of FLAG Limited exchanged its
remaining holding in FLAG Limited for shares in FLAG Telecom on January 4, 2000
such that on that date FLAG Limited became a wholly owned subsidiary of FLAG
Telecom. This acquisition has been accounted for as a recapitalisation such that
no goodwill arises and assets and liabilities are reflected at carryover basis.
The results of the operations of FLAG Limited have been included in the
consolidated results of FLAG Telecom's operations since the date of acquisition.
FLAG Limited is a facilities-based provider of telecommunications capacity
to licensed international carriers through its ownership of the world's longest
independent, privately-owned digital fiberoptic undersea cable system. The FLAG
Europe-Asia cable system links the telecommunications markets of Western Europe
and Japan through the Middle East, India, Southeast Asia and China, along a
route which adjoins countries with approximately 75% of the world's population.
The FLAG Europe-Asia cable system was constructed to address the growing demand
for high performance, secure and cost-effective digital communications for
voice, data and video along its route. FLAG Limited provides capacity on the
FLAG Europe-Asia cable system at market-based prices to licensed international
carriers. The FLAG Europe-Asia cable system, which was placed in commercial
service on November 22, 1997, cost approximately $1.6 billion to construct, and
consists of over 28,000 kilometers of fiberoptic cable.
FLAG Telecom also has an indirect 50% interest in FLAG Atlantic Limited via
FLAG Atlantic Holdings Limited, a wholly-owned subsidiary. FLAG Atlantic Limited
is a joint venture company set up to build, own and operate a transatlantic
fiber optic cable system connecting the United States, United Kingdom and
France. Global Telesystems Group, Inc. owns the other 50% interest in the
venture. The transatlantic cable system will be designed to carry voice,
high-speed data and video traffic. The FLAG Atlantic system is expected to be
ready for service in the first quarter of 2001.
FLAG Telecom is also developing various wholesale services, which will
provide customers city-to-city and site-to-site managed bandwidth on a short
term lease basis. The first such service on the London to Madrid route went into
service in the fourth quarter.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States ("U.S. GAAP") and are
expressed in U.S. Dollars ("Dollars"). The preparation of financial statements
in conformity with 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
F-8
<PAGE>
FLAG TELECOM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 FLAG
Telecom and its subsidiary companies after eliminating intercompany transactions
and balances. Investments in which FLAG Telecom has an investment of 20%-50% or
investments in which FLAG Telecom can assert significant influence, but does not
control, are accounted for under the equity method. The excess of the
contributions over the Group's proportionate share of the net assets acquired
are amortized on a straight line basis over the expected economic life and is
recorded as a component of "income from affiliates".
b) Revenue Recognition
Capacity contracts are accounted for as leases. For contracts that satisfy
sales type lease accounting, 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 maintenance charges. As a result of the issue of Interpretation 43 "Real
Estate Sales, an interpretation of FASB Statement No. 66", capacity contracts
entered into after June 30, 1999 must satisfy the additional requirements for
sales of real estate to qualify for sales type lease accounting.
Capacity contracts that do not qualify for sales type lease accounting are
accounted for as operating leases and revenue is recognized over the term of the
lease. Until June 30, 1999 revenues from operating lease transactions were
considered incidental and recorded as a reduction of the capacity available for
sale.
Payments received from customers before the relevant criteria for revenue
recognition are satisfied are included in deferred revenue.
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 Group.
In exchange for construction costs incurred, FLAG Limited 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.
Standby maintenance and restoration charges are invoiced separately from
capacity sales. Revenues relating to standby maintenance and restoration are
recognized over the period the service is provided.
F-9
<PAGE>
FLAG TELECOM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
c) Cost of Sales
The cost relating to capacity sold under sales type lease contracts 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 cable 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 cable
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 capacity of the
cable system is upgraded 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 cable 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.
Costs of the network relating to capacity contracts accounted for as
operating leases are treated as fixed assets and depreciated over the remaining
economic life of the network.
d) Commissions
Commissions for purchase commitments are recognized as an expense upon
recognition of the related revenues.
e) 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. Until
contracts are entered into that preclude sales type lease accounting for a
particular segment, the cost of such segment will remain in capacity available
for sale. Construction in progress is transferred to capacity available for sale
at the date it is completed and placed into commercial operation if the capacity
contracts on the particular segment will satisfy sales type lease accounting
rules. Construction in progress relating to other segments is transferred to
fixed assets and depreciated over its remaining economic life. Construction in
progress is stated at cost. 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 cable system.
f) Capitalized Financing Costs
Costs incurred by FLAG Limited to obtain financing for the FLAG Europe-Asia
cable system have been capitalized and are being amortized over the term of the
related borrowings. Capitalized costs relating to existing financings are
written off when a refinancing occurs.
F-10
<PAGE>
FLAG TELECOM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
g) 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
Leashold improvement................................... remaining lease term
Motor vehicles......................................... 20% per annum
Network assets......................................... 6 2/3% per annum
</TABLE>
h) Interest Rate Derivatives
The Group uses derivative financial instruments for the purpose of reducing
its exposure to adverse fluctuations in interest rates. The Group 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 Group is exposed to credit loss in
the event of nonperformance by these counterparties.
At the end of March 1998, FLAG Limited entered into two interest rate swap
agreements to manage its 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, FLAG Limited pays a fixed rate of 5.60% on a notional
amount of $60,000 and a fixed rate of 5.79% on a notional amount of $100,000 and
the counterparty pays the floating rate based on LIBOR. The swap agreements
terminate in January and July 2000, respectively, unless extended by 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 4. "Long-term Debt"). Interest is expensed as it
accrues. The Senior Notes are redeemable at FLAG Limited'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, FLAG Limited 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 FLAG Limited has excess cash flow,
as defined, for any fiscal year commencing in 2001, FLAG Limited 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 FLAG Limited 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 Group 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. Under hedge accounting, net
interest payments due to or from the counterparties are recorded as an increase
or reduction in interest expense.
F-11
<PAGE>
FLAG TELECOM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
If an interest rate derivative instrument were to terminate or be replaced
by another instrument and no longer qualify as a hedge instrument, then it would
be marked to market and carried on the balance sheet at fair value.
i) Translation of Foreign Currencies
Transactions in foreign currencies are translated into United States 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.
j) Long Term Incentive Plan
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" (SFAS 123), the Company has chosen to
account for employee stock options under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25), and, accordingly,
recognizes compensation expense for stock option grants to the extent that the
estimated fair value of the stock exceeds the exercise price of the option at
the measurement date. The compensation expense is charged against operations
ratably over the vesting period of the options.
k) 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. 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.
l) Net Income per Common Share
Basic net income per common share is based on dividing net income applicable
to common shareholders by the weighted average number of common shares
outstanding in the period. Diluted net income per common share is computed by
dividing net income by the weighted average number of common shares and common
share equivalents outstanding during the period.
m) Impairment of Long-Lived Assets
The Group periodically reviews events and changes in circumstances to
determine whether the recoverability of the carrying value of long-lived assets
should be reassessed. Should events or circumstances indicate that the carrying
value may not be recoverable based on undiscounted future cash flows, an
impairment loss measured by the difference between the discounted cash flows and
the carrying value of long-lived assets would be recognized by the Group.
F-12
<PAGE>
FLAG TELECOM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
n) Pending Accounting Standards
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). Following the amendment made by SFAS No. 137, SFAS 133
is effective for periods beginning after June 15, 2000. Management is currently
assessing the impact of the adoption of SFAS 133 on the Company's financial
position and results of operations, which may be material.
o) Reverse Stock Split
The accompanying consolidated financial statements have been retroactively
restated to give effect to the reverse stock split of 6:1 carried out by the
Company on February 11, 2000.
3. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Fixtures and fittings....................................... $ 1,504
Leasehold improvements...................................... 2,667
Computer equipment.......................................... 3,031
Motor vehicles.............................................. 286
Network assets.............................................. 304,508
--------
311,996
Less--Accumulated depreciation.............................. (12,253)
--------
Net book value.............................................. $299,743
========
</TABLE>
As a result of the application of FIN 43, sales on certain parts of the FLAG
system will not be able to satisfy the requirements for sales type lease
accounting. Accordingly the costs of these parts of the system have been
reclassified with effect from July 1, 1999 from capacity available for sale to
fixed assets and are being depreciated over their remaining useful economic life
of 15 years.
F-13
<PAGE>
FLAG TELECOM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
4. LONG-TERM DEBT
The Group's long-term debt comprises the following:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Bank credit facility........................................ $190,000
8 1/4% Senior Notes, due 2008, net of unamortized discount
of $4,730................................................. $425,270
</TABLE>
On January 30, 1998, FLAG Limited completed a refinancing which consisted of
$370,000 of bank credit facilities under the New Credit Facility and $430,000 of
the Senior Notes. Proceeds received under the Senior Notes were $424,088, net of
a $5,912 discount. The Senior Notes are not secured by any asset of the Group.
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. Total Group borrowings under the credit
facility at December 31, 1999 are $190,000. 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 FLAG Limited's assets
and revenues, other than FLAG Limited's physical assets.
The New Credit Facility and the indenture under which the Senior Notes were
issued impose certain operating and financial restrictions on FLAG Limited. Such
restrictions will affect, and in many respects significantly limit or prohibit,
among other things, the ability of FLAG Limited 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 FLAG
Limited to effect future financings, make needed capital expenditures, withstand
a future downturn in FLAG Limited's business or the economy in general, or
otherwise conduct necessary corporate activities.
The collateral trustee maintains certain accounts in accordance with the
terms of FLAG Limited's credit facility. The collateral trustee has a security
interest in these accounts.
As at December 31, 1999, contractual maturities of the Group's indebtedness
over the next five years were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
2000........................................................ --
2001........................................................ --
2002........................................................ --
2003........................................................ 58,080
2004........................................................ 105,600
</TABLE>
F-14
<PAGE>
FLAG TELECOM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
4. LONG-TERM DEBT (CONTINUED)
The above bank credit facility amended on February 16, 2000 and the
contractual maturities of the new facility over the next five years are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
2000........................................................ --
2001........................................................ 5,625
2002........................................................ 22,500
2003........................................................ 28,125
2004........................................................ 35,625
</TABLE>
5. SHAREHOLDER'S EQUITY
The authorized common share capital of FLAG Telecom consists of 189,833,333
shares with a par value of $.0006 per share. The following number of shares were
issued and outstanding at December 31, 1999.
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
Shares outstanding.......................................... 69,709,935
Share capital............................................... $ 42
</TABLE>
On February 26, 1999, FLAG Limited's shareholders other than Bell Atlantic
Network Systems exchanged all their common shares in FLAG Limited for common
shares in FLAG Telecom. Bell Atlantic Network Systems, however, exchanged only a
limited portion of its common shares in FLAG Limited for 3,666,155 common shares
in FLAG Telecom. At the same time, Bell Atlantic Network Systems and FLAG
Telecom entered into an Exchange Agreement and Plan of Reorganization providing
that Bell Atlantic Network Systems' remaining common shares in FLAG Limited
would be exchanged for common shares in FLAG Telecom in the event that, prior to
February 26, 2002, Bell Atlantic receives certain regulatory approvals from the
Federal Communications Commission allowing Bell Atlantic to offer long distance
service. Such regulatory approvals were obtained and Bell Atlantic exchanged its
remaining common shares in FLAG Limited for 36,256,121 common shares in FLAG
Telecom on January 4, 2000.
By ownership of their common shares, the shareholders are entitled to one
vote per share at each meeting of the shareholders and, at any general meeting
or special meeting of all shareholders. Common shareholders are entitled to
receive dividends or distributions declared or paid, pro rata in proportion to
the total number of common shares held.
6. STOCK OPTIONS
In March, 1998, the Group adopted a Long-Term Incentive Plan under which
options may be granted on up to 4,206,305 shares of common stock to eligible
members of staff. During 1999, the maximum number of options that could be
granted under the plan was increased to 6,763,791. Generally, options granted
under this plan vest and are exercisable over periods up to four years from the
date 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.
F-15
<PAGE>
FLAG TELECOM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
6. STOCK OPTIONS (CONTINUED)
The following summarizes stock option activity under this plan:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance December 31, 1997.......................... -- $ --
Granted............................................ 2,357,706 6.42
Forfeited.......................................... -- --
--------- ------
Balance December 31, 1998.......................... 2,357,706 6.42
Granted............................................ 1,758,344 6.80
Forfeited.......................................... (21,651) 6.42
--------- ------
Balance December 31, 1999.......................... 4,094,399 $ 6.58
========= ======
</TABLE>
At December 31, 1998 and December 31, 1999 no options had vested.
The weighted average fair value of options granted during 1998 and 1999 was
$3.64 and $13.15 per share respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions used for grants in 1998 and 1999: risk-free interest
rates ranging from 5.1% to 5.8%; expected lives of 5.0 years; expected dividend
yield of zero percent; and expected volatility of 59%.
During the period ended December 31, 1999 the Company recorded additional
shareholders capital of $18,088 relating to awards under the Long Term Incentive
Plan. During the period the Company recorded an expense of $8,800. Expected
future charges in respect of these stock options are as follows:
<TABLE>
<S> <C>
2000........................................................ 7,231
2001........................................................ 2,007
2002........................................................ 50
</TABLE>
Had compensation cost for these grants been determined consistent with
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation," the Group's net income and net income per share would have been
reduced to the following amounts:
<TABLE>
<CAPTION>
NET LOSS 1999
- -------- --------
<S> <C>
As reported............................................... $(15,486)
Pro forma................................................. $(26,967)
Basic income per share
As reported............................................... $ (0.22)
Pro forma................................................. $ (0.39)
Diluted income per share
As reported............................................... $ (0.21)
Pro forma................................................. $ (0.37)
</TABLE>
F-16
<PAGE>
FLAG TELECOM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
6. STOCK OPTIONS (CONTINUED)
The weighted average remaining contractual life of all options is 8.9 years.
The effects of applying SFAS 123 for disclosing compensation cost may not be
representative of the effects on reported income for future years.
7. BASIC AND DILUTED INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
Net loss.................................................... $ (15,486)
Number of shares............................................ 69,709,935
Basic income per share...................................... $ (0.22)
Diluted income per share.................................... $ (0.21)
</TABLE>
8. FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Group's financial instruments as of December 31, 1999:
<TABLE>
<CAPTION>
1999
NOTIONAL CARRYING FAIR
AMOUNT AMOUNT VALUE
-------- -------- --------
<S> <C> <C> <C>
Funds held by Collateral Trustee................. -- 134,066 134,066
8 1/4% Senior Notes.............................. 430,000 425,270 395,600
Long-term debt................................... -- 190,000 190,000
Interest rate swaps.............................. 160,000 -- 370
</TABLE>
The notional amounts of interest rate derivatives do not represent amounts
exchanged by the parties and, thus, are not a measure of the Group'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 TELECOM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
8. FINANCIAL INSTRUMENTS (CONTINUED)
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, 1999.
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.
</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, FLAG Telecom and all
its subsidiaries registered in Bermuda have received an undertaking from the
Bermuda Government exempting them from all such taxes until March 28, 2016.
The provision for income taxes reflected in the accompanying 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 Europe-Asia cable system where FLAG Limited is deemed to have a taxable
presence or the Group is otherwise subject to tax.
F-18
<PAGE>
FLAG TELECOM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
9. TAXES (CONTINUED)
Income tax expense, which consists entirely of taxes payable to foreign
governments, is comprised of the following:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Current..................................................... 1,080
Deferred.................................................... 469
------
$1,549
</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 Europe-Asia cable system. The
provision for deferred tax comprises the following:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Capacity sales revenues deferred for tax purposes........... $17,066
Deferred commissions for tax purposes....................... (1,851)
Future depreciation for tax purposes........................ (8,648)
Tax losses carried forward.................................. (2,220)
Other....................................................... (374)
-------
$ 3,973
</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
In May 1998, FLAG Limited entered into an Employee Services Agreement with
Bell Atlantic Global Systems ("BAGS") pursuant to which BAGS seconds certain
employees to FLAG Limited. The total cost incurred for this service during the
period from incorporation to December 31, 1999 was $298. These costs have been
expensed in the accompanying statements of operations.
11. COMMITMENTS AND CONTINGENCIES
As of December 31, 1999, FLAG Limited was committed under supply contracts
for the cable system for final payments totalling $52,411 representing funds
withheld pending the completion of certain outstanding items under the supply
contracts. Provision has been made in full in the Group's financial statements
to cover the anticipated final payments.
During 1997 FLAG Limited entered into an operations contract for the FLAG
Network Operations Center (the "FNOC") with one of the landing parties on the
FLAG, Europe-Asia cable 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, FLAG Limited 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
F-19
<PAGE>
FLAG TELECOM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM INCORPORATION TO DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 FLAG Limited on a cost plus
basis.
FLAG Limited 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>
2000........................................................ $1,301
2001........................................................ 717
2002........................................................ 556
2003........................................................ 541
2004........................................................ 541
Thereafter.................................................. 2,291
</TABLE>
FLAG Limited 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>
2000........................................................ $24,540
2001........................................................ 24,790
2002........................................................ 25,286
2003........................................................ 25,792
2004........................................................ 26,307
Thereafter.................................................. 82,121
</TABLE>
The estimated future payments under the standby maintenance agreements are
based on a number of assumptions, including, among other things, the proportion
of the total cable system capacity sold at any point in time and the number of
other cable systems serviced under the agreement.
The Group 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 Group's financial position or results of operations.
F-20
<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 February 26, 1999, and December 31,
1998 and 1997, and the related consolidated statements of operations,
comprehensive income, shareholders' equity and cash flows for the period from
January 1, 1999 to February 26, 1999 and for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of FLAG Limited's management. Our responsibility is to express an
opinion on these 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 financial position of FLAG Limited and
subsidiaries as of February 26, 1999, and December 31, 1998 and 1997, and the
results of their operations and their cash flows for the period from
January 1, 1999 to February 26, 1999 and 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
December 30, 1999
F-21
<PAGE>
FLAG LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 26, 1999 AND DECEMBER 31, 1998 AND 1997
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash................................................... $ 1,916 $ 3,024 $ 2,490
Accounts receivable, net of allowance for doubtful
accounts of $8,630, $8,630 and $9,054................ 68,501 70,211 91,102
Due from affiliates and other receivables.............. -- 206 690
Prepaid expenses and other assets...................... 3,524 2,673 2,395
---------- ---------- ----------
73,941 76,114 96,677
Accounts receivable...................................... 20,854 20,854 42,023
Funds held by collateral trustee......................... 219,136 255,366 425,905
Construction in progress................................. 18,471 11,494 389
Capacity available for sale.............................. 1,086,435 1,095,099 1,208,948
Capitalized financing costs, net of accumulated
amortization of $1,498, $1,498 and $52,669............. 12,078 12,352 61,848
Fixed assets, net........................................ 4,454 4,487 1,147
---------- ---------- ----------
$1,435,369 $1,475,766 $1,836,937
========== ========== ==========
LIABILITIES:
Current liabilities:
Accrued construction costs............................. $ 153,930 $ 146,165 $ 317,058
Accrued liabilities.................................... 15,151 33,214 21,394
Accounts payable....................................... 7,541 6,018 5,262
Income taxes payable................................... 6,620 6,453 4,391
Due to affiliate....................................... 1,175 1,843 5,892
Deferred revenue....................................... 18,809 39,121 16,558
---------- ---------- ----------
203,226 232,814 370,555
8 1/4% Senior Notes, due 2008, net of unamortized
discount of $5,321, $5,321, $nil....................... 424,777 424,679 --
Long-term debt........................................... 256,500 271,500 615,087
Deferred revenue and other............................... 83,570 84,415 176,221
Deferred taxes........................................... 3,562 3,562 4,600
---------- ---------- ----------
971,635 1,016,970 1,166,463
COMMITMENTS AND CONTINGENCIES
PREFERRED SHARES:
Series A, $100 liquidation value, net of unamortized
discount of $nil, $nil and $1,905.................... -- -- 129,445
SHAREHOLDERS' EQUITY:
Class A common shares, $.0001 par value................ -- 13 13
Class B common shares, $.0001 par value................ 64 57 57
Additional paid-in capital............................. 504,387 504,381 514,389
Foreign currency translation adjustment................ (526) (704) --
Retained (deficit) earnings............................ (40,191) (44,951) 26,570
---------- ---------- ----------
463,734 458,796 541,029
---------- ---------- ----------
$1,435,369 $1,475,766 $1,836,937
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
FLAG LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996
1999 1998 1997 (AS RESTATED)
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Capacity sales, net of discounts........ $ 25,554 $ 182,935 $ 335,982 --
Standby maintenance and restoration
revenue............................... 4,458 25,313 4,011 --
----------- ----------- ----------- -----------
30,012 208,248 339,993 --
SALES AND OTHER OPERATING EXPENSES:
Cost of capacity sold................... 8,294 101,288 196,190 --
Operations and maintenance.............. 5,114 37,931 4,600 --
Sales and marketing..................... 637 10,680 6,598 316
General and administrative.............. 2,870 21,674 30,339 12,345
Depreciation and amortization........... 233 844 276 121
----------- ----------- ----------- -----------
17,148 172,417 238,003 12,782
OPERATING INCOME (LOSS)................... 12,864 35,831 101,990 (12,782)
INTEREST EXPENSE.......................... 9,758 61,128 20,193 --
INTEREST INCOME........................... 1,825 14,875 6,637 2,408
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES......... 4,931 (10,422) 88,434 (10,374)
PROVISION FOR INCOME TAXES................ 171 1,260 8,991 --
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM... 4,760 (11,682) 79,443 (10,374)
EXTRAORDINARY ITEM........................ -- 59,839 -- --
----------- ----------- ----------- -----------
NET INCOME (LOSS)......................... 4,760 (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............................ $ 4,760 $ (81,529) $ 63,119 $ (24,784)
=========== =========== =========== ===========
Basic and diluted net income (loss) per
common share--Class A................... $ 0.00 $ (0.07) $ 0.05 $ (0.02)
=========== =========== =========== ===========
Basic and diluted net income (loss) per
common share--Class B................... $ 0.01 $ (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.................... 635,796,338 565,858,741 396,890,512 164,445,547
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
FLAG LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1996
1999 1998 1997 (AS RESTATED)
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
NET INCOME (LOSS)..................................... $4,760 $(81,529) $63,119 $(24,784)
Foreign currency translation adjustment............... 178 (704) -- --
------ -------- ------- --------
COMPREHENSIVE INCOME (LOSS)........................... $4,938 $(82,233) $63,119 $(24,784)
====== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
FLAG LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
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)
Conversion of Class A shares
into Class B shares
Class A shares
[retired]................ (132,000,000) (13) -- -- 13 -- $--
Class B shares issued.... -- -- 69,937,597 7 (7) -- --
Foreign currency translation
adjustment................. -- -- -- -- -- -- 178
1999 net income applicable to
common shareholders........ -- -- -- -- -- 4,760 --
------------ --- ----------- --- -------- -------- --------
Balance, February 26, 1999... -- $-- 635,796,338 $64 $504,387 $(40,191) $(528)
============ === =========== === ======== ======== ========
<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
Conversion of Class A shares
into Class B shares
Class A shares
[retired]................ --
Class B shares issued.... --
Foreign currency translation
adjustment................. 178
1999 net income applicable to
common shareholders........ 4,760
--------
Balance, February 26, 1999... $463,734
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
FLAG LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1999 1998 1997 1996
-------- --------- --------- -------------
(AS RESTATED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) applicable to common shareholders......... $ 4,760 $ (81,529) $ 63,119 $ (24,784)
-------- --------- --------- ---------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Pay-in-kind preferred dividends......................... -- 1,508 16,324 14,410
Amortization of financing costs......................... 274 3,427 6,082 --
Provision for doubtful accounts......................... -- (424) 9,054 --
Depreciation............................................ 233 844 276 121
Deferred taxes.......................................... -- (1,038) 4,600 --
Preferred share redemption premium...................... -- 8,500 -- --
Loss on debt refinancing................................ -- 59,839 -- --
Senior debt discount.................................... 98 591 -- --
Add (deduct) net changes in operating assets and
liabilities:
Accounts receivable................................... 1,710 42,500 (142,179) --
Due from affiliates and other receivables............. -- 484 (371) (294)
Prepaid expenses and other assets..................... (645) (272) 735 (337)
Capacity available for sale........................... 8,664 113,849 196,190 --
Accounts payable and accrued liabilities.............. (16,541) 12,250 26,335 (236)
Income taxes payable.................................. 168 2,062 4,391 --
Due to affiliate...................................... (668) (4,049) (4,179) (983)
Deferred revenue...................................... (21,157) (69,711) 104,779 --
-------- --------- --------- ---------
Net cash (used in) provided by operating
activities........................................ (23,104) 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............................... (15,000) (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... 36,230 170,539 (377,711) (1,657)
-------- --------- --------- ---------
Net cash provided by financing activities........... 21,230 97,818 245,677 342,011
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for construction in progress.................... 788 (181,998) (527,808) (329,372)
Purchase of fixed assets.................................. (200) (4,146) (845) (514)
-------- --------- --------- ---------
Net cash provided by (used in) investing
activities........................................ 588 (186,144) (528,653) (329,886)
NET (DECREASE) INCREASE IN CASH............................. (1,286) 505 2,180 22
Effect of foreign currency movements...................... 178 29 -- --
CASH, beginning of year..................................... 3,024 2,490 310 288
-------- --------- --------- ---------
CASH, end of year........................................... $ 1,916 $ 3,024 $ 2,490 $ 310
======== ========= ========= =========
</TABLE>
F-26
<PAGE>
FLAG LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1999 1998 1997 1996
-------- --------- --------- -------------
(AS RESTATED)
<S> <C> <C> <C> <C>
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING ACTIVITIES:
Costs (reimbursed) incurred for construction in
progress................................................ $ (788) $ 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.................... $ (788) $ 181,998 $ 527,808 $ 329,372
======== ========= ========= =========
SUPPLEMENTAL INFORMATION DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid............................................... $ 22,668 $ 39,171 $ 58,286 $ 14,018
======== ========= ========= =========
Taxes paid.................................................. $ -- $ -- $ -- $ --
======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND 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
independent, privately-owned digital fiberoptic undersea cable system, the FLAG
Europe-Asia cable system. The FLAG Europe-Asia cable 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 Europe-Asia
cable 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 Europe-Asia cable
system at market-based prices to licensed international carriers. The FLAG
Europe-Asia cable 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.
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. 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.
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
F-28
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 Europe-Asia cable 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 Europe-
Asia cable 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
Europe-Asia cable 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 Europe-Asia cable 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
Europe-Asia cable 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.
F-29
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
Europe-Asia cable 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, interest and other costs necessary for developing the FLAG
Europe-Asia cable system.
e) Capitalized Financing Costs
Costs incurred by the Company to obtain financing for the FLAG Europe-Asia
cable system have been capitalized and are being amortized over the term of the
related borrowings. Capitalized costs relating to existing financings 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>
1999 1998
-------- --------
<S> <C> <C>
Office furniture............................................ $1,265 $1,231
Leasehold improvements...................................... 2,371 2,326
Computer equipment.......................................... 1,703 1,582
Motor vehicles.............................................. 267 267
------ ------
5,606 5,406
Less--Accumulated depreciation.............................. (1,152) (919)
------ ------
Net book value.............................................. $4,454 $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
F-30
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 by
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 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 qualify 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
F-31
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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. 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
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 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 during the period.
l) Reclassifications/Restatements of 1996 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 year ended December 31, 1996, 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
F-32
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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
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, 2000. This pronouncement requires the recognition of all
derivative instruments on the balance sheet at fair-value. Any subsequent
changes in fair-value are then recognized in earnings unless the derivative
qualifies for treatment as a hedge. 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 lead to increased volatility in the Company's
earnings and comprehensive income.
The Financial Accounting Standards Board has recently issued Interpretation
No. 43, "Real Estate Sales, an interpretation of FASB Statement No. 66." This
interpretation clarifies that sales of real estate with property improvements or
integral equipment that cannot be removed and used separately from the real
estate without incurring significant costs should be accounted for under FASB
Statement No. 66, "Accounting for Sales of Real Estate" ("FAS 66"). The
provisions of this Interpretation are effective for all sales of real estate
with property improvements or integral equipment entered into after June 30,
1999. It is expected that the provisions of this pronouncement will affect
timing of the Company's recognition of revenues and costs associated with future
sales of capacity.
F-33
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
3. LONG-TERM DEBT
The Company's long-term debt comprises the following:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Tranche A Facility.......................................... $ -- $ -- $306,380
Tranche B Facility.......................................... -- -- 308,707
Bank credit facility........................................ 256,500 271,500 --
8 1/4% Senior Notes, due 2008, net of unamortized discount
of $5,321................................................. 424,777 424,679 --
-------- -------- --------
$681,277 $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. This
discount is being amortised over the life of the notes. 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
February 28, 1999 are $256,500. 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.
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.
The collateral trustee maintains certain accounts in accordance with the
terms of the Credit Facility. The collateral trustee has a security interest in
these accounts.
F-34
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
3. LONG-TERM DEBT (CONTINUED)
Contractual maturities of debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------
<S> <C>
Remainder of 1999..................................... $ --
2000.................................................. --
2001.................................................. --
2002.................................................. 27,700
2003.................................................. 96,880
--------
$124,580
========
</TABLE>
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>
1999 1998 1997
--------- --------- ----------
<S> <C> <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 and 1997 the Board of Directors
declared Preferred Share pay-in-kind dividends resulting in the issue of 21,701
and 156,885 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-35
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
5. SHAREHOLDERS' EQUITY
a) Class A Common Shares
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.
132,000,000 Class A shares were converted to 69,937,597 Class B shares.
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 were
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 were 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>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Shares outstanding................. 635,796,338 565,858,741 565,858,741
Share capital...................... $64 $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 Europe-Asia
cable 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. No options were
granted under the plan from January 1, 1999 to February 26, 1999. 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
F-36
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
6. STOCK OPTIONS (CONTINUED)
equity in the Company. All of the options were granted at an exercise price of
$1.07 per share. No options had vested. 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 management's estimated fair value of the shares on the date
of the grant (the measurement date).
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>
1999
--------
<S> <C>
Net income attributable to common shareholders
--as reported............................................. 4,760
--pro forma............................................... 4,501
Earnings per share
--as reported............................................. 0.01
--pro forma............................................... 0.01
</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 weighted average fair value of options granted during 1998 was $0.61 per
share. 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 contractual life of all options is
9.31 years.
F-37
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
7. BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
1999 1998 1997 1996
---------------------- ------------------------- ------------------------- -----------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A
-------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) before
extraordinary item...... -- $4,760 $(21,847) $(21,847) $63,119 $63,119 $(24,784)
Extraordinary item........ -- -- $(59,839) $(59,839) -- -- --
Net income (loss)......... -- $4,760 $(81,529) $(81,529) $63,119 $63,119 $(24,784)
Percentage entitlement.... -- 100% 11% 89% 11% 89% 11%
Net income (loss) per
class before
extraordinary item...... -- $4,760 $(2,403) $(19,444) $6,943 $56,176 $(2,726)
Extraordinary item........ -- -- $(6,582) $(53,257) -- -- --
Net income (loss) per
class................... -- $4,760 $(8,968) $(72,561) $6,943 $56,176 $(2,726)
Number of shares.......... -- 635,796,333 132,000,000 565,858,741 132,000,000 396,890,512 132,000,000
Income (loss) per share
before extraordinary
item.................... -- $0.01 $(0.02) $(0.03) $0.05 $0.14 $(0.02)
Extraordinary item per
share................... -- -- $(0.05) $(0.10) -- -- --
Net income (loss) per
share................... -- $0.00 $(0.07) $(0.13) $0.05 $0.14 $(0.02)
<CAPTION>
1996
-----------
CLASS B
-----------
<S> <C>
Net income (loss) before
extraordinary item...... $(24,784)
Extraordinary item........ --
Net income (loss)......... $(24,784)
Percentage entitlement.... 89%
Net income (loss) per
class before
extraordinary item...... $(22,058)
Extraordinary item........ --
Net income (loss) per
class................... $(22,058)
Number of shares.......... 164,445,547
Income (loss) per share
before extraordinary
item.................... $(0.13)
Extraordinary item per
share................... --
Net income (loss) per
share................... $(0.13)
</TABLE>
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 and
Class B common share in 1998 is based on dividing net loss applicable to
Class A and Class B shareholders by the weighted average number of common shares
outstanding during the period.
No stock options were granted during the period from January 1, 1999 to
February 26, 1999. The stock options granted during 1998, discussed in Note 6,
did not have a dilutive effect on 1999 net income per common share or 1998 net
loss per common share.
8. FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's financial instruments as of February 26, 1999 and December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
NOTIONAL CARRYING FAIR NOTIONAL CARRYING FAIR NOTIONAL CARRYING FAIR
AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Funds held by Collateral
Trustee...................... -- $219,136 $219,136 -- $255,366 $255,366 -- $425,905 $425,909
8 1/4% Senior Notes $430,000 $424,777 $407,425 $430,000 $424,679 $419,250 -- -- --
Long-term debt................. -- $256,500 $256,500 -- $271,500 $271,500 -- $615,087 $615,087
Interest rate swaps............ $160,000 -- (835) $160,000 -- $2,621 -- -- --
Interest rate collar
agreement.................... -- -- -- -- -- -- $300,000 -- $(1,613)
Treasury rate lock agreement... -- -- -- -- -- -- $100,000 -- $(1,260)
</TABLE>
F-38
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
8. FINANCIAL INSTRUMENTS (CONTINUED)
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.
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 The carrying amount is a reasonable estimate of fair value
Trustee....................... 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 the relevant
date.
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 The treasury rate lock agreement is "zero cost" meaning that
agreement..................... 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 implied yield
curve and essentially values the potential for change in
interest rates during the remaining term.
</TABLE>
F-39
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
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 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 Europe-Asia cable system where the Company is deemed to have a taxable
presence or is otherwise subject to tax.
Income tax expense, which consists entirely of taxes payable to foreign
governments, is comprised of the following:
<TABLE>
<CAPTION>
1999 1998 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Current....................................... $171 $2,281 $4,391 $--
Deferred...................................... -- (1,021) 4,600 --
---- ------ ------ ------
$171 $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 Europe-Asia cable system. The
provision for deferred tax comprises the following:
<TABLE>
<CAPTION>
1999 1998 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Capacity sales revenues deferred for tax
purposes.............................. $13,217 $13,217 $7,145 $--
Deferred commissions for tax purposes... (1,911) (1,911) (197) --
Future depreciation for tax purposes.... (5,797) (5,797) (2,362) --
Tax losses carried forward.............. (1,479) (1,479) -- --
Other................................... (468) (451) 14 --
------- ------- ------- -------
$3,562 $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.
F-40
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
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 Europe-Asia cable system.
a) Program Management Services Agreement
Under the terms of a Program Management Services Agreement, Bell Atlantic
Network Systems ("BANS"), a Shareholder of the Company, managed all aspects of
the planning and construction of the FLAG Europe-Asia cable system. The Company
reimbursed BANS 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 BANS. In June 1998, the Company made a final payment to BANS to
settle all outstanding liabilities under the Program Management Services
Agreement.
b) Marketing Services Agreement
The Company and BANS, entered into a Marketing Services Agreement pursuant
to which BANS was responsible for marketing the assignable capacity of the FLAG
Europe-Asia cable system. BANS invoiced the Company for commissions at the rate
of 3% of the commitments obtained.
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 Europe-Asia cable 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 Systems ("BAGS") pursuant to which BAGS seconds certain
employees to the Company.
F-41
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
10. RELATED PARTY TRANSACTIONS (CONTINUED)
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>
1999.............................. -- -- -- $208
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.
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 Europe-Asia cable system in the year ended
December 31, 1997. The capacity credits were utilized during the year ended
December 31, 1998.
F-42
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
11. COMMITMENTS AND CONTINGENCIES
As of February 26, 1999, the Company was committed under the Contract for a
final payment totaling $132,725. FLAG Limited is 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 Telecom 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 Operations Center (the "FNOC") with one of the landing parties on the
FLAG Europe-Asia cable 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 for the
period February 27, 1999 to December 31, 1999 and for the years ended
December 2000, 2001, 2002 and 2003 and thereafter are as follows:
<TABLE>
<S> <C>
Remainder of 1999........................................... $963
2000........................................................ 824
2001........................................................ 537
2002........................................................ 549
2003........................................................ 549
Thereafter.................................................. 2,910
</TABLE>
F-43
<PAGE>
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 for the period February 27, 1999 to December 31, 1999
and for the years ended December 2000, 2001, 2002 and 2003 and thereafter are as
follows:
<TABLE>
<S> <C>
Remainder of 1999........................................... $18,694
2000........................................................ 24,546
2001........................................................ 25,105
2002........................................................ 25,197
2003........................................................ 8,820
Thereafter.................................................. 35,280
</TABLE>
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 Europe-Asia cable 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.
12. SUBSEQUENT EVENTS.
On February 26, 1999, the Company was part of a reorganization whereby FLAG
Telecom Holdings Limited, a Bermuda company, became the holding company for the
FLAG Telecom group of companies. As a result of this reorganization, the Company
became a majority-owned subsidiary of FLAG Telecom Holdings Limited.
F-44
<PAGE>
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- --------------------------------------------------------------------------------
OFFER TO EXCHANGE
FLAG TELECOM HOLDINGS LIMITED
$300,000,000 11 5/8% SENIOR NOTES DUE 2010
[EURO]300,000,000 11 5/8% SENIOR NOTES DUE 2010
P R O S P E C T U S
DATED MAY 12, 2000
[LOGO]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
