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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO
RULE 13a-16 OR 15d-16 UNDER THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 2000
FLAG LIMITED
(Exact name of Registrant as specified in its charter)
CEDAR HOUSE
41 CEDAR AVENUE
HAMILTON HM12, BERMUDA
(Address of principal executive office)
Indicate by check mark whether the Registrant files or will file annual
reports under cover of Form 20-F or Form 40-F
Form 20-F /X/ Form 40-F / /
Indicate by check mark whether the Registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g-2(b) under the Securities Exchange Act of 1934
Yes |_| No |X|
This report ("Quarterly Report") sets forth certain information regarding the
financial condition and results of operations of FLAG Limited, a Bermuda company
(the "Company"), for the fiscal quarter ended June 30, 2000. This Quarterly
Report contains a review of the Company's unaudited financial information and
analysis for the second quarter, as well as certain other information.
The following unaudited financial statements, in the opinion of the Company's
management, reflect all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of the financial position, the
results of operations and cash flows for the periods presented.
===============================================================================
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FLAG LIMITED
FORM 6-K
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I FINANCIAL INFORMATION .............................................. 1
ITEM 1: FINANCIAL STATEMENTS................................................ 1
1.A Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999................................................ 1
1.B Consolidated Statements of Operations for the three
months and six months ended June 30, 2000 and 1999.............. 2
1.C Consolidated Statement of Comprehensive Income for the three
months and six months ended June 30, 2000 and 1999.............. 3
1.D Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 1999........................................... 4
1.E Notes to Consolidated Financial Statements....................... 5
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................... 7
PART II MORE INFORMATION.................................................... 14
ITEM 1: LEGAL PROCEEDINGS................................................... 14
ITEM 2: CHANGES IN SECURITIES............................................... 14
ITEM 3: DEFAULTS UPON SENIOR SECURITIES..................................... 14
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 14
ITEM 5: OTHER INFORMATION................................................... 14
ITEM 6: EXHIBITS AND REPORTS FILED ON FORM 6-K.............................. 14
SIGNATURES .................................................................... 15
</TABLE>
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PART 1
ITEM 1.A
FLAG LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(UNAUDITED) (AUDITED)
-------------- -----------
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash $ 1,605 $ 1,213
Accounts receivable, net of allowance for doubtful accounts
of $5,831 (1999 - $6,827) 85,329 89,814
Due from affiliates -- 950
Prepaid expenses and other assets 1,707 1,433
------------ ------------
88,641 93,410
Funds held by collateral trustee or in escrow 158,807 134,066
Capacity available for sale -- 774,366
Capitalized financing costs, net of accumulated
amortization of $4,311 (1999 - $3,142) 12,341 10,708
Fixed assets, net 1,035,773 295,977
----------- -----------
$ 1,295,562 $ 1,308,527
=========== ===========
LIABILITIES:
Current liabilities:
Accounts payable $ 14,737 $ 4,980
Accrued construction costs 50,067 52,411
Accrued liabilities 24,222 27,409
Income taxes payable 3,685 3,767
Due to affiliate 3,086 3,252
Deferred revenue 37,275 44,345
----------- -----------
133,072 136,164
8 1/4% senior notes, due 2008, net of unamortized
discount of $4,434 (1999 - $4,878) 425,566 425,270
Other long-term debt 150,000 190,000
Deferred revenue and other 162,920 100,724
Deferred taxes 3,925 3,973
----------- -----------
875,483 856,131
----------- -----------
SHAREHOLDERS' EQUITY:
Class B common shares, $.0001 par value 64 64
Additional paid-in capital 541,947 512,695
Foreign currency translation adjustment (591) (680)
Accumulated deficit (121,341) (59,683)
----------- -----------
420,079 452,396
----------- -----------
$ 1,295,562 $ 1,308,527
=========== ===========
</TABLE>
1
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PART I
ITEM 1.B
FLAG LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES 21,646 59,501 39,264 94,082
SALES AND OTHER OPERATING COSTS:
Cost of capacity sold - 24,748 - 33,505
Operations and maintenance
(including non-cash compensation
expense of $335, nil, $1,166, nil) 8,900 7,771 16,973 15,039
Sales and marketing
(including non-cash compensation
expense of $158, nil, $523, nil) 2,787 1,625 6,937 3,535
General and administrative
(including non-cash compensation
expense of $651, nil, $2,282, nil) 7,936 6,340 15,136 10,776
Depreciation and amoritization 19,446 389 39,161 721
----------- -------- --------- --------
39,069 40,873 78,207 63,576
OPERATING (LOSS)/INCOME (17,423) 18,628 (38,943) 30,506
INTEREST EXPENSE 13,036 12,982 26,059 27,486
INTEREST INCOME 1,803 2,013 3,477 4,661
----------- -------- -------- -------
(LOSS)/INCOME BEFORE INCOME TAXES (28,656) 7,659 (61,525) 7,681
PROVISION FOR INCOME TAXES 37 392 130 649
----------- -------- -------- -------
NET (LOSS)/INCOME (28,693) 7,267 (61,655) 7,032
----------- -------- -------- -------
Basic and diluted (loss)/income per common share $ (0.05) $ 0.01 $ (0.10) $ 0.01
Weighted average common shares outstanding 635,796,338 635,796,338 635,796,338 635,796,338
</TABLE>
2
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PART I
ITEM 1.C
FLAG LIMITED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(EXPRESSED IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET (LOSS)/INCOME (28,693) 7,267 (61,655) 7,032
Foreign currency translation adjustment 198 5 89 165
--------- -------- ---------- ----------
COMPREHENSIVE (LOSS)/INCOME (28,495) 7,272 (61,566) 7,197
--------- -------- ---------- ----------
</TABLE>
3
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PART I
ITEM 1.D
FLAG LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
(UNAUDITED) (UNAUDITED)
-------------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss applicable to common shareholders $ (61,655) $ 7,032
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of financing costs 1,169 822
Provision for doubtful accounts (996) -
Senior debt discount 295 295
Non-cash stock compensation 4,252 -
Depreciation 39,161 721
Loss on disposal of fixed assets 84 -
Deferred taxes 34 -
Add (deduct) net changes in assets and liabilities:
Accounts receivable 5,481 (2,731)
Due from affiliate 950 -
Prepaid expenses and other assets (275) (519)
Capacity available for sale - 37,982
Accounts payable and accrued liabilities 6,592 (5,929)
Income taxes payable (82) (1,132)
Due to affiliate (166) (939)
Deferred revenue and other 55,125 (3,153)
---------- ----------
Net cash provided by operating activities 49,969 32,449
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Financing costs incurred (2,802) -
Net proceeds from issuance of 8 1/4% senior notes 25,000 -
Repayment of long-term debt (40,000) (30,000)
Decrease (increase) in funds held by collateral trustee or in escrow (24,741) 84,562
--------- ----------
Net cash (used in)/provided by financing activities (42,543) 54,562
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for construction (2,344) (88,229)
Purchase of fixed assets, net (4,711) (933)
Proceeds from disposal of assets 33 -
--------- ----------
Net cash used in investing activities (7,022) (89,162)
--------- ----------
NET INCREASE (DECREASE) IN CASH 404 (2,151)
Effect of foreign currency movements (12) (27)
CASH, beginning of period 1,213 3,024
--------- ----------
CASH, end of period $ 1,605 $ 846
========= ==========
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING
ACTIVITIES:
Cash incurred for construction in progress $ (2,344) $ 88,229
--------- ----------
SUPPLEMENTAL INFORMATION DISCLOSURE OF
CASH FLOW INFORMATION
Interest paid $ 24,729 $ 26,335
--------- ---------
Interest capitalised - -
--------- ---------
Taxes paid $ 100 $ 35
--------- ---------
</TABLE>
4
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PART I
ITEM 1.E
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2000 AND 1999
1. GENERAL
The interim consolidated financial statements presented herein have been
prepared on the basis of U.S. generally accepted accounting principles and
include the accounts and balances of the Company and its wholly-owned
subsidiaries. All significant intercompany transactions have been eliminated
in consolidation. In the opinion of management, the unaudited consolidated
financial statements reflect all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the results of operations for
the the three and six month periods ended June 30, 2000 and 1999, the balance
sheets as of June 30, 2000 and December 31, 1999, and the cash flows for the
six month periods ended June 30, 2000 and 1999. These interim consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements for the year ended December 31, 1999. The
results of operations for any interim period are not necessarily indicative
of results for the full year.
2. 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 issuance of FASB
Interpretation No. 43, with effect from July 1, 1999, certain sales of
capacity may no longer be recognized as current revenue because they do not
satisfy the requirements for sales-type lease accounting. Revenues from these
capacity sales are now deferred and amortized over the term of the contracts.
The change to the accounting treatment has no impact on cash flows. Until
June 30, 1999 revenues from operating lease transactions were considered
incidental and recorded as a reduction of the capacity available for sale.
3. CAPACITY AVAILABLE FOR SALE
Historically capacity available for sale has been recorded at the lower of
cost or fair value less cost to sell and charged to cost of sales as capacity
is sold. Until contracts were entered into that precluded sales type lease
accounting for a particular segment, the cost of such segment remained in
capacity available for sale. As a result of extending the range of products
and services offered
5
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by FLAG Telecom, the greater part of future revenue is expected to arise
under agreements that will be accounted for as operating leases or service
contracts and will require the recognition of revenues over the relevant term
of the agreements. The remaining cost of the FLAG Europe-Asia cable system
has therefore been reclassified 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.
4. DEBT MODIFICATION
Fees paid to the lender as a result of a credit facility amendment are offset
against the modified debt instrument and amortised as an adjustment to
interest expense over the remaining term of the modified debt instrument
along with any existing unamortized premium or discount.
5. CONTINGENCIES
The Company is involved in litigation from time to time in the ordinary
course of business. In management's opinion, the litigation in which the
Company is currently involved, individually and in the aggregate, is not
material to it.
6. NET INCOME PER COMMON SHARE
Basic net income per common share is computed by 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.
7. 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.
The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101
outlines the SEC's views on applying generally accepted accounting principles
to revenue recognition in financial statements. Specifically, the bulletin
provides both general and specific guidance as to the periods in which
companies should recognize revenues. In addition, SAB 101 also highlights
factors to be considered when determining whether to recognize revenues on a
gross or net basis. SAB 101, as amended by SAB 101/A and SAB 101/B, is
effective beginning no later than their fourth fiscal quarter of the fiscal
year beginning after December 15, 1999. The Group believes that its policies
in regards to the recognition of revenues are in compliance with the
guidance of SAB 101 and does not expect that the adoption of this standard
will have any material effects on its results of operations, cash flows or
financial position.
The Emerging Issues Task Force (EITF) has recently issued EITF 00-2
("Accounting for Web Site Development Costs"). The Task Force has reached a
consensus that all costs associated with the planning of web site development
projects should be expensed as incurred, while costs incurred in the
application and development stage should generally be capitalized in
accordance with American Institute of Certified Public Accountants Statement
of Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use", or other relevant pronouncements. Costs incurred
in the operations of the web site are generally expensed as incurred. The
EITF has not yet reached a consensus as to the accounting for the costs of
developing and displaying content or other information on a web site, but the
Task Force plans further discussion on this issue. EITF 00-2 is effective for
web site development costs incurred for fiscal quarters beginning after June
30, 2000. As the Company's current policy is substantially consistent with
the consensuses reached in EITF 00-2, the Company does not expect that the
issuance of this pronouncement will have a material effect on its financial
condition or results of operations.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART I
ITEM 2
QUARTER ENDED JUNE 30, 2000 COMPARED WITH THE QUARTER ENDED JUNE 30, 1999
RESULTS OF OPERATIONS
REVENUES
Total revenue recognized by the Company during the quarter ended June 30,
2000, was $21.6 million compared to $59.5 million in total revenue for the
quarter ended June 30, 1999.
Revenue recognized from the sale of capacity was $11.4 million for the
quarter ended June 30, 2000 compared to $52.4 million during the quarter
ended June 30, 1999. As a result of the issue of FASB Interpretation No.43
with effect from July 1, 1999, certain sales of capacity may no longer be
recognized for sales-type lease accounting. Instead, revenues from these
capacity sales are being deferred and amortized over the term of the
contracts. Revenue for the quarter ended June 30, 2000 reflects this deferral
of revenues. The change in the accounting treatment has no impact on cash
flows.
As of June 30, 2000, the Company had entered into sales transactions with in
excess of 100 international telecommunication carriers compared to 88 as of
June 30, 1999.
Revenue recognized from operations and maintenance was $10.2 million for the
quarter ended June 30, 2000 compared to $7.1 million for the quarter ended
June 30, 1999, reflecting the increased cumulative sales on the FLAG
Europe-Asia cable system.
OPERATING EXPENSES
For the quarter ended June 30, 2000, the Company recorded $19.4 million in
respect of depreciation compared to $25.1 million for depreciation and cost
of capacity sold recorded in the quarter ended June 30, 1999. The adoption of
FASB Interpretation No.43 discussed above, has meant that the remaining
capacity available for sale was reclassified to fixed assets on January 1,
2000 and is being depreciated over the remaining economic life of the network.
During the quarter ended June 30, 2000 the Company incurred $8.9 million in
operations and maintenance costs compared to $7.8 million for the quarter
ended June 30, 1999. Operations and maintenance expenses relate primarily to
the provision of standby maintenance under Maintenance Zone Agreements as
well as Company salaries and overheads directly associated with operations
and maintenance activities. The increase is primarily due to additional costs
arising from increased activity plus increased use of contracted services.
During the quarter ended June 30, 2000, $2.8 million in sales and marketing
costs were incurred compared to $1.6 million incurred during the quarter
ended June 30, 1999. Sales and marketing costs are comprised of all sales and
7
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marketing activities that are directly undertaken by the Company. The
increase in sales and marketing costs in the quarter ended June 30, 2000 over
the quarter ended June 30, 1999 is due to the greater employment and related
costs associated with the increased world-wide sales and marketing activity
and non-cash stock compensation costs.
During the quarter ended June 30, 2000, $7.9 million of general and
administrative expenses were incurred compared to $6.3 million during the
quarter ended June 30, 1999. Increases are primarily due to non-cash stock
compensation costs incurred plus additional staff and office related costs.
Costs for the quarter ended June 30, 2000 include charges for non-cash stock
compensation expense in respect of certain 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.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense on borrowings remained constant at $13.0 million for the
quarters ended 30 June 2000 and 1999.
Interest income of $1.8 million was earned during the quarter ended June 30,
2000 compared to $2.0 million earned during the quarter ended June 30, 1999.
Interest was earned on cash balances and short term investments held by the
Collateral Trustee or in escrow arising from ongoing business operations.
PROVISION FOR TAXES
The provision for taxes was $0.04 million for the quarter ended June 30, 2000
compared to $0.4 million for the quarter ended June 30, 1999. The tax
provisions for periods consist of taxes on income derived from capacity sales
and standby maintenance revenue from customers in certain jurisdictions along
the FLAG Route where the Company is deemed to have a taxable presence or is
otherwise subject to tax. At the present time, no income, profit, capital or
capital gains taxes are levied in Bermuda. In the event that such taxes are
levied, the Company has received an undertaking from the Bermuda Government
exempting it from all such taxes until March 28, 2016.
NET LOSS AND LOSS PER COMMON SHARE
For the quarter ended June 30, 2000 the Company recorded a net loss of
$(28.7) million compared to a net income of $7.3 million for the quarter
ended June 30, 1999. This is attributable primarily to reduced accounting
revenue and increased depreciation costs caused by the adoption of FASB
Interpretation No. 43 with effect from July 1, 1999.
Loss per common share was $(0.05) for the quarter ended June 30, 2000
compared to an income per common share of $0.01 for the quarter ended June
30, 1999.
8
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
RESULTS OF OPERATIONS
REVENUES
Total revenue recognized by the Company during the six months ended June 30,
2000, was $39.3 million compared to $94.1 million in total revenue for six
months ended June 30, 1999.
Revenue recognized from the sale of capacity was $19.7 million for the six
months ended June 30, 2000 compared to $80.3 million during the six months
ended June 30, 1999. As a result of the issue of FASB Interpretation No.43
with effect from July 1, 1999, certain sales of capacity may no longer be
recognized for sales-type lease accounting. Instead, revenues from these
capacity sales are being deferred and amortized over the term of the
contracts. Revenue for the quarter ended June 30, 2000 reflects this deferral
of revenues. The change in the accounting treatment has no impact on cash
flows.
As of June 30, 2000, the Company had entered into sales transactions with in
excess of 100 international telecommunication carriers compared to 88 as of
June 30, 1999.
Revenue recognized from operations and maintenance was $19.6 million for the
six months ended June 30, 2000 compared to $13.8 million for the six months
ended June 30, 1999, reflecting the increased cumulative sales on the FLAG
Europe-Asia cable system.
OPERATING EXPENSES
For the six months ended June 30, 2000, the Company recorded $39.2 million in
respect of depreciation compared to $34.2 million for depreciation and cost
of capacity sold recorded in the six months ended June 30, 1999. The adoption
of FASB Interpretation No.43 discussed above, has meant that the remaining
capacity available for sale was reclassified to fixed assets on January 1,
2000 and is being depreciated over the remaining economic life of the network.
During the six months ended June 30, 2000 the Company incurred $17.0 million
in operations and maintenance costs compared to $15.0 million for the six
months ended June 30, 1999. Operations and maintenance expenses relate
primarily to the provision of standby maintenance under Maintenance Zone
Agreements as well as Company salaries and overheads directly associated with
operations and maintenance activities. The increase is primarily due to
additional costs arising from increased activity plus increased use of
contracted services.
During the six months ended June 30, 2000, $6.9 million in sales and
marketing costs were incurred compared to $3.5 million incurred during the
six months ended June 30, 1999. Sales and marketing costs are comprised of
all sales and marketing activities that are directly undertaken by the
Company. The increase in sales and marketing costs in the six months ended
June 30, 2000 over the six months ended June 30, 1999 is due to the greater
employment and related costs associated with the increased world-wide sales
and marketing activity and non-cash stock compensation costs.
9
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During the six months ended June 30, 2000, $15.1 million of general and
administrative expenses were incurred compared to $10.8 million during the
six months ended June 30, 1999. Increases are primarily due to non-cash stock
compensation costs incurred plus additional staff and office related costs.
Costs for the six months ended June 30, 2000 include charges for non-cash
stock compensation expense in respect of certain 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.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense on borrowings decreased from $27.5 million for the six
months ended June 30, 1999 to $26.1 million for the six months ended June 30,
2000. The decrease in interest expense of $1.4 million is attributable to a
reduction in the long term debt balance.
Interest income of $3.5 million was earned during the six months ended June
30, 2000 compared to $4.7 million earned during the six months ended June 30,
1999. Interest was earned on cash balances and short term investments held by
the Collateral Trustee or in escrow arising from ongoing business operations.
PROVISION FOR TAXES
The provision for taxes was $0.1 million for the six months ended June 30,
2000 compared to $0.6 million for the six months ended June 30, 1999. The tax
provisions for periods consists of taxes on income derived from capacity
sales and standby maintenance revenue from customers in certain jurisdictions
along the FLAG Route where the Company is deemed to have a taxable presence
or is otherwise subject to tax. At the present time, no income, profit,
capital or capital gains taxes are levied in Bermuda. In the event that such
taxes are levied, the Company has received an undertaking from the Bermuda
Government exempting it from all such taxes until March 28, 2016.
NET LOSS AND LOSS PER COMMON SHARE
For the six months ended June 30, 2000 the Company recorded a net loss of
$(61.7) million compared to a net income of $7.0 million for the six months
ended June 30, 1999. This is attributable primarily to reduced accounting
revenue and increased depreciation costs caused by the adoption of FASB
Interpretation No. 43 with effect from July 1, 1999.
Loss per common share was $(0.10) for the six months ended June 30, 2000
compared to an income per common share of $.01 for the six months ended June
30, 1999.
10
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LIQUIDITY AND CAPITAL RESOURCES
On February 16, 2000, the Company amended its existing credit facilities to
consist of a $150 million six-year term loan facility (all of which remained
outstanding at June 30, 2000) 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 the Company. The facilities are
secured by a pledge of all of the capital stock of the Company and by
assignment of the Company's contracts and a security interest in its bank
accounts and intangible property. In connection with this amendment, the
Company paid fees and expenses to the joint lead arrangers totalling
approximately $3.5 million.
At the end of March 1998, the Company entered into two interest rate swap
agreements to manage our exposure to interest rate fluctuations on the
Company'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 terminated in July 2000. Under the bank loan facility as
now in effect, we are obligated to hedge interest rate risk to the extent of
50% of the projected 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.
The Company believes that it will have no need for additional borrowing
facilities. The Company intends to finance future operations through proceeds
from the sale or lease of capacity, revenues from operations and maintenance,
investment income on cash and investment balances, borrowings under the
revolving credit facility, if any, and available funds in reserve account.
As of June 30, 2000 and December 31, 1999, the Company had working capital
deficits of $44.4 million and $42.8 million respectively. The working capital
deficit was primarily a result of the current accounts payable to the
contractors which is classified as a current liability but for which the
associated funds held in escrow are classified as a non-current asset and are
hence excluded from the measure of working capital.
Total cash provided by operating activities and used in investing activities
during the six months ended June 30, 2000 was $50.0 million and $(7.0)
million respectively. As of June 30, 2000, cash on deposit with the
collateral trustee or in escrow had increased to $158.8 million from $134.1
million at December 31, 1999.
Total cash provided by operations and used in investing activities during the
Six months ended June 30, 1999 was $32.4 million and $(89.2) million
respectively. These expenditures were funded from cash held by the Collateral
Trustees or in escrow.
11
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ASSETS
Our major asset is the remaining capital cost of the FLAG Europe-Asia cable
system recorded in fixed assets totalling $1,034.7 million.
As a result of the application of FASB Interpretation No. 43, the costs of
certain segments of the FLAG Europe-Asia cable were 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 will arise 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 on January 1, 2000. This cost
will be depreciated over the remaining estimated economic life of the system.
Our other fixed assets consist primarily of office furniture, leasehold
improvements, computer equipment and motor vehicles totalling $1.0 million.
OTHER INFORMATION
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 do not, however, anticipate any impact on
our current accounting treatment or that there will be an impact on our cash
flows.
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SAFE HARBOR STATEMENT UNDER
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements included in this Report on Form 6-K regarding future financial
performance and results and the other statements that are not historical
facts are forward-looking statements. The words "believes," "intends,"
"expects," "anticipates," "projects," "estimates," "predicts" and similar
expressions are also intended to identify forward-looking statements. Such
statements reflect various assumptions by the Company concerning anticipated
results and are subject to significant business, economic and competitive
risks, uncertainties and contingencies, including, without limitation, the
risks, uncertainties and contingencies described in registration statements,
reports and other documents filed by the Company from time to time with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended. Accordingly,
there can be no assurance that such statements will be realized. Such risks,
uncertainties and contingencies could cause the Company's actual results for
the six months ends June 30, 2000 and beyond to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. The Company makes no representation or warranty as to the accuracy
or completeness of such statements contained in this Report on Form 6-K.
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PART II
ITEM 1: LEGAL PROCEEDINGS
The Company is involved in litigation from time to time in the ordinary
course of business. In management's opinion, the litigation in which the
Company is currently involved, individually and in the aggregate, is not
material to it.
ITEM 2: CHANGES IN SECURITIES
Not Applicable.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No meetings of the shareholders of the Company were held during the quarter
to which this Report relates.
ITEM 5: OTHER INFORMATION
Not Applicable.
ITEM 6: EXHIBITS AND REPORTS FILED ON FORM 6-K
Not Applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized this 14th day of August 2000.
FLAG LIMITED
By: /s/ Mark Robinson
---------------------------------
Mark Robinson
CHIEF FINANCIAL OFFICER
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