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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO
RULE 13A-16 OR 15D-16 UNDER THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE THREE MONTHS ENDED MARCH 31, 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 March 31, 2000. This Quarterly
Report contains a review of the Company's unaudited financial information and
analysis for the first 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
PAGE
PART I FINANCIAL INFORMATION ................................................1
ITEM 1: FINANCIAL STATEMENTS..................................................1
1.A Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999................................................1
1.B Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999....................................2
1.C Consolidated Statement of Comprehensive Income for the
three months ended March 31, 2000 and 1999.......................3
1.D Consolidated Statements of Cash Flows for the three months
ended March 31, 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.............................................6
PART II ADDITIONAL INFORMATION...............................................10
ITEM 1: LEGAL PROCEEDINGS....................................................10
ITEM 2: CHANGES IN SECURITIES................................................10
ITEM 3: DEFAULTS UPON SENIOR SECURITIES......................................10
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................10
ITEM 5: OTHER INFORMATION....................................................10
ITEM 6: EXHIBITS AND REPORTS FILED ON FORM 6-K...............................10
SIGNATURES....................................................................11
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PART I
ITEM 1.A
FLAG LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
(UNAUDITED) (AUDITED)
----------- ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 1,823 $ 1,213
Accounts receivable, net of allowance for doubtful accounts
of $5,831 (1999 - $6,827) 83,227 89,814
Due from affiliates -- 950
Prepaid expenses and other assets 1,759 1,433
----------- -----------
86,807 93,410
Funds held by collateral trustee or in escrow 136,944 134,066
Capacity available for sale -- 774,366
Capitalized financing costs, net of accumulated
amortization of $3,636 (1999 - $3,142) 12,766 10,708
Fixed assets, net 1,050,070 295,977
----------- -----------
$ 1,286,586 $ 1,308,527
=========== ===========
LIABILITIES:
Current liabilities:
Accounts payable $ 6,570 $ 4,980
Accrued construction costs 50,067 52,411
Accrued liabilities 12,141 27,409
Income taxes payable 3,640 3,767
Due to affiliate 1,617 3,252
Deferred revenue 44,357 44,345
----------- -----------
118,393 136,164
8 1/4% senior notes, due 2008, net of unamortized
discount of $4,582 (1999 - $4,878) 425,418 425,270
Other long-term debt 150,000 190,000
Deferred revenue and other 141,202 100,724
Deferred taxes 4,004 3,973
----------- -----------
839,016 856,131
----------- -----------
SHAREHOLDERS' EQUITY:
Class B common shares, $.0001 par value 64 64
Additional paid-in capital 540,803 504,387
Foreign currency translation adjustment (653) (680)
Accumulated deficit (92,645) (51,375)
----------- -----------
447,570 452,396
----------- -----------
$ 1,286,586 $ 1,308,527
=========== ===========
</TABLE>
1
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PART I
ITEM 1.B
FLAG LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
(UNAUDITED) (UNAUDITED)
------------- -------------
<S> <C> <C>
REVENUE 17,619 34,581
SALES AND OTHER OPERATING COSTS:
Cost of capacity sold -- 8,757
Operations and maintenance (including
non-cash compensation expense of $831,
1999-nil) 8,073 7,268
Sales and marketing (including non-cash
compensation expense of $365, 1999-nil) 4,150 1,910
General and administrative (including
non-cash compensation expense of $1,631,
1999-nil) 7,200 4,436
Depreciation and amortisation 19,715 332
------------- -------------
39,138 22,703
OPERATING (LOSS)/INCOME (21,519) 11,878
INTEREST EXPENSE 13,023 14,504
INTEREST INCOME 1,674 2,648
------------- -------------
(LOSS)/INCOME BEFORE INCOME TAXES $ (32,868) $ 22
PROVISION FOR INCOME TAXES 93 257
------------- -------------
NET (LOSS) $ (32,962) $ (235)
============= =============
Basic and diluted loss per common share $ (0.05) $ (0.00)
Weighted average common shares outstanding 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 ENDED MARCH 31, 2000 AND 1999
(EXPRESSED IN THOUSANDS OF DOLLARS)
MARCH 31, MARCH 31,
2000 1999
(UNAUDITED) (UNAUDITED)
----------- ----------
NET LOSS $(32,962) $ (235)
Foreign currency translation adjustment (109) 160
------- -------
COMPREHENSIVE LOSS $(33,071) $ (75)
======= =======
3
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PART I
ITEM 1.D
FLAG LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(EXPRESSED IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
(UNAUDITED) (UNAUDITED)
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (32,952) (235)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of financing costs 494 411
Provision of doubtful accounts (996) --
Accretion of discount on 8 1/4% senior notes 148 148
Non-cash stock compensation 3,108 --
Depreciation 19,715 332
Add (deduct) net changes in assets and liabilities:
Accounts receivable 7,583 28,498
Due from affiliate 950 --
Prepaid expenses and other assets (327) (931)
Capacity available for sale -- 9,281
Accounts payable and accrued liabilities (13,653) (12,000)
Income taxes payable (127) 244
Due to affiliate (1,635) (720)
Deferred revenue and other 40,490 (22,316)
------- -------
Net cash provided by operating acitivities 22,788 2,112
======= =======
CASH FLOWS FROM FINANCING ACTIVITIES:
Financing costs incurred (2,552) --
Capital contribution from FLAG Telecom Holdings Limited 25,000 --
Repayment of long-term debt (40,000) (30,000)
Decrease (increase) in funds hold by collateral trustee or in escrow (2,878) 81,181
------- -------
Net cash provided by financing activities (20,430) 51,181
======= =======
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for construction (2,344) (54,454)
Investment in Fixed Assets and Networks 609 (351)
------- -------
Net cash used in investing activities (1,735) (54,805)
======= =======
NET INCREASE (DECREASE) IN CASH 623 (1,512)
Effect of foreign currency movements (13) (28)
CASH, beginning of period 1,213 3,024
------- -------
CASH, end of period 1,823 1,484
======= =======
SUPPLEMENTAL INFORMATION ON NON-CASH
INVESTING ACTIVITIES:
Cash (reimbursed) incurred for construction in progress 2,344 54,454
SUPPLEMENTAL INFORMATION DISCLOSURE OF
CASH FLOW INFORMATION
Interest paid $21,251 $22,843
======= =======
Taxes paid $ 146 $ --
======= =======
Interest-capitalised $ -- $ --
======= =======
</TABLE>
4
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PART I
ITEM 1.E
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000 AND 1999
(EXPRESSED IN THOUSANDS OF DOLLARS)
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 quarters ended March
31, 2000 and 1999, the balance sheets as of March 31, 2000 and December
31, 1999, and the cash flows for the three month periods ended March
31, 2000 and March 31, 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 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.
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
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 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 unamortised premium
or discount. Third party costs are expensed as incurred.
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 shares 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.
5
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PART I
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2000 COMPARED WITH THE QUARTER ENDED MARCH 31, 1999
RESULTS OF OPERATIONS
REVENUES
Total revenue recognized by the Company during the quarter ended March 31, 2000,
was $17.6 million compared to $34.6 million in total revenue for the quarter
ended March 31, 1999.
Revenue recognized from capacity sales was $8.3 million for the quarter ended
March 31, 2000 compared to $27.2 million during the quarter ended March 31,
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 as
current revenue because they do not satisfy the requirements 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 March 31, 2000 reflects this deferral of revenues. The
change in the accounting treatment has no impact on cash flows.
As of March 31, 2000, the Company had entered into sales transactions with
in excess of 90 international telecommunication carriers, compared to 82 as of
March 31, 1999.
Revenue recognized from operations and maintenance was $9.3 million for the
quarter ended March 31, 2000 compared to $7.4 million for the quarter ended
March 31, 1999, reflecting the increased cumulative sales on the FLAG
Europe-Asia cable system.
OPERATING EXPENSES
For the quarter ended March 31, 2000, the Company recorded $19.7 million in
respect of depreciation compared to $9.1 million for depreciation and cost of
capacity sold recorded in the quarter ended March 31, 1999. As a result of
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 March 31, 2000 the Company incurred $8.1 million in
operations and maintenance costs compared to $7.3 million for the quarter
ended March 31, 1999. Operations and maintenance costs relate primarily to
the provision of standby maintenance under Maintenance Zone Agreements as
well as salaries and overheads directly associated with operations and
maintenance activities. The increase is primarily due to non-cash stock
compensation costs.
During the quarter ended March 31, 2000, $4.2 million in sales and marketing
costs were incurred compared to $1.9 million incurred during the quarter
ended March 31, 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 quarter ended March 31, 2000
over the quarter ended March 31, 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.
6
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During the quarter ended March, 31, 2000, $7.2 million of general and
administrative expenses were incurred compared to $4.4 million during the
quarter ended March 31, 1999. Increases are primarily due to non-cash stock
compensation costs incurred plus additional staff and office related costs.
Costs for the quarter ended March 31, 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 $14.5 million for the quarter
ended March 31, 1999 to $13.0 million for the quarter ended March 31, 2000. The
decrease in interest expense of $1.5 million is primarily attributable to a
reduction in the Company's long term debt from $190 million as at March 31,
1999 to $150 million as at March 31, 2000. See also "Liquidity and Capital
Resources."
Interest income of $1.7 million was earned during the quarter ended March 31,
2000 compared to $2.6 million earned during the quarter ended March 31, 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 quarter ended March 31, 2000
compared to $0.3 million for the quarter ended March 31, 1999. The tax
provisions for these periods consists of taxes on income derived from
capacity sales and standby maintenance revenue 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. As 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 NET LOSS APPLICABLE TO COMMON SHAREHOLDERS
For the quarter ended March 31, 2000 the Company recorded a net loss of $(33.0)
million compared to net loss of $(0.2) million for the quarter ended March 31,
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 March 31, 2000 compared
to nil for the quarter ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
On February 16, 2000, the Company amended its existing credit facilities to
7
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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 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
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.
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 billings of standby
maintenance charges, investment income on cash and investment balances,
borrowings under the revolving credit facility, if any, and available funds in
reserve account.
As of March 31, 2000 and December 31, 1999, the Company had working capital
deficits of $31.6 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 quarter ended March 31, 2000 was $22.8 million and $(1.7) million
respectively. As of March 31, 2000, cash on deposit with the collateral trustee
or in escrow had increased to $136.9 million from $134.1 million at December 31,
1999.
Total cash provided by operations and used in investing activities during the
quarter ended March 31, 1999 was $2.1 million and $54.8 million respectively.
These expenditures were funded from cash held by the Collateral Trustees
or in escrow.
ASSETS
Our major asset is the remaining capital cost of the FLAG Europe-Asia cable
system recorded in fixed assets totalling $1,049 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.
8
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SAFE HARBOR STATEMENT UNDER
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements included in this Quarterly Report regarding future financial
performance and results and the other statements that are not historical facts
are forward-looking statements. The words "believes," "intends," "expects,"
"anticipates," "projects," "estimates," "predicts" and similar expressions are
also intended to identify forward-looking statements. Such statements reflect
various assumptions by the Company concerning anticipated results and are
subject to significant business, economic and competitive risks, uncertainties
and contingencies, including, without limitation, the risks, uncertainties and
contingencies described in registration statements, reports and other documents
filed by the Company from time to time with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended. Accordingly, there can be no
assurance that such statements will be realized. Such risks, uncertainties and
contingencies could cause the Company's actual results for the quarter ended
March 31, 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 Quarterly Report.
9
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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
At a meeting of the Company held on January 23, 2000, the sole shareholder of
the Company approved (1) the Company's 1998 Financial Statements, (2) the
appointment of Arthur Andersen & Co. as the Company's auditors until its next
annual general meeting and (3) the setting of the size of its Board of
Directors at three members and the appointment of Messrs. Best, Kawar and
McCormack to serve as directors.
ITEM 5: OTHER INFORMATION
On January 4, 2000, Bell Atlantic Network Systems Company exchanged the
remaining 217,536,730 common shares of the Company held by Bell Atlantic for a
like number of common shares in FLAG Telecom Holdings Limited, the parent
holding company of the Company. As a result, the Company becomes a wholly owned
subsidiary of FLAG Telecom Holdings Limited.
ITEM 6: EXHIBITS AND REPORTS FILED ON FORM 6-K
Not Applicable.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FLAG LIMITED
By: /s/ Mark Robinson
-------------------------------------
Mark Robinson
CHIEF FINANCIAL OFFICER
11
