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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 September 30, 2000
FLAG LIMITED
(Exact name of Registrant as specified in its charter)
CEDAR HOUSE
41CEDAR 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 September 30, 2000. This Quarterly
Report contains a review of the Company's unaudited financial information and
analysis for the third 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 September 30, 2000 and
December 31, 1999........................................... 1
1.B Consolidated Statements of Operations for the three months
and nine months ended September 30, 2000 and 1999 2
1.C Consolidated Statement of Comprehensive Income for the three
months and nine months ended September 30, 2000 and 1999.... 3
1.D Consolidated Statements of Cash Flows for the nine months
ended September 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...................................... 8
PART II OTHER INFORMATION.............................................. 15
ITEM 1: LEGAL PROCEEDINGS.............................................. 15
ITEM 2: CHANGES IN SECURITIES.......................................... 15
ITEM 3: DEFAULTS UPON SENIOR SECURITIES................................ 15
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 15
ITEM 5: OTHER INFORMATION.............................................. 15
ITEM 6: EXHIBITS AND REPORTS FILED ON FORM 6-K......................... 15
SIGNATURES ............................................................... 16
<PAGE>
PART 1
ITEM 1.A
FLAG LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
2000 1999
(UNAUDITED) (AUDITED)
-------------- --------------
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 3,260 $ 1,213
Accounts receivable, net of allowance for
doubtful accounts of $5,831 (1999 - $6,827) 69,845 89,814
Due from affiliates -- 950
Prepaid expenses and other assets 6,051 1,433
----------- -----------
79,156 93,410
Funds held by collateral trustee
or in escrow 153,076 134,066
Capacity available for sale -- 774,366
Capitalized financing costs, net
of accumulated
amortization of $4,986 (1999 - $3,142) 11,689 10,708
Fixed assets, net 1,017,746 295,977
----------- -----------
$ 1,261,667 $ 1,308,527
=========== ===========
LIABILITIES:
Current liabilities:
Accounts payable $ 13,982 $ 4,980
Accrued construction costs 50,067 52,411
Accrued liabilities 14,316 27,409
Income taxes payable 3,678 3,767
Due to affiliate 228 3,252
Deferred revenue 26,753 44,345
----------- -----------
109,024 136,164
8 1/4% senior notes, due 2008, net of
unamortized discount of $4,287 (1999 - $4,730) 425,713 425,270
Other long-term debt 125,000 190,000
Deferred revenue and other 200,643 100,724
Deferred taxes 3,581 3,973
----------- -----------
863,961 856,131
----------- -----------
SHAREHOLDERS' EQUITY:
Class B common shares, $.0001 par value 64 64
Additional paid-in capital 543,104 512,695
Foreign currency translation
adjustment (448) (680)
Accumulated deficit (145,014) (59,683)
----------- -----------
397,706 452,396
----------- -----------
$ 1,261,667 $ 1,308,527
=========== ===========
</TABLE>
1
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FLAG LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES 23,566 52,522 62,830 146,604
SALES AND OTHER OPERATING COSTS
Cost of capacity sold -- 18,588 -- 52,093
Operations and maintenance
(including non-cash compensation
expense of $339, nil, $1,506, nil) 7,585 6,290 24,558 21,329
Sales and marketing
(including non-cash compensation
expense of $160, nil, $683, nil) 3,091 4,720 10,028 8,255
General and administrative
(including non-cash compensation
expense of $658, nil, $2,929, nil) 8,183 3,449 23,319 14,225
Depreciation and amortization 18,697 4,400 57,858 5,121
------------ ------------ ------------ ------------
37,556 37,447 115,763 101,023
OPERATING (LOSS)/INCOME (13,990) 15,075 (52,933) 45,581
INTEREST EXPENSE 12,339 13,474 38,398 40,960
INTEREST INCOME 2,470 2,083 5,947 6,744
------------ ------------ ------------ ------------
(LOSS)/INCOME BEFORE INCOME TAXES (23,859) 3,684 (85,384) 11,365
PROVISION FOR INCOME TAXES (187) 346 (56) 995
------------ ------------ ------------ ------------
NET (LOSS)/INCOME (23,672) 3,338 (85,328) 10,370
------------ ------------ ------------ ------------
Basic and diluted (loss)/income
per common share $ (0.04) $ 0.01 $ (0.13) $ 0.02
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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(EXPRESSED IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET (LOSS)/INCOME (23,672) 3,338 (85,328) 10,370
Foreign currency translation adjustment 142 (43) 232 122
------- ----- ------- ------
COMPREHENSIVE (LOSS)/INCOME (23,530) 3,295 (85,096) 10,492
======= ===== ======= ======
</TABLE>
3
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PART I
ITEM 1.D
FLAG LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
(UNAUDITED) (UNAUDITED)
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/income applicable to common shareholders $ (85,328) $ 10,370
Adjustments to reconcile net loss to net cash
provided by/(used in) operating activities:
Amortization of financing costs 1,844 1,233
Provision for doubtful accounts (996) 1,176
Senior debt discount 443 443
Non-cash stock compensation 5,409 --
Depreciation 57,858 5,121
Loss on disposal of fixed assets 91 --
Deferred taxes (152) 117
Add (deduct) net changes in assets and liabilities:
Accounts receivable 20,968 (26,991)
Due from affiliate 950 (1,758)
Prepaid expenses and other assets (4,619) 1,284
Capacity available for sale -- 58,052
Accounts payable and accrued liabilities (4,084) (16,923)
Income taxes payable (89) (2,545)
Due to affiliate (3,024) (34)
Deferred revenue and other 82,327 5,417
--------- ---------
Net cash provided by operating activites 71,598 34,962
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITES:
Financing costs incurred (2,826) --
Capital contribution from FLAG Telecom Holdings Limited 25,000 --
Repayment of long-term debt (65,000) (48,500)
(Increase)/decrease in funds held by collateral trustee or in escrow (19,010) 111,183
--------- ---------
Net cash (used in)/provided by financing activities (61,836) 62,683
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for construction (2,344) (100,577)
(Purchase)/disposal of fixed assets, net (5,385) 2,043
Proceeds from disposal of assets 33 --
--------- ---------
Net cash used in investing activities (7,696) (98,534)
--------- ---------
NET INCREASE/(DECREASE) IN CASH 2,066 (889)
Effect of foreign currency movements (19) (29)
CASH, beginning of period 1,213 3,024
--------- ---------
CASH, end of period $ 3,260 $ 2,106
========= =========
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING ACTIVITIES:
Cash incurred for construction in progress $ (2,344) $ 100,577
========= =========
SUPPLEMENTAL INFORMATION DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 47,523 $ 48,396
========= =========
Interest capitalized $ -- $ 1,281
========= =========
Taxes paid $ -- $ --
========= =========
</TABLE>
4
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PART I
ITEM 1.E
FLAG LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 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
three and nine month periods ended September 30, 2000 and 1999, the balance
sheets as of September 30, 2000 and December 31, 1999, and the cash flows for
the nine month periods ended September 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 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.
5
<PAGE>
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 amortized 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 / (LOSS) PER COMMON SHARE
Basic net income / (loss) per common share is computed by dividing net income /
(loss) applicable to common shareholders by the weighted average number of
common shares outstanding in the period. Diluted net income / (loss) per common
share is computed by dividing net income / (loss) by the weighted average number
of common shares and common share equivalents outstanding during the 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.
In December 1999, 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 the fourth fiscal quarter of the fiscal year beginning
after December 15, 1999; as the Group is a calendar year-end company, this would
be the quarter ending December 31, 2000. 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 effect on its results of operations, cash flows or financial position.
The Emerging Issues Task Force (EITF) has recently issued EITF 00-2 ("Accounting
6
<PAGE>
for Web Site Development Costs") . The EITF 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 EITF 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.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART I
ITEM 2
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED WITH THE QUARTER ENDED SEPTEMBER 30,
1999
RESULTS OF OPERATIONS
REVENUES
Total revenue recognized by the Company during the quarter ended September 30,
2000, was $23.6 million compared to $52.5 million in total revenue for the
quarter ended September 30, 1999.
Revenue recognized from the sale of capacity was $13.2 million for the quarter
ended September 30, 2000 compared to $44.7 million during the quarter ended
September 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 September 30, 2000 reflects this deferral of revenues. The change
in the accounting treatment has no impact on cash flows.
As of September 30, 2000, the Company had entered into sales transactions with
in excess of 100 international telecommunication carriers compared to 90 as of
September 30, 1999.
Revenue recognized from operations and maintenance was $10.4 million for the
quarter ended September 30, 2000 compared to $7.8 million for the quarter ended
September 30, 1999, reflecting the increased cumulative sales on the FLAG
Europe-Asia cable system.
OPERATING EXPENSES
For the quarter ended September 30, 2000, the Company recorded $18.7 million in
respect of depreciation compared to $23.0 million for depreciation and cost of
capacity sold recorded in the quarter ended September 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, rather than
being written off as cost of sales.
During the quarter ended September 30, 2000 the Company incurred $7.6 million in
operations and maintenance costs compared to $6.3 million for the quarter ended
September 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 September 30, 2000, $3.1 million in sales and marketing
8
<PAGE>
costs were incurred compared to $4.7 million incurred during the quarter ended
September 30, 1999. Sales and marketing costs are comprised of all sales and
marketing activities that are directly undertaken by the Company. The decrease
in sales and marketing costs in the quarter ended September 30, 2000 over the
quarter ended September 30, 1999 relates to certain one off commission payments
in respect of sales made last year.
During the quarter ended September 30, 2000, $8.2 million of general and
administrative expenses were incurred compared to $3.4 million during the
quarter ended September 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 September 30, 2000 include charges for non-cash
stock compensation expense of $1.2 million 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 $13.5 million for the quarter
ended September 30, 1999 to $12.3 million for the quarter ended September 30,
2000. The decrease in interest expense of $1.2 million is primarily attributable
to a reduction in the Company's long term debt balance.
Interest income of $2.5 million was earned during the quarter ended September
30, 2000 compared to $2.1 million earned during the quarter ended September 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 $(0.2) million for the quarter ended September 30,
2000 compared to $0.3 million for the quarter ended September 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) /INCOME AND (LOSS) /INCOME PER COMMON SHARE
For the quarter ended September 30, 2000 the Company recorded a net loss of
$(23.7) million compared to a net income of $3.3 million for the quarter ended
September 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 $(0.04) for the quarter ended September 30, 2000
compared to an income per common share of $0.01 for the quarter ended September
30, 1999.
9
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
RESULTS OF OPERATIONS
REVENUES
Total revenue recognized by the Company during the nine months ended September
30, 2000, was $62.8 million compared to $146.6 million in total revenue for nine
months ended September 30, 1999.
Revenue recognized from the sale of capacity was $32.9 million for the nine
months ended September 30, 2000 compared to $125.0 million during the nine
months ended September 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 nine months ended September 30, 2000 reflects this deferral of
revenues. The change in the accounting treatment has no impact on cash flows.
As of September 30, 2000, the Company had entered into sales transactions with
in excess of 100 international telecommunication carriers compared to 90 as of
September 30, 1999.
Revenue recognized from operations and maintenance was $29.9 million for the
nine months ended September 30, 2000 compared to $21.6 million for the nine
months ended September 30, 1999, reflecting the increased cumulative sales on
the FLAG Europe-Asia cable system.
OPERATING EXPENSES
For the nine months ended September 30, 2000, the Company recorded $57.9 million
in respect of depreciation compared to $57.2 million for depreciation and cost
of capacity sold recorded in the nine months ended September 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, rather than being written off as cost of sales.
During the nine months ended September 30, 2000 the Company incurred $24.6
million in operations and maintenance costs compared to $21.3 million for the
nine months ended September 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 nine months ended September 30, 2000, $10.0 million in sales and
marketing costs were incurred compared to $8.3 million incurred during the nine
months ended September 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 nine months ended September 30,
2000 over the nine months ended September 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.
10
<PAGE>
During the nine months ended September 30, 2000, $23.3 million of general and
administrative expenses were incurred compared to $14.2 million during the nine
months ended September 30, 1999. Increases are primarily due to non-cash stock
compensation costs incurred plus additional staff and office related costs.
Costs for the nine months ended September 30, 2000 include charges for non-cash
stock compensation expense of $5.1 million 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 $41.0 million for the nine months
ended September 30, 1999 to $38.4 million for the nine months ended September
30, 2000. The decrease in interest expense of $2.6 million is attributable to a
reduction in the long term debt balance.
Interest income of $5.9 million was earned during the nine months ended
September 30, 2000 compared to $6.7 million earned during the nine months ended
September 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 nine months ended September
30, 2000 compared to $1.0 million for the nine months ended September 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) /INCOME AND (LOSS) /INCOME PER COMMON SHARE
For the nine months ended September 30, 2000 the Company recorded a net loss of
$(85.3) million compared to a net income of $10.4 million for the nine months
ended September 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 $(0.13) for the nine months ended September 30, 2000
compared to an income per common share of $0.02 for the nine months ended
September 30, 1999.
11
<PAGE>
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 ($125 million of which
remained outstanding at September 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
current interest rate is 200 basis points over LIBOR. 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 totaling
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. In August 2000 we entered into an interest rate collar
transaction for an initial notional amount of $60 million, reducing in
increments to $20 million up to April 2002. The transaction terminates on
April 30, 2002. The collar is comprised of a LIBOR cap at 8% and a floor of
5.85%. 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 September 30, 2000 and December 31, 1999, the Company had working capital
deficits of $29.9 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 nine months ended September 30, 2000 was $71.6 million and $(7.7)
million respectively. As of September 30, 2000, cash on deposit with the
collateral trustee or in escrow had increased to $156.3 million from $135.3
million at December 31, 1999.
Total cash provided by operations and used in investing activities during the
nine months ended September 30, 1999 was $35.0 million and $(98.5) 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
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system recorded in fixed assets totaling $1016.8 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 $0.9 million.
IMPACT OF THE EURO
On January 1, 1999, eleven of the 15 member countries of the European Union,
including France, Germany, Ireland, Italy and Spain, where the Group has
operations, established fixed conversion rates between their existing
sovereign currencies and a new currency called the Euro. These countries
adopted the Euro as their common legal currency on that date. The Euro trades
on currency exchanges and is available for non-cash transactions. Hereafter
and until January 1, 2002, the existing sovereign currencies will remain
legal tender in these countries. On January 1, 2002, the Euro is scheduled to
replace the sovereign legal currencies of these countries.
The Group has operations within the European Union including many of the
countries that have adopted the Euro. The Group continues to evaluate the impact
the Euro will have on its continuing business operations within the overall
scope of managing currency risk. However, the Group does not expect the
introduction of the Euro to have a material effect on the Group's financial or
competitive position as a result of price transparency within the European
Union.
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 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 nine months ended
September 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 Quarterly Report.
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PART II
ITEM 1: LEGAL PROCEEDINGS
The Company is involved in litigation from time to time in the ordinary course
of business. In management's opinion, the litigation in which the Company is
involved currently, 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 November 2000.
FLAG LIMITED
By: /s/ Mark Robinson
-------------------------------------
Mark Robinson
CHIEF FINANCIAL OFFICER
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