<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE OF 1934 For the transition period from ________to ________
Commission File No.: 000-292307
FLAG TELECOM HOLDINGS 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 (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
133,940,723 common shares were outstanding as of May 8, 2000
The Exhibit Index, filed as a part of this report, appears on page 17.
================================================================================
<PAGE>
FLAG TELECOM HOLDINGS LIMITED
FORM 10-Q
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, the period from incorporation
to March 31, 1999 and the period from January 1, 1999 to
February 26, 1999 (FLAG Limited).............................. 2
1.C Consolidated Statement of Comprehensive Income for the three
months ended March 31, 2000, the period from incorporation to
March 31, 1999 and the period from January 1, 1999 to
February 26, 1999 (FLAG Limited).............................. 3
1.D Consolidated Statements of Cash Flows for the three
months ended March 31, 2000, the period from incorporation to
March 31, 1999 and the period from January 1, 1999 to
February 26, 1999 (FLAG Limited).............................. 4
1.E Notes to Consolidated Financial Statements.................... 5
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................... 7
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......... 14
PART II ADDITIONAL INFORMATION............................................. 16
ITEM 1: LEGAL PROCEEDINGS.................................................. 16
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS.......................... 16
ITEM 3: DEFAULTS UPON SENIOR SECURITIES.................................... 16
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 17
ITEM 5: OTHER INFORMATION.................................................. 17
ITEM 6: EXHIBITS AND REPORTS FILED ON FORM 8-K............................. 17
SIGNATURES.................................................................. 18
<PAGE>
PART I
ITEM 1.A
FLAG TELECOM HOLDINGS 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 $ 1,086,907 $ 3,191
Accounts receivable, net of allowance for
doubtful accounts of $5,831 (1999 - $6,827) 85,873 90,065
Due from affiliate 2,000 2,000
Prepaid expenses and other assets 10,987 3,460
----------- -----------
1,185,767 98,716
Funds held by collateral trustee or in
escrow 236,944 134,066
Capacity available for sale -- 774,366
Capitalized financing costs, net of accumulated
amortization of $3,639 (1999 - $3,142) 13,718 11,678
Investment in FLAG Atlantic Limited 8,394 7,162
Fixed assets, net 1,054,765 299,743
----------- -----------
$ 2,499,588 $ 1,325,731
=========== ===========
LIABILITIES:
Current liabilities:
Accrued construction costs $ 50,067 $ 52,411
Accrued liabilities 19,865 39,152
Accounts payable 14,826 7,807
Income taxes payable 4,512 4,531
Deferred revenue 53,656 48,501
----------- -----------
142,926 152,402
Senior notes, net of unamortized
discount of $16,303 (1999 - 5,173) 1,002,116 425,270
Other Long-term debt 150,000 190,000
Deferred revenue and other 141,202 100,724
Deferred taxes 4,004 3,973
----------- -----------
1,440,248 872,369
MINORITY INTEREST -- 154,817
SHAREHOLDERS' EQUITY:
Common shares, $.0006 par value 80 42
Additional paid-in capital 1,105,619 313,848
Foreign currency translation
adjustment 213 141
Accumulated deficit (46,572) (15,486)
----------- -----------
1,059,340 298,545
----------- -----------
$ 2,499,588 $ 1,325,731
=========== ===========
</TABLE>
1
<PAGE>
PART I
ITEM 1.B
FLAG TELECOM HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000,
THE PERIOD FROM INCORPORATION TO MARCH 31, 1999 AND THE
PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 (FLAG LIMITED)
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
| FLAG Limited
Period from | Period from
incorporation to | January 1, 1999
March 31, March 31, | to February 26,
2000 1999 | 1999
(UNAUDITED) (UNAUDITED) | (AUDITED)
------------- ------------- | -------------
|
<S> <C> <C> | <C>
REVENUE $ 19,186 $ 4,569 | $ 30,012
|
SALES AND OTHER OPERATING COSTS: |
Cost of capacity sold -- 463 | 8,294
Network expenses 1,278 -- | --
Operations and maintenance |
(including non-cash compensation |
expense of $831, nil, nil) 8,066 2,154 | 5,114
|
Sales and marketing(including |
non-cash compensation expense of |
$481, nil, nil) 3,809 1,273 | 637
|
General and administrative (including |
non-cash compensation expense of |
$1,910, nil, nil) 8,558 1,566 | 2,870
|
Depreciation and amortization 20,108 99 | 233
------------- ------------- | -------------
|
41,819 5,555 | 17,148
|
OPERATING (LOSS) / INCOME (22,633) (986) | 12,864
|
INCOME FROM AFFILIATES 606 -- | --
|
INTEREST EXPENSE (15,689) (4,746) | (9,758)
|
INTEREST INCOME 7,066 823 | 1,825
------------- ------------- | -------------
|
(LOSS) / INCOME BEFORE MINORITY INTEREST |
AND INCOME TAXES (30,650) (4,909) | 4,931
|
MINORITY INTEREST -- 1,715 | --
------------- ------------- | -------------
(LOSS) / INCOME BEFORE INCOME TAXES (30,650) (3,194) | 4,931
|
PROVISION FOR INCOME TAXES (433) (86) | (171)
------------- ------------- | -------------
|
NET (LOSS) / INCOME $ (31,083) $ (3,280) | $ 4,760
------------- ------------- | -------------
|
|
Basic loss per common share $ (0.26) $ (0.00) | $ (0.01)
Diluted loss per common share $ (0.25) $ (0.00) | $ (0.01)
|
Weighted average common shares outstanding 121,330,891 69,709,935 | $ 635,796,338
</TABLE>
2
<PAGE>
PART I
ITEM 1.C
FLAG TELECOM HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000,
THE PERIOD FROM INCORPORATION TO MARCH 31, 1999 AND THE
PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 (FLAG LIMITED)
(EXPRESSED IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
| FLAG Limited
Period from | Period from
incorporation to | January 1, 1999
March 31, March 31, | to February 26,
2000 1999 | 1999
(UNAUDITED) (UNAUDITED) | (AUDITED)
------------ ----------------- | ---------------
<S> <C> <C> | <C>
NET (LOSS) / INCOME $(31,083) $(3,280) | $4,760
|
Foreign currency translation |
adjustment 72 (18) | 178
----------- ----------- | -----------
|
COMPREHENSIVE (LOSS) / INCOME $(31,011) $(3,298) | $4,938
----------- ----------- | -----------
</TABLE>
3
<PAGE>
PART I
ITEM 1.D
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2000,
THE PERIOD FROM INCORPORATION TO MARCH 31, 1999 AND THE
PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 (FLAG LIMITED)
(EXPRESSED IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
| FLAG Limited
Period from | Period from
incorporation | January 1, 1999
March 31, to March 31, | to February 26,
2000 1999 | 1999
(UNAUDITED) (UNAUDITED) | (AUDITED)
----------- --------- | -------------------
<S> <C> <C> | <C>
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net (loss) / income applicable to common |
shareholders $ (31,083) (4,995) | 4,760
----------- --------- | ---------
Adjustments to reconcile net income |
to net cash used in operating activities: |
|
Amortization of financing costs 497 137 | 274
|
Provision for doubtful accounts (996) -- | --
|
Senior debt discount 197 50 | 98
|
Non-cash stock compensation 3,223 -- | --
Depreciation and amortization 20,108 99 | 233
Deferred taxes 42 -- | --
Minority interest -- (1,715) | --
----------- --------- | ---------
Add (deduct) net changes in assets and liabilities: |
|
Accounts receivable 5,182 26,788 | 1,710
|
Due from affiliate -- -- | --
|
Prepaid expenses and other assets (7,613) (286) | (645)
|
Capacity available for sale -- 617 | 8,664
|
Accounts payable and accrued liabilities (12,034) 4,541 | (16,541)
|
Income taxes payable (13) 76 | 168
|
Due to affiliate -- (52) | (668)
|
Deferred revenue and other 45,633 (1,159) | (21,157)
----------- --------- | ---------
Net cash provided by (used in) operating |
activities 23,143 26,101 | (23,104)
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
Financing costs incurred (2,537) -- | --
|
Net proceeds from issuance of 11 5/8% senior notes 576,649 -- | --
|
Repayment of long-term debt (40,000) (15,000) | (15,000)
|
Capital contributions - Initial Public Offering |
(net of direct offering expenses of $3.5 million) 633,769 -- | --
|
Capital contributions - BANS -- -- | --
|
(Increase) / decrease in funds held by collateral |
trustee or in escrow (102,878) 44,951 | 36,230
----------- --------- | ----------
Net cash provided by financing activities 1,065,003 29,951 | 21,230
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
Cash paid for construction (2,344) (55,242) | 788
|
Investment in FLAG Atlantic (1,232) -- | --
|
Investment in Fixed Assets and Networks (854) (151) | (200)
----------- --------- | ---------
Net cash used in investing activities (4,431) (55,393) | 588
|
NET INCREASE (DECREASE) IN CASH 1,083,715 (1,341) | (1,286)
|
Effect of foreign currency movements 1 (206) | 178
|
CASH, beginning of period 3,191 -- | 3,024
----------- --------- | ---------
CASH, end of period $ 1,086,907 $ (1,547) | $ 1,916
=========== ========= | =========
SUPPLEMENTAL INFORMATION ON NON-CASH |
INVESTING ACTIVITIES: |
|
Costs (reimbursed) incurred for |
construction in progress $ 2,344 $ 55,242 | $ (788)
=========== ========= | =========
|
SUPPLEMENTAL INFORMATION DISCLOSURE |
OF CASH FLOW INFORMATION: |
|
Interest paid $ 23,863 $ 155 | $22,688
=========== ========= | =======
Taxes paid $ 357 $ -- | $ --
=========== ========= | =======
Interest capitalised $ -- $ -- | $ --
=========== ========= | =======
</TABLE>
4
<PAGE>
PART I
ITEM 1.E
FLAG TELECOM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 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 months ended
March 31, 2000, the period of incorporation to March 31, 1999 and the
period from January 1, 1999 to February 26, 1999 (FLAG Limited), the
balance sheets as of March 31, 2000 and December 31, 1999, and the cash
flows for the three months ended March 31, 2000, the period of
incorporation to March 31, 1999 and the period from January 1, 1999 to
February 26, 1999 (FLAG Limited). Our interim consolidated financial
statements should be read in conjunction with our 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.
FLAG Telecom Holdings Limited ("FLAG Telecom") was incorporated on
February 3, 1999 to serve as the holding company for the FLAG Telecom
group of companies. On February 26, 1999 FLAG Telecom acquired
approximately 65.79% of FLAG Limited by exchanging 69,709,935 shares
of FLAG Limited common stock for the same number of shares of FLAG
Telecom common stock. The minority shareholder of FLAG Limited
exchanged its remaining holding in FLAG Limited for shares in FLAG
Telecom on January 4, 2000 such that on that date FLAG Limited became
a wholly owned subsidiary of FLAG Telecom. This acquisition has been
accounted for as a recapitalisation such that no goodwill arises and
assets and liabilities are reflected at their carryover basis.
The results of the operations of FLAG Limited have been included in
the consolidated results of FLAG Telecom's operations since the date
of acquisition.
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 FASB 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 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 Telecom Network has therefore been reclassified 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.
4. EQUITY ISSUE
Direct third party costs incurred as a result of the issuance of
equity are offset against the proceeds from the issue and debited
against additional paid in capital.
5. DEBT ISSUE
New debt issues are recorded net of any discount on the offering.
Direct third party costs incurred during an issuance are capitalised
and classified as non current assets. Capitalized costs and
discounts are amortized as an adjustment to interest expense over
the lives of the relevant instruments.
6. 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. Third party costs are expensed as incurred.
7. 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.
8. 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.
9. SEGMENTAL INFORMATION
The Company has prepared segmental information using accounting
policies that are consistent across segments.
As a result of extending the range of products and services offered
by FLAG Telecom, management now reviews financial results of the
Group on the basis of the following two business segments: Capacity
Sales and Operations and Network Services. The Network Services
business now makes a material and growing contribution to the
Company's revenue. The segments include revenues from the various
types of products and services as noted:
Capacity Sales and Traditional carrier services, involving
Operations dispositions of capacity by sale, right
of use or lease.
5
<PAGE>
Operations and maintenance
revenues
Network Services Managed bandwidth services
(previously "wholesale services")
Other value added and related
services
Details of the financial results of the two business segments for
the three months ended March 31, 2000 are summarized below
reconciled to the totals for the group as a whole. Substantially all
the revenues and operating results in earlier periods arose from
Capacity Sales and Operations.
(Numbers in 000's)
<TABLE>
<CAPTION>
Capacity Sales Network TOTAL
and Operations Services
<S> <C> <C> <C>
Revenues
- Capacity Sale 7,815 --
- Operations & Maintenance 9,352 --
- Network Services -- 2,019
------ ------
17,167 2,019 19,186
Operating Loss (21,287) (1,347) (22,633)
Adjusted EBITDA(1) 47,397 (1,066) 46,331
</TABLE>
----------
(1) Adjusted EBITDA is operating income/(loss) plus the following
non-cash items: depreciation/cost of capacity sold, non-cash
stock compensation and changes in deferred revenues.
SEGMENTAL ASSETS
<TABLE>
<CAPTION>
(Numbers in 000's)
Capacity Sales and
TOTAL Operations Network Services
----- ------------------ ----------------
<S> <C> <C> <C>
Fixed Assets 1,054,765 1,053,908 857
</TABLE>
All fixed assets in earlier periods were held in Capacity Sales and
Operations. All other assets/liabilities are managed on a unified
basis and, therefore, no segmental analysis is prepared.
10. OTHER INFORMATION
On February 16, 2000, FLAG Telecom completed an initial public offering
of its common shares. Approximately $634.6 million net proceeds was
received from that offering. On March 17, 2000, FLAG Telecom completed
a private placement of 300 million dollar denominated and 300 million
Euro denominated 11 5/8% Senior Notes due 2010. Approximately
$576 million net proceeds was received from that offering.
On February 16, 2000, FLAG Limited amended its existing credit
facilities to consist of a $150 million six-year term loan facility
(all of which is outstanding) and a $10 million revolving credit
facility (none of which is outstanding).
FLAG Telecom recently announced plans to begin the construction of a
new trans-Pacific cable project, FLAG Pacific-1, a system designed to
link the cities of Seattle, Vancouver, San Francisco, Los Angeles
and Tokyo.
11. 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.
6
<PAGE>
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
ADJUSTED CONSOLIDATED RESULTS
The table below shows the significant income statement amounts, in thousands,
for the three months ended March 31, 1999, being a combination of the results
of FLAG Limited for the period from January 1, 1999 to February 26, 1999 and
the results of FLAG Telecom for the period from incorporation to March 31,
1999.
<TABLE>
<CAPTION>
Adjusted
three months ended
March 31, 1999
(Expressed in
thousands of dollars)
------------------
<S> <C>
REVENUE $ 34,581
SALES AND OTHER OPERATING COSTS:
Cost of capacity sold 8,757
Operations and maintenance 7,268
Sales and marketing 1,910
General and administrative 4,436
Depreciation and amortization 332
INTEREST EXPENSE (14,504)
INTEREST INCOME 2,648
-------------
INCOME BEFORE MINORITY INTEREST
AND INCOME TAXES 22
PROVISION FOR INCOME TAXES (257)
</TABLE>
7
<PAGE>
Statement of Cash Flow Data:
<TABLE>
<CAPTION>
Adjusted
three months as
of March 31,
1999
(Expressed in
thousands of dollars)
----------
<S> <C>
Cash flow from operating activities 997
Cash flow from financing activities 51,181
Cash flow from investing activities (54,805)
</TABLE>
REVENUES
Total revenue recognized by the Company during the quarter ended March 31, 2000,
was $19.2 million compared to $34.6 million in total revenue for the quarter
ended March 31, 1999.
Revenue recognized from the sale of capacity was $7.8 million for the quarter
ended March 31, 2000 compared to $27.9 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. Revenues from these capacity sales are deferred and
amortized over the term of the contracts. The change to 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 100 international telecommunication carriers, compared to 82 as of
March 31, 1999.
Revenue recognized from operations and maintenance was $9.4 million for the
quarter ended March 31, 2000 compared to $6.7 million for the quarter ended
March 31, 1999, reflecting the increased cumulative sales on the FLAG Telecom
Network.
Revenue recognized from Network Services was $2.0 million for the quarter ended
March 31, 2000. No Network Services revenue was generated for the quarter ended
March 31, 1999.
OPERATING EXPENSES
For the quarter ended March 31, 2000, the Company recorded $20.1 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. The adoption of
FASB Interpretation No. 43 discussed above has meant that the remaining
capacity available for sale has been 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 $1.3 million in
network services costs. No network services costs were incurred for the quarter
ended March 31, 1999.
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, $3.8 million in sales and marketing
8
<PAGE>
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 Group. 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.
During the quarter ended March, 31, 2000, $8.6 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 increased from $14.5 million for the quarter
ended March 31, 1999 to $15.7 million for the quarter ended March 31, 2000. The
increase in interest expense of $1.2 million is attributable to additional
borrowings obtained. See also "Liquidity and Capital Resources."
Interest income of $7.1 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 and cash held
by the Collateral Trustee or in escrow arising from ongoing business
operations. These amounts have increased significantly due to proceeds
received from the initial public offering of our shares and further
borrowings, which are currently held on deposit.
PROVISION FOR TAXES
The provision for taxes was $(0.4) million for the quarter ended March 31,
2000 compared to $(0.3) million for the quarter ended March 31, 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 Telecom Network where the Group 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 Group of companies incorporated in Bermuda
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
$(31.1) million compared to net loss of $(0.2) million (including minority
interest) 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 $(0.26) for the quarter ended March 31, 2000
compared to nil (including minority interest) for the quarter ended March 31,
1999.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations to date through a combination of equity
contributions, bank debt, the proceeds of debt offerings, and the proceeds of
an initial public offering of our common shares.
On February 16, 2000 we completed an initial public offering (IPO) of our
common shares. We received $634.6 million in net proceeds from that offering.
On March 17, 2000 we completed the issue of 11 5/8% Senior Notes in the US
and Europe, raising net proceeds of $576 million.
On February 16, 2000, FLAG Limited amended its existing credit facilities to
consist of a $150 million six-year term loan facility (all of which is
outstanding) and a $10 million revolving credit facility (none of which is
outstanding). Dresdner Kleinwort Benson and Barclays Capital acted as joint lead
arrangers. These facilities bear interest at a rate of 225 basis points over
LIBOR for the first six months and thereafter at a rate of between 150 and 250
basis points over LIBOR, depending on the credit rating of the 8 1/4% Senior
Notes of FLAG Limited. The facilities are secured by a pledge by us of all of
the capital stock of FLAG Limited and by assignment of FLAG Limited's contracts
and a security interest in its bank accounts and intangible property. In
connection with this amendment, FLAG Limited paid fees and expenses to the joint
lead arrangers totaling approximately $3.5 million.
At the end of March 1998, we entered into two interest rate swap agreements to
manage our exposure to interest rate fluctuations on FLAG Limited's credit
facilities. Under the swap agreements, we pay a fixed rate of 5.6% on a notional
amount of $60 million and a fixed rate of 5.79% on a notional amount of $100
million and the swap counterparty pays the floating rate based on LIBOR. One
swap agreement terminated in January 2000 and the other swap agreement
terminates in July 2000, unless extended for an additional six months at the
option of the swap counterparty. Under the bank loan facility as now in effect,
we are obligated to hedge interest rate risk to the extent of 50% of the
outstanding principal amount of the loans for three years. We recognize the net
cash amount received or paid on interest rate hedging instruments as an
adjustment to interest cost on the related debt.
We are developing the FLAG Atlantic-1 cable system under a 50/50 joint
venture between GTS TransAtlantic and FLAG Atlantic Holdings. FLAG Atlantic
Limited has a $575 million construction/term loan facility and a $25 million
revolving credit facility. These facilities have a term of 7.5 years and bear
interest at LIBOR plus 125 basis points for that portion of the loans (not to
exceed 50% of the outstanding loans) which are backed by investment grade
receivables and LIBOR plus 300 basis points for the balance of the loans.
Commitment fees accrue on the undrawn balance of the loans at between 37.5
basis points and 75 basis points.
FLAG Atlantic Limited's bank facility is secured by an assignment of all of
FLAG Atlantic Limited's assets, a pledge of all of the stock in FLAG Atlantic
Limited and a commitment by each of its shareholders to contribute $100
million in equity.
10
<PAGE>
During the quarter, we announced plans to begin construction of FLAG
Pacific-1, a system designed to link the cities of Seattle, Vancouver, San
Francisco, Los Angeles and Tokyo. We expect to fund the costs required to
complete the project from some of the proceeds from our IPO and the proceeds
from our 11 5/8% Senior Notes offering and other debt financings and
pre-sales.
As of March 31, 2000 and December 31, 1999, the Company had a working capital
surplus of $1,042.9 million and a deficit of $53.7 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 $23.1 million and $(4.4) million
respectively. As of March 31, 2000, cash on deposit, or with the collateral
trustee or in escrow had increased to $1,323.8 million from $137.3 million at
December 31, 1999, primarily as a result of the additional funds obtained
from the IPO of $634.8 million and from the 11 5/8% Senior Notes offering of
$576.6 million.
Total cash provided by operating activities and used in investing activities
during the quarter ended March 31, 1999 was $2.1 million and $54.8 million
respectively.
ASSETS
Our major asset is the remaining capital cost of the FLAG Telecom Network
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 Telecom Network 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 to be under agreements that will be
accounted for as operating leases or service contracts and will require us to
recognize revenues over the relevant terms of the agreements. We have
therefore reclassified the remaining cost of the FLAG Telecom Network 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.
Our other fixed assets consist primarily of office furniture, leasehold
improvements, computer equipment and motor vehicles totalling $6.0 million.
11
<PAGE>
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.
12
<PAGE>
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.
13
<PAGE>
PART I
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currency Risk.
We do not believe that we are exposed to significant risk from movements in
foreign currency exchange rates. All revenues from the disposition of capacity
and billings of standby maintenance and restoration services are payable in U.S.
dollars. All contracts for the provision by third parties of restoration are
invoiced to us in U.S. dollars. Some vendor contracts for the provision to the
FLAG Europe-Asia cable system of operations and maintenance services and local
operating expenses of our subsidiary companies are payable in currencies other
than U.S. dollars. Management believes that these exposures are not material to
our financial position. Whenever deemed appropriate, we may hedge our exposure
to foreign currency movements.
Interest Rate Risk.
We are exposed to interest rate risk in our financing instruments. Our
long-term financing is provided by fixed rate senior notes and floating rate
bank debt. We use derivative financial instruments for the purpose of
reducing our exposure to fluctuations in interest rates. We do not utilize
derivative financial instruments for trading or other speculative purposes.
The counterparties to these instruments are major financial institutions with
high credit quality. We are exposed to credit loss in the event of
nonperformance by these counterparties.
14
<PAGE>
FLAG TELECOM HOLDINGS LIMITED
LONG-TERM DEBT AS OF MARCH 31, 2000
<TABLE>
<CAPTION>
CURRENCY AND
PRINCIPAL CURRENCY AND
PRINCIPAL AMOUNT FAIR VALUE FLAG OPTION
TYPE OF INSTRUMENT PAYMENTS DUE MATURITY DATE INTEREST RATE ($ MILLION) ($ MILLION) TO REDEEM
- ------------------ ------------ ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
11 5/8% Senior Notes Semi-annually March 2010 Fixed 11 5/8% 300.0 283.5 Any time after
March 2005
11 5/8% Senior Notes Semi-annually March 2010 Fixed 11 5/8% 288.4 277.1 Any time after
March 2005
</TABLE>
FLAG LIMITED
LONG-TERM DEBT AS OF MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
PRINCIPAL AMOUNT FAIR VALUE FLAG OPTION
TYPE OF INSTRUMENT PAYMENTS DUE MATURITY DATE INTEREST RATE ($, MILLION) ($, MILLION) TO REDEEM
- ------------------ ------------ ------------- ------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
8 1/4% Senior Notes Semi-annually January 2008 Fixed 8 1/4% 430.0 380.6 Any time after
January 2003
Floating LIBOR
FLAG Limited credit Quarterly January 2006 + 150 to 250 150.0 150.0 At any time
facility basis points
</TABLE>
The three-month LIBOR rate at March 31, 2000 was 6.29%
INTEREST RATE SWAPS AS OF MARCH 31, 2000
<TABLE>
<CAPTION>
NOTIONAL COUNTERPARTY'S
TYPE OF INSTRUMENT PAYMENTS DUE MATURITY DATE RATE PAYABLE RATE AMOUNT FAIR VALUE OPTION TO
------------------ ------------ ------------- ------------ RECEIVABLE ($, MILLION) ($, MILLION) EXTEND UNTIL
---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Pay fixed, receive Quarterly July 2000 5.79% Three-month 100.0 0.2 January 2001
floating LIBOR
</TABLE>
The three-month LIBOR rate at March 31, 2000 was 6.29%
15
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
We are involved in litigation from time to time in the ordinary course of
business. In management's opinion, the litigation in which we are currently
involved, individually and in the aggregate, is not material to us.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable
(b) Not applicable
(c) We were formed on February 26, 1999 in connection with a reorganization
of the FLAG Telecom group of companies. As a result of this reorganization, we
became the parent holding company for the FLAG Telecom group of companies and
the owner of a 66% interest in FLAG Limited. As part of the reorganization,
pursuant to share transfer forms and subscription forms which each of the
shareholders of FLAG Limited executed, the shareholders of FLAG Limited, other
than Bell Atlantic Network Systems Company, exchanged all of the common shares
of FLAG Limited owned by them in consideration for a corresponding number of our
common shares. Bell Atlantic transferred only 21,996,930 shares of FLAG Limited
in connection with the February 1999 exchange.
On January 4, 2000 we issued 217,536,730 common shares to Bell Atlantic in
connection with its exchange of the shares held by Bell Atlantic in FLAG Limited
for our common shares. The share numbers set forth in the preceding discussion
do not reflect the reverse stock split of 6:1 we effected in connection with our
initial public offering.
(d) The effective date of our registration statement (Registration No.
333-94899) filed on Form F-1 relating to our initial public offering of common
shares was February 11, 2000. In our initial public offering, we sold 27,963,980
common shares at a price of $24.00 per share and selling shareholders sold
8,436,320 common shares at a price of $24.00 per share. Our initial public
offering was managed on behalf of the underwriters by Salomon Smith Barney,
Deutsche Banc Alex. Brown, Goldman Sachs & Co., Morgan Stanley Dean Witter &
Warburg Dillon Read LLC. The offering commenced on February 11, 2000 and closed
on February 16, 2000. Proceeds to us from our initial public offering, after
deduction of the underwriting discounts and commissions of approximately $33.6
million and offering expenses of approximately $3.0 million, totaled
approximately $634.6 million. None of the expenses incurred in our initial
public offering were direct or indirect payments to our directors, officers or
their associates, to persons owning 10% or more of any class of our equity
securities or to our affiliates. Of the $634.6 million raised by us,
approximately $100.0 million has been used to fund our equity contribution to
FLAG Atlantic Limited, $25.0 million has been used to repay long term
indebtedness, $1.0 million has been used for working capital purposes and the
balance of the offering proceeds to us remains available to use to fund
additional expansions of the FLAG Telecom network and to develop additional
wholesale and bundled product and service offerings and for general corporate
purposes. The occurrence of unforseen events or changed business conditions
could cause us to use the proceeds of our initial public offering in a manner
other than as described above.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the first quarter of 2000, a special meeting of our shareholders was
held by telephonic conference call on January 13, 2000 and an action by written
consent in lieu of a meeting was taken by our shareholders on February 9, 2000.
At the meeting held on January 13, 2000, our shareholders were asked to approve
certain matters relating to (1) our initial public offering, (2) the adoption,
following completion of our initial public offering, of amended by-laws, (3) an
increase in the number of common shares with respect to which options may be
granted under our long-term incentive plan, (4) the appointment of Michael
Fitzpatrick to our Board of Directors, (5) the size and composition of our Board
of Directors following our initial public offering, (6) approval of a reverse
6-for-1 stock split and an increase in our authorized number of common shares by
110,166,667, (7) approval of the filing of a registration on Form S-8 relating
to shares subject to options issuable under our stock option plan, (8) the
listing of our common shares on the Nasdaq National Market and the London Stock
Exchange, (9) the appointment of Messrs. McCormack, Kawar and Best to the Board
of Directors of our subsidiary, FLAG Limited, and (10) the authorization of an
amendment to FLAG Limited's credit facility. The matters were approved
unanimously by each of our then ten shareholders. The action by written
consent was executed by each of our shareholders on February 9, 2000. Following
the completion of our initial public offering, our Board of Directors consisted
of the following ten members: Messrs. Bande, McCormack, Fitzpatrick, McQuaid,
Omar, Petri, Seskin, Silvestri, Solomon and Vimolvanich.
ITEM 5. OTHER INFORMATION
During the quarter, we announced plans to begin construction of FLAG
Pacific-1, a system designed to link the cities of Seattle, Vancouver, San
Francisco, Los Angeles and Tokyo. We recently entered into a supply agreement
for the subsea portion of the proposed cable project and announced the lead
banks providing underwritten loan financing to help fund the construction of
the project. We cannot assure you, however, that we will successsfully
complete the project.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are filed as part of this Report on Form 10-Q as
required by Regulation S-K.
Exhibit
Number Description
- ------- -----------
4.1 Form of Registration Rights Agreement (Incorporated by Reference to the
Registrant's Registration Statement on Form F-1 (Registration No.
333-94899))
4.2 Purchase Agreement dated March 14, 2000 among FLAG Telecom Holdings
Limited, as Issuer, and Salomon Smith Barney Inc., Morgan Stanley & Co.
International Limited, Deutsche Bank Securitites Inc. and Bear Stearns
& Co. Inc., as Initial Purchasers (Incorporated by Reference to the
Registrant's Current Report on Form 8-K dated March 23, 2000))
4.3 Indenture dated March 17, 2000 between FLAG Telecom Holdings Limited
and The Bank of New York, as Trustee, relating to 11-5/8% Senior Euro
Notes Due 2010 (Incorporated by Reference to the Registrant's Current
Report on Form 8-K dated March 23, 2000)
4.4 Indenture dated March 17, 2000 between FLAG Telecom Holdings Limited
and The Bank of New York, as Trustee, relating to 11-5/8% Senior
Dollar Notes Due 2010 (Incorporated by Reference to the Registrant's
Current Report on Form 8-K dated March 23, 2000)
4.5 Registration Agreement dated March 17, 2000 among FLAG Telecom Holdings
Limited, as Issuer, and Salomon Smith Barney Inc., Morgan Stanley & Co.
International Limited, Deutsche Bank Securities Inc. and Bear Stearns &
Co. Inc., as Initial Purchasers (Euro Notes) (Incorporated by Reference
to the Registrant's Current Report on Form 8-K dated March 23, 2000)
4.6 Registration Agreement dated March 17, 2000 among FLAG Telecom Holdings
Limited, as Issuer, and Salomon Smith Barney Inc., Morgan Stanley & Co.
International Limited, Deutsche Bank Securities Inc. and Bear Stearns &
Co. Inc., as Initial Purchasers (Dollar Notes) (Incorporated by
Reference to the Registrant's Current Report on Form 8-K dated March
23, 2000)
10.1 Primary Supplier Agreement dated January 18, 2000 between Bell Atlantic
Global Systems Company and the Company (Incorporated by Reference to
the Registrant's Registration Statement on Form F-1 (Registration No.
333-94899))
(b) REPORTS ON FORM 8-K. We filed the following Reports on Form 8-K during
the quarter to which this Quarterly Report relates.
1. Form 8-K dated March 6, 2000
2. Form 8-K dated March 23, 2000
17
<PAGE>
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 Telecom Holdings Limited
By: /s/ Edward McCormack
-----------------------------
Edward McCormack
CHIEF OPERATING OFFICER AND
CHIEF FINANCIAL OFFICER
By: /s/ Stuart Rubin
-----------------------------
Stuart Rubin
GENERAL COUNSEL AND
ASSISTANT SECRETARY
18
