\
<PAGE>
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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
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No.: 0-29207
----------
For the quarterly period ended September 30, 2000
FLAG TELECOM HOLDINGS LIMITED
(Exact Name of Registrant
as Specified in its Charter)
BERMUDA
(State or Other Jurisdiction of Incorporation or Organisation)
NOT APPLICABLE
(IRS Employer Identification No.)
CEDAR HOUSE
41 CEDAR AVENUE
HAMILTON HM12, BERMUDA
(Address of principal executive offices)
[++1-441-296-0909]
(Registrant's Telephone Number, Including Area Code)
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 [ ]
134,015,170 common shares were outstanding as of October 31, 2000.
The Exhibit Index, filed as a part of this report, appears on page 24.
================================================================================
<PAGE>
FLAG TELECOM HOLDINGS LIMITED
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
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, the three months
ended September 30, 1999, the period from incorporation to
September 30, 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 and nine months ended September 30, 2000, the three
months ended September 30, 1999, the period from
incorporation to September 30, 1999 and the period from
January 1, 1999 to February 26, 1999 (FLAG Limited).......... 3
1.D Consolidated Statements of Cash Flows for the nine months
ended June 30, 2000, the period from incorporation to
September 30, 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........................................ 10
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 21
PART II OTHER INFORMATION................................................ 23
ITEM 1: LEGAL PROCEEDINGS................................................ 23
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS........................ 23
ITEM 3: DEFAULTS UPON SENIOR SECURITIES.................................. 23
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 23
ITEM 5: OTHER INFORMATION................................................ 23
ITEM 6: EXHIBITS AND REPORTS FILED ON FORM 8-K........................... 24
SIGNATURES ................................................................. 25
</TABLE>
<PAGE>
PART I
Item 1.A
FLAG TELECOM HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
(UNAUDITED) (AUDITED)
--------------------- ------------------
ASSETS:
Current assets:
<S> <C> <C>
Cash .......................................................................... $ 1,089,320 $ 3,191
Accounts receivable, net of allowance for doubtful accounts
Of $5,933 (1999 - $6,827) ................................................ 85,045 90,065
Due from affiliate ............................................................ 2,000 2,000
Prepaid expenses and other assets ............................................. 24,652 3,460
----------- -----------
1,201,017 98,716
Funds held by collateral trustee or in escrow ..................................... 256,868 134,066
Capacity available for sale -- 774,366
Capitalized financing costs, net of accumulated
Amortization of $5,060 (1999 - $3,142) ........................................ 13,413 11,678
Investment in FLAG Atlantic Limited ............................................... 10,593 7,162
Fixed assets, net ................................................................. 1,044,738 299,743
Construction in progress .......................................................... 16,056 --
Other long term assets ............................................................ 8,000 --
----------- -----------
$ 2,550,685 $ 1,325,731
=========== ===========
LIABILITIES:
Current liabilities:
Accrued construction costs .................................................... $ 50,067 $ 52,411
Accrued liabilities ........................................................... 57,566 39,152
Accounts payable .............................................................. 30,682 7,807
Income taxes payable .......................................................... 4,251 4,531
Deferred revenue .............................................................. 53,909 48,501
----------- -----------
196,475 152,402
Senior notes, net of unamortized
discount of $15,420 (1999 - $4,730) ........................................... 978,310 425,270
Other Long-term debt .............................................................. 125,000 190,000
Deferred revenue and other ........................................................ 217,320 100,724
Deferred taxes .................................................................... 3,581 3,973
----------- -----------
1,520,686 872,369
MINORITY INTEREST
-- 154,817
SHAREHOLDERS' EQUITY:
Common shares, $.0006 par value 80 42
Additional paid-in capital ........................................................ 1,108,552 313,848
Foreign currency translation adjustment ........................................... (148) 141
Accumulated deficit ............................................................... (78,485) (15,486)
----------- -----------
1,029,999 298,545
----------- -----------
$ 2,550,685 $ 1,325,731
=========== ===========
</TABLE>
1
<PAGE>
PART I
ITEM 1.B
FLAG TELECOM HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000,
THE THREE MONTHS ENDED SEPTEMBER 30, 1999,
THE PERIOD FROM INCORPORATION TO SEPTEMBER 30, 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>
NINE MONTHS PERIOD FROM | FLAG LTD
THREE MONTHS ENDED ENDED INCORPORATION | PERIOD FROM
SEPTEMBER 30, SEPTEMBER 30, TO SEPT 30, |JAN 1 TO FEB 26,
2000 1999 2000 1999 | 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) | (AUDITED)
----------- ----------- ----------- ----------- | ---------
|
<S> <C> <C> <C> <C> | <C>
REVENUES: 27,327 53,913 71,200 117,983 | 30,012
SALES AND OTHER OPERATING COSTS: |
Cost of capacity sold -- 18,588 -- 43,799 | 8,294
Network expenses 4,686 -- 8,288 -- | --
Operations and maintenance |
(including non-cash compensation |
Expense of $339, nil, $1,506, nil, nil) 7,603 6,290 24,574 16,215 | 5,114
Sales and marketing |
(Including non-cash compensation |
expense of $228, nil, $936, nil, nil) 3,552 4,437 9,942 7,335 | 637
General and administrative |
(including non-cash compensation |
expense of $773, nil, $3,448, nil, nil) 9,877 6,689 27,564 14,742 | 2,870
|
Depreciation and amortization 19,598 4,732 59,596 5,220 | 233
----------- ---------- ----------- ---------- | -----------
|
OPERATING (LOSS) / INCOME (17,989) 13,177 (58,764) 30,672 | 12,864
|
INCOME FROM AFFILIATES 1,138 -- 3,326 -- | --
INTEREST EXPENSE (28,287) (13,536) (74,417) (31,264) | (9,758)
FX GAIN 16,502 -- 18,870 -- | --
INTEREST INCOME 21,654 2,088 48,925 4,924 | 1,825
----------- ---------- ----------- ---------- | -----------
|
(LOSS) / INCOME BEFORE MINORITY INTEREST |
AND INCOME TAXES (6,982) 1,729 (62,060) 4,332 | 4,931
|
MINORITY INTEREST -- (1,586) -- (1,919) | --
|
(LOSS) / INCOME BEFORE INCOME TAXES (6,982) 143 (62,060) 2,413 | 4,931
|
PROVISION FOR INCOME TAXES 164 618 935 1,098 | 171
----------- ---------- ----------- ---------- | -----------
|
NET (LOSS) / INCOME (7,146) (476) (62,995) 1,315 | 4,760
|
Basic and diluted (loss) / income per comon share $ (0.05) $ (0.01) $ (0.49) $ 0.02 | $ 0.01
Weighted average common shares outstanding 133,977,574 69,709,935 129,751,360 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 AND NINE MONTHS ENDED SEPTEMBER 30, 2000,
THE THREE MONTHS ENDED SEPTEMBER 30, 1999,
THE PERIOD FROM INCORPORATION TO SEPTEMBER 30, 1999 AND THE
PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26, 1999 (FLAG LIMITED)
(EXPRESSED IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS PERIOD FROM | FLAG LTD
THREE MONTHS ENDED ENDED INCORPORATION | PERIOD FROM
SEPTEMBER 30, SEPTEMBER 30, TO SEPT 30, | JAN 1 TO FEB 26
2000 1999 2000 1999 | 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) | (AUDITED)
----------- ----------- ----------- ----------- | ---------
<S> <C> <C> <C> <C> | <C>
NET (LOSS) / (7,146) (476) (62,995) 1,315 | 4,760
INCOME |
Foreign currency translation (450) 10 (289) (3) | 178
adjustment |
------ ---- ------- ----- | ---------
COMPREHENSIVE (LOSS) / (7,596) (466) (63,284) 1,312 | 4,938
INCOME ====== ==== ======= ===== | =========
</TABLE>
3
<PAGE>
PART I
ITEM 1.D
FLAG TELECOM HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000,
THE PERIOD FROM INCORPORATION TO SEPTEMBER 30, 1999 AND THE
PERIOD FROM JANUARY 1, 1999 TO FEBRUARY 26,1999 (FLAG LIMITED)
(EXPRESSED IN THOUSANDS OF DOLLARS)
FLAG LIMITED
<TABLE>
<CAPTION>
PERIOD FROM | PERIOD FROM
INCORPORATION | JAN 1 TO
SEPTEMBER 30, TO SEPT 30, | FEB 26,
2000 1999 | 1999
(UNAUDITED) (UNAUDITED) | (AUDITED)
----------- ----------- | ---------
<S> <C> <C> | <C>
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net (loss) / income applicable to common shareholders $ (62,995) $ 1,315 | $ 4,760
Adjustments to reconcile net income to net cash |
provided by / (used in) operating activities: |
Amortization of financing costs 1,918 959 | 274
Provision for doubtful accounts (894) 1,176 | --
Senior debt discount 1,081 345 | 98
Non-cash stock compensation 5,890 3,464 | --
Depreciation and amortization 59,596 5,220 | 233
Loss on disposal of fixed assets 93 -- | --
Deferred taxes (152) 304 | --
Minority interest -- 1,919 | --
Add / (deduct) net changes in assets and liabilities: |
Accounts receivable 5,869 (28,681) | 1,710
Due from affiliate -- (5,000) | --
Prepaid expenses and other assets (30,072) (1,333) | (645)
Capacity available for sale -- 49,389 | 8,664
Accounts payable and accrued liabilities 42,521 9,701 | (16,541)
Income taxes payable (274) (2,064) | 168
Due to affiliate -- (1,175) | (668)
Deferred revenue and other 122,005 26,574 | (21,157)
----------- ----------- | -----------
Net cash provided by / (used in) operating acitivities 144,586 62,113 | (23,104)
----------- ----------- | -----------
CASH FLOWS FROM FINANCING ACTIVITIES: |
Financing costs incurred (3,653) -- | --
Net proceeds from issuance of 11 5/8 % senior notes 576,649 -- |
Repayment of long-tern debt (65,000) (33,500) | (15,000)
Capital contributions -Initial Public Offering 633,769 -- | --
Capital contributions - Options exercised 266 -- | --
(Increase) / decrease in funds held by collateral trustee |
or in escrow (122,802) 74,953 | 36,230
----------- ----------- | -----------
Net cash provided by financing activities 1,019,229 41,453 | 21,230
----------- ----------- | -----------
CASH FLOWS FROM INVESTING ACTIVITIES: |
Cash paid for construction (18,400) (101,365) | 788
Investment in FLAG Atlantic (3,431) -- | --
Proceeds from disposal of assets 32 -- | --
Investment in Fixed Assets and Networks (incl L/T Asset) (30,956) (1,271) | (200)
----------- ----------- | -----------
Net cash (used in) / provided by investing |
activities (52,755) (102,636) | 588
----------- ----------- | -----------
NET INCREASE / (DECREASE) IN CASH 1,111,062 930 | (1,286)
Effect of foreign currency movements (24,933) (10) | 178
CASH, beginning of period 3,191 1,916 | 3,024
----------- ----------- | -----------
CASH, end of period $ 1,089,320 $ 2,836 | $ 1,916
=========== =========== | ===========
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING |
ACTIVITIES: |
|
Costs incurred for construction in progress $ 18,400 $ 101,365 | $ (788)
----------- ----------- | -----------
SUPPLEMENTAL INFORMATION DISCLOSURE OF |
CASH FLOW INFORMATION: |
Interest paid $ 47,868 $ 25,790 | $ 22,688
=========== =========== | ===========
Interest capitalized $ 687 $ 1,281 | $ --
=========== =========== | ===========
Taxes paid $ 1,090 $ 1,771 | $ --
=========== =========== | ===========
</TABLE>
4
<PAGE>
PART I
ITEM 1.E
FLAG TELECOM HOLDINGS 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 FLAG Telecom
Holdings Limited ("FLAG Telecom" or 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 and nine
months ended September 30, 2000, the nine months ended September 30,
1999, the period from incorporation to September 30, 1999 and the
period from January 1, 1999 to February 26, 1999, (FLAG Limited), the
balance sheets as of September 30, 2000, and December 31, 1999, and the
cash flows for the nine months ended September 30, 2000, the period
from incorporation to September 30, 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 was incorporated on February 3, 1999 to serve as the
holding company for the FLAG Telecom group of companies (the
"Group"). 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 holdings 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 issuance of FASB Interpretation No. 43,
with effect from July 1, 1999, certain sales of capacity may no longer
be recognized as current revenue because they do not satisfy the
requirements for sales-type lease accounting. Revenues from these
capacity sales are now deferred and
5
<PAGE>
amortized over the term of the contracts. The change to the accounting
treatment has no impact on cash flows. Until June 30, 1999 revenues
from operating lease transactions were considered incidental and
recorded as a reduction of the capacity available for sale.
3. CAPACITY AVAILABLE FOR SALE
Historically, capacity 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 capitalized
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.
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\(LOSS) PER COMMON SHARE
Basic net income\(loss) per common share is computed by dividing
6
<PAGE>
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. For the three and nine month
periods ended September 30, 2000 presented, no potentially dilutive
securities have been included in the calculation of diluted net loss
per share amounts as they would be antidilutive in periods in which a
loss has been reported. The aggregate number of potential common share
equivalents that have been excluded from the diluted net loss per share
calculation was 1,607,066 and 1,674,845 for the three and nine month
periods ended September 30, 2000, respectively, and related entirely to
stock options.
9. SEGMENTAL INFORMATION
The Company has prepared segmental information using accounting
policies that are consistent across segments.
On a segmental basis, FLAG Telecom reports its results in its two
primary operational areas: 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
Operations and maintenance
revenues
Network Services Managed bandwidth services
Leased capacity services
IP point to point services
IP transit services
Other value added and related services
Details of the financial results of the two business segments for the
nine months ended September 30, 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.
7
<PAGE>
(Numbers in $'000's)
<TABLE>
<CAPTION>
Capacity Sales Network
and Operations Services TOTAL
-------------- -------- -----
<S> <C> <C> <C>
Revenues from external parties
- Capacity Sale .................................................... 29,410 -- 29,410
- Operations & Maintenance ......................................... 29,933 -- 29,933
- Network Services ................................................. -- 11,857 11,857
------- ------- -------
59,343 11,857 71,200
Operating Loss ..................................................... (54,849) (3,915) (58,764)
Adjusted EBITDA(1) ................................................. 131,753 (3,027) 128,726
</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
(Numbers in $'000's)
<TABLE>
<CAPTION>
Capacity Sales Network
and Operations Services TOTAL
-------------- -------- -----
<S> <C> <C> <C>
Fixed Assets and Construction
in Progress........................................................ 1,040,969 19,825 1,060,794
</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 $633.8 million net proceeds were
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 were 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
($125 million of which is outstanding) and a $10 million revolving
credit facility (none of which is outstanding).
The undersea survey for the FLAG Pacific-1 (FP-1) cable system is
ongoing. Upon completion of FP-1, scheduled for 2002, the
multi-terabit dual cable system will link the major internet hub
cities of Seattle, Vancouver, San Francisco, Los Angeles and Tokyo.
With FP-1, the FLAG Telecom network will extend over 64,500 kilometer
route.
8
<PAGE>
FLAG Atlantic-1 remains on schedule to enter service in the first
quarter of 2001. All the permits at the landing sites have been
obtained. One landing station in the USA is currently under
construction and is expected to be completed by year end. All other
landing stations are completed. The shore-end cables have been
successfully landed in the UK, France and the US and marine
installation activity across the Atlantic has begun.
FLAG Europe-Asia had made over $900 million sales to over 100 customers
worldwide as at 30 September 2000. The average fill rate across the
route was some 25% with substantially higher rates at the Western end
and over the Hong Kong to Japan leg.
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) and Statement of
Financial Accounting Standard No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of
FASB Statement No. 133" (SFAS 138). Following the amendment made by
SFAS No. 137, SFAS 133 and SFAS 138 is effective for periods beginning
after June 15, 2000. Management is currently assessing the impact of
the adoption of SFAS 133 and SFAS 138 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 their 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 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.
9
<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 $27.3 million compared to $53.9 million total revenue for the quarter
ended September 30, 1999.
Revenue recognized from the sale of capacity was $11.4 million for the quarter
ended September 30, 2000 compared to $46.1 million during the quarter ended
September 30, 1999. As a result of the issuance of FASB Interpretation No. 43,
with effect from July 1, 1999, certain sales of capacity may no longer be
recognized as current revenue because they do not satisfy the requirements for
sales-type lease accounting. Revenues from these capacity sales are now deferred
and amortized over the term of the contracts. The change to the accounting
treatment has no impact on cash flows.
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 $10.2 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
Telecom Network.
Revenue recognized from Network Services was $5.7 million for the quarter ended
September 30, 2000. No Network Services revenue was generated for the quarter
ended September 30, 1999.
OPERATING EXPENSES
For the quarter ended September 30, 2000 the Company recorded $19.6 million in
respect of depreciation compared to $23.3 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 has been 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 $4.7 million in
network services costs. No network services costs were incurred for the quarter
ended September 30, 1999. These costs relate primarily to local backhaul,
connection and restoration costs.
During the quarter ended September 30, 2000 the Company incurred $7.6 million in
10
<PAGE>
operations and maintenance costs compared to $6.3 million for the quarter ended
September 30, 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 additional costs arising from
increased activity plus increased use of contracted services.
During the quarter ended September 30, 2000, $3.6 million in sales and marketing
costs were incurred compared to $4.4 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 Group. 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, $9.9 million of general and
administrative expenses were incurred compared to $6.7 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 $1.3 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 increased from $13.5 million for the quarter
ended September 30, 1999 to $28.3 million for the quarter ended September 30,
2000. The increase in interest expense of $14.8 million is attributable to
additional borrowings obtained. See also "Liquidity and Capital Resources."
The foreign exchange gain of $16.5 million arises from the translation at the
quarter end of the Net Euro denominated borrowings from Euros to US dollars at
the balance sheet exchange rate.
Interest income of $21.7 million was earned during the quarter ended
September 30, 2000 compared to $2.1 million earned during the quarter ended
September 30, 1999. The interest income was earned on cash balances, 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, including the issuance of our Senior Notes, which are
currently held on deposit.
PROVISION FOR TAXES
The provision for taxes was $0.2 million for the quarter ended September 30,
2000 compared to $0.6 million for the quarter ended September 30, 1999. The tax
provisions for periods consists both 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, and taxes on the activities of group
undertakings in certain locations. 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
11
<PAGE>
received an undertaking from the Bermuda Government exempting it from all such
taxes until March 28, 2016.
NET LOSS AND LOSS PER COMMON SHARE
For the quarter ended September 30, 2000 the Company recorded a net loss of $7.1
million compared to a net loss of $0.5 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.
Basic and diluted loss per common share was $0.05 for the quarter ended
September 30, 2000 compared to basic and diluted loss per common share of $0.01
for the quarter ended September 30, 1999.
12
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
RESULTS OF OPERATIONS
ADJUSTED CONSOLIDATED RESULTS
The table below shows the significant income statement amounts for the nine
months ended September 30, 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 September 30, 1999.
Adjusted
nine months ended
September 30, 1999
(Expressed in
thousands of dollars)
------------------
REVENUE ......................... $ 147,995
SALES AND OTHER OPERATING COSTS:
Cost of capacity sold ....... 52,093
Operations and maintenance .. 21,329
Sales and marketing ......... 7,972
General and administrative .. 17,612
Depreciation and amortization 5,453
INTEREST EXPENSE ................ (41,022)
INTEREST INCOME ................. 6,749
---------
INCOME BEFORE MINORITY INTEREST
AND INCOME TAXES ............... 9,263
PROVISION FOR INCOME TAXES ...... 1,269
13
<PAGE>
Statement of Cash Flow Data:
Adjusted
nine months as
of September 30,
1999
(Expressed in
thousands of dollars)
----------------------
Cash flow from operating activities ................ 39,009
Cash flow from financing activities ................ 62,683
Cash flow from investing activities ................ (102,048)
REVENUES
Total revenue recognized by the Company during the nine months ended September
30, 2000 was $71.2 million compared to $148.0 million in total revenue for the
nine months ended September 30, 1999.
Revenue recognized from the sale of capacity was $29.4 million for the nine
months ended September 30, 2000 compared to $126.4 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 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 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 sales on the FLAG
Telecom Network.
Revenue recognized from Network Services was $11.9 million for the nine months
ended September 30, 2000. No Network Services revenue was generated for the nine
months ended September 30, 1999.
OPERATING EXPENSES
For the nine months ended September 30, 2000, the Company recorded $59.6 million
in respect of depreciation compared to $57.5 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 has been 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.
14
<PAGE>
During the nine months ended September 30, 2000 the Company incurred $8.3
million in network services costs. No network services costs were incurred for
the nine months ended September 30, 1999. These costs relate primarily to local
backhaul, connection and restoration costs.
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 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 additional costs
arising from increased activity plus increased use of contracted services.
During the nine months ended September 30, 2000, $9.9 million in sales and
marketing costs were incurred compared to $8.0 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 Group. 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.
During the nine months ended September 30, 2000, $27.6 million of general and
administrative expenses were incurred compared to $17.6 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 includes charges for non-cash
stock compensation expense of $5.9 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 increased from $41.0 million for the 9 months
ended September 30, 1999 to $74.4 million for the nine months ended September
30, 2000. The increase in interest expense of $33.4 million is attributable to
additional borrowings obtained. See also "Liquidity and Capital Resources."
The foreign exchange gain of $18.9 million arises from the translation at the
period end of the Net Euro denominated borrowings from Euros to US dollars at
the balance sheet exchange rate.
Interest income of $48.9 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 and cash held by the Collateral Trustee (with respect to FLAG
Limited's 8 1/4% Senior Notes) 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, including
the issuance of our Senior Notes, which are currently held on deposit.
PROVISION FOR TAXES
The provision for taxes was $0.9 million for the nine months ended September 30,
2000 compared to $1.3 million for the nine months ended September 30, 1999. The
tax provisions for periods consists both of taxes on income derived from
capacity
15
<PAGE>
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, and taxes on the activities of group
undertakings in certain locations. 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) / INCOME AND (LOSS) / INCOME PER COMMON SHARE
For the nine months ended September 30, 2000 the Company recorded a net loss of
$(63.0) million compared to net income of $6.1 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.
Basic and diluted loss per common share was $(0.49) for the nine months ended
September 30, 2000 compared to an income per common share of $0.09 (including
minority interest) for the nine months ended September 30, 1999.
16
<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 $633.8 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 $576.6 million.
On February 16, 2000, FLAG Limited 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 FLAG Limited. The current interest rate is 200
basis points over LIBOR. 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 $3.3 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 paid 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 paid 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.
On October 31, 2000 we announced that we had agreed to buy from GTS its
interest in FLAG Atlantic Limited (FLAG Atlantic), the 50/50 joint venture
that is building the FLAG Atlantic-1 (FA-1) system. On completion, FLAG
Atlantic will become a wholly-owned subsidiary of FLAG Telecom.
Under the terms of the agreement, GTS will receive $135 million in cash from
FLAG Telecom. In addition, GTS will receive additional duct and dark fibre
assets in France and will retain the right to acquire backhaul fibres,
wavelengths and/or duct space from FLAG Atlantic on favourable terms going
forward. GTS's fibre pair purchased on the system, with a total design
capacity of 400 Gbps, will now have an initial lit capacity of 80 Gbps (8 x
10 Gbps).
The transaction will have no impact on either the project's scheduled first
quarter 2001 Ready For Service (RFS) date or on the project's budget. Funding
arrangements for the project, including all pre-sale proceeds of $800 million,
are likewise unaffected.
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.
The current interest rate is 212.5 basis points over LIBOR.
17
<PAGE>
FLAG Atlantic Limited has elected to cancel $55.174 million of the un-drawn
construction / term loan facility as a result of payments from capacity
pre-sales.
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. Such contributions were made on October 31.
The undersea survey for the FLAG PACIFIC-1 (FP-1) cable system has begun. Upon
completion of FP-1, scheduled for 2002, the multi-terabit dual cable system will
link the hub internet 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 September 30, 2000 and December 31, 1999, the Company had a working
capital surplus of $1,004.5 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 nine months ended September 30, 2000 was $144.6 million and $(52.8)
million respectively. As of September 30, 2000, cash on deposit, or with the
collateral trustee or in escrow had increased to $1,346.2 million from $137.3
million at December 31, 1999, primarily as a result of the additional funds
obtained from the IPO of $633.8 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 nine months ended September 30, 1999 was $39.0 million and $(102.0)
million respectively.
ASSETS
Our major asset is the remaining capital cost of the FLAG Telecom Network
recorded in fixed assets totalling $1,053.2 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.
18
<PAGE>
Our other fixed assets consist primarily of office furniture, leasehold
improvements, computer equipment and motor vehicles totaling $7.6 million.
ACCOUNTS RECEIVABLE
The accounts receivable balance at September 30, 2000 includes $44.3 million,
which relates to sales contracts booked into deferred revenue but which are
payable in accordance with agreed payment schedules over periods up to one
year. The comparable figure at December 31, 1999 was $49.9 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
position or competitive position.
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.
19
<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
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.
20
<PAGE>
PART I
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currency Risk.
The value of the liability of the Euro300 million of 11 5/8% Senior Notes, as
expressed in U.S. dollars on our Balance Sheet, is dependent on the U.S.
dollar/Euro exchange rate at each balance sheet date. The change in this
liability over a period is reflected in our Income Statement in accordance
with U.S. generally accepted accounting principles. In this respect we are
exposed to changes in the value of the Euro against the US dollar. Management
is monitoring this exposure and may hedge the exposure if considered
appropriate.
Other than this, 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 contracts for the provision
of FLAG Network Services are payable in currencies other than 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.
The impact of the introduction of the Euro is discussed in the Liquidity and
Capital Resources section.
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.
21
<PAGE>
FLAG TELECOM HOLDINGS LIMITED
LONG TERM DEBT AS OF SEPTEMBER 30, 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 $270.0 Any time after
March 2005
11 5/8% Senior Notes Semi-annually March 2010 Fixed 11 5/8% Euro300.0 Euro259.5 Any time after
March 2005
</TABLE>
FLAG LIMITED
LONG-TERM DEBT AS OF SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Principal
Principal Amount Fair Value FLAG Option
Type of Instrument Payments Due Maturity Date Interest Rate ($, million) ($, million) to Redeem
------------------ ------------ ------------- ------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Any time
8 1/4% Senior Notes Semi-annually January 2008 Fixed 8 1/4% 430.0 378.4 after January
2003
Floating LIBOR
FLAG Limited credit Quarterly January 2006 + 150 to 250 125.0 125.0 At any time
facility basis points
</TABLE>
DERIVATIVE FINANCIAL INSTRUMENTS AS OF SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Notional
Rate Rate Amount Fair Value
Type of Instrument Payments Due Maturity Date Payable Receivable ($, million) ($, million)
------------------ ------------ ------------- ------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
LIBOR Collar Quarterly April 2002 Floor at Cap at 8% 60.0 (0.01)
5.85%
</TABLE>
The three-month LIBOR rate at September 30, 2000 was 6.81125%.
22
<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) Not applicable.
(d) Proceeds to us from our initial public offering, which closed on
February 16, 2000, after deduction of underwriting discounts and commissions
of approximately $33.6 million and offering expenses of approximately $3.8
million, totaled approximately $633.8 million. Of the $633.8 million raised
by us, approximately $105 million has been used to fund our equity
contribution to FLAG Atlantic Holdings Limited, $25 million has been used to
repay long term indebtedness, $28 million has been used for working capital
purposes, $32 million has been invested in FLAG Network Services 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the third quarter of 2000, no meetings of our shareholders were
held.
ITEM 5. OTHER INFORMATION
(a) During the first quarter of 2000, 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 have entered
into a supply agreement for the subsea portion of the proposed cable project
and expect to use proceeds from our 11 5/8% Senior Notes offering, and other
debt financings and pre-sales to fund the construction of the project. We
cannot assure you, however, that we will successfully complete the project.
(b) On July 10, 2000, we completed a registered offer to exchange up to
U.S.$300,000,000 aggregate principal amount of our privately placed 11 5/8%
Senior Notes due 2010 (which we refer to as the Initial Dollar Notes) and
300,000,000 Euro aggregate principal amount of our privately placed 11 5/8%
Senior Notes due 2010 (which we refer to as the Initial Euro Notes and, together
with the Initial Dollar Notes, our Initial Notes) for like principal amounts of
registered 11 5/8% Senior Notes due 2010. As of the expiration of the offer to
exchange on June 26, 2000 an aggregate of U.S.$300,000,000 principal amount of
the Initial Dollar Notes had been tendered for exchange in the offer and an
aggregate of 291,950,000 Euro principal amount of the Initial Euro Notes had
been tendered for exchange in the offer. We executed, and the Bank of New York,
as Trustee, authenticated, U.S.$300,000,000 aggregate principal amount of our
11 5/8% Senior Notes due 2010 (which we refer to as the Dollar Exchange Notes)
and 291,950,000 Euro aggregate
23
<PAGE>
principal amount of our 11 5/8% Senior Notes due 2010 (which we refer to as our
Euro Exchange Notes and, together with the Dollar Exchange Notes, our Exchange
Notes) for issuance pursuant to the exchange. The Exchange Notes issued in the
offer to exchange have substantially the same terms and conditions as the
Initial Notes, except that the Exchange Notes are not subject to the
restrictions on resale or transfer which applied to the Initial Notes and which
continue to apply to the outstanding Initial Notes that were not tendered in the
offer to exchange. The Exchange Notes are listed on the Luxembourg Stock
Exchange.
(c) As of September 25, 2000 Soopakij Chearavanont became a member
of our Board of Directors. Mr. Chearavanont is the shareholder representative
of K.I.N. (Thailand) Co. Ltd.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following Exhibits are filed as part of this Report on Form 10-Q as
required by Regulation S-K.
Exhibit Number Description
-------------- -----------
Not applicable
(b) REPORTS ON FORM 8-K.
We did not file any Reports on Form 8-K during the quarter to which
this Quarterly Report relates.
On November 3, 2000 we filed a report on Form 8-K.
24
<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
SECRETARY
25
