6-K 1 a2048606z6-k.txt 6-K -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 6-K REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13(a)-16 OR 15(d)-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934 ------------------------ FOR THE QUARTER ENDED MARCH 31, 2001 FLAG LIMITED (Exact name of registrant as specified in its charter) CEDAR HOUSE 41 CEDAR AVENUE HAMILTON HM12, BERMUDA (Address of principal executive office) Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F ~~Form 20-F --X-- Form 40-F -- --~~

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g-2(b) under the Securities Exchange Act of 1934 ~~Yes -- -- No --X--~~

This report ("Quarterly Report") sets forth certain information regarding the financial condition and results of operations of FLAG Limited, a Bermuda company (the "Company"), for the fiscal quarter ended March 31, 2001. This Quarterly Report contains a review of the Company's unaudited financial information and analysis for the first quarter, as well as certain other information. The following unaudited condensed financial statements, in the opinion of the Company's management, reflect all adjustments necessary for a fair presentation of the financial position, the results of operations and cash flows for the periods presented. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- FLAG LIMITED FORM 6-K INDEX

~~2000~~PAGE ~~1999 (UNAUDITED) (AUDITED)~~ --------~~------~~ ~~--------------~~PART ~~ASSETS:~~I ~~Current~~FINANCIAL ~~assets:~~INFORMATION....................................... ~~Cash $~~ 3~~,260~~ $ITEM 1~~,213~~: ~~Accounts~~FINANCIAL ~~receivable,~~STATEMENTS........................................ ~~net~~3 of1.A ~~allowance~~Consolidated ~~for~~Balance ~~doubtful~~Sheets ~~accounts~~as of ~~$5,831~~March ~~(1999 - $6~~31,~~827)~~ ~~69,845~~2001 ~~89,814 Due from affiliates -- 950 Prepaid expenses~~ and ~~other~~December ~~assets 6~~31,~~051~~ ~~1,433~~2000......................................... ~~-----------~~3 ~~-----------~~1.B ~~79,156~~Consolidated ~~93,410~~Statements ~~Funds~~of ~~held~~Operations byfor ~~collateral~~the ~~trustee~~three ormonths inended ~~escrow~~March ~~153~~31,~~076~~ ~~134,066~~2001 ~~Capacity~~and ~~available~~2000............................. ~~for~~4 ~~sale~~1.C --Consolidated ~~774,366~~Statements ~~Capitalized financing costs, net~~ of ~~accumulated~~Comprehensive ~~amortization~~Income offor ~~$4,986~~the ~~(1999~~three -months ~~$3,142)~~ended ~~11,689~~March 1031,~~708~~ ~~Fixed~~2001 ~~assets,~~and ~~net~~2000................ ~~1,017,746~~5 ~~295,977 ----------- ----------- $~~ 1~~,261,667~~.D $Consolidated ~~1,308,527~~Statements ~~===========~~of ~~===========~~Cash ~~LIABILITIES:~~Flows ~~Current~~for ~~liabilities:~~the ~~Accounts~~three ~~payable~~months $ended ~~13,982~~March ~~$ 4~~31,~~980~~ ~~Accrued~~2001 ~~construction~~and ~~costs~~2000............................. ~~50,067~~6 ~~52,411~~1.E ~~Accrued~~Notes ~~liabilities 14,316 27,409 Income taxes payable 3,678 3,767 Due~~ to ~~affiliate~~Consolidated ~~228~~Financial ~~3,252~~Statements.................. ~~Deferred~~7 ~~revenue~~ITEM ~~26,753~~2: ~~44,345~~MANAGEMENT'S ~~-----------~~DISCUSSION ~~-----------~~AND ~~109,024~~ANALYSIS ~~136,164~~OF 8FINANCIAL ~~1/4%~~CONDITION ~~senior~~AND ~~notes,~~RESULTS ~~due~~OF ~~2008,~~OPERATIONS................................. ~~net~~10 ofPART ~~unamortized~~II ~~discount~~OTHER ofINFORMATION........................................... ~~$4,287~~13 ~~(1999~~ITEM -1: ~~$4,730)~~LEGAL ~~425,713~~PROCEEDINGS........................................... ~~425,270~~13 ~~Other~~ITEM ~~long-term~~2: ~~debt~~CHANGES ~~125,000~~IN ~~190,000~~SECURITIES....................................... ~~Deferred~~13 ~~revenue~~ITEM ~~and other 200,643 100,724 Deferred taxes~~ 3~~,581~~: ~~3,973~~DEFAULTS ~~-----------~~UPON ~~-----------~~SENIOR ~~863,961~~SECURITIES............................. ~~856,131~~13 ~~-----------~~ITEM ~~----------- SHAREHOLDERS' EQUITY~~4: ~~Class~~SUBMISSION BOF ~~common~~MATTERS ~~shares,~~TO ~~$.0001~~A ~~par~~VOTE ~~value~~OF 64SECURITY 64HOLDERS......... ~~Additional~~13 ~~paid-in~~ITEM ~~capital~~5: ~~543,104~~OTHER ~~512,695~~INFORMATION........................................... ~~Foreign~~13 ~~currency~~ITEM ~~translation~~6: ~~adjustment~~EXHIBITS ~~(448)~~AND ~~(680)~~REPORTS ~~Accumulated~~FILED ~~deficit~~ON ~~(145,014)~~FORM ~~(59,683)~~ 6-~~----------~~K...................... ~~-----------~~13 ~~397,706~~SIGNATURES............................................................. ~~452,396 ----------- ----------- $ 1,261,667 $ 1,308,527 =========== ===========~~14

2 PART I ITEM 1.A FLAG LIMITED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2001 AND DECEMBER 31, 2000 (EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

~~THREE~~MARCH ~~MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30~~31, ~~SEPTEMBER~~DECEMBER 3031, ~~2000~~2001 ~~1999~~ 2000 ~~1999~~ (UNAUDITED) (~~UNAUDITED~~AUDITED) ~~(UNAUDITED) (UNAUDITED)~~ ----------- ----------- -~~----------~~ ~~-----------~~ASSETS: ~~REVENUES~~Current ~~23,566~~assets: ~~52,522~~Cash ~~62,830~~and ~~146,604~~cash ~~SALES~~equivalents............................... ~~AND~~$ ~~OTHER~~2,971 ~~OPERATING~~$ ~~COSTS Cost of capacity sold -- 18~~2,~~588~~623 --Accounts 52receivable,~~093~~ ~~Operations~~net ~~and~~of ~~maintenance~~allowance ~~(including~~for ~~non-cash~~doubtful ~~compensation~~accounts ~~expense~~ of $~~339~~5,289 ~~nil,~~ (2000--$15,~~506, nil~~289)..................... 753,~~585~~875 684,~~290~~067 ~~24,558~~Due ~~21,329~~from ~~Sales~~affiliates and ~~marketing~~other ~~(including~~receivables............... ~~non-cash~~3,586 ~~compensation~~8,768 ~~expense~~Other ofreceivables....................................... ~~$160~~8,405 ~~nil~~3,354 ~~$683,~~---------- ~~nil)~~---------- 3Total current assets...................................... 68,~~091~~837 498,~~720~~812 10Restricted cash........................................... 78,~~028~~187 8111,~~255~~453 ~~General~~Capitalized ~~and~~financing ~~administrative~~costs, ~~(including~~net ~~non-cash~~of ~~compensation~~accumulated ~~expense~~amortization of $~~658~~6,325 ~~nil,~~ (2000--$25,~~929, nil~~664)................... 810,~~183~~411 311,~~449~~073 ~~23,319~~Property ~~14,225 Depreciation~~ and ~~amortization 18~~equipment,~~697~~ ~~4,400~~net............................... 57983,~~858~~317 51,~~121~~001,246 ------------ ------------ ~~------------~~Total ~~------------~~Assets.............................................. 37$1,~~556 37~~140,~~447~~752 ~~115~~$1,~~763 101~~222,~~023~~584 ~~OPERATING~~========== ~~(LOSS)/INCOME~~========== ~~(13,990)~~LIABILITIES: ~~15,075~~Current ~~(52~~liabilities: Accrued construction costs.............................. $ 27,~~933)~~138 45$ 49,~~581~~139 ~~INTEREST~~Accounts ~~EXPENSE~~payable........................................ 1210,~~339~~518 1322,~~474~~246 38Accrued liabilities..................................... 14,~~398~~175 4014,~~960~~331 ~~INTEREST~~Interest ~~INCOME~~rate 2collars................................... 346 -- Deferred revenue........................................ 70,~~470~~950 259,~~083~~371 5Income taxes payable.................................... 4,~~947~~023 63,~~744~~766 ------------ ------------ ~~------------~~Total ~~------------~~current ~~(LOSS)~~liabilities................................. 127,150 148,853 8 1/~~INCOME~~4% ~~BEFORE~~senior ~~INCOME~~notes, ~~TAXES~~due ~~(23~~2008,~~859)~~ net of unamortized discount of $3,~~684~~991 (852000--$4,~~384~~134)................................ 11426,~~365~~009 ~~PROVISION~~425,861 ~~FOR~~Other ~~INCOME~~long-term ~~TAXES~~debt...................................... ~~(187)~~73,000 ~~346~~93,000 ~~(56)~~Deferred ~~995~~revenue and other................................ 209,224 210,158 Deferred taxes............................................ 3,308 3,358 ------------ ------------ Total Liabilities......................................... 838,691 881,230 ------------ ---------- SHAREHOLDERS' EQUITY: Class B common shares, $.0001 par value................... 64 64 Additional paid--in ~~NET~~capital................................ 545,333 544,697 Accumulated other comprehensive income.................... (~~LOSS~~720)~~/INCOME~~ (~~23,672~~418) ~~3,338~~Accumulated deficit....................................... (85242,~~328~~616) 10(202,~~370~~989) ------------ ------------ Total Shareholders' Equity................................ 302,061 341,354 ------------ ------------ ~~Basic~~Total liabilities and ~~diluted~~shareholders' ~~(loss)/income per common share $ (0~~equity.~~04) $ 0~~.~~01 $ (0~~.~~13) $ 0~~.02............ ~~Weighted average common shares outstanding 635~~$1,~~796~~140,~~338~~752 ~~635~~$1,~~796~~222,~~338~~584 ~~635,796,338~~========== ~~635,796,338~~==========

3 PART I ITEM 1.B FLAG LIMITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)

THREE MONTHS ENDED ~~NINE~~MARCH ~~MONTHS~~31, ~~ENDED~~2001 ~~SEPTEMBER~~2000 30(UNAUDITED) (UNAUDITED) ----------- ----------- REVENUES.................................................... 21,622 ~~SEPTEMBER~~17,619 30SALES AND OTHER OPERATING COSTS Operations and maintenance cost (including non-cash compensation expense of $151, 2000--$831)............... ~~1999~~7,399 ~~2000~~8,073 ~~1999~~Sales and marketing (~~UNAUDITED~~including non-cash compensation expense of $113, 2000--$365)............................ 2,496 4,150 General and administrative (~~UNAUDITED~~including non-cash compensation expense of $372, 2000--$1,631)............. 9,103 7,200 Depreciation and amortization............................. 18,626 19,715 ----------- ----------- 37,624 39,138 OPERATING LOSS.............................................. (~~UNAUDITED~~16,002) (~~UNAUDITED~~21,519) INTEREST EXPENSE............................................ 11,377 13,023 INTEREST INCOME............................................. 1,354 1,674 ----------- ----------- LOSS BEFORE INCOME TAXES.................................... (26,025) (32,868) PROVISION FOR INCOME TAXES.................................. 447 93 ----------- ----------- NET (LOSS~~)/INCOME~~.................................................... (2326,~~672~~472) ~~3,338~~ (8532,~~328~~961) ~~10,370~~----------- ~~Foreign~~----------- ~~currency~~Basic ~~translation~~and ~~adjustment~~diluted ~~142~~loss per common share..................... $ (430.04) ~~232~~$ ~~122~~(0.05) ------- ----- ------- ------ ~~COMPREHENSIVE~~Weighted ~~(LOSS)/INCOME~~average ~~(23,530)~~common ~~3,295~~shares ~~(85~~outstanding.................. 635,~~096)~~796,338 10635,~~492~~796,338 ~~=======~~----------- ~~===== ======= ======~~-----------

4 PART I ITEM 1.C FLAG LIMITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (EXPRESSED IN THOUSANDS OF DOLLARS)

~~SEPTEMBER~~THREE ~~30,~~MONTHS ~~SEPTEMBER~~ENDED 30MARCH 31, 2001 2000 ~~1999~~ (UNAUDITED) (UNAUDITED) --------- -- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss)/income applicable to common shareholders $ (85,328) $ 10,370 Adjustments to reconcile net loss to net cash provided by/(used in) operating activities: Amortization of financing costs 1,844 1,233 Provision for doubtful accounts (996) 1,176 Senior debt discount 443 443 Non-~~cash stock compensation 5,409~~ -- ~~Depreciation 57,858 5,121 Loss on disposal of fixed assets 91~~ -- ~~Deferred~~NET ~~taxes~~LOSS.................................................... (~~152) 117 Add (deduct) net changes in assets and liabilities: Accounts receivable 20,968 (~~26,~~991~~472) ~~Due from affiliate 950~~ (132,~~758~~961) ~~Prepaid~~Foreign ~~expenses~~currency ~~and~~translation................................ ~~other assets~~ (~~4,619~~305) ~~1,284 Capacity available for sale -- 58,052 Accounts payable and accrued liabilities~~ (~~4,084~~109) ~~(16,923)~~Loss ~~Income~~on ~~taxes payable (89) (2,545) Due to affiliate (3,024) (34) Deferred revenue and other 82,327 5,417~~ derivatives--~~-------~~effect ~~---------~~of ~~Net~~adoption ~~cash~~of ~~provided~~SFAS byNo. ~~operating~~133..... ~~activites 71,598 34,962 --------- --------- CASH FLOWS FROM FINANCING ACTIVITES: Financing costs incurred~~ (~~2,826~~94) -- ~~Capital~~Loss ~~contribution~~on ~~from FLAG Telecom Holdings Limited 25,000~~ derivatives--change ~~Repayment of long-term debt (65,000) (48,500) (Increase)/decrease~~ in ~~funds~~fair ~~held~~value................... ~~by collateral trustee or in escrow~~ (~~19,010~~252) ~~111,183~~ --~~-------~~ --------- ~~Net cash (used in)/provided by financing activities (61,836) 62,683~~ --------- ~~---------~~COMPREHENSIVE ~~CASH~~LOSS.......................................... ~~FLOWS FROM INVESTING ACTIVITIES: Cash paid for construction~~ (227,~~344~~123) (~~100,577) (Purchase)/disposal of fixed assets, net (5,385) 2,043 Proceeds from disposal of assets~~ 33 ~~-- --------- --------- Net cash used in investing activities (7~~,~~696~~070) (98,534) --------- --------- NET INCREASE/(DECREASE) IN CASH 2,066 (889) Effect of foreign currency movements (19) (29) CASH, beginning of period 1,213 3,024 --------- --------- CASH, end of period $ 3,260 $ 2,106 ========= ========= SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING ACTIVITIES: Cash incurred for construction in progress $ (2,344) $ 100,577 ========= ========= SUPPLEMENTAL INFORMATION DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 47,523 $ 48,396 ========= ========= Interest capitalized $ -- $ 1,281 ========= ========= Taxes paid $ -- $ -- ========= =========

5 PART I ITEM 1.D FLAG LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (EXPRESSED IN THOUSANDS OF DOLLARS)

6 PART I ITEM 1.E FLAG LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2001 AND DECEMBER 31, 2000 1. BACKGROUND AND ORGANISATION FLAG Limited (the "Company") is a facilities-based provider of telecommunications capacity to licensed international carriers through its ownership of an independent, privately-owned digital fiberoptic undersea cable system, the FLAG Europe-Asia ("FEA") cable system. The FEA cable system links the telecommunications markets of Western Europe and Japan through the Middle East, India, Southeast Asia and China (the "FLAG Route"). The FEA cable system, which was placed in commercial service on November 22, 1997, cost approximately $1.6 billion to construct, and consists of over 28,000 kilometers of fiberoptic cable. On February 26, 1999, the Company was part of a reorganization whereby FLAG Telecom Holdings Limited ("FLAG Telecom"), a Bermuda company, became the holding company for the FLAG Telecom group of companies. Pursuant to this reorganization, all of the Class A common shares of the Company were converted to Class B common shares, which were subsequently re-classified as Ordinary Shares and the shareholders of the Company transferred to FLAG Telecom 418,259,688 Ordinary Shares in exchange for an equal number of shares in FLAG Telecom. As a result of this reorganization, FLAG Telecom held 65.79% of the share capital of the Company with the balance of 34.21% being held by Bell Atlantic Network Systems Company. On January 4, 2000, Bell Atlantic exchanged its remaining holding in the Company for shares in FLAG Telecom. RISKS AND OTHER IMPORTANT FACTORS The Company's operations and ability to grow may be affected by risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to: the Company's ability to deploy sophisticated technologies on a global basis, the Company's ability to upgrade and expand its network and respond to customer demands and industry changes, regulatory enactments and changes, competition and pricing pressure, rapid technological change, adverse foreign economic or political events and other factors that are discussed in the Company's Registration Statement and subsequent periodic filings filed with the Securities and Exchange Commission. 2. BASIS OF PREPARATION The accompanying condensed consolidated financial statements presented herein have been prepared on the basis of U.S. generally accepted accounting principles ("US GAAP") 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 condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the results of operations for the three months ended March 31, 2001 and 2000, the balance sheets as of March 31, 2001 and December 31, 2000, and the cash flows for the three months ended March 31, 2001 and 2000. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2000. The results of operations for any interim period are not necessarily indicative of results for the full year. 7 FLAG LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF MARCH 31, 2001 AND DECEMBER 31, 2000 3. SIGNIFICANT ACCOUNTING POLICIES 3.1 REVENUE RECOGNITION CAPACITY Capacity contracts are accounted for as leases. 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. In compliance with FASB Interpretation No. 43, "Real Estate Sales, an Interpretation of FASB Statement No. 66," capacity contracts are deemed not to be sales of real estate and, therefore, are not accounted for as sales-type leases. The Company has recorded only operating leases for capacity transactions for the periods presented. Payments received from customers before the relevant criteria for revenue recognition are satisfied are included in deferred revenue. In exchange for construction costs incurred, the Company granted credits to suppliers toward future capacity. In addition, certain customers have committed to purchase capacity at a future date under signed capacity credit agreements. Such amounts received under these agreements and the capacity credits granted to suppliers are recorded at fair value as deferred revenue until the date the credits are utilized, at which time the deferred revenue is recognized as earned. Amounts receivable under these capacity agreements are reflected within accounts receivable in the accompanying balance sheets. OPERATIONS AND MAINTENANCE Standby maintenance charges are invoiced separately from capacity sales. Revenues relating to standby maintenance are recognized over the period the service is provided. Deferred revenue also includes amounts invoiced for standby maintenance which are applicable to future periods. 3.2 DIRECT COSTS RELATED TO REVENUE OPERATIONS AND MAINTENANCE COSTS Operations and maintenance costs are expensed as incurred. 3.3 PROPERTY AND EQUIPMENT Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is taken on a straight-line basis over the estimated useful lives of the property and equipment as follows: Computer equipment.................................... 3 years Fixtures and fittings................................. 5 years Leasehold improvements................................ Remaining lease term Motor vehicles........................................ 5 years Cable system.......................................... 15 years

The estimated useful life of the cable system is determined based on the estimated period over which it will generate revenue. 8 FLAG LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF MARCH 31, 2001 AND DECEMBER 31, 2000 3.4 CONSTRUCTION IN PROGRESS Construction in progress is stated at cost. Capitalized costs include costs incurred under the construction contract, engineering and consulting fees, legal fees related to obtaining landing right licenses, costs for the route surveys, indirect costs associated with the cable system and other costs necessary for developing the cable system. Construction in progress is transferred to property and equipment when placed into service. Construction in progress at March 31, 2001 and 2000 was nil. 3.5 IMPAIRMENT OF LONG LIVED ASSETS The Company periodically reviews events and changes in circumstances to determine whether the recoverability of the carrying value of long lived assets should be reassessed. Should events or circumstances indicate that the carrying value may not be recoverable based on undiscounted future cash flows, an impairment loss measured by the difference between the fair value and the carrying value of long lived assets would be recognized by the Company. 3.6 NET LOSS PER COMMON SHARE Basic net loss per common share is computed by dividing net loss applicable to common shareholders by the weighted average number of common shares outstanding in the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares and common share equivalents outstanding during the period. For the three month periods ended March 31, 2001 and March 31, 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. 3.7 RESTRICTED CASH The Company designates funds held by a collateral trustee, in escrow or legally designated for specific projects or commitments by bank agreements, as long term restricted cash. 4. ADOPTION OF STATEMENT OF ACCOUNTING STANDARDS NO. 133 Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and 138, which establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or a liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows gains and losses on a derivative to offset related results on the hedged item in the income statement, and requires that a company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The following effects were recorded in the accompanying condensed consolidated financial statements as a result of the adoption of SFAS No. 133: - The Company's interest rate collars are accounted for as effective cash flow hedges and, accordingly, upon adoption of SFAS No. 133 their fair values were recorded as liabilities in the balance sheet, with the corresponding effect of adoption recorded directly to accumulated other comprehensive income. 9 PART I ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as "may," "will," "should," "estimates," "predicts," "potential," "continue," "strategy," "believes," "anticipates," "plans," "expects," "intends" and similar expressions are intended to identify forward-looking statements. Forward-looking statements made in this report on Form 6-K are as of the date of filing with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. We expressly disclaim any obligation to update information presented herein, except as may otherwise be required by law. The Company's actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those discussed elsewhere in this report and in other documents the Company files from time to time with the SEC, including the Annual Report on Form 20-F for the fiscal year ended December 31, 2000. QUARTER ENDED MARCH 31, 2001 COMPARED WITH THE QUARTER ENDED MARCH 31, 2000 RESULTS OF OPERATIONS REVENUES Total revenue for the quarter ended March 31, 2001, increased 23% to $21.6 million as compared to $17.6 million for the quarter ended March 31, 2000. This increase is primarily due to the amortization of increased cumulative capacity sales and increased operations and maintenance from the FEA cable system. Revenue recognized from the sale of capacity increased by 14% to $9.5 million for the quarter ended March 31, 2001, as compared to $8.3 million during the quarter ended March 31, 2000. This increase is primarily due to increased cumulative sales. Revenue recognized from operations and maintenance increased by 30% to $12.1 million for the quarter ended March 31, 2001, as compared to $9.3 million for the quarter ended March 31, 2000, reflecting the increased cumulative sales and activated capacity on the FEA cable system. OPERATING EXPENSES For the quarter ended March 31, 2001, the Company recorded $18.6 million in respect of depreciation compared to $19.7 million for depreciation recorded in the quarter ended March 31, 2000. During the quarter ended March 31, 2001, operations and maintenance costs decreased by 9% to $7.4 million, as compared to $8.1 million for the quarter ended March 31, 2000. Operations and maintenance expenses relate primarily to the provision of standby maintenance under Maintenance Zone Agreements as well as Company salaries and overheads directly associated with operations and maintenance activities. Our agreements with the third party providers of operations and maintenance services allow for activity based variations in our expense which are reflected in the reduction in this expense for the quarter. 10 During the quarter ended March 31, 2001, sales and marketing costs decreased by 40% to $2.5 million, as compared to $4.2 million incurred during the quarter ended March 31, 2000. Sales and marketing costs are comprised of all sales and marketing activities that are directly undertaken by the Company. This decrease is due to the inclusion of non-recurring commission costs incurred in the first quarter of 2000. During the quarter ended March 31, 2001, general and administrative expenses increased by 26% to $9.1 million, as compared to $7.2 million during the quarter ended March 31, 2000. This increase is comprised principally of increased personnel costs and increased general overheads resulting from operational activity. Costs for the quarter ended March 31, 2001 include charges for non-cash stock compensation expense of $0.6 million in respect of certain awards under FLAG Telecom's long-term incentive plan. These charges are required under US GAAP and have no effect on our cash flows. INTEREST EXPENSE AND INTEREST INCOME Interest expense on borrowings for the quarter ended March 31, 2001 were $11.4 million compared to $13.0 million during the quarter ended March 31, 2000. The decrease in interest expense of $1.6 million is attributable to a reduction in Company bank borrowings during the period. See also "Liquidity and Capital Resources." Interest income of $1.4 million was earned during the quarter ended March 31, 2001 compared to $1.7 million earned during the quarter ended March 31, 2000. The interest income was earned on cash balances, short term investments and cash held by a collateral trustee or in escrow arising from ongoing business operations. PROVISION FOR TAXES The provision for taxes was $0.4 million for the quarter ended March 31, 2001 compared to $0.1 million for the quarter ended March 31, 2000. The tax provisions for both quarters consist of taxes on income derived from capacity sales and standby maintenance revenue from customers in certain jurisdictions along the FLAG Route where the Company is deemed to have a taxable presence or is otherwise subject to tax. At the present time, no income, profit, capital or capital gains taxes are levied in Bermuda. In the event that such taxes are levied, the Company has received an undertaking from the Bermuda Government exempting it from all such taxes until March 28, 2016. NET LOSS AND LOSS PER COMMON SHARE For the quarter ended March 31, 2001, the Company recorded a net loss of $26.5 million compared to a net loss of $33.0 million for the quarter ended March 31, 2000. Loss per common share was $0.04 for the quarter ended March 31, 2001 compared to a loss per common share of $0.05 for the quarter ended March 31, 2000. LIQUIDITY AND CAPITAL RESOURCES On February 16, 2000, the Company amended its existing credit facilities to consist of a $150 million six-year term loan facility ($73 million of which remained outstanding at March 31, 2001 and $93 million of which was outstanding at December 31, 2000) and a $10 million revolving credit facility (none of which was outstanding at March 31, 2001 or December 31, 2000). Dresdner Kleinwort Benson and Barclays Capital acted as joint lead arrangers. These facilities bear interest at a rate of 225 basis points over LIBOR for the first six months and thereafter at a rate of between 150 and 250 basis points over LIBOR, depending on the credit rating of the 8 1/4% Senior Notes of the Company. The current interest rate is 200 basis points over LIBOR. The facilities are secured by a pledge by us of all 11 of the capital stock of the Company and by assignment of the Company's contracts and a security interest in its bank accounts and intangible property. In connection with this amendment, the Company paid fees and expenses to the joint lead arrangers totaling approximately $3.3 million. At the end of March 1998, the Company entered into two interest rate swap agreements to manage our exposure to interest rate fluctuations on the Company's credit facilities. Under the swap agreements, we 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 in the final quarter of 2000. The transaction terminates on April 30, 2002. The collar is comprised of a LIBOR cap at 8% and a floor of 5.85%. We recognize the net cash amount received or paid on interest rate hedging instruments as an adjustment to interest cost on the related debt. The Company believes that it will have no need for additional borrowing facilities. The Company intends to finance future operations through proceeds from the sale or lease of capacity, revenues from operations and maintenance, investment income on cash and investment balances, borrowings under the revolving credit facility and available funds in reserve account. As of March 31, 2001, the Company had net current liabilities of $58.3 million compared to net current liabilities of $50.0 at December 31, 2000. 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 amounts 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 three months ended March 31, 2001 was $22.9 million and $22.7 million respectively. As of March 31, 2001, total cash had decreased to $81.2 million from $114.1 million at December 31, 2000, primarily due to the repayment of long term debt. Total cash provided by operations and used in investing activities during the three months ended March 31, 2000 was $22.8 million and $1.7 million respectively. These expenditures were funded from cash held as restricted cash. IMPACT OF THE INTRODUCTION AND ADOPTION OF THE EURO On January 1, 1999, eleven of the 15 member countries of the European Union, including France, Italy and Spain, where the Company has operations, established fixed conversion rates between their existing sovereign currencies and a new currency called the "Euro" (E). 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. 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 Company has operations within the European Union including some of the countries that have adopted the Euro. The Company continues to evaluate the impact the Euro will have on its continuing business operations within the overall scope of managing currency risk. However, the Company does not expect the introduction of the Euro to have a material effect on the group's financial position or competitive position. INFLATION In management's view, inflation in operating, maintenance and general and administrative costs will not have a material effect on our financial position over the long term. 12 PART II ITEM 1: LEGAL PROCEEDINGS The Company is involved in litigation from time to time in the ordinary course of business. In management's opinion, the litigation in which the Company is involved currently, individually and in the aggregate, is not material to us. ITEM 2: CHANGES IN SECURITIES Not Applicable. ITEM 3: DEFAULTS UPON SENIOR SECURITIES Not Applicable. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The sole shareholder of the Company adopted a Resolution in writing in pursuant to the Company's Bye-laws in lieu of the 2000 Annual General Meeting of the Company as of January 12, 2001. ITEM 5: OTHER INFORMATION Not applicable. ITEM 6: EXHIBITS AND REPORTS FILED ON FORM 6-K Not Applicable. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 15th day of May 2001. FLAG LIMITED By: /s/ NOEL DINSMORE ------------------------------------------ Noel Dinsmore CHIEF FINANCIAL OFFICER

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