FL GROUP hf

Transcription

FL GROUP hf

Prospectus December 2005
FL GROUP hf
FL GROUP hf
Table of contents
I
II
III
IV
V
VI
VII
VIII
IX
STATEMENTS AND NOTICE
Statements
References and glossary of terms and abbreviations
Publication calendar of accounts
Notice to investors
OFFERING AND LISTING OF SHARES
Issuer
Issuer’s operations
Managers of offering and listing on ICEX Main List
Total share capital
Issue, listing and share characteristics
Share capital increase – authorisation, sale and listing
Cost and cash flow
Information
SHARE CAPITAL AND OWNERSHIP
Total share capital and own shares
Authorisation for further increase of share capital
Development of share capital
Share performance
Market making
Ownership
Issue and share rights
ORGANISATION
Historical
Key milestones
Legal structure
Subsidiaries and associates
Organisational structure
PRIVATE EQUITY
Investment strategy
General description
Current investments
ASSET MANAGEMENT
Investment strategy
Current portfolio
AIRCRAFT TRADING AND LEASING
Aircraft trading
Aircraft leasing
Aircraft pricing
FL Group's tactics and strategy
The fleet
RISK FACTORS
Risks related to investment in the Company’s shares
Risks related to the Company
Risks related to operating companies
FINANCIAL HIGHLIGHTS
Consolidated Income Statement
Consolidated Balance Sheet
Consolidated Cash Flow Statement
The implementation of IFRS
APPENDICES
A Articles of association of FL GROUP hf.
B Interim Consolidated Financial
Statement January 1 - September 30, 2005
C Annual Accounts for 2004
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I. Statements and notice
Statements
Issuer’s statement
The Board of Directors of FL GROUP hf., Icelandic ID-No. 601273-0129, Sudurlandsbraut 12, IS-108 Reykjavík, Iceland, hereby declares that,
to the best of its knowledge, the information in this Prospectus both accords fully with the facts and no important items have been omitted
which could affect the evaluation of the Issuer or its shares.
Reykjavík, 29 December 2005
On behalf of the Board of Directors of FL GROUP hf.
Skarphédinn Berg Steinarsson
Chairman of the Board of Directors
Icelandic ID-No. 050763-7819
Hannes Thór Smárason
President & CEO
Managers' statement
Kaupthing Bank hf. - Investment Banking, Icelandic ID-No. 560882-0419, Borgartún 19, IS-105 Reykjavík, Iceland and Landsbanki Íslands hf. Corporate Finance, ID-No. 540291-2259, Austurstræti 11, IS-101 Reykjavík, Iceland, hereby declare that in preparing this Prospectus they have
gathered the data which in their estimation was necessary to provide a true and fair picture of FL GROUP hf. and its shares. To the best of
our knowledge no important items have been omitted which could affect the evaluation of the Issuer or the shares for which listing is sought.
On behalf of Kaupthing Bank hf. - Investment Banking
On behalf of Landsbanki Íslands hf. - Corporate Finance
Örvar Kærnested
Managing Director of Investment Banking
Bjarni Thórdur Bjarnason
Head of Corporate Finance
Auditors’ statements
KPMG Endurskodun hf., Icelandic ID-No. 590975-0449, Borgartún 27, IS-105 Reykjavík, Iceland, has audited and signed without qualification
the Consolidated Annual Accounts of FL GROUP hf. for the years 2002-2004. KPMG Endurskodun hf. has compiled the Consolidated
Interim Financial Statement of FL GROUP hf. for the first nine months of 2004 and 2005. We confirm that the information in this Prospectus
is consistent with the accounts that we have audited or compiled.
On behalf of KPMG Endurskodun hf.
Sæmundur Valdimarsson
State authorised public accountant
Jón Sigurdur Helgason
State authorised public accountant
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References and glossary of terms and abbreviations
References to the “Issuer” in this Prospectus shall be construed as
referring to FL GROUP hf., Icelandic ID-No. 601273-0129, unless
otherwise clear from the context. References to “FL Group hf.”, “FL
Group”, “FL Group Consolidation”, "the Group" and “the Company”
shall be construed as referring to FL GROUP hf., Icelandic ID-No.
601273-0129, and its subsidiaries and affiliates, unless otherwise clear
from the context. FL GROUP hf. is the legal Icelandic name of the
Issuer.
References to "Sterling" in this Prospectus shall be construed as referring to Sterling Airlines A/S, Danish ID-No. 18235404, Sterling Icelandic ApS, Danish ID-No. 18647370 and Flyselskabet af 15. juli 2005
A/S, Danish ID-No. 28988362 and their subsidiaries and affiliates,
unless otherwise clear from the context.
References to "Bluebird" in this Prospectus shall be construed as
referring to Bláfugl hf., Icelandic ID-No. 460899-2229 and Flugflutningar ehf., Icelandic ID-No. 600372-0179 and their subsidiaries and
affiliates, unless otherwise clear from the context.
References to "FL Travel Group" in this Prospectus shall be construed
as referring to Flugfélag Íslands hf., ID-No: 530575-0209, Ferdaskrifstofa Íslands hf., ID-No: 590670-0149, Íslandsferdir ehf., ID-No:
410791-1379, Kynnisferdir ehf., ID-No: 620372-0489, Bílaleiga Flugleida ehf., ID-No: 471299-2439 and Flugleidahótel hf. ID-No:
621297-6949 and their subsidiaries and affiliates, unless otherwise
clear from the context.
References to "Icelandair Group" in this Prospectus shall be construed as referring to Icelandair ehf., ID-No: 461202-3490, FlugleidirFrakt ehf., ID-No: 471299-2359, Loftleidir - Icelandic ehf., ID-No:
571201-4960, Flugthjónustan Keflavíkurflugvelli ehf., ID-No: 5512003530 and Tæknithjónustan Keflavíkurflugvelli ehf., ID-No: 5112022990 and their subsidiaries and affiliates, unless otherwise clear from
the context.
References to "the share offering" in this Prospectus shall be construed as referring to the offering of new shares in FL Group hf.
which investors subscribed for on 10 November 2005 and which this
Prospectus covers, unless otherwise clear from the context. The
share offering is described in Chapter II of this Prospectus.
References to “ICEX” in this Prospectus shall be construed as referring to the Iceland Stock Exchange, i.e. to Kauphöll Íslands hf., Icelandic ID-No. 681298-2829, unless otherwise clear from the context.
References to the “listing” and the "listing on ICEX Main List" in this
Prospectus shall be construed as referring to listing of shares on the
Main List at the Iceland Stock Exchange, unless otherwise clear from
the context.
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strued as referring to Kaupthing Bank hf., Icelandic ID-No. 5608820419, unless otherwise clear from the context. References to "Landsbanki Íslands" shall be construed as referring to Landsbanki Íslands hf.,
Icelandic ID-No. 540291-2259, unless otherwise clear from the context. The share offering and the listing of the new shares on the ICEX
Main List is arranged jointly by Kaupthing Bank hf.'s Investment Banking division and Landsbanki Íslands hf.'s Corporate Finance division.
References to the "Icelandic Takeover Panel" or the "Takeover Panel"
or the "Panel" in this Prospectus shall be construed as referring to the
Takeover Panel established in Iceland on 1 July 2005. The Panel issues
statements, provides advice and encourages professional discussion
on takeovers and related issues of companies listed on ICEX, but is
independent of ICEX. The founders of the Takeover Panel are ICEX,
Eignarhaldsfélag hlutafélaga (an association of listed companies), the
Financial Supervisory Authority, Eignarhaldsfélag lífeyrissjóda um verdbréfathing ehf. (association of pension funds), the Bankers’ and Securities Dealers’ Association of Iceland, the Association of Small
Investors, the Central Bank of Iceland, the Icelandic Chamber of
Commerce and the Ministry of Commerce. The Agreement creating
the Panel is valid for three years. A decision on its continuation will
be taken in light of the experience gained of its work
Abbreviations used in this Prospectus are listed in the following table.
CAA
Civil Aviation Authority
The Companies
actor Act 2/1995
Act number 2 from 1995 on
Public Limited Companies
DKK
Danish krone
EBITDA
Earnings before interest, tax, depreciation
and amortization
EBITDAR
Earnings before interest, tax, depreciation,
mortization and rental expense
PDP
Pre-Delivery Payment
GAAP
Generally Accepted Accounting Principles
ICEX
Iceland Stock Exchange
IFRS
International Financial Reporting Standards.
IRR
Internal Rate of Return
ISD
Icelandic Securities Depository
ISK
Icelandic króna
JFK
John F. Kennedy International Airport
References to “ISD” in this Prospectus shall be construed as referring
to the Icelandic Securities Depository, i.e. to Verdbréfaskráning
Íslands hf., Icelandic ID-No. 500797-3209, unless otherwise clear
from the context.
KEF
Keflavík International Airport
LF
Load Factor
LHR
London Heathrow Airport
LIBOR
London Inter Bank Offered Rate
References to “the Managers” in this Prospectus shall be construed
as referring to Kaupthing Bank hf. – Investment Banking division, Icelandic ID-No. 560882-0419 and Landsbanki Íslands hf. – Corporate
Finance division, Icelandic ID-No. 540291-2259, unless otherwise
clear from the context. References to "Kaupthing Bank" shall be con-
LTM
Last Twelve Months
PAYE
Pay-As-You-Earn
USD or $
US dollar
Publication calendar of accounts
FL Group hf. has announced that the Annual Accounts for the year
2005 are expected to be published in week 10 of 2006, i.e. 6-10
March 2006. In recent years the Annual General Meeting has been
held around 10 March.
Notice to investors
FL Group hf.'s total issued share capital amounts to 5,845,294,118
shares, each with the nominal value of ISK 1.0. All issued shares of FL
Group hf. are listed on the ICEX Main List and are included in the
ICEX-15 index.
This Prospectus concerns FL Group hf.'s issuing of 3,235,294,118
new shares, which corresponds to 56% of all outstanding shares and
represents a 127.5% increase in share capital, and the listing of those
new shares on ICEX Main List. The shares were issued to further
strengthen the equity base, with a special emphasis on reinforcing the
Company's private equity and asset management operations. New
shares sold amounted to ISK 44 billion. The 3,235,294,118 new
shares were sold at price of ISK 13.6 per share to 73 investors.
Investors subscribed for the shares on 10 November 2005. On 6
December FL Group hf. issued 73 million shares. The objective of
the increase was to fulfil a part of the terms of employee stock
option agreements. The subscription price of the shares was ISK 5.97
per share, in accordance with the terms of the option agreements.
Additional new shares will not be offered by FL Group hf. immediately following or as a result of the publishing of this Prospectus.
The listing will proceed pursuant to Icelandic law and regulations.
This Prospectus has been prepared pursuant to the legislation, government regulations and ICEX's regulations on the listing of shares
on the exchange. ICEX has reviewed and approved this Prospectus,
which is only published in English.
This Prospectus has been prepared to provide clear and thorough
information on the consolidated company FL Group hf., as well as on
the shares issued by the Company. Investors are advised to consider statements from the Issuer, the Managers and the Auditors
regarding the Prospectus. Investors are encouraged to acquaint
themselves thoroughly with the Prospectus and its Appendices.
Investors are advised to pay particular attention to the chapter Risk
Factors. Investors are reminded of the risk related to the fact that FL
Group hf. has recently changed its focus of operation and undergone
fundamental organisational changes which reduces the usefulness of
reference to its historical success and could increase the risk of the
investment. Also that its main subsidiaries operate in a market that is
highly dependent on the development of external factors that are
outside the Company's control and that a high proportion of the
Company's costs are fixed in the short to medium term.
The information provided in this Prospectus is based on premises
that are current at the date of publication of this Prospectus. These
premises may change from the date of publication. Investors are
therefore advised to study all public information issued by or relating
to FL Group hf. and not to rely exclusively on information in this
Prospectus.
FL Group hf. is not obligated to carry out the acquisition of Sterling
if certain conditions are not met including, but not limited to, the
obtaining of all necessary clearances from the competition authorities
in relevant countries, or if applicable waiting periods have elapsed. The
competition authorities in Norway, Sweden and Germany have been
notified of the acquisition and have all decided not to object to the
acquisition. The competition authorities in Denmark and Iceland have
requested information regarding the acquisition. The Danish authorities will not investigate the matter any further but the Icelandic Competition Appeals Committee will now consider whether the acquisition needs to be reported to The Icelandic Competition Council. As
of today, 29 December, this means that it cannot be assumed that all
conditions necessary to complete the acquisition will be met in the
beginning of January 2006. FL Group hf. and Fons Eignarhaldsfélag hf.
have not decided how or if they are going to respond to this. When
their position is clear, ICEX will be notified and an annex to this
prospectus will be issued.
This Prospectus and any related documents are not being distributed
and must not be mailed or otherwise distributed or sent in or into
any country in which distribution would require any additional registration measures or other measures to be taken, other than as applicable under Icelandic law and regulations, or would be in conflict with
any law or regulation in such country. The Prospectus is not being
sent out, directly or indirectly, by use of mail or any other means or
instrumentality (including, without limitation, facsimile transmission,
electronic mail, telex, telephone and the Internet) in or into the United States, Australia, Canada or Japan. Accordingly, the Prospectus,
and any related documents are not being and may not be mailed or
otherwise distributed, forwarded or sent in or into the United States,
Australia, Canada or Japan. The shares have not been registered
under the United States Securities Act of 1933, as amended, or any
securities laws of any state of the United States, or the securities laws
of Australia, Canada or Japan or its provinces. Accordingly, such
shares may not be offered, sold, re-sold or delivered, directly or indirectly, within the United States, Australia, Canada or Japan, or to any
residents of these countries, except pursuant to an exemption from
applicable registration.
This Prospectus should by no means be viewed or construed as a
promise by the Issuer, Managers or other parties of future success in
either operations or return on investments. Investors are reminded
that investing in shares entails risk, as the decision to invest is based
on expectations and not promises. Investors must primarily rely on
their own judgement regarding any decision to invest in FL Group
hf.’s shares, bearing in mind the business environment in which the
Company operates, anticipated profits, external conditions and the
risk inherent in the investment itself. Prospective investors are advised
to contact experts such as licensed financial institutions to assist them
in their assessment of the shares in FL Group hf. as an investment
option. Investors are advised to consider their legal status, including
taxation issues that may concern the purchase or sale of shares in FL
Group hf. and seek external and independent advice in that respect.
Due diligence reviews were conducted for FL Group hf. on Sterling
and Bluebird in connection with the purchase of shares in these companies. The reviews on Sterling, addressed to and for the exclusive
use of FL Group hf., were conducted by PricewaterhouseCoopers
(limited high level review of specific financial issues) in September and
October 2005 and Logos sf. in September 2005 and Bech-Bruun
Dragsted (limited high level reviews of specific legal issues) in Sep-
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tember 2005. The reports on Sterling all still in draft form. The due
diligence reviews on Bluebird were conducted by PricewaterhouseCoopers hf. (finance - review of specific financial and tax issues) in
July 2005, addressed to Kaupthing Bank, and Logos sf. (legal – review
of specific legal issues) in July 2005, addressed to FL Group hf.
Due diligence reviews on FL GROUP hf., addressed to the Managers,
were conducted by Deloitte & Touche rádgjöf ehf. (finance) and Lex
Nestor ehf. which conducted a due diligence review on specific parts
of the operation of FL GROUP hf. and its subsidiaries (legal) in
November 2005.
Attention is drawn to the interests of the Managers of this Prospectus. A subsidiary of Kaupthing Bank hf., FIH Erhvervsbank A/S in Denmark was the advisor to Fons Eignarhaldsfélag hf. on the sale of Sterling to FL Group hf. The share offering was, and the listing of the new
shares on the ICEX Main List is, arranged jointly by Kaupthing Bank
hf.'s Investment Banking division and Landsbanki Íslands hf.'s Corporate Finance division. Kaupthing Bank hf. underwrote 62.5% of the
share offering for a maximum of ISK 10 billion to be paid with cash,
and Landsbanki Íslands hf. underwrote 37.5% of the share offering for
a maximum of ISK 6 billion to be paid with cash. Investors had the
choice of paying for the shares in the share offering in cash or with
shares in the ten companies which are listed on ICEX and which had
the largest weight in ICEX-15 index. Among those ten companies'
shares are those of Kaupthing Bank hf. and Landsbanki Íslands hf. FL
Group hf. and a subsidiary of Kaupthing Bank hf. have formed a special holding company for the investment in a Boeing 747 aircraft purchased from Singapore Airlines Cargo for ISK 5 billion and leased
back to Singapore Airlines Cargo for ten years. Kaupthing Bank hf.
and FL Group hf. have agreed upon unbinding heads of terms relating to aircraft investments in 15 Boeing 737-800 aircraft over the
next couple of years, whereby FL Group hf. and Kaupthing Bank hf.
through a joint venture set up special purpose vehicles for each aircraft. Each aircraft will be 20% financed with equity, and FL Group hf.
will own 49% and Kaupthing Bank hf. initially 51%. Both Kaupthing
Bank hf. and Landsbanki Íslands hf. act as FL Group hf.'s corporate
banks. Kaupthing Bank hf. has for example provided FL Group with
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PDP financing in connection with the Company's commitment of
acquiring 10 Boeing 737-800 aircraft. The debt arrangement gives the
Company a right to draw funds to meet pre-payments in connection
with the acquisition of the aircraft. The maximum amount of the PDP
debt arrangement is USD 190 million, and the loan is repayable at
delivery of the aircraft. Kaupthing Bank hf. holds a 2.9% stake in the
Company as of 28 December 2005. Landsbanki Íslands hf. holds a
29.7% stake in the Company as of 28 December 2005. Thereof,
according to a major holdings announcement published on ICEX's
website on 14 December 2005 17.9% stake is related to forward
contracts. Of Landsbanki Íslands hf's direct shareholding in FL Group
hf. 10% stands as a hedge against derivate contracts. Both Landsbanki Íslands hf. and Kaupthing Bank hf. act as market makers for FL
Group hf.'s shares on ICEX.
II. Offering and listing of shares
Issuer
FL GROUP hf.
Headquarters: Sudurlandsbraut 12, IS-108 Reykjavík, Iceland
Telephone number: +354 591 4400
Issuer’s operations
FL Group hf. is registered in Iceland and operates pursuant to Act no.
2/1995 on Public Limited Companies. FL Group hf. was founded on
20 July 1973 as Flugleidir hf., by Flugfélag Íslands hf. and Loftleidir hf.
and the name was changed to FL Group hf. at the 2005 annual general meeting.
The object of FL Group hf., according to Article 3 of its Articles of
Association, is to achieve a return on the investment that shareholders have made in the Company by operating the Company and
investing in subsidiaries and associated companies which primarily
operate in the fields of air travel, tourism, transportation and investment.
Managers of offering and listing on ICEX Main List
Kaupthing Bank hf. – Investment Banking division,
Address: Borgartún 19, IS-105 Reykjavík, Iceland
Landsbanki Íslands hf. – Corporate Finance division,
Address: Hafnarstræti 5, IS-101 Reykjavík, Iceland
Total share capital
shares. Each share has a nominal value of ISK 1.0. FL Group hf.'s own
(treasury) shares amount to 43,704,232 shares, so that the active
share capital amounts to 5,801,589,886 shares.
Issue, listing and share characteristics
FL Group hf.'s shares are all issued electronically at the ISD and are
registered there under the name of the relevant shareholder or their
nominees. The ISIN number of the shares is IS0000000289.
All issued shares of FL Group hf. are listed on the ICEX Main List and
are included in the ICEX 15 index. The shares' ticker symbol in the
trading system of ICEX is FL. One Round Lot of the Company's
shares amounts to 5,000 shares. A Round Lot, as defined in NOREX
Member Rules, is the minimum number of shares which can generate a Latest Paid Price, as defined in NOREX Member Rules, in conjunction with trading on ICEX.
Share capital increase – authorisation,
sale and listing
This Prospectus concerns FL Group hf.'s issuing of 3,235,294,118 new
shares, representing a 127.5% increase in share capital, and the listing
of those new shares on ICEX Main List on 21 November 2005. The
gross proceeds of the new shares sold amounted to ISK 44 billion.
The Board of Directors of FL Group hf. has also on 5 December
2005 exercised an authorization contained in the Company's Articles
of Association to increase the Company’s share capital by 73 million
new shares. The objective of the increase was to fulfil a part of the
terms of employee stock option agreements. The subscription price
of the shares was ISK 5.97 per share, in accordance with the terms of
the option agreements.
At a shareholders' meeting of FL Group hf. on 1 November 2005 the
shareholders resolved to increase the share capital by ISK
3,235,294,118 by issuing new shares each with a nominal value ISK 1.
Shareholders waived their pre-emptive right of subscription to the
new shares. The shares were sold in a private placement directed
towards institutional investors both within and outside the current
shareholder group. The shares were sold for ISK 13.6 per share as
decided at the shareholders' meeting in accordance with a proposal
by the board of directors of FL Group hf. Payment could be made in
cash or in shares in Kaupthing Bank hf., Landsbanki Íslands hf., Íslandsbanki hf., Actavis Group hf., Straumur-Burdarás Fjárfestingarbanki hf.,
Bakkavör Group hf., Össur hf., SÍF hf., HB Grandi hf. and Marel hf.,
based on their closing prices on the ICEX on 9 November 2005, the
last trading day before the beginning of the subscription period. The
minimum subscription amount was ISK 5 million per participant. The
whole offering was either committed or underwritten. Kaupthing
Bank hf. underwrote the offering for a maximum of ISK 10 billion and
Landsbanki Íslands hf. underwrote the offering for a maximum of ISK
6 billion. Large shareholders had committed to invest ISK 28 billion in
the offering. The offering was oversubscribed, as investors subscribed
for more than ISK 69 billion. On 10 November 2005 a total of
3,235,294,118 shares were sold. The new shares are all paid in, and
the issue was registered on 18 November on the ICEX Main List. The
placement was arranged by Kaupthing Bank's Investment Banking division and Landsbanki Íslands' Corporate Finance division. The purpose
of the offering was to further strengthen the investment activity of FL
Group hf. and to reinforce the equity base.
At a shareholders' meeting of FL Group hf. on 1 November 2005 the
shareholders resolved to increase the share capital by ISK
3,235,294,118 by issuing new shares each with a nominal value ISK 1.
Shareholders waived their pre-emptive right of subscription to the
new shares. The shares were sold in a private placement directed
towards institutional investors both within and outside the current
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shareholder group. The shares were sold for ISK 13.6 per share as
decided at the shareholders' meeting in accordance with a proposal
by the board of directors of FL Group hf. Payment could be made in
cash or in shares in Kaupthing Bank hf., Landsbanki Íslands hf., Íslandsbanki hf., Actavis Group hf., Straumur-Burdarás Fjárfestingarbanki hf.,
Bakkavör Group hf., Össur hf., SÍF hf., HB Grandi hf. and Marel hf.,
based on their closing prices on the ICEX on 9 November 2005, the
last trading day before the beginning of the subscription period. The
minimum subscription amount was ISK 5 million per participant. The
whole offering was either committed or underwritten. Kaupthing
Bank hf. underwrote the offering for a maximum of ISK 10 billion and
Landsbanki Íslands hf. underwrote the offering for a maximum of ISK
6 billion. Large shareholders had committed to invest ISK 28 billion
in the offering. The offering was oversubscribed, as investors subscribed for more than ISK 69 billion. On 10 November 2005 a total
of 3,235,294,118 shares were sold. The new shares are all paid in,
and the issue was registered on 18 November on the ICEX Main List.
The placement was arranged by Kaupthing Bank's Investment Banking division and Landsbanki Íslands' Corporate Finance division. The
purpose of the offering was to further strengthen the investment
activity of FL Group hf. and to reinforce the equity base.
At a shareholders' meeting on 1 November 2005 the Company’s
board of directors was authorized to increase share capital by up to
330,000,000 shares, each with a nominal value ISK 1, on a non preemptive basis at the same price as in the aforementioned private
placement, i.e. ISK 13.6 per share. This authorisation, valued at ISK
4,488,000,000, shall be exercised in exchange for shares in Sterling.
The authorisation remains valid until 1 November 2006.
Cost and cash flow
The aforementioned 3,235,294,118 new shares in FL Group, were
sold at ISK 44 billion. The cost of the offering is expected to amount
to approximately ISK 1,300,000,000, including underwriting fees,
stamp duties, costs incurred at ICEX and ISD, cost of due diligence,
printing costs and advertising costs. The Issuer will bear these costs
in full. FL Group hf.'s net proceeds from the offering are therefore
expected to amount to approximately ISK 42.7 billion.
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Information
A hard copy of this Prospectus along with the material publicly cited
in it may be obtained at the following locations from the Managers
and Issuer:
Kaupthing Bank hf. – Investment Banking
Address: Borgartún 19, IS-105 Reykjavík, Iceland
Landsbanki Íslands hf. – Corporate Finance
Address: Austurstræti 11, IS-101 Reykjavík, Iceland
FL Group hf.
Address: Sudurlandsbraut 12, IS-108 Reykjavík, Iceland
A copy of this Prospectus can also be obtained in PDF format on
the following websites:
Kaupthing Bank hf.
www.kbbanki.is or www.kaupthing.net
Landsbanki Íslands hf. www.landsbanki.is
FL Group hf.
www.flgroup.is
ICEX (news)
www.icex.is
III. Share capital and ownership
Total share capital and own shares
shares. Each share has a nominal value of ISK 1. All issued share capital has been paid for. No outstanding loans include terms that affect
the Company's share capital. According to the Company's Articles of
Association, the Company may not grant loans or guarantees against
shares in the Company to shareholders, to members of the board of
directors, managing directors or managers. This does not prohibit
normal commercial loans or investments made by the Company's
employees or those of a related company in the Company's shares
or investments in shares on their behalf as permitted by law.
FL Group hf.'s active share capital (i.e. shares that have active voting
rights) amounts to 5,801,589,886 shares, which is the number of
total issued shares excluding the own shares. FL Group hf. holds
43,704,232 own shares as of 28 December 2005, or 0.7% of total
issued shares. The Annual General Meeting held on 10 March 2005
authorized the Company’s board of directors to buy own shares up
to a maximum of 10% of the total issued share capital. The purchase
price of the shares may be up to 20% higher than the average selling
price of shares in the Company as registered on the Iceland Stock
Exchange during the two-week period immediately preceding the
purchase. No minimum limit applies to this authorisation, regarding
either the purchase price or the number of shares purchased each
time. The authorization is valid for 18 months. By law, own shares do
not bear voting rights.
The authorisation to increase share capital by 700,000 shares. The
offer price of the shares and the terms of sale shall be decided by the
board of directors. Shareholders' pre-emptive rights to these shares
in the increase in share capital pursuant to the Act on Public Limited
Companies and the Company's articles of association shall not apply,
cf. authorisation provided in Art. 34 of Act no. 2/1995 on Public Limited Companies. The authorisation can be exercised partly or in its
entirety at any time at the discretion of the board of directors. The
authorisation is valid until 18 October 2009.
The authorisation to increase share capital by 692,100,000 shares on
a pre-emptive basis. The offer price of the shares and the terms of
sale shall be decided by the board of directors. The authorisation can
be exercised partly or in its entirety at any time at the discretion of
the board of directors. The authorisation is valid until 18 October
2009.
The authorisation to increase share capital by up to 330,000,000
shares on a non pre-emptive basis. The price shall be ISK 13.6 per
share. This authorisation, valued at ISK 4,488,000,000, shall be exercised in exchange for shares in Sterling Airlines A/S, Sterling Icelandic
ApS and Flyskabet A/S. The authorisation shall remain valid until 1
November 2006.
The new shares shall belong to the same class and carry the same
rights as other shares in the Company. The new shares shall grant
rights within the Company as of the date of registration of the
increase of share capital.
Authorisation for further increase of share capital
The board of directors of FL Group hf. is authorised to increase the
share capital of the Company by up to 1,022,800,000 shares, each
with a nominal value of ISK 1, on the basis of four distinctive authorisations granted by shareholders. These are:
9
Development of share capital
FL Group hf.'s total issued share capital remained the same from 2000 to 2003. The following table lists the changes from 1 January 2004:
Exhibit 1 – Development of share capital
Date
Transaction
01.01.2004
10.11.2004
Price (ISK)
Change in
Number of
per share number of shares shares outstanding
Own shares
Number of
shares issued
2,131,725,000
175,275,000
2,307,000,000
17,563,541
2,114,161,459
192,838,541
2,307,000,000
230,000,000
190,000,000
2,534,161,459
2,838,541
2,537,000,000
9,200,000
2,524,961,459
12,038,541
2,537,000,000
6,803,095
2,531,764,554
5,235,446
2,537,000,000
13.60
3,235,294,118
5,767,058,672
5,235,446
5,772,294,118
5.97
73,000,000
5,841,879,841
3,414,277
5,845,294,118
40,289,955
5,801,589,886
43,704,232
5,845,294,118
Opening balance . . . . . . . . . . . . . . . . . . . . . . .
Increased holding of own shares year
2004 before offering . . . . . . . . . . . . . . . . . . .
Offering by book building process
- new shares sold . . . . . . . . . . . . . . . . . . . . .
- own shares sold . . . . . . . . . . . . . . . . . . . . .
Increased holding of own shares
year 2004 after offering . . . . . . . . . . . . . .
10.11.2004
31.12.2004
10.11.2005
9.10
9.10
Decreased holding of own shares
year 2005 before offering. . . . . . . . . . . . .
Private offering - new shares
sold at fixed price . . . . . . . . . . . . . . . . . . . .
Shares issued to meet the terms of
employees stock-options . . . . . . . . . . . . .
Increase holding of own shares
10.11.-28.12.2005 . . . . . . . . . . . . . . . . . . . .
10.11.2005
05.12.2005
28.12.2005
28.12.2005
28.12.2005
Share capital outstanding . . . . . . . . . . . . . . .
Holdings of own shares. . . . . . . . . . . . . . . . .
5,801,589,886
43,704,232
28.12.2005
Issued shares . . . . . . . . . . . . . . . . . . . . . . . . . .
5,845,294,118
Share performance
On 28 December 2005 the market capitalization of FL Group hf. was
ISK 118 billion, according to the latest price paid on ICEX, which was
ISK 20.2 per share.
The volume of trading in shares for the twelve month period up until
the listing of approximately 3.2 billion shares on 21 November 2005
amounted to ISK 45.3 billion in trading value and ISK 3.1 billion at
nominal value, which corresponds to 121% of the total issued shares.
The average spread between the bid and ask price at closing was
Exhibit 2 – Development of FL Group hf.'s share price
800
FL
ICEX-15
ICEXMAIN
700
600
500
400
300
200
10
13. 10. 2005
05. 02. 2005
31. 05. 2004
24. 09. 2003
17. 01. 2003
15. 05. 2002
04. 09. 2001
28. 12. 2000
100
5,845,294,118
0.9% during the same period. The spread is a good indicator of the
liquidity of the stock.
Exhibit 2 sets forth the development of FL Group hf.'s end of day
share price on ICEX from 28 December 2000 until 28 Decembe
2005. The exhibit also shows the ICEX-15 index and ICEXMAIN,
which is the index for all shares on ICEX Main List during the same
period.
Market making
Both Landsbanki Íslands hf. and Kaupthing Bank hf. act as market
makers for FL Group hf.'s shares on ICEX pursuant to an agreement
with Kaupthing Bank on 7 October 2004 and Landsbanki Íslands hf.
on 2 November 2005. According to the agreement Kaupthing Bank
hf. through its own account shall submit daily bids and asks to ICEX
for a minimum of 500,000 shares on each side at a price determined
by the market maker on any given occasion. The maximum bid/ask
spread may not exceed 1.5% and the difference from the last price
paid may not exceed 5%. The market maker is obliged to provide liquidity for up to ISK 30 million per day. According to the agreement
with Landsbanki Íslands hf., the bank shall through its own account
submit daily bids and asks to ICEX for a minimum of 500,000 shares
on each side at a price determined by the market maker on any given occasion. The maximum bid/ask spread may not exceed 1.5%.
The market maker is obliged to provide liquidity for up to ISK 70 million per day.
Exhibit 3 – Twenty largest shareholders of FL Group hf.
FL Group hf. - Share register 28.12.2005
Shareholders
Description
Landsbanki Íslands hf.*
Bank
Eignarhaldsfélagi› Oddaflug ehf.
Holding company
Íslandsbanki hf.*
Bank
Arion safnreikningur
Custody account
Materia Invest ehf.
Holding company
Kaupthing Bank hf.
Bank
Straumur-Burdarás Fjárf.banki hf.*
Investment bank
Gildi - lífeyrissjódur
Pension fund
Saxbygg ehf.
Holding company
Lífeyrissjódur Bankastræti 7
Pension fund
Ten largest shareholders total
Fjárfestingasjódur Búnadarb. hf.
Investment fund
MP Fjárfestingarbanki hf.*
Investment bank
Lífeyrissjódur verslunarmanna
Pension fund
Sund ehf.
Holding company
VVÍB hf., sjódur 6
Investment fund
Einar S Ólafsson
Individual
Samvinnulífeyrissjódurinn
Pension fund
Sparisjódur Hafnarfjardar*
Savings Bank
Úlfur Sigurmundsson
Individual
Elías Skúli Skúlason
Individual
Twenty largest shareholders total
Other 4999 shareholders total
Total active shares
FL Group hf.
Own shares
Total issued shares
Shares
1.735,162,624
1,158,919,071
545,173,018
472,130,644
404,411,765
169,829,531
122,132,815
70,890,495
60,987,713
48,383,875
4,788,021,551
44,684,625
43,521,197
37,122,600
33,252,204
26,004,377
25,000,000
20,430,510
19,425,757
18,750,000
18,750,000
5,074,962,821
726,627,065
5,801,589,886
43,704,232
5,845,294,118
Ownership
The total number of shareholders in FL Group hf. as of 28 December 2005 was 5,019 at the end of the day. The ten largest shareholders owned the equivalent of 81.9% of total issued shares in the Company, a total of 4,788,021,551 shares. The twenty largest shareholders owned a total of 5,074,962,821 shares, or 86.8%. The Company is not aware of any shareholder agreements which have been
made concerning the exercising of voting rights.
The following shareholders are obligated not to dispose of their
shares in FL Group hf. for a certain period of time: Einar S. Ólafsson,
Elías Skúli Skúlason, Úlfur Sigmundsson and Thórarinn Kjartansson.
Pursuant to a purchase agreement of Flugflutningar ehf. each of these
individuals received 23,437,500 shares in FL Group. On 1 July 2005
they were allowed to sell 1/10 of that share capital. Every three
months thereafter they will be allowed to sell an additional 1/10 of
the share capital they received as a part of the sale. These restrictions
will be fully lifted as of 1 October 2007.
The largest shareholders
According to the share register, Landsbanki Íslands hf. (one of the
two Managers) is the largest shareholder in FL Group hf. with
1,735,162,624 shares. According to a major holdings announcement
published on ICEX’s website on 14 December 2005 Landsbanki Íslands hf. has entered into forward contracts whereby Landsbanki
%
29.7%
19.8%
9.3%
8.1%
6.9%
2.9%
2.1%
1.2%
1.0%
0.8%
81.9%
0.8%
0.7%
0.6%
0.6%
0.4%
0.4%
0.3%
0.3%
0.3%
0.3%
86.8%
12.4%
99.3%
0.7%
100.0%
*Including shares whereby the banks may have
entered into forward contracts requiring them to sell
shares at a predetermined future date.
Íslands hf. is obligated to sell 1,044,504,817 shares in FL Group hf. or
17.87% of FL Group hf.'s. total share capital. Of Landsbanki Íslands
hf's direct shareholding in FL Group hf. 10% stands as a hedge against
derivate contracts.
Eignarhaldsfélagid Oddaflug ehf. is the second largest shareholder
according to the share register but the largest beneficial shareholder
in FL Group hf., with a 19.83% holding. According to major holding
announcements sent to ICEX, most recently on 14 December 2005,
the company is owned by Hannes Smárason, CEO of FL Group hf. In
addition Eignarhaldsfélagid Oddaflug ehf. bears all financial risk and
benefits from what corresponds to the ownership of 292,264,706
shares by virtue of a derivative issued by Landsbanki Íslands hf.
According to the share register Íslandsbanki hf. is the third largest
shareholder in FL Group hf. with 545,173,018 shares or 9.3%. Islandsbanki hf. has not made any major holdings announcement on ICEX
regarding this shareholding. According to information from the bank
on 28 December 2005, the holding of Íslandsbanki hf. in FL Group hf.
is to a significant extent due to forward contracts which the bank has
entered into with its customers. The bank said its real shareholding is
insignificant and under the disclosure limits specified in the securities
transactions act.
The fourth party listed on the share register is an Arion safnreikningur.
These are shares held in nominee accounts on behalf of Arion's
clients. Arion Verdbréfavarsla hf. is a custody service company fully
11
owned by Kaupthing Bank hf. (one of the Managers). There is no further information available on the beneficial ownership of these
shares.
Materia Invest ehf. is the owner of 404,411,765 shares or 6.9% of FL
Group hf.'s share capital. According to a major holdings announcement sent to ICEX on 18 November 2005, Materia Invest ehf. is
owned by Magnús Ármann, member of the board of directors of FL
Group hf., Thorsteinn M Jónsson, member of the board of directors
of FL Group hf. and Kevin Stanford. Each of them owns one third of
the share capital of Materia Invest ehf.
Important parties not shown in the share register
According to a major holdings announcement in ICEX's news system, http://news.icex.is, the following parties not shown in the share
register have announced their interest in FL Group hf.'s shares.
Baugur Group hf. has entered into forward contracts to acquire a
total of 1,124,670,139 shares or 19.24% of the Company's shares,
making Baugur Group hf. the second largest shareholder of FL Group
hf. when shares have been delivered according to the terms of these
forwards contracts. Baugur Group hf. is an international investment
company focusing on retail investments and real estate sectors in
northern Europe. Among other principal assets owned by Baugur
Group hf. are Iceland Stores and Booker, a large stake in Mosaic
Fashions hf., listed on ICEX which runs womenswear brands, Oasis,
Coast, Karen Millen and Whistles, Hagar hf., the largest food and speciality retailer in Iceland, the toy company Hamleys, the Goldsmith
jewellery store chain, the MK One fashion chain and Julian Graves, a
speciality food chain. The CEO of Baugur Group hf., Jón Ásgeir
Jóhannesson, is a member of the board of directors of FL Group hf.
and the director of Nordic Investment within Baugur Group hf.
Skarphédinn Berg Steinarsson is the chairman of the board of directors of FL Group hf. In addition Baugur Group hf. bears all financial
risk and benefits from what corresponds to the ownership of
292,264,706 shares by virtue of a derivative issued by Landsbanki
Íslands hf.
Icon ehf. has entered into forward contracts to acquire a total of
448,487,889 shares or 7.8% of the Company's shares. According to
a major holdings announcement sent to ICEX on 31 October 2005,
Icon ehf. is owned by Magnús Ármann, member of the board of
directors of FL Group hf., Thorsteinn M Jónsson, member of the
board of directors of FL Group hf., Kevin Stanford and Sigurdur Bollason. Each of them owns 25% of the share capital of Icon ehf.
According to an announcement of trading by primary insiders dated
3 November 2005, Thorsteinn M Jónsson, member of the board of
directors, is the beneficial owner of 24,771,499 shares in FL Group
hf. or 0.4%.
Issue and share rights
Issue and share characteristics
FL Group hf.'s share capital consists of shares of ISK 1.0 and multiples
thereof. FL Group hf.'s shares are all issued electronically at the ISD
and are registered there under the name and Icelandic ID-Number
of the relevant shareholder or their nominee. The shares' symbol in
the ISD system is FL. The ISIN number of the shares is
IS0000000289.
FL Group hf.'s shares have been listed on the ICEX Main List since
12
29 June 1992, and are included in the ICEX-15 index. The Company's board of directors has not made any resolution on seeking a listing for FL Group hf. shares on other stock exchanges. The shares'
ticker symbol in the trading system of ICEX is FL. One Round Lot of
the Company's shares amounts to 5,000 shares. A Round Lot, as
defined in NOREX Members Rules is the minimum number of shares
which can generate a Latest Paid Price, as defined in NOREX Member Rules, in conjunction with trading on ICEX.
Rights
All the shares of FL Group hf. are of one class and carry equal rights.
The Company's shares carry no special rights and no restrictions are
placed on them. Owners of the Company’s share capital have the
right to vote at shareholders' meetings, the right to receive dividends
when declared, enjoy pre-emptive rights to new shares, unless
waived, and the right to a portion of the Company’s assets upon liquidation, all according to share ownership, statutes and the Company’s Articles of Association in effect at any given time.
Dividend policy
FL Group hf. decided at the Annual General Meeting on 10 March
2005 to pay 60% dividend on the nominal value of shares for the year
2004 which equalled 44% of the Company's after-tax profit for 2004.
The payment was made on 20. April 2005. It is FL Group hf.'s policy
to pay out 30-40% of its after-tax profit on average.
Right to dividends
A resolution on the distribution of dividends shall be made at an
annual general meeting which shall be held before the end of May
each year. According to the Company's Articles of Association the
dividend payment is presumed due at the annual general meeting,
and any dividends declared shall be paid to parties who are shareholders in the shareholder registry at the annual general meeting
which decides on the payment of dividends for the previous accounting year.
According to Article 4 of the Company's Articles of Association, each
shareholder shall inform the Company of his/her address. In the event
that shareholders neglect to provide information of such address,
they shall neither have any claim towards the Company to receive
any notice or payments which have been miscarried. However, shareholders may collect their dividends at the Company's office within
four years of payment being due. This provision on the lapse of the
right to a dividend that has not been collected is unanimous with provisions stating that these rights lapse after four years according to Act
no. 14/1905 on the Lapse of Debts and Other Claim Rights.
Right of ownership and transfer
There are no limitations on the authorization to transfer FL Group
hf.'s shares, and shareholders may pledge their shares unless prohibited from doing so by law. Nevertheless, it should be noted that individual shareholders may have agreed that their shares are subject to
certain restrictions. A party acquiring a share in the Company cannot
exercise its right as a shareholder unless its name has been registered
in the share registry or it has announced and proven its ownership of
the share. Only general legislative rules apply to the transfer of shares
in FL Group hf. The electronic registration of securities is governed
by Act no. 131/1997 on electronic registration of securities and Regulation no. 397/2000 which is based on that Act.
A printout from the ISD on the ownership of shares in FL Group hf.
is considered a valid registration of the shares. The Company shall
consider the share registry as full proof of ownership to shares and
attached rights. Dividends as well as all announcements shall at any
given time be sent to the party registered in the Company’s share
register as owner of the shares in question. The Company is in no
way liable if payments or announcements do not reach their recipients because a change of address has not been notified.
Rights to electronic shares must be registered at the ISD if they are
to enjoy legal protection against legal executions and disposal by
means of an agreement. It is forbidden to issue share certificates for
registered rights according to an electronic share or endorse them,
and such transactions are voided. Registration of the ownership of an
electronic share at the ISD, subsequent to a Securities Depository
final entry, formally gives a registered owner legal authorization to
the rights for which he is registered. Priority of incompatible rights is
determined by the chronological order of requests from the Banks’
Data Central reaching the Securities Depository.
Tax issues
The shares of FL Group hf. are subject to taxation according to law
in effect at any given time. Investors are advised to seek external tax
advice on the tax impact of any investment in the shares.
The Issuer's shares are subject to stamp duty in Iceland which the
Issuer shall pay within a year from the issue of the shares. Stamp duty
has been paid on all shares that have already been issued.
The Company is obliged to retain PAYE taxes on dividend payments,
according to Art. 3, Para. 2 and Art. 5. Para 4. of Act no. 94/1996 on
Capital Income Tax. For Icelandic parties other than those exempt
from PAYE tax on capital earnings, the PAYE tax is a final taxation.
As regards parties living abroad, it must be established whether there
is a double taxation agreement with the state where the party in
question resides and, if so, it must be established whether there is
any taxation payable in addition to that in Iceland.
Profit from the sale of shares in FL Group hf. is taxable in Iceland. As
regards parties living abroad, it must be established whether there is
a double taxation agreement with the state where the party in question resides and, if so, it should be determined which state has the
right of taxation.
the share register. The same applies to financial institutions which are
registered as nominees as the shareholder does not have the right to
issue a proxy to exercise the voting right. Shares held by a nominee
do therefore not provide voting rights at shareholders’ meetings.
Having shares registered by a nominee does not exempt the respective shareholder from being subject to the relevant rules relating to
the acquisition and disposal of major holdings in the Act on Securities
Transactions. Customers' ownership in nominee accounts shall be
included when assessing the need for disclosing such transactions.
In Article 11, Act no. 33/2003 it is stated that a financial undertaking,
which is authorised to hold financial instruments owned by its customers, may hold them in a special account (nominee account) and
accept payment on behalf of its customers from individual issuers of
financial instruments, provided the financial undertaking has explained
to the customer the legal effects of such and the customer has given
approval thereto. The financial undertaking must keep a record of the
holdings of each individual customer. Article 11 also states that in the
event that a financial undertaking is sent into receivership or granted
a debt moratorium, or the undertaking is wound up or comparable
measures taken, the customer can, on the basis of the record provided for in the first paragraph, withdraw his/her financial instruments
from the nominee account, provided there is no dispute as to the
holding.
Dissolution of the Company
According to the Company's Articles of Association the dissolution
of the Company shall be governed by the current act on public limited companies. The current act is Act no. 2/1995 on Public Limited
Companies and the provisions are set out in Chapter XIII. The same
Act shall apply to any type of merger or joining of the Company with
other companies, and to the sale of all of its assets. The meeting that
has made a valid decision to dissolve or liquidate the Company shall
also decide on the disposal of assets and the payment of debts, cf.
Chapter XIII of Act No. 2/1995 on Public Limited Companies. Chapter XIII also stipulates that shareholders controlling a minimum of two
thirds of a company's total share capital can make the decision at a
shareholders' meeting to the effect that the company shall be dissolved. Upon the satisfaction of all claims, payments to shareholders
shall be in correct proportion to their holdings.
Shares in FL Group hf. fulfil the conditions of item 1 of section B of
Article 30 of Act. no. 90/2003, with subsequent amendments, on
Income Tax and Net Wealth Tax. It discusses the deduction of
increased investments in shares before the end of 2002 from the
income tax base.
Nominee accounts
Provisions on nominee accounts are contained in the Act no.
33/2003on Securities Transactions, the Act no. 131/1997 on Electronic Registration of Title to Securities and the Act no. 2/1995 on
Public Limited Companies.
In Article 31, Act no. 2/1995 it is stated that those who own shares
cannot exercise their rights unless the ownership has been registered
in the share register. This does not include the right to dividends or
other payments and the right to new shares in the case of a new
share issue. According to Article 31 a shareholder does not have voting rights at a shareholders’ meeting unless his name is registered in
13
IV. Organisation
Historical
The story of FL Group hf.'s predecessors dates back to 1937, almost
as long as the story of commercial aviation in Iceland which began in
1919, less than 16 years after the Wright brothers made the firstever powered flight. FL Group hf. which was called Flugleidir hf. at
that time, was established in Reykjavik on 20 July 1973 by Flugfélag
Íslands hf. and Loftleidir hf.
Today FL Group hf. places its main focus on investment activities.
The Company is engaged in three areas of investments; firstly in private equity investments with a focus on operating companies, i.e.
businesses owned by the parent company and strategic investments;
secondly in asset management with a focus on short-term investments and asset management; and thirdly aircraft trading/leasing with
a focus on buying, selling and leasing aircraft. In addition finance and
administration takes place at a group level.
FL Group hf.'s business is largely involved in the private equity segment. The private equity division manages all business operated by
FL Group hf. The largest business in 2005 is Icelandair Group, and
the others are FL Travel Group and Bluebird. Sterling is expected to
join the Group from January 2006. Within Icelandair Group there are
five subsidiaries, whilst there are six subsidiaries within FL Travel
Group. FL Group aims to have 50-80% of total assets channelled into
private equity investments.
As a result of FL Group's recent share issue, through which the Company raised ISK 42.7 billion to the Company, more funds are available
for investing in new projects. Consequently, a large part of those new
funds have currently been invested through the asset management
side of the Company, while they may at a later stage be transferred
into private equity projects and strategic investments. FL Group aims
at having 20-50% of total assets invested in a portfolio of listed securities and other short-term investments.
1973
1979
1992
1993
1997
1998
2000
2001
2002
2003
2004
2005
2005
Loftleidir pioneered low-fare services across the North
Atlantic.
Loftleidir and Flugfélag Íslands merged to form Flugleidir.
Flugleidir assumed operating responsibilities of its two parents, Icelandair becomes its international name.
Flugleidir becomes listed on the ICEX Main List.
Total renewal of older fleet that began 1989 reaches a conclusion.
Flugfélag Nordurlands and Flugleidir domestic flight operation
merged to form Flugfélag Íslands, a wholly owned subsidiary
of Flugleidir hf.
Flugleidahótel hf. founded when the hotels that had been
part of Flugleidir hf. became a distinct subsidiary.
Flugleidir Frakt ehf. founded when the cargo business of Flugleidir became a distinct subsidiary.
Flugthjónustan Keflavíkurflugvelli ehf. founded when the
ground services of Flugleidir became a distinct subsidiary.
Loftleidir Icelandic ehf. founded when the wet lease and
charter arm of Icelandair became a distinct subsidiary.
Flugleidir became a holding company with 11 subsidiaries in
travel and tourist industry in Iceland, Flugleidir hf. operations
was divided into Icelandair, Icelandair Technical Services and
Fjárvakur-financial services. Icelandair is the largest subsidiary.
Flugleidir acquires an 8.4% holding in easyJet (current ownership 16.2%).
Flugleidir becomes FL Group. The holding company
announced its emphasis on investment. This was followed by
increased investment activities and the acquisitions of Bluebird and Sterling.
In October fundamental changes took place whereby investments became the focus of FL Group hf. and its airline and
tourist service operations were divided between two separate business units; Icelandair Group and FL Travel Group.
These business units are then to be made into separate subsidiaries from 1 January 2006.
The aircraft trading and leasing segment draws on the overall knowledge of FL Group hf.'s operation, history, contacts and capabilities. FL
Group hf. has a decade of experience in aircraft trading. Over the last
12 months Icelease, which is part of the aircraft trading and leasing
operation of FL Group hf., has been involved in the purchase and sale
of 25 aircraft in deals worth more than USD 1 billion.
Icelandair has been a member of International Air Transport Association (IATA) since 1950, a member of Association of European Airlines (AEA) since 1957, and a member of Flight Safety Foundation
(FSF) since 1966.
Key Milestones
Legal structure
1937
The business development of FL Group hf. has made its mark on the
Group's legal structure. In the 1990's FL Group hf. (then Flugleidir hf.)
broadened its scope of operation from being mainly focused on aviation to include cargo and the tourist industry. These additional activities formed either part of the operation of Flugleidir hf.'s parent company or part of the operation of subsidiaries. In 2003 action was tak-
1943
1944
1945
14
1953
Flugfélag Akureyrar founded in Akureyri on the north coast
of Iceland.
Name changed to Flugfélag Íslands (Icelandair) and headquarters moved to Reykjavík.
Loftleidir founded, later also known as Icelandic Airlines.
Flugfélag Íslands made its first international flights and Loftleidir in 1947.
en towards differentiating between different operations, whereby FL
Group hf. (then Flugleidir hf.) became the holding company of subsidiaries with specific operations. The last changes were implemented in October 2005 whereby the subsidiaries, excluding those
acquired in 2005, are to be categorised and mainly put into two
holding companies: Icelandair Group and FL Travel Group. This
change has not yet had its effect on the legal structure but is shown
in the chart under "Position within the organisation".
Subsidiaries and associates
On 29 December 2005 the following companies are subsidiaries of
FL Group. Note that FL Investment hf. will be merged with the parent company in the last quarter of 2005, and in January 2006 Sterling is expected to become part of the Group. Furthermore, as a
result of organisational changes made in October, the legal structure
of the Group will change from 31 December 2005:
Exhibit 4 – Legal structure of FL Group hf.
Subsidiaries:
Legal name
Ownership
Icelandair ehf.
100%
English brand name
100%
Icelandair Cargo
ID-No: 471299-2359, Reg.office: Reykjavíkurflugvöllur pc.101
Loftleidir - Icelandic ehf.
100%
Loftleidir - Icelandic
Flugthjónustan
Keflavíkurflugvelli ehf.
100%
IGS Ground Services
ID-No: 551200-3530, Reg.office: Heidarbóli 43 pc. 230
Tæknithjónustan
Keflavíkurflugvelli ehf.
100%
ITS Technical Services
ID-No: 511202-2990, Reg.office: Keflavíkurflugvöllur pc. 235
Flugfélag Íslands hf.
100%
Air Iceland
Ferdaskrifstofa Íslands hf.
100%
Ownership
ii no2 Ltd, ii no3 Ltd, ii
no4 Ltd, ii no5 Ltd
100%
English brand name
Reg.office: 30 Herbert Street, Dublin, Ireland
Fjárvakur Fjármálathjónusta ehf.
100%
FjárvakurFinancial services
FL Group hf.'s associated companies, both domestic and foreign, are
stated at historical cost. The Group holds a share of between 20%
and 50% in fifteen associated companies. The equity of the associated companies in the operating results and financial position of the
associated companies are not included in the Consolidated Financial
Statements of FL Group hf. due to the immaterial effect thereof and
therefore not included in the legal structure.
In addition to the above mentioned 37 subsidiaries and associates,
the Company owns 7 dormant companies not included in the legal
structure.
The Group's subsidiaries and parent company trade with each other.
There are no irregular loan agreements between them of a material
nature.
Icelandair
Flugleidir-Frakt ehf.
Legal name
(IT - Iceland Travel)
Principal Subsidiaries
Principal subsidiaries are those in which the issuer holds a proportion
of the capital likely to have a significant effect on the assessment of its
own assets and liabilities, financial position or profits and losses. In all
cases the book value of that subsidiary represents at least 10% of the
consolidated net assets or accounts for at least 10% of the consolidated net profit or loss of the group. Principal subsidiaries in 2005 are
Icelandair ehf. and FL Investment ehf. The operation of the parent
company FL Group hf. also falls into the category of a major entity. It
must be noted that FL Investment will be merged with the parent
company before the publication of the annual accounts, and the
organisational structure described later in this chapter has changed
since the first nine months of 2005.
ID-No: 590670-0149, Reg.office: Pósthólf 8650 pc 128
Íslandsferdir ehf.
100%
IT - Iceland Travel
ID-No:410791-1379, Reg.office: Lágmúli 4 pc 108
Kynnisferdir ehf.
96%
Reykjavík Excursions
ID-No: 620372-0489, Reg.office: Vesturvör 6, pc 200
Bílaleiga Flugleida ehf.
100%
Icelandair Hertz
Car Rental
Flugleidahótel hf.
100%
Icelandair hotels
Bláfugl hf.
100%
Blubird Cargo
ID-No: 460899-2229, Reg.office: Bygging 10 pc 235
Flugflutningar ehf.
100%
ID-No: 600372-0179, Reg.office: Hédinsgata 1-3 pc 105
FL investment ehf.
100%
Icelease ehf
Icelandair ehf.
Icelandair ehf. is a 100% owned subsidiary of FL Group hf. The total
share capital of Icelandair ehf. is 3,000,000,000 shares of ISK 1 each
and has been paid in full. On 30 September 2005, the book value of
Icelandair ehf. capital and reserves amounted to ISK 4,409 million. Icelandair ehf. was incorporated in December 2002. Icelandair ehf. paid
no dividend in 2005 for 2004.
100%
BlueCargo
FL investment ehf.
FL investment ehf. is a 100% owned subsidiary of FL Group hf. The
total share capital of FL investment ehf. is 1,000,000 shares of ISK 1
each and has been paid in full. On 30 September 2005, the book value of FL investment ehf. capital and reserves amounted to ISK 6,217
million. FL investment ehf. was incorporated in February 2004. FL
Investment ehf. paid ISK 350 million in dividend in 2005 for 2004.
Icecap Insurance PCC
Ltd, Cell 1
Organisational structure
100%
Reg.office: Polygon Hall Le Marchantstreet, St'Petersport, Guemsey
Icelease (Ireland) no 1
Ltd. ("ii no1 Ltd")
100%
Reg.office: 30 Herbert Street, Dublin, Ireland
The new organisational structure which was introduced in October
2005 is in line with the Group's main focus of an increased emphasis
on investments. Managing capital between attractive investment
propositions is the main task ahead. Investment activity is managed by
three distinct divisions: the asset management division managing short
15
term investments and investments in listed securities;
the aircraft trading and leasing division managing
investments and leasing of aircraft; and the private
equity division managing almost all operating companies and strategic investments owned by the Group.
Private equity will actively participate in the strategic
development of the Group's companies but will
distance itself from day-to-day operations. Each business is managed in accordance with portfolio theories and private equity initiatives, creating value with
strategic and business development decisions. The
finance and administration department is a support
division to the parent Company.
The new organisational structure has also focused on
simplifying the structure of companies managed by
the private equity division, categorising the existing
subsidiaries into either airline or tourist services
operations. At the moment Icelandair Group and FL
Travel Group are still only organisational entities but
will in the coming months also gain a legal setup
when many of the existing subsidiaries and operations described in the legal structure section on the
previous page will be transferred into three companies, Icelandair Group (yet to be founded), FL Travel Group (yet to be founded) and Bluebird. Sterling
is expected to join the Group from January 2006.
Exhibit 5 – FL Group's organisational structure
Board
of Directors
Hannes Smárason
CEO
Private Equity
Finance/Administration
Sveinbjörn Indridason
•
•
•
•
Financing
Treasury
Risk management
Internal bank
Fjárvakur
Finance services
Corporate Governance
Corporate governance in FL Group hf. is defined as the framework
by which the Company is directed and controlled and the means by
which relationships between the Company's management, its board
of directors, and its shareholders are conducted.
The aim of the board of directors' rules and corporate governance
programme in FL Group hf. is to ensure disclosure and transparency,
define the jurisdiction of the board of directors and its role with
respect to the management. In the corporate governance program
there are rules regarding, among other things, the order of board
meetings, rules on board members' qualifications to participate, resolutions made, rules on disclosure of agreements between the Company and any board member or the CEO, rules regarding confidentiality, information to be presented by the CEO to the board of
directors at board meetings, which shall generally be held at least
monthly etc.
The board of directors is ultimately responsible for the Group’s system of internal controls and for reviewing their effectiveness. However, such a system is designed to manage rather than eliminate the
risk of failure to achieve business objectives, and can only provide
reasonable assurance against material misstatement or loss. The
board of directors has adopted a code of business conduct, which
provides practical guidance for all staff regarding the principles by
which the Company wants to conduct business.
In 2004, the Iceland Chamber of Commerce, ICEX and the Confederation of Icelandic Employers issued guidelines on corporate governance. FL Group hf. has studied these guidelines and believes that it
complies with these guidelines apart from the fact that board mem-
16
Asset Management
Aircraft
Trading/Leasing
Jón Sigurdsson
Albert Jónsson
Halldór Vilhjálmsson
• Operating companies
• Private equity investments
• Strategic investments
• Short-term investments
• Asset management
• Investments in listed
securities
• Buying, selling and leasing
of aircraft
Icelandair Group
Jón Karl Ólafsson
FL Travel Group
Thorsteinn Örn Gudmundsson
Bluebird
Thórarinn Kjartansson
Sterling
Almar Örn Hilmarsson
bers are not being independent of major shareholders and there are
no functional sub-committees that have taken over the responsibilities described in the guidelines. The great majority of the Company's
board members are independent of the Company in accordance
with the guidelines on corporate governance, paragraph 2.6 which
states:
A director is not independent of the Company:
• If he is or has been an employee of the Company, or the conglomerate, during the past three years.
• If he receives compensation from the Company, or from a member of the operative management, besides the compensation due
him as a director, for example as a consultant or contractor.
• If he has close family ties with any of the consultants, directors or
members of the operative management of the Company.
• If he is a member of the operative management of a company that
does significant business with the Company.
• If he is a member of the operative management of a company in
which a member of the operative management of the Company is
a director,
• If he does considerable business with, or has significant business
interests in the Company.
• If he participates in a performance-based or a share purchase compensation scheme of the Company.
• If the board of directors is aware of any other instances wherein
the interests of the director and the Company might be in conflict.
On 17 August 2005 the Icelandic Takeover Panel made a statement
after its examination of whether a takeover obligation had arisen in
FL Group, following substantial changes in ownership or voting rights
in the Company on 1 July 2005. The investigation by the Panel was
directed at two principal points, i.e. at examining whether an agreement had been reached to acquire control or, whether the connections between Eignarhaldsfelagid Oddaflug ehf. and Katla Investment
S.A. and/or Baugur Group hf. were such that they were deemed to
be acting in concert in the meaning of the above statutory provision.
The Panel's conclusion, on the basis of the information obtained by
the Panel and which was available at that time, that Eignarhaldsfélagid
Oddaflug ehf. was not obliged to submit a takeover bid for FL Group
as a result of the changes in ownership or voting rights of shares in
the Company which took place on 1 July 2005.
On 14 December 2005 the Takeover Panel made a statement after
its examination of whether a takeover obligation had arisen in FL
Group, following substantial changes in ownership or voting rights in
the Company as announced in mid-November when the Company's
share capital was increased following a share offering on 10 November 2005. The investigation by the panel was directed at whether
Eignarhaldsfélagid Oddaflug ehf. and Baugur Group hf. had been acting in concert to acquire control of the Company when they undertook to subscribe for new shares in the share offering. Eignarhaldsfélagid Oddaflug ehf. subscribed for shares with a market value of ISK
7.5 billion and Baugur Group hf. subscribed for shares with a market
value of ISK 15 billion. The Takeover Panel concluded that Eignarhaldsfélagid Oddaflug ehf. and Baugur Group hf. had been acting in
concert when the allocation of share capital in the offering was
decided. The Takeover Panel concluded that Baugur Group hf. was
obligated to make a takeover bid in accordance with the Act no.
33/2003 on Securities Transactions chapter VI and VII to other
shareholders. Following the Panel's statement, Baugur Group hf. and
Eignarhaldsfélagid Oddaflug ehf. sold 5% each of the share capital of
FL Group hf. on 14 December 2005. The Takeover Panel subsequently announced on 14 December 2005 that since the combined
holdings of Eignarhaldsfélagid Oddaflug ehf. and Baugur Group hf. in
FL Group hf. was less than 40% after this transaction the Takeover
Panel concluded that there was no longer an outstanding obligation
to submit a takeover bid to other shareholders.
Statutory bodies
The supreme authority in the affairs of FL Group hf., within the limits established by its Articles of Association and statutory provisions,
is in the hands of the Company's shareholders’ meetings. Shareholders’ meetings may be attended by shareholders and their representatives. ICEX recommends that shareholders’ meetings of listed companies be open to representatives of the press and the ICEX.
The annual general meeting of FL Group hf. shall be held before the
end of May each year.
At shareholders’ meetings each share carries one vote. Decisions at
shareholders’ meetings are made by majority vote unless otherwise
provided for in the Articles of Association or prescribed by law.
Board of directors
The board of directors of FL Group hf. has the supreme authority in
the Company’s general affairs between shareholders' meetings and
endeavours to keep the organization and operations on course. The
Company’s board of directors directs company affairs and sets its
objective and future vision, deals with the annual budgets and company's goals presented by the CEO and the strategy to be taken to
reach them. The board of directors shall oversee that the Company's
strategy is in accordance with its vision and overall goals. The Company's board of directors ensures the sufficient supervision of the
accounting and handling of the Company’s funds.
The board of directors makes decisions on all matters that are
deemed extraordinary or significant. The board of directors can grant
the CEO the authority to resolve such issues. The CEO can also execute such matters if there is not the opportunity to wait for the board
of directors' approval without great disadvantage to the operation of
the Company. In such instances the CEO shall report promptly to the
chairman of the board of directors. Only the Company's board of
directors can grant power of procuration.
The board of directors appoints the CEO of FL Group hf. and
decides on the terms of his or her employment or entrusts the chairman of the board of directors to complete that task.
The Working Procedures of the board of directors state that board
members should familiarise themselves with the provisions of law, the
Company’s Articles of Association, general securities regulations and
the Company's special regulations on the handling of inside information and insider trading.
The majority of members of the board of directors of FL Group hf.
are independent of the Company, as recommended by the guidelines
on corporate governance issued by the Iceland Chamber of Commerce, ICEX and the Confederation of Icelandic Employers in 2004.
However, there are not two members independent of major shareholders, as recommended by the same guidelines.
The following section lists the current members of the board of directors and their activities. It is not intended to be exhaustive but details
the main occupations and/or other occupations that are linked to the
ownership or operations of FL Group hf. Skarphédinn Berg Steinarsson, Jón Ásgeir Jóhannesson, Magnús Ármann and Thorsteinn M.
Jónsson were elected as board members on 9 July 2005, whilst Jón
Ásgeir Jóhannesson was a member of the board of directors from
March 2003 to June 2004. Smári S. Sigurdsson was elected on to the
board of directors on 1 November 2005. From July 2005 until that
date he was a substitute board member of FL Group hf. In references
made to “related parties” who hold shares in FL Group hf., related
parties are linked to board members, where the board members
have extensive influence over the investment activity of the related
party. There are no extraordinary transactions between the board of
directors and the Company. The board of directors has not received
any loans or stock options from the Company.
Skarphédinn Berg Steinarsson, ID-No: 050763-7819, Melhagi 1, 107
Reykjavík. Chairman of the board of directors. Occupation: Managing
director of Nordic investments at Baugur Group. Own holding and
holding of spouse and children under 18 years of age in FL Group hf.
85,000. Related party: Managing director of Nordic investments at
Baugur Group hf. which holds 1,124,670,139 shares in FL Group hf.
or 19.24% of the share capital. In addition Baugur Group hf. bears all
financial risk and benefits from what corresponds to the ownership of
292,264,706 shares by virtue of a derivative issued by Landsbanki
Íslands hf.1)
17
Jón Ásgeir Jóhannesson, ID-No: 270168-4509, Sóleyjargata 11, 101
Reykjavík. Member of the board of directors. Occupation: President
and CEO of Baugur Group. Own holding and holding of spouse and
children under 18 years of age in FL Group hf.: 0 shares. Related party: CEO of Baugur Group hf. which holds 1,124,670,139 shares in FL
Group hf. or 19.24% of the share capital. In addition Baugur Group
hf. bears all financial risk and benefits from what corresponds to the
ownership of 292,264,706 shares by virtue of a derivative issued by
Landsbanki Íslands hf.1)
Magnús Ármann, ID-No: 160574-4969, Laufásvegur 69, 101 Reykjavík. Member of the board of directors. Occupation: Private investor.
Own holding and holding of spouse and children under 18 years of
age in FL Group hf.: 0 shares. Related party: one third part owner,
procurator and chairman of the board of directors of Materia Invest
ehf. which holds 404,411,765 shares in FL Group hf. or 6.9% of the
share capital, 25% owner, procurator and chairman of the board of
directors of Icon ehf. which holds 448,487,889 shares in FL Group hf.
or 7.7% of the share capital.2)
Smári Sigurdsson, ID-No: 030847-3349, Spordagrunn 1, 104 Reykjavík, Iceland. Member of the board of directors. Occupation: Managing director of finance and administration of Idntæknistofnun (Technological Institute of Iceland). Own holding and holding of spouse
and children under 18 years of age in FL Group hf.: 0 shares. Smári
Sigurdsson is not related to any other parties which own shares in FL
Group hf. Smári Sigurdsson is the father of the CEO Hannes Smárason.
Thorsteinn M. Jónsson, ID-No: 180263-3309, Laufásvegur 73, 101
Reykjavík, Iceland. Member of the board of directors. Occupation:
Chairman of the board of directors of Vífilfell hf., the Coca Cola bottler and distributor in Iceland. Own holding and holding of spouse
and children under 18 years of age in FL Group hf.: 24,771,499
shares. Related party: one third part owner, procurator and member
of the board of directors of Materia Invest ehf. which holds
404,411,765 shares in FL Group hf. or 6.9% of the share capital and
25% owner, procurator and member of the board of directors of
Icon ehf. which holds 448,487,889 shares in FL Group hf. or 7.7% of
the share capital.2)
Members of the board of directors currently have no stock options
or warrants in FL Group hf.
In addition to the five board members there are two substitute
board members, Kristinn Bjarnason ID-No: 240364-2209 and Thórdur Bogason ID-No: 260663-3809.
1) Baugur Group hf. through its forward contracts with banks is the second largest beneficial owner of FL Group hf. with 1,124,670,139 shares or 19.24%.
2) Icon ehf. through its forward contracts with banks is the third largest beneficial owner of FL Group hf. with 448,487,889 shares or 7.7%.
Auditors
A state authorised public accountant or accounting firm is elected as
the auditor at each annual general meeting of FL Group hf. for a term
of one year. The Auditor examines the Company’s accounts and all
relevant accounts documents for each year of operation and has
access to all the Company’s books and documents for this purpose.
Auditors are not elected from among the members of the board of
18
directors of the Company or employees. The qualifications and eligibility of the Auditor at elections are in other respects governed by
law.
The chartered accountants and registered auditor of FL Group hf. are
KPMG Endurskodun hf. ID-no. 590975-0449, Borgartún 27, IS-105
Reykjavik, Iceland. The Company's auditors are not allowed to own
stock in the Company.
Compliance Officer
As provided for by law a compliance officer is employed within the
Company. The compliance officer is directly responsible to and
appointed by the board of directors and is independent in his or her
duties. The compliance officer monitors the implementation of insider rules adopted by the Company, including rules regarding securities
trading by employees and primary insiders. The compliance officer is
responsible for interpreting the rules, and makes decisions based on
the rules. The compliance officer makes proposals for improved
working procedures for various positions within the Company and
helps develop and maintain the compliance monitoring system. A
substitute compliance officer has been appointed by the board of
directors.
In accordance with applicable regulations and recommendations of
the Icelandic Financial Supervisory Authority (FME) the Company has
introduced the rules set out by the FME on the handling of inside
information and insider trading.
Senior Management
The senior management team under the leadership of the CEO
Hannes Smárason comprises four managing directors. All have significant management experience in their field of operations. In addition
there are three CEOs of subsidiaries who are regarded as senior
managers. According to the Company's Articles of Association, the
Company may not grant loans or guarantees against shares in the
Company to shareholders, to members of the board of directors,
managing directors or managers. This does not prohibit normal commercial loans or investments made by the Company's employees or
those of a related company in the Company's shares or investments
in shares on their behalf as permitted by law.
Hannes Smárason, CEO, (ID-No: 251167-3389), Address: Fjölnisvegur 11, 101 Reykjavík, Iceland, joined FL Group hf. as chief executive on 19 October 2005. Previously, he was the chairman of the
board of directors of FL Group hf. from 11 March 2004 to 19 October 2005. He was earlier executive vice president and senior business
officer of deCode genetics Inc. Hannes Smárason worked with McKinsey & Co. in Boston from 1992 until December 1996 as a consultant. He received his B.S. in Mechanical Engineering and Management
from the Massachusetts Institute of Technology and his M.B.A. from
the Massachusetts Institute of Technology Sloan School of Management. Hannes Smárason's holdings in FL Group hf.: 0 shares, 0 call
options, 0 put options. Hannes Smárason, through his controlling
share in the holding company Eignarhaldsfélagid Oddaflug ehf., is the
largest shareholder of FL Group hf. with 1,158,919,071 shares or
19.8% of the share capital. In addition Eignarhaldsfélagid Oddaflug ehf.
bears all financial risk and benefits from what corresponds to the
ownership of 292,264,706 shares by virtue of a derivative issued by
Landsbanki Íslands hf. Holdings of other financially related parties: 0
shares.
Sveinbjörn Indridason, Chief Financial Officer (CFO), (ID-No:
140372-3589). He has been responsible for finance and administration since 3 May 2005. He joined FL Group hf. in 1999 in the risk
management department and as a director from 2000. Before that
he worked for Fjárfestingarbanki Atvinnulífsins – FBA hf. (now
Íslandsbanki hf.). Sveinbjörn Indridason's holdings in FL Group hf.:
15,500 shares, 29,500,000 call options, 0 put options. Holdings of
financially related parties: 0 shares.
senior vice president of corporate strategy & business development
at FL Group on 10 August 2005. Previously he worked as management consultant at McKinsey & Co. in Scandinavia and Singapore
between 1999 and 2004. He received his M.Sc. degree in Civil Engineering from the Technical University of Denmark in 1999.
Thorsteinn Örn Gudmundsson's holdings in FL Group hf.: 5,000
shares, 18,000,000 call options, 0 put options. Holdings of financially
related parties: 0 shares.
Jón Sigurdsson, Managing Director of Private Equity and Strategic
Investments (ID-No: 180378-4219), joined FL Group as managing
director on 20 September 2005. He has a relevant private equity
experience from his earlier work at Landsbanki Íslands hf. - Corporate Finance department and Bunadarbanki Íslands hf. (now
Kaupthing Bank hf.) – Corporate Finance department. He received
his B.Sc. in Business Administration from Reykjavík University. Jón Sigurdsson's holdings in FL Group hf.: 0 shares, 51,500,000 call options,
0 put options. Holdings of financially related parties: 0 shares.
Thórarinn Kjartansson, President and CEO of Bláfugl hf. (ID-No:
280752-7469). He has been the President and CEO of Bláfugl hf.
since its incorporation in early 2001. Thórarinn Kjartansson has been
involved in the airline business for over two decades working for
Loftleidir, Cargolux both in operation, scheduling and marketing and
finally managing director for North America and South America. In
Iceland he was one of the founders of Flugflutningar ehf., Bláfugl hf.
and Vallavinir ehf. (Airport Associates), an independent ground handling service company. He received his B.Sc. in economics from the
University of Gothenburg in 1978. Thórarinn Kjartansson's holdings in
FL Group hf.: 18,750,000 shares, 18,000,000 call options, 0 put
options. Holdings of financially related parties: 0 shares.
Albert Jónsson, Managing Director of Asset Management (ID-No:
180562-3119), joined FL Group as managing director on 1 October
2005. He has gained considerable asset management experience in
previous jobs, most recently for the past four years as chief investment officer for LSR (Pension Fund for State Employees), Iceland's
largest pension fund with assets under management of approximately ISK 220 billion. He received his Cand. Oecon from the University
of Iceland in 1986 and certification as a public stockbroker in 1998.
Albert Jónsson's holdings in FL Group hf.: 0 shares, 29,500,000 call
options, 0 put options. Holdings of financially related parties: 0 shares.
Halldór Vilhjálmsson, Managing Director of Aircraft Trading and
Leasing (ID-No: 051146-2559). He was appointed managing director of aircraft trading and leasing at FL Group hf. on 1 May 2005. He
joined FL Group hf. in November 1981 and was most recently the
finance director for Icelandair ehf. from May 1988. He received his
Cand. Oecon from University of Iceland in 1971. Halldór Vilhjálmsson's holdings in FL Group hf.: 8,333,556 shares, 5,500,000 call
options, 0 put options. Holdings of financially related parties: 0 shares.
Jón Karl Ólafsson, President and CEO of Icelandair Group (ID-No:
120958-2759). He was appointed President and CEO of Icelandair
ehf. on 1 June 2005 and later became the President and CEO of Icelandair Group after FL Group hf.'s fundamental organisational
changes on 19 October 2005. He joined FL Group hf. in 1984, firstly in the finance department, then as the manager of Icelandair's
route network. He then served as the general manager of Icelandair's
office in Frankfurt, Germany for 5 years. Before being appointed the
President and CEO of Icelandair ehf. he had been managing director
of Flugfélag Íslands hf. (Air Iceland) since 1999. He received his Cand.
Oecon from the University of Iceland in 1984. Jón Karl Ólafsson's
holdings in FL Group hf.: 7,988,391 shares, 18,000,000 call options, 0
put options. Holdings of financially related parties: 0 shares.
Remuneration
Remuneration to the board of directors
Remuneration for the board of directors of FL Group hf. for 2004
totalled ISK 15.3 million. Hannes Smárason, the chairman of the
board of directors, received ISK 3.6 million, Hreggvidur Jónsson, the
vice-chairman of the board of directors, received ISK 2.7 million and
the nine other members of the board of directors, five active at any
given time, received a total of ISK 12.6 million.
Remuneration for the board of directors of FL Group hf. for board
membership will be ISK 200,000 per month per board member.
There were seven board members between 10 March 2005 and 1
November 2005. According to a resolution passed at a shareholders'
meeting on 1 November 2005 Article 12 of FL Group hf.'s Articles
of Association was amended so that the board of directors will now
consist of five members instead of seven, with two substitute members. According to the current Articles of Association there will be
five board members from 1 November 2005 to mid-March 2006.
Consequently the total remuneration for board membership will be
ISK 14.8 million for the term between the annual general meeting in
March 2005 for the financial year 2004 and March 2006 for the financial year 2005.
On 19 October 2005 Hannes Smárason resigned as chairman of the
board and became the CEO of FL Group hf. On 1 November 2005
Skarphédinn Berg Steinarsson became chairman of the board and
Hannes Smárason left the board of directors. The highlights of
Hannes Smárason's terms of employment are described under remuneration to senior management later in this chapter. Other board
members this year have not received remuneration from FL Group hf.
this year apart from the remuneration for board membership specified above.
Thorsteinn Örn Gudmundsson, President and CEO of FL Travel
Group (ID-No: 211266-4149). He was appointed President and
CEO of FL Travel Group after FL Group hf.'s fundamental organisational changes on 19 October 2005. He joined FL Group hf. in September 2004 as director of corporate strategy and was appointed as
19
Auditors' fees
Auditors' fees in 2004 totalled ISK 26 million in 2004: ISK 11 million
for auditing, ISK 13 million for reviewing quarterly statements and ISK
2 million for the provision of other services.
Remuneration to senior management
FL Group hf. underwent fundamental organisational changes on 19
October 2005, which led to changes in the composition and structure of senior management. None of the senior managers held their
current position within the Group in 2004. The CEO of Sterling is
expected to join the Group’s senior management from January 2006.
Costs related to the organisational changes which will be expensed
in the fourth quarter of 2005 amounting to ISK 532 million. This
includes costs associated with the retirement of two former CEOs
and recruitment of all senior managers.
The CEO's monthly salary is ISK 4 million. Furthermore, he may
become entitled to bonus payments which are dependent on results.
The amount of the respective bonus payments is to be decided at
the end of each year by and between the CEO and the chairman of
the board of directors. Bonus payments can amount to anything up
to three times the CEO's annual salaries. The CEO's term of notice
is 12 months. The employment agreement provides for no other
retirement benefits.
The total salary package for the other seven key managers, i.e. the
four managing directors on Group level and the three CEOs of the
Group's subsidiaries, is expected to amount to ISK 154 million for
the next 12 months. Bonus payments are dependent on results and
are to be decided at the end of each year.
Sigurdur Helgason, former CEO of FL Group hf. (then Flugleidir hf.),
retired at the end of May 2005 after 20 years as CEO of the Group.
Mr. Helgason agreed to advise and consult the board of directors for
the next few years after his tenure as president. His successor Ragnhildur Geirsdóttir retired in mid-October 2005 following the fundamental organisational changes that were announced on 19 October
2005. Sigurdur Helgason will receive ISK 161 million over the next 45 years as retirement benefits and Ragnhildur Geirsdóttir will receive
ISK 130 million over the next 4-5 years as retirement benefits. A part
of the amount has been expensed in the 9-month results and the
remainder will be expensed during the fourth quarter of 2005 and is
included in the amount stated above
A bonus system based on Economic Value Added (EVA) has been
used for executives and amounted to ISK 30 million in 2004.
Employees’ shareholdings and stock options
A large number of FL Group hf.'s employees are shareholders in the
Company, and the Company believes that employees’ equity interest in the Company fosters commitment and personal interest in the
success of the Company as a whole. FL Group hf.'s employees currently own 2-3% of the Company. This excludes the CEO who has
a 19.8% interest through a company he controls.
In 2003 FL Group hf. paid out a bonus to all its employees in the
form of shares in FL Group hf., a total of 23 million shares.
At the annual general meeting on 10 March 2005 it was announced
that the board of directors had decided to reward employees with
shares in the Company worth about ISK 70,000 per person at pres-
20
ent market value, or about ISK 5,000 nominal value. The total value
of the shares distributed among the staff is ISK 170 million or about
12.1 million shares.
On 6 December 2005 the Board of FL Group hf. entered into stock
option agreements with FL Group hf.'s key employees, in line with a
statement made by the Company preceding its share offering in
November 2005. The number of options varied between key
employees, as is usual for key employee stock option plans. The
option agreements were set up so that key employees were allocated a fixed number of options when the agreements were entered
into, one third of the allocated options are to be vested between 10
November to 10 December each year for three years after the
agreements were entered into first between 10 November to 10
December 2006. All options are to be exercised at the strike price
ISK 13.6 per share which is the same price as in the share offering in
November 2005. The total number of allocated options corresponds
to 203,000,000 shares. These are the only stock options that will be
exercisable at year end 2005.
Employees
FL Group hf. believes that one of its principal strengths is its employees. Its operations require a wide range of knowledge and specialised
personnel within aviation technology, international marketing, finance
and management.
Number of employees
The average number of employees at FL Group (then Flugleidir) and
its subsidiaries in 2004 totalled 2,465 people, which represents an
increase by 7.7% compared to the previous year when there were
2,289 people. In 2002 the average number of employees was 2,181
people. At the end of 2004 over 64% of the Group's employees
were employed by companies within Icelandair Group. Most of the
remaining 36% were employed by companies within FL Travel
Group.
Today FL Group hf. and its subsidiaries, including Bluebird, employ
approximately 2,600 people. In addition there are approximately
1,800 people employed by Sterling which are expected to become
part of the Group from January 2006.
V. Private equity
Private equity operations will be the main activity of FL Group. Today
there are three main operating companies in the private equity portfolio, namely Icelandair Group, FL Travel Group and Bluebird. The
fourth unit, Sterling, is expected to be added in January 2006.
Investment strategy
FL Group aims to have 50-80% of its total assets channelled into private equity investments. The overall goals of the private equity operations can be summarized as follows:
Performance: Target IRR will in each case depend on level of risk,
being on average about 20%.
Size: Enterprise Value (EV) generally not less than ISK 5 billion
Geographical focus: Europe
Investment Horizon: Highly dependent on individual investments
but on average 3-5 years
Post offering FL Group will have considerable capacity for new
investments. Although the Company has traditionally focused on aviation and tourism related activities, the focus going forward will be
broader, which means that FL Group will not restrict itself to any
specific sectors. When deciding on new investments FL Group will
utilize the group-wide experience as well as relying on the expertise
that potential co-investors possess.
All new major investment decisions will be based on a set of strict
criteria and all new investments are subject to approval by the board
of directors.
Exhibit 6 – Decision criteria of new investments
Market growth
Market share
Strength of brand
label
Management capabilities
Quality of cash flow
Quality of earnings
➾
Each new investment will be presented to the board
of directors, ensuring deep involvement of board
members in each
investment decistion
➾
All decisions
of new
investments
subject to
board
approval
Extensive involvement in the operations of each of the companies
invested in is a key aspect in FL Group's investment strategy. FL
Group will aim to increase the value of its investments by: Refinancing and thereby utilizing an optimal mix of debt and equity for each
asset. Selling of units and streamlining with sale of non-vital assets and
optimizing cost structure is a key element in enhancing the value of
acquired companies. Clearer management responsibility and incen-
tives to ensure that the interest of management and the owners of
the Company are aligned. Utilization of synergies between companies
invested in.
It is important to note that FL Group's approach to each investment
will differ in each case, as the appropriate investment horizon, target
returns and risk, etc, will depend on the individual investment case.
General description
In general, private equity investments have a very broad meaning.
Most commonly the term refers to private investment partnerships
that buy up companies, generally in unrelated industries. The aim is
consequently to restructure, dispose of incidental assets and improve
operations and management.
The investment horizon differs widely from case to case, but in general the private equity investor will hold the asset for more than three
years. When exiting a private equity investment, there are several
options available. Among those is floating the company on a stock
exchange, thereby selling all or part of the company to the public.
Another option is a strategic sale, where the company is sold to
another company operating in the same industry. At the end the
decision will depend on which option is value maximizing for the
owners of the company today.
A distinctive aspect of private equity is the ability to make efficient use
of leverage. The aim of the private equity sponsor is to organise the
funding of each investment in the most efficient way. This entails making use of different borrowing options from secured bank debt to different forms of mezzanine debt. By organizing the company's debt
efficiently, the equity returns are potentially enhanced. Also, because
the leverage is organized at the company level and not at the fund
level, there is a ring fencing benefit: if one company fails to repay its
borrowing, the rest of the portfolio is not contaminated as a result.
This means that those who invest in private equity funds will benefit
from a leveraged portfolio with less downside risk.
Current investments
The following table is shown for illustrative purposes only, so that the
reader can better comprehend the importance of FL Group hf.'s different business units. The figures are all pro forma. Icelandair Group
and FL Travel Group were founded as business units on 19 October
2005, but were not operated as such in 2004. Bluebird is a combination of two companies Bláfugl hf. and Flugflutingar ehf. Sterling, which
is expected to join the Group in January 2006, has undergone great
changes in 2005 in the form of a merger and divestments of business
units. Reliable pro forma figures for 2004 and 2005 are not available
but for demonstrational purpose next year's budget is shown. Sterling's budget is dependent on many variables and the outcome from
21
changes that have been made and are going to be made on the
operation. The figures below were presented at ICEX, 3 November
2005.
Exhibit 7 – FL Group's private equity investments
(ISK millions)
Stake
Revenues EBITDA
EBIT
Profit
before
taxes
1,535
394
Icelandair Group1 . . . . 100%
FL Travel Group1 . . . . 100%
Inter-company
transactions . . . . . . . .
Total . . . . . . . . . . . . . . . . . . .
32,536
11,551
2,817
1,008
1,560
369
-1,500
42,587
3,825
1,928 1,9292
Bluebird3 . . . . . . . . . . . . . . 100%
Sterling4 . . . . . . . . . . . . . . . 100%
Total . . . . . . . . . . . . . . . . . . .
2,660
50,047
95,294
800
3,364
7,989
1 Figures for 2004, in these calculations the Group's revenues and costs have been
divided between FL Travel Group and Icelandair Group, as well as the associated
assets and debt.
2 Excluding profits from investments, amounting to ISK 2,157 million in 2004.
3 Figures for 2004.
4 Projections for 2006.
Icelandair Group
In 2004 Icelandair Group accounted for over 70% of all revenue generated in FL Group. All the subsidiaries of Icelandair Group have
operations related to international flights. Icelandair Group owns a
100% equity share in each of its subsidiaries. The subsidiaries are Icelandair, Loftleidir-Icelandic, Icelandair Cargo, Icelandair Ground Services and Icelandair Technical Services.
The group traces its roots back to 1937 when Flugfélag Akureyrar
was founded. Today the group operates daily flights through Icelandair both to Europe and North America using Keflavík as its main
hub. Today about 2/3 of the Icelandair Group revenues come from
Icelandair.
In 2004 the total revenue for the Icelandair Group was ISK 32.5 billion (based on rough calculation after the group has been divided
between FL Travel Group and Icelandair Group, and the associated
assets and debt). The revenue growth during the first nine months
2005 compared with 2004 is around 8%. Since the companies in the
group are all seasonal, each with its own high and low season, it
becomes harder to compare the revenues between them when less
than a whole year is used for the comparison.
Icelandair
Icelandair is the largest subsidiary of Icelandair Group. The company
is an international service company which services around 1.5 million
passengers annually. Today the company offers daily scheduled flights
from Iceland to Europe and North America to a total of 22 destinations. The company operates a fleet of 20 aircraft. Icelandair operates
all the aircraft that Icelandair Group has in service.
Icelandair network
Demand for Icelandair's flights is seasonal. Due to the seasonality in
air travel Icelandair offers almost twice as many flight in the high season during the summer than in the low season. Icelandair flies to 22
destinations in 13 countries during the summer. During the winter
the Company offers flights to five cities in the US and nine cities in
Europe.
Exhibit 8 – Icelandair Group's subsidiaries
Icelandair Group
Jón Karl Ólafsson is the CEO of Icelandair Group.
Exhibit 9 – Icelandair Group revenue split between subsidiaries
2004
Jan-Sept. 2005
Jan-Sept. 2004
IGS 2%
ITS 7%
IGS 5%
IGS 2%
ITS 2%
Icelandair 65%
ITS 2%
Lofleidir Icelandic 15%
Icelandair Cargo 11%
22
Icelandair 66%
Icelandair 70%
Exhibit 10 – Icelandair's network
Manchester, Madrid, Barcelona and Milan are not morning flights and
therefore are not marketed as Via destinations.
Due to this network structure Icelandair is able to offer flights on a
wider variety of routes than the number of destinations implies. By
matching US flights with European flights Icelandair is able to offer
flights on 54 routes in the winter and 89 during the summer, with 14
and 22 routes from Iceland respectively.
Exhibit 12 – Icelandair's destinations
Destinations
US
Europe
Icelandair uses Keflavík International Airport as its main hub. The
location of the airport in the North Atlantic between North America and Europe is a key to the Company's network strategy. The airport becomes especially busy in the morning when the flights from
the US arrive within a few minutes of each other. A large number of
passengers continue to their European destinations within a couple
of hours of arriving. In the afternoon the process is reversed when
the planes arrive from Europe and continue to the US. By having all
the flights arriving and departing within a relatively short time the
Company is successfully able to serve three markets segments, i.e.
customers travelling from Iceland, customers travelling to Iceland and
customers crossing the Atlantic. By doing this the Company has
increased the frequency of trips to Iceland – which has fuelled the
travel industry in Iceland and made it easier for Icelandic people to
travel abroad.
By designing the network so that most of the inbound traffic arrives
within a relatively short time period and most of the outbound traffic leaves soon after, the Company is able to increase its product
offering considerably. For example, by enabling passengers to catch a
connecting flight in Keflavík, the flight arriving from Boston not only
carries passengers that are going to Iceland but it also transports passengers heading for other European destinations served by Icelandair.
Exhibit 11 – Passengers coming to Iceland from Boston might be
heading for any of Icelandair's European destinations.
Amsterdam
Barcelona
Winter
Summer
5
6
9
16
Routes
Across To and from
the Atlantic Iceland
40
67
14
22
Total
54
89
Competition and market
Icelandair competes on three independent passenger markets which
gives the Company more options when allocating the number of
available seats on routes and when pricing them. Demand for air travel mainly depends on the economy, exchange rates, destination popularity and the cost of flying. Operating in three different markets
makes the Company less vulnerable to fluctuations in demand for any
particular route.
Travelling from Iceland (about 25% of passengers)
There has been strong demand for air travel from Iceland recently.
This strong demand can partly be explained by the strength of the ISK
and the state of the Icelandic economy. On most of its routes from
Iceland the Company is the only airline operating. For most business
travellers Icelandair is the only option due to the frequency of flights
and the number of destinations. The frequent flyer program also helps
attract business travellers. The company's pricing policy is designed to
capture some of the value that business travellers see in being able to
schedule their trip with short notice and return promptly.
Travelling to Iceland (about 35% of passengers)
Iceland has enjoyed increasing popularity as a tourist destination for
travellers over the past 25 years. The number of tourists visiting Iceland has grown from 66,000 in 1980 to 362,000 in 2004, which is an
increase of 449%. The company has fuelled this increase by strong
marketing efforts in Europe and United States and the high frequency
of flights to Iceland.
Berlin
Copenhagen
Frankfurt
400.000
Glasgow
350.000
Helsinki
London
KEF Iceland
300.000
250.000
200.000
Munchen
150.000
Oslo
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Zurich
50.000
1986
1987
1988
1989
1990
1991
1992
1993
1994
Stockholm
100.000
1981
1982
1983
1984
1985
Paris
1980
Boston
Exhibit 13 – Number of tourists visiting Iceland 1980 - 2004
23
In 2004 17% of tourists were from the United Kingdom, which was
the largest single source of visitors.
capacity the Company has no pricing power and tries to win customers in other areas instead.
Exhibit 14 – Proportion in 2004 split by geographical areas
Fleet
The fleet of passenger aircraft consists of 14 Boeing 757 aircraft and
three Boeing 767. The fleet is used both for scheduled flights and for
leasing to airlines or travel agencies through Loftleidir-Icelandic. In
addition the Group has three Boeing 757 aircraft which have been
converted into cargo planes. The fact that most of the Company's aircraft are Boeing 757 gives the Company opportunities for cost saving on training the crew, maintenance and scheduling. The Boeing
757 does not have sufficient range to fly to San Francisco. When Icelandair started flying to San Francisco in May 2005 the Company
needed to add the Boeing 767 to its fleet. The Boeing 767 has the
same cockpit as the Boeing 757 which reduces the cost of training
the crew.
Rest of the world 14%
N. America 15%
UK 17%
Rest of Europe 16%
Germany 12%
Scandinavia 27%
As seen above tourists come from all over the world to Iceland
which makes the Company less sensitive to the economy in the areas
of individual destinations.
The competition to and from Iceland
The company’s main competitor is Iceland Express, as well as charter operators. There are two companies that have announced their
entrance to the Icelandic market. Recently SAS Braathens announced
that it will start flying from Oslo to Iceland three times a week starting 26 March 2006. In addition British Airways will start flying to Iceland in May 2006.
Icelandair is by far the largest operator offering flights between
Europe and Iceland. Icelandair is the only airline that offers scheduled
flights between Iceland and North America. The company is the market leader in flights to and from Iceland. In the market from Iceland,
i.e. customers that are travelling from Iceland, the market share is
around 50% and Icelandair's share of the market for trips to Iceland
is about 75%
Travel agencies are an important part of the distribution network
especially when it comes to selling flights to Iceland. Over 50% of the
flights to Iceland are sold by travel agencies. The competition for
tourists that end up travelling to Iceland starts when the tourist is
choosing his travelling destination. Iceland as a destination is in competition with many top destinations all over the world.
Travelling across the Atlantic (about 40% of passengers)
The transatlantic market is the second largest market in the world
after the US domestic market and ahead of the intra western European market measured in revenue passenger kilometres. The market
over the Atlantic was deregulated in the 1990s, and according to the
US Department of Transportation it resulted in reduced fares, stimulated new traffic and shifted traffic more into the hub and spoke system than point to point. The company's main focus is on city pairs
where there are limited direct flights. The transatlantic market is
growing, and Boeing Market Outlook forecasts that this market will
grow 4.6% annually over the next 20 years.
Icelandair's strength in crossing the Atlantic lies in the Company's
network. Icelandair's market share on the North Atlantic market is
below 1%. Due to small market share Icelandair often faces fierce
competition in pricing, especially in winter time (low season). On
routes where the Company is competing with direct flights and over
24
In February the Company bought two new Boeing 787-8 Dreamliner wide body aircraft that will be delivered in Seattle in 2010. The list
price of the aircraft is USD 240 million. It is expected that these aircraft will be used in Icelandair's operation. The Company also has an
option on five additional Dreamliners until the end of 2009. If the
Company decides to exercise those options the delivery of the additional aircraft will depend on slot availability at Boeing at that time.
Block hours
The Icelandair network is designed to maximize the utilization of the
fleet. The highest level of utilization is of aircraft crossing the Atlantic
from the east coast of the US to Europe. Most of the Boeing 757 aircraft are utilized by flying to Europe in the morning and to the US in
the afternoon.
Exhibit 15 - Example of block hours achieved by Icelandair crossing the Atlantic example base on LHR-KEF-JFK
Arrives from the US . . . . . .
Departs to Europe . . . . . . . .
Arrives from Europe . . . . . .
Departs to the US . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . .
Icelandic time
06:45
08:00
16:00
17:00
Block hrs
5:30
3:00
3:00
6:00
17:30
Load Factor
The load factor follows the seasonality in demand. Icelandair operates
fewer aircraft during low season. Despite these efforts the load factor remains lower during low season.
Exhibit 16 – Scheduled flights overview: available seats,
number of passengers and load factor
Number of seats available
Number of passengers
Load Factor
100%
250.000
70%
60%
150.000
Load Factor
80%
50%
40%
100.000
30%
20%
50.000
Oct 2005
Sep 2005
Jul 2005
Aug 2005
Jun 2005
May 2005
Mar 2005
Apr 2005
Jan 2005
Feb 2005
Dec 2004
Nov 2004
Sep 2004
Oct 2004
Jul 2004
Aug 2004
Jun 2004
May 2004
Mar 2004
Apr 2004
Jan 2004
Feb 2004
0
Dec 2003
10%
Nov 2003
Seats or passengers
90%
200.000
the Company entered into agreements on flights to Cuba and
Venezuela. In mid-2003 the Company changed its policy and added
the Company's first Boeing 767 to its fleet which opened up new
markets. This led to an increase in the proportion of ACMI projects
(Aircraft, Crew, Maintenance and Insurance) at the expense of allinclusive projects, and the Company aims to continue in that direction. All-inclusive projects have proved to entail more risks due to
fluctuations in the external environment. Introducing Boeing 767
planes into the operation and the higher proportion of ACMI projects have been a significant factor in the improved results of the leasing operation. The market for charter flights and wet-leases is truly
international. The Company's competitors are many airlines world
wide, including the Icelandic company Avion Group.
0%
The Company has been successfully loading its planes, with the average load factor improving to 76.7% for the last twelve months ending October 2005, which represents an improvement from the
74.1% load factor during the previous twelve months. The breakeven load factor rose by 2.6% over the same time period. The breakeven load factor is the load factor needed for the airline where revenue equals cost.
Human resources
The Group's staff is the key to success. Icelandair Group’s goal is to
be one of the most popular companies to work for in Iceland. About
2,000 employees work for Icelandair Group. The Company has sales
and marketing offices in several cities in Europe and the US. It is
becoming increasingly common that a college degree is required to
qualify for jobs at Icelandair Group.
Icelandair Group places emphasis on its employees being service oriented and ready to work in an exciting and challenging international
working environment. The Group encourages and assists its employees in seeking further training. Some of the Group's employees are
required by law to get training before they start working for Icelandair Group. Furthermore, some of the Group's employees need
to attend training periodically.
Financial performance
The last few years have been particularly difficult for the airline industry. Icelandair Group has been profitable when the industry in general has been losing value. Icelandair Group has effectively worked on
reducing its fixed costs, which makes the Group more competitive in
today's aviation market. The Group is now more flexible and can
more effectively add or reduce capacity depending on market conditions.
Loftleidir - Icelandic
Loftleidir – Icelandic is a marketing vehicle operating in the international charter and wet-lease markets. The Company has eight aircraft
in its leasing business which are operated through Icelandair flight
operations. The Company has customers worldwide. Most recently
Icelandair Cargo
The Company effectively offers cargo services to its customers, using
the belly space capacity in its passenger aircraft. Utilizing the network
of passenger flights allows the Company to offer quick reliable services between all of its destinations. In addition the Company operates
three Boeing 757 freighters. They are used to fly in Icelandair Cargo's
network to Iceland from North America and Europe. The Company
also leases to TNT in Europe Aircraft with Crew Maintenance and
Insurance (ACMI project).
Icelandair Technical Services (ITS)
ITS provides aircraft maintenance and technical services for Icelandair.
The Company also provides services to aircraft which land in Keflavík,
heavy maintenance in Keflavík and technical services for several operators. ITS's core business is to provide Icelandair with maintenance
and technical services.
Icelandair Ground Services (IGS)
IGS provides comprehensive airport ground services for airlines and
passengers at Keflavík International Airport. IGS operates aircraft services, a flight kitchen, a freight centre and a restaurant division in the
Leifur Eiriksson Air Terminal. All these units are organised and settled
as profit units.
Looking forward
Icelandair Group has many opportunities for growth. Icelandair
expects it will continue to grow and improve its current schedule passenger network. In 2006 its network will be similar in size as in 2005.
The Company's focus over the next few months will be on simplifying processes and products and reducing unit costs within the business
model as it is today. The company is constantly optimizing the network and looking at new markets. In recent years both the cargo flight
(Icelandair Cargo) and the leasing operation (Loftleidir-Icelandic) have
grown considerably. The Group anticipates that this will continue.
FL Travel Group
FL Travel Group is mainly involved in tourist services in Iceland. The
subsidiaries are Icelandair Hotels, Reykjavik Excursions, Iceland Travel, Islandsferdir Group, Icelandair Hertz Car Rental and Air Iceland.
Many of FL Travel Group's subsidiaries were established by FL Group
25
Exhibit 17 – FL Travel Group and subsidiaries
FL Travel Group
Thorsteinn Örn Gudmundsson is the President and CEO of FL Travel Group.
in response to the increasing number of tourists visiting Iceland and
the Company's ability to develop its airline business by offering value
added complimentary services to travellers. Today the subsidiary
with the highest net revenue and the largest share of FL Travel
Group's profit is Air Iceland, which handles domestic flights in Iceland.
Exhibit 18 – FL Travel Group revenue split between subsidiaries
Jan.-Sep. 2004
Íslandsferðir 16%
Air Iceland 27%
FL Travel Group operates hotels, a domestic airline, travel agencies,
a car rental service and a bus service. A common feature of its operation is a marked seasonality, whereby it experiences considerable
activity during the second and third quarters with less activity during
the first and fourth quarters. FL Travel Group is largely dependent on
the inflow of tourists to Iceland and in particular those that come by
air. The Group is also dependent on travel patterns and general
spending of tourists. Over the last ten years to the end of 2004 the
number of tourist has grown 7.3% per annum. Growth this year is flat,
which is thought to be because of the strong Icelandic króna. During
the same period guest nights in hotels and guesthouses have
increased by 7.0% per annum.
Iceland Travel 10%
The market share for the individual companies is about 50% for all
companies except for Air Iceland.
Hertz Iceland 6%
Icelandair Hotels operates and markets two hotel chains: all-year
hotels under the trademark Icelandair Hotels, and summer hotels
under the trademark Edda Hotels. There are eight Icelandair hotels
and 15 Edda hotels. While the Company itself operates three Icelandair hotels, five hotels are operated under the trademarks of Icelandair Hotels by associated partners around the country under special franchise agreements. The two hotels that are located in Reykjavik account for approximately 75% of Icelandair Hotels' revenue,
namely Hotel Lofteidir and Nordica Hotel which recently underwent
thorough renovations. Icelandair Hotels rents all real estate which the
Company uses for operations.
Icelandair Hotels 21%
Reykjavik Excursions 20%
Jan.-Sep. 2005
Air Iceland 27%
Reykjavik Excursions 10%
Hertz Iceland 6%
Íslandsferðir 20%
The main competitors are centrally located hotels in Reykjavík such
as Hótel 101, other hotels situated in Reykjavík such as Radisson SAS
Hotel Saga, hotels located elsewhere such as Fosshótel, and finally
other alternatives such as bed and breakfast accommodation offered
in rural areas.
Iceland Travel 19%
In 2004 FL Travel Group total revenue were approximately ISK 11.6
billion. It should furthermore be noted that the revenue generation
during the first 9-month period is not representative for the full year
results, as the operation of the individual companies is seasonal.
The operation of FL Travel Group
FL Travel Group was founded as a business unit when fundamental
organisational changes were made on 19 October 2005. The aim of
the organisational changes, which brought domestic travel operations
under one operational unit, was to simplify FL Group's setup, which
will facilitate rationalisation and adaptation of the business towards
current and future changes in the working environment.
26
Íslandsferdir Group is a leader in the production, marketing and sales
of package tours and the reception of foreign tourists in Iceland.
Its main competitors are Atlantic, Terra Nova, Gudmundur Jónasson,
Allrahanda and Congress Reykjavík. Íslandsferdir has been unprofitable in recent years but is now being restructured.
Iceland Travel (Ferdaskrifstofa Íslands) operates travel agencies which
are mainly focused on Icelanders travelling abroad. It operates the
Úrval-Úts‡n and Plúsferdir travel agencies and organises tours for
business travellers. By placing greater emphasis on the internet as the
distribution channel operations have been rationalised. Its main competitors are Heimsferdir and Sumarferdir.
Reykjavík Excursions is a travel service company operating group and
scheduled services to a wide variety of destinations around Iceland,
including package, activity, incentive and adventure tours, and the Fly
Bus service between Reykjavík and Keflavík International Airport.
Reykjavik Excursions is a leading company serving foreign tourists
coming to Iceland. As well as being one of the largest organisers of
day trips for individuals and groups in Iceland, the company is also one
of the biggest group tour and bus companies in the country. Its main
competitors are excursion and bus companies such as Hópbílar and
Hópferdamidstödin.
Bluebird
Bluebird was acquired by FL Group in August 2005. Bluebird is based
at Keflavík International Airport in Iceland. Bluebird is a synonym for
two of FL Group's subsidiaries: Bláfugl hf. (Bluebird Cargo), which
operates a fleet of freighter aircraft, and Flugflutningar ehf. (BlueCargo), which is an air cargo sales agency.
Exhibit 19 – Blubird and subsidiaries
Bluebird
Icelandair Hertz Car Rental provides vehicles of all sizes for travel
around Iceland, with outlets at Keflavík International Airport, in
Reykjavík and at several other locations around the country. This
operation experiences pronounced seasonal fluctuations. When
demand peaks in the summer, it is 15 times higher than during the
slowest period in the winter.
There are about 50 car rental agencies in Iceland. The four largest car
rental agencies have a market share of around 80%. Its main competitors are ALP bílaleiga with AVIS and Budget and Bílaleiga
Akureyrar/Höldur with National, Alamo and Easy Car.
Air Iceland is a market-driven service company responsible for eight
scheduled domestic flights as well as routes from Iceland to the Faroe
Islands and Greenland. The company has also administered ambulance transport in Iceland. About 90% of the company's passenger
traffic is on the routes between Reykjavík, Akureyri, Ísafjördur and
Egilsstadir. In 2004 flight operations were continued to the Faroe
Islands in co-operation with Atlantic Airways, and to Greenland. Air
Iceland has entered a 10-year agreement with Greenland's home
rule in regards to flights between Reykjavík and Kulusuk and Constable Point. In 2004 the company acquired three Fokker 50 aircraft and
today has six such aircraft in operation. The company is currently
looking to lease two DASH 8-200 aircraft. In addition the company
operates smaller aircraft, namely Metro 23 and Twin Otter.
Looking forward
FL Travel Group’s intention is that its companies are strong and independent travel service companies. The short term strategy for the
next few months will be to increase profitability of all the companies
in the portfolio. FL Travel Group also intends to be active in modifying its business, both to optimise its operation and also to fulfil its
customers’ needs, which may change. The Company expects that
tourism in Iceland will continue to grow in the coming years, as in the
Company's opinion the capacity of the country as a tourist destination is not fully explored yet. The Company expects to grow with
the market and also expects to fuel market growth with new or better products.
The CEO of Bláfugl is Thórarinn Kjartansson
Bluebird Cargo
Bluebird commenced operations in March 2001 with one Boeing
737-300 freighter aircraft flying daily from Iceland via the United Kingdom to Cologne in Germany. Bluebird has grown fast and currently
operates five Boeing 737-300 freighters.
With a total fleet of five aircraft, Bluebird has around 60 employees,
approximately 30 of whom are pilots. Even though Bluebird operates
daily scheduled flights between Iceland and Europe, around 80% of
the operation is outside of Iceland.
Customers
Four of Bluebird's aircraft are currently operated for UPS in Europe,
making UPS a very important customer of Bluebird. One aircraft is
used in projects for Alitalia and one is in scheduled flights
Market
Bluebird Cargo has a nominal market share in the international cargo
market. The Company operates in the market of smaller cargo jets
where a large part of the customer base is composed of companies
that offer express delivery services where the speed between any
two destinations is more important than the lower cost of operating
larger cargo plane with lower frequency of flights. The Company's
main competitors that operate cargo aircraft of the same size are
Avion Group, Channel Express and Atlantic Airways.
The cargo market is growing rapidly. According to the forecast of
Boeing, Boeing Market Outlook, the cargo market will increase by an
average 6.2% annually over the next 20 years.
27
Exhibit 20 – Airbus prediction of cargo freight traffic year 2023 (average growth per annum 2004-2023)
9.8% (+4.9%)
19.8%
0.5%
(+5.0%)
5.3
(+
%
3.6
)
%)
6%
26.28% (+6.5%)
5.5
(+
5.
%)
%
(+
(+6.3
2.8
0%
7%)
(+5.
3.
2.7%
%)
11.5%
(+4.3%)
10.2%
(+7.3%)
Other-flows: 9.9%
It is predicted that the main driver for growth will be in Asia, both
domestic as well as in cargo flight to and from Asia. The main driver
for growth in Asia has been high-value and high-tech goods. Around
75% of Asian air freight by value is from high-tech goods. Bluebird's
current fleet allows the company to operate in the short range/medium range markets, which it is estimated will account for less than
25% of the world market in the future.
Sterling
Sterling is a low-cost airline operating from Copenhagen. Today Sterling is the fourth largest low-cost airline in Europe.
Almar Örn Hilmarsson is the CEO of Sterling.
Future
The company has grown fast since it started operations in 2001.
There are ambitious goals in place for further growth. To fuel this
growth Bluebird has signed a letter of intent concerning the lease of
two new Boeing 747-400ERF. The aircraft will be delivered in June
2007 and March 2008. The Boeing 747-400ERF currently has the
lowest operating cost per ton-mile in the industry as well as long
range capabilities. The new aircraft allows Bluebird to compete anywhere in the fast growing freighter market. A further benefit of the
Boeing 747 freighter is that it is the only aircraft with both a nosecargo door and a side-cargo door. This combination enables the aircraft to fly with a higher yield cargo that is extremely long or tall, and
it also shortens loading time for shipments. According to Boeing's
own estimates the benefits of the nose door can mean at least an
additional USD 20 million in yield for the operator.
BlueCargo
BlueCargo offers freight forwarding services to both Icelandic and
foreign companies. The company offers services to most destinations
in the world utilizing its relationships with Cargolux, UPS Air Cargo
and LTU. Building on those relationships it is able to offer its Icelandic
customers freight service to almost any destination in the world utilizing Bluebird Cargo's flights to tranship the cargo from Iceland to
Europe and then utilize the extensive networks of its partners to ship
the cargo to the final destination. BlueCargo's main competitors are
Eimskip Logistics, Icelandair Cargo and Iceland express. In addition
the company faces competition from the Icelandic cargo liners Eimskip, Samskip and Atlantsskip.
28
About the acquisition
FL Group acquired Sterling in October 2005. Sterling will become
part of the Group in January 2006 if certain conditions are met. The
motivation for the acquisition was first and foremost:
• An opportunity for FL Group to utilize its expertise within the airline industry to make a strategic acquisition.
• The low-cost business model has been very successful within the
airline industry, and FL Group believes that Sterling has good potential. Sterling occupies a key position within the lucrative Scandinavian
market
Sterling will continue to be operated independently, and no part of
Sterling's operations will be merged with other airline related business of FL Group, at least for the time being. On a group level there
are several identifiable synergies between the business of Sterling and
other aviation related business of FL Group. Theses are primarily
related to increased purchasing power with respect to key suppliers
such as ground service, maintenance and fuel purchases.
It is expected that FL Group will take over control of Sterling in January 2006. The highlights of the transaction are summarised as follows:
The total acquisition price is DKK 1,500 million, of which DKK 1,100
million will be paid in cash when the transaction is closed, while DKK
400 million will be paid in FL Group shares. The shares will be issued
at ISK 13.6 per share, and there will be a lock up period until 31
March 2007, preventing the seller from disposing of them prior to
that time.
Part of the acquisition price is performance related and can be lowered or increased by up to DKK 500 million. A correction in the
acquisition price will be tied to EBITDA performance in 2006, or 3.5
times any deviation from the budgeted EBITDA of DKK 345 million.
At delivery, the cash balance shall be no less than DKK 300 million
and interest bearing debt will be DKK 110 million (asset backed debt
due to one aircraft that is owned by Sterling). DKK 275 million have
already been established as a restructuring provision as of September 2005.
The acquisition is subject to the approval of competition authorities
and local CAA. The competition authorities in Norway, Sweden and
Germany have been notified of the acquisition and have all decided
not to object to the acquisition. The competition authorities in Denmark and Iceland have requested information regarding the acquisition. The Danish authorities will not investigate the matter any further but the Icelandic Competition Appeals Committee will now
consider whether the acquisition needs to be reported to The Icelandic Competition Council. As of today, 29 December, this means
that it cannot be assumed that all conditions necessary to complete
the acquisition will be met in the beginning of January 2006. FL
Group hf. and Fons Eignarhaldsfélag hf. have not decided how or if
they are going to respond to this. When their position is clear, ICEX
will be notified and an annex to this prospectus will be issued. The
acquisition is also subject to certain conditions that require the current management of Sterling to maintain progress on the restructuring of Sterling and Mærsk.
Operations of Sterling
Sterling Airways was founded in 1962. Since its establishment, the
company has evolved from being a traditional airline operator to
becoming the first Scandinavian low-cost airline. Today the company
is considered to be the fourth largest low-cost airline in Europe, and
in 2006 Sterling expects to transport around five million passengers.
Sterling is furthermore the second largest airline in terms of transported passengers from Copenhagen, only Scandinavian Airlines has
a larger market share. Sterling's primary activity is scheduled flights,
but the company is also engaged in charter operations.
The whole operations of Maersk will have to be aligned to the operations of Sterling's low cost business model, which implies among
other things a shift in distribution from traditional distribution
through agents to relying on distribution on the internet to a much
larger extend. Such a shift in distribution strategy always includes a
risk of loosing customers that prefer alternative ways of distribution.
In addition, certain activities, which were conduced in-house with the
former Maersk, will be outsourced in the operations of Sterling going
forward. Consequently, a number of employees of the merged
organisation will be laid off. Currently it is however unclear as to
which extend Sterling is able to terminate collective agreements with
certain groups within Sterling.
Route network
Sterling has a dense route-network from primary cities in Scandinavia
to southern Europe. The main base is Copenhagen airport where the
company is the second largest operator only behind SAS. In addition
Sterling flies from seven other Scandinavian destinations, which are
Billund, Oslo, Stavanger, Bergen, Stockholm, Malmö, and Gothen-
burg. In September 2005 Sterling announced that it was also planning
to commence scheduled flights from Helsinki in March 2006.
Sterling flies to the following destinations in Europe: Algarve, Alicante,
Amsterdam, Athens, Barcelona, Berlin, Bologna, Bordeaux, Budapest,
Cairo, Crete, Dublin, Edinburgh, Frankfurt, Geneva, Gran Canaria,
Lanzarote, Lisbon, London, Madrid, Malaga, Majorca, Montpellier,
Munich, Nice, Paris, Prague, Rhodos, Rome, Salzburg, Samos, Tallinn,
Tenerife, Venice and Vienna.
Following the acquisition of Mærsk, Sterling has reorganized its whole
route network. In particular routes out of Copenhagen have been
reorganized, as Mærsk and Sterling were competing on several
routes. The route network today is a combination of pure leisure and
vacation destinations and large European cities, that appeal to both
weekend travellers and business passengers. Sterling has furthermore
increased the flight frequency on several routes to attract more business travellers.
Sterling's position in charter operations is strong, as the majority of
the most recognised Danish tour operators have chosen to fly all or
part of their charter programmes with Sterling. Sterling also performs
charter flights on an ad hoc basis for companies, clubs and organisations that have specific requirements. The number of charter passengers has thus increased considerably in recent years.
Fleet
Sterling operates a standardised fleet, as only Boeing 737 aircraft are
utilized in the company's operations. The table below provides an
overview of the aircraft employed in Sterling's operations.
Exhibit 21 – Sterling fleet of aircraft
Boeing
No. of aircraft
737-500
6
737-700
13
737-800
10
The cost advantages of operating a standardized fleet are substantial,
especially with respect to maintenance and training of flying personnel. Sterling has a relatively young, homogenous fleet, in which the
oldest aircraft is from 1997. Over 3/4 of the fleet is Boeing 737 "New
Generation" which has lower operating and maintenance costs compared to older generation aircraft.
Looking forward
The management of Sterling has forecast sales of DKK 5,133 million
and EBITDA of DKK 345 million in 2006. This forecast is dependent
on factors such as the successful execution of the reorganization
process that was initiated after Sterling acquired Mærsk in September
2005. The aim of the restructuring process is primarily to align the
operations of Mærsk Air to the low-cost business model operated by
Sterling. Aligning the business models entails, among other things,
shifting the distribution from traditional inter-line sales to primarily
internet based sales, aggressive outsourcing of non-core activities and
optimizing the utilization of the fleet.
29
VI. Asset management
The asset management division manages FL Group's portfolio of listed stock and other short-term investments.
Investment strategy
FL Group aims to have 20-50% of total assets invested in a portfolio
of listed securities and other short-term investments. The investment
strategy devised by the board of directors for FL Group's asset management operation can be summarized as follows:
• All investments will be carefully evaluated with respect to risk and
return.
• All investments must be liquid enough to allow the Company to
enter and exit a position without causing a substantial change in
the respective share price.
• FL Group will aim to have a well diversified portfolio.
• FL Group will invest in Europe, which is the Company's main operating area.
• FL Group will on some occasions invest in companies where the
intention is to seek influence, which consequently means that the
investment will be characterized as a private equity investment.
Day-to-day investment decisions will be in the hands of the managing director. However, all major decisions on buying/selling securities
in individual companies will be put before the board of directors of
FL Group.
Of the total market value of ISK 72.8 billion in listed equities, ISK 29.6
billion were held through forward contracts. With regard to the company's investments in market securities, the overall profitability of the
Group will to a large extent depend on the performance of securities markets, in particular the Icelandic stock market, as the majority
of investments is denominated in ICEX listed stock.
The investment operations of FL Group have yielded significant
returns for the Company's shareholders. The largest single investment is in easyJet. FL Group started investing in easyJet stock in October 2004 when it bought an 8.4% share. Since then the Company has
accumulated a 16.18% holding in easyJet according to an announcement to ICEX on 18 November 2005.
The graph below demonstrates the share price performance for the
main assets invested in by FL Group on the ICEX over a 14 months
period. During this period FL Group has steadily increased its investments in these companies. The graph furthermore depicts the share
price performance of easyJet over the period in which FL Group has
invested in the stock.
Exhibit 23 - Relative performance of key assets
22.10.2004-28.12.2005
200
STRB
LAIS
150
ISB
Current portfolio
Today FL Group's portfolio primarily consists of investments in ICEX
companies and easyJet. The table below shows an overview of the
portfolio as announced on ICEX on 18 November 2005:
KAUP
100
ICEX15
50
3.2%
8.2%
2.0%
26. 11. 2005
13,792
18,492
5,421
18. 08. 2005
Ownership
10. 05. 2005
Market Value
mISK
30. 01. 2005
Nominal value
(million shares)
22. 10. 2004
Exhibit 22 – FL Group's portfolio
ICEX
Kaupthing Bank hf. . . . . . . . . . .
Íslandsbanki hf. . . . . . . . . . . . . .
Landsbanki Íslands hf. . . . . . . .
Straumur-Burdarás
Fjárfestingabanki hf. . . . . . . . .
Other ICEX listed companies..
Total ICEX . . . . . . . . . . . . . . . . .
21.5
1,120.7
223.1
604.3
9,427
3,875
51,007
5.8%
300
FTSE All Share
250
easyJet
200
150
100
30
0
22. 10. 2005
50
22. 07. 2005
72.834
16.2%
22. 04. 2005
20,548
279
21,827
22. 01. 2005
Total Assets . . . . . . . . . . . . . . . . .
64.8
22. 10. 2004
Other assets
easyJet . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . .
Total other assets . . . . . . . . . .
VII. Aircraft trading and leasing
The aircraft trading and leasing division handles the buying, selling and
leasing of aircraft on behalf of FL Group and is important to FL
Group’s growth with increased focus on investments. Halldór Vilhjálmsson is the managing director of FL Group's aircraft trading and
leasing division.
Aircraft trading
FL Group was involved in 25 aircraft transactions between December 2004 and November 2005. During this time the Company has
sold one aircraft and made leasing contracts on 14 aircraft. The deals
have so far been in Europe and in Asia.
Aircraft leasing
Aircraft leasing is large-scale worldwide branch of financial services.
During the past 25 years the number of aircraft owned by leasing
companies has been on the rise. Both the world fleet of aircraft and
the proportion of the fleet owned by leasing companies have
increased in size. Today around 35% of the world's commercial fleet
is owned by leasing companies. Aircraft are critical assets for airlines
and they pay around USD 115 billion annually in leases. Many companies have seen opportunities to enter the aircraft leasing business.
These companies include General Electric, Daimler Chrysler and Royal Bank of Scotland.
Boeing Market Outlook forecasts the average annual passenger and
cargo growth over the next 20 years at 4.8% and 6.2% respectively.
Such growth will in turn increase the size of the aircraft market, resulting in improved liquidity of assets.
Exhibit 24 – FL Group's leasing contracts
Aircraft pricing
Aircraft are expensive assets with a long lifespan. The rate of return
of aircraft leasing is most sensitive to the purchase price and residual
value of an aircraft when it is sold off. Aircraft prices are cyclical and
will always be cyclical. The reason is the inertia of changing supply and
the cyclical nature of demand.
31
Exhibit 25 : Cyclical nature of aircraft pricing
Demand - Cyclical
Supply - Stable
Market Prices - Cyclical
Depends on
- State of the Economy
Caracterized by:
- Impossible to match
supply to demand =>
Always cyclical
+
- GDP growth
- Cost of flying
- Long lifespan
=
- Takes long time to
increase/reduce production
The residual value of an aircraft in addition to market cycles is influenced by the age of the aircraft, characteristics of the aircraft, airline
preferences and regulation.
FL Group's tactics and strategy
FL Group is fully aware that the success of its operation is highly
dependent on the market cycle. The Company intends to utilize the
market cycle to maximize the return on equity. The Company seeks
long-term leasing contracts on its aircraft, preferably 5-10 year contracts, except in cases when the market is very weak. Having a longterm contract on the aircraft increases the odds that the market will
peak while the asset is under contract. In order to be able to sell an
asset with an attached leasing contract in a peak market, the Company needs to discount it to make up for the difference between current market leasing rates and the contract lease rate. It is difficult to
time the market peak, and therefore the Company reduces its overall risk by entering long-term contracts instead of running the risk of
a contract expiring when the market is at a low and no lessee can be
found.
The Company will actively search for equity partners in its aircraft
investments. The Company ideally wishes to have less than a 50%
stake in each investment.
The fleet
The current fleet consists of six passenger aircraft, one cargo freighter
and 17 future deliveries of passenger aircraft with additional five purchase options. Two of the future deliveries and all five purchase
options are B787-8 Dreamliner aircraft, which are expected to be
used in Icelandair Group's operations as discussed above.
In 2006 and 2007 Boeing will deliver 15 new Boeing 737-800 aircraft.
The Company has already leased five of them to Air China and four
to Hainan Air. The Company reinforced its relationship with Boeing
by placing an order for the 737-800 aircraft in the first half of 2005.
The Company anticipates considerable value in the deal due to the
attractive purchase price and the overall appreciation of the aircraft.
At one point a profit of around ISK 3.5-4.5 billion was estimated. If
this materializes, half of the proceeds will be posted as income in the
company’s books when the aircraft are delivered, the remainder during the lifetime of the aircraft. Ten aircraft will be delivered by Boeing 2006 and five in 2007. The Company and Kaupthing Bank hf. has
outlined heads of terms of Joint Venture ownership about this aircraft. The aforementioned heads of terms is not legally binding but
states that the joint venture shall incorporate special purpose vehicles
(SPV) wholly owned by the joint venture, which will own each aircraft. Equity investment is expected to be 20% in each SPV, and FL
Group hf. will own 49% of each SPV. Consequently the aircraft and
all related financial obligations will not be consolidated into FL Group
hf.'s accounts
Exhibit 26 : Overview of the Company’s aircraft. The grey area denotes future deliveries
Date
of deal
Aircraft
Type
Year
built
# of
Planes
Current
Status
Leasee
Dec-04
Jun-05
Jun-05
Jan-05
Jan-05
Jan-05
Apr-05
Oct-05
B737-500
B757-200
B757-200
B737-800
B737-800
B737-800
B737-800
B747-400F
1991
1991
1994
2006
2006
2006
2007
1997
3
1
2
5
4
1
5
1
Leased
Leased
Leased
Leased
Leased
To be placed
To be placed
Leased
Air Baltic
FL Group
FL Group
Air China
Hainan Air
na
na
Singapor Airl. Cargo
*Currently FL Group owns 100% share in the aircrafts but letter of intent has been signed of selling off 51%
32
Length of
contract
5
5
5
8
8
years
years
years
years
years
na
na
10 years
FL Share
of aircraft
49%
49%
49%
49% *
49% *
49% *
49% *
49%
VIII. Risk factors
Investing in shares is subject to numerous risks. Prior to making any
investment decision regarding shares in FL Group hf., please consider all the information in this document and, in particular, the risks and
uncertainties described below. The risks and uncertainties described
below are some of those that may materially affect the Company
and any investment made in its shares. If any combination of these
events occurs, the trading price of the shares could decline and
investors might lose part of their investment or even all of it. Additional risks and uncertainties that do not currently exist, that are not
presently considered material, or of which the Company is unaware
may also impair the business and operation of the Company. These
risks and uncertainties could have a material adverse impact on the
business, income, profits, assets, liquidity and share price of the Company. The following discussion is not exhaustive.
Risks related to investment in the
Company's shares
Risks inherent in equity investments
Equity investments involve a variety of risks. Examples of such risk
factors that may have a material effect on the price of the Company’s shares, and thereby on the investment value, are market risk, liquidity risk and counterparty risk. The share price can fluctuate considerably due to factors such as variations in operating income or
cost, changes in the market environment, adverse commentary
about the Company and its operations and services in the media and
changes to the Company’s competitive position. Moreover, it must
be kept in mind that shares are a subordinated claim on the assets
of companies. This means that in the event of the Company's liquidation, the shareholders will receive what is left after all other claims
have been met. In many countries, shares have yielded a better
return than bonds measured over long periods of time. Nevertheless, long periods can also be found where the return on shares has
been worse than on bonds and even negative. Those who intend to
invest in the Company should know that there is no guarantee of a
return on their investment in the future and investors should bear in
mind that even though stocks can provide a good return in general,
there is always a risk that an investment in the shares of individual
companies will decline in value. It is therefore suggested that those
who intend to invest in stocks pay close attention to diversifying their
risk and seek investment advice.
Due to the fact that the Company's shares are listed on ICEX, those
investing in the Company's shares may thereby become subject to
such public regulation relating to securities transactions, such as rules
relating to takeover bids, public disclosure of ownership stakes, etc.
Further share capital increase can dilute shareholdings
If new shares in the Company are issued, the proportional sharehold-
ing of those who already hold shares in the Company will be reduced
accordingly, unless they themselves acquire the new shares pro rata
to their existing holdings. The purpose of increasing capital is normally to finance projects with the long-term intention of making the
Company more valuable in the future. Shareholders may therefore
be faced with increased risk for their investment alongside the dilution of their shares. It is possible that the Company will consider
increasing its share capital further in the future in order to finance the
Company’s continuing growth.
Shareholder structure
The structure of shareholder ownership can be a risk factor for
investors. A lack of leading investors or large concentrations of ownership are examples of circumstances that can have negative effects.
Investors should be aware of the fact that ownership of the Company can change rapidly and without any prior warning.
Risks related to the Company
Market risk
Currently, the majority of the Company's assets consist of securities
issued by other companies. Should the market value of the securities
drop, this could have a significant impact on the Company's profitability. In the event of the bankruptcy of the issuers of the relevant securities, their value might be eliminated altogether. Furthermore, attention is drawn to the fact that some of the individual assets, e.g. the
Company's shares in easyJet, form quite a substantial portion of the
Company's total assests.
Key employees
The Company is dependent on its key employees and their willingness to continue working for the Company. There is, however, no
guarantee that the Company will be able to retain all of them in the
future. Some of them might move on for new challenges or for financially more favourable opportunities. If the Company loses any of its
key employees, the Company will most likely be adversely affected.
The Company offers competitive salary packages to its key employees to reduce the risk of losing any of them. Should members of key
personnel decide to join competitors or start competing independently with the Company, it may have serious consequences for the
Company's business.
Exchange rate hedging
The Company aims to eliminate as much as possible any exchangerate risk arising within the Group. This includes exchange-rate risk
posed by trading between Group companies with different functional currencies.
33
Securities regulation
Since the Company's shares are listed on the Iceland Stock Exchange,
the Company is subject to the provisions of Icelandic regulations on
securities, contained i.a. in the Icelandic Act on Securities Transactions no. 33/2003, governmental regulations and rules adopted by
the Iceland Stock Exchange. The Company endeavours to comply
with the said provisions, and any violation of these provisions may
have a financial impact on the Company. Serious breaches may result
in the Iceland Stock Exchange ceasing to list the Company's securities. Should the Company violate the respective rules, it may furthermore impact the Company's reputation and consequently result in
the price of the shares dropping.
Applicable law
The Company and its subsidiaries are subject to different laws and
regulations. Changes to the Group's applicable laws or the Company becoming subject to different laws might have an impact on how
the Company continues to conduct its business.
Liquidity risk
The Company faces the risk of having insufficient funds to meet current liabilities and finance future projects, e.g. due to inability or difficulties in liquidating its assets. This risk is mitigated to some extent by
maintaining liquid assets.
Risks related to operating companies
Pricing
The airline industry is heavily competitive. Pricing decisions are heavily dependent on competition from other airlines. In some markets
that decision is also dependent on alternative ways of travelling, such
as train, ferry and private cars. In most of the Company's markets the
Company faces stiff competition. In addition to its ability to lower
costs, internet sales have increased the price transparency in the market for airfares, which has in turn resulted in more intense competition. When a competitor gives a fare discount, the Company needs
to react accordingly.
Distribution system
Increased ticket sales over the internet, have made it easier for pricesensitive customers to shop around, which can in the long term lead
to lower ticket prices. Internet sales do not involve any material commissions and therefore it has led to lowered cost of sales and hence
helped the profitability of the Company. This distribution system
relies, however, to a great extent on automation over which the
Company may have limited control.
Regulations
Air transportation is subject to intensive regulations. An Air Operators Certificate has been issued to the Company authorising it to
conduct its airline operations. There is no guarantee, however, that
the Company will be issued such licenses in the future. Occasionally
the FAA (Federal Aviation and Administration) and its European
counterparts issue directives and other regulations relating to the
maintenance of aircraft that result in significant costs for the Company. There is no guarantee that the Company will be compensated for
this through higher ticket prices, and so it is likely that the Company
is adversely affected. The Company's operating authority is subject to
aviation agreements between governmental authorities of the Euro-
34
pean Union and the respective countries. Those agreements are periodically subject to renegotiation. Changes in aviation policies of those
countries could result in the termination of such agreement and
adversely affect the Company's operation. Individual airline regulators,
including the one in Iceland, may impose restrictions and requirements that would impact the Company's profitability.
Other aspects of the Company's business are subject to various regulations and public permits having been issued, including the business
segments relating to tourism.
Open skies agreement
The United States and Europe have been in negotiations regarding an
"open skies" agreement between the two markets. The agreement
would bring together the world's two largest aviation markets, allowing EU and US airlines to fly to any destination and charge prices at
their own discretion.
If the agreement materializes, competition on transatlantic flights is
likely to increase, which could affect the profitability of aviation related business of FL Group that is competing on transatlantic markets
adversely. The exact outcome from the negotiations is, however,
unclear since negotiations are ongoing.
Slots and airport access
In some airports, an air carrier needs landing and takeoff authorisations (slots) before being able to introduce new services or increase
the existing one. The Company is dependent on its slots in order to
be able to compete. The Company's inability to secure and retain
slots can therefore inhibit the Company's ability to compete in certain markets. Generally, access to airports is furthermore vital to minimize the likelihood of delays taking place, which can be detrimental
to the Company's profitability.
Security
Since the terrorist attacks on 11 September 2001, airport security has
been increased considerably, creating added cost. The occurrence of
another large scale terrorist attack or similar incidents could depress
the aviation industry and affect the Company adversely.
Diseases
Many airlines were affected by the outbreak of SARS (Severe Acute
Respiratory Syndrome) in 2003. Should there be an outbreak of any
disease that may result in fear of travelling, the profit of the Company could be affected negatively.
Labour
The airline industry is an inherently labour-intensive industry. The
majority of the Company's workers are unionized. The workers are
represented by several unions. Each union has its own contract on
salaries and benefits with the Company. Each contract is up for renegotiation every few years. Every time a contract is up for renegotiation there is a risk that the parties will not reach an agreement and
such situations can end with a strike. A strike can affect the Company heavily and in the worst case halt the operation of one or more
of the Company's subsidiaries. Strikes in the aviation industry can be
extremely expensive for airlines due to the nature of the business
which is burdened with high fixed costs. Additionally, the Company
could be adversely affected by strikes of airport employees or any
other employee group that the Company is dependent on but are
not part of the Company's own staff.
In addition to relying on hired personnel, the Company relies on
third parties to provide its customers with services on behalf of and
in cooperation with the Company. Any inability of the respective
third parties to provide such services may impact the business.
Fuel
All the Company's aircraft operations are heavily dependent on jet
fuel prices and availability. The effects of higher prices on the Company and its competitors depend on several factors. One of the factors is hedging. If the prices continue to rise, it will damage the Company's cost structure and its competitiveness towards its competitors
which have greater hedging. If prices fell at the same time as the
Company had a higher level of hedging than its competitors, it would
damage its competitiveness. Recently, when high fuel prices have
prevailed, airlines have been more efficient in passing price increases
on to its customers through fuel surcharges and other methods. If
fuel prices continue to rise there is no guarantee that the increase in
cost can be passed on to customers due to the competitive nature
of the airline industry, and therefore the Company could be affected
adversely. If fuel prices remain high for an extended period, long distance flights will become proportionally more expensive to operate,
and therefore leisure travellers may prefer travelling shorter distance
due to the lower cost involved. FL Group's stated target is to hedge
about 40-80% of all forecast fuel usage for the next 12-18 months.
The Company mostly uses options when hedging. The forward market for the next four months expects a 4% increase in oil prices,
while fuel prices have risen by 9.5% since mid-year 2005. Thus
increased stability is expected with regards to fuel prices. If the price
of oil stabilizes, the Company will increasingly use forward contracts
to lock in fuel prices.
Seasonality
The Company operates in a seasonal industry where traditionally the
higher demand for air travel throughout the summer results in relatively better results in Q2 and Q3 than Q1 and Q4. Labour actions,
weather, terrorism, the fear of war and other factors could affect the
seasonal pattern. Seasonality has a proportionately greater impact on
the Company during the summer as the Company operates more
aircraft during that season than during other seasons.
Insurances
The Company carries insurance for passenger liability, property damage, public liability and all-risk coverage for damaged aircraft. There
may be losses which the business may suffer that are not covered by
insurance. Furthermore, individual losses may exceed the coverage
under applicable insurance. In both cases, losses may subject the
Company to considerable financial harm.
Economic situation
Generally, the airline industry tends to experience greater profitability during times of economic prosperity. Similarly the Company is
dependent on the state of the economy in the countries in which it
operates. In a depressed economy, consumers are likely to reduce air
travel which could affect both load factors and yield as well. Even
though the Company has worked extensively on reducing its fixed
cost to reduce the adverse effects of reduced demand, the Compa-
ny will most likely be negatively affected in the case of a depressed
economy.
International operations
Operating in foreign markets exposes the Company to various risks.
There is a risk that the Company's prospects in some markets could
diminish due to various factors, including political changes, exchange
controls and taxation.
IT
Information technology is playing an ever increasing role in the Company's operations. An increasing proportion of ticket sales takes place
over the internet. The Company's planning, communication and revenue management systems are computer based as well. Those systems are vulnerable to disruptions that are beyond the Company's
control. Possible disruptions could result from viruses, hackers, equipment failure, power failure, natural disasters and human errors. The
Company has various initiatives in place to minimize the risk of failure
to those systems but there can be no assurance that those initiatives
will adequately prevent disruption to the Company's systems.
Accidents
If an aircraft is involved in an accident or crashes the Company could
be exposed to significant liability. Even though the Company is
insured the insurance coverage may be inadequate. In the event that
insurance is inadequate the Company might experience significant
losses. Additionally, if an aircraft from the Company is involved in an
accident it might create a public perception that the Company's aircraft are not reliable, which in turn could harm the business.
Agreements with public authorities
The Company has occasionally received public financial support for
the purpose of strengthening the marketing its services which public
authorities believe will promote tourism. There is no certainty that
the Company will enjoy such support in the future.
Fluctuations in operating profits
The operating results are dependent on several factors that fluctuate
and cannot be influenced by the Company. Those factors include
fluctuations in fuel, insurance, maintenance and security costs. Cost of
leasing and fluctuation in aircraft values that have been of a cyclical
nature in the past. The operating profit also depends on market conditions in markets which the Company plans to enter or increased
flight frequency. In addition there are the seasonal effects of lower
demand for air travel during the first and fourth quarters, compared
to quarters two and three. Weather can halt the Company's schedules, which can result in higher costs due to delays and flights being
cancelled. In addition bad winter weather can result in higher costs of
de-icing aircraft. Due to seasonality and fluctuations in the Company's
cost structure, quarter-to-quarter comparisons are not good indicators of operating results.
Competition
The airline industry is a very competitive industry. The Company
faces competition from both new and established carriers. The industry is characterized by generally low profit margins and high fixed
costs. The cost of an aircraft flight does not vary significantly with the
number of passengers carried on it. Therefore the number of passen-
35
gers on a plane and the pricing is instrumental in the effect on financial results. The airline industry is highly competitive due to the nominal cost of servicing additional customers on already scheduled
flights. This nominal cost means that the airline is better off selling
seats at low prices rather than not selling them at all, which is the reason why price wars are quite common in the airline industry. Should
competition increase even further in any of the Company's key markets, including the Icelandic market, it might have a considerable
effect on the Company's profitability. Due to Icelandair's favourable
market position in Iceland, Icelandair is subject to even more stringent anti-trust regulations than a company with a smaller market
share would be. This places some restriction on the Company's ability to grow in the Icelandic market. This market position of the Company was the reason why the Icelandic competition authority decided only to agree to the Company's acquisition Bluebird with certain
conditions, including a condition which obliged the Company to separate the control of Bluebird from the control of its other operations.
The Company is furthermore from time to time involved in disputes
with its competitors over alleged breaches of anti-trust regulations.
Should the competition authorities reach the conclusion that the
Company breached such regulations, it may have serious consequences for the Company which may include considerable fines and
affect the Company's ability to conduct its business in the usual manner.
A sole supplier for the majority of the Company's aircraft
The Company mainly uses Boeing aircraft since the Company
believes that Boeing aircraft satisfactorily meet its objectives of minimizing costs while maximizing passengers' security. Generally, having
only one aircraft supplier makes the Company dependent on the said
supplier to a certain extent. Furthermore, the Company has acquired
15 aircraft from Boeing that are to be delivered to the Company in
2006 and 2007. Should Boeing be unable, for whichever reason, to
deliver the aircraft to the Company, this could materially impact the
operating profits of the Company.
Maintenance costs
Maintenance costs will increase as the aircraft fleet becomes older.
Current costs incurred due to maintenance will consequently
increase unless the Company acquires new aircraft.
Third party guarantees
The Company has issued guarantees to third parties where the
Company guarantees the performance of other companies. Such
guarantees have been given for the purpose of securing the Company's business interests. Should the relevant companies become
unable to fulfil the respective obligations, the Company will need to
submit the necessary funds.
Aircraft pricing
The Company intends to actively participate in the market for owning and leasing aircraft to third parties. Aircraft prices and leasing are
cyclical by nature. If the value of an aircraft drops due to lower
demand for air travel or any other reason, the value of those planes
and leasing rates will be affected. If this happens the Company's profitability could be adversely affected. On the other hand when the
Company needs to replace the aircraft which it is currently operating with newer ones, add new aircraft or renegotiate leasing agree-
36
ments the operating cost of the aircraft the Company is operating
could increase or decrease depending on the market conditions at
that time and affect the profitability of the Company.
The Company furthermore owns a number of aircraft. The value of
the aircraft will have to be tested for impairment when there is an
indicator of impairment. Such impairment tests could result in the
writing down of the aircraft if the market value and the value in use
are below the carrying value of the aircraft.
Exchange rate and interest rate
The Company is exposed to the effect of foreign exchange rate and
interest rate fluctuations. The Company has put in place a hedging
strategy which, when implemented and adhered to, should limit this
risk. Such risk will not, however, be eliminated. Fluctuations in
exchange rates and interest rates can materially impact the Company's profitability, e.g. through its contractual relations relating to aircraft financing. FL Group's target is to hedge 40-70% of all interest
rate risk. This year the risk committee decided to deviate from the
overall objective and aim for 85% of all interest rate risk to be hedged
for the next 3-5 years.
Covenants – contractual risk
The Company is contractually bound to honour various contracts in
leasing and financing agreements. These include e.g. provisions relating to a change of control of the Group's entities and to what extent
the Company remains the owner of the share capital of its subsidiaries. Should the Company become unable to or for some reason
discontinue to fulfil the respective covenants, the lessors and financiers may become entitled to rescind the agreements which might
have grave financial consequences for the Company.
Litigation
Given the Company's size and scope of operations, it tends to be
involved in some form of litigation at any given time. Currently it is
involved in various legal disputes. One court case, however, could
potentially have a material impact, namely a dispute with MT Höjgaard
Íslandi ehf. which involves a claim brought against FL Group relating
to a cargo building construction. The principal of the plaintiff's claim
amounts to approximately ISK 180 million. Should the plaintiff succeed, it may furthermore be awarded default interest and expenses.
Trademarks and intellectual property
The Company owns a considerable number of trademarks and other intellectual property which it relies on in its operations. The Company has tried to secure legal rights to such trademarks and intellectual property. Should the Company, for some reason, be unable to
continue to rely on the respective intellectual property rights, that
could impact its business materially.
Internal controls
The Company is dependent on having sufficient internal controls in
place on various dimensions, including controls relating to the handling of electronic documents. The Company has focused on
strengthening such controls. Should such controls prove, however, to
be insufficient, this may have a negative impact on the Company. As
the Company's balance sheet and its scope of operations grows, the
need for sound internal controls will grow.
Tax
The Company could be affected by changes in tax legislation in any
of the countries that influence the financial results of the Company.
FL Group is not aware of any ongoing tax inspection concerning the
Group's subsidiaries which may have a material impact on the Company's shares and has no reason to believe that such an inspection is
imminent. Investigation of the Company's tax filings, as for any other
company, may be initiated at a later stage in accordance with relevant regulations and affect the prospects of the Company.
The Company and the tax authorities may potentially have different
opinions on how various financial arrangements within the Company
should be treated from a tax perspective. These include issues such
as to what extent a withholding tax is deducted from lease payments
to foreign lessors. The Company is of the opinion that it is in all main
respects in compliance with the relevant tax regulations and practices
and should not expect claims from tax authorities relating to its treatment of income or any other financial issues. No re-assurance can be
given in that respect, however.
Additionalrisks related to the acquisition of Sterling
The success of the acquisition of Sterling is dependent on numerous
factors, including the Company's ability to successfully execute the
restructuring and integration of Sterling and Maersk. Due to the fact
that the Company has not assumed the operations of Sterling, the
Company has not been able to review Sterling's operations in full
detail, even though it has conducted limited high level review of specific financial and legal issues. The Company cannot, for that reason,
exclude the possibility of new information arising which may have a
material impact on the operation of Sterling. Such complications may
i.a. relate to labour relations, anti-trust issues, and various corporate
matters. Should such complications materialize, they may have an
impact on the profitability of Sterling.
Investors should be aware of the risk relating to merger and integration issues with respect to the Sterling acquisition. This specifically
refers to the merging of two different cultures and two different business models. The value proposition offered by Sterling is different
compared to what was offered at Maersk.
The competition authorities in Norway, Sweden and Germany have
been notified of the acquisition and have all decided not to object to
the acquisition. The competition authorities in Denmark and Iceland
have requested information regarding the acquisition. The Danish
authorities will not investigate the matter any further but the Icelandic Competition Appeals Committee will now consider whether
the acquisition needs to be reported to The Icelandic Competition
Council. As of today, 29 December, this means that it cannot be
assumed that all conditions necessary to complete the acquisition will
be met in the beginning of January 2006. FL Group hf. and Fons
Eignarhaldsfélag hf. have not decided how or if they are going to
respond to this. When their position is clear, ICEX will be notified
and an annex to this prospectus will be issued.
37
IX. Financial highlights
This section on financial highlights will present the consolidated financial statements for FL Group for the period 2002-2004, and interim
financial statements for the nine months ending 30 September 2004
and 2005.
In general the shift in strategy from pure aviation and tourism related activities to a company with greater focus on investments is clearly reflected in the Company's consolidated financial statements, as
income from investments has gradually become a larger component
of overall income and the balance sheet now includes a larger portion of non operating assets. This means, that all comparison
between years must take into account this change in focus of FL
Group.
On the 10 November FL Group completed an equity offering
amounting to ISK 44 billion. The offering has a substantial effect on
the financial situation of the Company, as the share capital of FL
Group has been increased by 3,235,294,118 shares, or an increase of
127.5%. In accordance with a resolution passed at a shareholders'
meeting, subscribers in the offering were authorised to pay for new
share capital with shares in the ten largest ICEX-15 companies. 44.3%
of the total capital raised was paid with shares, while the remaining
amount was paid in cash.
Since the publishing of the third quarter financial statements, the
Company has entered into two engagements which will have an
effect on the Company's financial statements.
Firstly, FL Group and a Kaupthing Bank subsidiary have acquired a
Boeing 747-400 cargo aircraft for ISK 5 billion from Singapore Airlines Cargo and immediately leased the plane back to the same company. This is a so-called sale-leaseback contract, which means that
when the aircraft was bought it was simultaneously leased to Singapore Airlines Cargo for ten years. The acquisition of the aircraft is
therefore made for investment purposes on behalf of FL Group and
Kaupthing Bank, which have formed a special holding company for
the aircraft. Kaupthing Bank owns 51% of the holding company and
FL Group 49%. The purchase was financed with assistance from ABC
bank in Bahrain, and Icelease, FL Group’s subsidiary.
Secondly, FL Group has signed a purchase agreement for the acquisition of Sterling Airlines. The details of the contract can be viewed
on page 28.
38
Since the publishing of the third quarter results, FL Group has accumulated further shares in easyJet, and on 18 November 2005 the
total holding amounted to 16.2% of easyJet share capital. It should
also be highlighted that the Company has made other investments in
securities, which are listed in the table on page 30. Given the nature
of FL Group's operations, these holdings are subject to day by day
changes.
Since the beginning of 2005 the Company has reported in accordance with IFRS. Thus, the interim financial statements for 2005 presented below are in accordance with IFRS, while the full year financial statements for the years 2002 – 2004 are in accordance with Icelandic GAAP at the time of reporting. A more detailed discussion of
the effects of IFRS will be presented later in this section. In connection with the change in accounting principles, the categorization and
line items in FL Group's financial statements have changed somewhat.
For the profit and loss statement, the change has been minor, and
therefore the 2005 interim numbers are presented with the historical numbers. For the balance sheet and cash flow statement, however, the presentation of the financial statements has been more profound, hence historical numbers for the period 2002-2004 are presented separately from the interim figures.
Consolidated Income Statement
Development of key line items
Icelandair is the largest operating company, as it generates about half
of all operating income. As depicted in the picture below, Icelandair
accounts for 52% of total operating revenue generation for the first
nine months of 2005 and together the Icelandair Group companies
generated over 70% of FL Group’s revenue.
Total operating revenues increase by 9% during the period 20022004. This increase is mostly due to an increase in revenue from
charter operations. During the first nine months of 2005, passenger
revenues increased by 15% compared to the first nine months of
2004.
The historical operating performance of FL Group is very seasonal, as
most passenger traffic is generated during the summer months, thus
normally the third quarter is the best quarter for the Company. To
meet this seasonality, Icelandair has focused on increasing the flexibility of the Company's fleet by leasing additional aircraft during peak
months. With increasing demand for air travel and hence aircraft, it
has now become harder to find aircraft for short-term rental at
favourable prices than for the last three to four years.
Exhibit 27 - Revenue split
Jan.-Sept. 2004
Jan.-Sept. 2005
Other 9%
Loftleidir - Icelandic 9%
Other 7%
Islandsferdir 6%
Icelandair 52%
Islandsferdir 6%
Icelandair 49%
Icelandair Cargo 8%
Air Iceland 7%
Air Iceland 8%
Iceland Travel 5%
2004
Iceland Travel 5%
2003
Other 7%
Other 7%
Islandsferdir 6%
Islandsferdir 5%
Icelandair 51%
Icelandair 49%
Air Iceland 8%
Air Iceland 8%
Iceland Travel 5%
Iceland Travel 6%
Note: the operations of Bluebird (included in other) are only included for 11/2 months for the 9m 2005 figures.
With respect to operational costs, aircraft fuel has been the single
most decisive factor regarding the development of the aviation related cost base. Aircraft fuel as a percentage of total operating revenue
of the Group has increased from 9% in 2002, to 14% for the first nine
months of 2005. The market price for aircraft fuel has a major impact
on overall income and in 2005 fuel prices have soared which has hit
profitability negatively. Fuel costs from the beginning of the year until
the end of September 2005, have almost reached the same level as
for the full year 2004. Salaries and related expenses are the largest
cost item for FL Group. As a percentage of total operating revenue,
salaries and expenses have increased from 29% in 2002 to 34% for
the first nine months of 2005, thus negatively affecting profitability.
Other cost items have developed in line with increased activity during recent years.
The shift in strategy for FL Group is clearly reflected in the financial
items. For the first nine months of 2005 the profit from investment
activities amounted to roughly ISK 6 billion before taxes, which are
mostly in the form of gains on market securities. The investment
activities of FL Group also yielded good returns in 2004, when unrealised gains on market securities amounted to ISK 1.7 billion. As
already highlighted in the section on Asset Management, the portfolio which has generated these returns consists mostly of easyJet and
ICEX listed shares.
The step up in interest expenses is also related to increased investment activities, as new investments have to a large extent been
financed with new borrowings.
As FL Group carries a substantial part of operating assets off balance
sheet (operating leases on aircraft), EBITDAR is used as an approximate measure of operating cash flows. It is also general practice to
use EBITDAR as a benchmark indicator when comparing companies
that have a substantial part of operating assets financed by off balance sheet operating leases. For FL Group the EBITDAR margin
amounts to 13.4% for the first nine months of 2005. This is a substantial decrease from 20.7% in 2002. Reasons for this development
are mainly a more competitive environment and adverse development of external factors such as oil and lease rates, which have gradually increased as demand for aircraft has gone up during the recent
years. Part of lower EBITDAR margin in 2005 is non-recurring
expenses due to structural changes and shares given to employees
during first nine months, which is estimated in total at ISK 424 million.
39
Exhibit 28 – Consolidated Profit and Loss Account* (ISK millions)
Operating revenue:
Transport revenue:
Passengers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cargo and mail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charter revenue and aircraft lease . . . . . . . . . . . . . . . . . . . . . . .
Other operating revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Salaries and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aircraft fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aircraft lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aircraft servicing, handling and communication . . . . . . . . . . .
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating profit before financial income and expenses . . .
Net financial income (expenses) . . . . . . . . . . . . . . . . . . . . . . . .
Share of associates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Profit on sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealised gain on market securities . . . . . . . . . . . . . . . . . . . . .
Net gain on remeasurement of derivatives at fair value . . . .
Profit before deferred income tax
Deferred income tax
......................
...................................
2002
2003
2004
22,616
3,500
2,909
9,921
38,946
19,228
2,880
3,994
11,459
37,561
20,570
3,373
5,595
13,049
42,587
17,376
2,500
4,487
9,653
34,016
20,059
2,419
4,252
10,108
36,838
11,143
3,546
2,829
3,227
12,286
2,041
35,072
12,200
3,622
2,157
3,403
12,389
1,807
35,578
14,491
5,582
2,059
3,923
12,707
1,896
40,658
10,552
4,138
1,652
3,150
10,037
1,356
30,885
12,404
5,315
1,955
2,622
10,785
1,377
34,458
3,873
1,983
1,929
3,131
2,380
(495)
(31)
3,347
(736)
(572)
(5)
1,406
(285)
(161)
592
1,727
4,087
(668)
2004
Jan-Sept
(298)
607
3,440
(606)
2005
Jan-Sept
(676)
4
212
4,155
1,955
8,030
(1,455)
..............................
2,611
1,121
3,419
2,834
6,575
Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Profit (loss) as percentage of operating income . . . . . . . . . . .
1.21
42%
7%
0.52
13%
3%
1.58
38%
8%
1.34
2.60
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
365
640
1,515
5,914
15.2%
8,064
20.7%
3,790
10.1%
5,260
14.0%
3,825
9.0%
5,270
12.4%
4,487
13.2%
5,644
16.6%
3,757
10.2%
4,939
13.4%
Net earnings for the year
EBITDA
...............................................
as % of operating revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EBITDAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
as % of operating revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
*Full year financial statements are based on IS GAAP and first nine-month interim financial statements are based on IFRS
**Dividends as declared on the Annual General Meeting when the accounts for the respective year are confirmed.
Profitability
Bottom line profits have been somewhat volatile in recent years. The
airline industry is volatile by nature as airlines generally have a high
level of operational gearing, which means that they are very dependent on top line growth for maintaining profitability and demand for
air travel is cyclical. As already mentioned, FL Group has gone
through substantial efforts to decrease the level of operational gearing, by leasing further aircraft during peak months. In 2002 bottom
line profits amounted to ISK 2.6 billion and in 2003 the profits
amounted to ISK 1.2 billion. This decrease in profitability can partly
be related to high operational gearing, as in 2003 revenue decreased
as a result of increased competition and exchange rate movements
40
during the year. In 2004 the Company managed to grow revenue
substantially. This revenue growth was however somewhat offset by
primarily unfavourable external factors such as higher oil prices, as in
2004 the Company had already made efforts to increase the flexibility in capacity. Despite a similar profit from operations in 2003 and
2004 respectively, the bottom line profits were greatly improved in
2004, as profits from investment operations, which were initiated in
2004, yielded a return of ISK 1.7 billion. During the first nine months
of 2005 bottom line profits were almost double the full year profits
for 2004.
In terms of earnings per share, which are defined as the ratio
between profit and weighted average number of shares outstanding
during the year, FL Group reported earnings of ISK 2.60 for the first
nine months of 2005, which is a substantial improvement from ISK
1.58 for the full year 2004.
For 2004 FL Group paid a total of ISK 640 million in dividends compared with ISK 365 million in 2003. No dividends were paid out in
2002.
Consolidated Balance Sheet
At 30 September 2005 total assets amounted to ISK 70 billion, compared with ISK 43 billion at year end 2004. This large increase can
again be explained by the shift in focus for FL Group, as the investment operations have led to an expansion of the balance sheet.
Between 2002 and 2004, total assets increased by 26%.
In 2005 FL Group has committed itself to purchasing 15 Boeing 737
aircraft. This engagement is clearly reflected in the Company's financial statements, as assets increase by more than 50%. This increase is
mostly due to prepaid deposits to Boeing. The first deliveries of the
aircraft will take place in 2006. FL Group has signed a letter of intent
with Kaupthing Bank on a joint venture ownership of the 15 Boeing
737 aircraft, where FL Group will hold no more than 49% of a special purpose company that will own the aircraft.
At year end 2004 goodwill amounted to ISK 78 million, while at 30
September goodwill amounted to ISK 3,275 million. The reason for
the increase in goodwill is the acquisition of Bluebird, which was consolidated into the Group in August 2005. The book value of real
estate amounted to ISK 1.6 billion at 30 September 2005.
The amount of securities on FL Group's balance sheet increased substantially during the first nine months of 2005. This is mainly due to
increased investment by FL Group in easyJet. At year end 2004 FL
Group held 10.1% of easyJet stock, while the position at 30 September amounted to 13.89%.
During the period 2002-2004 total equity increased by 73%, while
during the first nine months of 2005 the Company's equity base
increased by 39%. This increase in equity can to a large extent be
explained by high returns on equity investments.
There was a considerable increase in liabilities during the first nine
months of 2005, as long-term liabilities more than doubled during
the period, which is mostly due to a bond issued in March 2005.
Increased borrowing is mostly related to increased investment activity. Current liabilities increased considerably during the same period,
which is primarily due to PDP debt in relation to acquisition of 15
Boeing 737-800 aircraft which is categorized as current maturities of
long term-debt.
During the period 2002-2004 FL Group maintained a prudent equity ratio, increasing from 23.4% in 2002 to 32.1% in 2004. At 30 September 2005 the equity ratio amounted to 29.4%. With respect to
liquidity, the current ratio has been constantly improving over the
period looked upon, or from 1.19 in 2002 to 1.59 in 2005.
Exhibit 29 - Consolidated Balance Sheet –according to IFRS
(ISK millions)
Balance Sheet
2004
31.Dec
2005
30.Sept
Assets:
Operating assets . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . .
Investments in associates . . . . . . . . . . . . . . .
Investments in other companies . . . . .
Long-term receivables . . . . . . . . . . . . . . . . . .
Non-current assets . . . . . . . . . . . . . . . . . . . .
20,522
284
192
192
515
21,705
31,315
3,535
305
261
686
36,102
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade and other receivables . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . .
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . .
832
5,214
12,912
2,819
21,777
912
8,294
20,597
4,106
33,909
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43,482
70,011
Equity:
Issued capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share premium . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . .
Total equity attributable to equity
holders of the parent . . . . . . . . . . . . . . . .
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,804
21
14,825
20,591
23
20,614
Liabilities:
Credit institutions . . . . . . . . . . . . . . . . . . . . . . .
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax . . . . . . . . . . . . . . . . . . .
Pension plan obligation . . . . . . . . . . . . . . . . .
Non-current liabilities . . . . . . . . . . . . . . . . .
12,100
1,413
191
13,704
14,790
10,013
2,946
278
28,027
Credit institutions . . . . . . . . . . . . . . . . . . . . . . .
Current maturities of long-term debt.
Trade and other payables . . . . . . . . . . . . . .
Unearned transportation revenue . . . .
Current liabilities . . . . . . . . . . . . . . . . . . . . . . .
3,482
1,773
7,549
2,149
4,953
7,893
10,014
3,463
21,370
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
28,657
49,397
Total equity and liabilities . . . . . . . . . . . . .
43,482
70,011
Equity ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34.1%
1.46
29.4%
1.59
2,525
3,609
(560)
9,230
2,532
3,748
(28)
14,339
41
Exhibit 30 - Consolidated Balance Sheet year end 2002 to 2004 –
according to IS GAAP (ISK millions)
Exhibit 31 - Consolidated Balance Sheet continued
Balance Sheet
Balance Sheet
Fixed assets:
Intangible assets:
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets . . . . . . . .
Property and equipment:
Buildings . . . . . . . . . . . . . . . . . . . . . . . . .
Aircraft and flight equipment . .
Other property and equipment
Aircraft purchase prepayments
Engine overhauls . . . . . . . . . . . . . . . .
Investments:
Investment in associated
companies . . . . . . . . . . . . . . . . . . . .
Investment in other companies
Long-term notes . . . . . . . . . . . . . . . .
Deposits and other . . . . . . . . . . . .
Fixed assets . . . . . . . . . . . . . . . . . . . . . .
42
2002
2003
2004
2002
2003
2004
2,153
538
-
2,132
533
1
-
2,525
3,609
213
(735)
5,930
8,622
6,544
9,210
1,417
7,906
14,935
150
731
881
161
989
1,150
180
1,466
1,646
17,964
15,963
12,242
2,612
3,207
6,530
2,947
1,553
3,314
1,900
9,379
1,543
4,191
2,032
10,973
1,773
4,331
2,149
17,730
..................
28,223
28,086
31,618
Stockholders’ equity and
liabilities total . . . . . . . . . . . . . . . .
36,845
37,296
46,553
Equity ratio . . . . . . . . . . . . . . . . . . . . . .
Current Ratio . . . . . . . . . . . . . . . . . . .
23.4%
1.19
24.7%
1.25
32.1%
1.43
Stockholders’ equity and liabilities
462
462
557
557
78
423
501
2,048
20,345
1,025
23,418
2,104
17,715
1,669
21,488
894
24,312
689
22,177
1,715
15,050
1,883
18,648
37
508
19,893
217
229
166
330
942
194
169
34
430
827
192
192
139
358
881
25,715
23,561
21,275
Current assets:
Inventories . . . . . . . . . . . . . . . . . . . . . .
464
707
832
Receivables:
Accounts receivable . . . . . . . . . . . .
Notes receivable . . . . . . . . . . . . . . .
Other receivables . . . . . . . . . . . . . .
2,921
378
634
3,437
438
664
3,304
355
788
Prepaid expenses . . . . . . . . . . . . . . .
Market securities . . . . . . . . . . . . . . .
Cash and cash equivalents . . . .
Current assets . . . . . . . . . . . . . . . . . .
874
5,859
11,130
747
7,742
13,735
855
13,246
5,898
25,278
Total assets . . . . . . . . . . . . . . . . . . . . . .
36,845
37,296
46,553
Stockholders´ equity:
Capital stock . . . . . . . . . . . . . . . . . . . .
Statutory stock reserve . . . . . . . .
Stock options reserve . . . . . . . . . .
Translation reserve . . . . . . . . . . . . .
Unrealised gain on market
securities . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . .
Stockholders' equity . . . . . . . . . . .
Obligations:
Pension plan obligation . . . . . . . . .
Deferred income tax . . . . . . . . . .
Long-term debt:
Credit institutions
..............
Current liabilities:
Credit institiutions . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . .
Current maturities of long-term
debt . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities and expenses
Unearned transportation revenue
Total liabilities
Exhibit 32 - Consolidated Cash flow statement – First nine months
of 2004 and 2005 – according to IFRS (ISK millions)
Exhibit 33 - Consolidated Cash Flow Statement 2002-2004
– IS GAAP (ISK millions)
Cash flow Statement
Cash Flow Statement
Cash flows from operating activities:
Profit for the period . . . . . . . . . . . . . . . . . . .
Adjustments for:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating activities, net . . . . . . . . . . . . . . .
Working captial from operations . . .
Net change in operating assets
and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Acquisitions of intangible assets . . . . . . .
Acquisitions of operating assets . . . . . . .
Proceeds from the sale of operating
assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities, change . . . . . . . . . . . . . . . . . . . . . . .
Increase in investments and longterm receivables . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities.
2004
Jan - Sept
2005
Jan - Sept
2.834
6.575
1,356
995
5,185
1,377
(3,652)
4,300
(4)
5,181
592
4,892
(844)
(946)
(242)
(14,542)
55
-
5,239
(2,854)
585
(1,150)
(4,348)
(16,747)
(188)
(640)
289
(1,251)
-
41
(1,466)
19,768
(1,719)
(3,482)
Cash flows from financing activities:
Own shares, change . . . . . . . . . . . . . . . . . . . .
Dividend paid . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from non-current borrowing
Repayment of borrowings . . . . . . . . . . . . .
Short-term borrowing, change . . . . . . . .
Net cash (used in) provided by
financing activities . . . . . . . . . . . . . . . . . . .
(1,790)
13,142
Net changes in cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,241
1,287
Cash and cash equivalents at 1 January
7,742
2,819
Cash and cash equivalents at
30 September . . . . . . . . . . . . . . . . . . . . . . .
9,983
4,106
2002
Net earnings for the year . . . . . . . . . . . . .
Adjustments to reconcile net earnings
provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital (gain) loss on sale of assets . .
Amortisation and deferred charges . .
Unrealised gain on market securities
Other operating activities, net . . . . . . .
Working capital from operations . . .
Net change in operating assets
and liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2003
2,611
1,121
to net cash
2,041
32
1,020
677
6,381
1,807
(80)
781
736
4,365
34
1,199
6,415
5,564
Capitalised deferred charges . . . . . . . . . (1,396)
Increase in property and equipment:
(19)
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aircraft and flight equipment . . . . . (3,266)
(209)
Other equipment . . . . . . . . . . . . . . . . . .
199
Proceeds from sale of equipment . . .
Increase in investments and
(372)
long-term notes . . . . . . . . . . . . . . . . . . . .
160
Market securities, increase . . . . . . . . . . . .
Net cash used in investing activites (4,902)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid in capital stock . . . . . .
(505)
Purchase of treasury stock, net . . . . . .
Proceeds from long-term borrowings 4,977
Payments and other changes in
long-term debt . . . . . . . . . . . . . . . . . . . . . . (1,879)
(29)
Notes payable, decrease . . . . . . . . . . . . . .
Net cash provided by (used in)
financing activities . . . . . . . . . . . . . . . . . . 2,565
(1,076)
2004
3,419
1,896
(35)
1,027
(1,727)
807
5,387
(267)
5,120
(1,088)
(61)
(831)
(993)
138
(61)
(1,234)
(834)
83
(497)
(3,320)
(300)
(11,519)
(14,953)
(365)
(143)
1,837
(640)
2,025
1,445
289
(1,690)
-
(1,660)
6,530
(361)
7,989
(Decrease ) increase in cash
and cash equivalents . . . . . . . . . . . . . . .
4,078
1,883
(1,844)
Cash and cash equivalents at
beginning of year . . . . . . . . . . . . . . . . . . .
1,781
5,859
7,742
Cash and cash equivalents at end
of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,859
7,742
5,898
43
Consolidated Cash Flow Statement
Operating cash flows for the consolidated company portray a very
cash generative operation. For the period 2002-2004 cash flows from
operating activities have been relatively stable. For the first nine
months of 2005 cash from operating activities amounted to ISK 4.9
billion, which is a marginal decrease compared to the same period in
2004.
Again, as with other aspects of FL Group's financial statements, the
cash flow statement is clearly marked by the change in strategy from
operating only aviation and tourism related companies to operating a
company with greater focus on investments. In 2004 market securities increased by ISK 11.5 billion, which is mostly due to the investment in easyJet. During 2005 FL Group has continued to accumulate
shares in easyJet and ICEX listed companies, which is clearly reflected in the statement of cash flows.
During the period FL Group furthermore acquired the operations of
Bluebird for ISK 4.1 billion.
During the first nine months of 2005 cash flows from investment
activities showed an outflow of ISK 14.5 billion in relation to the
acquisition of operating assets. This investment is related to prepayments on the previously mentioned 15 Boeing 737-800 aircraft.
Cash flows from investment activities provide an overview of changes
in the debt structure of FL Group during the period 2002 - Q3 2005.
During the period 2002-2004 there were only minor changes in the
Company's financial structure. Most noteworthy is a share capital
increase of ISK 2 billion in 2004. During the first three quarters of
2005 there were, however, substantial changes with respect to
financing, as non-current borrowing is ISK 19.7 billion. Part of this
increase is a ISK 10 billion bond offering that was sold to investors in
March 2005.
The implementation of IFRS
In preparing its opening IFRS balance sheet, the Company has adjusted amounts reported previously in financial statements prepared in
accordance with its old basis of accounting (previous GAAP). An
explanation of how the transition from previous GAAP to IFRS has
affected the Group’s financial position, financial performance and cash
flows is presented below.
Exhibit 34 - Equity 1.1.2005 (ISK millions)
Changes in measurement:
Intangible assets . . . . . . . . . . . . . . . .
Fair value of stock options . . .
Impairment of prepayments . .
Pension liabilities . . . . . . . . . . . . . . .
Engine overhaul liability
derecognised . . . . . . . . . . . . . . . .
Derivatives and financial
assets to fair value . . . . . . . . . .
Other changes . . . . . . . . . . . . . . . . .
Net change from previous
GAAP to IFRSs . . . . . . . . . . . . . .
44
IAS 38
IFRS 2
IAS 36
IAS 19
1.1.2004 1.1.2005
(121)
4
1
16
(44)
4
(9)
-
IAS 16, 37
97
IAS 39
(76)
Total
(117)
17
(40)
(9)
Changes in measurements
Some expenses that have been capitalized as intangible assets are
not in compliance with IAS 38 on intangible assets, e.g. pilot training.
This causes a decrease in the Group's equity by ISK 117 million, with
regards to income tax effects. The comparative figures in the interim
income statements have been adjusted accordingly.
The fair value of stock options was estimated based on the grant
date according to IFRS 2. The fair value is measured at grant date and
spread over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using the Black Scholes model, taking into account
the terms and conditions upon which the options were granted.
FL Group has in previous years expensed estimated costs of future
overhauls of engines owned by the Company. According to IAS 37
a liability arising from future expenses such as this cannot be recognized. As a result, the Group's equity increases by ISK 209 million,
with regards to income tax effects. The comparative amounts in the
interim income statements have been adjusted accordingly.
Prepayments recognized among long-term receivables have now
been stated according to effective interest rates and therefore equity decreases by ISK 40 million, with regards to income tax effects.
Pension benefit obligation is recognized according to IAS 19. As a
result equity decreases by ISK 9 million, with regards to income tax
effects.
Unsettled derivatives at the end of the year 2004 and some financial
assets are recognized at their fair value according to IAS 39. As a
result equity decreases by ISK 167 million, with regards to income tax
effects. The comparative figures in the income statement have not
been adjusted as is permitted in IFRS 1.
Changes in presentation
When adopting the standards some assets, previously presented as
operating assets but classified as intangible assets according to IAS 38,
have been transferred to intangible assets. Loan charges previously
presented as intangible assets are now subtracted from relevant
loans.
Next year's use of engine hours has been presented as current assets
but now this item is recognized among operating assets.
The Group's securities which were classified as cash and cash equivalents on 31 December 2004 do not fulfil the requirements of cash
and cash equivalents according to IAS 7 and therefore presentation
has been changed and they are presented as securities in the balance
sheet.
112
209
Shares acquired with a forward contract and presented as securities
are not recognised in the balance sheet according to IAS 39, instead
the net fair value of the forward contract is recognised in the financial statements.
(167)
(24)
(167)
(24)
In addition, minority interest in the Group's equity, previously included among current liabilities, is now presented as a separate item in
equity.
(55)
(131)
Exhibit 34 - Balance Sheet 1.1.2005 (ISK millions)
Balance Sheet
Icelandic
in GAAP
Changes
Changes in
presentation measurement
IFRSs
Assets:
Operating assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in associates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in other companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,893
501
192
192
497
21,275
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
832
5,302
13,246
5,898
25,278
(90)
(147)
(3,079)
(3,316)
2
(187)
(185)
832
5,214
12,912
2,819
21,777
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46,553
(2,905)
(166)
43,482
(50)
(81)
(131)
(131)
2,525
3,609
(560)
9,230
14,804
21
14,825
(53)
11
(42)
12,100
1,413
191
13,704
Equity:
Issued capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity attributable to equity holders of the parent . . . . . . . . . . . . . . . . .
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,525
3,609
895
7,906
14,935
14,935
374
(74)
111
411
(1,405)
1,405
21
21
255
(143)
192
192
(93)
19
20,522
284
515
21,705
Liabilities:
Credit institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension plan obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,242
1,466
180
13,888
(142)
Credit institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned transportation revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,530
1,773
7,278
2,149
17,730
(3,048)
264
(2,784)
7
7
3,482
1,773
7,549
2,149
14,953
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31,618
(2,926)
(35)
28,657
Total equity and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46,553
(2,905)
(166)
43,482
(142)
45
Balance sheet changes are presented without the effect of income
tax. Changes in equity were presented with regards to income tax
effects.
In the interim financial statements of FL GROUP hf. according to
IFRS the focus is on disclosing significant accounting policies, at the
same time, the effect of the adaptation of IFRS on the financial position of the Group is disclosed.
Exhibit 35 - Income Statement for the nine months ended 30 September 2004 (ISK millions)
Icelandic
GAAP
Operating revenue:
Transport revenue:
Passengers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,376
Cargo and mail . . . . . . . . . . . . . . . . . . . . . . . . 2,500
Charter revenue and aircraft lease . . . 4,487
Other operating revenue . . . . . . . . . . . . 9,653
34,016
Operating expenses:
Salaries and related expenses . . . . . . . 10,618
Aircraft fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,138
Aircraft lease . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,652
Aircraft servicing, handling and
communication . . . . . . . . . . . . . . . . . . . . . 3,150
Other operating expenses . . . . . . . . . . . 10,070
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,410
31,038
Operating profit before financial
income and expenses . . . . . . . . . . . . .
Net financial income
..................
Income tax expense . . . . . . . . . . . . . . . . . . .
IFRSs
-
17,376
2,500
4,487
9,653
34,016
(66)
10,552
4,138
1,652
(33)
(54)
(153)
3,150
10,037
1,356
30,885
2,978
153
3,131
304
5
309
3,282
158
3,440
(600)
(6)
(606)
...........
2,682
152
2,834
Attributable to:
Equity holders of the parent . . . . . . . . . .
Minority interest . . . . . . . . . . . . . . . . . . . . . . . .
Profit for the period . . . . . . . . . . . . . . . . . .
2,682
2,682
151
1
152
2833
1
2,834
46
Changes
Net profit attributable to the shareholders of the parent company
increases by ISK 161 million in the comparative figures in the financial
statements for the year 2004 due to the adaptation of the standards.
In the comparative figures for the first nine months of 2004, net profit attributable to the shareholders of the parent company increases
by ISK 151 million according to the income statement above.
Salaries and related expenses decrease by ISK 66 million due to
changes in the treatment of employee stock options.
Other operating expenses decrease by ISK 33 million and exchange
loss by ISK 5 million due to the de-recognition of estimated future
costs of engine overhauls.
Depreciation decreases by ISK 54 million due to changes in the measurement of previously capitalized cost due to changes in the evaluation of operating assets and amendments to previously capitalized
cost cf. discussion on the evaluation of assets.
Changes in income tax for the period result from the changes discussed here above.
Minority interest in the performance for the period is now presented separately among profits for the period but the minority interest
was previously expensed among financial income and financial
expenses.
Future outlook
The future prospects for each of the individual operating companies
within FL Group have been outlined in previous sections. However,
given the nature of the Group with increased emphasis on investments, the overall performance and profitability will to a large extent
be driven by the development of domestic and European securities
markets.
Appendix A
Translated from the Icelandic
This is an unauthorised translation of the Icelandic original
Articles of Association In the event of any discrepancies
the original Icelandic version shall prevail.
Articles of association of
FL GROUP hf.
I.
The name, address and object of the company.
II. Share capital and handling of share capital.
III. Shareholders' meetings.
IV. The company's board of directors etc.
V. Annual accounts, auditing etc.
VI. Dissolution of the company etc.
5 December 2005
47
Articles of association of FL GROUP hf.
Section I
The name, address and object of the company
The new shares shall grant rights in the company from the date on
which they are registered and they shall be governed by the company's articles of association.
The name of the company is FL GROUP hf.
The offering price of the shares and the rules of sale shall be determined by the board of directors in accordance with section V of Act
no. 2/1995 on Public Limited Companies. This authorisation shall be
exercised within five years of being approved. The authorisation may
be exercised in its entirety or in part as decided by the board of
directors.
Art. 2
Share capital is divided into shares of one króna or multiples thereof.
Address
Any increase in share capital must be approved by a shareholders'
meeting.
Art. 1
Name
The address of the company is Sudurlandsbraut 12, 108 Reykjavík.
Shares
Art. 3
Object
The object of FL GROUP is to achieve a return on the investment
which shareholders have made in the company by operating the
company and investing in subsidiaries and associated companies
which primarily operate in the fields of air travel, tourism, transportation and investment.
Section II
Share capital and the handling of share capital
Voting weight
All voting shares which have unrestricted voting rights have equal
rights, and there is one vote for each króna of share capital in the
company.
Art. 4
The voting rights of share classes with different voting weights
depend on the decision of a shareholders' meeting on the issue of
such classes.
Share capital, shares and classes
Classes of shares
The share capital of the company is ISK 5,845,294,118 – five billion
eight hundred and forty five million two hundred and ninety-four
thousand one hundred and eighteen Icelandic krónur.
Classes of shares with different rights to dividends and voting rights
may be issued. It is permitted to issue classes of shares without voting rights.
The board of directors of the company is authorised to increase the
company's share capital by up to ISK 1,022,800,000 by the sale of
new shares in such a way:
Pre-emptive rights to new shares
The company's board of directors shall be authorised to increase the
share capital by ISK 700,000. Shareholders' pre-emptive rights to
these shares in the increase in share capital pursuant to the Act on
Public Limited Companies and these articles of association shall not
apply, cf. authorisation provided in Art. 34 of Act no. 2/1995 on Public Limited Companies.
In the event that a shareholder does not wish to exercise the preemptive right, other shareholders have increased subscription rights.
company's share capital by ISK 692,100,000. Shareholders shall have
pre-emptive rights to these shares in the increase in share capital
pursuant to the Act on Public Limited Companies and the company's articles of association.
company's share capital by up to ISK 330,000,000 at nominal value
by issuing new shares. Shareholders do not have pre-emptive rights
to the new shares, which shall be handed over as part of the purchase price in return for shares in Sterling Airlines A/S, Sterling Icelandic ApS and Flyselskabet A/S. Notwithstanding the provisions of
paragraph 4, article 4 of the articles of association the price of the
new shares shall be ISK 13.6 for each króna nominal value and the
board shall exercise this authorisation within one year of it being
approved.
48
The company's shares are issued electronically in accordance with the
provisions of legislation on the electronic registration of title to securities.
Parties who own shares in the company when the increase takes
place have pre-emptive rights to the new shares in direct proportion
to their shareholdings in the company.
Register of shares
A register of shares, cf. provisions of the act on the electronic registration of title to securities, is considered full proof of ownership of
shares in the company, and dividends at any given time and all
announcements shall be sent to the party which at any given time is
the registered owner of the shares in question in the company's register of shares. The company bears no responsibility if payments or
announcements do not reach the intended recipient because of a failure to notify the company of a change of address.
Restrictions on selling shares to foreign parties
The sale of shares to foreign parties is governed by the provisions of
Icelandic law as valid at any given time.
Change in ownership
The change in ownership and execution thereof is governed by the
existing legislation on the electronic registration of title to securities
and regulations based thereupon.
Ban on granting credit
The company is not permitted to grant credit against its shares.
The company is not permitted to grant credit to shareholders, board
members, the chief executive officer or management of the company, nor to provide collateral for them. The provisions of this article
do not apply however to normal business loans or investments by
company employees or those of a related company in the company
or investments in shares on their behalf as permitted by law.
Art. 5
The company's own shares
The company is permitted to buy own shares to the extent allowed
by law. The company can only acquire shares in accordance with the
authorisation granted to the board of directors by a shareholders'
meeting. The authorisation granted to the company's board of directors to buy own shares may not be valid for more than 18 months
at a time. No voting rights are attached to the company's own
shares.
Art. 6
The rights and obligations of shareholders
Shareholders are obliged without any specific commitment to abide
by the company's articles of association, both in their current form
and any form which may be established legally at a later date. Shareholders will not be obliged, neither by the articles of association nor
by amendments to the law, to increase their shareholdings in the
company. Shareholders are not obliged to redeem their shares unless
the company is dissolved, the share capital is reduced or in accordance with a specific authorisation provided for in the act on public
limited companies.
Shareholders are not responsible for the company's liabilities in
excess of their holdings in the company. This provision may not be
amended by any kind of resolution at a shareholders' meeting.
Art. 7
Pre-emptive rights
No special rights are attached to the shares in the company other
than the pre-emptive right to subscribe for new shares.
Section III
Shareholders' meetings
Art. 8
Jurisdiction of shareholders' meetings
A legitimate shareholders' meeting is the supreme authority in all the
company's affairs, within the limitations set out in the articles of association.
Shareholders' exercise their executive power at shareholders' meetings.
Proxy
Shareholders can arrange for proxies to attend shareholders' meetings on their behalf. The proxy attending a meeting must provide a
written and dated proxy.
Legitimacy and arrangement of shareholders' meetings
A shareholders' meeting is legitimate regardless of attendance if it is
rightfully called. Attendance shall be calculated by the number of voting slips handed out.
The chairman of the company or an elected person shall chair shareholders' meetings and shall oversee the election of a secretary to the
meeting. The chair of the meeting shall ascertain at the beginning of
the meeting whether the meeting is legitimate and will announce if
this is the case.
Discussions and voting are carried out in accordance with decisions
of the chair of the meeting.
Calling a meeting
Shareholders' meetings shall be called by means of an advertisement
in a daily newspaper or in another verifiable manner, with at least one
week's notice.
An annual general meeting shall be called with at least two weeks'
notice.
The invitation to the meeting shall specify the agenda of the meeting.
If a proposal to amend the articles of association is to be put forward,
the main subject of the motion shall be specified in the invitation to
the meeting.
Right of shareholders to raise issues for discussion
All shareholders are entitled to raise particular issues for discussion at
shareholders' meetings provided that they send a written request to
the board of directors with sufficient notice so that the matter can be
included in the agenda of the meeting.
Agenda and final proposals at shareholders' meetings
The agenda and the final proposals to be dealt with at the meeting
shall be made available to shareholders at the company's offices at
least seven days before a shareholders' meeting.
The company's annual accounts, the report of the board of directors
and the auditors' report shall be made available to shareholders at
the company's offices at least seven days before a shareholders'
meeting.
Additional and amended proposals which have been legitimately
raised may be put forward at the meeting itself, even if they have not
been made available to shareholders. An annual general meeting can
always deal with matters which must be handled according to legislation or the company's articles of association.
Matters not specified in the agenda
Matters which have not been specified on the agenda cannot be
49
decided upon at a shareholders' meeting without the approval of all
shareholders in the company, but a resolution thereon may be made
for the guidance of the board of directors.
When shall a shareholders' meeting be called
The company's board of directors shall call a shareholders' meeting
when it decides it is necessary, in accordance with a resolution
passed at a meeting, or when shareholders controlling 1/10 (one
tenth) of the share capital request a meeting in writing. They shall
also send a report to the board of directors specifying why they
request the meeting and the board of directors shall inform the
shareholders of the topic of the meeting in the invitation to the
meeting.
When a legitimate request to hold a meeting has been put forward,
the board of directors is obliged to call the meeting within at least 14
days of receiving the request. If the board of directors has not called
the meeting within this period, shareholders can demand that a
meeting be called pursuant to the provisions of the act on public limited companies.
Art. 10
Dividends
Dividends are considered due on the day of the annual general meeting and shall be paid to those who are considered shareholders. Payment of dividends shall take place no later than three months after it
was determined at the annual general meeting.
Art. 11
Amendments to the articles of association
The company's articles of association may only be amended at a legitimate shareholders' meeting, provided that this is clearly stated in the
invitation to the meeting that it is intended to amend the articles of
association and what the main aspects of such amendment are. A resolution will only be valid if it is approved by at least 2/3 of votes cast
and is approved by shareholders controlling at least 2/3 of the share
capital represented by votes at the shareholders' meeting.
Qualified majority of votes for approval
Weight of votes
One vote is attached to each króna owned in the company in those
classes which have unrestricted voting rights, but otherwise as is
specified for such classes of shares.
The approval of all shareholders or a qualified majority is necessary
to approve special proposals on amendments to the articles of association and this depends on the provisions of current legislation on
public limited companies.
Casting votes
Section IV
At shareholders' meetings all normal business is decided by voting,
unless otherwise provided for in these articles of association.
The company's board of directors etc.
Book of minutes
A short report of what occurs at shareholders' meetings and all resolutions passed at the meeting and the result of voting shall be
entered in special book of minutes.
The minutes of the meeting shall be read aloud at the end of the
meeting and shall be signed by the chair of the meeting and the secretary to the meeting. This report on the meeting shall be full documentation of what occurs at meetings.
Art. 9
Annual general meeting
The annual general meeting shall be held before the end of May
every year.
The following matters shall be discussed at an annual general meeting:
1. The company's board of directors reports on the financial position of the company and activities during the past operating year.
2. The audited annual accounts are submitted for approval.
3. How the company's profit or loss during the fiscal year shall be
handled.
4. Decision shall made on remuneration to the company's board of
directors.
5. Election of the company's board of directors pursuant to Art. 12.
6. Election of auditors pursuant to Art. 16.
7. Discussion of, and voting on, other business which may be legitimately raised by the meeting.
50
Art. 12
Board of directors and terms of the board of directors
The company's board of directors shall comprise five members and
two substitutes, elected at an annual general meeting for a period of
one year at a time. The competence of board members is set down
in legislation.
The election of a board of directors takes place as follows:
Those who wish to be considered for a seat on the board of directors shall inform the board thereof in writing at least five days before
the annual general meeting. The only people eligible for election at
the annual general meeting are those who have put themselves forward as a candidate in this way.
At annual general meetings only those who have put themselves forward as a candidate with the stipulated notice can be voted.
Art. 13
Scope and tasks of board of directors and chief executive officer
The company's board of directors is the supreme authority in the
company's affairs between shareholders' meetings and shall ensure
that the organisation and activities of the company are generally in
correct and good order.
The board of directors appoints the chief executive officer of the
company.
The board of directors and the chief executive officer are responsible for managing the company.
The company's board of directors establishes a strategy for the company and sets its targets with the interests of shareholders as a guiding principle in accordance with the company's object. The company's board of directors works in accordance with working rules which
the board of directors establishes on the basis of the act on public
limited companies.
The company's board of directors shall ensure that there is sufficient
supervision of the company's accounts and the handling of the company's funds.
Only the company's board of directors can issue the power of
procuration.
The chief executive officer undertakes the day-to-day management
of the company and shall adhere to the policy and instructions set
out by the company's board of directors. Day-to-day management
does not include measures which are considered of an unusual or
major nature. The chief executive officer can only take such measures in accordance with special authorisation from the company's
board of directors, unless it is not possible to wait for the decision of
the company's board of directors without considerable inconvenience to the company's operations. In such instances the chief executive officer shall consult the chairman of the board of directors, if
possible, and the board of directors shall immediately be informed of
such measure.
The chief executive officer shall ensure that the company's accounts
be entered in accordance with legislation and customs and that the
company's assets are handled securely.
tant decision may not be made, however, unless all board members
have been able to discuss the matter, if possible.
Voting
A simple majority decides issues at board meetings.
Obligating the company
The signatures of the majority of board members obligate the company.
Section V
Annual accounts, auditing etc.
Art. 16
Fiscal year
The company's fiscal year is the calendar year.
The annual accounts shall be audited by an auditing company.
An auditing company shall be elected for one year at a time at the
annual general meeting.
Section VI
Dissolution of the company etc.
Art. 17
Dissolution of the company, division or merger
Art 14.
Meetings of the board of directors
The board of directors elects a chairman from its members but in
other respects it delegates tasks between its members as necessary.
The chairman will call board meetings and ensures that other board
members are invited to attend.
A meeting shall also be held at all times if requested by a board
member or the chief executive officer.
The chief executive officer attends meetings of a company's board of
directors even though he or she is not a board member, and he or
she has the right to debate and to submit proposals there, unless the
company's board of directors decides otherwise in individual
instances.
A book of minutes shall be kept to record what occurs at board
meetings and this shall be signed by those attending a meeting. A
board member or the chief executive officer who are not in agreement with a decision by the board of directors are entitled to have
their dissenting opinion entered in the book of minutes.
The dissolution, division or merger of the company is governed by
current legislation on public limited companies.
Art. 18
Other provisions
Where the provisions of these articles of association provide no guidance, the provisions of the current legislation on public limited companies shall apply.
The memorandum of association and the articles of association of
Flugleidir hf. were approved at the establishment meeting of the company on 20 July 1973, and the founders signed the articles of association in accordance with the authorisation provided at the annual
general meetings of Flugfélag Íslands hf. and Loftleidir hf., which were
held on 28 June 1973.
Art. 15
Decisions of the board of directors
The company's board of directors is competent to make decisions
when the majority of board members attend a meeting. An impor-
51
The company's articles of association have been amended several
times since then.
At
At
At
At
At
At
At
At
At
At
At
At
At
At
At
At
At
At
At
At
At
At
At
At
At
At
At
At
a shareholders' meeting on 4 March 1976
a shareholders' meeting on 8 June 1976
an annual general meeting on 24 May 1977
an annual general meeting on 14 April 1978
an annual general meeting on 24 March 1983
a shareholders' meeting on 15 May 1986
a shareholders' meeting on 23 October 1990
a shareholders' meeting on 18 October 2004
a meeting of the board of directors on 3 November 2004
a shareholders' meeting on 1 November 2005
a meeting of the board of directors on 5 December 2005
The above articles association are now the currently valid articles of
association of the company with entered amendments which have
been approved.
The headings to sections in these articles of association do not form
part of the articles of association but are for purposes of convenience
only.
The above articles association are now the currently valid articles of
association of the company.
FL GROUP hf.
______________________
Hannes Smárason, CEO
52
Appendix B
Interim Consolidated Financial Statements
January 1- September 30, 2005
Endorsement and Signatures of the Board of Directors and the
Managing Director
The Company's Interim Consolidated
Financial Statements are for the third time
prepared in accordance with International
Financial Reporting Standards. The Company's financial statements for the previous
years have been prepared in accordance
with the Financial Statements Act and
accounting principles in Iceland. The total
effect of IFRS adoption on the Company's
financial statements is that equity decreases
by an amount of ISK 131 million, from ISK
14,935 million to ISK 14,804 million. The
effect of IFRS adoption is further explained
in the financial statements. The Interim
Consolidated Financial Statement comprise
the consolidated financial statements of FL
GROUP hf. and its subsidiaries, which were
seventeen at the end of the period.
According to the income statement net
profit for the period amounted to ISK 6,575
million. According to the balance sheet,
equity at the end of the period amounted to
ISK 20,591 million. Reference is made to the
Notes to the financial statements regarding
changes in equity during the period.
The Board of Directors and the Managing
Director of FL GROUP hf. hereby confirm
the Interim Consolidated Financial Statements of the Company for the nine months
ended September 30, 2005, by means of
their signatures.
Reykjavík, November 18, 2005
The Board of Directors and Alternate board
members:
Skarphé›inn Berg Steinarsson, Chairman
fiorsteinn M. Jónsson, vice Chairman
Jón Ásgeir Jóhannesson
Magnús Ármann
Smári S. Sigur›sson
Kristinn Bjarnason
fiór›ur Bogason
Managing Director:
Hannes Smárason
Auditors’ Report
The Board of Directors and Shareholders of FL GROUP hf.
We have compiled the Interim Consolidated
that is the representation of management.
consolidated interim financial information are
Balance Sheet of FL GROUP hf. and its sub-
We have not audited or reviewed the
necessary when it prepares its first IFRS finan-
sidiaries as of September 30, 2005 and the
accompanying Interim Consolidated Financial
cial statements as of 31 December 2005.
related Consolidated Income Statement and
Statements and, accordingly, do not express
Statement of Cash Flows for the nine months
an opinion or any other form of assurance on
then ended. These Interim Consolidated
them. As explained in the notes, figures might
Financial Statements are presented in accor-
change during the year, mainly because the
Jón S. Helgason
dance with International Financial Reporting
Consolidated Annual Financial Statements will
Gu›ni S. Gústafsson
Standards and is this the third time the
be made according to IFRS in force at year-
Company presents its financial statements in
end.
that manner. All information included in these
54
Reykjavík, November 18, 2005
KPMG Endursko›un hf.
As explained in Note b, that explains the
Interim Consolidated Financial Statements is
Company's
the representation of the management of FL
Financial Reporting Standards (“IFRSs”), there
transition
to
International
GROUP hf.
is a possibility that the Company's manage-
A compilation is limited to presenting in
ment may determine that changes to the
the form of Financial Statements information
accounting policies adopted in preparing the
All amounts are in ISK million
Income Statement
For the Nine Months Ended September 30, 2005
Notes
3rd Quarter
Year to Date
July 1 - September 30
January 1 - September 30
2005
2004
2005
2004
9,474
8,177
20,059
17,376
Operating revenue:
Transport revenue:
Passengers
..................................................
843
821
2,419
2,500
...............................
1,814
1,632
4,252
4,487
.......................................
4,643
4,529
10,108
9,653
16,774
15,159
36,838
34,016
...................................
4,444
3,663
12,404
10,552
....................................................
2,359
1,810
5,315
4,138
677
497
1,955
1,652
...................
1,189
1,250
2,622
3,150
......................................
4,571
4,142
10,785
10,037
Cargo and mail
.............................................
Charter revenue and aircraft lease
Other operating revenue
Operating expenses:
Salaries and related expenses
Aircraft fuel
Aircraft lease
..................................................
Aircraft servicing, handling and communication
Other operating expenses
Depreciation
..................................................
Operating profit before net financing income. . . . . . . . . . . . . .
Net financial income (expenses)
.......................................
3
475
463
1,377
1,356
13,715
11,825
34,458
30,885
3,059
3,334
2,380
3,131
5,646
309
2,624
(42)
Share of associates
......................................................
11
0
4
0
Profit before tax
............................................
5,694
3,292
8,030
3,440
Income tax expense
............................................
(1,052)
Profit for the period
........................................
2
(575)
(1,455)
(606)
4,642
2,717
6,575
2,834
4,638
2,716
6,571
2,833
Attributable to:
Equity holders of the parent
Minority interest
.................................
............................................
........................................
2
4
1
4
1
4,642
2,717
6,575
2,834
1.84
1.28
2.60
1.34
1.80
1.27
2.55
1.32
Earnings per share:
Basic earnings per share (ISK)
................................
Diluted earnings per share (ISK)
..............................
55
Balance Sheet September 30, 2005
Assets
Notes
30.9.2005
31.12.2004
Operating assets
...................................................
31,315
20,522
Intangible assets
...................................................
3,535
284
305
192
.....................................
261
192
..............................................
686
515
36,102
21,705
912
832
........................................
8,294
5,214
.........................................................
20,597
12,912
Investments in associates
...........................................
Investments in other companies
Long-term receivables
Non-current assets
Inventories
........................................................
Trade and other receivables
Securities
Cash and cash equivalents
4,106
2,819
Current assets
33,909
21,777
Total assets
70,011
43,482
2,532
2,525
3,748
3,609
..........................................
Equity:
Issued capital
......................................................
Share premium
Reserves
7
....................................................
(28)
..........................................................
(560)
..................................................
14,339
9,230
Total equity attributable to equity holders of the parent
20,591
14,804
Retained earnings
Minority interest
23
21
20,614
14,825
..................................................
14,790
12,100
............................................................
10,013
0
2,946
1,413
Total equity
9
Liabilities:
Credit institutions
Bonds
Deferred income tax
...............................................
Pension plan obligation
.............................................
Non-current liabilities
Credit institutions
..................................................
56
0
3,482
7,893
1,773
7,549
3,463
2,149
Current liabilities
21,370
14,953
Total liabilities
49,397
28,657
Total equity and liabilities
70,011
43,482
................................
..........................................
...................................
10
191
13,704
10,014
Current maturities of long-term debt
Trade and other payables
278
28,027
Statement of Cash Flows
For the Nine Months Ended September 30, 2005
3rd Quarter
Year to Date
July 1 - September 30
January 1 - September 30
Notes
2005
2004
2005
2004
2
4,642
2,717
6,575
2,834
475
463
1,377
1,356
806
(3,652)
............................................
Adjustments for:
Depreciation
...............................................
Operating activities, net
......................................
Working captial from operations
Net change in operating assets and liabilities
......................
Net cash provided by operating activities
(1,625)
3,492
3,986
(2,815)
(2,497)
677
1,489
4,300
592
4,892
995
5,185
(4)
5,181
Acquisitions of intangible assets
.................................
(122)
(110)
(242)
(844)
Acquisitions of operating assets
.................................
(2,908)
(204)
(14,542)
(946)
Proceeds from the sale of operating assets
Securities, change
.......................
..............................................
Increase in investments and long-term receivables
................
Net cash used in investing activities
2
5,239
55
(3,038)
208
0
(2,854)
0
(102)
94
(4,348)
585
(218)
(16,747)
(5,962)
(1,150)
Own shares, change
Dividend paid
............................................
..................................................
Proceeds from non-current borrowing
Repayment of borrowings
...........................
......................................
Short-term borrowing, change
..................................
0
0
(1,466)
(640)
72
19,768
289
(308)
(1,719)
(302)
(2,572)
Net changes in cash and cash equivalents . . . . . . . . . . . . . . . . .
(6,786)
Cash and cash equivalents at 1 January
..............
(188)
0
(1,501)
Cash and cash equivalents at 30 September
41
1,373
Net cash provided by (used in) financing activities
....................
1
0
(235)
(3,482)
(1,251)
0
13,142
(1,790)
1,036
1,287
2,241
10,892
8,947
2,819
7,742
4,106
9,983
4,106
9,983
57
Notes
Significant accounting policies
FL GROUP hf.'s legal residence is at Sudurlandsbraut 12, Reykjavík. The consolidated interim financial statements of the Company for the
nine months ended 30 September, 2005 comprise the Company and its subsidiaries and the Group's interest in associates.
The interim financial statements were authorised for issue by the directors on November 18, 2005.
a. Statement of compliance
The consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs)
on interim financial statements passed by the International Accounting Standards Board (IASB). These are the Group's third consolidated
interim financial statements prepared according to IFRS and the nine months ended September 30, 2005 are a part of the Group's first
full year consolidated financial statements prepared according to the standards. IFRS 1, First-time Adoption of IFRS, has been applied. The
consolidated interim financial statements include all relevant information regarding the Company's operations and its financial position but
not all the disclosures required in consolidated financial statements for a full year.
An explanation of how the transition to IFRSs has affected the reported financial position, financial performance and cash flows of the
Group is provided in note 11. In the report, the changes in equity's comparative figures and the Group's results as they were disclosed
according to Icelandic GAAP for the year 2004 and as they are according to IFRS, are explained.
b. Basis of preparation
The Consolidated Interim Financial Statements presented in Icelandic kronas, rounded to the nearest million. They are prepared on the
historical cost basis except that securities and derivative financial instruments are stated at their fair value.
The preparation of financial statements in conformity with IAS 34, Interim Financial Reporting, requires management to make judgments,
estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Actual
results may differ from these estimates.
These consolidated interim financial statements have been prepared on the basis of IFRSs in issue that are effective or available for early
adoption at the Group's first IFRS annual reporting date, 31 December 2005. Based on these IFRSs, the Board of Directors has made
assumptions about the accounting policies expected to be adopted when the first IFRS annual financial statements are prepared for the
year-ended 31 December 2005.
The IFRSs that will be effective or available for voluntary early adoption in the annual financial statements for the period ended 31
December 2005 are still subject to change and to the issue of additional interpretations and therefore cannot be determined with certainty. Accordingly, the accounting policies for that annual period that are relevant to this interim financial information will be determined
only when the first IFRS financial statements are prepared at 31 December 2005.
The preparation of the consolidated interim financial statements in accordance with IAS 34 resulted in changes to the accounting policies
as compared with the most recent annual consolidated financial statements prepared under previous GAAP. The accounting policies set
out below have been applied consistently to all periods presented in these consolidated interim financial statements. They also have been
applied in preparing an opening IFRS balance sheet at 1 January 2004 for the purposes of the transition to IFRSs.
The accounting policies have been applied consistently throughout the Group for purposes of these consolidated interim financial statements.
c. Basis of consolidation
(i)
Subsidiaries
Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting
rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the
consolidated financial statements from the date that control commences until the date that control ceases.
58
Notes, cont.:
(ii) Associates
Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies.
The consolidated financial statements include the Group's share of the total recognised gains and losses of associates on an equity
accounted basis, from the date that significant influence commences until the date that significant influence ceases. When the Group's
share of losses exceeds its interest in an associate, the Group's carrying amount is reduced to nil and recognition of further losses is
discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of an
associate.
(iii) Transactions eliminated on consolidation
Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated
in preparing the consolidated financial statements. Unrealised gains arising from transactions with associates and jointly controlled entities are eliminated to the extent of the Group's interest in the entity. Unrealised losses are eliminated in the same way as unrealised
gains, but only to the extent that there is no evidence of impairment.
d. Foreign currency
(i)
Foreign currency transactions
Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets
and liabilities denominated in foreign currencies at the balance sheet date are translated to Icelandic kronas at the foreign exchange
rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Purchase of operating assets is translated using the exchange rate at the date of the transaction. Operating expenses and income originating in foreign
currencies are converted at the actual daily rate of the business transactions.
(ii) Financial statements presented in foreign currencies, and of foreign operations
The Parent Company and two domestic subsidiaries keep their records in USD and present their financial statements in that currency. The Group also includes a few foreign subsidiaries. The assets and liabilities of the Group are translated to Icelandic kronas at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of the Group are translated to Icelandic kronas at
average exchange rates for the period. Foreign exchange differences arising on retranslation are recognised directly in a separate component of equity.
e. Derivative financial instruments
The Company uses derivative financial instruments only for the purposes to hedge its exposure to interest rate risk, foreign exchange rate
risk, and fluctuation of fuel prices, arising from operational and financing activities. The Company has also entered into forward contracts
regarding the acquisition of shares. The contracts are stated at fair value but the underlying asset is not recognised in the balance sheet.
Derivative financial instruments are recognised at fair value. The gain or loss on remeasurement to fair value is recognised immediately in
profit or loss. However, where derivatives qualify for hedge accounting, any resultant gain or loss is recognised directly in equity.
The fair value of derivatives is the price which would be quoted in an exchange between informed, willing and unrelated parties. The fair
value of derivatives listed on an active market is their market price at the balance sheet date. If derivatives are not listed on an active market their fair value is estimated according to recognised valuation methods, for example present value calculations and valuation models.
The fair value of derivatives is mostly based on information provided from active markets and all factors that market participants would
take into account in the pricing of derivatives under normal circumstances.
f.
Hedging
(i)
Cash flow hedges
Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a
highly probable forecasted transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. The associated cumulative gain or loss is removed from equity and recognised in the income statement in the same period or periods during which the hedged forecast transaction affects profit or loss. The ineffective part of any gain or loss is recognised
immediately in the income statement.
59
Notes, cont.:
g. Operating assets
(i)
Aircrafts and flight equipment
Aircrafts and flight equipment, e.g. aircraft engines and aircraft spare parts, are stated at cost less accumulated depreciation. When
aircrafts are acquired the purchase price is divided between the aircraft itself and engine hours. Aircrafts are depreciated over the
estimated useful live of the relevant aircraft until a residual value is met. Engine hours are depreciated according to flown hours. When
an engine is overhauled the cost of the overhaul is capitalised and the remainder of the cost of the previous overhaul that has not
already been depreciated, if there is any, is expensed in full.
Prepayments for undelivered aircrafts are recognised among aircrafts and related assets. The Company capitalises the financing costs
arising from these prepayments according to the Company's average cost of debt. At the beginning of the year the Company entered
into an agreement with Boeing regarding the purchase of ten 737-800 aircrafts to be delivered in the year 2006. Recently a contract
was confirmed regarding the purchase of five additional Boeing 737-800 aircrafts to be delivered in the year 2007. The intention is
to lease out these aircrafts. In February 2005 the Company entered into an agreement with Boeing regarding the purchase of two
Boeing 787 Dreamliner large jets to be delivered in the year 2010. The intention is to use these airplanes for Icelandair's scheduled
flights.
(ii) Buildings and other property and equipmen
Buildings and other property and equipment are stated at cost less accumulated depreciation.
(iii) Subsequent costs
The Company recognises in the carrying amount of an item of operating assets the cost of replacing part of such an item when that
cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the
item can be measured reliably. All other costs are recognised in the income statement as an expense as incurred.
(iv) Depreciation
Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of
operating assets, taking into consideration the asset's residual-value. The estimated useful lives and estimated residual value are as follows:
Useful life
Residual value
.............................................
10-25 years
10%
............................................................
est. flight hours
0
................................................................
20-50 years
10%
5-8 years
0-10%
Aircrafts and flight equipment
Engine hours
Buildings
...........................................
The residual value is estimated annually
h. Intangible assets
(i)
Goodwill
Goodwill represents amounts arising on acquisition of subsidiaries and entity. Goodwill represents the difference between the cost
of the acquisition and the fair value of the net identifiable assets acquired. Goodwill is stated at cost less any accumulated impairment
losses. Goodwill is allocated to cash-generating units and is no longer amortized but is tested annually for impairment.
Negative goodwill arising on an acquisition is recognized directly in profit or loss.
(ii) Other intangible assets
Other intangible assets that are acquired by the Group are stated at cost less accumulated amortization. Amortization is charged to
the income statement on a straight line basis over the estimated useful life of the relevant asset. Estimated useful life is specified as
follows::
Useful life
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60
3 years
Notes, cont.:
i.
Investments in other companies and long-term receivables
Investments in other companies are classified as financial assets available for sale and are stated at cost because their fair value has not
been estimated. Available-for-sale assets are recognized / derecognized by the Group on the date it commits to purchase / sell the asset.
Long-term receivables comprise prepayments, insurance fees, term deposits and bonds that are defined as financial assets held to maturity. Long-term receivables are recognised according to the effective interest rate method.
j.
Inventories
Goods for resale and supplies are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in
the ordinary course of business, less the estimated costs of completion and selling expenses. Flight equipment expendable parts are valued at the actual daily rate of purchase.
The cost of inventories is based on the first-in first-out principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition.
k. Trade and other receivables
Trade and other receivables are stated at their cost less impairment losses.
l.
Securities
Securities comprise of shares and of various short-term securities which the Company acquires to get a return on liquid assets. Also presented among securities is the fair value of derivatives relating to shares. Listed securities are stated at their latest qouted price and the
change in their fair value recognised in the income statement.
m. Cash and cash equivalents
Cash and cash equivalents comprises cash balances and call deposits.
n. Impairment
The carrying amounts of the Group’s assets, other than inventories and securities are reviewed at each balance sheet date to determine
whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated.
An impairment loss is recognized whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.
Impairment losses are recognized in the income statement.
(i)
Calculation of recoverable amount
The recoverable amount of the Group’s long-term receivables is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate. Receivables with a short duration are not discounted.
The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time
value of money and the risks specific to the asset.
o. Share capital
(i)
Repurchase of share capital
When share capital recognized as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is
recognized as a change in equity. Repurchased shares are classified as treasury shares and presented as a deduction from total equity.
p. Interest-bearing borrowings
Interest-bearing borrowings are recognized initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortized cost with any difference between cost and redemption value being recognized in the
income statement over the period of the borrowings on an effective interest basis.
61
Notes, cont.:
q. Employee benefits
(i)
Retirement benefit obligation
The company has entered into pension plan agreements with some of its former employees. The obligation is presented in the balance sheet. The increase or decrease of the obligation is recognised in the income statement. The obligation is estimated according to
average life expectancy and its present value calculated using 2% interest rates. Obligations arising from retirement agreements with
former management personell are also recognised among retirement benefit obligations wich present value is calculated using 2% interest rates.
(ii) Share-based payment transactions
The share option agreements entered into during the year 2003, allow Company employees to acquire shares of the Company. The
fair value of options granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured
at grant date and spread over the period during which the employees become unconditionally entitled to the options. The fair value
of the options granted is measured using the Black Scholes model, taking into account the terms and conditions upon which the options
were granted.
r.
Provisions
A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event,
and it is probable that an outflow of economic benefits will be required to settle the obligation.
s.
Revenue
Passenger tickets sales are not recognized as revenue until transportation has been provided. Sold and unused documents are shown in
the balance sheet as unearned transportation revenue. Sold documents not used within nine months from the month of sale are recognized as revenue.
Revenue from mail and cargo transportation is recognized in the income statement after transportation has been provided. Revenue from
aircraft lease is recognized in the Income Statement at the completion of the leased flights. Revenue from rendering services is recognized
in the income statement after performance of the services.
t.
Expenses
(i)
Operating lease payments
Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease.
(ii) Net financing income
Net financing income comprise interest payable on borrowings calculated using the effective interest rate method, interest receivable
on funds invested, dividend income, foreign exchange gains and losses, gains and losses on derivative financial instruments that are
recognised in the income statement, and fair value changes of securities.
Interest income is recognised in the income statement as it accrues, using the effective interest method. Dividend income is recognised
in the income statement on the date the entity’s right to receive payments is established.
u. Income tax
Income tax on the profit or loss for the period comprises current and deferred tax.
Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are
not provided for: goodwill not deductible for tax purposes, and differences relating to investments in subsidiaries to the extent that they
will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation
or settlement of the carrying amount of assets and liabilities, using tax rates enacted at the balance sheet date.
v. Segment reporting
A segment is a distinguishable component of the Group that is engaged either in providing products or services which is subject to risks
and rewards that are different from those of other segments.
62
Notes, cont.:
Segment reporting
1. Summary of the Group's operating results for the first nine months of the year specified according to business segments:
International
Tourism
Financial services
flights
services
and investments
Eliminations
Consolidated
2005
2004
2005
2004
2005
2004
2005
2004
2005
2004
1.1.-30.9
1.1.-30.9
1.1.-30.9
1.1.-30.9
1.1.-30.9
1.1.-30.9
1.1.-30.9
1.1.-30.9
1.1.-30.9
1.1.-30.9
26,874
24,604
9,774
9,412
190
0
0
0
36,838
34,016
9,581
9,985
351
239
2,033
1,913
(11,965) (12,137)
0
0
Total revenue of segment . . . . .
36,455
34,589
10,125
9,651
2,223
1,913
(11,965) (12,137)
36,838
34,016
Segment expenses
(34,958) (32,844)
(9,650)
(8,858)
(1,826)
(1,325)
Revenues from
external customers
..........
Inter-segment revenue
Operating profit
........
............
.............
Net financing costs
............
Profit after net financing costs
Income tax
...................
..........
1,497
(23)
1,474
(250)
1,224
1,745
119
1,864
(327)
1,537
11,976
12,142
(34,458) (30,885)
475
793
397
588
11
5
2,380
3,131
(83)
(32)
5,756
293
0
(71)
5,650
309
392
761
6,153
881
11
(66)
8,030
3,440
(77)
(143)
(1,128)
(136)
0
0
(1,455)
315
618
5,025
745
11
(66)
6,575
(606)
2,834
Quarterly Statements
2. Summary of the Group's operating results by quarters:
Operating revenue
.............................
Q3
Q4
Q1
Q2
Q3
2004
2004
2005
2005
2005
15,159
8,571
7,816
12,248
16,774
(10,993)
(8,840)
(8,660)
(10,557)
Operating expenses excluding
depreciation and aircraft lease
................
(12,682)
Operating profit (loss) excluding
depreciation and aircraft lease (EBITDAR)
Aircraft operating lease
.....
.........................
4,166
(369)
(269)
(844)
(288)
(296)
(557)
(1,140)
(465)
(426)
(1,022)
(1,566)
1,841
1,597
1,691
(328)
4,092
(558)
depreciation (EBITDA)
......................
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating profit (EBIT)
........................
3,797
(463)
3,334
(42)
1,363
(476)
3,534
(475)
887
3,059
1,425
2,624
Net financing costs
.............................
Share of associates
.............................
0
0
...............................
3,292
819
28
(72)
(3)
2.717
747
25
1,908
4,642
.....................
2,716
747
26
1,907
4,638
................................
1
0
1
4
2,717
747
1,908
4,642
Profit before tax
Income tax
....................................
Profit for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(575)
(3)
(4)
2,308
(400)
11
5,694
(1,052)
Attributable to:
Minority interest
...........................
(1)
25
63
Notes, cont.:
Net financing income
3. Net financing income is specified as follows:
Interest income
.............................................
Interest expenses
2004
1.7.-30.9.
2005
1.1.-30.9.
2004
1.1.-30.9.
289
124
665
299
(479)
(228)
.....................................
225
16
............................................
0
0
10
67
0
46
212
607
...........................................
Exchange rate difference
Dividend income
2005
1.7.-30.9.
Profit on sale of investment
..................................
(639)
(42)
(25)
...
1,489
0
4,155
0
.........
1,100
0
1,955
0
........................................
2,624
(42)
5,646
309
Net gain on remeasurement of market securities at fair value
Net gain on remeasurement of derivatives at fair value
(1,309)
Changes in the Group
4. In February 2005 the Company acquired all outstanding shares in Bláfugl hf. and Flugflutningar hf. On August 16, 2005 the acquisition was
finalized. The companies are therefore part of FL GROUP hf.´s consolidated financial statements as of that date.
Comparative amounts in the Consolidated Financial Statements do not contain amounts from the Financial Statements of the aforementioned companies.
The acquisitions, accounted for according to the purchase method, had the following effect on the Group’s assets and liabilities:
Operating assets
.............................................................................................
Long-term recivables
Current assets
1.988
.........................................................................................
192
...............................................................................................
360
....................................................................................
153
Deferred income tax
.........................................................................................
(71)
.........................................................................................
(1,274)
.............................................................................................
(455)
Current liabilities
Net identifiable assets and liabilities
............................................................................
893
.......................................................................................
3,233
...........................................................................................
4,126
Goodwill on acquisition
Consideration paid
Consideration satisfied by share issue
Consideration satisfied in cash
..........................................................................
.................................................................................
(1,350)
2,776
Included in the consideration paid are acquisition related expenses, for example expert advisors fees and other fees.
Allocation of the consideration paid to recognisable assets and liabilities has not been finshed and therefore the amount of goodwill recognised is subject to change. The intention is to conclude the allocation in the Group's financial statements for the whole year.
Investments in subsidiaries
5. The Parent, FL GROUP hf., owns 17 subsidiaries. The subsidiaries, which are all included in the Consolidated Financial Statements, are as
follows:
International flights:
Share
Icelandair ehf.
100%
..............................................................................................
Fluglei›ir - Frakt ehf.
.......................................................................................
100%
....................................................................................
100%
...............................................................................................
100%
Loftlei›ir - Icelandic ehf.
Icelease ehf.
.......................................................................
100%
.........................................................................................
100%
.................................................................................................
100%
Tæknifljónustan Keflavíkurflugvelli ehf.
ICECAP, Guernsey
Bláfugl hf.
Flugflutningar ehf.
64
100%
.........................................................................
Flugfljónustan Keflavíkurflugvelli ehf.
..........................................................................................
100%
Notes, cont.:
5. Cont.:
Tourism services:
Share
Bílaleiga Fluglei›a ehf.
100%
.......................................................................................
....................................................................................
100%
.........................................................................................
100%
Fluglei›ahótel hf.
..........................................................................................
100%
Íslandsfer›ir ehf.
...........................................................................................
100%
Kynnisfer›ir ehf.
...........................................................................................
96%
Fer›askrifstofa Íslands hf.
Flugfélag Íslands hf.
Financial services and investments:
Fjárvakur - fjármálafljónusta ehf.
Fluglei›ir fjárfestingafélag ehf.
.............................................................................
100%
...............................................................................
100%
The Company's subsidiaries own thirteen subsidiaries which also are a part of the consolidated financial statements.
6. In October 2005 the Company acquired all the shares in the company Sterling Airlines A/S. According to acquisition agreement the consideration paid for Sterling is DKK 1,500 million, a portion of the consideration will vary in relation to the performance of Sterling Airlines
A/S. The consideration paid will be settled with DKK 1,100 in cash and DKK 400 million in shares in FL Group hf. The acquisition is subject to approval of competition authorities and various conditions in the contract. FL Group hf. will take over the operation of Sterling
on January 1, 2006.
Equity
7. Issued shares are specified as follows:
Total issued shares at the end of the period
Own shares
...................................................
Amounts
Ratio
2,537
100.0%
(5)
.................................................................................
(0.2%)
2,532
99.8%
8. A shareholders meeting on November 1, 2005 approved an increase in share capital for the maximum of ISK 3.2 billion nominal value or
ISK 44 billion at market value. Also approved was an increase in share capital amounting to ISK 330 million nominal value to fulfil the acquisition agreement for Sterling Airlines A/S. This share increase permission is valid for one year. The Board of Directors was also given permission to increase share capital by ISK 73 million nominal value to fulfil employee stock option agreements. This permission is valid for
five years.
9. Summary of equity:
Equity 1.1 2004
IFRS adoption
...............
Share
premium
Stock
option
reserve
2,132
533
1
......
2,132
533
.................
230
1,795
163
1,281
2,525
3,609
Dividends to shareholders
Own shares, change
.............
Adoption of IAS 32 / 39
(75)
7
6,469
(640)
2,525
3,609
9,210
Minority
interest
Total
equity
20
9,230
(69)
9,141
(69)
20
2,025
9,161
2,025
(640)
(640)
1,444
1,444
156
223
(958)
3,580
3,001
1
3,002
163
223
(958)
9,409
14,971
21
14,992
(323)
335
(100)
(623)
......
Restated equity 1.1.2005 . . . . . . .
Retained
Shareearnings holders of
the Parent
6,544
.....
..........
Net profit (loss) for the period
Equity 31.12.2004
Hedging Translation Unrealised
reserve
reserve
gain on
shares
6
................
Equity 1.1.2004, restated
Shares issued
Share
capital
163
(179)
0
9,230
(167)
14,804
(167)
21
14,825
Cont.:
65
Notes, cont.:
9. Cont.:
Equity 31.12.2004
.............
Share
capital
Share
premium
Stock
option
reserve
2,525
3,609
213
223
(958)
1,417
7,906
(50)
(323)
335
(1,417)
1,324
163
(100)
(623)
IFRS adoption . . . . . . . . . . . . . . . . .
Equity 31.12.2004, restated
Dividend to shareholders
....
2,525
3,609
0
......
7
Own shares, change . . . . . . . . . . .
..............
Minority
interest
Total
equity
21
14,956
14,935
(131)
(131)
9,230
14,804
(1,466)
(1,466)
21
3,748
(60)
735
(143)
103
635
(766)
0
14,825
6,575
7,212
2
7,214
14,339
20,591
23
20,614
(1,466)
41
105
2,532
Retained
Shareearnings holders of
the Parent
34
Net profit (loss) for the period ..
Equity 30.9.2005
Hedging Translation Unrealised
reserve
reserve
gain on
shares
41
10. Loans from credit institutions are specified as follows:
Loans in foreign currency
Loans in USD
.............................................................................................
21,847
Loans in EUR
..............................................................................................
274
Loans in CHF
.............................................................................................
73
...............................................................................................
66
Loans in JPY
Loans in GBP
..............................................................................................
27
22,287
Loans in ISK
Indexed loans
.............................................................................................
Long term debt, including current portion
Current portion
......................................................................
.............................................................................................
Total long-term debt according to the balance sheet
............................................................
396
22,683
(7,893)
14,790
Changes due to Adoption of International Financial Reporting Standards
11. As stated in notes regarding significant accounting policies, these are the Group’s third consolidated financial statements prepared in accordance with IFRSs.
The accounting policies set out in notes regarding significant accounting policies have been applied in preparing the financial statements for
the year, the comparative information presented in these financial statements for the year ended 31 December 2004 and in the preparation of an opening IFRS balance sheet at 1 January 2004 (the Group’s date of transition).
In preparing its opening IFRS balance sheet, the Group has adjusted amounts reported previously in financial statements prepared in accordance with its old basis of accounting (previous GAAP). An explanation of how the transition from previous GAAP to IFRSs has affected
the Group’s financial position, financial performance and cash flows is set out in the following tables and the notes that accompany the
tables.
Equity 1.1. 2005:
................................................................
14,935
.............................................................................
14,804
Equity according to previous GAAP 31.12.2004
Equity according to IFRS 1.1.2005
Net change from previous GAAP to IFRSs
.....................................................................
Changes in measurements:
Intangible assets
1.1.2004
4
(117)
1
16
17
................................
IAS 36
(44)
4
(40)
..........................................
IAS 19
(9)
0
(9)
.................................
Impairment of prepayments
Pension liabilities
.......................
IAS 16, 37
Derivatives and financial assets to fair value . . . . . . . . . . . . . . . . . .
IAS 39
Engine overhaul liability derecognised
Other changes
97
............................................
Net change from previous GAAP to IFRSs
66
(121)
Total
IFRS 2
..........................................
Fair value of stock options
IAS 38
1.1.2005
(131)
.....................................
(76)
112
209
(167)
(167)
(24)
(24)
(55)
(131)
Notes, cont.:
11. Cont.:
Changes in equity are stated after the deduction of income tax
Changes in measurements
Some expenses that have been capitalized as intangible assets are not in compliance with IAS 38 on intangible assets, e.g. pilot training.
This causes a decrease in the Group's equity by ISK 117 million, with regards to income tax effects. The comparative figures in the interim income statements have been adjusted accordingly.
The fair value of stock options was estimated based on the grant date according to IFRS 2. The fair value is measured at grant date and
spread over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using the Black Scholes model, taking into account the terms and conditions upon which the options were granted.
The Company has in previous years expensed estimated costs of future overhauls of engines owned by the Company. According to IAS
37 a liability arising from future expenses such as this can not be recognized. As a result, the Group's equity increases by ISK 209 million,
with regards to income tax effects. The comparative amounts in the interim income statements have been adjusted accordingly.
Prepayments recognized among long-term receivables have now been stated according to effective interest rates and therefore equity
decreases by ISK 40 million, with regards to income tax effects.
Pension benefit obligation is recognized according to IAS 19. As a result equity decreases by ISK 9 million, with regards to income tax
effects.
Unsettled derivatives at the end of the year 2004 and some financial assets are recognized at their fair value according to IAS 39. As a
result equity decreases by ISK 167 million, with regards to income tax effects. The comparative figures in the income statement have not
been adjusted as is permitted in IFRS 1.
Changes in Presentation
When adopting the standards some assets, previously presented as operating assets but classified as intangible assets according to IAS 38,
have been transferred to intangible assets. Loan charges previously presented as intangible assets are now subtracted from relevant loans.
Next years use of engine hours has been presented as current assets but now this item is recognized among operating assets.
The Group's securities which were classified as cash and cash equivalents on December 31, 2004 do not fulfil the requirements of cash
and cash equivalents according to IAS 7 and therefore presentation has been changed and they are presented as securities in the balance
sheet.
Shares acquired with a forward contract and presented as securities are not recognised in the balance sheet according to IAS 39, instead
the net fair value of the forward contract is recognised in the accounts.
In addition, minority interest in the Group's equity, previously included among current liabilities, is now presented as a separate item in
equity.
67
11. Cont.:
Balance Sheet 1.1.2005
Icelandic
GAAP
Changes in
Changes in
31.12.2004
presentation
measurement
IFRSs
374
255
20,522
(74)
(143)
Assets:
Operating assets
............................................
19,893
Intangible assets
.............................................
501
Investment in associates
.....................................
192
...............................
192
.......................................
497
111
(93)
Total non-current assets
21,275
411
19
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
832
Long-term receivables
Market securities
192
.................................
5,302
(90)
13,246
(147)
5,898
(3,079)
515
21,705
832
............................................
Trade and other receivables
284
192
2
(187)
5,214
12,912
2,819
Total current assets
25,278
(3,316)
(185)
21,777
Total assets
46,553
(2,905)
(166)
43,482
Equity:
Issued capital
...............................................
Share premium
Other equity
.............................................
...............................................
Retained earnings
...........................................
Total equity attributable to equity holders of the parent
........
2,525
2,525
3,609
3,609
(1,405)
(50)
7,906
895
1,405
(81)
9,230
14,935
0
(131)
14,804
(131)
14,825
21
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity
14,935
21
12,242
(142)
(560)
21
Liabilities:
Credit institutions
...........................................
......................................
1,466
Deferred income tax
........................................
180
........................................
13,888
(142)
...........................................
6,530
(3,048)
Credit institutions
......................
1,773
....................................
7,278
.............................................
2,149
Current portion of non-current liabilities
Trade and other payables
Prepaid income
12,100
(53)
11
(42)
1,413
191
13,704
3,482
1,773
264
7
7,549
0
2,149
7
14,953
Current liabilities
17,730
(2,784)
Total liabilities
31,618
(2,926)
(35)
28,657
Total equity and liabilities
46,553
(2,905)
(166)
43,482
Balance sheet changes are presented without the effect of income tax, changes in equity were presented with regards to income tax effects.
In the interim financial statements of FL GROUP hf. according to IFRS the focus is on disclosing significant accounting policies, at the same
time, the effect of the adoptation of IFRS on the financial position of the Group is disclosed.
68
11. Cont.:
Income Statement for the nine months ended September 30, 2004
Icelandic GAAP
Changes
IFRSs
Operating revenue:
Transport revenue:
Passengers
17,376
17,376
2,500
2,500
............................................
4,487
4,487
....................................................
9,653
9,653
................................................................
Cargo and mail
...........................................................
34,016
0
34,016
.................................................
10,618
(66)
10,552
.................................................................
4,138
4,138
1,652
1,652
Operating expenses:
Aircraft fuel
Aircraft lease
................................................................
.................................
3,150
...................................................
10,070
(33)
10,037
................................................................
1,410
(54)
1,356
31,038
(153)
30,885
Depreciation
3,150
.................................
2,978
153
3,131
........................................................
304
5
309
............................................................
3,282
158
3,440
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(600)
(6)
(606)
2,682
152
2,834
2,682
151
2,833
Operating profit before net financing income
Profit before tax
........................................................
Attributable to:
...............................................
..........................................................
0
1
1
Profit for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,682
152
2,834
Minority interest
Earnings per share:
Basic earnings per share (ISK)
................................................
Diluted earnings per share (ISK)
..............................................
1.27
1.34
1.25
1.32
Net profit attributable to the shareholders of the Parent Company increases by ISK 161 million, in the comparative figures in the financial
statements for the year 2004 due to the adoptation of the standards. In the comparative figures for the 3rd quarter, net profit attributable to the shareholders of the Parent Company increase by ISK 151 million according to the income statement above.
Salaries and related expense decrease by ISK 66 million due to changes in the treatment of employee stock options.
Other operating expense decrease by ISK 33 million and exchange loss by ISK 5 million due to the derecognition of estimated future costs
of engine overhauls.
Depreciation decreases by ISK 54 million due to changes in the measurement of previously capitalized cost due to changes in the evaluation of operating assets and amendments to previously capitalized cost cf. discussion on the evalutaion af assets.
Changes in the income tax for the period result from the changes discussed here above.
Minority interest in the performance for the period is now presented separately among profits for the period but the minority interest
was previously expensed among financial income and financial expenses.
69
Ratios
12. The Group´s primary ratios are specified as follows:
Working capital from operations
..............................................................
4,300
5,185
30.9.2005
31.12.2004
1.59
1.46
1.89
1.70
........................................................
29.4%
34.1%
.................................................................
8.13
5.86
...............................................
Current ratio - excluding unearned transportation revenue
Equty ratio - equity / capital employed
70
2004
1.1.-30.9.2005
......................................
Current ratio - current assets / current liabilities
Total equity to issued capital
2005
1.1.-30.9.2005
Appendix C
Annual Accounts for 2004
71
Signatures of the Board of Directors and the President and CEO
In February 2004, one subsidiary, Flugleidir
Investments, was founded. One subsidiary,
Íslandsferdir ehf., became a subsidiary of
Flugleidir hf. as of 1 January 2004. Íslandsferdir
ehf. was formerly a subsidiary of Icelandair
and, thus, part of the Group. After the change,
Flugleidir hf. is a holding company presently
controlling the operations of thirteen independent subsidiaries, and therefore the
amounts shown are only from the Group’s
Consolidated Financial Statements.
In 2004, the Company purchased market
securities in listed companies for ISK 11,519
million. Their value at year-end 2004 was ISK
13,246 million. At year-end 2004, the
Company acquired 49% of the shares in
Barkham Associates SA. That company leases
aircraft.
In November 2004, the Company sold new
capital stock for a nominal value of ISK 230
million and treasury stock for a nominal value
of ISK 190 million or a total nominal value of
ISK 420 million. The shares were sold at the
rate 9.1.
At the beginning of the year 2005, the
Company concluded an agreement with the
Boeing aircraft manufacturer for the purchase
of ten new Boeing 737-800 aircraft. The aircraft will be delivered to the Company in the
year 2006, and the intention is to lease them
to third parties.
The total number of stockholders was
4,133 at the end of 2004, compared with
4,619 at the end of 2003, down by 486 dur-
ing the year. Three stockholders owned more
than 10% of the Company’s outstanding capital stock at the end of 2004. They were:
Oddaflug ehf., holding a 29.4% share, Saxbygg
ehf., with 25.6%, and Skildingur ehf., holding a
10.1% of the outstanding shares at the end of
the year 2004.
The Board of Directors recommends paying a 60% dividend on the nominal value of
the capital stock to stockholders in the year
2005 for the operating year 2004, i.e. ISK
1,515 million on stock outstanding at year-end
2004. The dividend distribution amounts to
44% of the net earnings for the year 2004.
Changes in the stockholders’ equity section
during the year 2004 are shown in the Notes
to the Financial Statements.
The Board of Directors and the President
and CEO of Flugleidir hf. hereby confirm the
Consolidated Financial Statements for 2004.
We conducted our audit in accordance
In our opinion, the Consolidated Financial
Stockholders of Flugleidir hf. (the Icelandair
with generally accepted auditing standards.
Statements present fairly the financial position
parent company):
Those standards require that we plan and
of Flugleidir hf. at 31 December 2004, as well
perform the audit to obtain reasonable assur-
as its operating results and cash flows for the
ance about whether the Financial Statements
year then ended, in accordance with the law
are free of material misstatements. Our audit
and generally accepted accounting principles
includes examining, on a test basis, evidence
in Iceland.
The Consolidated Financial Statements of
Flugleidir hf. (the Icelandair parent company)
are prepared in accordance with the Financial
Statements Act and the Regulation on the
Presentation and Contents of Financial
Statements and Consolidated Financial
Statements. The Company predominantly
uses the same accounting principles as in previous years, except that inflation accounting
has been discontinued as the transitional provision in the Act on Financial Statements
allowing companies to use inflation accounting
was repealed as of year-end 2003. In addition,
the parent company and one of its subsidiaries received permission to maintain their
accounts and prepare their Financial
Statements in US dollars as of 1 January 2004.
The Group’s Financial Statements are presented in millions of Icelandic kronas (ISK).
Comparative amounts in the Financial
Statements have not been changed. The
changes are further explained in Note 22. The
total results for the subsidiaries and ownership
are explained in the Notes to the Financial
Statements.
According to the Statements of Earnings,
the operating revenues of the Group amounted to 42,587 million in 2004. Net earnings
from the Group’s operations for the year 2004
were ISK 3,419 million. According to the
Balance Sheet, the Group’s stockholders’ equity amounted to ISK 14,935 million at the end
of 2004, including ISK 2,525 million in capital
stock, or 32% of the total capital employed.
Reykjavik, 24 February 2005.
Board of Directors:
Hannes Smárason, Chairman
Árni Oddur Thórdarson
Benedikt Sveinsson
Gunnar Thorláksson
Gylfi Ómar Hédinsson
Jón Thorsteinn Jónsson
Ragnhildur Geirsdóttir
President and CEO:
Sigurdur Helgason
Auditors’ Report
To the Board of Directors and
We
have
Consolidated
audited
the
Financial
accompanying
Statements
of
Flugleidir hf. for the year 2004. The Financial
Statements consist of the Signatures of the
Board of Directors, Statements of Earnings,
Balance Sheet, Statements of Cash Flows and
Notes 1-61. The Financial Statements are the
responsibility of the Company's management.
Our responsibility is to express an opinion on
these Financial Statements based on our audit.
supporting the amounts and disclosures in the
Financial Statements. Our audit also includes
assessing the accounting principles used and
significant estimates made by management, as
well as evaluating the overall presentation of
the Financial Statements. We believe that our
audit provides a reasonable basis for our opinion.
72
Reykjavik, 24 February 2005.
Gudni S. Gústafsson
Jón Sigurdur Helgason
KPMG Endurskodun hf.
Statements of Earnings for the year 2004
Notes
2004
2003
6
20,570
19,228
7
3,373
2,880
7
5,595
3,994
24
13,049
11,459
42,587
37,561
14,491
12,200
Aircraft fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,582
3,622
Aircraft lease
2,059
2,157
3,923
3,403
12,707
12,389
Operating revenue:
Transport revenue:
Passengers
.....................................................
Cargo and mail
.................................................
..................................
...........................................
Operating expenses:
.......................................
25
......................................................
.......................
..........................................
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating profit before financial income and expenses
Deferred income tax
Net profit per share
...............................
.................................
29
16, 46
...................................
..........................................
...................................................
Net profit per each ISK of capital stock
..............................
Diluted profit per each ISK of capital stock
All amounts are in ISK millions
9, 10, 31
................
...............................................
27
...........................
20, 52
23
1,896
1,807
40,658
35,578
1,929
1,983
431
(577)
1,727
0
4,087
1,406
(668)
(285)
3,419
1,121
1,58
0,52
1,56
0,52
8
73
Balance Sheet
Assets
Notes
2004
2003
78
0
9, 30
423
557
501
557
38
1,715
2,104
37
15,050
17,715
1,883
1,669
Fixed assets:
Intangible assets:
Goodwill
.......................................................
Other intangible assets
..........................................
Property and equipment:
Buildings
.......................................................
Aircraft and flight equipment
.....................................
..................................
Aircraft purchase prepayments
...................................
9, 31
Engine overhauls
................................................
18,648
21,488
32
737
0
11, 37
508
689
19,893
22,177
Investments:
..............................
13, 40
192
194
..................................
13, 41
192
169
139
34
43
358
430
881
827
21,275
23,561
832
707
.............................................
3,304
3,437
Notes receivable
...............................................
355
438
Other receivables
...............................................
788
664
Investment in associated companies
Long-term notes
................................................
Deposits and other
.............................................
Fixed assets
Current assets:
Inventories
........................................................
Receivables:
15, 45
Accounts receivable
Prepaid expenses
.................................................
11, 37
855
747
Market securities
..................................................
16, 46
13,246
0
17, 47
5,898
7,742
Current assets
25,278
13,735
Total assets
46,553
37,296
74
14, 44
..........................................
31 December 2004
Stockholders’ equity and liabilities
Notes
2004
2003
48
2,525
2,132
.............................................
3,609
533
..............................................
213
1
(735)
0
Stockholders´ equity:
Capital stock
......................................................
Statutory stock reserve
Stock options reserve
Translation reserve
................................................
Retained earnings
.................................
..................................................
Stockholders' equity
18, 49
1,417
0
7,906
6,544
14,935
9,210
Obligations:
Deferred income tax
.............................................
...............................................
19, 50
20, 52, 53
180
161
1,466
989
1,646
1,150
12,242
15,963
Long-term debt:
Credit institutions
..................................................
54
Current liabilities:
Credit institiutions
................................................
6,530
0
Accounts payable
..................................................
2,947
3,207
1,773
1,543
4,331
4,191
Current maturities of long-term debt
Accrued liabilities and expenses
................................
55
.....................................
2,149
2,032
17,730
10,973
Total liabilities
31,618
28,086
Stockholders’ equity and liabilities total
46,553
37,296
...................................
Commitments and contingencies
..............................
6, 7, 56
34, 36
75
Statements of Cash Flows for the year 2004
Notes
2004
2003
23
3,419
1,121
9, 10, 31
1,896
1,807
...........................................
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation
...................................................
Capital (gain) loss on sale of assets
...............................
33
Amortisation and deferred charges
...............................
11
1,027
16, 46
(1,727)
Other operating activities, net
..............................
...................................
Net change in operating assets and liabilities
(35)
Net cash provided by operating activities
781
0
807
736
5,388
4,365
(267)
.........................
(80)
1,199
5,121
5,564
(1,088)
(1,076)
(61)
(61)
Capitalised deferred charges
........................................
Increase in property and equipment:
Buildings
11, 30
31
.......................................................
.....................................
(1,234)
(831)
...............................................
(834)
(993)
83
138
(300)
(497)
Other equipment
Proceeds from sale of equipment
...................................
Increase in investments and long-term notes
Market securities, increase
33
.........................
..........................................
46
Net cash used in investing activites
(11,519)
0
(14,953)
(3,320)
(640)
(365)
Dividends paid
....................................................
49
Additional paid in capital stock
......................................
48
2,025
Purchase of treasury stock, net
......................................
18
1,445
Proceeds from long-term borrowings
Payments and other changes in long-term debt
Notes payable, decrease
289
................................
(1,660)
......................
6,530
...........................................
Net cash provided by (used in) financing activities
(Decrease ) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
7,989
............
0
(143)
1,837
(1,690)
0
(361)
(1,844)
1,883
...............
17, 47
7,742
5,859
.....................
17, 47
5,898
7,742
.....................................
581
613
...........................................
456
439
..............................................................
20
22
Cash and cash equivalents at end of year
Supplemental information:
Interest paid on long-term debt
Interest income received
Income tax paid
76
Notes to Financial Statements
Summary of Accounting Policies
Basis of preparation
1.
The Financial Statements of Flugleidir hf. (the Icelandair Parent Company) contain the Consolidated Financial Statements of the Group;
where all major inter-Group transactions are eliminated. The Financial Statements are prepared in accordance with the Financial
Statements Act and the Regulation on the Presentation and Contents of Financial Statements and Consolidated Financial Statements.
The Financial Statements are based on historial cost accounting. The Company predominantly uses the same accounting principles as in
previous years apart from the changes in accounting policies explained in Note 20. The Consolidated Financial Statements of the Group
are prepared in the Icelandic currency and amounts are presented in millions of Icelandic krónur (ISK).
2.
The Company’s assets in aircraft and related loans are recorded predominantly in the parent company’s Balance Sheet. The parent company and one of its subsidiaries maintain their accounts and prepare their Financial Statements in US dollars as of 1 January 2004. In
preparing the Group’s Consolidated Financial Statements, which are prepared in Icelandic krónur, the Balance Sheet of those two companies is translated to Icelandic krónur at the exchange rate of the Icelandic krónur to the US dollar at the end of the year. Income and
expenses are converted into Icelandic krónur at the average exchange rate for the year. All resulting krónur translation differences are
posted to a separate component of stockholders’ equity as “translation reserve”.
3.
Subsidiaries are companies in which the Company holds a controlling interest, directly or indirecly. A controlling interest exists when the
Company has significant influence over the financial and operational polices of a subsidiary. The Financial Statements of the subsidiary are
included in the Group's Consolidated Financial Statements from the acquisition of the controlling interest until the interest is no longer
held.
All material balances between the Group companies, transactions and profits created in transactions between Group companies are eliminated in the Consolidated Financial Statements.
Foreign currency
4.
All business transactions originating in foreign currencies are converted at the spot rate on the transaction date. Exchange rate difference
is posted to the Statements of Earnings. Purchase of fixed assets is converted at the spot rate of the purchase. Operating expenses and
income originating in foreign currencies are converted at the spot rate of the business transactions. Monetary assets and liabilities denominated in foreign currencies are stated in ISK at the latest official exchange rate for December 2004.
Derivatives
5.
Currency swap and option trading contracts are shown in the Financial Statements at market value at 31 December 2004. Contracts
with a positive market value are shown in the Balance Sheet as current assets, and contracts with a negative value are shown in current
liabilities. Changes in the market value of these contracts are recognised in the Statements of Earnings when contracts are settled.
Changes in the market value of unrealised gain or loss on these contracts are, on the other hand, posted to the stockholders’ equity section as “currency derivatives”.
The value of interest swap and forward rate agreements at 31 December 2004 is not shown in the Balance Sheet. Accrued interest due
to these contracts is included in the Financial Statements and their effect is included in the calculation of average weighted interest on
the Company’s long-term debt.
To limit the risk of fluctuation in aircraft fuel prices, the Company has entered into both swap and option contracts. The value of the
fuel derivatives is reflected in the Financial Statements for the same period that the use of the fuel under the contracts takes place.
Revenue recognition
6.
Passenger tickets and cargo sales are not recognised as revenue until tranportation is provided. Sold and unused documents amounting
to ISK 1,683 million at 31 December 2004 are shown in the Balance Sheet as unearned transportation revenue. Sold documents not
used within nine months from the month of sale are recognised as revenue.
77
Notes, cont.:
7.
Revenue from mail and cargo transportation is recognised in the Statements of Earnings after transportation has been provided. Revenue
from aircraft lease is recognised in the Statements of Earnings on completion of the leased flights. Revenue from services is recognised in
the Statements of Earnings after providing the service.
Earnings per share
8.
Earnings per share is the ratio between profit and weighted average capital stock during the year and shows the profit per each ISK 1 of
capital stock. Net earnings for the year 2004 amounted to ISK 3,419 million and the weighted average number of outstanding shares
amounted to ISK 2,167 million, taking into consideration new shares and the Company's transactions with treasury shares. The nominal
value of each share is ISK 1. Earnings per share thus amounted to ISK 1.58. In calculating diluted earnings per share, option contracts concluded with Company employees in the amount of ISK 98 million have been taken into account. The Company has not taken any convertible loans.
Intangible assets
9.
Included in other intangible assets in the Balance Sheet are training costs of crew members, software systems and loan expense in relation to the purchase of new aircraft. The cost of training crew members and software systems is amortised to expense over three years,
whereas the loan expense is amortised to expense over the life of the loans.
Property and equipment
10. The net book value of property and equipment is based on historical cost less depreciation. Depreciation is calculated on a straight-line basis
according to the estimated service life of the asset until a 10% residual value is reached. Estimated service life is as follows:
Buildings
.....................................................................................................
...................................................................................
.................................................................................
25-50 years
10-25 years
3-8 years
11. The Company capitalises engine overhauls when incurred and amortises such cost to maintenance expense over their estimated service
lives on a usage basis. The remaining portion, ISK 958 million, is shown in the Balance Sheet both as prepaid expenses and specified under
property and equipment. The effect of changes in the exchange rate of the US dollar are posted as currency difference in the Statements
of Earnings.
Subsidiaries
12. Investments in subsidiaries are capitalised at a value that corresponds to the Company's share in their stockholders' equity, including the
difference between the purchase price and the Company's share in their stockholders' equity at the acquisition date.
The Financial Statements of foreign subsidiaries are converted to ISK using the accounting methods and principles valid in Iceland.
Currency exchange difference resulting from translation into ISK is posted to a separate component of stockholders’ equity as “translation difference and currency hedging”.
Associated companies and other companies
13. The investment of the Group in domestic and foreign companies is stated at historical cost. The Group holds a share between 20% and
50% in fourteen associated companies. Its equity in the operating results and financial position of its associated companies is not included in the Consolidated Financial Statements due to the immaterial effect thereof.
Investment in other domestic and foreign companies is stated at cost value, taking portfolio reserve into account.
Inventories
14. Flight equipment expendable parts are capitalised at the spot rate of purchase and are, as other inventories, valued at the latest purchase
price.
Accounts receivable
15. Allowance has been made for doubtful notes and accounts receivable. This entry does not represent a final write-off, but only a reserve
to meet possible losses, and is deducted from the appropriate Balance Sheet items.
78
Notes, cont.:
Market securities
16. Listed shares are shown in the Balance Sheet as market securities. The shares are posted at their listed market price at year-end 2004.
Changes in the market value are entered as unrealised gain in the Statements of Earnings and shown as a special item in the Stockholders'
Equity section.
17. Cash and cash equivalents consist of short-term securities, cash and bank deposits. Short-term securities include short-term notes of financial institutions, government and municipal securities listed on the Iceland Stock Exchange and bonds of unit trusts.
Purchase of treasury stock
18. When treasury stock is purchased, the total purchase price, including related expenses, is posted as a deduction from stockholders' equity. When treasury stock is sold, the sale is posted as an increase in stockholders' equity. Capital gain or loss is not recorded. Cost of issuing and selling new capital stock is posted as a decrease in the stockholders’ equity section.
19. The Company has entered into pension plan agreements with some of its former employees. These obligations are presented in the
Balance Sheet as a separate line item, and the change in the obligation is included in the Statements of Earnings.
Deferred income tax liability
20. The deferred income tax liability is calculated and entered in the Financial Statements. It is mainly a result of timing difference between
Icelandic financial accounting and tax accounting, primarily from the valuation of fixed assets and their depreciation.
International Financial Reporting Standards
21. According to the rules on the presentation of Financial Statements of companies registered on the Iceland Stock Exchange, the Company
will adopt the International Financial Reporting Standards as of the beginning of 2005. The Company has already begun preparing for this
change. The possible effect of the change on stockholders' equity has not been estimated.
Change in accounting principles: inflation accounting discontinued
22. The Company has, pursuant to an Act passed by the Icelandic Parliament at year-end 2001, discontinued inflation accounting. The effects
of price level changes are no longer entered in the Company’s Statements of Earnings. The Company’s aircraft are no longer revalued
based on the value of the US dollar. Intangible assets, property, equipment and shares in associated companies and other companies, previously adjusted according to changes in the general price level, are now valued at cost price. Depreciaton and amortisation are now calculated based on historical cost instead of revalued historical cost, and inflation adjustment is no longer calculated nor posted to the
Statements of Earnings. As a result of these changes, operating results are no longer shown at the average price for the period, and assets
are not valued at the 31 December 2004 price level.
In accordance with international accounting standards regarding the change to non-inflation adjusted accounting, comparative amounts in
the Financial Statements have not been changed.
The parent company and one of its subsidiaries have received permission to maintain their accounts and prepare their Financial
Statements in US dollars as of the beginning of the year 2004. In the Group's Consolidated Financial Statements, which are prepared in
Icelandic krónur, the Balance Sheet of those two companies is translated into Icelandic krónur at the ISK exchange rate to the US dollar
at the end of the year. Income and expenses are converted to ISK at the average exchange rate for the year.
79
Notes, cont.:
Quarterly summary
23. The Group's operations are specified as follows by quarters:
Operating revenue
.............................
..................
..................
Q1
Q2
Q3
Q4
Total
2004
2004
2004
2004
2004
7,280
11,577
15,159
8,571
42,587
(7,696)
(9,766)
(11,009)
(8,846)
(37,317)
1,811
4,150
depreciation and aircraft lease (EBITDAR)
Aircraft lease
......
(416)
..................................
(381)
(407)
(369)
(275)
5,270
(288)
(1,445)
Operating profit (loss) excluding . . . . . . . . . . . . . . . . .
depreciation (EBITDA)
Depreciation
.......................
(797)
..................................
(445)
Operating profit (loss) (EBIT)
...................
................
Deferred income tax
.............
...........................
(1,242)
1,404
(477)
927
157
191
0
0
194
(215)
(891)
903
3,781
(488)
3,293
(44)
0
(579)
3,825
(486)
(1,896)
(1,049)
1,929
127
431
1,727
1,727
(68)
(668)
737
3,419
2004
2003
............................
1,636
1,354
...........................................................................
711
420
............................................................................
297
319
Net earnings (loss) for the period
...............
2,670
(563)
Operating revenue
24. Other operating revenue is specified as follows:
Restaurant and Saga Boutique sales at airports and on board aircraft
Sold maintenance
Aircraft handling
..............................................................
888
597
.......................................................................
4,850
5,123
..............................................................................
Freight handling and service fees
Travel agency revenue
Hotel revenue
1,358
1,114
............................................................
1,121
761
................................................................................
380
390
35
80
Excursions and car rental revenue
Commission
Gain on the sale of assets
Miscellaneous income
....................................................................
.......................................................................
1,772
1,301
13,049
11,459
2004
2003
10,173
8,443
Operating expenses
Salary and related expenses
25. Salaries and related expenses are specified as follows:
Salaries
.....................................................................................
Salary-related expenses
2,048
1,617
......................................................
12,221
10,060
...................................................................
2,270
2,140
............................
14,491
12,200
...................................................
2,465
2,289
......................................................................
Salaries and salary-related expenses total
Other personnel expenses
Salaries, salary-related expenses and other personnel expenses, total
Average number of employees for the year
80
Notes, cont.:
26. Remuneration to the Board of Directors and the CEO in relation to their work for companies within the Group, their stock options and
shareholdings in the Company are specified as follows:
Salaries and
Call
Shareholdings
fringe benefits
options
at year-end
25
13
34
......................
199
80
221
................................................
0
0
743
Sigurdur Helgason, President and CEO
......................................
Sixteen managing directors of Icelandair and subsidiaries
Directors:
Hannes Smárason, Chairman
..........................................
0
0
0
....................................................
0
0
0
.........................................................
Hreggvidur Jónsson, Vice-Chairman
Árni Oddur Thórdarson
Benedikt Sveinsson
1
0
0
Gylfi Ómar Hédinsson*
....................................................
0
0
0
Jón Thorsteinn Jónsson*
....................................................
0
0
0
......................................................
1
0
0
........................................................
1
0
0
Former Directors:
Einar Thór Sverrisson
Gardar Halldórsson
Grétar Br. Kristjánsson
.....................................................
2
0
0
Hördur Sigurgestsson
......................................................
3
0
2
Ingimundur Sigurpálsson
....................................................
1
0
0
Jón Ásgeir Jóhannesson
.....................................................
1
0
0
.............................................................
1
0
1
2
0
0
Jón Ingvarsson
Pálmi Haraldsson
..........................................................
Remunerations to Directors are determined in arrears at the Company’s Annual General Meeting.
The Company entered into stock option contracts with the CEO and other managing directors for a nominal value of ISK 93 million at
the end of 2003, which are based on the exercise price 5.97.
Included in the column “Shareholdings at year-end” are shares in the Company held by companies controlled by Board members and
managing directors of Flugleidir hf.
*Gylfi Ómar Hédinsson and Jón Thorsteinn Jónsson are shareholders in companies that control Saxbygg ehf., which held a 25.6% stake in
Flugleidir hf. at year-end 2004.
27. Other operating expenses are specified as follows:
2004
2003
679
600
Aircraft maintenance expenses
...............................................................
1,824
1,949
Buildings and interior expenses
Cost of goods sold
..........................................................................
...............................................................
1,402
1,272
....................................................................
1,141
1,081
........................................................................
Communication expenses
Advertising expenses
1,014
888
........................................................
1,599
1,622
......................................................................
2,182
2,397
448
353
...................................................
737
703
................................................................
399
377
Booking fee and commission expenses
Travel agency expenses
Excursions and car rental expenses
...........................................................
Passenger and hotel guest service expenses
Insurance and claim expenses
Miscellaneous expenses
......................................................................
1,282
1,147
12,707
12,389
81
Notes, cont.:
Auditors’ fees
28. Remuneration to the Company’s Auditors are specified as follows:
2004
2003
Audit of Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11
10
Review of Interim Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13
11
Other services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
2
26
23
2004
2003
29. Net financial income (expenses) are as follows:
Interest earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
477
485
Interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(927)
(845)
Currency fluctuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
218
2,079
Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
71
0
Gain (loss) on sale of investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
592
(5)
Calculated inflation income entry – monetary items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
431
1,714
0
443
Calculated inflation expenses adjustment due to revaluation of aircraft and flight equipment
in accordance with changes in the USD rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
(2,734)
Total inflation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
(2,291)
Net financial income (expenses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
431
(577)
2004
2003
Other intangible assets 1.1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
557
462
Currency difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(26)
14
Fixed assets
Intangible assets
30. The book value of other intangible assets is specified as follows:
Additions during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
129
270
Amortised during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(237)
(189)
Other intangible assets 31.12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
423
557
Amortisation factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6-33%
6-33%
31. Property and equipment are specified as follows:
Aircraft
Other
and flight
property and
Buildings
equipment
equipment
Total
Total value 1.1.2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,772
23,090
3,419
30,281
Total depreciated 1.1.2004 . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,668)
(5,375)
(1,750)
(8,793)
Net book value 1.1.2004 . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,104
17,715
1,669
21,488
Currency translation differences during the year . . . . . . . . . . .
(324)
Additions during the year . . . . . . . . . . . . . . . . . . . . . . . . . . .
61
591
821
Sales and disposals during the year . . . . . . . . . . . . . . . . . . . .
0
(16)
(120)
(1,046)
(487)
Depreciation during the year . . . . . . . . . . . . . . . . . . . . . . . . .
Net book value 31.12.2004 . . . . . . . . . . . . . . . . . . . . . . . . . .
82
(126)
1,715
(2,194)
15,050
0
1,883
(2,518)
1,473
(136)
(1,659)
18,648
Notes, cont.:
31. Cont.
Total value 31.12.2004
.....................................
Other
property and
Buildings
equipment
equipment
Total
3,314
20,267
3,863
27,444
(1,599)
(5,217)
(1,980)
(8,796)
.................................
1,715
15,050
1,883
18,648
.........................................
2-4%
4-10%
12-33%
Total depreciated 31.12.2004
Net book value 31.12.2004
Depreciation factor
Aircraft
and flight
...............................
Depreciation as shown in the Statements of Earnings is segregated as follows:
Depreciation of property and equipment
.....................................................................
Amortisation of other intangible assets, see note 30
Total depreciation
1,659
...........................................................
237
...........................................................................................
1,896
32. Prepayments in relation to the purchase of aircraft include ISK 614 million for an agreement to purchase ten Boeing 737-800 aircraft,
which will be delivered to the Company in 2006. In addition, ISK 74 million are entered in relation to the purchase of two aircraft around
mid-year 2005. The two aircraft have been leased and used in the Company's operations during the past years. The intention is to sell
the aircraft along with the third aircraft owned by the Company at year-end 2004. The effect of the transaction on the Group's Statements
of Earnings in 2005 will be immaterial.
33. In the year 2004 the parent company sold property and equipment for ISK 83 million. Capital gain on the sale was ISK 35 million and is
included under other operating income in the Statements of Earnings.
Operating lease agreements
34. The Group had operating lease agreements for fourteen aircraft at 31 December 2004. The aircraft are nine Boeing 757, three Boeing
767 and two smaller aircraft. The Group also leases premises and equipment for its operations under operating leases expiring in the year
2018. At 31 December 2004, approximate future rental payments according to those agreements totalled ISK 10,035 million, which is
specified as follows:
Buildings
Aircraft
Other
Total
Year 2005
.................................................
559
1,212
262
2,033
Year 2006
.................................................
559
825
126
1,510
Year 2007
.................................................
551
647
75
1,273
Year 2008
.................................................
551
106
66
723
Year 2009
.................................................
551
0
56
607
..........................................
3,809
0
80
3,889
......................................................
6,580
2,790
665
10,035
Subsequent years
Total
35. Lease expenses in the year 2004 included in the Financial Statements of the Group amounted to ISK 3,152 million.
Mortgages and commitments
36. Mortgages by the Group with remaining balances in foreign currencies are ISK 13,927 million at year-end 2004.
83
Notes, cont.:
Insurance value of aircraft and flight equipment
37. The insurance value and book value of aircraft and related equipment of the parent company at year-end 2004 are specified as follows:
Insurance value
Book value
Boeing 757-200 / 300 - six aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Flight equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,938
1,798
2,025
12,760
702
1,588
Aircraft and flight equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Engine hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,761
2,578
15,050
958
23,339
16,008
Unused engine hours are shown in the Balance Sheet both as prepaid expenses and specified under property and equipment.
Real estate insurance value
38. The principal buildings owned by the Group at 31 December 2004 are the following:
Official premises
valuation
Insurance
value
Book
value
.
.
.
.
.
.
.
1,166
303
574
303
230
82
335
1,882
486
731
467
357
85
516
589
352
152
143
136
97
246
Buildings total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,993
4,524
1,715
Maintenance hangar, Keflavík Airport . . . . . . . .
Freight building, Keflavík Airport . . . . . . . . . . .
Office building, Reykjavík Airport . . . . . . . . . .
Service building, Keflavík Airport . . . . . . . . . . .
Hangar 4 and other buildings, Reykjavík Airport
Vesturvör 6, Kópavogur . . . . . . . . . . . . . . . . .
Other buildings . . . . . . . . . . . . . . . . . . . . . . .
.
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Official valuation of the Group's leased land for buildings at December 31, 2004 amounted to ISK 132 million, and is not included in the
Balance Sheet.
Investments
Subsidiaries
39. The parent company, Flugleidir hf., now owns thirteen subsidiaries, after one new subsidiary, Flugleidir Fjárfestingafélag ehf. (Flugleidir
Investments), was established and began operation at year-start 2004. Flugleidir hf. also took over Icelandair ehf. shares in Íslandsferdir
ehf. The subsidiaries, which are all included in the Consolidated Financial Statements, are the following:
Share
Airlines:
Flugfélag Íslands hf. (Air Iceland) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Icelandair ehf. (Icelandair) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Travel agencies
Ferdaskrifstofa Íslands hf. (Iceland Travel)
....................................................................
Íslandsferdir ehf. (Íslandsferdir) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kynnisferdir ehf. (Reykjavik Excursions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other subsidiaries:
Bílaleiga Flugleida ehf. (Icelandair Hertz Car Rental) . . . . . . . . . . . . .
Fjárvakur - fjármálathjónusta ehf. (Icelandair Shared Services) . . . . . .
Flugleidahótel hf. (Icelandair Hotels) . . . . . . . . . . . . . . . . . . . . . . . .
Flugleidir Fjárfestingafélag ehf. (Flugleidir Investments) . . . . . . . . . . .
Flugleidir - Frakt ehf. (Icelandair Cargo) . . . . . . . . . . . . . . . . . . . . .
Flugthjónustan Keflavíkurflugvelli ehf. (Icelandair Ground Services) . . .
Loftleidir-Icelandic ehf. (charter and leasing) . . . . . . . . . . . . . . . . . .
Tæknithjónustan Keflavíkurflugvelli ehf. (Icelandair Technical Services)
84
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100%
100%
100%
100%
96%
100%
100%
100%
100%
100%
100%
100%
100%
Notes, cont.
39. Cont.
The parent company’s equity in the operating results of the subsidiaries for the year 2004 was a net profit of ISK 3,030 million. The minority interest in the operating results of the subsidiaries is a net profit of ISK 19 million for the year. The minority interest in the stockholders' equity of the subsidiaries was ISK 21 million at 31 December 2004, and is included in accrued liabilities and expenses in the Balance
Sheet.
Associated companies
40. Investment in associated companies is specified as follows:
Ásgardur hf.
Book value
50.6%
54
..................................................................
20.1%
53
....................................................................
................................................................................
Median - Rafræn midlun hf.
31.0%
23
................................................................
30.0%
18
................................................................................
19.2%
16
..................................................................................
21.9%
6
Sérleyfisbílar Keflavíkur hf.
Ferdaskrifstofa Akureyrar ehf.
Íshestar ehf.
Tjarnir hf.
Share %
Flugbúnadur ehf.
22.7%
5
..........................................................................
24.4%
7
............................................................................
40.0%
4
50.0%
3
............................................................................
Flugskóli Íslands hf.
Viking K.K., Japan
Nordland Tours Gmbh, fi‡skalandi
Other companies (4 companies)
...........................................................
3
.............................................................
Investment in associated companies
192
..........................................................
Other companies
41. Investment in other companies is specified as follows:
Share %
Book value
Tölvumyndir hf.
.............................................................................
10.2%
178
Dalagisting ehf.
.............................................................................
9.6%
5
...................................................................................
0.3%
4
.....................................................................................
4.0%
3
Anza ehf.
BSÍ hf.
Other companies (23 companies)
............................................................
Investment in other companies, total
Portfolio reserve
.........................................................
...........................................................................
..............................................................
7
197
(5)
192
42. At the annual Board meeting of SITA SC, a subsidiary of SITA foundation, in the year 2000, a decision was made to change the organisational structure of the company by establishing a new entity, SITA Information Networking Computing N.V. The goal is to expand the
activity of SITA in the fast-growing market in communications and Internet services. Shares in the new SITA company have been distributed to Flugleidir based on the volume of business with SITA in the years 1998 and 1999. The market value of the 65,566 shares issued
to Flugleidir is not known due to sales restrictions in effect. Additional distribution of shares in the new SITA Company to Flugleidir will
be based on the volume of business with SITA SC in the years 2000 to 2003.
85
Notes, cont.:
Deposits and other
43. Included in deposits and other in the Balance Sheet are deposits in relation to aircraft lease and lease of premises. Deposits and other is
segregated as follows:
2004
2003
.......................................................................
208
156
Bank guarantees
............................................................................
98
150
Other deposits
.............................................................................
52
124
358
430
Aircraft lease deposits
Deposits and other total
....................................................................
Financial institutions have guaranteed aircraft lease and other obligations of the Group for the amount of ISK 504 million.
Current assets
Inventories
44. Inventories are specified as follows:
2004
2003
...........................................................
587
476
.............................................................................
6
11
...........................................................................
239
220
............................................................................
832
707
Flight equipment expendable parts
Fuel inventories
Other inventories
Total inventories
Receivables
45. Allowance for doubtful notes and accounts receivable is deducted from the appropriate Balance Sheet items. Activity in this account is
segregated as follows:
2004
2003
165
457
(73)
(521)
....................................................
130
229
Allowance for doubtful accounts 31 December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
222
165
Allowance for doubtful accounts 1 January
Bad debts during the period
....................................................
.................................................................
Increase in provision, recorded as expense
Market securities
46. Market securities are specified as follows:
Market value
easyJet plc.
.................................................................................
Other market securities
Share
31.12.2004
10.1%
9,599
3,647
.....................................................................
13,246
47. Cash on hand, bank deposits and all highly liquid debt instruments are segregated as follows:
2004
2003
.............................................................
3,114
2,007
................................................................
2,784
5,735
5,898
7,742
Cash on hand and bank deposits
Highly liquid debt instruments
Total cash and cash equivalents
86
..............................................................
Notes, cont.:
48. The Company’s total capital stock amounts to ISK 2,537 million, as stipulated in its Articles of Association. Each share of one ISK in the
Company carries one vote. During the year 2004, the Company’s capital stock was increased by a nominal value of ISK 230 million, from
ISK 2,307 million to ISK 2,537 million. The Company purchased treasury stock for the nominal value of ISK 35 million for ISK 279 million.
The Company also sold treasury stock for the nominal value of ISK 198 million for ISK 1,723 million. Capital stock according to the Balance
Sheet amounts to ISK 2,525 million and is segregated as follows:
Capital stock issued and outstanding, according to Articles of Association
Treasury stock
........................................
..............................................................................................
Capital stock according to Balance Sheet
......................................................................
2,537
(12)
2,525
49. Changes in stockholders' equity are specified as follows:
Balance 1.1.2004
Dividend paid
................
Capital
stock
Statutory
reserve
Stock
options
reserve
2,132
533
1
Translation
reserve and
currency
derivatives
Unrealised
gain on
market
securities
Retained
earnings
Total
0
0
6,544
9,210
(640)
..................
Additional paid in capital stock
Treasury stock, purchased
Treasury stock sold
(35)
.......
198
.............
Cost of stock options
Currency derivatives
230
...
1,795
(244)
(279)
1,525
1,723
212
...........
212
223
............
Currency translation differences
223
(958)
..
........
Stockholders’ equity 31.12.2004
2,525
..
3,609
(640)
2,025
213
(735)
(958)
1,417
2,002
3,419
1,417
7,906
14,935
Obligations
Pension plan
50. The company has entered into pension plan agreements with some of its former employees. This obligation at 31 December 2004 is estimated at approximately ISK 224 million, calculated at a 3% interest rate. This amount is presented in the Balance Sheet as ISK 180 million in long-term obligations and ISK 44 million in current liabilities. The increase in the obligation is included in the Statements of Earnings.
Stock option contracts
51. At year-end 2003, stock option contracts were concluded with the President and CEO, managing directors and employees for a nominal value of ISK 98 million at the rate of 5.97. The stock options will become effective on 1 December 2005 and are redeemable within
four weeks from that date. If employment is terminated prior to that time, the stock option is cancelled in full. Approximately ISK 212
million are expensed in the Statements of Earnings regarding the contracts, as the market value of the shares exceeds the stock option
price.
Deferred income tax liability
52. The deferred income tax liability of the parent company was ISK 1,466 million at year-end 2004. The change in this item is segregated as
follows:
Deferred income tax liability 1.1.2004
Currency adjustment
.........................................................................
........................................................................................
989
(191)
Calculated deferred income tax, increase
......................................................................
668
......................................................................
1,466
87
Notes, cont.:
53. The Company’s deferred income tax liability is attributable to the following items:
.....................................................................................
1,041
............................................................................................
310
.................................................................................................
73
Market securities
Investments
Accounts receivable
.........................................................................................
Other Balance Sheet items
...................................................................................
91
(28)
1,487
Loss carry-forward
..........................................................................................
......................................................................
(21)
1,466
Long-term debt
54. Long-term debt and interest rate terms are as follows:
Interest
Loan balance
6.2%
439
Loans in ISK:
Indexed loans
...........................................................................
439
Loans in foreign currencies:
........................................................
3.9%
12,974
.................................................................
3.2%
601
Aircraft purchase, bank loans, USD
Loans in other currencies
13,575
Long-term loans total including current maturities
Current maturities
..............................................................
..........................................................................................
Long-term debt 31.12.2004
..................................................................................
14,015
(1,773)
12,242
The above interest rates represent weighted average rates at 31 December 2004. Interest on the Company’s long-term debt in foreign
currencies amounting to ISK 7,944 million varies according to foreign loan market rates.
55. Annual maturities of long-term debt by the Group at 31 December 2004 are as follows:
Year 2005
..................................................................................................
1,773
Year 2006
..................................................................................................
1,213
Year 2007
..................................................................................................
1,248
Year 2008
..................................................................................................
2,827
Year 2009
..................................................................................................
1,418
Subsequent years
...........................................................................................
Total long-term debt, including current maturities
..............................................................
5,537
14,015
Current liabilities
Deferred income
56. Deferred income is specified as follows:
2004
2003
................................................
1,683
1,572
.........................................................................
466
460
2,149
2,032
Unearned transportation revenue, see Note 6
Other prepayments
Total deferred income
88
......................................................................
Notes, cont.:
Derivaties
57. The Company has entered into derivatives contracts with financial institutions to limit its risk regarding currency, interest rates and fluctuation in aircraft fuel prices.
To limit its currency risk, the Company has entered into both swap and option contracts to trade currencies for ISK 3,040 million based
on exchange rates at 31 December 2004. The contracts are made to reflect the forecast currency risk in relation to cash flows in foreign
currrencies for the next 12 months. The market value of these contracts at 31 December 2004 is negative by approximately ISK 112 million and is included in the Financial Statements.
To limit its interest rate risk, the Company has entered into both swap and option contracts changing the inerest rate of the long-term
loans from variable interest to fixed. The notional principal amount of these agreements is approximately ISK 5,046 million at 31
December 2004, and the market value of these contracts is positive by approximately ISK 6 million at 31 December 2004. Accrued interest due to these contracts is included in the Financial Statements, and the effect of these contracts is included in the calculation of the
average weighted interest rate of long-term debt stated in Note 54.
To limit the risk of fluctuations in aircraft fuel prices, the Company has entered into both swap and option contracts to buy aircraft fuel
at a certain price. The principal amount of these contracts is ISK 188 million at 31 December 2004. The market value of these contracts
is positive by approximately ISK 6 million at 31 December 2004, and is not included in the Financial Statements. The value of the fuel
derivatives is reflected in the Financial Statements for the same period that the use of the fuel under the contracts takes place.
Taxes
58. Taxes for the operating year 2004, such as income tax, net worth tax and industrial tax, have been calculated and entered in the Financial
Statements. The Company will not have to pay income tax in the year 2005 due to carry-forward losses. The Parent and all local limited liability subsidiaries may file a joint tax return. The Parent Company and its local subsidiaries have loss carry-forwards of approximately ISK 132 million at December 31, 2004. Tax loss carry-forward can only be utilized to offset future taxable income over the next ten
years after the tax loss is incurred.
Five-year summary
59. Five-year summary of the Group in ISK million:
2004
2003
2002
2001
2000
42,587
37,561
38,945
37,971
34,552
(37,317)
(32,301)
(30,881)
(33,747)
(31,126)
Operation:
Operating revenue
.............................
.................
Operating profit excluding depreciation and
aircraft lease (EBITDAR)
Aircraft lease
......................
..................................
Oprating profit excluding depreciation (EBITDA) . .
Depreciation
..................................
5,270
5,260
8,064
4,224
3,426
(1,445)
(1,470)
(2,150)
(2,890)
(2,815)
3,825
3,790
5,914
1,334
(1,896)
(1,807)
(2,041)
(2,099)
(1,576)
1,929
1,983
3,873
(765)
(965)
(892)
(380)
611
Operating profit (loss) before net financial
expenses and taxes (EBIT)
Net financial expenses
....................
.........................
.............
Profit (loss) before deferred income tax
Deferred income tax
.........
...........................
Net earnings (loss) for the year
431
(577)
(526)
1,727
0
0
4,087
1,406
3,347
(668)
3,419
(285)
1,121
(736)
2,611
0
(1,657)
445
(1,212)
0
(1,345)
406
(939)
89
Notes, cont.:
59. Cont.
2004
2003
2002
2001
2000
21,275
23,561
25,715
29,042
22,043
25,278
13,735
11,130
7,635
8,340
46,553
37,296
36,845
36,677
30,383
14,935
9,210
8,622
6,373
7,328
Balance Sheet:
Fixed assets
...................................
Current assets
.................................
Total assets
...........................
1,646
1,150
881
132
586
Long-term debt
...............................
12,242
15,963
17,964
19,802
13,320
Current liabilties
...............................
17,730
10,973
9,378
10,370
9,149
46,553
37,296
36,845
36,677
30,383
5,388
4,365
6,381
1,300
983
1.43
1.25
1.19
0.74
0.91
1.62
1.54
1.49
0.89
1.14
0.32
0.25
0.23
0.17
0.24
5.91
4.32
4.00
2.85
3.18
Obligations
....................................
Stockholders' equity and total liabilities
Ratios
60. Main ratios for the Group:
................
Current ratio-current assets / current liabilities
...
Current ratio-excluding unearned transportation
revenue
.....................................
Debt-equity ratio (stockholders' equity / total
liabilities)
....................................
Total stockholders' equity / capital stock
.........
Corporate Governance
61. The Board of Directors of Flugleidir hf. places emphasis on maintaining good corporate governance. The Board of Directors has laid down
comprehensive guidelines defining the Board’s authority and its purview vis-à-vis the CEO. These rules include, inter alia, rules on procedure, comprehensive rules regarding the competence of directors to participate in discussions on issues, rules on confidentiality, rules
regarding the disclosure of information by the CEO to the Board of Directors, etc. The Company Board of Directors determines the
CEO’s terms of employment, meets regularly with Company Auditors and has hired internal auditors. The Company's Board of Directors
fulfils the independence requirements specified in Article 2.6 of the Guidelines on Corporate Governance. It will be the task of the new
Board of Directors, which is to be elected at the Company's Annual General Meeting on 10 March 2005, to decide upon other issues
discussed in the Rules for Issuers of Securities Listed issued by the Iceland Stock Exchange, which took effect on 1 January 2005 and are
based on the Guidelines on Corporate Governance issued in 2004 jointly by the Iceland Stock Exchange, the Iceland Chamber of
Commerce and the Federation of Icelandic Employers.
90
FL GROUP hf
FL GROUP hf

FL GROUP hf

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