<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 01-14271
FIRSTLINK COMMUNICATIONS, INC.
--------------------------------
(Exact name of Registrant as specified in its charter)
Oregon 93-1197477
- ----------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
190 SW Harrison Street, Portland, Oregon 97201
--------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (503) 306-4444
Not Applicable
----------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past (90) days. YES [X] NO [ ]
As of May 12, 1999, the Registrant had 3,597,150 shares of its no par value
Common Stock outstanding.
<PAGE>
<PAGE>
INDEX
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Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998 3
Condensed Statements of Operations for the Three
Months Ended March 31, 1999 and 1998 (unaudited) 4
Condensed Statements of Cash Flows for the Three
Months Ended March 31, 1999 and 1998 (unaudited) 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Forward-Looking Statements 7
General 7
Overview 7
Three Months Ended March 31, 1999 Compared to
Three Months Ended March 31, 1998 7
Liquidity and Capital Resources 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Exhibits and Reports on Form 8-K 9
Signatures
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<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
March 31, 1999 (unaudited) and December 31, 1998
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $1,655,803 $1,617,582
Investments 2,766,572 3,284,495
Accounts receivable, net of allowance
for doubtful accounts of $25,240 and
$33,194 at March 31, 1999 and December 31,
1998, respectively 94,164 87,131
Other receivables 57,737 55,872
Prepaid and other current assets 59,373 35,953
----------- -----------
Total current assets 4,633,649 5,081,033
Property and equipment, NET 1,141,564 1,173,668
Other assets 23,019 9,078
----------- -----------
Total assets $5,798,232 $6,263,779
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 183,457 $ 206,916
Accrued liabilities 157,216 169,105
Current portion of capital lease obligations 64,618 62,051
----------- -----------
Total current liabilities 405,291 438,072
----------- -----------
LONG-TERM DEBT:
Capital lease obligations 160,201 177,279
----------- -----------
Total long-term debt 160,201 177,279
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, no par value; 1,000,000
shares authorized, no shares issued or
outstanding $ - -
Common stock, no par value; 20,000,000
shares authorized, 3,597,150 and 3,593,550
shares issued and outstanding at March 31,
1999 and December 31, 1998, respectively 8,464,723 8,458,495
Retained deficit (3,231,983)
(2,810,067)
----------- -----------
Total stockholders' equity 5,232,740 5,648,428
----------- -----------
Total liabilities and stockholders' equity $5,798,232 $6,263,779
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements
<PAGE>
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
For the Three Months Ended
March 31, 1999 and 1998 (unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenue $ 326,813 $ 283,483
Expenses:
Operating 259,080 221,472
Selling, general and administrative 456,346 288,196
Depreciation and amortization 57,226 20,788
----------- -----------
Total expenses 772,652 530,456
----------- -----------
Operating loss (445,839) (246,973)
----------- -----------
Other (INCOME) expense:
Interest, net (30,938) 30,756
Other 7,015 106,499
----------- -----------
(23,923) 137,255
----------- -----------
Net loss $ (421,916) $ (384,228)
=========== ===========
PER SHARE AMOUNTS:
Basic and diluted loss per common share $ (.12) $ (.20)
=========== ===========
Basic and diluted weighted average common
shares 3,596,550 1,918,398
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements
<PAGE>
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the Three Months Ended
March 31, 1999 and 1998 (unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (421,916) $ (384,228)
Adjustments to reconcile net loss to net
cash used in operating activities:
Noncash charge for debt conversion to equity - 105,000
Depreciation and amortization 64,673 35,829
Provision for losses on accounts receivable 9,808 9,101
Changes in assets and liabilities:
Accounts receivable (16,841) (19,806)
Prepaid and other current assets (25,285) (57,026)
Accounts payable and accrued liabilities (35,348) (30,844)
----------- -----------
Net cash used in operating activities (424,909) (341,974)
----------- -----------
Cash flows from investing activities:
Capital expenditures (25,123) (19,917)
Maturities of investment securities 517,923 -
Capitalized acquisition costs (15,159) -
----------- -----------
Net cash provided by (used in)
investing activities 477,641 (19,917)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock - 390,391
Principal payments under capital leases (14,511) (8,783)
----------- -----------
Net cash provided by (used in)
financing activities (14,511) 381,608
Net increase in cash and cash
equivalents 38,221 19,717
Cash and cash equivalents, beginning of period 1,617,582 389,415
----------- -----------
Cash and cash equivalents, end of period $1,655,803 $ 409,132
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 14,260 $ 19,660
Cash paid for income taxes - -
Other 7,446 -
</TABLE>
See accompanying notes to condensed financial statements
<PAGE>
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
(1) Unaudited Condensed Financial Statements
The financial statements included herein have been prepared by FirstLink
Communications, Inc. (the "Company") pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures included herein are adequate to make the information presented not
misleading. A description of the Company's accounting policies and other
financial information is included in the audited financial statements as filed
with the Securities and Exchange Commission in the Company's Annual Report on
Form 10-KSB.
The financial statements and related notes as of March 31, 1999, and for
the three months ended March 31, 1999 and 1998 are unaudited but, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, which are necessary for a fair presentation of the
financial condition, results of operations and cash flows of the Company. The
operating results for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999.
(2) Acquisition and Financing Agreement
On May 3, 1999, the Company signed a letter of intent for an acquisition
and financing agreement with an investor group led by Newman & Associates,
Inc. ("Newman"). Under terms of the letter of intent, Newman will arrange for
$50 million in capitalization for a newly formed company, which has been
formed for the purpose of acquiring U.S. Online Communications, Inc. ("USOL")
and the Tenant Services Division of GMAC Commercial Mortgage Corporation
("GMACCM"), known as "GMAC Resident's Advantage." GMAC Resident's Advantage
provides ancillary services to residents of multi-dwelling units (MDUs) under
exclusive marketing agreements with property owners. According to GMAC
Resident's Advantage, it currently has marketing agreements with MDUs passing
in excess of 450,000 residential units. In connection with the proposed
transaction, the Company expects to enter into a marketing agreement with
GMACCM, which will permit the Company to offer GMAC Resident's Advantage
products and services to GMACCM's MDU borrower clients.
Upon receiving shareholder approval, the Company will acquire the newly
formed company for consideration comprised of $25 million of Company preferred
stock (convertible at $2.00 per share) and $25 million in mezzanine notes.
Furthermore, Newman will arrange for an additional $30 million in senior debt
financing for the Company in connection with the closing of the transaction
(collectively, the preferred stock, mezzanine notes and senior debt are
referred to as the "Financing Transaction"). The Company will also issue
certain members of the Newman group 2 million shares of the Company's common
stock at $2.00 per share under a three-year note. Further, the Company will
issue certain creditors and shareholders of USOL 1.5 million shares of common
stock and 1.5 million warrants to purchase common stock at $5.50 per share.
Additionally, the Company will pay GMACCM $2.5 million in cash and issue
325,000 warrants to purchase common stock at $2.00 per share in connection
with the GMACCM Resident's Advantage acquisition.
The Newman letter of intent supersedes the Company's previously announced
financing and acquisition transaction with Peregrine Capital, Inc.
("Peregrine").
(3) Nettaxi
On March 26, 1999, Peregrine signed a letter of intent with Nettaxi, Inc.
("Nettaxi"), a Campbell, California based community and portal web site
company. Under the terms of the letter of intent, a new limited liability
company would be formed for the purposes of providing general internet
services to the Company's subscribers and develop and provide online
communities, web sites and other services to MDUs. In return for giving this
new entity exclusive rights to provide internet services to its customers, the
Company would receive a 25% interest in the new entity. Subsequent to
Peregrine and Nettaxi entering into the letter of intent, the Company issued a
side letter to Nettaxi stating that the Company would honor the letter of
intent if, and only if, the Company's financing transaction with Peregrine was
consummated. As described in Note 2 above, the Company's agreement with
Peregrine was superseded, thereby terminating the letter of intent. However,
the Company has agreed to negotiate in good faith in regards to how the
Company and Nettaxi may work together.
Two of the Company's directors have financial relationships with Nettaxi.
Mr. Thomas E. McChesney is a member of a partnership which has the option to
acquire shares of Nettaxi common stock. Further, under terms of the letter of
intent, Mr. McChesney would receive a 5% membership interest in the new
entity. Additionally, the investment banking group of Schneider Securities,
Inc., of which Mr. James F. Twaddell is a member, has signed a letter of
intent to raise capital for Nettaxi.
(4) Loss Per Common Share
Basic and diluted loss per common share is calculated by dividing the net
loss by the weighted average number of shares outstanding. The calculation of
basic and diluted loss per common share does not assume conversion, exercise
or contingent issuance of securities that would have an anti-dilutive effect
on earnings per share.
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
The statements contained in this Form 10-QSB of the Company which are not
historical in nature are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements include statements in this Item 2., Management's Discussion and
Analysis of Financial Condition and Results of Operations, regarding intent,
belief or current expectations of the Company or its officers with respect to
the development or acquisition of new business.
General
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Condensed
Financial Statements and the Notes thereto of the Company included elsewhere
in this Form 10-QSB.
Overview
The Company provides integrated telecommunications and entertainment
services to residents of multi-family apartment and condominium complexes.
Services provided include cable television and enhanced local and long-
distance telephone services. In certain properties, the Company also provides
high-speed internet access. The Company's primary objective is to become a
leading provider of RMTS in the United States. The Company plans to accomplish
this objective by growing primarily through acquisitions and by providing
outstanding customer service. The Company seeks to maximize enterprise value
by acquiring private and wireless cable operators and their right of entry
agreements ("ROEs") at attractive prices in strategic geographic clusters. The
Company believes that it can improve the penetration rates in the acquired
properties by offering improved channel line-ups, better customer service and
additional services such as telephony and internet access.
As more fully discussed in the Company's Annual Report filed on Form 10-
KSB and Note 2 to the Condensed Financial Statements, the Company's first
acquisition will be Austin, Texas based U.S. Online Communications, Inc.
("USOL"), a provider of telecommunication services to residents of MDUs. USOL
serves properties in Austin, Dallas, San Antonio, Denver and Washington, D.C.,
passing 15,000 total units. Furthermore, it is the Company's belief that the
Resident's Advantage acquisition from GMACCM can be developed into an
E-Commerce business opportunity and management is currently reviewing various
strategies for accomplishing this.
The Company's first property, the 525-unit Portland Center Apartments
complex, went online in September 1994. The properties under contract as of
March 31, 1999 totaled 4,166 units, of which 3,300 where online. Contract
terms range from five to 20 years.
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998
The Company reported a net loss of $421,916 for the three months ended
March 31, 1999 compared to a net loss of $384,228 for the same period of the
prior year.
Revenue increased by $43,330, or 15%, for the three months ended March
31, 1999 compared to the same period of the prior year. The increase in
revenue is attributable to the Company having 14 properties online during the
1999 period compared to 11 properties during the same period of the prior
year. The increase in revenue is not proportional to the increase in
properties due to the timing of when properties were brought online. Further,
two of the properties added during 1999 were new builds and, thus, were not
fully leased during the 1999 three-month period.
Operating expenses increased by $37,608, or 17%, for the three months
ended March 31, 1999 compared to the same period of the prior year. The
increase in operating expenses, which are generally directly variable with
revenue, was due to the increase in properties between periods. Operating
expenses were 79% of revenue for the three-month period ended March 31, 1999
compared to 78% for the same period of the prior year. Management anticipates
that the Company's margins will improve once it commences to operate as a
private cable operator (which will take place upon closing the USOL
acquisition).
Selling, general and administrative expenses increased by $168,150, or
58%, for the three months ended March 31, 1999 compared to the same period of
the prior year. The increase between periods resulted primarily from increases
in payroll and related costs. During the first quarter of 1999, the Company
took action to reduce the number of personnel in its Portland office. By
March 31, 1999, the Company had reduced its headcount by 43% from December 31,
1998. The Company took the above-mentioned actions in anticipation of
relocating the Company's headquarters to Austin, Texas as part of the USOL
acquisition. The Company expects to realize the financial benefits of the
reduced headcount during the second quarter of 1999. Selling, general and
administrative expenses were 140% of revenue for the three months ended March
31, 1999 compared to 102% for the same period of the prior year.
Depreciation and amortization expenses increased by $36,438, or 175%, for
the three months ended March 31, 1999 compared to the same period of the prior
year. The increase in depreciation and amortization expense was the result of
increased fixed assets between years. Depreciation and amortization expense
was 18% of revenue for the three months ended March 31, 1999 compared to 7%
for the same period of the prior year.
Other income increased by $161,178 for the three months ended March 31,
1999 compared to the same period of the prior year. The increase between years
resulted primarily from a one-time noncash charge in the prior year to other
expense related to the induced conversion of debt combined with an increase in
interest income between years. Other income was 7% of revenue for the three
months ended March 31, 1999 compared to other expense of 48% in the prior
year.
Liquidity and Capital Resources
At March 31, 1999, the Company had cash, cash equivalents and investments
of $4,422,375 compared to $4,902,077 at December 31, 1998. Net cash of
$424,909 was used in operating activities during the three months ended March
31, 1999, which approximated the Company's net loss.
Net cash of $477,641 was provided by investing activities during the
three months ended March 31, 1999, which was comprised of maturities of the
Company's investment securities partially offset by capital expenditures and
costs associated with the Company's anticipated acquisition of USOL.
Net cash of $14,511 was used in financing activities during the three
months ended March 31, 1999, which consisted entirely of principal payments
under capital lease obligations.
Management believes that the Company's cash and investments on hand, and
proceeds from the Financing Transaction, will provide sufficient funds
necessary for the Company to execute its business plan for at least the next
12 months.
The Company has agreements with certain cable operators to purchase bulk
cable signals at the Company's properties. As of March 31, 1999, the Company's
commitment was $32,759 per month for such services. At March 31, 1999, there
were no material commitments for capital expenditures. However, in connection
with the Company's anticipated acquisition of USOL and the related Financing
Transaction, the Company's board of directors approved loaning USOL up to
$500,000 under short-term secured notes bearing interest at 12% per annum and
guaranteed by Peregrine. As of the date of this Form 10-QSB, the Company had
loaned $500,000 to USOL. The Company will be repaid in full from the proceeds
of the Financing Transaction.
The Company has performed a comprehensive review of its information and
support systems to determine whether such systems will properly function in
the year 2000 and thereafter. Systems reviewed include the Company's switches
and network operations systems, billing and financial systems, and the
Company's internal communications systems. Although the Company relies
primarily on systems developed with current technology that were designed to
be year 2000 compliant, the Company will have to replace and upgrade certain
equipment. The Company has identified its Cortelco switch as being
noncompliant and it will have to be replaced. It is the Company's goal to
replace the Cortelco switch before June 30, 1999. Additionally, the Company
has identified that its DXC switch will require a software upgrade to be year
2000 compliant. The Company anticipates completing the upgrade during the
third quarter of 1999. The Company's due diligence also included an evaluation
of vendor-provided technology and the implementation of new policies to
require vendors to confirm that they have disclosed and will correct any year
2000 compliance issues.
The costs associated with investigating and resolving year 2000 issues
have been minor and have been expensed as incurred. Replacing the Cortelco and
upgrading the DXC switches are not expected to have a material impact on the
Company's financial condition or results of operations. The Company estimates
year 2000 remediation will be approximately $180,000. While the Company
believes that its software applications will be year 2000 compliant, there can
be no assurance until the year 2000 occurs that all systems will then function
adequately. Further, if the software applications of local exchange carriers,
long-distance carriers, cable providers or others on whose services the
Company depends are not year 2000 compliant, it could have a material adverse
effect on the Company's financial condition and results of operations. The
Company is continuing to monitor its operations for year 2000 readiness,
including developing its contingency plan to be year 2000 compliant. If
additional year 2000 compliance issues are discovered, the Company will
evaluate the need for repair or replacement or contingency plans to such
issues.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
From time to time, the Company is subject to litigation incidental to its
business. The Company is not presently a party to any material litigation.
Item 2. Changes in Securities
Not applicable.
Item 3. Exhibits and Reports on Form 8-K
Not applicable.
<PAGE>
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRSTLINK COMMUNICATIONS, INC.
Dated: May 13, 1999 By: /s/ A. Roger Pease
--------------- --------------------------------
A. Roger Pease, President, Chief
Executive Officer and Director
Dated: May 13, 1999 By: /s/ Jeffrey S. Sperber
--------------- --------------------------------
Jeffrey S. Sperber, Chief Financial
Officer and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S
10-QSB FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,655,803
<SECURITIES> 2,766,572
<RECEIVABLES> 119,404
<ALLOWANCES> 25,240
<INVENTORY> 0
<CURRENT-ASSETS> 4,633,649
<PP&E> 1,409,773
<DEPRECIATION> 268,209
<TOTAL-ASSETS> 5,798,232
<CURRENT-LIABILITIES> 405,291
<BONDS> 0
0
0
<COMMON> 8,464,723
<OTHER-SE> (3,231,983)
<TOTAL-LIABILITY-AND-EQUITY> 5,798,232
<SALES> 0
<TOTAL-REVENUES> 326,813
<CGS> 0
<TOTAL-COSTS> 715,426
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 9,808
<INTEREST-EXPENSE> 14,260
<INCOME-PRETAX> (421,916)
<INCOME-TAX> 0
<INCOME-CONTINUING> (421,916)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (421,916)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
