<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 June 30, 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 August 13, 1999, the Registrant had 3,615,617 shares of its no
par value Common Stock outstanding.
<PAGE>
<PAGE>
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 1999
(unaudited)
and December 31, 1998 4
Condensed Statements of Operations for the Three and
Six Months Ended June 30, 1999 and 1998 (unaudited) 6
Condensed Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 (unaudited) 8
Notes to Condensed Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Forward-Looking Statements 11
General 12
Overview 12
Three Months Ended June 30, 1999 Compared to
Three Months Ended June 30, 1998 12
Six Months Ended June 30, 1999 Compared to
Six Months Ended June 30, 1998 13
Liquidity and Capital Resource 14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
June 30, 1999 (unaudited) and December 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS June 30, December 31,
1999 1998
----------- -----------
(Unaudited)
Current assets:
Cash and cash equivalents $1,417,276 $ 1,617,582
Investments securities 2,090,125 3,284,495
Accounts receivable, net of allowance
for doubtful accounts of $36,331 and
$25,240 at June 30, 1999 and December
31, 1998, respectively 119,297 87,131
Note receivable from U.S. Online
Communications including accrued interest 510,000 --
Other receivables 7,425 55,872
Prepaid and other current assets 47,633 35,953
---------- ----------
Total current assets 4,191,756 5,081,033
Property and equipment, NET 1,200,489 1,173,668
OTHER ASSETS 77,802 9,078
----------- ---------
Total assets $5,470,047 $6,263,779
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 131,633 $ 206,916
Accrued liabilities 177,800 169,105
Current portion of capital lease
obligations 66,882 62,051
Total current liabilities 376,315 438,072
LONG-TERM DEBT:
Capital lease obligations 142,778 177,279
---------- ----------
Total long-term debt 142,778 177,279
---------- ----------
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, 3,615,617 and 3,593,550 shares
issued and outstanding at June 30, 1999 and
December 31, 1998, respectively 8,515,209 8,458,495
Retained deficit (3,564,255) (2,810,067)
----------- -----------
Total stockholders' equity 4,950,954 5,648,428
----------- -----------
Total liabilities and stockholders'
equity $5,470,047 $6,263,779
=========== ===========
See accompanying notes to condensed financial statements.
</TABLE>
<PAGE>
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended
June 30, 1999 and 1998 (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-----------------------------------------
<S> <C> <C> <C> <C>
REVENUE $349,602 $316,001 $676,415 $599,484
EXPENSES:
Operating 278,995 243,023 538,075 464,495
Selling, general and
administrative 370,580 390,782 827,813 678,978
Depreciation and amortization 57,227 22,950 114,453 43,738
---------- -------- --------- --------
Total expenses 706,802 656,755 1,480,341 1,187,211
---------- -------- --------- ----------
Operating loss (357,200)(340,754) (803,926) (587,727)
========== ======== ========= ==========
OTHER (INCOME) EXPENSE:
Interest, net (25,178) 18,653 (55,724) 49,409
Other (638) 4,221 5,986 110,721
---------- -------- --------- -------
(25,816) 22,874 (49,738) 160,130
---------- ------- -------- -------
Net loss $(331,384) $(363,628) $(754,188) $(747,857)
--------- ---------- ---------- --------
PER SHARE AMOUNTS:
Basic and diluted loss per common
share $(.09) $(.17) $(.21) $(.37)
======= ====== ===== =====
Basic and diluted weighted average
common shares 3,601,611 2,165,536 3,599,102 2,042,650
=========== =========== ========== =======
See accompanying notes to condensed financial statements.
</TABLE>
<PAGE>
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the Six Months Ended
June 30, 1999 and 1998 (unaudited)
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(754,188) $(747,857)
Adjustments to reconcile net loss
to net cash used in operating activities-
Noncash charge for debt conversion to
equity -- 105,000
Noncash charge for stock grants 34,400 --
Depreciation and amortization 139,204 62,835
Provision for losses on accounts receivable 43,510 19,015
Changes in assets and liabilities -
Accounts receivable (75,676) (34,309)
Prepaid and other current assets 26,767 9,160
Accounts payable and accrued
liabilities (66,588) 176,423
Other current liabilities (114,004)
----------- -----------
Net cash used in operating
activities (652,571) (523,737)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (141,274) (77,994)
Capitalized merger costs (71,161) --
Maturities of investment securities 1,194,370 --
U.S. Online Communications note receivable (500,000) --
---------- ----------
Net cash provided by (used in)
investing activities 481,935 (77,994)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock -- 490,391
Principal payments under capital leases (29,670) (22,154)
Capitalized public offering costs -- (167,157)
---------- -----------
Net cash provided by (used in) financing
activities (29,670) 301,080
---------- -----------
Net decrease in cash and cash equivalents (200,306) (300,651)
CASH AND CASH EQUIVALENTS, beginning of
period 1,617,582 389,415
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $1,417,276 $ 88,764
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 28,605 $ 38,391
Cash paid for income taxes -- --
Assets acquired under capital leases -- 77,994
Conversion of Promissory Notes to equity -- 199,552
Other 24,751 33,781
See accompanying notes to condensed financial statements.
</TABLE>
<PAGE>
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 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 June 30, 1999, and
for the three and six months ended June 30, 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 and six months
ended June 30, 1999 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1999.
(2) Merger Agreement
In July 1999, the Company signed a definitive merger agreement with
USOL Holdings, Inc. ("USOL"), to merge USOL into FirstLink. USOL has
acquired certain assets and liabilities of U.S. Online Communications, Inc.
("US Online"), an Austin, Texas based provider of integrated
telecommunication services to residents of apartments and condominiums
passing approximately 15,500 cable and 7,200 telephone units, 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 and approximately 140,000
customers.
The Company plans to run the GMAC Resident's Advantage business as a
wholly owned subsidiary, separately from the integrated telecommunications
business under the name The Residents Club.Com (the "Residents Club"). The
Residents Club business plan will be an E-commerce based business targeting
residents of MDUs, focusing initially on the 450,000 plus passings acquired
from GMACCM. The Residents Club will exclusively offer the products and
services of selected sponsors either on a national or market-by-market
basis. In return, the Residents Club will receive fees from the sponsors
for providing access to its customer base.
Upon receiving shareholder approval, the Company will merge with USOL
in a stock-for-stock transaction in which the Company will issue $37
million of $25 par preferred stock (convertible at $2.00 per share) and
3,175,000 shares of the Company's common stock of which 2,000,000 shares
are subject to a three-year $3,675,000 note. Further, the Company will
issue shareholders of USOL 1,825,000 warrants to purchase common stock
(1,500,000 at $5.50 per share and 325,000 at $2.00 per share).
Additionally, the Company will assume USOL's $35 million senior credit
facility and any borrowings thereunder at the time the transaction closes.
The Company anticipates receiving shareholder approval during the fourth
quarter of 1999.
The merger agreement superseded the letter of intent the Company had
previously signed with Peregrine Capital, Inc. ("Peregrine").
(3) Note Receivable from U.S. Online Communications
During the second quarter of 1999, the Company loaned US Online
$500,000 under a short-term note bearing interest at 12% per annum (the
"Note") due on July 15, 1999. The Note was secured by a secondary interest
in the assets of US Online, which the Company shared with certain other
investors who also loaned US Online monies during the same time period.
Additionally, the Note was secured by a guarantee from Peregrine.
In July 1999, the Note was paid in full, including accrued interest
thereon.
(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.
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 ("Quarterly Report") 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.
Such forward-looking statements involve certain risks and
uncertainties that could cause actual results to differ materially from
anticipated results. These risks and uncertainties include regulatory
constraints, the ability of the Company to acquire or build passings on
economical terms and conditions, the risk of insufficient cable and phone
penetrations, the ability of the Company to effectively manage growth,
general and local market conditions including the presence of competing
companies, as well as other factors as may be identified from time to time
in the Company's filings with the Securities and Exchange Commission or in
the Company's press releases.
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 Quarterly Report.
Overview
The Company provides integrated telecommunications and entertainment
services to residents of multi-family apartment and condominium complexes.
Services consist of local and long-distance telephone, cable television and
high-speed internet access, in a single package on a single invoice for the
resident. The Company's first property went online in September 1994. As of
June 30, 1999, the Company passed 3,300 phone and 3,300 cable units in 14
properties, all in Portland, Oregon. The Company had 2,082 cable and 1,556
telephone subscribers, respectively.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30,
1998
The Company reported a net loss of $331,384 for the three months ended
June 30, 1999 compared to a net loss of $363,628 for the same period of the
prior year. The decrease in net loss is primarily attributable to increased
interest income from the Company's investment securities during 1999.
Revenue increased by $33,601, or 11%, for the three months ended June
30, 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. During the second quarter of 1999, the Company discovered that
not all long-distance call records were being billed due to memory capacity
management issues of its switch. The problem has since been corrected.
Accordingly, it is management's expectation that the revenue increase
between periods will be more proportional with the increase in properties
online.
Operating expenses increased by $35,972, or 15%, for the three months
ended June 30, 1999 compared to the same period of the prior year. The
increase in operating expenses was due to the increase in properties
between periods. Operating expenses were 80% of revenue for the three-month
period ended June 30, 1999 compared to 77% for the same period of the prior
year.
Selling, general and administrative expenses decreased by $20,202, or
5%, for the three months ended June 30, 1999 compared to the same period of
the prior year. The decrease between periods resulted from decreases in
payroll and related costs associated with the Company's reduction in
headquarters personnel, which the Company began earlier in 1999 in
anticipation of the merger with USOL. Second quarter 1999 selling, general
and administrative expenses were approximately $90,000 less than those of
the first quarter. Included in the three months ended June 30, 1999 amount
is a $34,400 noncash charge for stock grants issued to certain
nonmanagement employees as part of a sticking bonus to incent key
nonmanagement employees to remain with the Company during the transition
period leading up to the USOL merger. Selling, general and administrative
expenses were 106% of revenue for the three months ended June 30, 1999
compared to 124% for the same period of the prior year.
Depreciation and amortization expenses increased by $34,277, or 149%,
for the three months ended June 30, 1999 compared to the same period of the
prior year. Depreciation and amortization expense was 16% of revenue for
the three months ended June 30, 1999 compared to 7% for the same period of
the prior year.
Other income increased by $48,690 for the three months ended June 30,
1999 compared to the same period of the prior year. The increase between
years resulted primarily from the generation of interest income during 1999
compared to interest expense in 1998. This was the result of the Company
having investment securities during 1999 due to the Company's initial
public offering during July 1998. Other income was 7% of revenue during
1999 while other expense was 7% of revenue during 1998.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
The Company reported a net loss of $754,188 for the six months ended
June 30, 1999, compared to a net loss of $747,857 for the same period of
the prior year. The 1999 net loss approximated the 1998 net loss. However,
the 1999 operating loss was $216,199 greater than the loss during 1998.
This was caused by across the board increases in operating selling, general
and administrative and depreciation expenses during 1999 compared to the
prior year. The increase in operating loss was offset by an increase in
other income.
Revenue increased by $76,931, or 13%, for the six months ended June
30, 1999 compared to the same period of the prior year. The increase in
revenue is primarily attributable to the Company having 14 properties
operating as of June 30, 1999 compared to 11 properties as of June 30,
1998.
Operating expenses increased by $73,580, or 16%, for the six months
ended June 30, 1999 compared to the same period of the prior year. The
increase in operating expenses was due to the increase in properties
between years. Operating expenses were 80% of revenue for the six-month
period ended June 30, 1999 compared to 77% for the same period of the prior
year.
Selling, general and administrative expenses increased by $148,835, or
22%, for the six months ended June 30, 1999 compared to the same period of
the prior year. The increase between periods resulted from increases in
payroll and related costs, travel expenses, rent and insurance expenses. As
the Company has previously disclosed, it has taken steps to reduce
headquarters personnel in anticipation of its merger with USOL.
Depreciation and amortization expenses increased by $70,715, or 162%,
for the six months ended June 30, 1999 compared to the same period of the
prior year. Depreciation and amortization expense was 17% of revenue for
the six-month period ended June 30, 1999 compared to 7% for the same period
of the prior year.
Other income increased by $209,868 for the six months ended June 30,
1999 compared to the same period of the prior year. The increase between
years resulted from a $105,000 one-time noncash charge to other expense
related to the induced conversion of certain convertible notes during the
first quarter of 1998 combined with an increase in 1999 interest income due
to the Company's initial public offering in July 1998. Other income was 7%
of revenue for the six months ended June 30, 1999 compared to other expense
of 27% for the same period of the prior year.
Liquidity and Capital Resources
At June 30, 1999, the Company had cash, cash equivalents and
investment securities of $3,507,401 compared to $4,902,077 at December 31,
1998. Additionally, the Company had a note receivable including accrued
interest from U.S. Online of $510,000 which was repaid subsequent to June
30, 1999. Net cash of $652,571 was used in operating activities during the
six months ended June 30, 1999, which resulted from the Company's net loss
offset by noncash charges.
Net cash of $481,935 was provided by investing activities during the
six months ended June 30, 1999, which consisted of maturities of investment
securities of $1,194,370 offset by the loan to U.S. Online of $500,000,
capital expenditures of $141,274, and capitalized costs associated with the
Company's merger with USOL of $71,161. Capital expenditures consisted
primarily of telephone equipment for new properties.
Net cash of $29,670 was used in financing activities during the six
months ended June 30, 1999, which consisted entirely of principal payments
on capital leases.
The Company has agreements with certain cable operators to purchase
bulk cable signals at the Company's properties. As of June 30, 1999, the
Company's commitment was $32,759 per month for such services. At June 30,
1999, the Company had material commitments for certain capital
expenditures. The Company is currently upgrading its telephony facilities
in Portland in order to improve operating efficiencies and network
reliability and offer additional services such as caller ID. Additionally,
the Company is migrating certain properties from resold local telephone
service provided by a CLEC to Company facility-based service. The expected
cost of these improvements, including the cost of a new Portland switch
room is $550,000. The Company anticipates completing the projects by the
end of August 1999.
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 principally
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, upgrade or reprogram certain systems or equipment. The
Company has identified its Cortelco switch as needing to be replaced and a
software upgrade as necessary for its DXC switch. Upon completion of the
telephony upgrade described above, the Company's systems will be year 2000
compliant. 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 resolving year 2000 issues have been
expensed as incurred and, in the aggregate, are not expected to have a
material impact on the Company's financial condition or results of
operations. However, to the extent that the telephony network upgrades
previously described above will resolve year 2000 deficiencies, such costs
will be capitalized as part of the overall system improvements. 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.
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 litigation.
Item 2. Changes in Securities
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Form 8-K dated April 21, 1999.
<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 August 13, 1999 By:/s/ A. Roger Pease
-------------------------------
A. Roger Pease
President, Chief Executive Officer
and Director
Dated August 13, 1999 By: /s/ Jeffrey S. Sperber
-------------------------------
Jeffrey S. Sperber
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AND CONDENSED STATEMENTS OF OPERATIONS FOUND ON PAGES 3
AND 4 OF THE COMPANY'S FORM 10-QSB FOR THE SIX MONTHS ENDED JUNE 30, 1999, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 1,417,276
<SECURITIES> 2,090,125
<RECEIVABLES> 665,628
<ALLOWANCES> 36,333
<INVENTORY> 0
<CURRENT-ASSETS> 4,191,756
<PP&E> 1,525,924
<DEPRECIATION> (325,435)
<TOTAL-ASSETS> 5,470,047
<CURRENT-LIABILITIES> 376,315
<BONDS> 0
0
0
<COMMON> 8,515,209
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,470,047
<SALES> 676,415
<TOTAL-REVENUES> 676,415
<CGS> 0
<TOTAL-COSTS> 1,480,341
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 43,510
<INTEREST-EXPENSE> 45,855
<INCOME-PRETAX> (754,188)
<INCOME-TAX> 0
<INCOME-CONTINUING> (754,188)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (754,188)
<EPS-BASIC> (.21)
<EPS-DILUTED> (.21)
</TABLE>
