<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
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: 333-48371
FACILICOM INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 52-2065185
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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1401 New York Avenue, NW
9th Floor
Washington, D.C. 20005
(202) 496-1100
(Address and telephone number of principal executive offices)
Indicate by check mark whether 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 period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ ] NO [X]
As of August 1, 1998, there were 225,741 shares of common stock outstanding, par
value $.01 per share.
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FACILICOM INTERNATIONAL, INC.
Form 10-Q
TABLE OF CONTENTS
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Page
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PART I: FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30,
1998 and September 30, 1997 3
Condensed Consolidated Statements of Operations for the
Three Months ended June 30, 1998 and 1997 and the Nine
Months ended June 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3: Quantitative and Qualitative Disclosures About
Market Risk 14
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 16
Item 2: Changes in Securities and Use of Proceeds 16
Item 3: Defaults upon Senior Securities 16
Item 4: Submissions of Matters to a Vote of Security Holders 16
Item 5: Other Information 16
Item 6: Exhibits and Reports on Form 8-K 16
Signatures 17
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2
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Part I: Financial Information
Item 1: Financial Statements
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
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<CAPTION>
June 30, September 30,
1998 1997
------------ ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 80,433 $ 1,016
Accounts receivable--net of allowance for doubtful accounts of
$1,952 at June 30, 1998 and $161 at September 30, 1997 39,689 19,485
Marketable securities 85,994 --
Prepaid expenses and other current assets 9,863 1,737
-------- --------
Total current assets 215,979 22,238
-------- --------
PROPERTY AND EQUIPMENT:
Transmission and communications equipment 69,313 16,593
Transmission and communications equipment--leased 16,928 5,419
Furniture, fixtures and other 5,360 1,266
-------- --------
91,601 23,278
Less accumulated depreciation and amortization (7,263) (3,034)
-------- --------
Net property and equipment 84,338 20,244
-------- --------
OTHER ASSETS:
Intangible assets 5,536 1,535
Debt issue costs, net of accumulated amortization of $476
at June 30, 1998 9,829 --
Advance to affiliate 2,018 --
Marketable securities 58,001 --
-------- --------
Total other assets 75,384 1,535
-------- --------
TOTAL ASSETS $375,701 $ 44,017
======== ========
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See notes to condensed consolidated financial statements.
3
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FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
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<CAPTION>
June 30, September 30,
1998 1997
------------ ---------------
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LIABILITIES AND CAPITAL ACCOUNTS
CURRENT LIABILITIES:
Accounts payable $ 40,047 $ 24,205
Accounts payable--transmission equipment 25,774 --
Accounts payable--related party 161 389
Other current obligations 22,684 6,255
Capital lease obligations due within one year 3,382 573
Long-term debt due within one year 394 1,043
-------- --------
Total current liabilities 92,442 32,465
-------- --------
OTHER LIABILITIES:
Capital lease obligations 4,984 1,723
Long-term debt 300,445 13,000
Loans from owners -- 6,250
-------- --------
Total other liabilities 305,429 20,973
-------- --------
COMMITMENTS AND CONTINGENCIES
CAPITAL ACCOUNTS:
Common stock, $.01 par value--300,000 shares authorized;
225,741 issued and outstanding at June 30, 1998 2 --
Additional paid-in capital 36,534 --
Class A initial capital -- 180
Class B initial capital -- 60
Excess capital contributions--Class A -- 16,296
Stock-based compensation 5,994 --
Holding loss on marketable securities (220) --
Foreign currency translation adjustments 1,245 684
Accumulated deficit (65,725) (26,641)
-------- --------
Total capital accounts (22,170) (9,421)
-------- --------
TOTAL LIABILITIES AND CAPITAL ACCOUNTS $375,701 $ 44,017
======== ========
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See notes to condensed consolidated financial statements.
4
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FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
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<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------ --------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Revenues $ 46,192 $19,037 $117,146 $ 46,131
Cost of revenues 47,987 17,896 114,473 43,321
-------- ------- -------- --------
Gross (deficit) margin (1,795) 1,141 2,673 2,810
-------- ------- -------- --------
Operating Expenses:
Selling, general and administrative 8,678 3,591 20,917 9,316
Stock-based compensation expense 192 -- 5,706 --
Related party expense 448 49 917 176
Depreciation and amortization 2,460 619 5,314 1,709
-------- ------- -------- --------
Total operating expenses 11,778 4,259 32,854 11,201
-------- ------- -------- --------
Operating loss (13,573) (3,118) (30,181) (8,391)
-------- ------- -------- --------
Other income (expense):
Interest expense-related party (15) (116) (195) (237)
Interest expense (8,095) (187) (14,344) (529)
Interest income 3,089 -- 5,594 --
Gain on settlement agreement 791 -- 791 --
Foreign exchange loss (261) (298) (655) (1,621)
-------- ------- -------- --------
Total other income (expense) (4,491) (601) (8,809) (2,387)
-------- ------- -------- --------
Loss before income taxes (18,064) (3,719) (38,990) (10,778)
Income tax benefit 3,249 -- 6,475 --
-------- ------- -------- --------
Net loss $(14,815) $(3,719) $(32,515) $(10,778)
======== ======= ======== ========
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5
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FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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<CAPTION>
Nine Months Ended
June 30,
------------------------------
1998 1997
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Cash flows from operating activities:
Net loss $ (32,515) $(10,778)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 5,314 1,709
Non-cash stock-based compensation 5,706 --
Income tax benefit (6,569) --
Amortization of bond discount 762 --
Changes in operating assets and liabilities:
Accounts receivable (19,881) (8,381)
Prepaid expenses and other current assets (7,595) 350
Accounts payable and other current liabilities 30,720 15,914
Accounts payable--related party (228) --
Advance to affiliate (2,018) --
--------- --------
Net cash used in operating activities (26,304) (1,186)
--------- --------
Cash flows from investing activities:
Purchase of investments in subsidiaries (4,652) --
Purchase of investments in available-for-sale securities (64,234) --
Maturities of available-for-sale securities 1,769 --
Sales of available-for-sale securities 4,037 --
Purchase of investments in held-to-maturity securities (86,549) --
Purchases of property and equipment (35,877) (1,157)
Intangible assets 44 208
--------- --------
Net cash used in investing activities (185,462) (949)
--------- --------
Cash flows from financing activities:
Advances from owners -- 3,713
Excess capital contributions 13,750 --
Proceeds from debt issuance 300,000 --
Payments of long-term debt and capital leases (12,823) (616)
Payment of debt issuance costs (10,305) --
--------- --------
Net cash provided by financing activities 290,622 3,097
--------- --------
Effect of exchange rate changes on cash 561 (554)
--------- --------
Increase in cash and cash equivalents 79,417 408
Cash and cash equivalents, beginning of period 1,016 2,198
--------- --------
Cash and cash equivalents, end of period $ 80,433 $ 2,606
========= ========
Supplemental cash flow information:
Interest paid $ 1,181 $ 900
========= ========
</TABLE>
6
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FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements, in the
opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial information set
forth therein, in accordance with generally accepted accounting principles for
interim financial reporting and Securities and Exchange Commission regulations.
The results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for any future period. Certain
information and footnote disclosures normally contained in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto contained in Facilicom International, Inc.'s (the "Company" or "FCI")
Registration Statement on Form S-4 (No. 333-48371) filed under the Securities
Act of 1933, as amended, and declared effective on June 2, 1998.
2. EXCHANGE OFFER FOR 10- 1/2% SENIOR NOTES DUE 2008
In June 1998, the Company's registration on Form S-4 relating to its exchange
offer for its 10- 1/2% Senior Notes due 2008 was declared effective. By
July 2, 1998, the expiration date of the exchange offer, all of the unregistered
10- 1/2% Senior Notes were exchanged for registered 10- 1/2% Senior Notes due
2008 ("Senior Notes").
3. COMMITMENT
In May 1998, the Company entered into a Memorandum of Understanding ("MOU") with
Qwest Communications Corporation ("Qwest"). The MOU incorporates agreements to
provide Qwest with international direct dial termination service to various
destinations and to provide the Company an indefeasible right of use ("IRU") for
domestic and international fiber optic capacity. Delivery of capacity under the
IRU is expected by September 1998. The IRU is for twenty-five years, for which
the Company has agreed to pay $24 million over a three-year period, which
includes a $4.8 million payment on the Ready For Service date, as defined in the
agreement. In addition, during the three-year period, Qwest has the right of
first refusal pursuant to additional capacity purchases made by the Company.
In addition, the Company has entered into two agreements that provide the
Company with IRU's for international fiber optic capacity for Europe and the
Pacific Rim. Deliveries of the capacity under the agreements are expected
between September 1998 and November 1999. The IRU's are for ten to fifteen
years, for which the Company has agreed to pay approximately $41.6 million over
a three-year period, of which $2.5 million has already been paid as a deposit
and an additional $21.6 million is expected to be paid in the next twelve
months.
4. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 129, "Disclosure of
Information about Capital Structure," which establishes standards for disclosing
information about an entity's capital structure. The statement is effective for
fiscal years ending after December 15, 1997. In June 1997 the FASB issued
SFAS No. 130, "Reporting Comprehensive Income," which (i) establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements, and (ii) requires an enterprise to report a total for comprehensive
income in condensed financial statements of interim periods. The statement is
effective for fiscal years beginning after December 15, 1997. In June 1997 the
FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. The statement is effective for fiscal years beginning after
December 15, 1997. In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measuring those
instruments at fair value, with the potential effect on operations dependent
upon certain conditions being met. The statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The implementation of
such standards is not expected to have a material impact on the Company's
financial position or results of operations, except for SFAS No. 133, for which
the Company has not determined the impact on the Company's financial position or
results of operations.
7
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FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. ACQUISITION OF OY TELEYKKANEN AB
On April 27, 1998, the Company entered into an agreement to purchase 100% of the
issued and outstanding capital stock of Oy Teleykkanen AB ("Tele 1" or "FCI-
Finland"), a corporation formed under the laws of Finland, for $4.0 million in
cash. Tele 1 is a Finnish provider of local and long distance international
telecommunication services and has a carrier agreement to exchange customer
traffic with Telecom Finland, the dominant carrier in Finland.
6. LITIGATION
The Company is involved in various claims and possible actions arising in the
normal course of its business. Although the ultimate outcome of these claims
cannot be ascertained at this time, it is the opinion of the Company's
management, based on its knowledge of the facts and advice of counsel, that the
resolution of such claims and actions will not have a material adverse effect on
the Company's financial condition or results of operations.
In August 1997, the Company entered into a settlement agreement relating to
litigation arising from a certain 1996 Nordiska Tele8 AB ("Tele8" or "FCI-
Sweden") international telephone services agreement and related billing,
collection and factoring agreements with third parties. Tele8 is the Company's
Swedish subsidiary. For the year ended September 30, 1996, selling, general and
administrative expenses included approximately $708,000 of losses relating to
the settlement of which $500,000 represented a reserve on advances, paid at the
time of the settlement agreement, on behalf of the telephone service company.
Under the settlement agreement all of the above amounts were paid to fully
satisfy any amounts which may be owing from the Company and the telephone
services company to a company under a factoring agreement. At the date of
settlement, the management of the Company believed the amounts advanced to the
telephone services company were uncollectible. The settlement agreement also
provided for the factoring company to assign to the Company any and all
receivable claims the factoring company may have against the billing and
collection agent ("Agent"). The Company filed a complaint against the Agent for
breach of contract and related claims pursuant to an agreement between the
Company and the Agent. The Agent agreed to place in escrow the sum of
$1,431,324. On May 8, 1998, the balance of the escrow account was distributed
among various entities. The Company received $790,880, which is included in
other income.
8
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Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
This document contains various "forward-looking statements", as defined in the
Private Securities Litigation Reform Act of 1995, that are based on management's
beliefs as well as assumptions made by and information currently available to
management. Such statements are subject to various risks and uncertainties
which could cause actual results to vary materially from those contained in such
forward-looking statements. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated, expected or projected.
Certain of these risks and uncertainties are described in the Company's
Registration Statement on Form S-4 filed under the Securities Act of 1933, as
amended, and declared effective on June 2, 1998, including the section entitled
"Risk Factors".
OVERVIEW
FCI is a rapidly growing multinational carrier focused on providing
international wholesale telecommunications services to other carriers worldwide.
As a facilities-based carrier, the Company seeks primarily to provide service
over its facilities and international transmission capacity owned or leased on a
fixed-cost basis ("on-net"). The Company believes that it is better able to
control the quality and the termination costs of on-net traffic and that
increasing the proportion of on-net traffic significantly improves the Company's
gross margins. For the three months ended June 30, 1998, 31.0% of the Company's
wholesale international traffic was terminated on-net and 69.0% was terminated
by other long distance carriers pursuant to resale and operating agreements
between the Company and such carriers ("off-net"). The Company plans to expand
its facilities to increase the percentage of on-net traffic.
The Company provides its services over a carrier-grade international
network consisting of international gateway switches, transmission capacity
owned or leased on a fixed-cost basis and various multinational termination
agreements and resale arrangements with other long distance providers. FCI began
generating revenue in July 1995 through it's acquisition of FCI-Sweden, formerly
Tele8. Since that time the Company has installed ten additional international
gateway switches within the United States (New York, New Jersey, Los Angeles and
Miami) and Europe (United Kingdom, The Netherlands, Germany, Sweden, Finland,
Denmark and Norway).
The Company's strategy is to invest in network facilities as it expands its
customer base, allowing it to enhance service quality and increase gross margins
on particular routes. However, this approach also causes the Company's gross
margins to fluctuate with changes in network utilization due to the Company's
fixed-cost investment in its network. The Company intends to expand its
international presence significantly during 1998 by installing six additional
switches in Austria, Belgium, France, Italy, Spain and Switzerland. The Company
believes that expansion into these additional markets will provide the Company
with an opportunity to increase its traffic volume.
Currently, the Company's revenues are generated through the sale of
international long distance services on a wholesale basis to telecommunications
carriers and through the sale of domestic and international long distance
services on a retail basis in Sweden, Denmark and Finland. The Company records
revenues from the sale of telecommunications services at the time of customer
usage. The Company earns revenue based on the number of minutes it bills to and
collects from its customers. The Company's agreements with its wholesale
customers are short-term in duration and are subject to significant traffic
variability. The rates charged to customers are subject to change from time to
time, generally requiring seven days' notice to the customer. However, the
Company is beginning to offer longer-term, fixed-price arrangements to select
customers who historically have generated large volumes of traffic, specifically
on routes where the Company provides on-net service.
The Company believes its services are competitively priced in each country
in which the Company offers its services. Prices for wholesale and retail
telecommunications services in many of the Company's markets have declined in
recent years as a result of deregulation and increased competition. The Company
believes that worldwide deregulation and increased competition are likely to
continue to reduce the Company's wholesale and retail revenues per billed minute
of use. The Company believes, however, that any decrease in wholesale and retail
revenues per minute will be at least partially offset by an increase in billed
minutes by the Company's wholesale and retail customers, and by a decreased cost
per billed minute.
9
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The Company currently has operating agreements with established long
distance providers in Belgium, Chile, Denmark, the Dominican Republic, Estonia,
Finland, Germany, Hungary, Iceland, Italy, Nicaragua, Norway, Poland, Portugal,
Slovenia, the U.K. and Venezuela, and is in the process of negotiating
additional operating agreements with carriers in other countries. Under its
operating agreements, FCI typically agrees to send traffic to its foreign
partners who agree to send a proportionate amount of return traffic via the
Company's network at negotiated rates. The Company and its foreign partners
typically settle the amounts owed to each other in cash on a net basis,
subsequent to the receipt of return traffic. FCI records the amount due to each
foreign partner as an expense in the period during which the Company's traffic
is delivered. FCI recognizes revenue on return traffic in the period in which it
is received. For the nine months ended June 30, 1998 the Company received 19.3
million minutes of return traffic, which accounted for 1.4% of the Company's
consolidated revenues.
The Company has made since its inception, and expects to continue to make,
significant investments to expand its network. Increased capital expenditures in
the future can be expected to affect the Company's operating results due to
increased depreciation charges and interest expense in connection with
borrowings to fund such expenditures.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data and related percentage of revenues:
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<CAPTION>
Three Months Ended June 30, Nine Months Ended June 30,
------------------------------------ --------------------------------------
1998 1997 1998 1997
-----------------------------------------------------------------------------
$ % $ % $ % $ %
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 46,192 100.0% $19,037 100.0% $117,146 100.0% $ 46,131 100.0%
Cost of revenues 47,987 103.9 17,896 94.0 114,473 97.7 43,321 93.9
-------- ----- ------- ------ -------- ------ -------- ------
Gross (deficit) margin (1,795) (3.9) 1,141 6.0 2,673 2.3 2,810 6.1
-------- ----- ------- ------ -------- ------ -------- ------
Operating Expenses:
Selling, general and 8,678 18.8 3,591 18.9 20,917 17.9 9,316 20.2
administrative
Stock-based compensation expense 192 0.4 -- -- 5,706 4.9 -- --
Related party expense 448 1.0 49 0.2 917 0.8 176 0.4
Depreciation and amortization 2,460 5.3 619 3.3 5,314 4.5 1,709 3.7
-------- ----- ------- ------ -------- ------ -------- ------
Total operating expenses 11,778 25.5 4,259 22.4 32,854 28.1 11,201 24.3
-------- ----- ------- ------ -------- ------ -------- ------
Operating loss (13,573) (29.4) (3,118) (16.4) (30,181) (25.8) (8,391) (18.2)
-------- ----- ------- ------ -------- ------ -------- ------
Other income (expense):
Interest expense-related party (15) -- (116) (0.6) (195) (0.2) (237) (0.5)
Interest expense (8,095) (17.5) (187) (1.0) (14,344) (12.2) (529) (1.2)
Interest income 3,089 6.7 -- -- 5,594 4.8 -- --
Gain on settlement agreement 791 1.7 791 0.7
Foreign exchange loss (261) (0.6) (298) (1.5) (655) (0.6) (1,621) (3.5)
-------- ----- ------- ------ -------- ------ -------- ------
Total other income (expense) (4,491) (9.7) (601) (3.1) (8,809) (7.5) (2,387) (5.2)
-------- ----- ------- ------ -------- ------ -------- ------
Loss before income taxes (18,064) (39.1) (3,719) (19.5) (38,990) (33.3) (10,778) (23.4)
Income tax benefit 3,249 7.0 -- -- 6,475 5.5 -- --
-------- ----- ------- ------ -------- ------ -------- ------
Net loss $(14,815) 32.1% $(3,719) (19.5)% $(32,515) (27.8)% (10,778) (23.4)%
======== ===== ======= ====== ======== ====== ======== ======
</TABLE>
FOR THE THREE MONTHS ENDED JUNE 30, 1998, AS COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1997
Revenues increased by $27.2 million to $46.2 million for the three months
ended June 30, 1998, from $19.0 million for the three months ended June 30,
1997. The growth in revenue resulted primarily from an increase in billed
customer minutes of use resulting from an increase in wholesale customers in the
U.S. and Europe and an increase in retail customers in Sweden, Denmark and
Finland, as well as usage increases from existing wholesale customers.
Offsetting the growth in revenue during this period was a decrease in the price
per billed minute to $0.219 for the three months ended June 30, 1998, from
$0.280 for the three months ended June 30, 1997, as a result of increased on-net
traffic and competition. For the three months ended June 30, 1998, U.S. revenues
totaled $29.1 million or 63.0% of the Company's consolidated revenues and
European revenues totaled $17.1 million, or 37.0% of consolidated revenues.
Billed minutes of use increased by 142.8 million, to 210.7 million minutes of
use for the three months ended June 30, 1998, from 67.9 million minutes of use
for the three months ended June 30, 1997.
10
<PAGE>
Cost of revenues includes those costs associated with the transmission and
termination of international long distance and domestic telecommunications
services. Historically, this expense has been variable, based upon minutes of
use, consisting largely of payments to other long distance providers and, to a
lesser extent, customer/carrier interconnect charges, leased fiber circuit
charges and switch facility costs. Cost of revenues increased by $30.1 million,
to $48.0 million for the three months ended June 30, 1998, from $17.9 million
for the three months ended June 30, 1997. As a percentage of revenues, cost of
revenues increased to 103.9% for the three months ended June 30, 1998, from
94.0% for the three months ended June 30, 1997, primarily as a result of
increased fixed costs associated with expanding inter-switch fiber capacity
within the U.S and Europe. For the three months ended June 30, 1998 the fixed
portion of cost of revenues increased to 13.4% of total cost of revenues from
5.9% in the quarter ended June 30, 1997. Cost of revenues as a percentage of
revenues is expected to decrease as a result of improved efficiencies of network
fiber facilities due to higher traffic volumes as well as from an anticipated
increase in the percentage of on-net traffic.
Gross margin decreased by $2.9 million to ($1.8) million for the three
months ended June 30, 1998, from $1.1 million for the three months ended
June 30, 1997. As a percentage of revenues, gross margin decreased to (3.9%) for
the three months ended June 30, 1998, from 6.0% for the three months ended
June 30, 1997.
Selling, general and administrative expenses consist primarily of personnel
costs, facilities costs, travel, commissions, consulting fees, professional fees
and advertising and promotion expenses. Selling, general and administrative
expenses increased by $5.7 million to $9.3 million for the three months ended
June 30, 1998, from $3.6 million for the three months ended June 30, 1997,
primarily as a result of the Company's increased sales, an increase in customer
service, billing, collections and accounting staff required to support revenue
growth, and approximately $192,000 of expenses related to stock-based
compensation arrangements. Staff levels grew by 109 from June 30, 1997, or 133%,
to 191 employees at June 30, 1998. As a percentage of revenues, selling, general
and administrative expenses increased to 20.2% for the three months ended June
30, 1998, from 19.1% for the three months ended June 30, 1997. Bad debt expense
was $882,000, or 1.9% of revenues for the three months ended June 30, 1998
compared with $141,000, or 0.7% of revenues for the three months ended June 30,
1997, as a result of increased revenue and new customers. Although selling,
general and administrative expenses are expected to increase on an absolute
basis in order to support expansion of the Company's operations, the Company
expects that selling, general and administrative expenses as a percentage of
revenues will decrease over time.
Depreciation and amortization increased by $1.8 million to $2.5 million for
the three months ended June 30, 1998, from $619,000 for the three months ended
June 30, 1997, primarily due to increased capital expenditures incurred in
connection with the deployment and expansion of the Company's network.
Interest expense increased by $7.8 million to $8.1 million for the three
months ended June 30, 1998, from $303,000 for the three months ended June 30,
1997, primarily due to the offering of the Company's 10- 1/2% Senior Notes due
2008 ("Senior Notes") in the aggregate principal amount of $300 million.
Interest income for the three months ended June 30, 1998, was $3.1 million
and related principally to interest on proceeds from the Senior Notes offering,
which were invested in marketable securities.
Foreign exchange loss decreased by $37,000 to $261,000 for the three months
ended June 30, 1998, from $298,000 for the three months ended June 30, 1997.
Income tax benefit of $3.2 million was recorded for the three months ended
June 30, 1998 related mainly to a tax benefit utilized by Armstrong Holdings,
Inc. ("AHI").
FOR THE NINE MONTHS ENDED JUNE 30, 1998, AS COMPARED TO THE NINE MONTHS ENDED
JUNE 30, 1997
Revenues increased by $71.0 million to $117.1 million for the nine months
ended June 30, 1998, from $46.1 million for the nine months ended June 30, 1997.
The growth in revenue resulted primarily from an increase in billed customer
minutes of use resulting from an increase in wholesale customers in the U.S. and
Europe and an increase in retail customers in Sweden, Denmark and Finland, as
well as usage increases from existing wholesale customers. Offsetting the growth
in revenue during this period was a decrease in the price per billed minute to
11
<PAGE>
$0.233 for the nine months ended June 30, 1998, from $0.286 for the nine months
ended June 30, 1997, as a result of increased on-net traffic and competition.
For the nine months ended June 30, 1998, U.S. revenues totaled $80.8 million or
68.9% of the Company's consolidated revenues and European revenues totaled $36.4
million, or 31.1% of consolidated revenues. Billed minutes of use increased by
342.1 million, to 503.3 million minutes of use for the nine months ended June
30, 1998, from 161.3 million minutes of use for the nine months ended June 30,
1997.
Wholesale customers increased by 75 or 174%, to 118 wholesale customers at
June 30, 1998, from 43 at June 30, 1997. As of June 30, 1998 retail customers in
Sweden, Denmark and Finland total approximately 25,700.
Cost of revenues increased by $71.2 million, to $114.5 million for the nine
months ended June 30, 1998, from $43.3 million for the nine months ended
June 30, 1997. As a percentage of revenues, cost of revenues increased to 97.7%
for the nine months ended June 30, 1998, from 93.9% for the nine months ended
June 30, 1997, primarily as a result of increased fixed costs associated with
expanding inter-switch fiber capacity within the U.S and Europe. For the nine
months ended June 30, 1998 the fixed portion of cost of revenues increased to
10.4% of total cost of revenues from 6.0% in the nine months ended June 30,
1997. Cost of revenues as a percentage of revenues is expected to decrease as
a result of improved efficiencies of network fiber facilities due to higher
traffic volumes as well as from an anticipated increases in the percentage of
on-net traffic.
Gross margin decreased by $137,000 to $2.7 million for the nine months
ended June 30, 1998, from $2.8 million for the nine months ended June 30, 1997.
As a percentage of revenues, gross margin decreased to 2.3% for the nine months
ended June 30, 1998, from 6.1% for the nine months ended June 30, 1997.
Selling, general and administrative expenses increased by $18.0 million to
$27.5 million for the nine months ended June 30, 1998, from $9.5 million for the
nine months ended June 30, 1997, primarily as a result of the Company's
increased sales, an increase in customer service, billing, collections and
accounting staff required to support revenue growth, and approximately $5.7
million of expenses related to stock-based compensation arrangements. As a
percentage of revenues, selling, general and administrative expenses increased
to 23.5% for the nine months ended June 30, 1998, from 20.6% for the nine months
ended June 30, 1997. Bad debt expense was $1.8 million, or 1.5% of revenues for
the nine months ended June 30, 1998 compared with $354,000, or 0.8% of revenues
for the nine months ended June 30, 1997, as a result of increased revenue and
new customers. Although selling, general and administrative expenses are
expected to increase on an absolute basis in order to support expansion of the
Company's operations, the Company expects that selling, general and
administrative expenses as a percentage of revenues will decrease over time.
Depreciation and amortization increased by $3.6 million to $5.3 million for
the nine months ended June 30, 1998, from $1.7 million for the nine months ended
June 30, 1997, primarily due to increased capital expenditures incurred in
connection with the deployment and expansion of the Company's network.
Interest expense increased by $13.8 million to $14.5 million for the nine
months ended June 30, 1998, from $766,000 for the nine months ended June 30,
1997, primarily due to the offering of the Senior Notes.
Interest income for the nine months ended June 30, 1998, was $5.6 million
and related principally to interest on proceeds from the Senior Notes offering,
which were invested in marketable securities.
Foreign exchange loss decreased by $966,000 to $655,000 for the nine months
ended June 30, 1998, from $1.6 million for the nine months ended June 30, 1997.
Income tax benefit of $6.5 million was recorded for the nine months ended
June 30, 1998 related mainly to a tax benefit of $7.0 million utilized by AHI
and a $393,000 tax charge related to the change in tax status as a result of the
reorganization on December 22, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating losses and negative cash
flows as a result of the development and operation of its network, including the
acquisition and maintenance of switches and undersea fiber optic capacity. The
Company has financed its growth primarily through equity, a credit facility
provided by Armstrong
12
<PAGE>
International Telecommunications, Inc. ("AIT"), credit facilities with two
equipment vendors, capital lease financing and the proceeds from the $300
million offering of Senior Notes.
Net cash provided by (used in) operating activities was ($26.3) million for
the nine months ended June 30, 1998 due principally to a net loss of $32.5
million offset in part by depreciation and amortization expense of $5.3 million.
Net cash provided by (used in) investing activities was ($185.5) million
for the nine months ended June 30, 1997. Net cash utilized by investing
activities in this period resulted from an increase in capital expenditures to
expand the Company's network, acquisition of FCI-Finland and the purchase of
marketable securities.
Net cash provided by (used in) financing activities was $290.6 million for
the nine months ended June 30, 1998. Net cash provided by financing activities
for the nine months ended June 30, 1998 resulted from the $13.8 million equity
investment by AIT and the issuance of $300 million of Senior Notes partially
offset by payments on existing long-term debt and capital leases.
Non-cash financing activities for the nine months ended June 30, 1998
resulted from the financing of network equipment provided by NTFC Capital Corp.
(''NTFC'') and Ericsson I.F.S., and financing of undersea fiber circuits
provided by Teleglobe Cantat-3 Inc. and Telecom A/S (collectively
''Globesystems'').
The Company's business strategy contemplates aggregate capital expenditures
in excess of $100 million through December 31, 1999. Such capital expenditures
are expected to be used primarily for international gateway switches, Points of
Presence ("PoPs"), transmission equipment, undersea and international fiber
circuits (including Indefeasible Right of Use ("IRUs") and Minimum Assignable
Ownership Units ("MAOUs")) for new and existing routes and other support
systems. In May 1998, the Company entered into a Memorandum of Understanding
with Qwest. The agreement provides Qwest with international direct dial
termination service to various destinations and provides the Company an IRU for
domestic and international fiber optic capacity. The IRU is for twenty-five
years, for which the Company has agreed to pay $24 million over a three-year
period. During 1998, the Company plans to install six additional switches in
Austria, Belgium, France, Italy, Spain and Switzerland. In addition, the Company
plans to invest in fiber optic transmission capacity connecting North America,
Europe, Latin America, Asia and the Pacific Rim, including the Americas-1,
Gemini, TPC-5, APCN (A) and Southern Cross fiber optic cables, and to acquire
additional capacity in the FLAG system.
On December 22, 1997, the Company received the equity investment from AIT,
which consisted of a contribution of cash and the cancellation of indebtedness.
Following the recapitalization, AIT owned approximately 84.0% of the outstanding
shares of common stock of the Company.
On January 28, 1998, FCI issued $300 million in aggregate principal amount
of Senior Notes. Interest on the Senior Notes is payable semiannually in arrears
on January 15 and July 15 of each year, commencing on July 15, 1998. In June
1998, 100% of the Senior Notes were exchanged for the registered Senior Notes.
The registered Senior Notes have the same terms and conditions as the
unregistered Senior Notes, other than restrictions of transferability.
The Senior Notes are redeemable at the option of FCI, in whole or in part
at any time on or after January 15, 2003, at specified redemption prices plus
accrued and unpaid interest and Liquidated Damages (as defined in the
Indenture), if any, thereon to the date of redemption. In addition, at any time
prior to January 15, 2001, FCI may redeem from time to time up to 35.0% of the
originally issued aggregate principal amount of the Senior Notes at the
specified redemption prices plus accrued interest and Liquidated Damages, if
any, to the date of redemption with the Net Cash Proceeds (as defined in the
Indenture) of one or more Public Equity Offerings (as defined in the Indenture);
provided that at least 65.0% of the originally issued aggregate principal amount
of the Senior Notes remains outstanding after such redemption. In the event of a
Change in Control (as defined in the Indenture), each holder of the Senior Notes
has the right to require FCI to purchase all or any of such holder's Senior
Notes at a purchase price in cash equal to 101% of the aggregate principal
amount thereof, plus accrued and paid interest and Liquidated Damages, if any,
to the date of purchase.
13
<PAGE>
FCI used approximately $86.5 million of the proceeds from the offering of
the Senior Notes to purchase a portfolio of Pledged Securities (as defined in
the Indenture) consisting of U.S. Government Obligations (as defined in the
Indenture), which are pledged as security and restricted for the first six
scheduled interest payments on the Senior Notes. In addition, approximately
$16.9 million of existing indebtedness was paid off with the proceeds from the
offering of the Senior Notes.
The Company continuously reviews opportunities to further its business
strategy through strategic alliances with, investments in, or acquisitions of
companies that are complementary to the Company's operations. The Company may
finance such alliances, investments or acquisitions with cash flow from
operations or through additional bank debt, vendor financing or one or more
public offerings or private placements of securities.
The Company believes that the net proceeds from the offering of the Senior
Notes will provide the Company with sufficient capital to fund planned capital
expenditures and anticipated losses and to make interest payments on the Senior
Notes for at least the next twelve months. There can be no assurance, however,
that the Company will achieve or, if achieved, will sustain profitability or
positive cash flow from operating activities in the future.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure," which establishes standards for disclosing information
about an entity's capital structure. The statement is effective for fiscal years
ending after December 15, 1997. In June 1997 the FASB issued SFAS No. 130,
"Reporting Comprehensive Income," which (i) establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purpose financial statements, and
(ii) requires an enterprise to report a total for comprehensive income in
condensed financial statements of interim periods. The statement is effective
for fiscal years beginning after December 15, 1997. In June 1997 the FASB issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. The
statement is effective for fiscal years beginning after December 15, 1997. In
June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measuring those instruments at fair value,
with the potential effect on operations dependent upon certain conditions being
met. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The implementation of such standards is not
expected to have a material impact on the Company's financial position or
results of operations, except for SFAS No. 133, for which the Company has not
determined the impact on the Company's financial position or results of
operations.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs having been written
using two digits rather than four to define the applicable year, resulting in
date-sensitive software having the potential to recognize a date using ''00'' as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. Neither management nor AHI has developed
a plan to review software that was internally developed or externally purchased
or licensed. Management has not reviewed with its key vendors and service
providers their software, for compliance with Year 2000 processing requirements.
If the systems of other companies on whose services the Company depends,
including AHI, or with whom the Company's systems interface are not Year 2000
compliant, there could be a material adverse effect on the Company's business,
financial condition and results of operation.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
Although the Company's reporting currency is the U.S. dollar, the Company
expects to derive an increasing percentage of its revenues from international
operations. Accordingly, changes in currency exchange rates may have a
significant effect on the Company's results of operations. For example, the
accounting rate under operating agreements is often defined in monetary units
other than U.S. dollars, such as "special drawing rights" or "SDRs." To the
extent that the U.S. dollar declines relative to units such as SDRs, the dollar
equivalent accounting rate would
14
<PAGE>
increase. In addition, as the Company expands into foreign markets, its exposure
to foreign currency rate fluctuations is expected to increase. Although the
Company does not currently engage in exchange rate hedging strategies, it may
choose to limit such exposure by purchasing forward foreign exchange contracts
or other similar hedging strategies. The Company's board of directors (the
''Board of Directors'') periodically reviews and approves the overall interest
rate and foreign exchange risk management policy and transaction authority
limits. Specific hedging contracts, if any, will be subject to approval by
certain specified officers of FCI acting within the Board of Directors' overall
policies and limits. The Company intends to limit its hedging activities to the
extent of its foreign currency exposure. There can be no assurance that any
currency hedging strategy would be successful in avoiding currency exchange-
related losses.
15
<PAGE>
Part II: Other Information
Item 1: Legal Proceedings:
The Company makes routine filings and is a party to customary
regulatory proceedings with the FCC relating to its operations. The
Company is not a party to any lawsuit or proceeding which, in the
opinion of management, is likely to have a material adverse effect on
the Company's business, financial condition and results of operations.
Item 2: Changes in Securities and Use of Proceeds:
Not applicable.
Item 3: Defaults upon Senior Securities:
Not applicable.
Item 4: Submissions of Matters to a Vote of Security Holders:
Not applicable.
Item 5: Other Information:
Not applicable.
Item 6: Exhibits and Reports on Form 8-K:
A. Exhibits
Exhibit No. Exhibits
-----------
27 Financial Data Schedule
B. Reports on Form 8-K
There were no reports on Form 8-K filed during the period.
16
<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.
Facilicom International, Inc.
Dated: August 14, 1998 By: /s/
---------------------------------------
Christopher S. King
Vice President--Finance and
Administration, Chief Financial
Officer (Principal Financial Officer
and Principal Accounting Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying condensed consolidated financial statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 80,433
<SECURITIES> 85,994
<RECEIVABLES> 41,641
<ALLOWANCES> (1,952)
<INVENTORY> 0
<CURRENT-ASSETS> 215,979
<PP&E> 91,601
<DEPRECIATION> (7,263)
<TOTAL-ASSETS> 375,701
<CURRENT-LIABILITIES> 92,442
<BONDS> 305,429
0
0
<COMMON> 2
<OTHER-SE> (22,168)
<TOTAL-LIABILITY-AND-EQUITY> 375,701
<SALES> 117,146
<TOTAL-REVENUES> 117,146
<CGS> 114,473
<TOTAL-COSTS> 114,473
<OTHER-EXPENSES> 32,854
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,539
<INCOME-PRETAX> (38,990)
<INCOME-TAX> 6,475
<INCOME-CONTINUING> (32,515)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,515)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
