<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 December 31, 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)
<TABLE>
<S> <C>
DELAWARE 52-2065185
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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 [X] NO [_]
As of February 8, 1999, there were 225,741 shares of common stock outstanding,
par value $.01 per share.
<PAGE>
FACILICOM INTERNATIONAL, INC.
Form 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
<S> <C>
Item 1: Financial Statements (Unaudited) Page
Condensed Consolidated Balance Sheets as of December 31, 1998 and
September 30, 1998................................................................... 3
Condensed Consolidated Statements of Operations and Comprehensive
Income for the Three Months Ended December 31, 1998 and 1997......................... 5
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 1998 and 1997..................................................... 6
Notes to Condensed Consolidated Financial Statements................................. 8
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................... 9
Item 3: Quantitative and Qualitative Disclosures About Market Risk.......................... 15
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
</TABLE>
2
<PAGE>
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)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 29,539 $ 68,129
Accounts receivable--net of allowance for doubtful accounts of $5,215
at December 31, 1998 and $4,620 at September 30, 1998........................... 69,418 59,915
Marketable securities ($31,296 at December 31, 1998 and $31,394 at
September 30, 1998 restricted).................................................. 43,718 70,092
Prepaid expenses and other current assets.............................................. 5,813 6,060
----------- ------------
Total current assets............................................................ 148,488 204,196
----------- ------------
PROPERTY AND EQUIPMENT:
Transmission and communications equipment.............................................. 123,968 97,849
Transmission and communications equipment--leased...................................... 58,779 17,162
Furniture, fixtures and other.......................................................... 16,015 11,154
----------- ------------
198,762 126,165
Less accumulated depreciation and amortization......................................... (14,168) (10,417)
----------- ------------
Net property and equipment...................................................... 184,594 115,748
----------- ------------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of $1,974 at
December 31, 1998 and $1,673 and September 30, 1998............................. 5,550 5,630
Debt issue costs, net of accumulated amortization of $1,005 at December 31, 1998 and
$744 and September 30, 1998..................................................... 9,435 9,696
Advances to affiliates................................................................. 549 490
Marketable securities-restricted....................................................... 43,699 43,124
----------- ------------
Total other assets.............................................................. 59,233 58,940
----------- ------------
TOTAL ASSETS............................................................................ $ 392,315 $ 378,884
=========== ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND CAPITAL ACCOUNTS
CURRENT LIABILITIES:
Accounts payable..................................................................... $ 69,917 $ 63,802
Accounts payable--transmission equipments............................................ 27,367 24,668
Accounts payable--related party...................................................... 329 332
Accrued interest..................................................................... 15,121 7,109
Other current obligations............................................................ 11,557 12,610
Capital lease obligations due within one year........................................ 16,566 3,407
Long-term debt due within one year................................................... 394 394
-------- --------
Total current liabilities......................................................... 141,251 112,322
-------- --------
OTHER LIABILITIES:
Capital lease obligations............................................................ 9,102 4,791
Long-term debt....................................................................... 300,248 300,346
-------- --------
Total other liabilities........................................................... 309,350 305,137
-------- --------
COMMITMENTS AND CONTINGENCIES
CAPITAL ACCOUNTS:
Common stock, $0.1 par value--300,000 shares authorized; 225,741 issued and
outstanding at December 31, 1998 and September 30, 1998........................... 2 2
Additional paid-in capital........................................................... 36,534 36,534
Stock-based compensation............................................................. 6,465 6,305
Holding gain on marketable securities................................................ -- 24
Foreign currency translation adjustments............................................. 3,472 3,450
Accumulated deficit.................................................................. (104,759) (84,890)
-------- --------
Total capital accounts............................................................. (58,286) (38,575)
-------- --------
TOTAL LIABILITITES AND CAPITAL ACCOUNTS................................................. $392,315 $378,884
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Revenues..................................... $82,965 $35,808
Cost of revenues............................. 77,668 32,809
-------- -------
Gross margin................................. 5,297 2,999
-------- -------
Operating Expenses:
Selling, general and administrative...... 12,151 5,747
Stock-based compensation expense......... 160 --
Related party expense.................... 560 215
Depreciation and amortization............ 4,297 1,001
-------- -------
Total operating expenses............ 17,168 6,963
-------- -------
Operating loss............................... (11,871) (3,964)
-------- -------
Other income (expense):
Interest expense-related party........... -- (180)
Interest expense......................... (8,174) (355)
Interest income.......................... 1,796 --
Foreign exchange loss.................... (1,388) (457)
-------- -------
Total other income (expense)........ (7,766) (992)
-------- -------
Loss before income taxes..................... (19,637) (4,956)
Income tax benefit (expense)................. 3,711 (393)
-------- -------
Net loss..................................... (15,926) (5,349)
Other comprehensive income:
Foreign currency translation adjustment.. 22 224
-------- -------
Total comprehensive loss $(15,904) $(5,125)
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------------
1998 1997
-------------- -------------
Cash flows from operating activities:
<S><C> <C> <C>
Net loss....................................................... $(15,926) $(5,349)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.................................. 4,297 1,001
Non-cash stock-based compensation.............................. 160 --
Non-cash income tax (benefit) loss............................. (3,943) 393
Amortization of bond discount.................................. (549) --
Changes in operating assets and liabilities:
Accounts receivable............................................ (9,503) (5,975)
Prepaid expenses and other current assets...................... 247 (963)
Accounts payable and other current liabilities................. 13,074 7,730
Accounts payable--related party................................ (3) 395
Advance to affiliate........................................... (195) (1,068)
-------- -------
Net cash used in operating activities.......................... (12,341) (3,836)
-------- -------
Cash flows from investing activities:
Purchase of investments in subsidiaries........................ -- (588)
Purchase of investments in available-for-sale securities....... (7,407) --
Maturities of available-for-sale securities.................... 13,378 --
Sales of available-for-sale securities......................... 20,353 --
Purchases of property and equipment............................ (52,091) (2,987)
Other.......................................................... (69) --
-------- -------
Net cash used in investing activities.......................... (25,836) (3,575)
-------- -------
Cash flows (used in) provided by financing activities:
Excess capital contributions................................... -- 13,750
Payments of long-term debt and capital leases.................. (435) (226)
-------- -------
Net cash (used in) provided by financing activities............ (435) 13,524
-------- -------
Effect of exchange rate changes on cash........................... 22 224
-------- -------
(Decrease) increase in cash and cash equivalents.................. (38,590) 6,337
Cash and cash equivalents, beginning of period.................... 68,129 1,016
-------- -------
Cash and cash equivalents, end of period.......................... $ 29,539 $ 7,353
======== =======
Supplemental cash flow information:
Interest paid.................................................. $ 162 $ 279
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
(Footnotes on following page)
6
<PAGE>
- --------
NONCASH TRANSACTIONS:
(a) For the three months ended December 31, 1997, the majority owner converted
$6,250 of loans into capital.
(b) FCI received property and equipment under capital leases and financing
agreements, which increased property and equipment and long-term obligations
$17,807 and $5,066 in the three months ended December 31, 1998 and 1997,
respectively. In addition, for the three months ended December 31, 1998, FCI
received equipment, which increased property and equipment and accounts
payable transmission equipment by $2,699.
(c) FCI recognized a tax benefit of $3,943 for the three months ended December
31, 1998. In accordance with the tax sharing agreement with AHI entered into
on December 22, 1997, FCI recorded a dividend to AHI for the amount of the
benefit to be realized by AHI.
See notes to condensed consolidated financial statements.
7
<PAGE>
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")
Form 10-K for the year ended September 30, 1998.
2. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which 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 requires an enterprise
to report a total for comprehensive income in condensed financial statements of
interim periods. The Company adopted SFAS No. 130 in the quarter ended December
31, 1998 and has elected to display the components of comprehensive income
within the Condensed Consolidated Statements of Operations and Comprehensive
Loss.
3. LONG-TERM DEBT
In May 1998, the Company entered into a Memorandum of Understanding with Qwest
Communications Corporation ("Qwest"). The agreement provides Qwest with
international direct dial termination service to various destinations and
provides the Company an Indefeasible Right of Use ("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. Delivery of two of the capacity
segments occurred during the three months ended December 31, 1998. The delivery
of the remaining capacity is expected within the next six months. The Company
has recorded a liability of $17.8 million related to the two capacity segments
that were delivered during the three months ended December 31, 1998.
4. 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 position or results of operations.
8
<PAGE>
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 December 31, 1998, 42.6% of the
Company's wholesale international traffic was terminated on-net and 57.4% 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 Nordiska
Tele8 AB. Since that time the Company has installed or acquired 13 additional
international gateway switches in the United States (New York, New Jersey, Los
Angeles and Miami) and Europe (United Kingdom, The Netherlands, Germany,
Finland, Denmark, France, Norway, Switzerland and Italy).
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 fiscal 1999 by installing three
additional switches in Austria, Belgium and Spain. 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, Norway 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.
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.
The Company currently has operating agreements with established long distance
providers in Belgium, Chile, Denmark, the Dominican Republic, Estonia, Finland,
Germany, Hungary, Iceland, Italy, Norway, Poland, Portugal,
9
<PAGE>
Slovenia, the U.S., 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
the return traffic is received. For the three months ended December 31, 1998 the
Company received 7.9 million minutes of return traffic, which accounted for 0.8%
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 unaudited
financial data and related percentage of revenues (in thousands):
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1998 1997
-----------------------------------------------------
$ % $ %
-----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 82,965 100.0% $35,808 100.0%
Cost of revenues........................ 77,668 93.6 32,809 91.6
-------- ------ ------- ------
Gross margin............................ 5,297 6.4 2,999 8.4
-------- ------ ------- ------
Operating Expenses:
Selling, general and administrative
(including related party)........ 12,711 15.3 5,962 16.6
Stock-based compensation expense.... 160 0.2 -- --
Depreciation and amortization....... 4,297 5.2 1,001 2.8
-------- ------ ------- ------
Total operating expenses....... 17,168 20.7 6,963 19.4
-------- ------ ------- ------
Operating loss.......................... (11,871) (14.3) (3,964) (11.0)
-------- ------ ------- ------
Other income (expense):
Interest expense (including
related party)................... (8,174) (9.9) (535) (1.5)
Interest income..................... 1,796 2.2 -- --
Foreign exchange loss............... (1,388) (1.7) (457) (1.3)
-------- ------ ------- ------
Total other income (expense)... (7,766) (9.4) (992) (2.8)
-------- ------ ------- ------
Loss before income taxes................ (19,637) (23.7) (4,956) (13.8)
Income tax benefit (expense)............ 3,711 4.5 (393) (1.1)
-------- ------ ------- ------
Net loss................................ $(15,926) (19.2)% $(5,349) (14.9)%
======== ====== ======= ======
</TABLE>
For the Three Months Ended December 31, 1998, as Compared to the Three Months
Ended December 31, 1997
Revenues increased by $47.2 million to $83.0 million for the three months
ended December 31, 1998, from $35.8 million for the three months ended December
31, 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, Norway
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 $0.215 for the three months ended December 31, 1998, from
$0.274 for the three months ended December 31, 1997, as a result of increased
on-net traffic and competition. For the three months ended December 31, 1998,
U.S. revenues totaled $36.0 million or 43.4% of the Company's consolidated
revenues and European revenues totaled $46.9 million, or 56.6% of consolidated
revenues. Billed minutes of use increased by 255.7 million, to 386.3 million
minutes of use for the three months ended December 31, 1998, from 130.6 million
minutes of use for the three months ended December 31, 1997.
10
<PAGE>
Wholesale customers increased by 79 or 102.6%, to 156 wholesale customers at
December 31, 1998 from 77 wholesale customers at December 31, 1997. As of
December 31, 1998 there were approximately 47,000 retail customers in Sweden,
Denmark, Finland and Norway.
Cost of revenues increased by $44.9 million to $77.7 million for the three
months ended December 31, 1998, from $32.8 million for the three months ended
December 31, 1997. As a percentage of revenues, cost of revenues increased to
93.6% for the three months ended December 31, 1998, from 91.6% for the three
months ended December 31, 1997, primarily as a result of increased fixed costs
associated with expanding inter-switch fiber capacity within the U.S and Europe.
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 increased by $2.3 million to $5.3 million for the three months
ended December 31, 1998, from $3.0 million for the three months ended December
31, 1997. As a percentage of revenues, gross margin decreased to 6.4% for the
three months ended December 31, 1998, from 8.4% for the three months ended
December 31, 1997.
Selling, general and administrative expenses increased by $6.9 million to
$12.9 million for the three months ended December 31, 1998, from $6.0 million
for the three months ended December 31, 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
$160,000 of expenses related to stock-based compensation arrangements. As a
percentage of revenues, selling, general and administrative expenses decreased
to 15.5% for the three months ended December 31, 1998, from 16.6% for the three
months ended December 31, 1997. Bad debt expense was $1.2 million, or 1.5% of
revenues for the three months ended December 31, 1998 compared with $268,000, or
0.8% of revenues for the three months ended December 31, 1997. 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 $3.3 million to $4.3 million for
the three months ended December 31, 1998, from $1.0 million for the three months
ended December 31, 1997, primarily due to increased capital expenditures
incurred in connection with the deployment and expansion of the Company's
network.
Interest expense increased by $7.6 million to $8.2 million for the three
months ended December 31, 1998, from $535,000 for the three months ended
December 31, 1997, primarily due to interest obligations on the Company's 10-
1/2% Senior Notes due 2008 ("Senior Notes") in the aggregate principal amount of
$300 million, which were issued in 1998.
Interest income for the three months ended December 31, 1998 was $1.8 million
and related principally to interest on proceeds from the Senior Notes offering,
which were invested in marketable securities.
Foreign exchange loss increased by $931,000 to $1.4 million for the three
months ended December 31, 1998, from $457,000 for the three months ended
December 31, 1997.
Income tax benefit of $3.7 million was recorded for the three months ended
December 31, 1998 related principally to the estimated tax benefits of $3.9
million utilized by Armstrong Holdings, Inc. ("AHI") partially offset by
approximately $232,000 for a tax charge in Finland. The Company had a tax charge
of $393,000 for the three months ended December 31, 1997, resulting from a
change in the Company's tax status as a result of the reorganization.
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 International Telecommunications, Inc. ("AIT"), credit
facilities with two equipment vendors, capital lease financing and the proceeds
from the $300 million offering of Senior Notes.
11
<PAGE>
Net cash provided by (used in) operating activities was ($12.3) million for
the three months ended December 31, 1998 due principally to a net loss of $15.9
million offset in part by depreciation and amortization expense of $4.3 million.
Net cash provided by (used in) investing activities was ($25.8) million for
the three months ended December 31, 1998. Net cash used in investing activities
in this period resulted from an increase in capital expenditures to expand the
Company's network offset in part by the sale of marketable securities.
Net cash provided by (used in) financing activities was ($435,000) for the
three months ended December 31, 1998. Net cash used in financing activities for
the three months ended December 31, 1998 resulted from payments on existing
long-term debt and capital leases.
Non-cash financing activities for the three months ended December 31, 1998
resulted from the financing of undersea fiber circuits provided by Qwest.
The Company's business strategy contemplates aggregate capital expenditures of
approximately $100 million during fiscal year 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 Communications Corporation ("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. Delivery of two of the capacity segments occurred during the three
months ended December 31, 1998. The delivery of the remaining capacity is
expected within the next six months.
In addition, the Company has entered into an agreement that provides the
Company with an IRU for international fiber optic capacity for the Pacific Rim.
Delivery of the capacity under the agreement is expected prior to November 1999.
The IRU is for 15 years, for which the Company has agreed to pay $20.0 million
through September 30, 2002, of which $2.5 million has already been paid as a
deposit and an additional $2.5 million is expected to be paid within the next 12
months. The Company has also agreed to acquire additional capacity in Europe
and Scandinavia for approximately $8.2 million. Deliveries and payment of the
capacity under these agreements are expected by September 30, 1999. During
fiscal 1999, the Company also plans to install three additional switches in
Austria, Belgium and Spain.
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 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 Company has yet to determine any impact the
implementation of the standard will have on the Company's financial position or
results of operations.
12
<PAGE>
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, among other things, 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, which could have
material adverse operational and financial consequences. Currently, the Company
believes that a disruption in the operation of its networks, billing system and
financial and accounting systems and/or an inability to access interconnections
with other telecommunications carriers, are the major risks associated with the
inability of systems and software to process Year 2000 data correctly. 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 position
and results of operations.
State of Readiness
FCI, in conjunction with AHI, formed a task team in February 1998. The task
team's program comprises three phases: (i) assessment of Year 2000 compliance of
FCI's equipment, software and systems, (ii) a detailed inventory of these items
and (iii) building and implementing a workplan and contingency plan, which
includes assessing the cost in dollars and the necessary manpower, upgrading or
replacing the item, and scheduling the date of compliance. The Company has
completed the first two phases and expects the majority of phase three to be
completed by June 30, 1999 with remaining items completed by September 30, 1999.
Included in the task team's assessment is a review of the Year 2000 compliance
efforts of FCI's key suppliers. Below is a more detailed breakdown of our
efforts to date:
Internal Issues
Network elements--The Company's main concern is the switching equipment and
peripherals, and other vendor components that are time and date sensitive. The
Company is upgrading all of its networks with the compliant software and expects
to have this completed by the end of June 1999, except for one switch in
Finland, for which the vendor is currently producing a Year 2000 compliance
plan. In addition, the Company expects to complete the software upgrade for its
Passport equipment, which will make the equipment Year 2000 compliant, by the
end of June 1999. Passport equipment allows the Company to compress its traffic,
which allows more traffic to be carried over a single fiber optic cable. The
Company's transmission equipment is currently Year 2000 "Friendly", which means
the manufacturer has represented that the software releases will not experience
any service-affecting issues upon rollover into the new millennium. Although the
Company expects that it will be able to resolve Year 2000 problems with
workarounds, there can be no assurance that such workarounds will be successful.
The Company expects Year 2000 compliant software releases to be released and
installed by the end of September 1999; however, the development and release of
such software is not within the control of the Company.
Billing System and the Accounting System--The Company's billing system was
developed by AHI's programmers and operates on the IBM AS400. The Company
believes that the billing system and the IBM AS400 are Year 2000 compliant.
However, the production of accurate and timely customer invoices depends upon
the generation of accurate and timely underlying data by the Company's switches.
Though the switch manufacturer has represented that the Company's switches are
Year 2000 compliant, there can be no assurance that such billing problems will
not occur. The Company is in the process of converting its accounting system.
The manufacturer has represented that this system is Year 2000 compliant and its
implementation is expected to be completed by June 30, 1999.
Information Systems--The Company's upgrade of its information systems is in
progress. The Company believes that all of the Company's hardware equipment,
including the equipment it relies upon at AHI, is Year 2000 compliant. Three
main software products used by the Company are not Year 2000 compliant. Two of
the software products have free patches that can be downloaded from the
developer's website through the internet and the third product can be upgraded
to the latest version; the Company intends to take these steps. The Company
has approximately 150 workstations and laptops that will need these software
upgrades. Each upgrade is expected to take approximately 20 to 30 minutes and
will be performed by the Company's MIS team.
13
<PAGE>
Third Party Issues
Vendor Issues--In general, FCI's product vendors have made available either
Year 2000 compliant versions of their products or new compliant products as
replacements of discontinued offerings. In most cases, statements made by the
Company herein as to the degree of compliance of the products in question are
based on vendor-provided information, which remains subject to FCI's testing and
verification activities. Testing and verification is expected to be completed
by September 30, 1999. The Company is in the process of requesting information
from utilities and similar service providers.
Customer Issues--FCI's customers are interested in the progress of FCI's Year
2000 efforts, and FCI anticipates increased demand for information, including
detailed testing data and company-specific responses. When requested by
customers, the Company provides Year 2000 compliance information. At this time,
the Company has not performed an analysis of its potential liability to
customers in the event of Year 2000 related problems.
Interconnecting Carriers--FCI's network operations interconnect with domestic
and international networks of other carriers. If one of these interconnecting
carriers should fail or suffer adverse effect from a Year 2000 problem, the
Company's customers could experience impairment of services. In addition, since
many of these interconnecting carriers are also the Company's customers, a Year
2000 problem by one of these customers could result in a loss of revenue due to
its inability to send traffic to the Company's network. The Company is in the
process of sending correspondence to its major interconnecting carriers to
determine the status of their Year 2000 compliance review.
Costs
Although total costs to implement the plan cannot be precisely estimated, the
Company has not incurred costs to date in excess of those normally associated
with business planning and implementation. The Company anticipates that future
costs will not be material, in as much as the Company began to acquire products
after the Year 2000 issue was identified and manufacturers had begun to
remediate the problem. However, there can be no assurance that material costs
will not be incurred. The Company cannot estimate the future cost related to
the interoperability of third party products. These costs will be expensed as
incurred, unless new systems are purchased that should be capitalized in
accordance with generally accepted accounting principles.
Risks
The failure to correct a material Year 2000 problem could cause an
interruption or failure of certain of the Company's normal business functions or
operations, which could have a material adverse effect on the Company's
business, financial position and results of operations. Due to the uncertainty
inherent in other Year 2000 issues that are ultimately beyond the Company's
control, including, for example, the Year 2000 readiness of the Company's
suppliers, customers and interconnecting carriers, the Company is unable to
determine at this time the likelihood of a material impact on the Company's
business, financial position and results of operation, due to such Year 2000
issues. However, based upon risk assessment work conducted thus far, the Company
believes that the most reasonably likely worst case scenario of the failure by
the Company, its suppliers or other telecommunications carriers with which the
Company interconnects to resolve Year 2000 issues would be an inability by the
Company (i) to provide telecommunications services to the Company's customers,
(ii) to route and deliver telephone calls originating from or terminating with
other telecommunications carriers, and (iii) to timely and accurately bill its
customers. In addition to lost earnings, these failures could also result in
loss of customers due to service interruptions and billing errors, substantial
claims by customers and increased expenses associated with Year 2000 litigation,
stabilization of operations and executing mitigation and contingency plans.
While the Company believes that it is taking appropriate measures to mitigate
these risks, there can be no assurance that such measures will be successful.
Contingency Plan
At this time, the Company does not have a contingency plan, but is in the
process of developing a plan. This plan is expected to be completed by June 30,
1999.
14
<PAGE>
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 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 position 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: February 16, 1999 By: /s/
------------------------------------
Christopher S. King
Vice President--Finance and
Administration, Chief Financial Officer
(Authorized Officer, Principal Financial
Officer and Principal Accounting Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary 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> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 29,539
<SECURITIES> 43,718
<RECEIVABLES> 74,633
<ALLOWANCES> 5,215
<INVENTORY> 0
<CURRENT-ASSETS> 148,488
<PP&E> 198,762
<DEPRECIATION> 14,168
<TOTAL-ASSETS> 392,315
<CURRENT-LIABILITIES> 141,251
<BONDS> 309,350
0
0
<COMMON> 2
<OTHER-SE> (58,288)
<TOTAL-LIABILITY-AND-EQUITY> 392,315
<SALES> 82,965
<TOTAL-REVENUES> 82,965
<CGS> 77,668
<TOTAL-COSTS> 77,668
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,174
<INCOME-PRETAX> (19,637)
<INCOME-TAX> 3,711
<INCOME-CONTINUING> (15,926)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,926)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
