FORM 10QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED March 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM __________________ TO __________________
Commission file number 0-25194
FIRSTCOM CORPORATION
(Exact name of registrant as specified in charter)
TEXAS 87-0464860
(State of Incorporation) (IRS Employee Identification)
220 ALHAMBRA CIRCLE, SUITE 910
CORAL GABLES, FLORIDA 33134
(Address of principal executive offices) (Zip Code)
Registrant's telephone number:
(305) 448-4422
(Former name, former address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the past 12 months (or for such shorter period than that
the registrant was required to file such reports),
Yes [x] No [ ]
and (2) has been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of May 14, 1999 - 19,494,300
NOTE: Page 1 of 19 sequentially numbered pages.
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FIRSTCOM CORPORATION
INDEX
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
(unaudited)
Condensed Consolidated Balance Sheets - as of
March 31, 1999 (unaudited)and December 31, 1998 3
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 1999 and 1998
(unaudited) 4
Condensed Consolidated Statement of Stockholders'
Equity - Three Months Ended March 31, 1999
(unaudited) 5
Condensed Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1999
(unaudited) 6
Notes to Condensed Consolidated Financial Statements
(unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results Of Operations 9
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index 19
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PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FIRSTCOM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
03/31/99 12/31/98
--------- ---------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .................... $ 3,174 $ 8,892
Restricted cash .............................. 8,028 22,599
Restricted investments ....................... 19,941 19,670
Accounts receivable,net ...................... 7,902 6,935
Prepaid expenses and other current assets .... 1,188 624
--------- ---------
Total current assets ................. 40,233 58,720
Restricted investments ......................... 20,292 20,021
Telecommunications networks, net ............... 78,454 45,901
Intangible assets, net ......................... 15,373 15,765
Deferred financing costs and other ............. 15,080 14,437
--------- ---------
Total assets ......................... $ 169,432 $ 154,844
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................. $ 11,098 $ 8,238
Vedor Financing,current ...................... 193 254
Bank debt .................................... 2,208 --
Promissory notes ............................. 6,461 --
Accrued interest ............................. 8,925 3,695
Other accrued expenses ....................... 759 1,963
Lease obligations, current ................... 130 136
Other current liabilities .................... 1,154 471
--------- ---------
Total current liabilities ............ 30,928 14,757
Senior notes, net .............................. 132,538 132,338
Vendor Financing ............................... 1,576 1,337
Bank debt ...................................... 3,143 --
Lease obligations, less current portion ........ 190 238
--------- ---------
Total liabilities .................... 168,375 148,670
--------- ---------
Minority Interest .............................. 1,846 --
Commitments and contingencies .................. -- --
Stockholders' equity
Preferred stock, $.001 par value,
authorized 10,000,000
shares, none issued
Common stock, $.001 par value,
authorized 50,000,000
shares, issued and outstanding
19,189,786 and 19,084,300
as of March 31, 1999 and December 31,
1998, respectively......................... 19 19
Additional paid in capital ................... 31,923 31,737
Warrants ..................................... 26,737 26,737
Accumulated deficit .......................... (58,624) (51,475)
Cumulative translation adjustments ........... (238) (238)
--------- ---------
(183) 6,780
Shareholder loans ............................ (606) (606)
--------- ---------
Total stockholders' equity ........... (789) 6,174
--------- ---------
Total liabilities and
stockholders' equity ............... $ 169,432 $ 154,844
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<TABLE>
<CAPTION>
FIRSTCOM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
------------ ------------
1999 1998
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues
Long Distance ............................ $ 7,188 $ 2,927
Internet .......................... ...... 666 --
Data ..................................... 1,516 153
Other .................................... 75 247
------------ ------------
9,445 3,327
Operating expenses:
Cost of revenues ......................... 7,191 2,609
Selling, general and administrative ...... 4,427 1,831
Depreciation and amortization ............ 893 523
------------ ------------
Loss from operations ....................... (3,066) (1,636)
------------ ------------
Interest expense ........................... (4,504) (5,403)
Interest income and other .................. 421 1,761
------------ ------------
Net loss ................................... $ (7,149) $ (5,278)
============ ============
Net basic and diluted loss per share ....... $ (0.37) $ (0.28)
============ ============
Weighted average common shares
outstanding ................................ 19,115,555 19,084,300
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<TABLE>
<CAPTION>
FIRSTCOM CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL ACCRUED CUMULATIVE
----------------------- PAID-IN DISTRIBUTIONS ACCUMULATED TRANSLATION SHAREHOLDER
SHARES AMOUNTS CAPITAL AND WARRANT DEFICIT ADJUSTMENT LOANS TOTAL
------------- -------- ---------- ------------- ----------- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 19,084,300 19 31,737 26,737 (51,475) (238) (606) 6,174
Exercise of stock options
(unaudited) 75,000 -- 19 -- -- -- -- 19
Stock option grants (unaudited) -- -- 82 -- -- -- -- 82
Common Stock issued (unaudited) 30,496 -- 85 -- -- -- -- 85
Net loss (unaudited) -- -- -- -- (7,149) -- -- (7,149)
---------- ---------- ---------- ---------- --------- --------- ------ -------
Balances at March 31, 1999
(unaudited) 19,189,796 $ 19 $ 31,923 $ 26,737 $ (58,624) $ (238) $ (606) $ (789)
========== ========== ========== ========== ========= ========= ====== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<TABLE>
<CAPTION>
FIRSTCOM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................ $ (7,149) $ (5,278)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense ......... 893 523
Amortization of deferred financing costs and
original issue discounts .................... 357 297
Accretion of discount on restricted
Investments ................................. (542) (206)
Capitalized interest related to network ....... (1,532) (206)
Construction
Stock options issued and exercised ............. 101 --
Changes in assets and liabilities:
Accounts receivable ......................... (152) (164)
Prepaid expenses and other current assets ... (518) 534
Other assets ................................ 159 (31)
Accounts payable and accrued expenses ....... 4,420 2,678
Due to related parties ...................... -- (263)
Other current liabilities ................... 540 122
-------- --------
Cash used in operating activities ........ (3,423) (1,788)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of telecommunications network .......... (12,072) (5,762)
Use of restricted cash .......................... 14,572 5,713
Acquisition of Teleductos, net .................. (4,936) --
-------- --------
Cash used in investing activities ....... (2,436) (49)
CASH FLOWS FROM FINANCING ACTIVITIES:
Vendor debt ..................................... 178 --
Payments under leasing obligations .............. (37) (121)
-------- --------
Cash provided by financing activities, net 141 1,671
-------- --------
Net decrease in cash and cash
equivalents ..................................... (5,718) (3,508)
Cash and cash equivalents, beginning of period .... 8,892 14,936
-------- --------
Cash and cash equivalents end of period ........... $ 3,174 $ 11,428
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements included herein
have been prepared by FirstCom Corporation (the "Company"). The foregoing
statements contain all adjustments, consisting only of normal recurring
adjustments which are, in the opinion of the Company's management, necessary to
present fairly the consolidated financial position of the Company as of March
31, 1999 and the consolidated results of its operations and its consolidated
cash flows for the three month periods ended March 31, 1999 and 1998.
Certain information and footnote disclosure normally included in financial
statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to the instructions, rules
and regulations prescribed by the Securities and Exchange Commission ("the
Commission"). Although the Company believes the disclosures provided are
adequate to make the information presented not misleading, it strongly
recommends that these unaudited condensed consolidated financial statements be
read in conjunction with the audited consolidated financial statements and the
footnotes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1998.
NOTE 1 - TELECOMMUNICATIONS NETWORKS
Telecommunications networks are recorded at cost and are depreciated on a
straight-line method over the estimated useful lives of the related assets.
Construction, engineering, interest , labor costs and import and value added
taxes directly related to the development of the Company's networks are
capitalized. The Company begins depreciating these costs when the networks
become commercially operational.
Telecommunications networks consists of:
<TABLE>
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ESTIMATED
MARCH 31, DECEMBER 31, USEFUL
1999 1998 LIFE
----------- ----------- ---------------
<S> <C> <C> <C>
Telecommunications equipment ........................ $ 44,901 $ 15,837 10 to 20 years
Telecommunications equipment pending installation and
construction in progress ............................ 29,765 27,635 --
Office equipment, furniture and vehicles ............ 6,851 5,104 3 to 7
----------- -----------
81,517 48,576
Less: accumulated depreciation ...................... (3,063) (2,675)
----------- -----------
$ 78,454 $ 45,901
=========== ===========
</TABLE>
.
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NOTE 2- ACQUISITION OF TELEDUCTOS
On February 2, 1999, the Company acquired 76% of Teleductos' (now known
as FirstCom Colombia) outstanding stock for approximately $6,000 million in
cash, $7,000 in short-term promissory notes, a $2,000 stock subscription payable
on February 8, 2000 and 100,000 shares of the Company's common stock. The
promissory notes bear interest at 5% per annum and mature at various dates
through February 2000.
The allocation of the purchase price is preliminary, pending
finalization of appraisals and other estimates.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements set forth herein including information with respect to
the Company's plans and strategy for its business, acquisitions and related
financings, are forward-looking statements. Such forward-looking statements are
subject to material risks, uncertainties and contingencies, many of which are
beyond control of the Company. As a result, the actual results, performance or
achievements of the Company, may be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Given these uncertainties, investors and creditors
are cautioned not to place undue reliance on such forward-looking statements.
OVERVIEW
The Company's strategy is to (i) build facilities based fiber optic and digital
switching intelligent networks; (ii) develop strategic relationships with
technology network vendors and developers of Internet-based software; and (iii)
provide end-to-end network solutions to business customers in key Latin American
business centers.
Today, the Company is operating state-of-the-art fiber optic ATM/IP
networks in Santiago, Chile and Lima, Peru, and as a result of the Company's
February 1999 acquisition of Teleductos, S.A. the Company currently has
operations in Bogota, Cali and Cartagena Colombia. ATM is an information
transfer standard that is one of a general class of packet technologies. ATM can
be used by many different information systems, including local area networks to
deliver traffic at varying rates, permitting a mix of voice, data, video and
multimedia. The fiber optic cable installed in (i) Santiago, runs through the
downtown business district and the outlying industrial and airport corridor,
(ii) Lima, runs through the major commercial and industrial districts of Lima,
and the port city of Callao and (iii) Bogota, runs through the major commercial
and industrial districts of Bogota. A summary of key metrics as of March 31,
1999 follows:
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<TABLE>
<CAPTION>
AS OF MARCH 31, 1999 (UNAUDITED)
CHILE PERU COLOMBIA CORPORATE TOTAL
----- ---- -------- --------- -----
<S> <C> <C> <C> <C> <C>
NETWORK INSTALLATION
Route Kilometers .......... 156 711 499 1,366
Fiber Kilometers .......... 2,604 24,118 11,335 38,057
ATM Nodes Installed ....... 5 22 5 32
Buildings Wired ........... 38 49 630 717
Long Distance Switches .... 3 -- -- 3
Teleports ................. 1 -- -- 1
OPERATING INDICATORS
Employees ................. 211 194 88 9 502
Ports Installed ........... 492 80 1,510 2,082
Customers:
Dedicated Internet Access 162 45 -- 207
Dial-Up Internet Access . 3,491 -- -- 3,491
Data Transmission ....... 118 37 147 302
</TABLE>
In Chile the Company operates through four wholly owned subsidiaries,
FirstCom Networks S.A., FirstCom Long Distance S.A., FirstCom Internet S.A.
(formerly known as Red de Computadores S.A.), which was acquired by the Company
during October 1998 and FirstCom Telephony S.A. (FirstCom Networks, FirstCom
Long distance, FirstCom Internet and FirstCom Telephony are collectively
referred to herein as "FirstCom Chile"). Although, separate legal entities, the
Company operates its Chilean subsidiaries as one functional entity, providing
seamless service delivery of integrated telecommunication solutions to its
Chilean customers.
Through its Chilean subsidiaries the Company currently provides
commercial customers in Santiago with the following services: (i) high quality
voice and high-speed data communications services on a private line basis, LAN
interconnections, dedicated channels for access to local information warehouses
(i.e. credit bureaus, etc.), remote terminal access, PBX to PBX connections,
remote printing capabilities, local and wide area network design, engineering,
installation, systems' integration and support services, (ii) domestic and
international long distance services that are switched and transported, in part,
through its own gateway switch and satellite earth station, as well as through
interconnections with other Chilean long distance carriers, (iii) internet
access services on a dial-up and dedicated access basis, as well as value-added
services such as web-hosting and corporate e-mail.
In Peru, the Company operates through a wholly owned subsidiary,
FirstCom Peru S.A. "FirstCom Peru") (formerly known as Resetel S.A.) Given the
substantial completion of its fiber optic network as of March 1999, FirstCom
Peru began providing multinational, national and local businesses a broad array
of high quality data, video and voice communication services, including LAN
interconnection, frame relay, remote terminal access and dedicated channels for
access to the Internet, on a private line basis. As a result of the accelerated
liberalization of Peru's telecommunications markets and expiration of Telefonica
de Peru's exclusive concession to provide public switched local and long
distance telephony services effective August 1, 1998, FirstCom Peru applied for
and has been granted concessions to provide international and domestic public
switched long distance voice services in Peru and public switched local voice
services. FirstCom Peru intends to aggressively expand its existing service
offerings to provide long distance public switched telephony by mid-1999.
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In February 1999, the Company acquired 76% of FirstCom Colombia
(formerly known Teleductos S.A.), a company operating in the Colombian
cities of Bogota, Cali and Cartagena. FirstCom Colombia S.A. provides over 140
multinational, national and local businesses a broad array of high quality data
communication services, including LAN to LAN interconnection, frame relay, and
dedicated channels for access to local information warehouses (i.e. the Bogota
stock exchange), on a private line basis.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUES. Consistent with 1998, during the first three months of 1999
the majority of the Company's revenues were derived primarily from its
operations in Chile. However, as a result of the acquisitions of FirstCom
Internet, FirstCom Colombia and the substantial completion of the ATM/IP
networks in Chile and Peru long distance revenues dropped from 92% of total
revenues for the three months ended March 31, 1998 to 77% of total revenues for
the three months ended March 31, 1999. The Company expects revenues to increase
over the next few years due to the expansion of its operations in Peru, Chile
and Colombia.
The Company's revenues were $9,445,000 for the three months ended March
31, 1999 as compared to $3,327,000 for the three months ended March 31, 1998.
Long distance revenues increased from $2,927,000 for the three months ended
March 31, 1998 to $7,188,000 for the three months ended March 31, 1999. These
revenues were generated through the sale of approximately 26.6 million and 9.2
million minutes for the three months ending March 31, 1999 and 1998,
respectively, resulting in an average revenue per minute of approximately $0.27
and $0.31, respectively. The increased long distance revenue was driven by the
marketing and promotional campaigns that started in mid-1998 and have continued
to date. The decrease in the revenue per minute is due to an increased mix of
domestic long distance traffic. Internet service revenue of $666,000 earned
during the three months ended March 31, 1999 was generated by FirstCom Internet
S.A. in Chile. Data service revenue increased from $153,000 for the three months
ended March 31, 1998 to $1,516,000 for the three months ended March 31, 1999 as
a result of the February 1999 FirstCom Colombia acquisition and the initiation
of data services over the Company's ATM/IP network in Chile.
COST OF REVENUES. Cost of revenues include both the cost of services
provided and the cost of equipment sold. For the three months ended March 31,
1999 cost of revenues relate principally to long distance services and include
access charges paid to local exchange carriers and transmission payments to
other carriers. Cost of revenues also include payments for rights of way related
to the Company's fiber optic networks.
The Company's cost of revenues was $7,191,000 for the three months
ended March 31, 1999 as compared to $2,609,000 for the three months ended March
31, 1998. This increase was primarily attributable to increased long distance
revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist principally of salaries, wages and related
liabilities, advertising and marketing costs, professional fees related to
legal, recruiting and accounting, and travel. The Company expects selling,
general and administrative expenses to increase over time as it continues to
expand its operations.
The Company's selling, general and administrative expenses were
$4,427,000 for the three months ended March 31, 1999 as compared to $1,831,000
for the three months ended March 31, 1998. This increase was primarily
attributable to the hiring of additional personnel related to the growth of the
Peruvian and Chilean operations, the acquisition of FirstCom Colombia and
FirstCom Internet and increased marketing efforts in Chile. At March 31, 1999
the Company had approximately 500 employees compared to 150 at March 31, 1998.
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DEPRECIATION AND AMORTIZATION. The Company depreciates its
telecommunications networks and intangible assets on a straight line basis over
their estimated useful lives. The Company believes that depreciation and
amortization expense will continue to increase with the expansion of its
operations.
The Company's depreciation and amortization was $893,000 for the three
months ended March 31, 1999 as compared to $523,000 for the three months ended
March 31, 1998. This increase was primarily attributable to continued investment
in the Company's telecommunications networks..
INTEREST EXPENSE. The Company currently incurs interest expense on the
outstanding Senior Notes (as defined below), capital leases and vendor
financing. Interest expense has been reduced for amounts capitalized related to
the Company's construction of its fiber optic networks. Interest costs reported
with respect to the Company's New Notes include amortization of (i) deferred
financing costs and (ii) original issue discount related to detachable warrants.
The Company's interest expense was $4,504,000 for the three months ended
March 31, 1999 as compared to $5,403,000 for the three months ended March 31,
1998. This decrease was primarily due to increased capitalization of interest
costs in connection with the Company's construction of its fiber optic network
in Lima, Peru from $206,000 for the three months ended March 31, 1998 to
1,532,000 for the three months ended March 31, 1999.
INTEREST INCOME AND OTHER. The Company currently earns interest income
on cash and cash equivalents, restricted cash, and restricted investments.
The Company's interest income and other was $421,000 for the three
months ended March 31, 1999 as compared to $1,761,000 for the three months ended
March 31, 1998. This decrease was primarily attributable to a reduction in
restricted cash and investments.
INCOME TAXES. The Company is subject to federal, state and foreign
income taxes but has incurred no liability for such taxes due to net operating
losses incurred. Under certain circumstances, these net operating losses could
be used to offset future taxable income. The Company's net deferred tax assets,
which result primarily from the future benefit of these net operating losses,
are fully offset by a valuation allowance for the same amount because of the
uncertainty surrounding the future realization of these net operating loss
carryforwards. However, as the Company expands its fiber optic networks in Chile
,Peru and Colombia, the Company expects to generate taxable income. Certain tax
benefits could expire prior to the time the Company generates taxable income.
LIQUIDITY AND CAPITAL RESOURCES
On October 27, 1997, the Company consummated a private offering (the
"Senior Note Offering") of 150,000 Units consisting of an aggregate of $150.0
million aggregate principal amount of 14% Senior Notes due October 27, 2007 (the
"Senior Notes") and 5,250,000 Unit Warrants to purchase 5,250,000 shares of
Common Stock of the Company at an exercise price of $4.40 per share. In
addition, UBS Securities LLC, the initial purchaser of the Units in the Senior
Note Offering, was granted 2,250,000 warrants to acquire 2,250,000 shares of
Common Stock of the Company at an exercise price of $4.40 per share.
Approximately $57 million of the proceeds were invested in an escrow
fund (referred to herein on the Company's balance sheet as "Restricted
Investments") for payment of interest on the Senior Notes through October 27,
2000. Under certain circumstances, Restricted Investments may be used for
repayment of principal of the Senior Notes. Restricted investments will be
reduced by $10.5 million on each of April 27 and October 27 during 1998, 1999
and 2000 to pay interest on the Senior Notes. Approximately $62 million of the
proceeds were deposited in an account controlled by a trustee (referred to on
the
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Company's balance sheet as "Restricted Cash") for payment of Permitted
Expenditures, as defined in the Indenture Agreement between the Company and
State Street Bank, as Trustee (the "Indenture").
The ability of the Company to make scheduled payments with respect to
its indebtedness, including interest on the Senior Notes after October 27, 2000,
will depend upon, among other things, (i) its ability to implement its business
plan, and to expand its operations and to successfully develop its customer base
in its target markets, (ii) the ability of the Company's subsidiaries to remit
cash to the Company in a timely manner and (iii) the future operating
performance of the Company and its subsidiaries. Each of these factors is, to a
large extent, subject to economic, financial, competitive, regulatory and other
factors, many of which are beyond the Company's control. The Company expects
that it will continue to generate cash losses for the foreseeable future. The
Company has deposited cash in escrow funds representing interest payments with
respect to the Senior Notes through October 2000. However, no assurance can be
given that the Company will be successful in developing and maintaining a level
of cash flow from operations sufficient to permit it to pay the principal of,
and the interest on the Senior Notes after such time, or with respect to its
other indebtedness. If the Company is unable to generate sufficient cash flow
from operations to service its indebtedness, including the Senior Notes, it may
have to modify its growth plans, restructure or refinance its indebtedness or
seek additional capital. There can be no assurance that (i) any of these
strategies can be effected on satisfactory terms, if at all, in light of the
Company's high leverage or (ii) any such strategy would yield sufficient
proceeds to service the Company's indebtedness, including the Senior Notes. Any
failure by the Company to satisfy its obligations with respect to the Senior
Notes at maturity or prior thereto would constitute a default under the
indenture and could cause a default under other agreements governing current or
future indebtedness of the Company.
Substantially all of the Company's assets are held by its subsidiaries
and substantially all of the Company's sales are derived from operations of such
subsidiaries. Future acquisitions may be made through present or future
subsidiaries of the Company. Accordingly, the Company's ability to pay the
principal of, and interest and liquidated damages, if any, when due, on the
Senior Notes is dependent upon the earnings of its subsidiaries and the
distribution of sufficient funds from its subsidiaries. The Company's
subsidiaries will have no obligation, contingent or otherwise, to make funds
available to the Company for payment of the principal of, and interest and
liquidated damages on, if any, the Senior Notes. In addition, the ability of the
Company's subsidiaries to make such funds available to the Company may be
restricted by the terms of such subsidiaries' current and future indebtedness,
the availability of such funds and the applicable laws of the jurisdictions
under which such subsidiaries are organized. Furthermore, the Company's
subsidiaries will be permitted under the terms of the indenture to incur
indebtedness that may severely restrict or prohibit the making of distributions,
the payment of dividends or the making of loans by such subsidiaries to the
Company. The failure of the Company's subsidiaries to pay dividends or otherwise
make funds available to the Company could have a material adverse effect upon
the Company's ability to satisfy its debt service requirements including its
ability to make payments on the Senior Notes.
On November 11, 1998 a subsidiary of the Company entered into a
financing arrangement (the "First Vendor Financing") with one of the Company's
significant equipment vendors. The terms of the First Vendor Financing are as
follows: (i) maximum amount available $10,000,000 (ii) interest rate of LIBOR
plus 5.5%, (iii) the Company may draw on the facility until December 31, 2000,
(iv) draws under the facility shall be repaid in 20 consecutive quarterly
principal and interest payments, (v) the First Vendor Financing is
collateralized by the equipment being financed. As of March 31, 1999 the Company
had $1,770,000 outstanding under the First Vendor Financing.
On December 24, 1998 a subsidiary of the Company entered into a
financing arrangement (the "Second Vendor Finanacing") with another one of the
Company's significant equipment vendors. The terms of the Second Vendor
Financing are as follows: (i) maximum amount available $10,000,000 (ii) interest
rate of Libor plus 4%, (iii) the Company may draw on the facility until December
31, 2000, (iv) draws under the facility shall be repaid in 20 consecutive
quarterly principal and interest payments beginning on March 31, 2001, (v)
interest only quarterly payments shall be made for each draw from the respective
date of funding through December 31, 2000, (vi) the Second Vendor Financing will
be
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collateralized by the equipment being financed. As of March 31, 1999 the Company
had no amounts outstanding under the Second Vendor Financing.
To accelerate its growth rate and to finance the launch or build-out of
additional markets, the Company will consider obtaining financing from various
sources, including additional vendor financing provided by equipment suppliers,
project financing from commercial banks and international agencies, bank lines
of credit and the sale of equity and debt securities. To the extent that the
Company or any of its subsidiaries issues debt, its leverage and debt service
obligations will increase. There can be no assurance that the Company will be
able to raise such capital on satisfactory terms, if at all. In addition, the
Indenture related to the Senior Notes limits the ability of the Company and its
subsidiaries to incur additional indebtedness.
As part of its business strategy, the Company intends to continue to
evaluate potential acquisitions, joint ventures and strategic alliances in
companies that own existing networks or companies that provide services that
complement the Company's existing businesses. The Company continues to consider
potential acquisitions from time to time. New sources of capital such as credit
facilities and other borrowings, and additional debt and equity issuances, will
be necessary be used to fund any material acquisitions and similar strategic
investments.
Net cash used in operating activities for the three months ended March
31, 1999 was $3,422,000. This amount represented cash used to fund the Company's
net loss for the period offset by an increase in accrued interest payable.
Net cash used in investing activities for the three months ended March
31, 1999 was $2,436,000. This amount primarily represented the Company's
continued build-out of its fiber-optic network in Peru and the Feruary 1999
acquisition of FirstCom Colombia offset by the use of restricted cash to fund
such items. The growth of the Company's fiber networks was evidenced as route
kilometers and fiber kilometers increased from approximately 820km and 25,500km,
respectively as of December 31, 1998 to approximately 1,400km and 38,100km,
respectively, as of March 31, 1999.
Net cash provided by financing activities for the three months ended
March 31, 1999 was $141,000. This amount principally represented proceeds from
the Company's credit facilities with equipment vendors. As of March 31, 1999 the
Company had approximately $18,200,000 available under credit facilities with
equipment vendors.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer controlled systems using
two digits rather then four to define the applicable year. This could result in
system failure or miscalculations causing disruptions in of operations
including, among other things, temporary inability to process transactions, send
invoices or engage in similar normal business activities. To ensure that its
computer based systems and applications will function properly beyond 1999, the
Company has implemented a Year 2000 program.
The Company's Year 2000 Program (the "Program") consists of the
following phases:
(i) Preliminary Assessment - During this phase the Company will inventory
all existing hardware and software and assess Year 2000 compliance.
This assessment is based on documented representations from vendors and
Company personnel and third party consultants for Company developed
software. As of March 31, 1999 approximately 95% of this phase was
completed.
(ii) Action Definition - For items identified as requiring an upgrade,
replacement or other action to achieve Year 2000 compliance, a detailed
action plan, including estimated completion times and corrective steps,
is developed. As of March 31, 1999, approximately 85% of this phase was
completed.
14
<PAGE>
(iii) Execution - During this phase the action steps as defined in phase (ii)
are performed. Any additional action items identified are prioritized
and added to the action plan. As of Mar ch 31, 1999, approximately 75%
of this phase was completed.
(iv) Operational Compliance - The Company anticipated completing phases (i)
through (iii) by September 30, 1999, prior to any anticipated impact on
its operating systems.
Given that the majority of the Company's telecommunications network
infrastructure and critical back office systems have been purchased since 1997,
Year 2000 compliance was ensured at the time of purchase. The Company does not
anticipate total Year 2000 compliance costs to exceed $500,000. These estimated
costs and the date the Company anticipates to complete the Year 2000
modifications are based on management's estimates, which are derived utilizing
assumptions of future events, including the continued availability of certain
resources, third party assistance and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
from those anticipated.
While the Company is working to test its own mission-critical systems
for Year 2000 compliance, the Company does not control the systems of its
suppliers. The company is currently seeking assurance from its suppliers and
strategic business partners regarding the Year 2000 readiness of their systems.
The Company is currently planning interoperability tests to ensure that its
suppliers' and business partners' systems will accurately interact with the
Company's systems into and beyond the Year 2000. Notwithstanding these measures
there is some risk that the interaction of the Company's systems and those of
its suppliers or business partners may be impacted by the Year 2000 date change.
In addition, in light of the vast interconnection and interoperability of
telecommunications networks worldwide, the ability of any telecommunications
provider, including the Company, to provide services to its customers (e.g., to
complete calls and transport data and to bill for such services) is dependent,
to some extent, on the networks and systems of other carriers. To the extent the
networks and systems of those carriers are adversely impacted by the Year 2000
problems, the ability of the Company to service its customers may be adversely
impacted as well. Any such impact could have a material adverse effect on the
Company's operations.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the company's
results of operations, liquidity and financial conditions. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Program is expected to
significantly reduce the company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and readiness of its
material suppliers and business partners. The Company believes that, with the
completion of the Program as scheduled, the possibility of significant
interruptions of normal operations should be reduced.
In a recent Securities and Exchange Commission release regarding Year
2000 disclosure, the Securities and Exchange Commission stated that public
companies must disclose the most reasonably likely worst case Year 2000
scenario. Although it is not possible to assess the likelihood of any of the
following events, each must be included in a consideration of worst case
scenarios: widespread failure of electrical, gas, and similar supplies serving
the Company; widespread disruption of the services provided by common
communications carriers; similar disruption to the means and modes of
transportation for the Company and its employees, contractors, supplier, and
customers; significant disruption to the Company's ability to gain access to,
and remain working in, office buildings and other facilities; the failure of
substantial numbers of the Company's critical computer hardware and software
systems, including both internal business systems and systems controlling
operational facilities such as electrical generation, transmission, and
distribution systems; and the failure of outside entities' systems, including
systems related to banking and finance.
If the Company cannot operate effectively after December 31, 1999, the
Company could, among other things, face substantial claims by customers or loss
of revenue due to service interruptions, inability to fulfill contractual
obligations or to bill customers accurately and on a timely basis, and increased
15
<PAGE>
expenses associated with litigation, stabilization of operations following
critical system failures, and the execution of contingency plans. The Company
could also experience an inability by customers and others to pay, on a timely
basis or at all, obligations owned to the Company. Under these circumstances,
the adverse effects, although not quantifiable at this time, would be material.
The Company believes that its critical systems should be Year 2000
compliant before January 1, 2000. Having identified the mission-critical systems
of the company and its key suppliers, and the associated risks of failure to
ensure that those systems are Year 2000 ready, the Company is in the process of
devising contingency plans which will be implemented in the event any such
systems is not be Year 2000 compliant in a timely manner. Additionally, to the
extent the networks and systems of other carriers are adversely impacted by the
Year 2000 problem, the ability of the Company to service its customers may be
adversely impacted.
INFLATION AND EXCHANGE RATES
Inflation and exchange rate variations may have substantial effects on
the Company's results of operations and financial condition. Generally, the
effects of inflation in many Latin American countries, including Chile, Peru and
Colombia, have been offset in part by a devaluation of the local countries'
currencies relative to the U.S. dollar. Nevertheless, the devaluation of each
country's currency may have an adverse effect on the Company.
A substantial portion of the Company's purchases of capital equipment
and interest on the Senior Notes is payable in U.S. dollars. To date, the
Company has not had significant foreign currency exposure with third parties and
generally intends to be paid for its services in U.S. dollars or in local
currencies with a pricing adjustment that is structured to protect the Company
against the risk of fluctuations in exchange rates. As a result, the Company has
not entered into foreign currency hedging transactions. In the future, if third
party foreign currency exposure increases, the Company may enter into hedging
transactions in order to mitigate any related financial exposure. However, a
portion of sales to customers of the Company will be denominated in local
currencies, and substantial or continued devaluations in such currencies
relative to the U.S. dollar could have a negative effect on the ability of
customers of the Company to absorb the costs of devaluation. This could result
in the Company's customers seeking to renegotiate their contracts with the
Company or, failing satisfactory renegotiation, defaulting on such contracts.
In addition, from time to time, Latin American countries have
experienced shortages in foreign currency reserves and restrictions on the
ability to expatriate local earnings and convert local currencies into U.S.
dollars. Also, currency devaluations in one country may have adverse effects in
another country, as in late 1994 and 1995, when several Latin American countries
were adversely impacted by the devaluation of the Mexican peso. Any devaluation
of local currencies in the country where the Company operates, or restrictions
on the expatriation of earnings or capital from such countries, could have a
material adverse effect on the business, results of operations and financial
condition of the Company.
NET OPERATING LOSS CARRYFORWARDS
At December 31, 1998 the Company has net tax operating loss
carryforwards of approximately $32,000 for U.S. income tax purposes and
approximately $28,700 for foreign income tax purposes. These carryforwards are
available to offset future taxable income, if any, and expire for U.S. income
tax purposes in the years 2007 through 2018. The foreign net operating loss
carryforwards related (1) to Peru, $4,400 expire in the years 2000 through 2002
and (2) to Chile, $24,300, do not expire.
EFFECTS OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES (the "Statement"). The Company expects to adopt the Statement
effective January 1, 2000. The Statement will require the recognition of all
derivatives on the Company's consolidated balance sheet at fair value. The
Company does not anticipate that the adoption of this Statement will have a
significant effect on its results of operations or financial position.
16
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed below are filed as part of this Report.
EXHIBIT DESCRIPTION
------- -----------
27 Financial Data Schedule for the three months
ended March 31, 1999
(b) Reports on Form 8-K
17
<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 be the
undersigned, thereunto duly authorized.
FIRSTCOM CORPORATION
/s/ PATRICIO E. NORTHLAND 5/17/99
- ------------------------- -------
Patricio E. Northland Date
Chairman of the Board,
President, and Chief Executive Officer
(Principal Executive Officer)
/s/ DOUGLAS G. GEIB II 5/17/99
- ------------------------- -------
Douglas G. Geib II Date
Chief Financial Officer
(Principal Financial Officer)
18
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
27 Financial Data Schedule for the three months
ended March 31, 1999
19
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<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 11,202
<SECURITIES> 19,941
<RECEIVABLES> 7,902
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 40,233
<PP&E> 81,517
<DEPRECIATION> (3,063)
<TOTAL-ASSETS> 169,452
<CURRENT-LIABILITIES> 30,928
<BONDS> 132,538
0
0
<COMMON> 19
<OTHER-SE> (805)
<TOTAL-LIABILITY-AND-EQUITY> 169,452
<SALES> 9,445
<TOTAL-REVENUES> 9,445
<CGS> 7,191
<TOTAL-COSTS> 12,511
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,504
<INCOME-PRETAX> (7,149)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,149)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,149)
<EPS-PRIMARY> (0.37)
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