SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT No. 1
AMENDED CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): December 24, 1999
Convergence Communications, iNC.
(Exact name of registrant as specified in its charter)
Nevada 00-21143 87-0545056
- - -------------------------------- ------------ ----------------------
(State or other jurisdiction (Commission (I. R. S. Employer
of incorporation or organization) File Number) Identification Number)
102 West 500 South, Suite 320, Salt Lake City, Utah 84101
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (801) 328-5618
--------------
Amendment No. 1
Convergence Communications, Inc. ("CCI") hereby amends the following items,
financial statements, exhibits or other portions of its Current Report on Form
8-K dated January 13, 2000 as follows:
Item 7. Financial statements and exhibits
Item 7(a): Financial statements of businesses acquired [expressed in Mexican
pesos]
International Van, S.A. de. C.V. ("Intervan") audited balance sheets as of
December 31, 1998 and 1997, and the related audited statements of loss,
shareholders' equity, and of changes in financial position for the years ended
December 31, 1998 and 1997 and related notes and report of independent auditors
[expressed in Mexican pesos with purchasing power as of December 31, 1998].
Intervan unaudited balance sheets as of September 30, 1999 and 1998, and the
unaudited statements of loss, and changes in financial position for the nine
months ended September 30, 1999 and 1998 and the unaudited statement of
shareholders' equity for the nine months ended September 30, 1999 and related
notes [expressed in Mexican pesos with purchasing power as of September 30,
1999].
Item 7(b): Pro forma financial information [expressed in U.S. dollars]
Pro forma balance sheet of CCI as of September 30, 1999 and pro forma statements
of operations for the year ended December 31, 1998 and nine months ended
September 30, 1999.
Item 7(c): Exhibits
None
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Convergence Communications, Inc. (Registrant)
/s/ Jerry Slovinski
---------------------------------------
By: Jerry Slovinski, Chief Financial Officer
Dated: March 11, 2000
Item 7(a): Financial statements of businesses acquired [expressed in Mexican
pesos]
Intervan audited balance sheets as of December 31, 1998 and 1997, and the
related audited statements of loss, shareholders' equity, and of changes in
financial position for the years ended December 31, 1998 and 1997 and related
notes and report of independent auditors are included herein. Intervan unaudited
balance sheets as of September 30, 1999 and 1998, and the unaudited statements
of loss, and changes in financial position for the nine months ended September
30, 1999 and 1998 and the unaudited statement of shareholders' equity for the
nine months ended September 30, 1999 and related notes are included herein.
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
International Van, S. A. de C. V.:
We have audited the accompanying balance sheets of INTERNATIONAL VAN, S.A. DE
C.V. (the Company) as of December 31, 1998 and 1997, and the related statements
of loss, shareholders' equity and changes in financial position for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in Mexico. Those standards require that the audit be planned and performed to
obtain reasonable assurance about whether the financial statements are free of
material misstatement and that they are prepared in accordance with the
accounting principles generally accepted in Mexico. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As explained in Note 2, in 1998 the Company changed its policies for recording
payments made on the contracting and installation of telephone links
("Backbone") and local links to connect with clients ("Local loop"). The effect
of this change was an increase in the 1998 operating costs of $21,908,175.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Van, S.A. de C.V.
as of December 31, 1998 and 1997, and the results of its operations, the changes
in its shareholders' equity and the changes in its financial position for the
years then ended, in conformity with the accounting principles generally
accepted in Mexico.
Note 9 presents supplementary information that is not necessary for the
interpretation of the accompanying financial statements in conformity with the
accounting principles generally accepted in Mexico.
Arthur Andersen
Mexico City, Mexico
May 7, 1999
INTERNATIONAL VAN, S. A. DE C. V.
BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997
EXPRESSED IN MEXICAN PESOS WITH PURCHASING POWER AS OF DECEMBER 31, 1998
- - --------------------------------------------------------------------------------
ASSETS 1998 1997
CURRENT ASSETS:
Cash and marketable securities $ 2,204,124 $ 14,481,543
Accounts receivable:
Trade, net 11,268,429 4,490,917
Affiliated companies 16,656,891 4,166,487
Recoverable taxes 2,110,124 3,962,966
Other 612,063 472,524
------------- -------------
30,647,507 13,092,894
Inventories 537,177 -
------------- -------------
Total current assets 33,388,808 27,574,437
FURNITURE AND EQUIPMENT, net 35,175,633 22,499,102
OTHER ASSETS, net 5,217,985 3,902,259
------------- -------------
$ 73,782,426 $ 53,975,798
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable to suppliers $ 18,520,375 $ 3,031,001
Other accounts payable 2,229,528 1,968,932
Affiliated companies 214,585
Accrued taxes 760,018 39,361
Accrued asset taxes 545,144
-------------
Total current liabilities 22,269,650 5,039,294
------------- -------------
CONVERTIBLE CREDIT 28,996,364
-------------
SHAREHOLDERS' EQUITY:
Capital stock:
Paid-in capital 30,698,835 29,337,125
Unpaid capital (1,361,710)
-------------
29,337,125 29,337,125
Additional paid-in capital 68,472,162 68,472,162
Accumulated losses (54,455,492) (28,035,400)
Cumulative effect of restatement (20,837,383) (20,837,383)
------------- -------------
Total shareholders' equity 22,516,412 48,936,504
------------- -------------
$ 73,782,426 $ 53,975,798
============== =============
The accompanying notes are an integral part of these balance sheets.
INTERNATIONAL VAN, S. A. DE C. V.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
EXPRESSED IN MEXICAN PESOS WITH PURCHASING POWER AS OF DECEMBER 31, 1998
- - ------------------------------------------------------------------------------------------------------------------------------------
Capital Stock Additional Cumulative Total
---------------------------- Paid-in Accumulated Effect of Shareholders'
Paid Unpaid Capital Losses Restatement Equity
BALANCES AS OF DECEMBER 31, 1996 $ 27,063,338 $ - $ $ (5,074,546) $ (20,837,383) $ 1,151,409
Increase in capital stock 2,273,787 - 68,472,162 - - 70,745,949
Net loss for the year - - - (22,960,854) - (22,960,854)
------------- ------------- ------------- -------------- -------------- --------------
BALANCES AS OF DECEMBER 31, 1997 29,337,125 68,472,162 (28,035,400) (20,837,383) 48,936,504
Increase in capital stock 1,361,710 (1,361,710) - - -
Net loss for the year - - - (26,420,092) - (26,420,092)
------------- ------------- ------------- -------------- -------------- --------------
BALANCES AS OF DECEMBER 31, 1998 $ 30,698,835 $ (1,361,710) $ 68,472,162 $ (54,455,492) $ (20,837,383) $ 22,516,412
============= ============= ============= ============== ============== ==============
The accompanying notes are an integral part of these statements.
INTERNATIONAL VAN, S. A. DE C. V.
STATEMENTS OF LOSS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
EXPRESSED IN MEXICAN PESOS WITH PURCHASING POWER AS OF DECEMBER 31, 1998
- - --------------------------------------------------------------------------------
1998 1997
REVENUE FROM SERVICES RENDERED $ 65,715,464 $ 37,017,238
COST OF SERVICES 71,298,814 44,132,321
------------- -------------
GROSS LOSS (5,583,350) (7,115,083)
OPERATING EXPENSES 21,666,677 17,064,427
------------- -------------
OPERATING LOSS (27,250,027) (24,179,510)
COMPREHENSIVE FINANCING RESULT:
Interest income (expense), net 4,321,445 (4,187,231)
Exchange gains (losses), net (128,508) 2,232,553
Gain (loss) from monetary position (535,982) 2,806,390
------------- -------------
3,656,955 851,712
OTHER INCOME (EXPENSE), net (2,072,745) 459,956
------------- -------------
Loss before provision for asset taxes (25,665,817) (22,867,842)
ASSET TAXES (754,275) (93,012)
------------- -------------
Net loss for the year $ (26,420,092) $ (22,960,854)
============== ==============
The accompanying notes are an integral part of these statements.
INTERNATIONAL VAN, S. A. DE C. V.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
EXPRESSED IN MEXICAN PESOS WITH PURCHASING POWER AS OF DECEMBER 31, 1998
- - --------------------------------------------------------------------------------
1998 1997
OPERATING ACTIVITIES:
Net loss for the year $ (26,420,092) $ (22,960,854)
Less- Depreciation and amortization 9,755,710 7,073,167
------------- -------------
(16,664,382) (15,887,687)
Net cash used in working capital (1,009,491) (15,440,364)
Net cash used in operating activities (17,673,873) (31,328,051)
INVESTING ACTIVITIES:
Additions to furniture and equipment, less
net book value of retirements (19,756,196) (12,365,799)
Other assets (3,843,714) (2,409,434)
------------- -------------
(23,599,910) (14,775,233)
------------- -------------
FINANCING ACTIVITIES:
Convertible credit 28,996,364 -
Change in long-term debt in real terms - (8,837,507)
Reduction in long-term debt due to -
restatement in constant pesos - (1,389,257)
Increase in capital stock - 2,273,787
Additional paid-in capital - 68,472,162
------------- -------------
28,996,364 60,519,185
------------- -------------
Net increase (decrease) in cash and
marketable securities (12,277,419) 14,415,901
CASH AND MARKETABLE SECURITIES:
At beginning of year 14,481,543 65,642
------------- -------------
At end of year $ 2,204,124 $ 14,481,543
============= =============
The accompanying notes are an integral part of these statements.
(Translation of financial statements originally issued in Spanish)
International Van, S.A. de. C.V.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Expressed in Mexican Pesos with Purchase Power as of December 31, 1998)
- - --------------------------------------------------------------------------------
EXPLANATION ADDED FOR TRANSLATION INTO ENGLISH:
The accompanying financial statements have been translated into English for use
outside of Mexico and are presented on the basis of accounting principles
generally accepted in Mexico, which differ in certain significant respects from
generally accepted accounting principles in the United States.
1. MAIN ACTIVITIES:
The Company's main activity is the rendering of telecommunication link services,
primarily data link, as well as value-added services.
The Company started its operations late in 1996 and, as shown in these financial
statements, it has incurred gross and operating losses in 1997 and 1998. As
well, the results of 1998 were affected by a change in accounting policy more
fully discussed in Note 2. In 1999, both the shareholders and the Company's
management have taken a number of steps to increase the capital of the Company
and increase its operating margin; consequently, they expect that results will
show substantial improvements over the coming months and will reach a breakeven
point in 2000.
Up until June 30, 1998, the Company had no employees, so, all administrative
services were provided by an affiliated company. After this date, employees were
transferred to meet the Company's operational needs, and it assumed the
responsibilities of a surrogate employer.
2. SIGNIFICANT ACCOUNTING POLICIES:
The accounting policies followed by the Company are in conformity with the
accounting principles in Mexico, which require that management make certain
estimates and use certain assumptions to determine the valuation of some of the
items included in the financial statements and make the required disclosures
therein. While the estimates and assumptions used may differ from their final
effect, management believes that they were adequate under the circumstances.
These accounting policies are as follows:
Changes in accounting policies-
- - ------------------------------
Up until 1997, the Company capitalized payments made on the contracting and
installation of telephone links ("Backbone"), which were not subsequently
amortized. Beginning in 1998, these payments are being amortized over a 5-year
term. The amortization effect increased the 1998 operating costs by $547,851.
As well, until 1997 the Company recorded the payments made on the contracting of
local links to connect with clients ("Local loop"), debiting 50% of the amount
to deferred assets and the other half to operating costs. Beginning in 1998, the
overall disbursement is recorded in operating costs. The effect of this change
increased the 1998 operating costs by $21,360,324.
Recognition of the effects of inflation in the financial information-
- - ----------------------------------------------------------------------
The Company restates all of its financial statements in terms of the purchasing
power of the Mexican peso as of the end of the latest period, thereby
comprehensively recognizing the effects of inflation. Consequently, all
financial statement amounts are comparable, both for the current and the prior
year, since all are stated in terms of Mexican pesos of the same purchasing
power. Accordingly, the financial statements of the prior year have been
restated in terms of Mexican pesos of the latest period. The prior year amounts
presented herein differ from those originally reported in terms of Mexican pesos
of the corresponding year.
To recognize the effects of inflation in terms of Mexican pesos with purchasing
power as of year end, the procedures were as follows:
- - - Balance sheet:
-------------
Furniture and equipment are recorded at their acquisition cost and are
restated from the date using inflation factors derived from the National
Consumer Price Index (NCPI). Depreciation is calculated under the
straight-line method on the restated final balances.
Shareholders' equity and other nonmonetary items are restated using a
factor derived from the NCPI cumulative from the date of contribution or
generation.
- - - Statement of income:
-------------------
Revenues and expenses that are associated with a monetary item are
restated from the month in which they arise through year end, based on
factors derived from the NCPI.
Revenues and expenses that are associated with nonmonetary items are
restated through year end, by applying factors derived from the NCPI to
the restated cost or expense at the time it is incurred, as a function of
the use or consumption of the nonmonetary item.
The gain or loss from monetary position, which represents the erosion of
the purchasing power of monetary items caused by inflation, is determined
by applying to net monetary assets or liabilities, at the beginning of
each month, the inflation factor derived from the NCPI, and is restated at
year end with the corresponding factor.
- - - Other statements:
----------------
The statement of changes in financial position presents the changes in
constant Mexican pesos, according to the financial position at the prior
year end, restated to Mexican pesos as of the most recent year end.
Marketable securities-
- - ---------------------
Marketable securities are primarily short-term bank deposits valued at market
(cost plus accrued interest).
Other assets-
- - ------------
Other assets include payments made on the contracting and installation of
telephone links ("Backbone") that are owned by the Company, which beginning in
1998, are amortized over a 5-year term. This line item also includes local links
to connect with clients ("Local loop"), which until 1997 were recorded by
debiting 50% of the amount to deferred assets and the other half to operating
costs. Beginning in 1998, the overall disbursement is recorded in operating
costs.
Deferred income taxes-
- - ---------------------
Since there are no significant nonrecurring temporary differences whose
turnaround period can be determined and that are not expected to be replaced by
items of similar nature and amount, the Company has not recorded any deferred
income tax assets or liabilities.
Employee benefits-
- - -----------------
According to the labor law, the Company is liable for severance payments and
seniority premiums to employees terminating under certain circumstances.
Indemnity payments to involuntarily terminated employees are charged to results
in the period in which they are made. At December 31, 1998, the Company had not
recorded a liability for seniority premiums because it was not material
considering personnel seniority and turnover.
Revenue recognition-
- - --------------------
Revenues from connection services are recognized at the time the underlying
contracts are signed, while those arising from link rents are recorded as
accrued.
Comprehensive financing result-
- - -----------------------------
The comprehensive financing result includes all financial revenues and expenses,
such as interest income and expense, exchange gains or losses and gains or
losses from monetary position as they occur or accrue.
Transactions in foreign currency are recorded at the exchange rate as of the
date of the transaction and the assets and liabilities in foreign currency are
adjusted to the exchange rate as of year end, affecting income as part of the
comprehensive financing result.
3. FOREIGN CURRENCY TRANSACTIONS AND POSITION:
At December 31, 1998 and 1997, the Company had assets and liabilities
denominated in U.S. dollars that were converted at the respective Mexican
peso-U.S. dollar exchange rates of $9.89 and $8.08, as follows:
U.S. dollars
------------------------------
1998 1997
Current assets $ 3,309,868 $ 1,742,856
Current liabilities 3,181,059 912,852
------------ ------------
Net foreign currency-denominated
assets $ 128,809 $ 830,004
============ ============
Equivalent in Mexican pesos $ 1,273,921 $ 6,706,432
============ ============
At May 7, 1999, date of issue of these financial statements, the unaudited
foreign exchange position was similar to that at year end, and the exchange rate
was $9.33 per U.S. dollar.
4. FURNITURE AND EQUIPMENT:
Average
Annual
Depreciation
Rate
1998 1997 %
Telecommunications equipment $ 49,697,370 $ 31,499,317 20%
Office furniture and equipment 852,258 452,127 10%
Transportation equipment 712,488 - 25%
------------- -------------
51,262,116 31,951,444
Less- Accumulated depreciation 16,086,483 9,452,342
------------- -------------
$ 35,175,633 $ 22,499,102
============= =============
5. RELATED-PARTY TRANSACTIONS AND BALANCES:
Net balances receivable and payable with affiliated companies and other related
parties are as follows:
1998 1997
Receivables-
Intersys Mexico, S.A. de C.V. $ - $ 4,166,487
Editorial Red, S.A. 172,932 -
Servicios Corporativos Netcapital, S.A. de C.V. 6,460,252 -
Netcapital, S.A. de C.V. 10,023,707 -
------------- ------------
$ 16,656,891 $ 4,166,487
============= ============
Payables-
Netec, S.A. de C.V. $ 214,585 $ -
------------- ------------
$ 214,585 $ -
============= ============
The Company had the following significant transactions with affiliated companies
and other related parties:
1998 1997
Revenues-
Services $ 7,071,551 $ 4,848,633
Interest 4,084,704 -
Sale of equipment 4,135 3,624,362
Other - 695,075
------------- -------------
$ 11,160,390 $ 9,168,070
============= =============
Disbursements-
Equipment purchases $ 15,988,051 $ 7,658,224
Administrative services 3,085,378 9,095,097
Interest 3,403,549 3,925,693
Administrative expenses - 5,080,708
Links - 13,395,025
Equipment rent 1,131,880 3,974,544
Other - 524,757
------------- ------------
$ 23,608,858 $ 43,654,048
============= ============
6. TAX ENVIRONMENT:
Income and asset tax regulations-
The Company is subject to income and asset taxes. Income taxes are computed
taking into consideration the taxable and deductible effects of inflation, such
as depreciation calculated on restated asset values, and taxable income is
increased or reduced by the effects of inflation on certain monetary assets and
liabilities through the inflationary component, which is similar to the gain or
loss from monetary position. Beginning in 1999, the income tax rate increased
from 34% to 35%, with the obligation to pay this tax each year at a rate of 30%
(transitorily 32% in 1999), with the remainder payable upon distribution of
earnings.
Asset taxes are computed at an annual rate of 1.8% on the average of the
majority of restated assets less certain liabilities, and the tax is paid only
to the extent that it exceeds the income taxes of the period. Any required
payment of asset taxes is creditable against the excess of income taxes over
asset taxes of the preceding three and the following ten years.
Reconciliation of book and taxable income-
The principal items affecting the Company's tax loss are as follows:
1998 1997
Loss before provision for asset taxes $ (25,665,817) $ (22,867,842)
Less- Effect of the third amendment to
Bulletin B-10 and gain from
monetary position 3,182,895 3,460,524
-------------- --------------
(22,482,922) (19,407,318)
Add-
Inflationary component, net 901,830 1,783,551
Book depreciation and amortization 9,755,709 3,058,804
Cost of services 66,155,367 35,356,991
Nondeductible expenses 3,587,083 1,340,856
Book cost of fixed assets sold 235,583 -
Other - 1,969,437
-------------- --------------
80,635,572 43,509,639
Less-
Tax depreciation and amortization 7,392,314 4,063,396
Connection costs 57,253,360 31,404,493
Tax cost of fixed assets sold 127,792 -
Cancellation or application of provisions, net 1,831,638 3,573,046
Other 6,131,485 138,752
-------------- --------------
72,736,589 39,179,687
-------------- --------------
Tax loss $ (14,583,939) $ (15,077,366)
============== ==============
Tax loss carryforwards and recoverable asset taxes-
At December 31, 1998, the Company has tax loss carryforwards for income tax
purposes and recoverable asset taxes, which will be indexed for inflation
through the year applied or recovered, in the following restated amounts:
Tax Loss Recoverable
Expiration Date Carryforwards Asset Taxes
2006 $ 7,725,092 $ -
2007 18,878,370 78,412
2008 15,822,115 754,275
-------------- --------------
$ 42,425,577 $ 832,687
============== ==============
7. CONVERTIBLE CREDIT:
Netcapital, S.A. de C.V., holding company, granted credit to the Company to
finance its operations through fund withdrawals payable in U.S. dollars and
bearing annual interest of 6%. These draws are convertible into capital stock.
As explained in Note 8, during a Shareholders' Meeting held on March 29, 1999,
Netcapital, S.A. de C.V. converted this credit into capital stock; therefore, at
December 31, 1998, this liability is shown in the balance sheet as noncurrent.
8. SHAREHOLDERS' EQUITY:
During an Extraordinary Shareholders' Meeting held on August 18, 1998, the
shareholders approved an increase in the variable capital stock of the Company
of $1,361,710, represented by 1,361,710 common, nominative shares with a par of
one Mexican peso each, payable in cash by Netcapital, S.A. de C.V., who reserved
the right to subscribe and pay for such shares.
At December 31, 1998, capital stock consisted of 6,224,836 shares with a par
value of one Mexican peso each, of which, 50,000 are classified as fixed capital
and 6,174,836 as variable capital, this being unlimited. A total of 1,361,710
shares were held in the Company's treasury.
Capital reductions will be subject to taxes on the excess of the reduction over
the price-level adjusted paid-in capital, in accordance with a formula
prescribed by the Income Tax Law.
During an Extraordinary Shareholders' Meeting held on March 29, 1999,
Netcapital, S.A. de C.V., the holding company, decided to convert the
US$3,500,000 credit granted to the Company into capital stock, and received in
exchange 1,361,710 shares. In addition, the shareholders approved an increase in
capital stock of US$7,609,227, of which, US$487,212 were subscribed and paid on
that date, and US$512,788 were subscribed and paid on April 17, 1999. The unpaid
portion is represented by shares held in the Company's treasury for future
subscription and payment. On these same dates, the shareholders granted the
Company a new convertible credit for US$6,609,227 to finance its operations.
9. SUPPLEMENTARY INFORMATION:
The following supplementary information is a reconciliation of shareholders'
equity as of December 31, 1998 and net loss for the year then ended under the
accounting principles generally accepted in Mexico to the accounting principles
generally accepted in the United States as of that date and in Mexican pesos:
Shareholders' equity-
- - ---------------------
Shareholders' equity as of December 31, 1998 in
conformity with the accounting principles generally
accepted in Mexico, in Mexican pesos $22,516,412
Add (less)- Cumulative recognition of deferred taxes
in conformity with SFAS-109 13,840,197
Cumulative recognition of deferred employee profit
sharing in conformity with SFAS-109 (521,576)
Valuation allowance of deferred taxes due uncertainty
of future income for tax purposes (13,840,197)
------------
Shareholders' equity as of December 31, 1998 in
conformity with the accounting principles generally
accepted in the United States, in Mexican pesos. $21,994,836
===========
Net loss for the year-
- - ---------------------
Net loss for the year ended December 31, 1998 in
conformity with the accounting principles generally
accepted in Mexico, in Mexican pesos $ (26,420,092)
Add (less)- Recognition of deferred taxes for the year
in conformity with SFAS-109 6,068,785
Recognition of deferred employee profit sharing for
the year in conformity with SFAS-109 (521,576)
Recognition of valuation allowance of deferred taxes
due uncertainty of future income for tax purposes (6,068,785)
--------------
Netloss for the year ended December 31, 1998 in
conformity with the accounting principles generally
accepted in the United States, in Mexican pesos $ (26,941,668)
=============
The determination of deferred income taxes in table above, were provided by the
liability method for all temporary differences between the amounts of assets and
liabilities for financial and tax reporting purposes, computed in accordance
with SFAS No. 109.
SFAS-109 requires that deferred tax liabilities or assets at the end of each
period be determined using the tax rate expected to be in effect when taxes are
expected to be paid or recovered. Accordingly, income tax provisions increase or
decrease in the same period in which changes in future tax rates are enacted.
Due to the uncertainty of the realization of the deferred income tax assets, a
valuation allowance for the potential future tax saving related to tax loss
carry forwards must be recognized.
This supplementary information is not necessary for the interpretation of the
accompanying financial statements in conformity with the accounting principles
generally accepted in Mexico.
Item 7(a): Financial statements of businesses acquired [expressed in Mexican
pesos] (Continued)
Intervan unaudited balance sheets as of September 30, 1999 and 1998, and the
unaudited statements of loss, and changes in financial position for the nine
months ended September 30, 1999 and 1998 and the unaudited statement of
shareholders' equity for the nine months ended September 30, 1999 and related
notes are all included herein.
INTERNATIONAL VAN, S. A. DE C. V.
UNAUDITED BALANCE SHEETS AS OF SEPTEMBER 30, 1999 AND 1998
EXPRESSED IN MEXICAN PESOS WITH PURCHASING POWER AS OF SEPTEMBER 30, 1999
- - --------------------------------------------------------------------------------
ASSETS 1999 1998
CURRENT ASSETS:
Cash and marketable securities $ 6,242,332 $ 165,458
Accounts receivable:
Trade, net 24,187,686 12,960,408
Affiliated companies 23,307,747
Other 2,520,504 804,174
-------------- --------------
Inventories
81,226 202,648
-------------- --------------
Total current assets 33,031,748 37,440,435
FURNITURE AND EQUIPMENT, net 52,430,908 37,251,253
OTHER ASSETS, net 5,856,205 28,720
-------------- --------------
$ 91,318,861 $ 74,720,408
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable to suppliers $ 22,943,943 $ 11,747,978
Other accounts payable 6,485,285 3,683,731
Accrued taxes 1,169,362 0
-------------- --------------
Total current liabilities 30,598,590 15,431,709
-------------- --------------
CONVERTIBLE CREDIT 18,037,645 17,837,440
-------------- --------------
SHAREHOLDERS' EQUITY:
Capital stock:
Paid-in capital 33,624,434 33,624,434
Unpaid capital (1,492,354) (1,492,354)
-------------- --------------
32,132,080 32,132,080
Additional paid-in capital 119,770,712 74,999,094
Accumulated losses (86,397,001) (42,856,750)
Cumulative effect of restatement (22,823,165) (22,823,165)
-------------- --------------
Total shareholders' equity 42,682,626 41,451,259
-------------- --------------
$ 91,318,861 $ 74,720,408
============== ==============
The accompanying notes are an integral part of these unaudited balance sheets.
INTERNATIONAL VAN, S.A. DE C.V.
UNAUDITED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
EXPRESSED IN MEXICAN PESOS WITH PURCHASING POWER AS OF SEPTEMBER 30, 1999
- - -----------------------------------------------------------------------------------------------------------------------------------
Capital Stock Additional Cumulative Total
------------------------ Paid-in Accumulated Effect of Shareholders'
Paid Unpaid Capital Losses Restatement Equity
(C> (C>
BALANCES AS OF JANUARY 1, 1998 $ 33,624,434 $(1,492,354) $ 74,999,094 $ (32,023,122) $ (22,823,165) $ 52,284,887
Net loss for the period 0 0 0 (10,833,628) 0 (10,833,628)
--- --- --- ------------- --- ------------
BALANCES AS OF SEPTEMBER 30, 1998 $ 33,624,434 $(1,492,354) $ 74,999,094 $(42,856,750) $ (22,823,165) $ 41,451,259
============== ============= =============== ============== ============== =============
NET LOSS FOR 1998 4th Quarter
(16,346,331) (16,346,331)
BALANCES AS OF JANUARY 1, 1999 $ 33,624,434 $(1,492,354) $ 74,999,094 $ (59,203,081) $ (22,823,165) $ 25,104,928
Increase in capital stock 44,771,618 0 0 44,771,618
Net loss for the period 0 0 0 (27,193,920) 0 (27,193,920
--- --- --- ------------- ---- -------------
BALANCES AS OF SEPTEMBER 30, 1999 $ 33,624,434 $(1,492,354) $ 119,770,712 $ (86,397,001) $ (22,823,165) $ 42,682,626
============== ============ ============== ============== ============== ============
The notes are an integral part of these unaudited financial statements.
INTERNATIONAL VAN, S. A. DE C. V.
UNAUDITED STATEMENTS OF LOSS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
EXPRESSED IN MEXICAN PESOS WITH PURCHASING POWER
AS OF SEPTEMBER 30, 1999
- - --------------------------------------------------------------------------------
1999 1998
REVENUE FROM SERVICES RENDERED $ 83,543,503 $ 50,339,520
COST OF SERVICES 77,467,015 49,015,460
-------------- -------------
GROSS PROFIT 6,076,488 1,324,060
OPERATING EXPENSES 36,120,259 12,491,429
-------------- -------------
OPERATING LOSS (30,043,771) (11,167,369)
COMPREHENSIVE FINANCING RESULT:
Exchange gains (losses), net (3,300,372) (2,489,935)
Gain (loss) from monetary position (230,421) 2,156,194
-------------- -------------
(3,530,793) (333,741)
OTHER INCOME (EXPENSE), net 0 0
(333,741)
Loss before provision for alternate Asset Tax (26,512,978) (10,833,628)
ALTERNATE ASSET TAX 680,942 0
(333,741)
Net loss for the period $(27,193,920) $(10,833,628)
============== ==============
The accompanying notes are an integral part of these unaudited statements.
INTERNATIONAL VAN, S.A. DE. C.V.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Expressed in Mexican Pesos with Purchasing Power as of September 30, 1999)
- - --------------------------------------------------------------------------------
BASIS OF PRESENTATION:
The accompanying unaudited financial statements of the Company have been
prepared in accordance with the basis of accounting principles generally
accepted in Mexico. They do not include all of the information and footnotes
required by accounting principles generally accepted in Mexico for complete
financial statements. These financial should be read in conjunction with the
audited financial statements for the year ended December 31, 1998. The
accompanying financial statements have not been examined by independent
accountants, but in the opinion of Intervan management, all adjustments
(consisting of normal recurring entries) necessary for the fair presentation of
Intervan's results of operations, financial position, and changes therein for
the periods presented have been included. The results of operations for the nine
months ended September 30, 1999 and 1998 may not be indicative of the results
that may be expected for the year ending December 31, 1999.
1. Significant accounting policies
Nature of operations and business organization- As of December 24, 1999,
International Van, S.A. de C.V. is a 100% owned subsidiary of Convergence
Communications, S.A. de C.V. ("CCI Mexico") a subsidiary of Convergence
Communications Inc. [See Note 7] International Van, S.A. de C.V. (the "Company")
service offerings consist of telecommunications link services, primarily data
link, and some other value added-services. The Company operates under a permit
and is applying for a license concession for developing its operations under the
Federal Telecommunication Laws and regulations in Mexico.
The license term is for fifteen years renewable under the license regulations
terms, covering the largest cities in Mexico. The license term establishes that
licensees should record their fees related to services in the SCT files.
Concentration of risks - The Company supplies telecommunication services (data
transmission) all over the country, and no dependence exists in regard to a
specific customer. The Company evaluates its customers' credit histories and
establishes an allowance for doubtful accounts based upon the credit risk of
specific customers and the Company policies based on historical.
Use of estimates - Preparation of the financial statements in conformity with
Generally Accepted Accounting Principles in Mexico (Mex. GAAP) requires
management to make estimates and assumptions, that affect the amounts of assets,
liabilities and disclosures of contingent assets and liabilities, at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Basis of presentation - The financial statements are prepared in conformity to
the Generally Accepted Accounting Principles in Mexico (Mex.-GAAP), which
requires the inflationary effects recognition in the financial information as
set in the B-10 bulletin.
Recognition of the effects of inflation in the financial information- The
Company restates all of its financial statements in terms of the purchasing
power of the Mexican peso as of the end of the latest period, thereby
comprehensively recognizing the effects of inflation. Consequently, all
financial statement amounts are comparable, both for the current and the prior
year, since all are stated in terms of Mexican pesos of the same purchasing
power. Accordingly, the financial statements of the prior year have been
restated in terms of Mexican pesos of the latest period, or September 30, 1999.
The prior year amounts presented herein differ from those originally reported in
terms of Mexican pesos of the corresponding year.
Cash and cash equivalents - The Company considers all highly liquid, temporary
cash investments with original maturities of three months or less to be cash and
cash equivalents.
Property, Plant and Equipment - Property, Plant and Equipment are valued at net
replacement value by recognizing the changes in pricing levels (INPC), less
accumulated depreciation. Depreciation is calculated using the straight line
method based on the estimated useful lives of the assets as follows:
Vehicles 4
Computing Equipment 3
Telecommunication equipment 5
Furniture 10
Expenditures which increase the value or extend the useful lives of assets are
capitalized, while maintenance and repairs are charged to operating expenses as
they are incurred.
Deferred income tax - Since there are no significant nonrecurring temporary
differences whose turnaround period can be determined and are not expected to be
replaced by items of similar nature and amount, the Company has not recorded any
deferred income tax assets or liabilities.
Employees benefits - According to the labor law, the Company is liable for
severance payments and seniority premiums to employees under certain
circumstances. Indemnity payments to involuntarily terminated employees are
charged to operations when incurred.
Revenue recognition - Revenues from connection services are recognized at the
time the underlying services are delivered and earned. Revenues and expenses are
recorded on the accrual basis.
Foreign currency - The Company's operations are located in Mexico and its books
and records are maintained in Mexican pesos. During 1999, the Mexican economy is
no longer considered hyper-inflationary. The Company's functional currency is
the Mexican peso to U.S. dollars at current exchange rates. The result of
translation is recorded as a component of the comprehensive financing result on
the income statement. Transactions denominated in foreign currencies are
initially recorded at the prevailing exchange rate on the transaction date.
Fluctuations in exchange rates from the transactions to the settlement date or
year-end are charged to operations.
3. FURNITURE AND EQUIPMENT:
Depreciation
Rate
1999 1998 %
Telecommunications equipment $52,810,709 $ 34,965,211 20%
Office furniture and equipment 1,038,457 627,790 10%
Transportation equipment 863,848 223,109 25%
------------ -------------
Total 54,713,014 35,816,110
Less- Accumulated depreciation 16,639,640 9,129,682
Net $38,073,374 $ 26,686,428
============ ============
Deferred Charges 7,532,774 5,692,716
Inflation Adjustment 6,824,760 4,872,109
------------ ------------
Net Furniture and Equipment $52,430,908 $ 37,251,253
============ ============
4. CONVERTIBLE CREDIT:
Netcapital, S.A. de C.V., holding company, granted credit to the Company to
finance its operations through fund withdrawals payable in U.S. dollars and
bearing annual interest of 6%. These draws are convertible into capital stock.
As explained in Note 5, during a Shareholders' Meeting held on March 29, 1999,
Netcapital, S.A. de C.V. converted this credit into capital stock; therefore, at
September 30, 1999, this liability is shown in the balance sheet as non-current.
5. SHAREHOLDERS' EQUITY:
During an Extraordinary Shareholders' Meeting held on August 18, 1998, the
shareholders approved an increase in the variable capital stock of the Company
of $1,361,710, represented by 1,361,710 common, nominative shares with a par of
one Mexican peso each, payable in cash by Netcapital, S.A. de C.V., who reserved
the right to subscribe and pay for such shares.
Capital reductions will be subject to taxes on the excess of the reduction over
the price-level adjusted paid-in capital, in accordance with a formula
prescribed by the Income Tax Law.
During an Extraordinary Shareholders' Meeting held on March 29, 1999,
Netcapital, S.A. de C.V., the holding company, decided to convert the US
$3,500,000 credit granted to the Company into capital stock, and received in
exchange 1,361,710 shares. In addition, the shareholders approved an increase in
capital stock of US$7,609,227, of which, US$487,212 were subscribed and paid on
that date, and US$512,788 were subscribed and paid on April 17, 1999. The unpaid
portion is represented by shares held in the Company's treasury for future
subscription and payment. On these same dates, the shareholders granted the
Company a new convertible credit for US$6,609,227 to finance its operations.
6. SUPPLEMENTARY INFORMATION:
US - Mex. GAAP reconciliation:
The following supplementary information is a reconciliation of shareholders'
equity as of September 30, 1999 and the net loss for the nine months then ended
under the Generally Accepted Accounting Principles in Mexico to the Generally
Accepted Accounting Principles in the United States as of this date and in
Mexican pesos.
Shareholders' equity
Shareholders' equity as of September 30, 1999 in
conformity with Mexican GAAP, in Mexican pesos $ 42,682,626
Add (Less)
Cumulative recognition of deferred taxes according
with SFAS-109 26,164,704
Cumulative recognition of deferred employee profit
sharing according to SFAS-109 (806,627)
Book valuation allowance of deferred asset tax due to
uncertainty of future taxable income (26,164,704)
-------------
Shareholders' equity as of September 30, 1999 in
conformity with US GAAP, in Mexican pesos $ 41,875,999
=============
Net loss
Net loss for the nine months period ended on
September 30, 1999 in conformity with Mexican GAAP,
in Mexican pesos $ (27,193,920)
Add (Less)
Recognition of deferred income tax benefit for the
nine month period, according with SFAS-109 12,324,507
Recognition of deferred employee profit sharing for
the nine month period, according to SFAS-109 (285,051)
Recognition of book valuation allowance of deferred
tax due to uncertainty of future taxable income (12,324,507)
Net loss for the nine month period ended on September
30, 1999 in conformity with US GAAP, in Mexican pesos $ (27,478,971)
==============
The above mentioned deferred tax calculation, is based on the liability method
for all temporary differences between the amounts of assets and liabilities for
financial and tax-reporting purposes computed in accordance with SFAS-109.
SFAS-109 requires that deferred tax liabilities or assets at the end of each
period be determined using the tax rate expected to be in effect when taxes are
expected to be paid or recovered. Accordingly, income tax provisions increase or
decrease in the same period in which changes in future tax rates are enacted.
Due to the uncertainty of deferred income asset tax realization, a valuation
allowance for the potential future tax savings related to carry forward tax
losses and tax on assets paid must be recognized.
This supplementary information is not necessary for the interpretation of
accompanying financial statements in conformity with the Mexican GAAP.
7. SUBSEQUENT EVENT:
On December 24, 1999, Convergence Communications, S.A. de C.V. ("CCI Mexico"),
acquired all of the outstanding stock of the Company. The total purchase price
for the Company was approximately $21,000,000 USD, of which CCI Mexico paid
$15,000,000 USD in cash at the closing. The balance of the purchase price was
paid through CCI Mexico's delivery of two promissory notes which are due on the
first and second anniversaries of the closing. The promissory note due on
December 24, 2000 is in the face amount of $4,500,000 USD and is non-interest
bearing. The promissory note due on December 24, 2001 is in the face amount of
$1,500,000 USD and bears interest during the second year at the rate of 8% per
annum. The notes were discounted at 10.75%, which reflects the estimated market
rate of interest. The amounts represented by the promissory notes are subject to
downward adjustment if the Company suffers recurring revenue losses after the
closing.
Item 7 (b): Pro forma financial information (Expressed in U.S. Dollars)
On December 27, 1999, Convergence Communications, S.A. de C.V. ("CCI Mexico"), a
subsidiary of CCI, acquired all of the outstanding stock of Intervan. Intervan
provides data networking and network access services to over 420 customers in
Mexico through a nationwide ATM network. The seller of Intervan was Controladora
S.O.E., S.A. de C.V., a Mexican corporation ("SOE"). The total purchase price
for Intervan was approximately $21 million, of which CCI Mexico paid $15 million
in cash at the closing. The balance of the purchase price was paid through CCI
Mexico's delivery of two promissory notes which are due on the first and second
anniversaries of the closing. The promissory note due on December 24, 2000 is in
the face amount of $4,500,000 and is non-interest bearing. The promissory note
due on December 24, 2001 is in the face amount of $1,500,000 and bears interest
during the second year at the rate of 8% per annum. The combined present value
of both promissory notes is estimated at $5,257,000. The notes were discounted
at 10.75%, which reflects the estimated market rate of interest. The amounts
represented by the promissory notes are subject to downward adjustment if
Intervan suffers recurring revenue losses after the closing.
On December 15, 1999, pursuant to a Stock Purchase Agreement, CCI acquired all
of the outstanding shares of capital stock of GBnet Corporation ("GBnet") for a
total purchase price of $13,000,000. See Form 8-K filed on January 6, 2000 and
Form 8-K/A filed on February 28, 2000.
The accompanying unaudited pro forma balance sheets as of September 30, 1999 and
unaudited pro forma statements of operations for the year ended December 31,
1998 and the nine month period ended September 30, 1999 are presented to reflect
the acquisition of all of the outstanding stock of Intervan from SOE by CCI
Mexico and the acquisition of all of the outstanding stock of GBnet by CCI. The
acquisitions were accounted for under the purchase method of accounting. The
accompanying unaudited pro forma financial statements reflect the effects of
preliminary allocations of the purchase prices.
The pro forma financial statements also reflect the impact of the $109.5 million
private equity and credit facility package (the "Financing") previously
disclosed in CCI's Current Reports on Form 8-K dated November 2, 1999 and
December 8, 1999.
The accompanying unaudited pro forma financial statements should be read in
conjunction with the companies' historical financial statements and notes
thereto. The unaudited pro forma financial statements are presented for
informational purposes only and are not necessarily indicative of actual results
had the foregoing transactions occurred as described in the preceding
paragraphs, nor do they purport to represent results of future operations of the
consolidated companies.
The pro forma balance sheet assumes the acquisitions occurred on September 30,
1999. The pro forma consolidated statements of operations present CCI's
historical statements of operations for the fiscal year ended December 31, 1998
and the nine month period ended September 30, 1999, along with Intervan's and
GBnet's statements of operations for the same periods adjusted to give effect to
the acquisitions as if the acquisitions had occurred on January 1, 1998.
Unaudited pro forma financial information presented herein reflects adjustments
for (i) the estimated allocations of purchase prices to the fair value of assets
acquired, including intangible assets, and liabilities assumed, (ii) the effect
of the private equity and credit facility, and (iii) the effect of recurring
charges related to the acquisitions, primarily the amortization of intangible
assets and the recording of interest expense on borrowings to finance the
acquisitions.
The preliminary allocation of the purchase price of Intervan as of September 30,
1999 resulted in approximately $14.6 million of intangible assets comprised
primarily of subscriber rights. The actual amount of the intangible assets
recorded will vary based upon the final purchase price allocation resulting from
the completion of the integration plan and the asset valuations discussed above.
Changes in the intangible asset allocation and the related amortization expense
resulting from these plans and assessments may be material.
The preliminary allocation of the purchase price of GBnet resulted in
approximately $9.8 million of intangible assets comprised of subscriber rights,
contract rights and license rights. The actual amount of these intangible assets
recorded will vary based upon the final purchase price allocation resulting from
the completion of the integration plan and the asset valuations discussed above.
Changes in the intangible asset allocation and the related amortization expense
resulting from these plans and assessments may be material.
CONVERGENCE COMMUNICATIONS, INC.
UNAUDITED PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1999
(EXPRESSED IN U.S. DOLLARS)
- - ------------------------------------------------------------------------------------------------------------------------------------
Adjustments
Convergence -------------------------------------------- Pro Forma
Communica- GBnet GBnet Intervan Adjusted
ASSETS tions, Inc. Corporation Intervan Acquisition Acquisition Financing Balance
(a)
CURRENT ASSETS:
Cash and cash equivalents $ 543,510 $ 667,058 $(4,000,000)(b)$(15,000,000)(b) 59,355,000 $41,565,568
Accounts receivable - net 624,161 $ 284,398 2,854,049 3,762,608
Inventory 380,973 8,680 389,653
Other current assets 275,264 625,797 901,061
--------- --------- -------
Total current assets 1,823,908 284,398 4,155,584 (4,000,000) (15,000,000) 59,355,000 46,618,890
INVESTMENT IN CENTURION 845,955 845,955
PROPERTY AND EQUIPMENT - net 18,351,638 2,984,671 4,873,493 26,209,802
INTANGIBLE ASSETS - net 19,582,353 9,798,931(c) 14,579,406(c) 43,960,690
OTHER ASSETS 969,087 969,087
--------- ---------
TOTAL ASSETS $ 41,572,941 $ 3,269,069 $ 9,029,077 $ 5,798,931 $ (420,594) $ 59,355,000 $ 118,604,424
============= ============ =========== ============ =========== ============ =============
See notes to unaudited pro forma consolidated financial statements.
28
CONVERGENCE COMMUNICATIONS, INC.
UNAUDITED PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1999
(EXPRESSED IN U.S. DOLLARS)
- - ------------------------------------------------------------------------------------------------------------------------------------
Adjustments
Convergence ----------------------------------- Pro Forma
Communications, GBnet GBnet Intervan Adjusted
LIABILITIES AND STOCKHOLDERS' EQUITY Inc. Corporation Intervan Acquisition Acquisition Financing Balance
(a)
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities $ 5,995,340 $2,743,079 $ 68,000(d) $ 81,600(d) $ 8,888,019
Notes payable 4,861,599 4,861,599
Notes payable (payable to related
parties) 7,165,925 7,165,925
Accrued consulting fees (payable to
related parties) 522,240 522,240
Due to affiliates 835,138 835,138
Unearned revenue 386,568 526,699 913,267
--------- ----------- ----------- ---------- ----------- ------------ ----------
Total current liabilities 19,766,810 3,269,778 68,000 81,600 23,186,188
--------- ----------- ----------- ---------- ----------- ------------ ----------
LONG-TERM LIABILITIES:
Long-term debt (payable to
related parties) 6,069,249 1,927,511 (1,927,511)(i)$(4,966,836) 1,102,413
Subordinated exchangeable promissory
notes (payable to related parties) 10,000,000 (10,000,000)
Notes payable 3,497,500 9,000,000(b)5,257,105(b) 17,754,605
Accrued foreign severance 224,286 224,286
--------- ----------- ----------- ---------- ----------- ------------ ----------
Total long-term liabilities 19,791,035 1,927,511 9,000,000 3,329,594 (14,966,836) 19,081,304
MINORITY INTEREST IN SUBSIDIARIES 1,288,180 5,525,000 6,813,180
--------- ----------- ----------- ---------- ----------- ------------ ----------
Total liabilities 40,846,025 5,197,289 9,068,000 3,411,194 (9,441,836) 49,080,672
------------ ----------- ----------- ---------- ------------ ----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series "B" Preferred stock 101 101
Seires "C" Preferred stock 10,000 10,000
Common stock 11,738 12,529,047 (12,529,047)(e) 11,738
Additional paid-in capital 27,349,360 68,786,836 96,136,196
Accumulated deficit (26,605,221) (8,421,612) 8,421,612(e) (26,605,221)
Accumulated other comprehensive loss (29,062) (275,647) 275,647(e) (29,062)
Net investment in GBnet 3,269,069 (3,269,069)(c)
--------- ----------- ----------- ---------- ----------- ------------ ----------
Total stockholders' equity 726,916 3,269,069 3,831,788 (3,269,069) (3,831,788) 68,786,836 69,523,752
--------- ----------- ----------- ---------- ----------- ------------ ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 41,572,941 $ 3,269,069 $ 9,029,077 $ 5,798,931 $ (420,594) $ 59,355,000 $118,604,424
============ =========== =========== =========== ========== ============ ===========
See notes to unaudited pro forma consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(EXPRESSED IN U.S. DOLLARS)
- - ------------------------------------------------------------------------------------------------------------------------------------
Adjustments
Convergence ---------------------------------- Pro Forma
Communica- GBnet GBnet Intervan Adjusted
tions, Inc. Corporation Intervan Acquisition Acquisition Financing Balance
(a)
NET REVENUES $ 3,113,482 $ 8,443,882 $ 7,188,499 $ 18,745,863
COST OF SERVICE 1,876,133 4,969,500 6,857,559 13,703,192
--------- ----------- ----------- ---------- ----------- ------------ ----------
GROSS MARGIN 1,237,349 3,474,382 330,940 5,042,671
OPERATING EXPENSES:
Professional fees 2,270,588 2,270,588
Depreciation and amortization 2,864,789 1,117,800 718,850 1,633,155(f)2,223,998(f) 8,558,592
Leased license expense 708,912 708,912
General and administrative 5,261,916 1,003,550 2,819,657 9,085,123
Stock-based compensation expense 753,046 753,046
--------- ----------- ----------- ---------- ----------- ------------ ----------
Total 11,859,251 2,121,350 3,538,507 1,633,155 2,223,998 21,376,261
--------- ----------- ----------- ---------- ----------- ------------ ----------
OPERATING (LOSS) INCOME (10,621,902) 1,353,032 (3,207,567) (1,633,155) (2,223,998) (16,333,590)
OTHER INCOME AND (EXPENSES):
Interest income 268,996 458,658 727,654
Interest expense (677,188) (967,500)(g)(565,138)(g) (2,209,826)
--------- ----------- ----------- ---------- ----------- ------------ ----------
Total (408,192) 458,658 (967,500) (565,138) (1,482,172)
--------- ----------- ----------- ---------- ----------- ------------ ----------
NET (LOSS) INCOME BEFORE INCOME TAX AND
MINORITY INTEREST (11,030,094) 1,353,032 (2,748,909) (2,600,655) (2,789,136) (17,815,762)
INCOME TAX 473,561 137,411 (h) (h) 610,972
--------- ----------- ----------- ---------- ----------- ------------ ----------
NET (LOSS) INCOME BEFORE MINORITY
INTEREST (11,030,094) 879,471 (2,886,320) (2,600,655) (2,789,136) (18,426,734)
MINORITY INTEREST IN LOSS OF
SUBSIDIARIES 799,298 799,298
--------- ----------- ----------- ---------- ----------- ------------ ----------
NET (LOSS) INCOME (10,230,796) 879,471 (2,886,320) (2,600,655) (2,789,136) (17,627,436)
============= ========= ============ ============ =========== ============ ============
NET (LOSS) INCOME PER BASIC AND
DILUTED COMMON SHARE $ (0.87) $ 0.07 $ (0.25) (j) $ (0.82)
=========== ======= ======== =======
WEIGHTED AVERAGE COMMON SHARES
- BASIC and DILUTED 11,736,927 11,736,927 11,736,927 21,465,836
============ ============ ============ ==========
See notes to unaudited pro forma consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(EXPRESSED IN U.S. DOLLARS)
- - ------------------------------------------------------------------------------------------------------------------------------------
Adjustments
Convergence ---------------------------------- Pro Forma
Communica- GBnet GBnet Intervan Adjusted
tions, Inc. Corporation Intervan Acquisition Acquisition Financing Balance
(a)
NET REVENUES 6,455,538 6,625,714 8,907,222 21,988,474
COST OF SERVICE 2,371,382 3,771,509 7,090,652 13,233,543
--------- ----------- ----------- ---------- ----------- ------------ ----------
GROSS MARGIN 4,084,156 2,854,205 1,816,570 8,754,931
OPERATING EXPENSES:
Professional fees 2,028,151 2,028,151
Depreciation and amortization 3,661,625 977,754 892,418 1,224,866(f)1,667,998(f) 8,424,661
Leased license expense 66,796 66,796
General and administrative 6,606,920 787,462 4,127,351 11,521,733
Stock-based compensation expense 1,015,101 1,015,101
--------- ----------- ----------- ---------- ----------- ------------ ----------
Total 13,378,593 1,765,216 5,019,769 1,224,866 1,667,998 23,056,442
--------- ----------- ----------- ---------- ----------- ------------ ----------
OPERATING (LOSS) INCOME (9,294,437) 1,088,989 (3,203,199) (1,224,866) (1,667,998) (14,301,511)
OTHER INCOME AND (EXPENSES):
Interest income 82,458 351,878 434,336
Interest expense (3,029,268) (725,625)(g)(120,935)(g) (3,875,828)
--------- ----------- ----------- ---------- ----------- ------------ ----------
Total (2,946,810) 351,878 (725,625) (120,935) (3,441,492)
--------- ----------- ----------- ---------- ----------- ------------ ----------
NET (LOSS) INCOME BEFORE INCOME
TAX AND MINORITY INTEREST (12,241,247) 1,088,989 (2,851,321) (1,950,491) (1,788,933) (17,743,003)
INCOME TAX 134,774 381,146 72,601 (h) (h) 588,521
--------- ----------- ----------- ---------- ----------- ------------ ----------
NET (LOSS) INCOME BEFORE MINORITY
INTEREST (12,376,021) 707,843 (2,923,922) (1,950,491) (1,788,933) (18,331,524)
MINORITY INTEREST IN LOSS OF
SUBSIDIARIES 1,257,337 1,257,337
--------- ----------- ----------- ---------- ----------- ------------ ----------
NET (LOSS) INCOME (11,118,684) 707,843 (2,923,922) (1,950,491) (1,788,933) (17,074,187)
============= ========= ============ ============ ============ ============
NET (LOSS) INCOME PER BASIC AND
DILUTED COMMON SHARE $ (0.92) $ 0.06 $ (0.24) (j) $ (0.78)
=========== ======= ======= =======
WEIGHTED AVERAGE COMMON SHARES
- BASIC AND DILUTED 12,022,728 12,022,728 12,022,728 21,751,637
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See notes to unaudited pro forma consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 (UNAUDITED,
EXPRESSED IN U.S. DOLLARS)
- - --------------------------------------------------------------------------------
Based upon the terms of the acquisitions, the transactions are accounted for as
purchases of Intervan and GBnet for financial reporting and accounting purposes.
Accordingly, CCI revalued the basis of Intervan's and GBnet's acquired assets to
fair value. The purchase prices of Intervan and GBnet are calculated as the cash
paid, plus the present value of notes issued plus the transaction costs. The
difference between the purchase price and the fair value of the identifiable
tangible and intangible assets acquired and liabilities assumed is recorded as
intangible assets and will be amortized over terms ranging from 5-7 years. The
preliminary allocations of the purchase prices are subject to completion of
certain valuations relating to tangible and intangible assets, and the
completion of the Company's integration plan. Changes to the preliminary
purchase price allocations resulting from the finalization of the valuations and
integration plan, may be material. The preliminary allocation of the purchase
price to the fair value of assets acquired and liabilities assumed is as
follows:
Intervan GBnet
Purchase price $ 21,000,000 $13,000,000
Present value adjustment of promissory notes (742,895)
Transaction costs 81,600 68,000
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Total estimated purchase price $ 20,338,705 $ 13,068,000
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Purchase price has been allocated as follows:
Fair value of assets acquired:
- - -----------------------------
Current assets $ 3,750,457 $ 396,161
Property and equipment 5,136,584 2,872,908
Other assets 851,128
Intangible assets (subscriber contract rights) 13,343,988 9,798,931
Liabilities assumed (2,743,452)
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$ 20,338,705 $ 13,068,000
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THE UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999
GIVES EFFECT TO THE FOLLOWING PRO FORMA ADJUSTMENTS:
(a) Represents certain components of the $109.5 million financing which closed
on October 18, 1999 and November 16, 1999 as described in the Company's Current
Reports on Form 8-K:
o Issuance of 7,733,332 shares of Series "C" Preferred
Stock for cash $58,000,000
o Sale of 32.6% minority interest in Chispa Dos
(controlled subsidiary) for cash 5,525,000
o Exchange of debt for 1,995,577 shares of Series "C"
Preferred Stock 14,966,836
o Equity issuance costs of approximately $4,170,000 (4,170,000)
(b) Represents the cash paid or the present value of the notes payable issued to
effect the acquisition. The notes were discounted at 10.75%, which reflects the
estimated market rate of interest.
(c) Represents the excess of the purchase price over the net assets acquired
which has been allocated to intangible assets resulting from the acquisitions
and will be amortized over terms ranging from 5-7 years. This amount allocated
to intangible assets assumes the acquisitions occurred on September 30, 1999
using the net assets existing as of September 30, 1999 which is different from
the actual amount allocated to intangible assets as of the actual purchase
dates.
(d) Represents the estimated transaction costs of $81,600 for Intervan and
$68,000 for GBnet.
(e) Represents the elimination of the Intervan's and GBnet's net investment,
common stock, accumulated deficit and accumulated other comprehensive loss.
THE UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 GIVE EFFECT TO
THE FOLLOWING PRO FORMA ADJUSTMENTS:
(f) Represents the increase in intangible amortization expense. The intangibles
and the related amortization expense are subject to adjustment resulting from
the completion of the final purchase price allocation.
(g) Represents the adjustments to interest expense related to debt acquired to
finance the GBnet and Intervan acquisitions. The interest expense related to the
GBnet acquisition was calculated on average borrowings of $9 million, multiplied
by an interest rate of 10.75%. The combined face value of the two promissory
notes acquired to finance the Intervan acquisition totaled $6 million and were
discounted at 10.75%. The interest rate of 10.75% represents the estimated
market rate of interest.
(h) There was no net impact of the income tax benefit (expense) for the period
and the valuation allowance, which reduces the deferred tax asset component for
net operating loss carryforwards to what management believes is realizable.
(i) Represents the reduction in related party debt that was not assumed in the
Intervan purchase.
(j) The net loss per basic and diluted common share in the Pro Forma Adjusted
Balance column includes the 9,728,909 shares of Series "C" Preferred Stock
issued during the financing discussed in adjustment (a). No pro forma effect, as
if the financing had occurred on January 1, 1998, relating to any potential
reductions in interest expense on acquired debt has been included in any part of
the pro forma statements of operations.