U.S. SECURITIES AND EXCHANGE COMMISSION.
Washington, D.C. 20549
FORM 10-QSB
[X} QUARTERLY REPORT UNDER SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000.
{X} TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ____.
Commission file number 21143
CONVERGENCE COMMUNICATIONS, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 87-0545056
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 West 500 South, Suite 320
Salt Lake City, Utah 84101
(Address of Principal Executive Offices) (Zip Code)
(801) 328-5618
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
---
As of November 10, 2000, 11,795,857 shares of registrant's Common Stock, par
value $.001 per share, 29,521 shares of the registrant's Series B Preferred
Stock, par value $.001 per share, and 13,620,472 shares of the registrant's
Series C Preferred Stock, par value $.001 per share, were outstanding.
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS REQUIRED BY FORM 10-QSB
The accompanying unaudited consolidated financial statements of
Convergence Communications, Inc. have been prepared in accordance with generally
accepted accounting principles for interim financial reporting and pursuant to
the rules and regulations of the Securities and Exchange Commission. They do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. These financial
statements should be read in conjunction with Note 1 herein and the consolidated
financial statements and notes thereto included in our annual report on Form
10-KSB for the year ended December 31, 1999, which are incorporated herein by
reference. The accompanying financial statements have not been examined by
independent accountants in accordance with generally accepted auditing
standards, but in the opinion of management, all adjustments (consisting of
normal recurring entries) necessary for the fair presentation of our 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, 2000 may not be indicative of the results that may be expected for
the year ending December 31, 2000.
[THIS SPACE INTENTIONALLY LEFT BLANK]
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
- ----------------------------------------------------------------------------------------------------------------
September 30, December 31,
2000 1999
--------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 23,647,633 $ 26,303,296
Accounts receivable - net 5,332,149 3,180,748
Inventory - net 918,394 262,177
Other current assets 4,149,931 1,225,490
--------------- ---------------
Total current assets 34,048,107 30,971,711
PROPERTY AND EQUIPMENT - net 43,396,097 28,446,776
INTANGIBLE ASSETS - net 44,393,828 36,660,025
OTHER ASSETS 6,305,880 1,126,011
--------------- ---------------
TOTAL ASSETS $ 128,143,912 $ 97,204,523
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - current portion $ 16,267,563 $ 11,313,343
Accounts payable and accrued liabilities 16,834,621 6,851,249
--------------- ---------------
Total current liabilities 33,102,184 18,164,592
LONG-TERM LIABILITIES:
Notes payable - long-term portion 21,722,196 11,389,937
Long-term debt (payable to related parties) 2,677,434 2,595,634
Other long-term liabilities 282,494 185,686
--------------- ---------------
Total long-term liabilities 24,682,124 14,171,257
MINORITY INTEREST IN SUBSIDIARIES 3,040,298 5,493,394
--------------- ---------------
Total liabilities 60,824,606 37,829,243
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series "B" Preferred stock; $0.001 par value; 750,000 shares authorized:
29,521 and 101,374 shares outstanding in 2000 and 1999, respectively. 29 101
Series "C" Preferred stock; $0.001 par value; 14,250,000 shares authorized:
13,620,472 and 9,728,909 shares outstanding in 2000 and 1999, respectively. 13,620 9,729
Common stock; $0.001 par value; 100,000,000 shares authorized:
11,389,191 and 11,585,489 shares outstanding in 2000 and 1999, respectively 11,389 11,585
Additional paid-in capital 126,286,884 95,147,893
Accumulated deficit (58,785,595) (35,764,016)
Accumulated other comprehensive loss (207,021) (30,012)
--------------- ---------------
Total stockholders' equity 67,319,306 59,375,280
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 128,143,912 $ 97,204,523
=============== ===============
See notes to consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
- ------------------------------------------------------------------------------------------------------------
Nine Months Nine Months
Ended Ended
September 30 September 30
2000 1999
------------------ -----------------
NET REVENUES FROM SERVICES $ 24,978,043 $ 6,455,538
------------------ -----------------
COSTS AND EXPENSES:
Variable cost of services 14,580,464 2,371,382
Salaries, wages and benefits 11,620,175 3,697,487
Selling, general and administrative 10,715,344 5,004,380
Depreciation and amortization 10,690,622 3,661,625
Stock option compensation expense 573,508 1,015,101
------------------ -----------------
Total costs and expenses 48,180,113 15,749,975
------------------ -----------------
OPERATING LOSS (23,202,070) (9,294,437)
OTHER INCOME AND (EXPENSES):
Interest income 791,190 82,458
Interest expense (2,662,918) (3,009,082)
Net gain (loss) on foreign exchange 97,130 (20,186)
------------------ -----------------
Total other expense (1,774,598) (2,946,810)
------------------ -----------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (24,976,668) (12,241,247)
PROVISION FOR INCOME TAXES (146,007) (134,774)
------------------ -----------------
LOSS BEFORE MINORITY INTEREST (25,122,675) (12,376,021)
MINORITY INTEREST IN LOSS OF SUBSIDIARIES 2,453,096 1,257,337
------------------ -----------------
NET LOSS (22,669,579) (11,118,684)
NON-CASH REMEASUREMENT OF OPTIONS (see Note 5) (352,000) -
------------------ -----------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (23,021,579) $ (11,118,684)
================== =================
Net loss per basic and diluted common share $ (1.03) $ (0.92)
================== =================
Weighted-average number of common shares:
Basic and diluted 22,355,824 12,022,728
================== =================
See notes to consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
- ------------------------------------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
September 30 September 30
2000 1999
------------------ -----------------
NET REVENUES FROM SERVICES $ 9,126,110 $ 2,310,963
------------------ -----------------
COSTS AND EXPENSES:
Variable cost of services 5,582,604 931,577
Salaries, wages and benefits 4,826,527 1,343,793
Selling, general and administrative 3,190,291 1,586,697
Depreciation and amortization 3,804,771 1,240,640
Stock option compensation expense 63,141 381,092
------------------ -----------------
Total costs and expenses 17,467,334 5,483,799
------------------ -----------------
OPERATING LOSS (8,341,224) (3,172,836)
OTHER INCOME AND (EXPENSES):
Interest income 366,162 3,329
Interest expense (1,001,221) (1,488,246)
Net gain (loss) on foreign exchange and other 7,410 -
------------------ -----------------
Total other expense (627,649) (1,484,918)
------------------ -----------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (8,968,873) (4,657,754)
PROVISION FOR INCOME TAXES (51,860) (100,000)
------------------ -----------------
LOSS BEFORE MINORITY INTEREST (9,020,733) (4,757,755)
MINORITY INTEREST IN LOSS OF SUBSIDIARIES 925,641 503,381
------------------ -----------------
NET LOSS (8,095,092) (4,254,374)
NON-CASH REMEASUREMENT OF OPTIONS (see Note 5) (352,000) -
------------------ -----------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (8,447,092) $ (4,254,374)
================== =================
Net loss per basic and diluted common share $ (0.35) $ (0.35)
================== =================
Weighted-average number of common shares:
Basic and diluted 24,087,956 12,022,728
================== =================
See notes to consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND YEAR ENDED DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock
-----------------------------------------------
Series "B" Series "C" Common Stock
--------------------------------------------- -----------------------
Total Shares Amount Shares Amount Shares Amount
----------- --------- --------- ---------- --------- ----------- ----------
BALANCE, DECEMBER 31, 1999 59,375,280 101,374 101 9,728,909 9,729 11,585,489 11,585
Comprehensive loss:
Net loss for nine months ended Sept 30, 2000 (22,669,579)
Other comprehensive loss consisting of
foreign currency translation adjustment (177,009)
----------- --------- --------- ---------- --------- ----------- ----------
Total comprehensive loss (22,846,588) - - - - - -
Acquisition of Metrotelecom stock for
CCI common shares 1,000,000 121,212 121
Acquisition of treasury stock - (71,853) $ (72) (328,510) (329)
Non-cash remeasurement of options -
Exercise of shareholder stock options 29,186,722 3,891,563 $ 3,891
Exercise of employee stock options 241 11,000 11
Issuance of options for common shares
below fair value 603,651
----------- --------- --------- ---------- --------- ----------- ----------
BALANCE, SEPTEMBER 30, 2000 $ 67,319,306 29,521 $ 29 13,620,472 $ 13,620 11,389,191 $ 11,389
=========== ========= ========= ========== ========= =========== ==========
See notes to consolidated financial statements.
(Continued)
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND YEAR ENDED DECEMBER 31, 1999
BALANCE, DECEMBER 31, 1999 (Continued)
Accumulated
Additional Other Compre-
Paid-in Accumulated hensive Income
Capital Deficit (Loss)
------------- ------------ --------------
BALANCE, DECEMBER 31, 1999 95,147,893 (35,764,016) (30,012)
Comprehensive loss:
Net loss for nine months ended Sept 30, 2000 (22,669,579)
Other comprehensive loss consisting of
foreign currency translation adjustment $ (177,009)
------------- ------------ --------------
Total comprehensive loss - (22,669,579) (207,021)
Acquisition of Metrotelecom stock for
CCI common shares 999,879
Acquisition of treasury stock 400
Non-cash remeasurement of options 352,000 (352,000)
Exercise of shareholder stock options 29,182,831
Exercise of employee stock options 230
Issuance of options for common shares
below fair value 603,651
------------- ------------ --------------
BALANCE, SEPTEMBER 30, 2000 $ 126,286,884 $(58,785,595) $ (207,021)
============= ============ ==============
See notes to consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
- ------------------------------------------------------------------------------------------------
Nine Months Nine Months
Ended Ended
September 30 September 30
2000 1999
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(22,669,579) $(11,118,684)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 10,690,622 3,661,625
Provision for bad debts 795,088 238,289
Minority interest in loss of subsidiaries (2,453,096) (1,057,337)
Issuance of options for common shares below fair value 603,651 1,015,101
Amortization of discount on notes payable 1,661,862 588,525
Issuance of warrants below fair value - 154,520
Change in assets and liabilities, net of effects
of acquisitions:
Accounts receivable (2,295,839) (430,957)
Due from affiliates - 5,000,000
Inventory (656,217) (176,419)
Other current assets (2,877,908) (102,104)
Other assets (4,934,028) (643,278)
Accounts payable and accrued liabilities 6,445,939 2,678,949
Due to affiliates (122,356) (240,874)
Other long-term liabilities 96,807 89,195
-------------- --------------
Net cash used in operating activities (15,715,054) (343,449)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in Metrotelecom acquisition, net (3,417,851) -
Purchases of property and equipment (18,120,577) (10,940,574)
-------------- --------------
Net cash used in investing activities (21,538,428) (10,940,574)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of employee stock options 241 -
Increase in minority interest from issuance of subsidiary
common stock - 200,000
Net proceeds from issuance of Series "C" Preferred Stock 29,186,722 -
Proceeds from related party note - 11,935,422
Payments on related party borrowings and outstanding debt (539,893) (8,569,771)
Proceeds from promissory notes 6,418,025 4,335,000
Payments on promissory notes (454,167) (383,334)
-------------- --------------
Net cash provided by financing activities 34,610,928 7,517,317
-------------- --------------
EFFECT OF EXCHANGE RATES ON CASH (13,109) (5,065)
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,655,663) (3,771,771)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 26,303,296 4,315,281
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,647,633 $ 543,510
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 347,963 $ 276,236
============== ==============
Cash paid during the period for income taxes
(including prepaid) $ 183,522 $ 86,133
============== ==============
See notes to consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
1. Basis of Presentation
---------------------
Convergence Communications, Inc. and subsidiaries is a provider of
integrated broadband communications and Internet services through its own
metropolitan area networks. We operate in recently deregulated and high growth
markets, principally Mexico, Central America and the Andean region of South
America. We offer business entities, governmental agencies and residential
customers high-speed broadband data connections, high-speed and dial-up Internet
access, voice and video services. Our networks use technology based on the
Internet Protocol, or "IP", and asynchronous transfer mode, or "ATM",
technology.
From our inception, we have focused on providing telecommunications
services using high-speed transmission networks within and across national
borders. We intend to capitalize on the rapidly growing demand for
telecommunications services in countries emerging from developing and
state-controlled economies and where there is growing liberalization of
regulations governing the provision of telecommunications services.
Our consolidated financial statements include the accounts of our all
wholly- and majority-owned subsidiaries, as well as Chispa Dos, Inc. ("Chispa"),
the holding entity of Cablevisa, S.A., Multicable S.A. and Cybernet de El
Salvador S.A. We own 32.6% of the capital stock of Chispa, but we have operating
control and hold 50% of the Board of Directors seats of Chispa. We have
eliminated all significant intercompany accounts and transactions in
consolidation. All capitalized terms not defined in this report have the
meanings given them in our annual report on Form 10-KSB for the year ended
December 31, 1999.
2. Net loss per common share and common share equivalent
-----------------------------------------------------
Net loss per common share and common share equivalents is computed by
both the basic method, which uses the weighted average number of common shares
and the common stock equivalents on a voting basis for the Series B and Series C
preferred stock outstanding, and the diluted method, which includes the dilutive
common shares from stock options and warrants, as calculated using the treasury
stock method.
3. Use of Estimates in Preparing Financial Statements
--------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure 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.
4. Operating Segment Information
-----------------------------
We make key financial decisions based on certain operating results of
our subsidiaries and revenue types. Our operating segment information is as
follows for the nine months ended September 30, 2000 and 1999:
NET REVENUES FROM SERVICES BY SUBSIDIARY:
DIAL UP INTERNET ACCESS September 30, September 30,
2000 1999
------------------ -----------------
Intervan (in Mexico) $ 342,450 $ -
GBnet (in Central America) 327,723 -
Inter@net (in Venezuela) 747,126
Chispa Dos (in El Salvador) 40,843 825,206
MetroTelecom (in Guatemala) 669,832
Parent Company, elim. and others 4,665 59,256
-
------------------ -----------------
Consolidated total $ 2,132,639 $ 884,462
================== =================
HIGH SPEED DATA September 30, September 30,
INTERNET ACCESS 2000 1999
------------------ -----------------
Intervan (in Mexico) $ 8,297,782 $ -
GBnet (in Central America) 2,507,667 -
Inter@net (in Venezuela) 79,911 13,701
Chispa Dos (in El Salvador) 667,780 16,541
MetroTelecom (in Guatemala) 468,819 -
Parent Company, elim. and others 8,885 -
------------------ -----------------
Consolidated total $ 12,030,844 $ 30,242
================== =================
CABLE TELEVISION September 30, September 30,
2000 1999
------------------ -----------------
Intervan (in Mexico) $ - $ -
GBnet (in Central America) - -
Inter@net (in Venezuela) - -
Chispa Dos (in El Salvador) 4,768,958 4,845,420
MetroTelecom (in Guatemala) 643,654 -
Parent Company, elim. and others - -
------------------ -----------------
Consolidated total $ 5,412,612 $ 4,845,420
================== =================
OTHER (primarily equipment rents, September 30, September 30,
installation & advertising) 2000 1999
------------------ -----------------
Intervan (in Mexico) $ 3,226,440 $ -
Gbnet (in Central America) 394,508 -
Inter@net (in Venezuela) 49,941 24,975
Chispa Dos (in El Salvador) 840,670 666,974
MetroTelecom (in Guatemala) 698,473
Parent Company, elim. And others 191,916 3,465
------------------ -----------------
Consolidated total $ 5,401,948 $ 695,414
================== =================
TOTAL REVENUES September 30, September 30,
2000 1999
------------------ -----------------
Intervan (in Mexico) $ 11,866,672 $ -
GBnet (in Central America) 3,229,898 -
Inter@net (in Venezuela) 876,978 863,882
Chispa Dos (in El Salvador) 6,318,251 5,588,191
MetroTelecom (in Guatemala) 2,480,778 -
Parent Company, elim. And others 205,466 3,465
------------------ -----------------
Consolidated total $ 24,978,043 $ 6,455,538
================== =================
OPERATING (LOSS) September 30, September 30,
2000 1999
------------------ -----------------
Intervan (in Mexico) $ (6,209,952) $ -
GBnet (in Central America) (2,518,343) -
Inter@net (in Venezuela) (1,520,542) (632,127)
Chispa Dos (in El Salvador) (2,590,777) (1,024,905)
MetroTelecom (in Guatemala) (1,244,334) -
Parent Company, elim. and other (9,118,122) (7,637,405)
------------------ -----------------
Consolidated total $ (23,202,070) $ (9,294,437)
================== =================
5. Series C Option Exercise
------------------------
We received approximately $29.2 million in July and September, 2000
from the exercise of options that we granted in October 1999 to a group of
shareholders who invested $109.5 million in us, in the form of equity and debt,
in October 1999 (see the section entitled "Subsequent Financings and Other
Transactions" in our report on Form 10-KSB for the year ended December 31, 1999
for a more detailed description) and issued 3,891,563 shares of our Series C
preferred stock in exchange for the $29.2 million.
In conjunction with this equity transaction, the original July exercise
date was extended to September for a portion of those options. The modification
of the original option term requires us to remeasure the fair value of the
options. Accordingly, we recognized $352,000 of non-cash remeasurement as a
reduction in our net loss attributable to common shareholders for the quarter
ended September 30, 2000.
6. Recently Issued Accounting Standards
------------------------------------
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements.
SAB 101 establishes accounting and reporting standards for the recognition of
revenue. It states that revenue generally is realized or realizable and earned
when all of the following criteria are met: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services have been rendered;
(3) the seller's price to the buyer is fixed or determinable; (4) collection is
reasonably assured. Effective January 1, 2000, we adopted SAB 101. The adoption
of SAB 101 did not have a material impact on our financial statements.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivative assets or liabilities in the balance sheet and
measure those instruments at fair value. SFAS No. 133 is effective for the
Company's financial statements for the year beginning January 1, 2001. We do not
believe that SFAS No. 133 will have a material impact on our financial
statements.
7. Subsequent Event
----------------
Minority Interest Purchases - In October 2000, we purchased minority
interests from three parties. The minority interests we purchased were for 5% of
our Mexican operating subsidiary, 5% of our Venezuelan operating subsidiary and
10% of our Panamanian operating subsidiary. We acquired the stock from the
minority parties in exchange for a $175,000 cash payment and the issuance of an
aggregate of 406,666 shares of our common stock.
Intervan Restructuring - In October 2000, we restructured our Mexican
operating subsidiaries in connection with our application for certain Mexican
telecommunications licenses ("Intervan Restructuring"). Under those types of
licenses, the voting control of the licensee must be held by Mexican citizens or
entities. Mexican law provides, however, that licenses may be organized with
both voting and non-voting shares. Therefore, under the terms of the
restructuring we sold 51% of the voting control (representing approximately 10%
of the corporation's stock on an economic interest basis) of our Mexican
operating subsidiary to one of our executives who is a Mexican citizen. We
retained the remaining 49% voting control (and approximately 90% of the economic
interest) in the corporation, along with the right to veto certain types of
fundamental corporate business transactions. The executive's purchase of the 51%
voting control interest was financed through a loan from us which bears interest
on a deferred basis at a rate of 12% per annum and which is due in one payment
in 2010. We are currently evaluating the accounting for this transaction, which
may include our accounting for this transaction under the equity method.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis relates to our financial
condition and results of operations for the nine months ended September 30, 2000
and 1999. This information should be read in conjunction with our consolidated
financial statements and the notes related thereto appearing elsewhere in this
report.
OVERVIEW
We are a provider of telecommunications services to business and
residential customers over Metropolitan Area Networks ("MANs") in Latin America.
From our inception, we have focused on providing telecommunications services in
emerging markets, primarily in Latin America, using a high speed transmission
network within and across national borders. We intend to capitalize on the
rapidly growing demand for telecommunications services in countries emerging
from developing and state-controlled economies and where there is growing
liberalization of regulations governing the provision of telecommunications
services.
As part of our business strategy, we expect to continue to expand
through additional significant acquisitions and strategic alliances. We believe
that additional attractive acquisition opportunities currently exist in Latin
America and we are continually evaluating these opportunities. Certain of these
transactions, if consummated, may be material to our operations and financial
condition. Those acquisitions may not be successfully integrated into our
business operations or result in projected benefits.
H. MATERIAL CHANGES IN RESULTS OF OPERATIONS
Nine months ended September 30, 2000 compared to the nine months ended September
30, 1999:
Revenues. Our revenues for the nine months ended September 30, 2000
totaled $24.97 million, compared to $6.45 million for the same period in 1999,
an increase in revenues of $18.52 million (or 287%). The following table shows
our revenues by operating subsidiary for the first three quarters of 2000 and
1999:
TOTAL REVENUES SEPTEMBER 30, SEPTEMBER 30,
(in thousands) 2000 1999
------------------- -------------------
Intervan (1) $ 11,867 -
GBNet (1) 3,229 -
Inter@net 877 $ 864
Chispa 6,318 5,588
MetroTelecom (2) 2,480 -
Parent Company, elim. & others 205 3
----------- ----------
Consolidated total $ 24,978 $ 6,455
============ ==========
- -----------------
(1) Intervan and GBNet subsidiaries were acquired in December 1999.
(2) MetroTelecom subsidiary was acquired in April 2000.
(3)
The 287% increase in revenues was primarily attributable to our acquisition and
ownership of the Intervan, GBNet and MetroTelecom entities during the nine
months ended September 30, 2000. Our customer base has increased to almost
50,000 subscribers as of September 30, 2000, compared to approximately 30,000
customers as of September 30, 1999, indicating a subscriber base increase of
67%.
Variable Cost of Services. Variable cost of services consists primarily
of bandwidth, interconnect and cable programming charges. The cost of these
services totaled $14.58 million for the nine months ended September 30, 2000, an
increase of $12.2 million over September 1999. Of total variable cost of
services for the nine months ended September 30, 2000, $8.8 million related to
our Intervan operations in Mexico, $2.1 million related to our GBNet operations
in Central America, $0.5 million related to our Inter@net operations in
Venezuela, $2.1 million related to our Chispa operations in El Salvador and $0.9
million related to our MetroTelecom operations in Guatemala. The significant
increase in variable cost of services reflects growth in our revenues, including
completing significant acquisitions in December 1999 and April 2000.
Salaries, Wages and Benefits. Our salaries, wages and benefits totaled
$11.6 million for the nine months ended September 30, 2000, an increase of $7.9
million over the nine months ended September 30, 1999. We had a total of over
750 employees at September 30, 2000, compared to 311 employees at September 30,
1999. The increase in headcount reflects both the normal increases associated
with our maturing operations and the employees we acquired during the month of
December 1999 with our purchases of Intervan and GBnet, which had approximately
190 and 52 employees, respectively. The increase also reflects the employees we
hired in April 2000 with our purchase of MetroTelecom, which had approximately
175 employees at September 30, 2000.
Selling, General and Administrative Expenses. We incurred SG&A expenses
of $10.7 million during the nine months ended September 30, 2000, an increase of
$5.7 million compared to the nine months ended September 30, 1999. The increase
in SG&A expenses reflects growth in our operations, including completing
significant acquisitions in December 1999 and April 2000, as well as the
increased development of our networks. The increase in SG&A reflects:
o Consulting and legal fees, which totaled $2.9 million for the nine
months ended September 30, 2000, compared with $1.6 million for the
nine months ended September 30, 1999.
o Travel, advertising and promotion costs increased $1.9 million to a
total of $2.9 million for the nine months ended September 30, 2000,
compared to only $1.0 million for the nine months ended September 30,
1999. This increase in expenses is the result of the rapid development
of our operations into Central America, Mexico and Venezuela.
o Other operating expenses such as contract labor, rents, office
expenses, utilities, etc., increased approximately $1.9 million as a
result of acquisitions and increased operations.
o On a consolidated basis, we recorded a provision for doubtful accounts
of $0.8 million for the nine months ended September 30, 2000, compared
to $0.2 million for the nine months ended September 30, 1999 as a
result of acquisitions, increased operations and payments in arrears.
Stock Compensation Expense. We incurred non-cash stock compensation
expense in the nine months ended September 30, 2000 of $0.6 million, $0.4
million less than that recorded in the nine months ended September 30, 1999.
Depreciation and Amortization. Our depreciation and amortization
expense totaled $10.7 million in the nine months ended September 30, 2000,
representing an increase of $7.0 million over the nine months ended September
30, 1999. The increase reflects the amortization of intangible assets relating
to our three acquisitions in December 1999 and April 2000. Additionally, the
increase reflects the depreciation expense from network assets obtained through
acquisitions and foreign subsidiary network asset purchases.
Interest Income & Interest Expense. Our interest income increased $0.7
million for the nine months ended September 30, 2000, compared to less than $0.1
million for the nine months ended September 30, 1999. Interest expense decreased
$0.3 million for the nine months ended September 30, 2000. For the nine months
ended September 30, 1999, interest expense activity was greater because it
included imputed interest for warrants issued in conjunction with the December
1998 Notes and the interest expense pertaining to the 1999 FondElec loan. The
average interest rate recorded on our indebtedness outstanding during the nine
months ended September 30, 2000 was approximately 10.75%, compared to
approximately 10.0% for the nine months ended September 30, 1999.
Provision for Income Taxes. We recorded a provision for income taxes of
$0.14 million during the nine months ended September 30, 2000, compared to $0.13
million for the nine months ended September 30, 1999. Intervan, which operates
in Mexico, recognized the majority of this income tax expense.
Net Loss. We incurred a net loss of $23.0 million for the nine months
ended September 30, 2000, an increase of $11.9 million compared to the same
period in 1999. The principal reasons for the increased loss were:
o a $7.9 million increase in salary and benefits expense attributable to
acquisitions and as a result of growth in our operations.
o a $7.0 million increase in depreciation and amortization expense as a
result of acquisitions and the build-out of our networks.
o a $5.7 million increase in SG&A expenses due to the growth in our
operations and as a result of acquisitions.
o the above increases were offset by a $6.3 million increase in net
revenues over variable cost of services and a decrease in net interest
expense of $1.1 million. Minority interest in loss of subsidiaries
also offset the increase by $1.2 million.
Nine months ended September 30, 1999 compared to the nine months ended September
30, 1998:
During the nine months ended September 30, 1999, we had recently
completed our development activities and commenced planned principal operations.
We were still in the development stage during the nine months ended September
30, 1998.
Revenues. Our revenues for the nine months ended September 30, 1999
totaled $6.45 million, compared to $1.25 million for 1998, an increase in
revenues of $5.2 million (or 416%). The following table shows our revenues by
operating subsidiary for the first nine months of 1999 and 1998:
TOTAL REVENUES SEPTEMBER 30, SEPTEMBER 30,
(in thousands) 1999 1998
---------------------- ----------------
Inter@net(1) $ 864 $ 147
Chispa (1) 5,588 1,051
Parent Company, elim. & others 3 51
--------- --------
Consolidated total $ 6,455 $1,249
========= ========
- ----------------
(1) Inter@net and Chispa were both acquired in the third fiscal quarter of
1998. -
The increase in revenues for the nine months ended September 30, 1999 was
primarily attributable to having our ownership interests in Inter@net and Chispa
during the full nine months ended September 30, 1999.
Variable Cost of Services. Our variable cost of services totaled $2.3
million in the nine months ended September 30, 1999, an increase of $1.3 million
over the same period in 1998. The increase is due to our ownership interests in
Inter@net and Chispa during the full nine months ended September 30, 1999.
Salaries, Wages and Benefits. Our salaries, wages and benefits totaled
$3.7 million for the nine months ended September 30, 1999, an increase of $2.9
million from the same period in 1998. We maintained 311 employees at September
30, 1999, compared to 199 employees at September 30, 1998. The increase in
headcount reflects increases in our employee count as our foreign operations
were developed.
Selling, General and Administrative Expenses. We incurred SG&A expenses
of $5.0 million in the nine months ended September 30, 1999, an increase of $1.7
million (or 53%) compared to the same period in 1998. The increase in SG&A
expenses reflects growth in our operations, including completing significant
acquisitions in the third quarter of 1998 and increased development of our
networks. The increase in SG&A reflects:
o Consulting and legal fees, which totaled $1.6 million for the nine
months ended September 30, 1999, compared with $1.3 million for the
same period in 1998 for an increase of $0.3 million.
o Travel, advertising and promotion costs increased to about $1.0
million compared to less than $0.5 million for the same period in 1998
for an increase of $0.5 million. The increase in travel was due to
researching potential business offerings in Central America.
o Certain operating expenses such as contract labor, rents, office
expenses, utilities, etc., increased approximately $0.9 million as a
result of our acquisitions in El Salvador and Venezuela in the third
fiscal quarter of 1998.
Stock Compensation Expense. We incurred non-cash stock compensation
expense in the nine months ended September 30, 1999 totaling $1.0 million. We
had no non-cash stock compensation expense in the same period of 1998.
Depreciation and Amortization. Our depreciation and amortization
expense totaled $3.7 million for the nine months ended September 30, 1999,
representing an increase of $2.0 million compared to the same period in 1998.
The increase relates primarily to the amortization of intangible assets relating
to acquisitions.
Interest Income & Interest Expense. Our interest income decreased $0.2
million for the nine months ended September 30, 1999, compared to interest
income of $0.3 million for the nine months ended September 30, 1998. Interest
expense increased $2.7 million for the nine months ended September 30, 1999. The
nine months ended September 30, 1999 interest expense activity was greater
because it included imputed interest for warrants issued in conjunction with the
December 1998 Notes and the interest expense pertaining to the 1999 FondElec
loan. The significant increase in interest expense also resulted from the
interest on debt issued to complete acquisitions in the third fiscal quarter of
1998.
Net Loss. We incurred a net loss of $11.1 million in the nine months
ended September 30, 1999, an increase of $5.8 million over the same period in
1998. The principal reasons for the increased loss were:
o the $2.9 million increase in salary, wages and benefit expenses due to
the growth in our operations and as a result of acquisitions in 1998
o the $1.7 million increase in SG&A expenses due to the growth in our
operations and as a result of acquisitions in 1998
o the $1.0 million increase in stock-based compensation expense to
attract key management
o the $2.0 million increase in our depreciation and amortization expense
on intangible assets as a result of acquisitions in 1998
o the $2.8 million increase in net interest expense as a result of debt
related to acquisitions and financing of operational growth.
o the above increases were offset by a $3.9 million increase in net
revenues over variable cost of services. Minority interest in loss of
subsidiaries also offset the increase by $1.0 million
Liquidity and Capital Resources
Since inception, we have funded our cash requirements at the parent
company level through debt and equity transactions. The proceeds from these
transactions were primarily used to fund our investments in, and acquisition of,
start-up network operations, to provide working capital, and for general
corporate purposes, including the expenses we incurred in seeking and evaluating
new business opportunities. Our foreign subsidiary interests have been financed
by a combination of equity investments and shareholder loans.
We will continue to make significant capital expenditures in the next
several years in connection with building our networks, the further development
of our operations in Mexico, Venezuela and Central America, and new customer
accounts (for which we install our equipment on customer premises). We intend to
meet our capital requirements during the remainder of year 2000 from a
combination of the following:
o unused proceeds from the July and September 2000 exercise of options
issued to the investors in connection with our October 1999 financing
transactions.
o borrowings under the definitive vendor financing agreement with
Alcatel
We anticipate that we will require up to $14 million during the
remaining three months of fiscal 2000 for capital expenditures related to the
continued expansion of our existing telecommunications business, and that we
will require significant amounts thereafter.
During the nine months ended September 30, 2000, our operating
activities used $15.7 million, compared with using $0.3 million during the nine
months ended September 30, 1999. Our investing activities consisted of the $3.4
million net cash component pertaining to the MetroTelecom acquisition in
Guatemala and $18.1 million capital expenditures for network construction. Both
of these activities combined for a total of $21.5 million used for investing
activities during the nine months ended September 30, 2000. This $21.5 million
activity compared to the $10.9 million used for capital expenditures for network
equipment and Mexico fiber-optic network capacity during the nine months ended
September 30, 1999.
Our financing activities in the nine months ended September 30, 2000
provided $34.6 million which consisted primarily from the $29.2 million in net
proceeds due to the issuance of 3,891,563 shares of Series C Preferred Stock to
our shareholders, $6.4 million of network equipment purchases and debt issue
cost were financed with Alcatel offset by repayments of amounts owed to a
third-party bank and amounts owed to repay the Inter@net acquisition debt. This
$34.6 million activity compared to the $7.5 million that was provided from
proceeds from related party notes and borrowing activity (net of payments)
during the quarter ended September 30, 1999.
As of September 30, 2000, we had current assets of $34.0 million,
compared to $31.0 million as of December 31, 1999, for a small increase of $3.0
million. As of September 30, 2000, we had current liabilities of $33.1 million,
including the current portion of acquisition debt of $16.3 million. The
significant increase in current liabilities is due to the significant growth in
our foreign operations combined with the due dates of certain acquisition debt
now falling within the current repayment period.
The cash flow generated by our foreign operations will not be
sufficient to cover our planned significant operational growth in the coming
fiscal year. Our ability to provide the services contemplated by our business
plan will be dependent on our efforts to obtain substantial additional sources
of funds to finance our business plan.
We have the ability to moderate our capital spending and losses by
varying the number and extent of our market build out activities and the
services we offer in our various markets. If we elect to slow the speed, or
narrow the focus, of our business plan, we will be able to reduce our capital
requirements and losses. The actual costs of building out and launching our
markets would depend on a number of factors, however, including our ability to
negotiate favorable prices for purchases of network equipment, the number of
customers and the services for which they subscribe, the nature and success of
the services that we may offer, regulatory changes and changes in technology. In
addition, actual costs and revenues could vary from the amounts we expect or
budget, possibly materially, and such variations are likely to affect how much
additional financing we will need for our operations. Accordingly, there can be
no assurance that our actual financial needs will not exceed the anticipated
amounts available to us, including from new, third parties, described above.
To the extent we acquire the amounts necessary to fund our business
plan through the issuance of equity securities, our shareholders may experience
dilution in the value per share of their equity securities. The acquisition of
funding through the issuance of debt could result in a substantial portion of
our cash flow from operations being dedicated to the payment of principal and
interest on that indebtedness, and could render us more vulnerable to
competitive and economic downturns. Our subsidiaries or affiliates could also
obtain financing from third parties, but there can be no assurance our
subsidiaries or affiliates will be able to obtain the financing required to make
planned capital expenditures, provide working capital or meet other cash needs
on terms which are economically acceptable to us.
D. SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
- ----------------------------------------------------------
Certain statements contained in "Management's Discussion and Analysis"
constitute forward-looking statements concerning our operations, economic
performance and financial condition. Because those statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by those forward-looking statements.
In addition, any statements that express or involve discussions as to
expectations, beliefs, plans, objectives, assumptions or future events or
performance are not historical facts and may be forward-looking and,
accordingly, those statements involve estimates, assumptions and uncertainties
which could cause actual results to differ materially from those expressed in
the forward-looking statements. Accordingly, those types of statements are
qualified in their entirety by reference to, and are accompanied by, the factors
discussed throughout this report. Among the key factors that have a direct
bearing on our results of operations are the potential risk of delay in
implementing our business plan; the political, economic and legal aspects of the
markets in which we operate; competition; and our need for additional
substantial financing. We have no control over some of these factors.
The factors described in this report could cause our actual operating
results to differ materially from those expressed in any forward-looking
statements made by or on behalf of us. Persons reviewing this report, therefore,
should not place undue reliance on those forward-looking statements. Further, to
the extent this report contains forward-looking statements, they speak only as
of the date of this report, and we undertake no obligation to update any
forward-looking statement or statements to reflect the occurrence of
unanticipated events. New factors may emerge from time to time, and it is not
possible for management to predict all of such factors. Further, management
cannot assess the impact of each such factor on our business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the section entitled "Legal Proceedings" in our report on Form
10-QSB for the quarter ended June 30, 2000 and our report on Form 10-KSB for the
year ended December 31, 1999.
ITEM 2. CHANGES IN SECURITIES
In July and September 2000, we issued a total of 3,891,563 shares of
our Series C Convertible Preferred Stock to five investors for approximately
$29.2 million upon their exercise of certain options we granted them in October
1999 in connection with a $109 million equity and debt financing round. In
October 2000, we issued a total of 406,666 shares of our common stock to three
parties in exchange for their respective minority ownership rights in certain
operating subsidiaries.
In each case, we believe (and received representations and warranties
to the effect) that (i) the investor was an "accredited investor", as that term
is defined under the Securities Act of 1933, as amended (the "Act"), (ii)
acquired the securities for investment purposes, and without a view to resale or
distribution in violation of the federal securities laws, (ii) understood that
the securities were subject to severe restrictions on resale or further
disposition, and that any such disposition would be subject to the disposition
qualifying for an exemption from registration or the securities being registered
under the Act, and (iv) understood that the certificates representing the
securities would bear restrictive legends typically placed on unregistered
securities.
In July 2000, we canceled 328,510 common shares and 71,853 Series B
preferred shares under the terms of the settlement. See our report on Form 8-K
filed on July 7, 2000 for a more detailed description.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MATTERS SUBMITTED TO A VOTE OF THE COMPANY'S SHAREHOLDERS
In October 2000, we received the written consent from the holders of
approximately 88.7% of the voting power of our outstanding capital stock for an
amendment to our articles of incorporation increasing the total authorized share
of stock of the Corporation from 115,000,000 to 125,000,000 with the 10,000,000
share increase designated to preferred stock. On October 16, 2000, we filed an
Information Statement on Schedule 14C with the Commission which described the
transaction, the reasons for it, the number of shares consenting to the
transaction, the percentage of the voting power of our securities represented by
those shares, and that the number of shares consenting to the transaction was
sufficient to authorize the transaction at any duly called and convened meeting
of our shareholders.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
A. EXHIBITS.
None.
B. REPORTS ON FORM 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONVERGENCE COMMUNICATIONS, INC.
Date: November 14, 2000 BY /s/ JERRY SLOVINSKI
-------------------
Jerry Slovinski
Chief Financial Officer