U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001.
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 April 30, 2001, 11,921,094 shares of registrant's Common Stock, par value
$.001 per share, 13,620,472 shares of the registrant's Series C Preferred Stock,
par value $.001 per share, and 2,643,636 shares of the registrant's Series D
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, 2000, 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 three months ended March 31, 2001 may not be
indicative of the results that may be expected for the year ending December 31,
2001.
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 2001 AND DECEMBER 31, 2000
- ------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2001 2000
---------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,097,914 $ 4,193,170
Accounts receivable - net 6,711,437 5,244,893
Inventory - net 889,316 910,204
Value added tax receivable 2,651,787 4,048,900
Prepaid expenses and other 2,548,060 2,129,438
---------------- ----------------
Total current assets 20,898,514 16,526,605
PROPERTY AND EQUIPMENT - net 65,263,737 56,652,546
INTANGIBLE ASSETS - net 44,809,717 46,513,030
OTHER ASSETS
Debt issue costs 5,550,687 5,550,687
Other 1,441,813 1,475,034
---------------- ----------------
Total other assets 6,992,500 7,025,721
---------------- ----------------
TOTAL ASSETS $ 137,964,468 $ 126,717,902
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt (payable to related party) $ - $ 3,000,000
Notes payable - current portion 17,536,416 22,298,447
Current portion of long-term debt (payable to related party) 1,436,519 1,436,519
Accounts payable and accrued liabilities 24,362,044 21,944,835
---------------- ----------------
Total current liabilities 43,334,979 48,679,801
LONG-TERM LIABILITIES:
Notes payable - long-term portion 11,943,398 12,274,717
Long-term debt (payable to related parties) 8,269,497 4,769,497
Other long-term liabilities 803,125 392,239
---------------- ----------------
Total long-term liabilities 21,016,020 17,436,453
MINORITY INTEREST IN SUBSIDIARIES 911,555 2,012,603
---------------- ----------------
Total liabilities 65,262,554 68,128,857
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series "D" Preferred stock; $0.001 par value; 10,000,000 shares authorized:
2,643,636 shares outstanding in 2001 2,644 -
Series "C" Preferred stock; $0.001 par value; 14,250,000 shares authorized:
13,620,472 and 9,728,909 shares outstanding in 2001 and 2000, respectively. 13,620 13,620
Common stock; $0.001 par value; 100,000,000 shares authorized:
11,921,094 and 11,585,489 shares outstanding in 2001 and 2000, respectively 11,921 11,921
Additional paid-in capital 150,889,771 127,897,441
Accumulated deficit (78,324,157) (69,089,076)
Accumulated other comprehensive loss 108,115 (244,861)
---------------- ----------------
Total stockholders' equity 72,701,914 58,589,045
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 137,964,468 $ 126,717,902
================ ================
See notes to consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
- ------------------------------------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
March 31 March 31
2001 2000
------------------ -----------------
NET REVENUES FROM SERVICES $ 10,509,328 $ 7,216,423
------------------ -----------------
COSTS AND EXPENSES:
Variable cost of services 6,950,200 4,100,160
Salaries, wages and benefits 6,091,755 3,154,721
Selling, general and administrative 2,856,309 3,680,208
Depreciation and amortization 3,906,505 2,908,715
Stock option compensation expense 32,703 264,223
------------------ -----------------
Total costs and expenses 19,837,472 14,108,027
------------------ -----------------
OPERATING LOSS (9,328,144) (6,891,604)
OTHER INCOME (EXPENSE):
Interest income 139,707 272,541
Interest expense (1,231,403) (717,480)
Other 70,972 7,898
Net gain on foreign exchange 44,165 30,383
------------------ -----------------
Total other expense (976,559) (406,658)
------------------ -----------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (10,304,703) (7,298,262)
PROVISION FOR INCOME TAXES (31,427) (53,759)
------------------ -----------------
LOSS BEFORE MINORITY INTEREST (10,336,130) (7,352,021)
MINORITY INTEREST IN LOSS OF SUBSIDIARIES 1,101,049 657,741
------------------ -----------------
NET LOSS $ (9,235,081) $ (6,694,280)
================== =================
Net loss per basic and diluted common share $ (0.34) $ (0.31)
================== =================
Weighted-average number of common shares:
Basic and diluted 27,069,000 21,419,157
================== =================
See notes to consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS AND YEAR ENDED DECEMBER 31, 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock
--------------------------------------------------------------
Series "B" Series "C" Series "D"
------------------ -------------------- ------------------
Total Shares Amount Shares Amount Shares Amount
------------ -------- ------- ---------- -------- ---------- --------
BALANCE, DECEMBER 31, 1999 $ 59,375,280 101,374 $ 101 9,728,909 $ 9,729 - $ -
Comprehensive loss:
Net loss for year ended December 31, 2000 (32,973,060)
Other comprehensive loss consisting of
foreign currency translation adjustment (214,849)
------------ -------- ------- ---------- -------- ---------- --------
Total comprehensive loss (33,187,909) - - - - - -
Acquisition of Metrotelecom stock for
CCI common shares 1,000,000
Acquisition of stock from former officer - (71,853) (72)
Conversion of Series B to common shares - (29,521) (29)
Non-cash remeasurement of options -
Exercise of shareholder stock options 27,374,162 3,891,563 3,891
Exercise of employee stock options 241
Issuance of common shares for minority interest 3,765,727
Issuance of warrants on Alcatel debt 13,251
Issuance of options for common shares
below fair value 248,293
------------ -------- ------- ---------- -------- ---------- --------
BALANCE, DECEMBER 31, 2000 58,589,045 - - 13,620,472 13,620 - -
Comprehensive loss:
Net loss for three months ended March (9,235,081)
31, 2000
Other comprehensive income consisting of
foreign currency translation adjustment 352,976
------------ -------- ------- ---------- -------- ---------- --------
Total comprehensive loss (8,882,105) - - - - - -
Issuance of Series D shares 22,937,349 2,643,636 2,644
Issuance of options on Alcatel debt 6,625
Stock-based compensation expense 51,000
------------ -------- ------- ---------- -------- ---------- --------
BALANCE, MARCH 31, 2001 $ 72,701,914 - - 13,620,472 $ 13,620 2,643,636 $ 2,644
============ ======== ======= ========== ======== ========== ========
(CONTINUED ON NEXT PAGE)
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS AND YEAR ENDED DECEMBER 31, 2000 (CONTINUED FROM PREVIOUS PAGE)
Accumulated
Common Stock Additional Other
------------------ Paid-in Accumulated Comprehensive
Shares Amount Capital Deficit Income (Loss)
---------- -------- ------------ ------------- -------------
BALANCE, DECEMBER 31, 1999 11,585,489 $ 11,585 $ 95,147,893 $(35,764,016) $ (30,012)
Comprehensive loss:
Net loss for year ended December 31, 2000 (32,973,060)
Other comprehensive loss consisting of
foreign currency translation adjustment (214,849)
---------- -------- ------------ ------------- -------------
Total comprehensive loss - - - (32,973,060) (214,849)
Acquisition of Metrotelecom stock for
CCI common shares 121,212 121 999,879
Acquisition of stock from former officer (328,510) (328) 400
Conversion of Series B to common shares 125,237 125 (96)
Non-cash remeasurement of options 352,000 (352,000)
Exercise of shareholder stock options 27,370,271
Exercise of employee stock options 11,000 11 230
Issuance of common shares for minority interest 406,666 407 3,765,320
Issuance of warrants on Alcatel debt 13,251
Issuance of options for common shares
below fair value 248,293
---------- -------- ------------ ------------- -------------
BALANCE, DECEMBER 31, 2000 11,921,094 11,921 127,897,441 (69,089,076) (244,861)
Comprehensive loss:
Net loss for three months ended
March 31, 2000 (9,235,081)
Other comprehensive income consisting of
foreign currency translation adjustment 352,976
---------- -------- ------------ ------------- -------------
Total comprehensive loss - - - (9,235,081) 352,976
Issuance of Series D shares 22,934,705
Issuance of options on Alcatel debt 6,625
Stock-based compensation expense 51,000
---------- -------- ----------- ------------- -------------
BALANCE, MARCH 31, 2001 11,921,094 $ 11,921 $ 150,889,771 $(78,324,157) $ 108,115
========== ======== ============ ============= =============
CONVERGENCE COMMUNICATIONS, INC. DRAFT
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
- -----------------------------------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
March 31 March 31
2001 2000
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,235,081) $ (6,694,280)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,906,505 2,908,715
Provision for bad debts 332,915 35,944
Minority interest in loss of subsidiaries (1,101,049) (657,741)
Stock-based compensation expense 51,000 264,223
Amortization of discount on notes payable 211,900 589,085
Issuance of options on Alcatel debt 6,625 -
Change in assets and liabilities:
Accounts receivable (1,799,459) (612,553)
Inventory 20,888 (105,538)
Prepaid expenses and other current assets 978,491 (2,266,256)
Other assets (147,875) (409,937)
Accounts payable and accrued liabilities 2,715,625 2,763,551
Other long-term liabilities 410,886 8,213
---------------- ----------------
Net cash used in operating activities (3,648,629) (4,176,574)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (10,633,287) (2,691,898)
---------------- ----------------
Net cash used in investing activities (10,633,287) (2,691,898)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Series "D" Preferred Stock 22,937,349 -
Proceeds from related party borrowings 4,230,000 -
Payments on related party borrowings (3,000,000) -
Payments on notes payable (5,964,000) (199,666)
Net proceeds from exercise of employee stock options - 241
---------------- ----------------
Net cash provided by (used in) financing activities 18,203,349 (199,425)
---------------- ----------------
EFFECT OF EXCHANGE RATES ON CASH (16,689) 12,559
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,904,744 (7,055,338)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,193,170 26,303,296
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,097,914 $ 19,247,958
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the quarter for interest $ 507,910 $ 107,577
================ ================
Cash paid during the quarter for income taxes (including prepaid) $ 35,466 $ 41,164
================ ================
See notes to consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(Unaudited)
1. Basis of Presentation
Convergence Communications, Inc. and subsidiaries (the "Company"), is a
Latin American facilities-based telecommunications company which owns and
operates IP-based, broadband metropolitan area networks. The Company offers a
menu of broadband connectivity, IP-telephony, high-speed Internet access,
web-site hosting, virtual private networks, e-commerce and pay television
services to businesses and consumers in Latin America.
From its inception, the Company has focused on providing telecommunications
services using high-speed transmission networks within and across national
borders. The Company intends 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.
The Company's consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classifications of recorded amounts of assets or the amounts
and classifications of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern depends upon its ability to generate sufficient cash flows to meet its
obligations on a timely basis and to obtain additional financing or refinancing
as may be required.
At March 31, 2001, the Company's current liabilities exceeded current
assets by $22,436,465. Since its inception, the Company has sustained net losses
and negative cash flow, due primarily to amortization of intangible assets
relating to acquisitions, interest expense on debt relating to acquisitions,
start-up costs, legal and professional expenses, and charges for depreciation
and other costs relating to its acquisition and development of its business. The
Company expects to continue to experience net losses and negative cash flow
through 2002, and may continue to do so thereafter while it develops and expands
its business, even if individual markets of the Company become profitable.
In addition, as of March 31, 2001, the Company was out of compliance with
the operating covenants of the $175,000,000 Alcatel equipment financing facility
and has not received a waiver of such noncompliance from the lender. As a
result, Alcatel has the right to accelerate the maturity of the outstanding debt
and the Company is unable to draw upon its facility until such covenants are
met. The outstanding balance under the Alcatel facility of $7,591,555 has been
classified as a current liability in the accompanying consolidated balance
sheets.
The Company intends to meet its operational and capital expenditure
requirements during 2001 from a combination of:
o Net proceeds from its recent equity financing (see "Changes in
Securities" below)
o Additional private equity or debt transactions
o Extending or modifying repayment terms on seller notes
o Reductions in capital expenditures
o Control of operating expense growth
o Sales of selected businesses and/or assets
Management also intends to work with Alcatel to renegotiate the operating
covenants under the Alcatel financing facility, which, if successful, may allow
the Company to extend repayment terms under the facility and make further draws
for equipment purchases. The Company can give no assurance that it will be able
to obtain additional equity and debt financing, renegotiate its operating
covenants with Alcatel or make further draws on the Alcatel facility, or control
operating and capital expenditures in amounts sufficient for the Company to
continue as a going concern.
2. Principles of Consolidation
The consolidated financial statements include the accounts of Convergence
Communications, Inc., all wholly and majority-owned subsidiaries, its 32.6%
interest in Chispa Dos, Inc. ("Chispa"), the holding entity of Cablevisa, S.A.,
Multicable S.A. and Cybernet de El Salvador S.A, and its 49% voting interest in
International Van, S. A. de C.V. ("Intervan"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
3. Net Loss per Common Share and Common Share Equivalent
Net loss per common share and common share equivalent amounts are 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
(which was converted to common stock in August 2000) and Series C and D
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. At March 31, 2001 and 2000, all options and warrants were
anti-dilutive due to the losses of the Company.
4. Use of Estimates in Preparing Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America 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.
5. 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 three months ended March 31, 2001 and 2000:
Central
2001 Mexico Venezuela America Corporate Totals
- ---------------------- ------------- ------------- -------------- -------------- -------------
Revenue:
- - Data $ 3,513,812 $ 330,668 $ 1,115,862 $ - $ 4,960,342
- - CATV - - 1,836,354 - 1,836,354
- - Other 1,351,247 18,617 2,342,768 - 3,712,632
Operating loss (3,272,123) (1,022,827) (2,533,688) (2,499,506) (9,328,144)
Central
2000 Mexico Venezuela America Corporate Totals
- ---------------------- ------------- ------------- -------------- -------------- --------------
Revenue:
- - Data $ 2,595,748 $ 292,439 $ 1,216,996 $ - $ 4,105,183
- - CATV - - 1,661,884 - 1,661,884
- - Other 1,050,193 12,326 386,837 - 1,449,356
Operating loss (1,715,549) (355,180) (1,323,988) (3,496,887) (6,891,604)
6. Subsequent Event
On April 30, 2001, the Company received a notice from FondElec Group, Inc.
that it had initiated an arbitration proceeding against the Company for amounts
allegedly due under the terms of a services agreement between the Company and
FondElec dated August 1999. The services agreement requires the Company to pay
FondElec amounts for investment advisory and other consulting services. FondElec
alleges the total amount due it under that agreement in excess of $3.1 million.
FondElec is a shareholder in the Company and is an affiliate of FondElec
Essential Services Growth Fund, L.P., which is one of our principal
shareholders. The Company believes it has recorded adequate accruals and has
significant counterclaims and setoffs against FondElec for the amounts allegedly
due under the terms of that services agreement, and that it otherwise has
meritorious defenses to any claim for all or a portion of the fees, and intends
to defend its position vigorously in the arbitration.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis relates to our financial condition
and results of operations for the three months ended March 31, 2001 and 2000.
This information should be read in conjunction with our consolidated financial
statements and the notes related thereto appearing elsewhere in the document.
A. OVERVIEW
We provide high quality, low-cost integrated communications services using
our own metropolitan area networks and local networks of incumbent local
exchange providers. We operate primarily in recently deregulated and high-growth
markets, principally in Mexico, Venezuela and Central America. We offer
customers broadband, high-speed data connections, high-speed and dial-up
Internet access, voice and video services in a number of our markets using an
IP-based technology platform and networks that employ fiber-optic fixed wireless
technologies and hybrid fiber coaxial cable.
From our inception in 1995 until 1998, our main activities consisted of
acquiring licenses and authorizations in our various market countries, acquiring
building access rights, hiring management and other key personnel, developing
operating systems and activities directly associated with the acquisition and
deployment of our various networks. During fiscal 1998, we acquired the ability
to provide, or introduced, significant bundled telecommunications services in
our markets.
Since our inception, we have sustained significant net losses and negative
cash flow. We expect the losses and negative cash flow to continue until we
develop a customer base that will generate sufficient revenues to fund our
operating expenses. We expect that our 2001 operating and net losses and
negative operating cash flow will be greater than in 2000. We also anticipate
that the execution of our business plan will result in a rapid expansion of our
operations, which may place a significant strain on our management, financial
and other resources. Our ability to manage the problems associated with our
expansion will depend, among other things on, our ability to monitor operations,
control costs, maintain effective quality control, secure necessary interconnect
and regulatory approvals, expand internal management, technical, information and
accounting systems and attract, assimilate and retain qualified management and
professional personnel. Our inability or failure to effectively manage these
issues could result in significant subscriber turnover, stagnant or decreasing
subscriber growth, our inability to meet our contractual obligations for
continued funding under our various vendor financing relationships such as with
Alcatel, managerial inefficiencies, missed corporate opportunities and
continuing or increased losses.
The difficulties in managing these various business issues will be
compounded by a number of the unique attributes of our business operations and
our strategy for becoming a premier facilities-based telecommunications provider
in our various markets. For example, we use, as part of our operating network,
wireless technology. This technology has been used by other telecommunications
providers for a significant period of time, but our point-to-multipoint
technology has only been commercially used on a limited basis. We selected this
technology because we believe it complements the wireline technologies we
otherwise employ in our networks, but if that technology does not perform as
expected or provide the advantages that we expect, our business, financial
condition and the results of our operations may be materially and adversely
affected. Further, we employ an IP-based technology platform that uses packet
switching to transmit voice, video and data elements over the same network. We
believe that IP-based packet-switched networks have less overhead and greater
capacity than traditionally used technology platforms but, in the past, there
have been issues regarding the quality of service provided by those platforms.
We believe that the quality of services provided by other transport systems has
been incorporated into the newer generations of IP switches and bandwidth
managers, but if our technology platform does not perform as expected or provide
the advantages we expect, our business, financial condition and the results of
our operations could also be materially and adversely affected. Also, as part of
our operations in some of our markets, we rely on network capacity that we lease
from third parties, some of which may be our competitors in the market. Those
parties may not have the same incentive as other, non-competitive, network
owners to maintain those existing relationships with us on terms which promote
our competitive advantage.
B. MATERIAL CHANGES IN RESULTS OF OPERATIONS
Three months ended March 31, 2001 compared to the three months ended March 31,
2000:
Revenues. Our revenues for the three months ended March 31, 2001 totaled
$10.5 million, compared to $7.2 million for the same period in 2000,
representing a $3.3 million increase in revenues (or 46%). The following table
shows our revenues by region for the first quarters of 2001 and 2000:
TOTAL REVENUES
(in thousands) 2001 2000
---------- ----------
Mexico (Intervan) $ 4,865 $ 3,646
Venezuela (Inter@net) 349 305
Central America 5,295 3,265
---------- ----------
Consolidated total $ 10,509 $ 7,216
========== ==========
The increase in our 2001 revenues was primarily attributable to growth of
our operations in Mexico (Intervan) combined with the acquisition of
Metrotelecom (Central America) in April 2000. Intervan contributed almost $1.2
million of the revenue increase, consisting of an increase of $0.9 million in
high speed data revenue with the remainder consisting of other revenue. The
acquisition of Metrotelecom in April 2000 contributed $1.8 million to the
revenue increase in 2001.
Variable Cost of Services. Variable cost of services consists primarily of
high-speed data bandwidth, telephony and cable programming charges. The cost of
these services totaled $6.9 million for the three months ended March 31, 2001,
an increase of $2.9 million over the same period of 2000. The significant
increase in variable cost of services is a result of growth in our revenues,
including completing the acquisition of Metrotelecom in April 2000.
Salaries, Wages and Benefits. Our salaries, wages and benefits totaled $6.1
million for the three months ended March 31, 2001, an increase of $2.9 million
over the same period in 2000. We maintained a total of 795 employees at March
31, 2001, of which 142 employees related to Metrotelecom which we acquired in
April 2000. The adjusted headcount of 654 employees for March 31, 2000, compared
to 795 employees at March 31, 2001 reflects an employee headcount increase of
22%. The increase in employee headcount reflects significant employee hiring in
primarily our sales, marketing and technical departments to support our planned
significant growth in operations. We increased the salaries, wages and benefits
of our personnel to match market rates and increases in cost of living.
Selling, General and Administrative Expenses. We incurred SG&A expenses of
$2.9 million during the three months ended March 31, 2001, a decrease of $0.8
million compared to the same period in 2000. The decrease in SG&A expenses
reflects a concerted effort by management to reduce such expenses in 2001.
Depreciation and Amortization. Our depreciation and amortization expense
totaled $3.9 million during the three months ended March 31, 2001, representing
an increase of $1.0 million over the same period in 2000. The significant
increase reflects the depreciation expense from network assets obtained through
acquisitions and foreign subsidiary network asset purchases.
Interest Income and Interest Expense. Our interest income decreased $0.1
million for a total of almost $0.1 million during the three months ended March
31, 2001 due to a lower average cash investment balance during the period.
Interest expense over the same period increased $0.5 million due primarily to
the acquisition debt we incurred in April 2000. Additionally, the average
interest rate recorded on our indebtedness during the three months ended March
31, 2001 was approximately 12.5%, compared to approximately 10.75% as of March
31, 2000.
Net Loss. We incurred a net loss attributable to common shareholders of
$9.2 million in the three months ended March 31, 2001, an increase of $2.5
million compared to the same period in 2000. The principal reasons for the $2.5
million increase were:
o $2.9 million increase in salary and benefits expense attributable
primarily to the significant growth in employee headcount to
support planned operations.
o $1.0 million increase in depreciation on fixed assets and
amortization expense on intangible assets as a result of the
build-out of our networks and one additional acquisition.
o $0.5 million increase in interest expense due to the increased
acquisition debt balance.
o above increases were offset by a $0.4 million increase in net
revenues over variable cost of services, a $0.5 million increase
in minority interest loss, a $0.8 million decrease in SG&A
expenses due to the concerted effort by management to reduce such
expenses and a $0.2 million decrease in non-cash stock
compensation expense.
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 acquisitions 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 2001 from a combination of the following:
o unused proceeds from our February 2001 financing
o additional equity or debt financings
o extending or modifying repayment terms on seller notes
o reductions in capital expenditures
o control of operating expense growth
o sales of selected businesses and/or assets
We anticipate that we will require a minimum of $20 million during 2001 for
capital expenditures related to the expansion of our existing telecommunications
business, and that we will require significant amounts thereafter. If we spend
over $20 million for capital expenditures, as noted above, we would anticipate
meeting a portion of our capital requirements through draw downs on the Alcatel
facility. Under the terms of the January amendment to our agreements with
Alcatel, we are required to obtain additional equity financing (as well as meet
operational milestones) in order to make further draw downs on the Alcatel
facility and obtain reimbursement of certain amounts we have paid or will pay
prior to the reimbursement. As of the date of this report, we have not met some
of the amended operating covenants, and therefore, have been unable to draw down
on the Alcatel facility. We intend to work with Alcatel to renegotiate the
operating covenants to provide us with the ability to make further draw downs on
the facility. We can make no assurances that Alcatel will agree to any such
modifications. Further, as of the date of this report, we are not in compliance
with the payment covenants of the equipment purchasing provision of the Alcatel
agreements. We are negotiating a waiver of those payment provisions with
Alcatel, but we have not yet received (and there can be no assurance that we
will obtain) Alcatel's agreement to the waiver, or that Alcatel will agree to
modify the payment provisions in a manner which we believe is acceptable. As a
result, Alcatel has the right to accelerate the maturity of the amounts we have
drawn under the facility and pursue its remedies for default. See our report on
Form 8-K dated June 22, 2000 and our annual report on Form 10-KSB for the year
ended December 31, 2000 for a more detailed description of Alcatel's rights
under the financing facility.
If we are able to obtain a waiver or modification of the payment
provisions, but are still unable to make draw downs on the Alcatel facility (and
receive reimbursement of certain amounts we have paid or will pay thereunder),
the amount of our capital expenditures could be reduced significantly. Also, as
noted above, we intend to meet a portion of our capital requirements through the
sale of our equity or debt securities and through the sale of certain of our
assets, including all or a portion of our Guatemala and El Salvador operations.
There can be no assurance, however, that we will be able to complete any such
financing transactions or sales on terms acceptable to us, or on any terms, in
part because of the current state of the telecommunications industry. The
telecommunications market dropped dramatically during 2000, and from March 2000
through the beginning of 2001, the market value of telecommunications companies
decreased significantly. The values of telecommunications companies have also
been adversely affected by the credit experience of the established
telecommunications vendors, which have recently had increasing problems in
collecting payments for their equipment. As a result of these factors, investors
and lenders are carefully evaluating prospective investment opportunities in,
and the investment values of, telecommunications companies that are seeking
investments. If we are unable to obtain additional equity capital as a result of
the factors noted above in this paragraph, or otherwise, our ability to comply
with the terms of the Alcatel financing facility and make draw downs on the
facility (and receive reimbursement of certain amounts we have paid or will pay
thereunder) also could be adversely affected.
During the first quarter ended March 31, 2001, our operating activities
used $3.6 million, compared with $4.2 million during the same quarter in 2000.
Our investing activities used $10.6 million in the first quarter ended March 31,
2001, compared with $2.7 million during the same quarter in 2000. These changes
are primarily attributable to the increase in working capital requirements and
purchases of property and equipment related to our rapidly expanding operations.
Financing activities, principally the issuance of Series D Preferred Stock in
February 2001 offset by the payments on notes payable, provided $18.2 million in
net cash flow during the first quarter ended March 31, 2001.
As of March 31, 2001, we had current assets of $20.9 million, compared to
$16.5 million as of December 31, 2000, for an increase of $4.4 million. The
increase in current assets was primarily due to an increase in cash related to
the issuance of Series D Preferred Stock in February 2001.
The cash flow generated by our foreign operations will not be sufficient to
cover our planned significant operational growth in this fiscal year. Our
ability to execute our business plan will be dependent on our efforts to obtain
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. If
we are required to conserve our operating cash by slowing the buildout of our
networks, decreasing our marketability efforts or otherwise modifying our
service offerings or the manner and timing of the way we implement our business
plan, our ability to meet the operational milestones set forth in the January
2001 amendment to our Alcatel agreements could be adversely affected, perhaps
materially. If we are unable to meet those operations milestones, we will not be
able to make further draw downs on the Alcatel facility or obtain reimbursements
of certain amounts we have paid on or will pay Alcatel under the facility.
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 pressures 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 also the section entitled "Legal Proceedings" in our report on Form
10-KSB for the year ended December 31, 2000.
On April 30, 2001, we received a notice from FondElec Group, Inc. that it
had initiated an arbitration proceeding against us for amounts allegedly due
under the terms of a services agreement between us and FondElec dated August
1999. The services agreement requires us to pay FondElec amounts for investment
advisory and other consulting services. FondElec alleges the total amount due it
under that agreement in excess of $3.1 million. FondElec is a shareholder in the
company and is an affiliate of FondElec Essential Services Growth Fund, L.P.,
which is one of our principal shareholders. We believe we have recorded adequate
accruals and have significant counterclaims and setoffs against FondElec for the
amounts allegedly due under the terms of that services agreement, and that we
otherwise have meritorious defenses to any claim for all or a portion of the
fees, and intends to defend our position vigorously in the arbitration.
ITEM 2. CHANGES IN SECURITIES
On February 7, 2001, we issued 2,643,636 shares of our Series D convertible
preferred stock to six accredited investors and received $24,585,850 in cash.
See our report on Form 8-K filed on March 8, 2001 for a more detailed
description of this transaction.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Item 5 below.
ITEM 4. MATTERS SUBMITTED TO A VOTE OF THE COMPANY'S SHAREHOLDERS
None.
ITEM 5. OTHER INFORMATION
MetroTelecom Acquisition - On April 5, 2000, we completed the acquisition
of all of the outstanding stock of a group of companies that conduct, through
directly or indirectly held operating subsidiaries, high speed data, dial-up
Internet, high speed Internet, telephony and subscription cable television
services in Guatemala. The Company has notified the former shareholders of
several material claims it has under the purchase contract, which would result
in a reduction in the initial purchase price and an offset against future notes
due under the purchase contract. Accordingly, the Company did not pay a note
payable due on April 5, 2001 in the amount of $4,750,000 plus accrued interest.
ITEM 6. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
A. EXHIBITS.
None.
B. REPORTS ON FORM 8-K
On March 8, 2001, we filed a report on Form 8-K which described (i) the
closing of a $24,585,850 private placement of equity securities and
corresponding payment made with the cash proceeds, (ii) the receipt of a data
concession in Mexico (iii) the receipt of a data and telephony concession in
Venezuela, and (iv) an update on the status of our Alcatel financing agreements.
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: May 15, 2001 BY /s/ JERRY SLOVINSKI
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Jerry Slovinski
Chief Financial Officer