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, 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 November 9, 2001, 58,884,543 shares of registrant's Common 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
accounting principles generally accepted in the United States of America 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 accounting principles generally accepted 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 our independent accountants in accordance
with auditing standards generally accepted in the United States of America, 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, 2001
may not be indicative of the results that may be expected for the year ending
December 31, 2001.
[THIS SPACE INTENTIONALLY LEFT BLANK]
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
- ------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2001 2000
---------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,229,937 $ 4,193,170
Accounts receivable - net 6,576,235 5,244,893
Inventory - net 39,981 910,204
Value added tax receivable 1,024,891 4,048,900
Note receivable (due from related party) 500,000
Prepaid expenses and other 2,959,822 2,129,438
---------------- ----------------
Total current assets 23,330,866 16,526,605
PROPERTY AND EQUIPMENT - net 51,835,754 56,652,546
INTANGIBLE ASSETS - net 31,494,475 46,513,030
OTHER ASSETS
Debt issue costs 5,305,709 5,550,687
Note receivable (due from related party) 2,250,000
Other 1,506,119 1,475,034
---------------- ----------------
Total other assets 9,061,828 7,025,721
---------------- ----------------
TOTAL ASSETS $ 115,722,923 $ 126,717,902
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt (payable to related party) $ 3,000,000
Notes payable - current portion $ 16,133,499 22,298,447
Current portion of long-term debt (payable to related party) 206,400 1,436,519
Accounts payable and accrued liabilities 19,517,947 21,944,835
---------------- ----------------
Total current liabilities 35,857,846 48,679,801
LONG-TERM LIABILITIES:
Notes payable - long-term portion 8,705,555 12,274,717
Long-term debt (payable to related parties) 9,576,236 4,769,497
Other long-term liabilities 3,084,911 392,239
---------------- ----------------
Total long-term liabilities 21,366,702 17,436,453
MINORITY INTEREST IN SUBSIDIARIES - 2,012,603
---------------- ----------------
Total liabilities 57,224,548 68,128,857
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Series "D" Preferred stock; $0.001 par value; 10,000,000 shares authorized:
none issued - -
Series "C" Preferred stock; $0.001 par value; 14,250,000 shares authorized:
13,620,472 shares issued and outstanding in 2000 - 13,620
Common stock; $0.001 par value; 100,000,000 shares authorized:
58,884,543 and 11,921,094 shares issued in 2001 and 2000, respectively 58,885 11,921
Additional paid-in capital 176,959,814 127,897,441
Accumulated deficit (116,977,718) (69,089,076)
Accumulated other comprehensive loss (224,537) (244,861)
Treasury stock, 572,468 common shares in 2001 at cost (1,318,069) -
---------------- ----------------
Total stockholders' equity 58,498,375 58,589,045
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 115,722,923 $ 126,717,902
================ ================
See notes to consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
- -------------------------------------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
September 30 September 30
2001 2000
----------------- -----------------
NET REVENUES FROM SERVICES $ 9,291,905 $ 9,126,110
----------------- -----------------
COSTS AND EXPENSES:
Variable cost of services 6,649,065 5,582,604
Salaries, wages and benefits 3,926,399 4,826,527
Selling, general and administrative 1,710,729 3,190,291
Depreciation and amortization 3,022,785 3,804,771
Stock option compensation expense - 63,141
Business restructuring charges and asset impairments 1,514,989 -
----------------- -----------------
Total costs and expenses 16,823,967 17,467,334
----------------- -----------------
OPERATING LOSS (7,532,062) (8,341,224)
OTHER INCOME (EXPENSE):
Interest income 93,620 273,039
Interest expense (1,275,719) (1,001,221)
Other (2,190) 93,123
Net gain (loss) on foreign exchange (570,698) 7,410
----------------- -----------------
Total other expense (1,754,987) (627,649)
----------------- -----------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (9,287,049) (8,968,873)
PROVISION FOR INCOME TAXES (6,416) (51,860)
----------------- -----------------
LOSS BEFORE MINORITY INTEREST (9,293,465) (9,020,733)
MINORITY INTEREST IN LOSS OF SUBSIDIARIES - 925,641
----------------- -----------------
NET LOSS (9,293,465) (8,095,092)
NON-CASH REMEASUREMENT OF OPTIONS AND WARRANTS (5,396,396) (352,000)
----------------- -----------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (14,689,861) $ (8,447,092)
================= =================
Net loss per basic and diluted common share $ (0.45) $ (0.35)
================= =================
Weighted-average number of common shares:
Basic and diluted 32,951,750 24,087,956
================= =================
See notes to consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------------------------------------
Nine Months Nine Months
Ended Ended
September 30 September 30
2001 2000
------------------ ------------------
NET REVENUES FROM SERVICES $ 30,378,950 $ 24,978,043
------------------ ------------------
COSTS AND EXPENSES:
Variable cost of services 21,026,311 14,580,464
Salaries, wages and benefits 15,391,205 11,620,175
Selling, general and administrative 7,533,779 10,715,344
Depreciation and amortization 10,704,144 10,690,622
Stock option compensation expense 54,505 573,508
Business restructuring charges and asset impairments 18,122,270 -
------------------ ------------------
Total costs and expenses 72,832,214 48,180,113
------------------ ------------------
OPERATING LOSS (42,453,264) (23,202,070)
OTHER INCOME (EXPENSE):
Interest income 305,230 767,566
Interest expense (3,511,474) (2,662,918)
Gain on asset sale 8,001,337 -
Other 68,422 97,130
Net gain (loss) on foreign exchange (708,172) 23,624
------------------ ------------------
Total other income (expense) 4,155,343 (1,774,598)
------------------ ------------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (38,297,921) (24,976,668)
PROVISION FOR INCOME TAXES (31,675) (146,007)
------------------ ------------------
LOSS BEFORE MINORITY INTEREST (38,329,596) (25,122,675)
MINORITY INTEREST IN LOSS (GAIN) OF SUBSIDIARIES (3,536,304) 2,453,096
------------------ ------------------
NET LOSS (41,865,900) (22,669,579)
NON-CASH REMEASUREMENT OF OPTIONS AND WARRANTS (5,396,396) (352,000)
------------------ ------------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (47,262,296) $ (23,021,579)
================== ==================
Net loss per basic and diluted common share $ (1.61) $ (1.03)
================== ==================
Weighted-average number of common shares:
Basic and diluted 29,404,660 22,355,824
================== ==================
See notes to consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND YEAR ENDED DECEMBER 31, 2000
- ----------------------------------------------------------------------------------------------------------------------------
Preferred Stock
---------------------------------------------------------------------------
Series "B" Series "C" Series "D" Common Stock
----------------------------------------------------------------------------
------------------ ------------------ ------------------ -----------------
Total Shares Amount Shares Amount Shares Amount Shares Amount
---------- -------- ------- -------- -------- --------- -------- -------- -------
BALANCE, JANUARY 1, 2000 $ 59,375,280 101,374 $ 101 9,728,909 $ 9,729 - - 11,585,489 $ 11,585
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 1,000,000 121,212 121
Acquisition and retirement of stock from
former officer - (71,853) (72) (328,510) (328)
Conversion of Series B to common shares - (29,521) (29) 125,237 125
Non-cash remeasurement of options -
Exercise of shareholder stock options 27,374,162 3,891,563 3,891
Exercise of employee stock options 241 11,000 11
Issuance of common shares for minority
interest 3,765,727 406,666 407
Issuance of warrants on 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 - - 11,921,094 11,921
Comprehensive loss:
Net loss for nine months ended
September 31, 2001 (41,865,900)
Other comprehensive income consisting of
foreign currency translation
adjustment 20,324
---------- ------- ------- --------- ------- --------- -------- -------- -------
Total comprehensive loss (41,845,576) - - - - - - - -
Issuance of Series D shares 22,937,349 2,643,636 $ 2,644
Acquisition of treasury stock (1,318,069)
Issuance of options on debt 12,929
Stock-based compensation expense 54,505
Non-cash remeasurement of preferred stock
warrants
Exercise of warrants to preferred stock 64,243 3,973,758 3,974 2,450,523 2,450
Modification of common stock warrants -
Exercise of warrants to common stock 7,457 745,650 746
Conversion of Series C stock into
common stock 0 (17,594,230) (17,594) 17,594,230 17,594
Conversion of Series D stock into common
stock 0 (5,094,159) (5,094) 5,094,159 5,094
Conversion of prommisory note to common
stock 1,818,082 2,138,920 2,139
Issuance of common stock 18,178,410 21,390,490 21,391
---------- ------- ------- --------- ------- --------- -------- -------- -------
BALANCE, SEPTEMBER 30, 2001 $ 58,498,375 - - - $ - - $ - 58,884,543 $ 58,885
========== ======= ======= ========= ======= ========= ======== ======== =======
CONTINUED ON NEXT PAGE
See notes to consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND YEAR ENDED DECEMBER 31, 2000
CONTINUED FROM PREVIOUS PAGE
- --------------------------------------------------------------------------------------
Accumulated
Additional Other
Paid-in Accumulated ComprehensiveTreasury
Capital Deficit Income (Loss) Stock
---------- --------------- -----------------------
BALANCE, JANUARY 1, 2000 $ 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 999,879
Acquisition and retirement of stock from
former officer 400
Conversion of Series B to common shares (96)
Non-cash remeasurement of options 352,000 (352,000)
Exercise of shareholder stock options 27,370,271
Exercise of employee stock options 230
Issuance of common shares for minority
interest 3,765,320
Issuance of warrants on debt 13,251
Issuance of options for common shares
below fair value 248,293
---------- --------------- ----------- ----------
BALANCE, DECEMBER 31, 2000 127,897,441 (69,089,076) (244,861) -
Comprehensive loss:
Net loss for nine months ended
September 30, 2001 (41,865,900)
Other comprehensive income
consisting of foreign currency
translation adjustment 20,324
---------- --------------- ----------- ----------
Total comprehensive loss - (41,865,900) 20,324 -
Issuance of Series D shares 22,934,705
Acquisition of treasury stock $(1,318,069)
Issuance of options on debt 12,929
Stock-based compensation expense 54,505
Non-cash remeasurement of preferred
stock warrants 5,396,396 (5,396,396)
Exercise of warrants to preferred
stock 57,819
Modification of common stock warrants 626,346 (626,346)
Exercise of warrants to common stock 6,711
Conversion of Series C stock into
common stock
Conversion of Series D stock into
common stock
Conversion of prommisory note to
common stock 1,815,943
Issuance of common stock 18,157,019
----------- --------------- ----------- ----------
BALANCE, SEPTEMBER 30, 2001 $ 176,959,81 $ (116,977,718) $(224,537)$(1,318,069)
=========== =============== =========== ==========
See notes to consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------------------------
Nine Months Nine Months
Ended Ended
September 30 September 30
2001 2000
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(41,865,900) $(22,669,579)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 10,704,144 10,690,622
Asset impairment 13,584,371 -
Gain on asset sale (8,001,337) -
Provision for bad debts 959,855 795,088
Minority interest in gain (loss) of subsidiaries 3,536,304 (2,453,096)
Stock-based compensation expense 54,505 590,400
Amortization of discount on notes payable 776,402 1,661,862
Issuance of options on debt 12,929 13,251
Change in assets and liabilities:
Accounts receivable (2,547,969) (2,295,839)
Inventory (46,613) (656,217)
Other current assets (309,143) (2,877,908)
Other assets (1,043,318) (4,934,028)
Accounts payable and accrued liabilities (3,933,446) 6,445,939
Due to affiliates - (122,356)
Other long-term liabilities 2,975,535 96,807
------------- --------------
Net cash used in operating activities (25,143,681) (15,715,054)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (19,449,426) (18,120,577)
Cash paid in Metrotelecom acquisition, net - (3,417,851)
Proceeds from asset sale 19,750,000 -
------------- --------------
Net cash provided by (used in) investing activities 300,574 (21,538,428)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of employee stock options - 241
Net proceeds from issuance of Series "C" Preferred Stock - 29,186,722
Net proceeds from issuance of Series "D" Preferred Stock 22,937,349 -
Net proceeds from exercise of shareholder warrants 71,700 -
Net proceeds from issuance of common stock 18,178,410 -
Proceeds from related party borrowings 5,980,000 -
Payments on related party borrowings (4,999,497) (539,893)
Proceeds from notes payable - 6,418,025
Payments on notes payable (9,178,970) (454,167)
------------- --------------
Net cash provided by financing activities 32,988,992 34,610,928
------------- --------------
EFFECT OF EXCHANGE RATES ON CASH (109,118) (13,109)
------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,036,767 (2,655,663)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,193,170 26,303,296
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 12,229,937 $ 23,647,633
============= ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 1,313,235 $ 347,963
============= ==============
Cash paid during the period for income taxes (including prepaid) $ 37,491 $ 183,522
============= ==============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of treasury stock in exchange for minority interest in$s1,318,069 $ -
============= ==============
Issuance of notes receivable in asset sale $ 2,000,000 $ -
============= ==============
Conversion of prommisory note to common stock $ 1,818,082 $ -
============= ==============
See notes to consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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, primarily in Mexico.
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 September 30, 2001, the Company's current liabilities exceeded
current assets by $12,526,980. 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 acquisition and the 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. As described in more detail below, in September 2001, the Company
received approximately $18.18 million from the private placement of its
securities.
As described in more detail in Note 2 below, the Company recorded a
pre-tax charge of $18,122,270 for the quarter ended September 30, 2001 in
connection with a restructuring plan.
As of September 30, 2001, the Company continues to be out of compliance
with the operating covenants of the Alcatel equipment financing facility and had
not received a waiver of such noncompliance from the lender. As a result, the
company is unable to draw upon its facility until it meets those covenants, and
Alcatel has the right to accelerate the maturity of the outstanding debt. 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 The sale of its equity securities and of selected operations and
assets. In September 2001, the Company closed a private placement of
its equity securities and in June 2001, the Company sold a portion of
its El Salvador operations
o Extending or modifying repayment terms on seller notes
o Reductions in capital expenditures
o Control of operating expense growth
2. Business Restructuring Charges and Related Asset Impairments
In connection with a restructuring plan to exit certain non-strategic
market regions and to streamline the Company's cost structure in both foreign
and corporate operations, the Company recorded a pre-tax charge of $18,122,270
for the nine months ended September 30, 2001, which includes restructuring costs
of $4,523,914 and asset write-downs of $13,598,356. These costs include
$1,514,989 of restructuring costs recorded in the three months ended September
30, 2001 to reflect the Company's approval to cease operations in Venezuela.
For the nine months ended September 30, 2001, restructuring costs
primarily relate to involuntary employee separations of $2,863,825 for
approximately 200 employees and facility reduction costs of $1,660,089. The
employee separation costs primarily impact the Company's corporate operations
and Venezuela, but also impact all geographic locations of the Company, with the
majority pertaining to management employees. For the three months ended
September 30, 2001, the severance and facility reduction costs were $583,663 and
$517,191, respectively. As of November 9, 2001, almost all of the 200 employee
separations were completed.
For the nine months ended September 30, 2001, asset write-downs reflect
the write-down of certain long-lived intangible assets, VAT tax receivable and
tangible fixed assets that became impaired as a result of management's decision
to limit or reduce certain operations in non-strategic market regions and reduce
operations in Venezuela. As a result of the decision to cease operations in
Venezuela, additional other assets of $414,135 became impaired in the three
months ended September 30, 2001. Impairment losses were determined based on the
write-down of fixed assets, goodwill and other acquired intangibles to their
fair value, which was estimated by the expected future cash flows. The Company
expects to substantially complete the restructuring plan by December 31, 2001.
The following table displays the status of the restructuring reserve at
September 30, 2001:
-------------------------------------- ----------------- --------------- ---------------- ----------------
Type of Cost Initial Charge Cash charges Non-cash 9-30-01 Reserve
charges
-------------------------------------- ----------------- --------------- ---------------- ----------------
Restructuring costs:
Employee separations $2,863,825 $1,416,330 $1,447,495
Facility reductions 1,660,089 24,500 1,635,589
-------------------------------------- ----------------- --------------- ---------------- ----------------
Total 4,523,914 1,440,830 3,083,084
Asset write-downs:
Goodwill, and other acquired 2,530,223 $2,530,223
intangibles
Fixed assets 9,054,556 9,054,556
VAT tax receivable 1,599,442 1,599,442
Other assets 414,135 414,135
-------------------------------------- ----------------- --------------- ---------------- ----------------
Total $18,122,270 $1,440,830 $13,598,356 $3,083,084
-------------------------------------- ----------------- --------------- ---------------- ----------------
Consolidated revenues and net losses of the Venezuelan operations for
the nine months ended September 30, 2001 were $0.9 million and $18.4 million,
respectively, and for the nine months ended September 30, 2000 were $0.9 million
and $1.5 million, respectively.
3. Equity and Debt Financings
On July 30, 2001, the Company borrowed $1.75 million on an unsecured
basis from a shareholder. The loan was due on August 15, 2001 and subsequently
converted into preferred stock (see below) on September 11, 2001. See the
Company's report on Form 8-K filed on October 9, 2001 for a more detailed
description of the transactions.
On July 31, 2001, the Company converted a loan due on August 1, 2001
totaling $1,407,635.89 (which includes accrued interest through July 31, 2001)
into a ten-year obligation under the terms of a loan commitment agreement
between the Company and Transworld Telecommunications, Inc. ("TTI"), a related
party. The commitment agreement is described in greater detail in the Company's
filing on Form 10-SB (EDGAR notation 10-12 G/A) dated December 31, 1996. As a
result of the conversion, the Company will be obligated to pay TTI $17,078.51
per month, beginning September 1, 2001 and through August 30, 2011. See the
Company's report on Form 8-K filed August 7, 2001 for a more detailed
description of the transactions.
On September 11, 2001, the Company closed a $20 million private
placement with two shareholders of the Company. At the closing, the Company
issued those investors 3,529,410 shares of our common stock for $18.18 million
in cash and converted approximately $1.82 million due under a promissory note to
one of the shareholders in July 2001. See the Company's report on Form 8-K filed
October 9, 2001 for a more detailed description of the transactions. As a
condition of the private placement, all of the outstanding and issuable warrants
of the Company held by the investors in the Series C and Series D preferred
stock equity rounds were immediately vested and exercised at $0.01 per warrant
into their respective common or preferred stock. Additionally, all outstanding
preferred stock was then immediately converted to common stock on a 1:1 basis.
As a result of the induced conversion of preferred stock, the Company recorded
$5,396,396 for the quarter ended September 30, 2001 as a non-cash remeasurement
charge to net earnings available to common stockholders for preferred stock
warrants and $626,346 as a disproportionate distribution charge against
accumulated deficit related to the modification of the common stock warrants.
4. Principles of Consolidation
The consolidated financial statements include the accounts of
Convergence Communications, Inc., all wholly-owned and controlled subsidiaries
including its 33% interest in Chispa through June 21, 2001 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.
5. 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 (which was converted to common stock in September
2001), and the diluted method, which includes the dilutive common shares from
stock options and warrants, as calculated using the treasury stock method. At
September 30, 2001 and 2000, all outstanding options and warrants were
anti-dilutive due to the losses of the Company.
6. Use of Estimates in Preparing Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted 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.
7. Operating Segment Information
The Company makes key financial decisions based on certain operating
results of our subsidiaries and revenue types. The Company's operating segment
information is as follows for the nine months ended September 30, 2001 and 2000:
Central
2001 Mexico Venezuela America Corporate Totals
- ------------------- ---------------- -------------- -------------- -------------- ---------------
Revenue:
- - Data $ 11,572,663 $ 865,925 $ 6,598,867 $ - $ 19,037,455
- - CATV - - 3,264,737 - 3,264,737
- - Other 4,000,486 36,798 4,039,474 - 8,076,758
Operating loss (11,520,095) (16,769,895) (6,733,437) (7,429,837) (42,453,264)
Central
2000 Mexico Venezuela America Corporate Totals
- ------------------- ---------------- -------------- -------------- -------------- ---------------
Revenue:
- - Data $ 8,640,232 $ 827,037 $ 4,696,214 $ - $ 14,163,483
- - CATV - - 5,412,612 - 5,412,612
- - Other 3,226,440 49,941 2,125,567 - 5,401,948
Operating loss (6,209,952) (1,520,542) (6,353,454) (9,118,122) (23,202,070)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis relates to our financial
condition and results of operations for the nine-month periods ended September
30, 2001 and 2000. This information should be read in conjunction with our
consolidated financial statements and the notes related thereto appearing
elsewhere in this report.
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 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
situation and other resources. Our ability to manage the problems associated
with our expansion will depend, among other things, on our capability 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
Nine months ended September 30, 2001 compared to the nine months ended September
30, 2000:
Revenues. Our revenues for the nine months ended September 30, 2001
totaled $30.4 million, compared to $25 million for the same period in 2000,
representing a $5.4 million increase in revenues (or 22%). The following table
shows our revenues (in thousands) by region for the first nine months of 2001
and 2000:
TOTAL REVENUES
(in thousands) 2001 2000
---------- ----------
Mexico (Intervan) $ 15,573 $ 11,867
Venezuela 903 877
Central America 13,903 12,234
---------- ----------
Consolidated total $ 30,379 $ 24,978
========== ==========
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, but was offset by the sale of a
portion of our El Salvadoran operations (Chispa) in June 2001. Intervan
contributed $3.7 million of the revenue increase, consisting of an increase of
$2.9 million in high speed data revenue with the remainder consisting of other
revenue, including telephony.
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 $21 million for the nine months ended September 30,
2001, an increase of $6.4 million over the same period in 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
$15.4 million for the nine months ended September 30, 2001, an increase of $3.8
million over the same period in 2000, due primarily to employee hirings
subsequent to June 2000. We maintained a total of about 440 employees at
September 30, 2001 reflecting a significant reduction of 310 employees from our
headcount total of 750 at September 30, 2000. This net reduction of 310
employees includes the reduction of 200 employees resulting from the sale of
Chispa in June 2001, combined with about 155 employees who we terminated in
connection with our business restructuring discussed below.
Selling, General and Administrative Expenses. We incurred SG&A expenses
of $7.5 million during the nine months ended September 30, 2001, a decrease of
$3.2 million compared to the same period in 2000. The decrease in SG&A expenses
reflects the impact of management's cost reduction program.
Depreciation and Amortization. Our depreciation and amortization
expense totaled $10.7 million during the nine months ended September 30, 2001
and 2000. The lack of an increase reflects the sales of fixed assets in El
Salvador and asset impairment reserves recorded on Venezuela intangibles and
fixed assets as of June 30, 2001.
Business Restructuring Charges and Asset Impairments. During the second
and third quarters of 2001, our management approved a restructuring plan, which
resulted in a restructuring charge of $18,122,270. (See Note 2)
Interest Income and Interest Expense. Our interest income decreased
$0.5 million for a total of $0.3 million during the nine months ended September
30, 2001 due to a lower average cash investment balance during the period.
Interest expense over the same period increased $0.8 million due primarily to
the acquisition debt we incurred in April 2000. Additionally, the average
interest rate recorded on our indebtedness during the nine months ended
September 30, 2001 was approximately 12.5%, compared to approximately 10.75% as
of September 30, 2000.
Gain on Asset Sale. On June 1, 2001, we completed the sale of our cable
television and residential data assets located in El Salvador and recognized an
$8 million pre-tax gain, before minority interest of $5 million.
Net Loss. We incurred a net loss attributable to common shareholders of
$47.3 million in the nine months ended September 30, 2001, an increase of $24.2
million compared to the same period in 2000. The principal reasons for the
increase were:
o $5 million in non-cash remeasurement of options and warrants charge as
a result of the induced conversion of preferred stock on September 11,
2001.
o $6.4 million increase in salary and benefits expense attributable
primarily to the significant growth subsequent to June 2000 in
employee headcount to support then planned operations. Since March 31,
2001, salary and benefit costs have significantly decreased in
connection with the restructuring plan implemented during 2001.
o $18.1 million increase in business restructuring charges and asset
impairments.
o $0.8 million increase in interest expense due to the increased
acquisition debt balance.
o $6 million increase in minority interest gain of which $5 million
directly relates to the sale of our interest in Chispa.
o The above increases were offset by the $8 million pre-tax gain on
asset sale, a $3.2 million decrease in SG&A expenses due to the
concerted effort by management to reduce such expenses and a $0.5
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 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 The sale of its equity securities and of selected operations and
assets. In September 2001, the Company closed a private placement of
its equity securities (see Note 3) and in June 2001, the Company sold
a portion of its El Salvador operations
o Extending or modifying repayment terms on seller notes
o Reductions in capital expenditures
o Control of operating expense growth
We anticipate that we will require a minimum of $1.2 million during the
remainder of 2001 for capital expenditures related to the expansion of our
existing telecommunications business, and that we will require significant
amounts thereafter.
The telecommunications market dropped dramatically beginning in 2000,
which has significantly affected the market value of companies in that industry.
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 nine months ended September 30, 2001, our operating
activities used $25.2 million, compared with $15.7 million during the same
period in 2000. Our investing activities provided $0.3 million in the nine
months ended September 30, 2001, compared with using $21.5 million during the
same period in 2000. These changes were primarily attributable to the sale of
our cable television and residential data assets in El Salvador, and 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 and issuance of common
stock in September 2001 offset by the payments on notes payable, provided $33.1
million in net cash flow during the nine months ended September 30, 2001.
As of September 30, 2001, we had current assets of $23.3 million,
compared to $16.5 million as of December 31, 2000, for an increase of $6.8
million. The increase in current assets was primarily due to cash received from
the equity funding in September 2001.
The cash flow generated by our foreign operations will not be
sufficient to cover our planned operational growth in the next 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.
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 that 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-KSB for the year ended December 31, 2000 and our report on Form 10-QSB for
the quarter ended June 30, 2001.
ITEM 2. CHANGES IN SECURITIES
On September 11, 2001, we closed a $20 million private placement with
two accredited investors. At the closing, we issued those investors 23,529,410
shares of our common stock for $18.18 million in cash and the conversion of
approximately $1.82 million due under the promissory note we issued to one of
the investors in July 2001. Under the terms of that transaction, we converted
all of our outstanding preferred stock (consisting of Series C Convertible
Preferred Stock and Series D Convertible Preferred Stock) into common shares. As
a result of the conversions, we now have only common stock outstanding. See our
report on Form 8-K filed on October 9, 2001 for a more detailed description of
the private placement and the ancillary transactions effected in connection with
it.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See the section entitled "Item 5 - Other Information" in our report on
Form 10-QSB for the quarter ended March 31, 2001.
ITEM 4. MATTERS SUBMITTED TO A VOTE OF THE COMPANY'S SHAREHOLDERS
During June 2001, we submitted a consent resolution relating to an
amendment of our Amended and Restated Articles of Incorporation to increase our
authorized capital from 125,000,000 shares to 175,000,000 shares, comprised of
75,000,000 shares of preferred stock and 100,000,000 shares of common stock
through the use of written consents, which is authorized under our
organizational documents and Nevada corporate law. The amendment was effected in
July 2001. The approval procedures, number of shares of our stock voting in
favor of each of those actions pursuant to the written consents and a
description of each of the transactions so approved are described in more detail
in our information statement on Schedule 14c dated July 3, 2001.
In conjunction with the September 2001 equity financing described in
Item 2 above, we submitted a consent resolution in October 2001 to amend our
Amended and Restated Articles of Incorporation to vote for certain amendments to
our Articles of Incorporation, including an amendment that will increase the
maximum number of members of our board of directors from ten members to twelve
members, and an amendment that will require the approval of at least 75% of our
board of certain types of equity offerings through December 31, 2007 through the
use of written consents, which is authorized under our organizational documents
and Nevada corporate law. The approval procedures, number of shares of our stock
voting in favor of each of those actions pursuant to the written consents and a
description of each of the transactions so approved are described in more detail
in our information statement on Schedule 14c dated November 1, 2001.
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
On July 3, 2001, we filed a report on Form 8-K which described (i) the
closing of an exchange of our interest in Chispa, the holding company for most
our El Salvador operations, with one of our shareholders for some of its common
stock in the company (see "Item 2 - Changes in Securities" above) and (ii) the
appointment of two new directors to our board.
On August 7, 2001, we filed a report on Form 8-K which described (i) a
$1.75 million unsecured loan we obtained from a shareholder and (ii) our
conversion of a promissory note due on August 1, 2001 into a ten-year term note.
On October 9, 2001, we filed a report on Form 8-K which described a $20
million private placement of common stock, including the conversion of a
promissory note and exercise of certain warrants.
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 13, 2001 BY /s/ GARY BARLOW
-------------------------------
Gary Barlow
Chief Accounting Officer