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, 1998.
[ ] 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 Registrant (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 15, 1998, 11,738,277 shares of Registrant's Common Stock, par
value $.001 per share and 101,374 shares of the Registrant's Series B Preferred
Stock, par value $.001 per share, were outstanding.
<PAGE>
PART I : FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS REQUIRED BY FORM 10-QSB
The accompanying unaudited consolidated financial statements have been
prepared by Convergence Communications, Inc. (the "Company") 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 the Company's annual report
on Form 10-KSB for the year ended December 31, 1997, as amended, 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
the Company's results of operations, financial position and changes therein for
the periods presented have been included. The results of operations for the
three and nine months ended September 30, 1998 may not be indicative of the
results that may be expected for the year ending December 31, 1998.
[THIS SPACE INTENTIONALLY LEFT BLANK]
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
September 30, December 31,
1998 1997
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................................ $ 3,288,650 $ 6,171,515
Accounts receivable - net ............................................................ 862,883 9,754
Due from affiliates .................................................................. 2,656 36,950
Inventory ............................................................................ 131,018 32,074
Prepaid license fees ................................................................. 228,741 186,982
Other current assets ................................................................. 6,557 18,007
------------ ------------
Total current assets .................................................. 4,520,505 6,455,282
INVESTMENT IN CENTURION .................................................................. 845,955 845,955
EQUIPMENT - net .......................................................................... 3,636,688 421,944
LICENSE RIGHTS - net ..................................................................... 720,167 807,167
SUBSCRIBER RIGHTS - net .................................................................. 24,678,715 8,916,587
OTHER ASSETS ............................................................................. 486,090 42,171
------------ ------------
TOTAL ASSETS ............................................................................. $ 34,888,120 $ 17,489,106
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ............................................. $ 2,752,956 $ 640,164
Notes payable ........................................................................ 8,860,226 350,000
Accrued license lease fees ........................................................... 142,594 121,621
Accrued consulting fees (payable to related party) ................................... 92,593 100,000
Due to affiliates .................................................................... 876,137 709,558
Customer deposits .................................................................... 33,791 40,070
------------ ------------
Total current liabilities ............................................. 12,758,297 1,961,413
LONG-TERM LIABILITIES:
Long-term debt (owed to related party) ............................................... 1,791,171 1,130,660
Notes payable ........................................................................ 3,341,068 --
------------ ------------
Total long-term liabilities ........................................... 5,132,239 1,130,660
MINORITY INTEREST IN SUBSIDIARIES ........................................................ 2,385,752 18,067
------------ ------------
Total liabilities ..................................................... 20,276,288 3,110,140
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY*:
Series "A" Preferred stock; $0.001 par value; 0 shares authorized
issued and outstanding in 1998, 4,250,000 authorized: 839,526 shares
issued and outstanding in 1997 .................................................... -- 839
Series "B" Preferred stock; $0.001 par value; 750,000 shares authorized:
101,374 shares issued and outstanding in 1998 and 1997 ........................... 101 101
Common stock; $0.001 par value; 100,000,000 shares authorized:
11,738,277 and 1,744,999 shares issued and outstanding in
1998 and 1997, respectively ....................................................... 11,738 1,745
Additional paid-in capital ........................................................... 25,179,494 19,632,022
Currency translation adjustment ...................................................... (21,018) --
Deficit accumulated during the development stage ..................................... (10,558,483) (5,255,741)
------------ ------------
Total stockholders' equity ............................................ 14,611,832 14,378,966
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................................... $ 34,888,120 $ 17,489,106
============ ============
* = Retroactively restated for the 1 to 3.5 reverse stock split approved by the Company's shareholders on August 17, 1998.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, AND
FROM SEPTEMBER 27, 1994 (DATE OF INCEPTION) TO SEPTEMBER 30, 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three Three September 27,
Months Months 1994 (Date of
Ended Ended Inception) To
September 30, September 30, September 30,
1998 1997 1998
------------ ------------ ------------
NET REVENUES .................................................. $ 1,204,535 $ 38,648 $ 1,289,632
COST OF SERVICE ............................................... 876,309 24,106 1,238,910
------------ ------------ ------------
GROSS MARGIN .................................................. 328,226 14,542 50,722
OPERATING EXPENSES:
Professional fees ........................................ 669,912 138,919 2,477,382
Depreciation and amortization ............................ 807,906 187,353 2,292,643
Leased license expense ................................... 40,410 28,884 239,608
General and administrative ............................... 1,243,215 306,826 4,100,324
Stock option compensation expense ........................ -- -- 962,738
------------ ------------ ------------
Total ................................... 2,761,443 661,982 10,072,695
------------ ------------ ------------
OPERATING LOSS ................................................ (2,433,217) (647,440) (10,021,973)
OTHER INCOME AND EXPENSES:
Interest income .......................................... 57,166 34,839 367,688
Interest expense ......................................... (276,797) (47,348) (1,176,272)
------------ ------------ ------------
Total ................................... (219,631) (12,509) (808,584)
------------ ------------ ------------
NET LOSS BEFORE MINORITY INTEREST ............................. (2,652,848) (659,949) (10,830,557)
MINORITY INTEREST IN LOSS OF SUBSIDIARIES ..................... 250,987 3,237 272,074
------------ ------------ ------------
NET LOSS ...................................................... $ (2,401,861) $ (656,712) $(10,558,483)
============ ============ ============
Net loss per basic common share* .............................. $ (0.21) $ (0.08)
============ ============
Net loss per diluted common share* ............................ $ (0.21) $ (0.08)
============ ============
Weighted-average common shares*
Basic .................................................... 11,693,557 8,691,374
============ ============
Diluted .................................................. 12,528,527 8,691,924
============ ============
* Retroactively restated for the 1 to 3.5 reverse stock split approved by the Company's shareholders
on August 17, 1998 and the adoption of Statements of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share," effective December 31, 1997.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, AND
FROM SEPTEMBER 27, 1994 (DATE OF INCEPTION) TO SEPTEMBER 30, 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nine Nine September 27,
Months Months 1994 (Date of
Ended Ended Inception) To
September 30, September 30, September 30,
1998 1997 1998
------------ ------------ ------------
NET REVENUES .................................................. $ 1,249,446 $ 38,648 $ 1,289,632
COST OF SERVICE ............................................... 1,073,862 24,106 1,238,910
------------ ------------ ------------
GROSS MARGIN .................................................. 175,584 14,542 50,722
OPERATING EXPENSES:
Professional fees ........................................ 1,380,187 229,571 2,477,382
Depreciation and amortization ............................ 1,673,461 235,903 2,292,643
Leased license expense ................................... 123,447 61,370 239,608
General and administrative ............................... 2,477,689 490,145 4,100,324
Stock option compensation expense ........................ -- -- 962,738
------------ ------------ ------------
Total ................................... 5,654,784 1,016,989 10,072,695
------------ ------------ ------------
OPERATING LOSS ................................................ (5,479,200) (1,002,447) (10,021,973)
OTHER INCOME AND EXPENSES:
Interest income .......................................... 251,321 34,839 367,688
Interest expense ......................................... (333,926) (116,861) (1,176,272)
------------ ------------ ------------
Total ................................... (82,605) (82,022) (808,584)
------------ ------------ ------------
NET LOSS BEFORE MINORITY INTEREST ............................. (5,561,805) (1,084,469) (10,830,557)
MINORITY INTEREST IN LOSS OF SUBSIDIARIES ..................... 259,063 8,665 272,074
------------ ------------
============ ============ ============
NET LOSS ...................................................... $ (5,302,742) $ (1,075,804) $(10,558,483)
============ ============ ============
Net loss per basic common share* .............................. $ (0.47) $ (0.15)
============ ============
Net loss per diluted common share* ............................ $ (0.47) $ (0.15)
============ ============
Weighted-average common shares*
Basic .................................................... 11,356,162 7,204,602
============ ============
Diluted .................................................. 12,191,132 10,589,750
============ ============
* Retroactively restated for the 1 to 3.5 reverse stock split approved by the Company's shareholders
on August 17, 1998 and the adoption of Statements of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share," effective December 31, 1997.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998,
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995,
AND FROM SEPTEMBER 27, 1994 (DATE OF INCEPTION) TO SEPTEMBER 30, 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Series "A" Preferred Series "B" Preferred
Stock Stock
Shares * Amount Shares * Amount
--------------------- ---------------------
Issuance of TIC stock to TIC shareholders
on September 27, 1994
Net loss for the period from September 27, 1994
(date of inception) to December 31, 1994
-------- -------- -------- --------
BALANCE, DECEMBER 31, 1994
Net loss for the year ended December 31, 1995
-------- -------- -------- --------
BALANCE, DECEMBER 31, 1995
Net loss for the year ended December 31, 1996
-------- -------- -------- --------
BALANCE, DECEMBER 31, 1996
Reverse acquisition of TIC:
Exchange of TIC common shares for CCI
Series "A" Preferred shares ..................... 685,063 $ 685
Addition of CCI common stock
Exchange of CVV common stock for CCI common
shares and Series "B" Preferred shares .......... 101,374 $ 101
Issuance of CCI common stock and Series
"A" Preferred shares for cash ................... 150,380 150
Issuance of warrants below fair value
Issuance of CCI common stock and Series
"A" Preferred shares for cash ................... 4,083 4
Issuance of options for common shares and
Series "A" Preferred shares below fair value
Net loss for the year ended December 31, 1997
-------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 .......................... 839,526 839 101,374 101
Issuance of CCI common stock and Series
"A" Preferred shares for cash ................... 91,180 91
Conversion of Series "A" Preferred shares into
common shares ................................... (930,706) (930)
Exchange of Telecom common stock for CCI
common shares
Net loss for the nine months ended September 30, 1998
-------- -------- -------- --------
BALANCE, SEPTEMBER 30, 1998 ......................... -- $ -- 101,374 $ 101
======== ======== ======== ========
* = Retroactively restated for the 1 to 3.5 reverse stock split approved by the Company's shareholders on August 17, 1998.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998,
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995,
AND FROM SEPTEMBER 27, 1994 (DATE OF INCEPTION) TO SEPTEMBER 30, 1998
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deficit
Common Stock Additional Currency Accumulated
------------------------ Paid-in Translation During the
Shares * Amount Capital Adjustment Development Stage
------------------------------- ----------- ----------- ----------------
Issuance of TIC stock to TIC shareholders
on September 27, 1994 ...................... 428,571 $ 429
Net loss for the period from September 27, 1994
(date of inception) to December 31, 1994 ... $ (59,108)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1994 .......................... 428,571 429 (59,108)
Net loss for the year ended December 31, 1995 ....... (179,771)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1995 .......................... 428,571 429 (238,879)
Net loss for the year ended December 31, 1996 ....... (422,568)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 .......................... 428,571 429 (661,447)
Reverse acquisition of TIC:
Exchange of TIC common shares for CCI
Series "A" Preferred shares ................ (428,571) (429) $ 14,315
Addition of CCI common stock ............... 1,041,494 1,041 85,949
Exchange of CVV common stock for CCI common
shares and Series "B" Preferred shares ..... 450,563 451 7,095,948
Issuance of CCI common stock and Series
"A" Preferred shares for cash .............. 228,658 229 9,999,621
Issuance of warrants below fair value ............... 657,143
Issuance of CCI common stock and Series
"A" Preferred shares for cash .............. 24,284 24 299,972
Issuance of options for common shares and
Series "A" Preferred shares below fair value 1,479,074
Net loss for the year ended December 31, 1997 ....... (4,594,294)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 .......................... 1,744,999 1,745 19,632,022 (5,255,741)
Issuance of CCI common stock and Series
"A" Preferred shares for cash .............. 600,504 600 4,955,935
Conversion of Series "A" Preferred shares into
common shares .............................. 9,307,060 9,307 (8,377)
Exchange of Telecom common stock for CCI
common shares .............................. 85,714 86 599,914
Net loss for the nine months ended September 30, 1998 $ (21,018) (5,302,742)
------------ ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1998 ......................... 11,738,277 $ 11,738 25,179,495 $ (21,018) (10,558,483)
============ ============ ============ ============ ============
* = Retroactively restated for the 1 to 3.5 reverse stock split approved by the Company's shareholders on August 17, 1998.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997,
AND FROM SEPTEMBER 27, 1994 (DATE OF INCEPTION) TO SEPTEMBER 30, 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nine Nine September 27,
Months Months 1994 (Date of
Ended Ended Inception) To
September 30, September 30, September 30,
1998 1997 1998
------------- ------------- -------------
CASH FLOWS FROM DEVELOPMENT ACTIVITIES:
Net loss ............................................................. $ (5,302,742) $ (1,075,804) $(10,558,483)
Adjustments to reconcile net loss to net cash used in
development activities:
Depreciation and amortization .................................. 1,673,461 235,903 2,292,643
Amortization of note discount on notes payable ................. 244,508 -- 244,508
Minority interest in loss of subsidiaries ...................... (259,063) (8,665) (272,074)
Issuance of stock options below fair value ..................... -- -- 1,479,074
Issuance of warrants below fair value .......................... -- -- 657,143
Change in assets and liabilities, net of effects
of acquisitions of IAN and interest in Chispa Dos:
Accounts receivable ......................................... 27,435 -- 28,394
Due from affiliates ......................................... 76,523 (40,127) 304,169
Inventory ................................................... 18,064 -- 51,289
Prepaid license fees ........................................ (41,759) (44,567) (53,528)
Other current assets ........................................ 11,688 -- 52,132
Other assets ................................................ (289,420) 585,396 (298,264)
Accounts payable and accrued liabilities .................... 696,766 (459,807) 692,721
Accrued license lease fees .................................. 20,973 121,621 33,196
Accrued consulting fees ..................................... (7,407) -- (7,407)
Due to affiliates ........................................... 146,913 100,000 (51,229)
Customer deposits ........................................... (6,917) -- (6,600)
------------ ------------ ------------
Net cash used in development activities ................ (2,990,977) (586,050) (5,412,316)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Centurion .............................................. -- (1,648,455) (805,955)
Reverse acquisition of WCCI .......................................... -- 56,582 56,582
Acquisition of CVV (net of cash acquired) ............................ -- (200,000) (387,318)
Purchase of minority interest in CVV ................................. -- -- (800,000)
Acquisition of interest in Chispa Dos (net of cash acquired(2,341,074) -- (2,341,074)
Acquisition of IAN (net of cash acquired) ............................ (961,412) -- (961,412)
Purchases of equipment ............................................... (1,605,959) -- (1,734,738)
------------ ------------ ------------
Net cash used in investing activities .................. (4,908,445) (1,791,873) (6,973,915)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............................... 3,161,661 1,800,686 5,144,606
Proceeds from issuance of Series A preferred stock ................... 1,794,965 8,199,314 10,127,020
Proceeds from related party borrowings ............................... 60,510 58,960 1,366,127
Payments on related parties borrowings ............................... -- (175,319) (962,293)
Proceeds from promissory notes ....................................... -- 2,985,600 2,300,000
Payments on promissory notes ......................................... -- (2,253,217) (2,300,000)
------------ ------------ ------------
Net cash provided by financing activities .............. 5,017,136 10,616,024 15,675,460
------------ ------------ ------------
EFFECT OF EXCHANGE RATES ON CASH ......................................... (579) -- (579)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH .......................................... (2,882,865) 8,238,101 3,288,650
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......................... 6,171,515 8,902 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................... $ 3,288,650 $ 8,247,003 $ 3,288,650
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest ............................... $ -- $ -- $ 30,996
============ ============ ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATINOS, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (UNAUDITED) FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 AND FROM SEPTEMBER 27, 1994 (DATE OF
INCEPTION) TO SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<S> <C>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
Acquisition by Chispa Dos of the El Salvador multi-channel television systems (July 17, 1998):
Fair value of assets acquired, including subscriber rights and
equipment (net of cash acquired).........................................................................$ 17,290,853
Fair value of liabilities assumed................................................................... (956,513)
Notes payable........................................................................................... (11,366,518)
Minority interest......................................................................................... (2,626,748)
-------------
Net cash paid.........................................................................................$ 2,341,074
=============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
Acquisition of IAN (August 17, 1998):
Fair value of assets acquired, including subscriber rights and
equipment(net of cash acquired)...........................................................................$ 2,881,495
Fair value of liabilities assumed......................................................................... (520,083)
CCI common stock issued................................................................................... (600,000)
Notes payable............................................................................................. (800,000)
-------------
Net cash paid $ 961,412
=============
</TABLE>
The determination of the fair value of the assets described above are
preliminary. The actual amounts recorded will vary based upon the final purchase
price allocation resulting from settlement of any financial statement
adjustments under the acquisition agreements and the completion of asset and
technology valuations which will occur prior to reporting the audited financial
results for the year ended December 31, 1998.
<PAGE>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 1998
1. Presentation
The interim unaudited consolidated financial statements include the
accounts of the Company's subsidiaries, including (i) a 100% interest in
Interamerican Telecom, Inc., ("Telecom") which, through a wholly owned
subsidiary, holds 100% of the stock of Interamerican Net de Venezuela, S.A.,
("IAN"), a Venezuelan internet service provider; (ii) a 49.5% interest in Chispa
Dos, Inc., ("Chispa Dos") which holds 100% of the stock of two separate
companies providing multi-channel television services in El Salvador. Under the
terms of the parties agreements the Company has operating control and holds a
majority of the board of directors seats for Chispa Dos; (iii) a 78.14% interest
in Caracas Viva Vision TV, S.A. ("CVV"), a local multi-point distribution
service wireless communications system in Venezuela; (iv) a 94.9% interest in
Auckland Independent Television Services, Ltd., which holds license and lease
rights for a multi-point video distribution service and four multi-channel,
multi-point distribution service ("MMDS") channels in three new Zealand cities;
(v) a 100% interest in Wireless Communications Holding - Guatemala, S.A. ("WCH -
Guatemala") and Wireless Communications License Holdings - Guatemala, S.A.,
corporations which have been formed to acquire and operate telecommunications
rights in Guatemala; (vi) a 100% interest in Sociedad Television Interactiva,
S.A., a corporation that has the right to manage and operate an LMDS system in
Costa Rica; (vii) a 90% interest in Wireless Communications Panama, S.A., which
will act as the operating company for an LMDS system in Panama; (viii) an 80%
interest in WCI de Argentina, which holds a value added license to provide
telecommunications services in Argentina; and (ix) a 100% interest in Transworld
Wireless Television, Inc., a corporation that holds four MMDS channels in Park
City, Utah. The Company also has a 45% interest in LatinCom, Inc., which has not
engaged in any business activities and an 8.46% interest in Comunicaciones
Centurion, S.A., which holds the licenses for the multi-point distribution
services provided by CVV. All significant intercompany accounts and transactions
have been eliminated in consolidation.
2. Net loss per common share
Net loss per common share is computed by both the basic
method, which uses the weighted average number of common shares, and the diluted
method, which assumes the exercise of stock options and warrants, as calculated
using the treasury stock method. All share amounts have been retroactively
restated for the 1 for 3.5 reverse stock split and conversion of each Series A
preferred share into 10 shares of common stock, as approved by the Company's
shareholders on August 17, 1998. See Part II, Item 4.
<PAGE>
4. Use of Estimates in Preparing Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
5. New Accounting Standard
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. SFAS No. 130 requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the equity section of a
statement of financial position.
Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 130. Accordingly, the Company determined that no other Company transactions
were considered to be an additional component of comprehensive income except for
the currency translation adjustment of $21,018 for the three months ended
September 30, 1998. Except for the currency translation adjustment,
comprehensive loss equaled net loss for the three and nine months ended
September 30, 1998 and 1997.
6. Year 2000
The "year 2000 issue" relates to the potential problems with computer
systems or any equipment with computer chips that use dates where the data has
been stored as just two digits (e.g., 97 for 1997). On January 1, 2000, any
clock or date recording mechanism, including data sensitive software, which uses
only two digits to represent the year may recognize a date using 00 as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations, causing disruption of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar activities.
The Company recently adopted a policy of purchasing only equipment
which is year 2000 compliant and is converting its current financial and
operating systems to year 2000 compliant systems. The Company does not
anticipate a significant cost to modify its systems to accommodate the impact of
the upcoming change in the century.
The Company also has third-party customers, financial institutions,
vendors and others with which its conducts business. While the Company believes
that these third-party vendors and customers will successfully address year 2000
issues in a timely manner, it is possible that a series of failures by third
parties could have a material adverse effect on the Company's results of
operations in future years.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
A. MATERIAL CHANGES IN FINANCIAL CONDITION
At September 30, 1998, the Company had current assets of $4,520,505,
compared to $6,455,282 at December 31, 1997, for a decrease of $1,934,777. Cash
decreased by $2,882,865 from $6,171,515 to $3,288,650 during the nine month
period, primarily as a result of the Company's investment in Chispa Dos and the
acquisition by Chispa Dos of two multi-channel television service companies in
El Salvador ("El Salvador Acquisitions"), the Company's acquisition of IAN, a
Venezuelan internet service provider ("IAN Acquisition"), and the Company's
purchase of equipment to develop the network infrastructure for the Company's
start-up markets. The El Salvador Acquisitions are more particularly described
in the Company's report on Form 8-K filed August 3, 1998, which description is
incorporated herein by reference. The IAN Acquisition is more particularly
described in the Company's report on Form 8-K filed September 1, 1998, which
description is incorporated herein by reference. The determination of the fair
value of the assets recorded for these acquisitions are preliminary. The actual
amounts recorded will vary based upon the final purchase price allocation
resulting from settlement of any financial statement adjustments under the
acquisition agreements and the completion of asset and technology valuations
which will occur prior to reporting the audited financial results for the year
ended December 31, 1998. Current liabilities as of September 30, 1998 were
$12,758,297, compared to $1,961,413 as of December 31, 1997, for an increase of
$10,796,884. The increase was primarily due to an increase in accounts payable
and accrued expenses which were assumed in the El Salvador Acquisitions and the
IAN Acquisition (collectively, the "Acquisitions"), an increase in notes payable
related to future amounts due under the Acquisitions, an increase in accrued
license lease fees and an increase in amounts due to affiliates related to
amounts due under a service contract.
At September 30, 1998, total assets were $34,888,120, compared to
$17,489,106 as of December 31, 1997, for an increase of $17,399,014. The
increase in total assets was primarily due to the assets acquired in the
Acquisitions and purchases of equipment. Total liabilities increased
$17,166,148, from $3,110,140 as of December 31, 1997 to $20,276,288 as of
September 30, 1998. The increase in total liabilities is primarily a result of
the increase in current liabilities, an increase in related party long-term debt
related to additional accrued interest, an increase in notes payable related to
future amounts due under the Acquisitions and an increase in minority interest
in subsidiaries associated with the recording of the net interest in Chispa Dos
for the other shareholder in Chispa Dos. Total stockholders' equity increased
during the period by $232,866, from $14,378,966 at December 31, 1997, to
$14,611,832 at September 30, 1998.
B. MATERIAL CHANGES IN RESULTS OF OPERATIONS
For the nine months ended September 30, 1998, the Company had revenues
of $1,249,446, which includes revenues from the El Salvador Acquisitions from
July 17, 1998 and the IAN Acquisition from August 17, 1998. This compares to
revenues of $38,648 for the nine months ended September 30, 1997. The 1997
revenues were generated from the multi-channel television service provided in
Caracas, Venezuela by CVV, for the period from August 17, 1997 (date of
acquisition) to September 30, 1997. The cost of service for the nine months
<PAGE>
ended September 30, 1998 was $1,073,862, compared to $24,106 for the nine months
ended September 30, 1997.
Operating expenses for the nine months ended September 30, 1998 were
$5,654,784 compared to $1,016,989 for the same period in 1997, for an increase
of $4,637,795. This increase was primarily due to costs associated with
negotiating and completing the Acquisitions, start-up expenses associated with
the Company's current telecommunications projects and the depreciation,
amortization and lease expense from the Company's telecommunications assets and
subscriber rights. The Company's operating loss was $5,479,200 for the nine
months ended September 30, 1998, compared to $1,002,447 for the same period in
1997.
Interest income for the nine months ended September 30, 1998 was
$251,321, compared to $34,839 for the same period in 1997, for an increase of
$216,482. The increase was primarily due to higher cash balances related to cash
received for equity investments in August 1997 and February 1998. Interest
expense increased $217,065 from $116,861 for the nine months ended September 30,
1997, to $333,926 for the same period in 1998. The increase was due primarily to
interest associated with the notes payable related to the Acquisitions.
Minority interest in loss of subsidiaries was $259,063 for the nine
months ended September 30, 1998, compared to $8,665 for the same period in 1997,
for an increase of $250,398. The increase primarily relates to the loss
attributable to the minority shareholder's interest in Chispa Dos.
As a result of the foregoing, the Company's net loss for the nine months
ended September 30, 1998 was $5,302,742, compared to $1,075,804 for the nine
months ended September 30, 1997, for an increase in net loss of $4,226,938.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its cash requirements at the
parent company level through debt and equity transactions. The proceeds from
these transactions were primarily used to fund the Company's acquisitions, fund
investments in start-up network operations, provide working capital and for
general corporate purposes, including the expenses incurred in seeking and
evaluating new business opportunities. The Company's foreign subsidiary
interests have been financed by the Company through a combination of equity
investments and shareholder loans.
The Company's principal sources of funds are its available reserves of
cash and cash equivalents. At September 30, 1998, the Company had cash and cash
equivalents of $3.29 million. The cash flow generated by the Company's current
operations and projected telecommunications and multi-channel television
services will not be sufficient to cover the Company's projected operating
expenses, general and administrative expenses and start-up costs. Accordingly,
the Company's cash and cash equivalents are being depleted under current
operating conditions. Nevertheless, the Company believes that its cash and cash
equivalents, together with the anticipated cash flow from its operations, will
be sufficient to cover the Company's operating expenses through the end of 1998.
<PAGE>
The Company has entered into negotiations with two of its current
shareholders who have previously provided equity capital to the Company for an
additional round of equity financing. The Company anticipates that any such
financing would be available to the Company in two installments, one in late
1998 and the other in early 1999. There can be no assurance the Company will
acquire additional financing from the shareholders with which it is currently
negotiating, or on what terms any such financing would be available, if at all.
The Company's current business plan anticipates further growth in the
acquired companies, launching of new markets, and launching of additional
telecommunications services as the Company's target markets deregulate. The
Company's current sources of funds are insufficient to fund the complete
buildout and launch of those markets and service capabilities. The ability of
the Company to launch all markets and provide these services will be dependent
upon the Company obtaining substantial additional sources of funds to finance
these projects. The Company is also in negotiations with third party financing
sources and vendor relationships for equity and debt financing transactions.
While the Company believes that it may be able to obtain additional financing
through one or more of these sources, no assurances can be given that any such
financing will be available, or that the Company would be able to obtain any
such financing on favorable terms.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the section entitled "Legal Proceedings" in the Company's report on
Form 10-KSB for the year ended December 31, 1997, as amended and the Company's
report on Form 8-K filed on October 23, 1998.
ITEM 2. CHANGES IN SECURITIES
See Item 4 below.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MATTERS SUBMITTED TO A VOTE OF THE COMPANY'S SHAREHOLDERS
The Company held its annual meeting of stockholders on August 17, 1998.
At that meeting, the Company's shareholders approved the Company's Amended and
Restated Articles of Incorporation, which were previously adopted by the
Company's board of directors. The shareholders also approved a 1 for 3.5 reverse
stock split of the Company's outstanding capital stock and an agreement under
which each share of the Company's outstanding Series A Preferred Stock was
converted into ten shares of Common Stock.
ITEM 5.
In June 1996, the licensing authority for the Republic of Panama issued
Administracion E Inversiones Radiales, S.A. ("ADIRA") licenses for 24 5MHz
channels in the 27.6 to 28.08 GHz frequency band and 1 channel in the 6086 MHz
frequency band for Panama City, Panama (the "Original Frequencies"). In March
1997, the Company acquired 90% of Wireless Communications Panama S.A. ("Wireless
Panama"), a Panamanian joint venture corporation that was formed for the purpose
of commercializing those rights. The other 10% of Wireless Panama is owned by
ADIRA on a non-dilutive basis.
In September 1998, ADIRA made application with the Panamanian licensing
authority for the frequencies between the 5MHZ channels in the 27.6 to 26.08
band for Panama City, Panama, and Wireless Panama made application for
frequencies consisting of a 1.4GHz block of frequencies in the 28.1GHz to
29.5GHz band for Panama City, Panama (the "New Frequencies"). Those applications
were prompted, in part, by the Company's determination that the New Frequencies
would allow the Company to carry out its proposed local multi-point distribution
service business operations in Panama. The application by Wireless Panama was
also prompted by the Panamanian licensing authority's claim in a regulatory
proceeding that ADIRA was not using the Original Frequencies. The Company
believes those claims are without merit and filed an appeal. On November 16,
1998, the Panamanian licensing authority notified ADIRA that it had rejected the
appeal, with the result that the right to use the Original Frequencies was
revoked. ADIRA may appeal the decision of the licensing authority to the
Panamanian Supreme Court. ADIRA is currently evaluating whether it will do so.
On October 2, 1998, the Company received notice that the applications of
ADIRA and Wireless Panama for the New Frequencies had been approved and would be
subjected to the alternative application process consisting of (i) a 30-day
notice period (the "Initial Period") during which third parties could offer to
match the annual rent offered by ADIRA or Wireless Panama for all or a portion
of the New Frequencies ("Alternative Applications") and (ii) an additional
fourteen day period (the "Review Period") during which the Panamanian licensing
authority will evaluate any Alternative Applications which it may receive. The
Initial Period ended on November 16, 1998 and the Review Period will expire on
November 30, 1998. If the Panamanian licensing authority receives any
Alternative Applications for any of the New Frequencies, the portions of the New
Frequencies that are the subject of those requests would be awarded first, on
the basis of the priority level accorded to each of the proposed uses and,
second, in the event of multiple applications with equal priority levels,
through a lottery process expected to be conducted by the Panamanian licensing
authority on Decenber 6, 1998. It is anticipated that frequencies for which no
Alternative Applications are filed will be awarded within 14 days of the
conclusion of the Review Period.
ITEM 6. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
A. EXHIBITS.
None
B. REPORTS ON FORM 8-K
On October 23, 1998, the Company filed a report on Form 8-K describing
the resignation of two of the Company's board members, the termination of one of
the Company's executive employees and two arbitration proceedings. On September
1, 1998, the Company filed a report on Form 8-K describing its acquisition,
through wholly-owned subsidiaries, of an internet service business in Maracaibo,
Venezuela and the results from the Company's annual meeting of stockholders held
on August 17, 1998. As permitted by Securities and Exchange Commission
regulations, on September 30, 1998, the Company filed a report on Form 8-KA
which contained the financial statements required under the Securities Exchange
Act of 1934 for the El Salvador Acquisition, as described in the report on Form
8-K filed on August 13, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONVERGENCE COMMUNICATIONS, INC.
Date: November 20, 1998 BY /s/ JERRY SLOVINSKI
------------------------------
Jerry Slovinski
Chief Financial Officer
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