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 JUNE 30, 1999.
[ ] 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 August 20, 1999, 11,738,277 shares of registrant's Common Stock, par value
$.001 per share and 101,379 shares of the registrant's Series B Preferred Stock,
par value $.001 per share, were outstanding.
PART I: FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS REQUIRED BY FORM 10-QSB
The accompanying unaudited consolidated financial statements of
Convergence Communications, Inc. (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and pursuant to the rules and regulations of the Securities and
Exchange Commission. They do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. These financial statements should be read in conjunction with Note 1
herein and the consolidated financial statements and notes thereto included in
the Company's annual report on Form 10-KSB for the year ended December 31, 1998,
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 six months ended June 30, 1999 may not be
indicative of the results that may be expected for the year ending December 31,
1999.
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
- --------------------------------------------------------------------------------------------------------------
June 30, December 31,
1999 1998
--------------- --------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,593,984 $ 4,315,281
Accounts receivable - net 588,881 432,868
Note proceeds due from affiliate - 5,000,000
Inventory 427,203 205,408
Prepaid license fees 12,592 57,359
Other current assets 416,924 115,801
--------------- --------------
Total current assets 3,039,584 10,126,717
INVESTMENT IN CENTURION 845,955 845,955
PROPERTY AND EQUIPMENT - net 17,028,542 8,524,521
INTANGIBLE ASSETS - net 20,412,424 22,650,040
OTHER ASSETS 699,904 325,811
--------------- --------------
TOTAL ASSETS $ 42,026,409 $ 42,473,044
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 4,104,728 $ 3,603,165
Notes payable 863,439 8,676,722
Notes payable (payable to related parties) 5,165,925 -
Foreign bank lines of credit outstanding - 27,281
Accrued consulting fees (payable to related parties) 461,703 340,629
Due to affiliates 809,214 1,074,855
Unearned revenue 342,494 373,486
--------------- --------------
Total current liabilities 11,747,503 14,096,138
LONG-TERM LIABILITIES:
Long-term debt (payable to related parties) 9,650,523 1,224,504
Subordinated exchangeable promissory notes (payable to related parties) 10,000,000 10,000,000
Notes payable 4,142,865 3,987,268
Accrued foreign severance 144,169 135,091
--------------- --------------
Total long-term liabilities 23,937,557 15,346,863
MINORITY INTEREST IN SUBSIDIARIES 1,791,561 2,345,517
--------------- --------------
Total liabilities 37,476,621 31,788,518
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY *:
Series "B" Preferred stock; $0.001 par value; 750,000 shares authorized:
101,374 shares issued and outstanding in 1999 and 1998. 101 101
Common stock; $0.001 par value; 100,000,000 shares authorized:
11,738,277 shares issued and outstanding in 1999 and 1998. 11,738 11,738
Additional paid-in capital 26,917,858 26,179,739
Accumulated deficit (22,350,847) (15,486,537)
Accumulated other comprehensive loss (29,062) (20,515)
--------------- --------------
Total stockholders' equity 4,549,788 10,684,526
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 42,026,409 $ 42,473,044
=============== ==============
* 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>
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<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999, 1998 AND 1997
- ----------------------------------------------------------------------------------------------------------------------
Six Months Six Months Six Months
Ended Ended Ended
June 30, June 30, June 30,
1999 1998 1997
--------------- -------------- ---------------
<S> <C> <C> <C>
NET REVENUES $ 4,144,575 $ 44,911 $ -
COST OF SERVICE 1,439,805 197,553 -
--------------- -------------- ---------------
GROSS MARGIN 2,704,770 (152,642) -
OPERATING EXPENSES:
Professional fees 1,312,603 710,275 137,050
Depreciation and amortization 2,420,985 865,555 48,550
Leased license expense 44,829 83,037 32,486
General and administrative 4,434,130 1,234,474 136,921
Stock-based compensation expense 634,009 - -
--------------- -------------- ---------------
Total 8,846,556 2,893,341 355,007
--------------- -------------- ---------------
OPERATING LOSS (6,141,786) (3,045,983) (355,007)
OTHER INCOME AND (EXPENSES):
Interest income 79,129 194,155 -
Interest expense (1,520,835) (57,129) (69,513)
--------------- -------------- ---------------
Total (1,441,706) 137,026 (69,513)
--------------- -------------- ---------------
NET LOSS BEFORE INCOME TAX AND MINORITY INTEREST (7,583,492) (2,908,957) (424,520)
INCOME TAX 34,774 - -
--------------- -------------- ---------------
NET LOSS BEFORE MINORITY INTEREST (7,618,266) (2,908,957) (424,520)
MINORITY INTEREST IN LOSS OF SUBSIDIARIES 753,956 8,076 5,428
--------------- -------------- ---------------
NET LOSS $ (6,864,310) $ (2,900,881) $ (419,092)
=============== ============== ===============
Net loss per basic common share* $ (0.57) $ (0.25) $ (0.06)
=============== ============== ===============
Net loss per diluted common share* $ (0.57) $ (0.25) $ (0.06)
=============== ============== ===============
Weighted-average common shares*
Basic 12,022,728 11,469,119 6,449,061
=============== ============== ===============
Diluted 14,102,389 12,404,978 6,775,459
=============== ============== ===============
* 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>
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<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999, 1998 AND 1997
- ----------------------------------------------------------------------------------------------------------------------
Three Months Three Months Three Months
Ended Ended Ended
June 30, June 30, June 30,
1999 1998 1997
--------------- -------------- ---------------
<S> <C> <C> <C>
NET REVENUES $ 2,102,087 $ 16,575 $ -
COST OF SERVICE 783,057 105,753 -
--------------- -------------- ---------------
GROSS MARGIN 1,319,030 (89,178) -
OPERATING EXPENSES:
Professional fees 712,129 383,205 47,694
Depreciation and amortization 1,215,114 436,658 29,000
Leased license expense 20,635 41,340 24,544
General and administrative 2,219,522 661,323 81,178
Stock-based compensation expense 317,004 - -
--------------- -------------- ---------------
Total 4,484,404 1,522,526 182,416
--------------- -------------- ---------------
OPERATING LOSS (3,165,374) (1,611,704) (182,416)
OTHER INCOME AND (EXPENSES):
Interest income 18,869 107,834 -
Interest expense (875,503) (24,857) (43,841)
--------------- -------------- ---------------
Total (856,634) 82,977 (43,841)
--------------- -------------- ---------------
NET LOSS BEFORE INCOME TAX AND MINORITY INTEREST (4,022,008) (1,528,727) (226,257)
INCOME TAX - - -
--------------- -------------- ---------------
NET LOSS BEFORE MINORITY INTEREST (4,022,008) (1,528,727) (226,257)
MINORITY INTEREST IN LOSS OF SUBSIDIARIES 398,696 3,980 3,157
--------------- -------------- ---------------
NET LOSS $ (3,623,312) $ (1,524,747) $ (223,100)
=============== ============== ===============
Net loss per basic common share* $ (0.30) $ (0.13) $ (0.03)
=============== ============== ===============
Net loss per diluted common share* $ (0.30) $ (0.13) $ (0.03)
=============== ============== ===============
Weighted-average common shares*
Basic 12,022,728 11,937,014 7,892,329
=============== ============== ===============
Diluted 14,120,621 12,979,170 8,293,267
=============== ============== ===============
* 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
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------------------------
Series "A" Preferred Stock Series "B" Preferred Stock
-------------------------- --------------------------
Total Shares * Amount Shares * Amount
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ (661,018)
Reverse acquisition of TIC:
Exchange of TIC common shares for CCI
Series "A" Preferred shares 14,571 685,063 $ 685
Addition of CCI common stock 86,990
Exchange of CVV common stock for CCI common
shares and Series "B" Preferred shares 7,096,500 101,374 $ 101
Issuance of CCI common stock and Series
"A" Preferred shares for cash 10,000,000 150,380 150
Issuance of warrants below fair value 657,143
Issuance of CCI common stock and Series
"A" Preferred shares for cash 300,000 4,083 4
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 14,378,966 839,526 839 101,374 101
Comprehensive loss:
Net loss for the year ended December 31, 1998 (10,230,796)
Other comprehensive loss consisting of
foreign currency translation adjustment (20,515)
------------- ------------- ------------- ------------- -------------
Total comprehensive loss (10,251,311) - - - -
Issuance of CCI common stock and Series
"A" Preferred shares for cash 4,956,626 91,180 91
Conversion of Series "A" Preferred shares into
common shares - (930,706) (930)
Exchange of Telecom common stock for CCI
common shares 600,000
Issuance of options for common shares
below fair value 1,000,245
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 10,684,526 - - 101,374 101
Comprehensive loss:
Net loss for the six months ended June 30, 1999 (6,864,310)
Other comprehensive loss consisting of
foreign currency translation adjustment (8,547)
------------- ------------- ------------- ------------- -------------
Total comprehensive loss (6,872,857) - - - -
Stock-based compensation expense activity 634,009
Interest expense from issuance of warrants 104,110
------------- ------------- ------------- ------------- -------------
BALANCE, JUNE 30, 1999 $ 4,549,788 - $ - 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
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- -CONTINUED-
- ----------------------------------------------------------------------------------------------------------------------
Common Stock Additional Accumulated
--------------------------- Paid-in Accumulated Other Compre-
Shares * Amount Capital Deficit hensive Loss
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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)
Comprehensive loss:
Net loss for the year ended December 31, 1998 (10,230,796)
Other comprehensive loss consisting of
foreign currency translation adjustment $ (20,515)
------------- ------------- ------------- ------------- -------------
Total comprehensive loss - - - (10,230,796) (20,515)
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
Issuance of options for common shares
below fair value 1,000,245
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 11,738,277 11,738 26,179,739 (15,486,537) (20,515)
Comprehensive loss:
Net loss for the six months ended June 30, 1999 (6,864,310)
Other comprehensive loss consisting of
foreign currency translation adjustment (8,547)
------------- ------------- ------------- ------------- -------------
Total comprehensive loss - - - (6,864,310) (8,547)
Stock-based compensation expense activity 634,009
Interest expense from issuance of warrants 104,110
------------- ------------- ------------- ------------- -------------
BALANCE, JUNE 30, 1999 11,738,277 $ 11,738 $ 26,917,858 $(22,350,847) $ (29,062)
============= ============ ============= ============= =============
* 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>
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<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------------------------------------------
Six Months Six Months Six Months
Ended Ended Ended
June 30, June 30, June 30,
1999 1998 1997
-------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,864,310) $ (2,900,881) $ (419,092)
Adjustments to reconcile net loss to net cash used in
development activities:
Depreciation and amortization 2,420,985 865,555 48,550
Minority interest in loss of subsidiaries (553,956) (8,076) (5,428)
Stock-based compensation expense 634,009 - -
Amortization of discount on notes payable 392,350 - -
Imputed interest expense for warrants 104,110 - -
Change in assets and liabilities:
Accounts receivable - net (157,388) 9,275 -
Due from affiliates 5,000,000 (2,121) -
Inventory (222,649) 7,679 -
Prepaid license fees 44,767 (14,769) 16,940
Other current assets (301,123) 8,837 -
Other assets (374,093) (139,625) 577,377
Accounts payable and accrued liabilities 498,067 435,476 (136,915)
Accrued consulting fees 121,074 - -
Due to affiliates (266,798) 100,666 100,000
Unearned revenue (30,992) - -
Accrued foreign severance 9,078 - -
------------- ------------- -------------
Net cash provided by (used in) operating activities 453,131 (1,637,984) 181,432
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Centurion - - (788,424)
Reverse acquisition of WCCI - - 56,582
Purchases of property and equipment (9,271,736) (765,748) -
------------- ------------- -------------
Net cash used in investing activities (9,271,736) (765,748) (731,842)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock - 3,161,661 -
Proceeds from issuance of Series A preferred stock - 1,794,965 -
Increase in minority interest from issuance of
subsidiary common stock 200,000 - -
Proceeds from related party note 9,966,115 - -
Payments on related parties borrowings (52,500) 45,603 49,141
Payments on foreign bank line of credit (27,281) - (175,319)
Proceeds from promissory notes 4,335,000 - 746,095
Payments on promissory notes (8,322,361) - -
------------- ------------- -------------
Net cash provided by financing activities 6,098,973 5,002,229 619,917
------------- ------------- -------------
EFFECT OF EXCHANGE RATES ON CASH (1,665) - -
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH (2,721,297) 2,598,497 69,507
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,315,281 6,171,515 8,902
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,593,984 $ 8,770,012 $ 78,409
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 7,100 $ - $ -
============= ============= =============
Cash paid during the period for income tax $ 58,805 $ - $ -
============= ============= =============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
1. Basis of Presentation
---------------------
Convergence Communications, Inc. (the "Company") is a provider of data,
video and voice telecommunications service to business and residential customers
over metropolitan area networks ("MAN") in Latin American.
The consolidated financial statements of the Company include the
accounts of the Company's subsidiaries, including (i) a 44.03% interest in
Chispa Dos, Inc. ("Chispa") which is a holding company for three subsidiaries
that provide multi-channel television and Internet services in El Salvador (the
"El Salvador Entities"); (ii) a 100% interest in Interamerican Telecom, Inc.,
the parent company of Interamerican Net de Venezuela, S.A. ("Inter@net"), which
is providing Internet services in Venezuela; (iii) a 78.14% interest in Caracas
Viva Vision TV, S.A. ("CVV"), a local multi-point distribution service ("LMDS")
wireless communications system in Venezuela, (iv) a 94.9% interest in Auckland
Independent Television Services, Ltd. ("AITS"), which holds license and lease
rights in four multi-channel, multi-point distribution service ("MMDS")
channels, (v) a 100% interest in Wireless Communications Holding -Guatemala,
S.A. ("WCH - Guatemala"), a corporation which holds LMDS license rights in
Guatemala, (vi) a 100% interest in Sociedad Television Interactiva, S.A.
("TISA"), a corporation that intends to operate a wireless telecommunications
system in Costa Rica, (vii) a 90% interest in Wireless Communications Panama,
S.A. ("WC - Panama"), which is acting as the operating company for an LMDS
system in Panama, (viii) a 95% interest in Convergence Communications de Mexico,
S.A. ("CCI Mexico"), which will act as the operating company for a
telecommunications system in Mexico and which owns fiber optic network capacity
in Mexico City, (ix) an 80% interest in WCI de Argentina ("WCIA"), which holds a
value added license to provide telecommunications services in Argentina, and (x)
a 100% interest in Transworld Wireless Television, Inc. ("TWTV"), a corporation
that holds four MMDS channels and a leased transmitter in Park City, Utah. All
significant intercompany accounts and transactions have been eliminated in
consolidation. All capitalized terms not defined in this report have the
meanings given them in the Company's annual report on Form 10-KSB for the year
ended December 31, 1998.
2. Net loss per common share and common share equivalent
-----------------------------------------------------
Net loss per common share and common share equivalents is computed by
both the basic method, which uses the weighted average number of common shares
and the common stock equivalents on a voting basis for the Series "B" preferred
stock outstanding, and the diluted method, which includes the dilutive common
shares from stock options and warrants, as calculated using the treasury stock
method.
3. Use of Estimates in Preparing Financial Statements
--------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
4. Debt Obligations
----------------
El Salvador Acquisition Note Refinancing - In May 1999, Chispa obtained
a long-term loan from a third party lender totaling $4,335,000, of which a
portion was used to pay the second note payable payment from the El Salvador
Entities acquisition of $3,607,134. The loan is due in May 2004, bears interest
at LIBOR plus 4.75% quarterly and has mandatory annual payments. In conjunction
with the loan, a FondElec Essential Services Growth Fund LP ("FondElec") loan in
the amount of $4,769,497 was refinanced under the same terms of the third party
loan, except that the FondElec loan was subordinated to the third party lender's
position and the due date for the FondElec loan was changed to January 1, 2000,
with an annual renewal until the third party lender is repaid.
Under the terms of the loans, the Company is required to refrain from
engaging in certain types of business activities (including sales of its assets,
mergers or other fundamental corporate transactions) without the consent of the
lenders. The loans are secured by the assets and capital stock of Cablevisa,
S.A. de C.V. and Multicable, S.A. de C. V., which are the two companies
providing multi-channel television service to subscribers in El Salvador.
FondElec is a shareholder of the Company, and, pursuant to agreements
among the Company and certain of its shareholders, two of FondElec's designees
currently sit on the Company's Board of Directors.
MetroNet Transaction Loan - The Company financed the purchase of the
MetroNet acquired network capacity agreement (see Item 5 below) through a
$2,615,925 loan from FondElec and a $2,550,000 loan from Internexus, S.A.
("Internexus"). The loans are evidenced by senior promissory notes which bear
interest at 10% per annum, and are due (together with unpaid interest) on the
earlier of January 3, 2000 or the receipt by the Company of proceeds from any
equity or debt financing. FondElec and Internexus will also receive warrants to
acquire shares of the Company's common stock while the notes are outstanding and
a premium based on the actual repayment date of the notes. The premium will be
an amount equal to 3.08% of the original principal amount if the loans are
repaid on or before August 1, 1999, 9.18% of the original principal amount if
they are repaid between August 2, 1999 and September 20, 1999, 15.35% of the
original principal amount if they are repaid between September 21, 1999 and
November 9, 1999, and 20.46% of the original principal amount if they are repaid
between November 10, 1999 and January 3, 2000.
Under the terms of the loans, the Company is required to refrain from
engaging in certain types of business activities (including sales of its assets,
mergers or other fundamental corporate transactions) without the consent of both
lenders, and, as an accommodation to the lenders, certain of the Company's
shareholders (who, in the aggregate, beneficially own approximately 44% of the
Company's outstanding shares) delivered share proxies to the lenders. The
proxies are not exercisable unless the Company defaults on the loans, and, in
the event of any such default, the proxies will be voted jointly by the lenders,
in accordance with an agreement to be reached by them.
Internexus is a shareholder of the Company, and, pursuant to agreements
among the Company and certain of its shareholders, two of Internexus' designees
currently sit on the Company's Board of Directors.
FondElec Loan Transaction - On August 6, 1999, the Company borrowed $1
million from FondElec. The loan is subject to the following terms and
conditions: (i) all unpaid amounts bear interest at the rate of 13% per annum,
(ii) the note is due in full on November 6, 1999, (iii) if the Company closes a
equity or debt financing prior to the maturity date, the Company must prepay the
note to the extent the proceeds of the financing are in excess of the amounts
necessary to discharge the Company's obligations to FondElec and Internexus,
S.A. under the terms of their June 15, 1999 and December 23, 1998 loan
agreements with the Company (the "Prior Obligations"), and (iv) the Company's
repayment of the loan is subordinated to the discharge of the Prior Obligations.
The Company's performance under the loan is guaranteed by Lance D'Ambrosio and
Troy D'Ambrosio, officers and directors of the Company. In connection with the
loan, FondElec also acquired five year warrants to purchase the Company's common
shares at an exercise price, subject to adjustment based on the price for which
the Company issues its securities in the future, of $8.70 per share. Under the
warrant, FondElec will receive, on a monthly basis, the right to purchase the
number of common shares equal to 3.5% of the principal amount of the note then
outstanding, divided by $8.70. The warrants are accompanied by demand and
"piggy-back" registration rights.
5. CVV Financial Results
---------------------
The Company owns approximately 78% of the stock of CVV, a Venezuelan
corporation that acts as the operating company for a multi-channel television
system in Caracas, Venezuela. The Company reports the operating results of CVV
on a consolidated basis under appropriate accounting rules. During the four
months immediately proceeding April 1999, CVV has generated losses of
approximately $25,000 per month. On July 28, 1999 (after repeated requests by
the Company for CVV's financial information for the period covered by this
report), Donald Williams, the president of CVV, notified the Company that CVV's
monthly financial information was current only through April 1999, and declined
to release that operating information to the Company. The Company is currently
pursuing two arbitration proceedings against Mr. Williams. See the Company's
annual report on Form 10-KSB for the period ended December 31, 1998. As a
result, the financial information set forth in this report does not include
actual operating result information for CVV. The Company has, however, included
estimates for CVV's operating results during the period, based on its historical
operating results. The Company believes CVV's operations are not material to its
consolidated financial operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis relates to the financial
condition and results of operations of the Company for the six months ended June
30, 1999 and 1998. This information should be read in conjunction with the
Company's consolidated financial statements and the notes related thereto
appearing elsewhere in the document.
A. OVERVIEW
--------
The Company is a leading provider of data, video and voice
telecommunications services to business and residential customers over MANs in
Latin America. From its inception, the Company has focused on providing
telecommunications services in emerging markets, primarily in Latin America,
using a high speed transmission network 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.
As part of the Company's business strategy, it expects to continue to
expand through additional significant acquisitions and strategic alliances. The
Company believes that additional attractive acquisition opportunities currently
exist in Latin America and it is continually evaluating these opportunities.
Certain of these transactions, if consummated, may be material to the Company's
operations and financial condition. Those acquisitions may not be successfully
integrated into the Company's business operations or result in projected
benefits.
B. MATERIAL CHANGES IN RESULTS OF OPERATIONS
-----------------------------------------
Six months ended June 30, 1999 compared to the six months ended June 30, 1998:
For the six months ended June 30, 1999, the Company had revenues of
$4,144,575 as compared to $44,911 for the same period in 1998, for an increase
of $4,099,664. The increase is primarily related to the revenues from the El
Salvador Entities and Inter@net operations which were acquired in the third
quarter of 1998.
The cost of service increased $1,242,252, from $197,553 for the six
months ended June 30, 1998, to $1,439,805 in 1999. The increase is primarily
related to the additional revenues earned in 1999. The Company's gross margin
was $2,704,770 for the six months ended June 30, 1999, compared to ($152,642)
for the same period in 1998.
Operating expenses for the six months ended June 30, 1999 were
$8,846,556 compared to $2,893,341 for 1998, for an increase of $5,953,215. This
increase was primarily due to an increase in general and administrative and
professional fees related to the Company's acquisitions, the addition of new
employees, the additional depreciation and amortization from the Company's
acquired operations and the recognition of stock-based compensation expense for
anticipated options with exercise prices below fair market value. The Company's
operating loss was $6,141,786 for the six months ended June 30, 1999, compared
to $3,045,983 for the six months ended June 30, 1998.
Interest income for the six months ended June 30, 1999 was $79,129,
compared to $194,155 in 1998. The $115,026 decrease is primarily related to the
lower cash balances in 1999. Interest expense increased $1,463,706 from $57,129
for the six months ended June 30, 1998 to $1,520,835 for the six months ended
June 30, 1999. The increase was due primarily to the interest expense from the
debt used to acquire the El Salvador Entities ("Chispa Acquisition Debt") and
the fiber optic network capacity in Mexico City acquired in June 1999 (see the
Company's report on Form 8-K dated June 23, 1999 for a more detailed
description) ("MetroNet Transaction"), the accrual of interest expense for the
subordinated exchangeable promissory notes the Company issued in December 1998
(the "December 1998 Notes") and the recording of imputed interest expense for
warrants issued in conjunction with the December 1998 Notes.
Income tax expense was $34,773 for the six months ended June 30, 1999
which was related to the El Salvador Entities. There was no income tax expense
in 1998. Minority interest in loss of subsidiaries was $753,956 for the six
months ended June 30, 1999, compared to $8,076 for the six months ended June 30,
1998 for an increase of $745,880. The increase was primarily due to the
recording of the minority interest for the El Salvador Entities.
As a result of the foregoing, the Company's net loss for the six months
ended June 30, 1999 was $6,864,310, compared to $2,900,881 for 1998, for an
increase of $3,963,429.
Six months ended June 30, 1998 compared to the six months ended June 30, 1997:
For the six months ended June 30, 1998, the Company had revenues of
$44,911 from the multi-channel video services provided in Caracas, Venezuela by
CVV, which manages the Venezuelan network. Prior to August 17, 1997, the Company
did not have revenues. The cost of service for CVV's revenues was $197,553 for
the six months ended June 30, 1998.
Operating expenses for the six months ended June 30, 1998 were
$2,893,341 compared to $355,007 for 1997, for an increase of $2,538,334. This
increase was primarily due to an increase in general and administrative and
professional fees related to the development of the Company's Venezuelan network
rights and search for potential acquisition candidates, and the depreciation,
amortization and lease expense from the Company's New Zealand assets and
Venezuelan assets. The Company's operating loss was $3,045,983 for the six
months ended June 30, 1998, compared to $355,007 for the six months ended June
30, 1997.
Interest income for the six months ended June 30, 1998 was $194,155.
The Company had no interest income during 1997. Interest expense decreased
$12,384, from $69,513 for the six months ended June 30, 1997 to $57,129 for the
six months ended June 30, 1998. The decrease in interest expense was primarily
attributable to a decrease in notes payable from promissory notes which were
paid in early 1998.
Minority interest in loss of subsidiaries was $8,076 for the six months
ended June 30, 1998 compared to $5,428 for 1997. This loss related to the New
Zealand subsidiary, AITS.
As a result of the foregoing, the Company's net loss for the six months
ended June 30, 1998 was $2,900,881, compared to $419,092 for 1997, for an
increase of $2,481,789.
C. LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The telecommunications industry is capital intensive. In order for the
Company to successfully compete, it will require substantial capital to continue
to develop its networks and meet the funding requirements of its operations
(including losses from operations), as well as to provide capital for its
acquisitions and business development initiatives. The Company expects that it
will spend over $100 million over the next two years to meet its capital
requirements as it implements its business plan.
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 investments in, and
acquisition of, start-up network operations, to 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 from the Company.
As of June 30, 1999, the Company had current assets of $3,039,584,
compared to $10,126,717 as of December 31, 1998, for a decrease of $7,087,133.
The decrease in current assets was primarily due to a decrease in note proceeds
due from affiliate and a decrease in cash. The note proceeds due from affiliate
was received in the form of cash in the first week of January 1999 and then cash
totaling $7,721,297 was used to purchase capital expenditures and inventory, pay
accounts payable and pay corporate expenses associated with the development of
the Company's telecommunications operations during the six months ended June 30,
1999.
The Company had current liabilities of $11,747,503 as of June 30, 1999,
compared to $14,096,138 as of December 31, 1998, for a decrease of $2,348,635.
The decrease in current liabilities was due to the refinancing of all of the
short-term acquisition debt from the acquisition of the El Salvador Entities
(see Item 5), the payment of the outstanding foreign bank lines of credit and
the payment of amounts due to affiliates. The decrease was partially offset by
an increase in accounts payable for equipment purchases and operating expenses,
an increase in accrued liabilities for accrued interest on the December 1998
Notes, an increase in related party accrued consulting and an increase in
related party notes payable in conjunction with the MetroNet Transaction (see
Item 5). Long term debt increased $8,590,694, from $15,346,863 at December 31,
1998 to $23,937,557 at June 30, 1999. The increase was due primarily to the
refinancing of the Chispa Acquisition Debt through FondElec Essential Services
Growth Fund, L.P., a shareholder in the Company and Chispa ("FondElec") and a
third party commercial lender.
The Company's principal sources of funds are its available resources of
cash and cash equivalents. At June 30, 1999, the Company had cash and cash
equivalents of $1,593,984. The cash flow generated by the Company's operations
and projected network launches will not be sufficient to cover the Company's
projected operating expenses, general and administrative expenses and capital
expenditures. The Company also expects acquisitions will constitute a major part
of its business strategy, so it is likely the Company will seek additional
financing in the future for these purposes.
The Company's ability to provide the services contemplated by its
business plan will be dependent upon the Company obtaining substantial
additional sources of funds. While the Company believes that it may be able to
obtain financing through additional equity or debt financing or otherwise, no
assurances can be given that any such financing will be available, or that the
Company will be able to obtain any such financing on favorable terms. Also, the
actual amount and timing of the Company's future capital requirements may differ
materially from its current estimates. In particular, the accuracy of the
Company's estimates is subject to changes and fluctuations in the Company's
revenues, operating costs and development expenses, which can be affected by its
ability to (1) effectively and efficiently manage the build-out of the MANs in
each of its markets, (2) obtain infrastructure contracts, rights-of-way,
licenses, interconnection agreements and other regulatory approvals necessary to
complete and operate the MANs, (3) negotiate favorable contracts with suppliers,
including large volume discounts on purchases of capital equipment and (4)
access markets, attract sufficient numbers of customers and provide and develop
services for which customers will subscribe. The Company's revenue and costs are
also dependent upon a number of factors that are not within its control, such as
political, economic and regulatory changes, changes in technology, increased
competition and various factors such as strikes, weather, and performance by
third parties in connection with our operations. Due to the uncertainty of these
factors, the Company's actual revenues and costs may vary from expected amounts,
possibly to a material degree, and those variations are likely to affect the
Company's future capital requirements. In addition, if the Company expands its
operations at an accelerated rate or consummates acquisitions, its funding needs
will likely increase, possibly to a significant degree, and it would, therefore,
expend its capital resources sooner than currently expected. If the Company's
capital resources prove to be insufficient, it will need to raise additional
capital to execute its current business plan and to fund expected operating
losses, as well as to consummate future acquisitions and exploit opportunities
to expand and develop its businesses.
To the extent the Company acquires the amounts necessary to fund its
business plan through the issuance of equity securities, the then-current
shareholders of the Company 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 the Company's cash flow from operations
being dedicated to the payment of principal and interest on that indebtedness,
and could render the Company more vulnerable to competitive and economic
downturns. Financing could also be obtained by the Company's subsidiaries or
affiliates from third parties, although there can be no assurance the Company's
subsidiaries or affiliates will be able to obtain the financing required to make
planned capital expenditures, provide working capital or meet other cash needs
on terms which are economically acceptable to the Company.
The Company has taken several actions which it believes will improve
its short-term and ongoing liquidity and cash flow:
- The Company has entered into an agreement with a New York-based
investment bank for the purpose of securing third party equity and debt for its
activities, and management believes that this funding can be obtained under
satisfactory terms. While there can be no assurance that the Company will secure
such financing, management believes that this is achievable prior to September
30, 1999.
- The Company is currently conducting a formal bid and proposal process
for the selection of a technology partner that would provide a vendor financing
package for the Company's capital equipment, professional engineering services
and systems integration expenditures.
- The Company closed a $1,000,000 short-term bridge loan with a major
shareholder in early August, 1999 to provide the Company with working capital
while it secures the additional financing described above.
- Management is undertaking actions intended to conserve cash and
control costs as it pursues additional financing and capital resources.
D. THE YEAR 2000 ISSUE
-------------------
The Company has completed a review of its computer systems and
operations to determine the extent to which its systems will be vulnerable to
potential errors and failures as a result of the "year 2000" problem. The year
2000 problem results from the use of computer programs which were written
employing only two digits (rather than four digits) to define applicable years.
On January 1, 2000, any clock or date recording mechanism, including
date-sensitive software which uses only two digits to represent the year, could
recognize a date using "00" as the year "1900", rather the year "2000". This
could result in system failures or miscalculations, causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, provide services or engage in similar activities.
These failures, miscalculations, and disruptions could have a material adverse
effect on the Company's business, operations and financial condition.
The Company has concluded, based on its review of its operations and
computer systems, that its significant computer programs and operations will not
be materially affected by the year 2000 problem and that the programs that will
be affected can be properly modified or replaced by the end of 1999 at an
estimated cost of approximately $100,000. Under a reasonably likely worst-case
scenario, the Company's computer systems and operations could be materially
affected by the year 2000 problem. In addition to its own operations and
computer systems, the Company relies on operations and computer systems of
third-party customers, financial institutions, vendors and other parties with
and through which it conducts business (such as national telephone systems under
the Company's interconnect agreements, and the owners of communications
backbones utilized by the Company).
The Company intends to prioritize its year 2000 efforts to protect, to
the extent possible, its business and operations. The Company's first priority
will be to protect its mission-critical operations--such as those systems and
applications that are vital to the provision by the Company of voice, video and
data switching, processing and transport services to customers--from incurring
material service interruptions that could occur as the result of the year 2000
transition. To this end, the Company has attempted to identify any element
within its business operations (including elements relating to third party
relationships) that could be impacted by the year 2000 date change, and has
attempted to determine the risks to its continuing business operations as a
result of an adverse effect resulting from that date change.
The Company generally requires that its key vendors and suppliers
warrant in writing that they are year 2000 ready. The Company has purchased or
acquired most of its mission-critical systems from such third-party vendors.
Unfortunately, like other telecommunications providers (and, in particular,
telecommunications providers operating outside of the United States), the
Company's products and services are dependent upon third parties which may not
be fully year 2000 compliant. The Company has attempted to identify the vendors
and third-parties with which it has contractual relationships that may not be
year 2000 compliant by the end of 1999, and has adopted contingency plans which
it believes will mitigate any adverse impact to its business operations
resulting from those vendors' or third-parties' inability to perform in
accordance with their contractual obligations. These contingency plans include
the preparation and use of backup copies of financial records, installing
portable diesel generators, determining the availability and reliability of
alternate networks, and scheduling additional phone center, network operating
center, and repair personnel.
Although the Company's efforts to be Year 2000 compliant are intended
to minimize the adverse effects of the Year 2000 issue on its business and
operations, the actual effects of the issue will not be known until 2000.
Difficulties in implementing the remediation or prevention phases or failure by
the Company's major vendors, third party network service providers, and other
material service providers and customers to adequately address their respective
Year 2000 issues in a timely manner could have a material adverse effect on the
Company's business, results of operations, and financial conditions.
E. SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
-------------------------------------------------
Certain statements contained in "Management's Discussion and Analysis"
constitute forward-looking statements concerning the Company's 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 the Company's results of operations are the potential risk of delay
in implementing the Company's business plan; the political, economic and legal
aspects of the markets in which the Company operates; competition; and the
Company's need for additional substantial financing. The Company has no control
over some of these factors.
The factors described in this report could cause the Company's actual
operating results to differ materially from those expressed in any
forward-looking statements of the Company made by or on behalf of the Company.
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
the Company undertakes 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 the Company's 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
On August 9, 1999, the plaintiffs in the suit styled as Clearview
Cable, Inc., et al. v. Convergence Communications, Inc., et al., agreed to
dismiss that action without prejudice pursuant to the terms of a settlement
agreement with the Company. See the Company's report on Form 8-K filed on August
12, 1999 for a more detailed description of the suit and the terms of the
settlement. See also the section entitled "Legal Proceedings" in the Company's
report on Form 10-QSB for the quarter ended March 31, 1999 and for the year
ended December 31, 1998.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MATTERS SUBMITTED TO A VOTE OF THE COMPANY'S SHAREHOLDERS
None.
ITEM 5. OTHER INFORMATION
FondElec Loan Transaction - On August 6, 1999, the Company borrowed
$1,000,000 from FondElec Essential Services Growth Fund, L.P. ("FondElec"). See
the Company's report on Form 8-K filed on August 12, 1999 and note 4 to the
financial statements included in this report for more detailed descriptions of
this transaction.
MetroNet Agreement - On June 15, 1999, the Company consummated the
acquisition of fiber optic network capacity in Mexico City, Mexico and financed
the acquisition through a loan from FondElec and Internexus, S.A. See the
Company's report on Form 8-K filed on June 23, 1999 and note 4 to the financial
statements included in this report for more detailed descriptions of those
transactions.
El Salvador Acquisition Note Refinancing - In May 1999, Chispa obtained
a long-term loan from a third party lender of approximately $4.3 million and a
FondElec loan was refinanced. See the Company's report on Form 10-QSB for the
three months ended March 31, 1999 and note 4 to the financial statements
included in this report for more detailed descriptions of the refinancing.
Venezuelan Point-to-Multipoint Concession - In January, 1999, the
Venezuelan telecommunications licensing authority granted Inter@net an extension
to its telecommunications concession. The extension provisionally granted
Inter@net the right to conduct point-to-multipoint data transmission services
through both fiber optic cable and using a portion of the Venezuelan wireless
frequency spectrum. The concession was conditioned on a technical review of
Inter@net system and the licensing authority's frequency use plan. After the
date of the provisional grant, the Company repeatedly requested the licensing
authority to inspect the Company's facilities, and believes its system met the
technical requirements necessary for the extension to be granted on a permanent
basis. Nevertheless, on August 9, 1999, the Company received notice from the
Venezuelan licensing authority that, based on its review of its frequency use
plan, it had rescinded the extension. The authority's frequency use plan has not
been made public.
The Company intends to vigorously defend its expectancy rights in the
extension. On August 20, 1999, Inter@net filed a petition with the Venezuelan
licensing authority in response to its August 9, 1999 action. Among other
things, the petition requests the authority to reconsider its rescission of the
concession's extension or, alternatively, to grant Inter@net spectrum in some
portion of the Venezuelan wireless frequency band that is consistent with the
authority's frequency use plan. The petition also requests the authority to
immediately reinstate the portion of the extension relating to the provision of
point-to-multipoint data transmission using fiber optic cable. Under applicable
law, the licensing authority has four months to act on the petition.
ITEM 6. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
A. EXHIBITS.
None
B. REPORTS ON FORM 8-K
The Company filed two reports on Form 8-K since the filing of the
Company's report on Form 10-QSB for the quarter ended March 31, 1999:
1. On June 23, 1999, the Company filed a report on Form 8-K describing
its acquisition of a portion of the capacity of a fiberoptic network in Mexico
City, Mexico, and the financing transaction relating to that acquisition.
2. On August 12, 1999, the Company filed a report on Form 8-K
describing the terms of a $1,000,000 million loan from FondElec and the
dismissal, without prejudice, of a lawsuit involving the Company pursuant to the
terms of a settlement agreement with the plaintiffs in that action.
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: August 23, 1999 BY /s/ JERRY SLOVINSKI
---------------------------------
Jerry Slovinski
Chief Financial Officer
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