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 MARCH 31, 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. [x] Yes [ ] No
As of May 21, 1999, 11,738,277 shares of registrant's Common Stock, par value
$.01 per share and 101,379 shares of the registrant's Series B Preferred Stock,
par value $.01 per share, were outstanding.
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, 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 months ended March 31, 1999 may not be indicative of the results that may
be expected for the year ending December 31, 1999.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
- ------------------------------------------------------------------------------------------------------------------
March 31, December 31,
1999 1998
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,233,153 $ 4,315,281
Accounts receivable - net 551,196 432,868
Note proceeds due from affiliate - 5,000,000
Inventory 136,918 205,408
Prepaid license fees 33,227 57,359
Other current assets 320,714 115,801
------------- -------------
Total current assets 5,275,208 10,126,717
INVESTMENT IN CENTURION 845,955 845,955
PROPERTY AND EQUIPMENT - net 11,733,310 8,524,521
INTANGIBLE ASSETS - net 21,294,995 22,650,040
OTHER ASSETS 368,084 325,811
------------- -------------
TOTAL ASSETS $ 39,517,552 $ 42,473,044
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 155,568 $ 8,676,722
Accounts payable and accrued liabilities 4,514,695 3,976,651
Foreign bank lines of credit outstanding - 27,281
Accrued consulting fees (payable to related parties) 401,166 340,629
Due to affiliates 802,589 1,074,855
------------- -------------
Total current liabilities 5,874,018 14,096,138
LONG-TERM LIABILITIES:
Long-term debt (payable to related parties) 5,928,315 1,224,504
Subordinated exchangeable promissory notes (payable to related parties) 10,000,000 10,000,000
Notes payable 7,563,314 3,987,268
Accrued foreign severance 155,416 135,091
------------- -------------
Total long-term liabilities 23,647,045 15,346,863
MINORITY INTEREST IN SUBSIDIARIES 2,190,257 2,345,517
------------- -------------
Total liabilities 31,711,320 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 26,550,990 26,179,739
Accumulated deficit (18,727,535) (15,486,537)
Accumulated other comprehensive loss (29,062) (20,515)
------------- -------------
Total stockholders' equity 7,806,232 10,684,526
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,517,552 $ 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.
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<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999, 1998 AND 1997
- ----------------------------------------------------------------------------------------------------------------------
Three Months Three Months Three Months
Ended Ended Ended
March 31, March 31, March 31,
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
NET REVENUES $ 2,042,488 $ 28,336 $ -
COST OF SERVICE 980,352 91,800 -
-------------- ------------- -------------
GROSS MARGIN 1,062,136 (63,464) -
OPERATING EXPENSES:
Professional fees 600,474 327,070 66,158
Depreciation and amortization 1,205,871 428,897 19,550
Leased license expense 24,194 41,697 7,942
General and administrative 1,891,004 573,151 78,941
Stock-based compensation expense 317,005 - -
-------------- ------------- -------------
Total 4,038,548 1,370,815 172,591
-------------- ------------- -------------
OPERATING LOSS (2,976,412) (1,434,279) (172,591)
OTHER INCOME AND (EXPENSES):
Interest income 60,260 86,321 -
Interest expense (645,332) (32,272) (25,672)
-------------- ------------ -------------
Total (585,072) 54,049 (25,672)
-------------- ------------- -------------
NET LOSS BEFORE INCOME TAX AND MINORITY INTEREST (3,561,484) (1,380,230) (198,263)
INCOME TAX 34,774 - -
-------------- ------------- -------------
NET LOSS BEFORE MINORITY INTEREST (3,596,258) (1,380,230) (198,263)
MINORITY INTEREST IN LOSS OF SUBSIDIARIES 355,260 4,096 2,271
-------------- ------------- -------------
NET LOSS $ (3,240,998) $ (1,376,134) $ (195,992)
============== ============= =============
Net loss per basic common share* $ (0.27) $ (0.13) $ (0.04)
============== ============= =============
Net loss per diluted common share* $ (0.27) $ (0.13) $ (0.04)
============== ============= =============
Weighted-average common shares*
Basic 11,839,656 10,813,180 4,989,757
============== ============= =============
Diluted 12,745,544 11,545,695 5,240,091
============== ============= =============
* 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.
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<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 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 three months ended March 31, 1999 (3,240,998)
Other comprehensive loss consisting of
foreign currency translation adjustment (8,547)
------------ ----------- ----------- ----------- -----------
Total comprehensive loss (3,249,545) - - - -
Stock-based compensation expense activity 317,005
Interest expense from issuance of warrants 54,246
------------ ----------- ----------- ----------- -----------
BALANCE, MARCH 31, 1999 $ 7,806,232 - $ - 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>
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<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 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 three months ended March 31, 1999 (3,240,998)
Other comprehensive loss consisting of
foreign currency translation adjustment (8,547)
----------- ----------- ------------ ------------- ------------
Total comprehensive loss - - - (3,240,998) (8,547)
Stock-based compensation expense activity 317,005
Interest expense from issuance of warrants 54,246
----------- ----------- ------------ ------------- ------------
BALANCE, MARCH 31, 1999 11,738,277 $ 11,738 $26,550,990 $(18,727,535) $ (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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<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999, 1998 AND 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Three Months
Ended Ended Ended
March 31, March 31, March 31,
1999 1998 1997
--------------- -------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,240,998) $ (1,376,134) $ (195,992)
Adjustments to reconcile net loss to net cash used in
development activities:
Depreciation and amortization 1,205,871 428,897 19,550
Minority interest in loss of subsidiaries (155,260) (4,096) (2,271)
Stock-based compensation expense 317,005 - -
Amortization of discount on notes payable 235,758 - -
Imputed interest expense for warrants 54,246 - -
Change in assets and liabilities:
Accounts receivable - net (118,328) (10,257) -
Due from affiliates - 1,359 -
Inventory 68,490 (3,704) -
Prepaid license fees 24,132 (29,271) 12,203
Other current assets (204,913) (3,076) -
Other assets (42,273) 3,072 574,103
Accounts payable and accrued liabilities 350,634 (13,433) (122,105)
Accrued consulting fees 60,537 - -
Due to affiliates (272,266) 41,604 100,000
Accrued foreign severance 20,325 - -
--------------- -------------- ---------------
Net cash provided by (used in) operating activities (1,697,040) (965,039) 385,488
--------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Centurion - - (617,076)
Reverse acquisition of WCCI - - 56,582
Purchases of equipment (3,506,368) (271,169) -
--------------- -------------- ---------------
Net cash used in investing activities (3,506,368) (271,169) (560,494)
--------------- -------------- ---------------
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 5,000,000 - -
Proceeds from related party borrowings 4,703,811 22,451 20,566
Payments on related parties borrowings - - (175,319)
Proceeds from promissory notes - - 530,838
Payments on promissory notes (4,783,029) - -
--------------- -------------- ---------------
Net cash provided by financing activities 5,120,782 4,979,077 376,085
--------------- -------------- ---------------
EFFECT OF EXCHANGE RATES ON CASH 498 - -
--------------- -------------- ---------------
NET INCREASE (DECREASE) IN CASH (82,128) 3,742,869 201,079
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,315,281 6,171,515 8,902
--------------- -------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,233,153 $ 9,914,384 $ 209,981
=============== ============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 4,388 $ - $ -
=============== ============== ===============
Cash paid during the period for income tax $ 27,196 $ - $ -
=============== ============== ===============
See notes to consolidated financial statements.
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CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
1. Presentation
The consolidated financial statements 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, (iii) a 100% interest in Wireless Communications Holding - Guatemala,
S.A. ("WCH - Guatemala"), a corporation which holds LMDS license rights in
Guatemala, (iv) a 100% interest in Sociedad Television Interactiva, S.A.
("TISA"), a corporation that intends to operate a wireless telecommunications
system in Costa Rica, (v) a 90% interest in Wireless Communications Panama, S.A.
("WC - Panama"), which will act as the operating company for an LMDS system in
Panama, (vi) an 80% interest in WCI de Argentina ("WCIA"), which holds a value
added license to provide telecommunications services in Argentina, and (vii) 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
A. MATERIAL CHANGES IN RESULTS OF OPERATIONS
Three months ended March 31, 1999 compared to the three months ended March 31,
1998:
For the three months ended March 31, 1999, the Company had revenues of
$2,042,488 as compared to $28,336 for the same period in 1998, for an increase
of $2,014,152. 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 $888,552, from $91,800 for the three
months ended March 31, 1998 to $980,352 in 1999. The increase is primarily
related to the additional revenues earned in 1999. The Company's gross margin
was $1,062,136 for the three months ended March 31, 1999, compared to ($63,464)
for the same period in 1998.
Operating expenses for the three months ended March 31, 1999 were
$4,038,548 compared to $1,370,815 for 1998, for an increase of $2,667,733. This
increase was primarily due to an increase in general and administrative and
professional fees related to the Company's acquisitions and 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 $2,976,412 for the three months ended March 31, 1999,
compared to $1,434,279 for the three months ended March 31, 1998.
Interest income for the three months ended March 31, 1999 was $60,260,
compared to $86,321 in 1998. Interest expense increased $613,060 from $32,272
for the three months ended March 31, 1998 to $645,332 for the three months ended
March 31, 1999. The increase was due primarily to the interest expense from the
debt used to acquire the El Salvador Entities ("Chispa Acquisition Debt"), the
accrual of interest expense on the subordinated exchangeable promissory notes
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 three months ended March 31,
1999 which was related to the El Salvador Entities. There was no income tax
expense in 1998. Minority interest in loss of subsidiaries was $355,260 for the
three months ended March 31, 1999, compared to $4,096 for the three months ended
March 31, 1998 for an increase of $351,164. 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 three
months ended March 31, 1999 was $3,240,998, compared to $1,376,134 for 1998, for
an increase of $1,864,864.
Three months ended March 31, 1998 compared to the three months ended March 31,
1997:
For the three months ended March 31, 1998, the Company had revenues of
$28,336 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 $91,800 for
the three months ended March 31, 1998.
Operating expenses for the three months ended March 31, 1998 were
$1,370,815 compared to $172,591 for 1997, for an increase of $1,198,224. 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 $1,434,279 for the three
months ended March 31, 1998, compared to $172,591 for the three months ended
March 31, 1997.
Interest income for the three months ended March 31, 1998 was $86,321.
The Company had no interest income during 1997. Interest expense increased
$6,600, from $25,672 for the three months ended March 31, 1997 to $32,272 for
the three months ended March 31, 1998. The increase in interest expense was
primarily attributable to an increase in the principal amount of debt due to
affiliates.
Minority interest in loss of subsidiaries was $4,096 for the three
months ended March 31, 1998 compared to $2,271 for 1997. This loss related to
the Company's New Zealand subsidiary, AITS.
As a result of the foregoing, the Company's net loss for the three
months ended March 31, 1998 was $1,376,134, compared to $195,992 for 1997, for
an increase of $1,180,142.
B. 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 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 March 31, 1999, the Company had current assets of $5,275,208,
compared to $10,126,717 as of December 31, 1998, for a decrease of $4,851,509.
The decrease in current assets was primarily due to a decrease in inventory and
note proceeds due from affiliate. The note proceeds due from affiliate was
received in the form of cash in the first week of January 1999 and then cash
totaling $5,082,128 was used to make capital expenditures, pay accounts payable
and pay corporate expenses associated with the development of the Company's
telecommunications operations during the three months ended March 31, 1999.
The Company had current liabilities of $5,874,018 as of March 31, 1999,
compared to $14,096,138 as of December 31, 1998, for a decrease of $8,222,120.
The decrease in current liabilities was due to the refinancing of all of the
short-term Chispa Acquisition Debt (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, and an increase in related party accrued
consulting. Long term debt increased $8,300,182, from $15,346,863 at December
31, 1998 to $23,647,045 at March 31, 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").
The Company's principal sources of funds are its available resources of
cash and cash equivalents. At March 31, 1999, the Company had cash and cash
equivalents of $4.2 million. 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 start-up
costs.
The ability of the Company to provide the services contemplated by its
business plan will be dependent upon the Company obtaining substantial
additional sources of funds to finance its business plan. 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.
The Company currently estimates that it will require between $20 and
$25 million to build out and launch its operations in accordance with its
business plans during the rest of 1999. The Company has the ability to moderate
its capital spending and losses by varying the number and extent of its market
build out activities and the services it offers in its various markets. If the
Company elects to slow the speed (or narrow the focus) of its business plan, the
Company will be able to reduce its capital requirements and losses. The actual
costs of building out and launching the Company's markets would depend on a
number of factors, however, including the Company's ability to negotiate
favorable prices for purchases of network equipment, the number of customers and
the services for which they subscribe, the nature and success of the services
that the Company may offer, regulatory changes, the stage of development of the
Company's markets, and changes in technology. In addition, actual costs and
revenues could vary from the amounts the Company expects or budgets, possibly
materially, and such variations are likely to affect how much additional
financing the Company will need for its operations. Accordingly, there can be no
assurance that the Company's actual financial needs will not exceed the
anticipated amounts available to it (including from new, third parties).
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 June 30, 1999.
* Management is undertaking actions intended to conserve cash and
control costs as it pursues additional financing and capital
resources.
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 electrical generators, determining the availability and reliability of
alternate networks, and scheduling additional phone center, NOC, and repair
personnel.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 1999, CCI was served with a complaint regarding its investment
in Comunicaciones Centurion, S.A. and CVV. The complaint alleges seven causes of
action, including violations of federal securities laws, violations of the New
Jersey Uniform Fraudulent Transfer Act and New Jersey minority shareholder
protection provisions, conversion, unjust enrichment and a claim of respondent
superior liability. The complaint seeks damages of approximately $3.2 million.
The Company believes the complaint is without merit and intends to defend the
lawsuit vigorously.
In May 1999, CCI was served with a complaint regarding the merger of
CCI's wholly-owned subsidiary New WCCI, Inc. with Telecom Investment Corporation
and certain actions taken by CCI's officers and directors. The complaint alleges
seven causes of action, including violations of the Nevada General Corporation
Law, breaches of fiduciary duty, conversion, and negligent misrepresentation.
The complaint does not seek damages in any specified amount. The Company
believes the complaint is without merit and intends to defend the lawsuit
vigorously.
See also the section entitled "Legal Proceedings" in the Company's
report on Form 10-KSB 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
Guatemala Transaction - In February 1999, the Company entered into an
agreement to acquire 60% of a Guatemalan holding company that owns companies
which provide Internet and multi-channel television services to over 12,400
subscribers in Guatemala and initiated telephony services in February 1999. The
agreement is subject to the sellers meeting certain conditions prior to closing
the transaction.
The purchase price for the Company's 60% interest of the Guatemalan
holding company will be $7.5 million, consisting of $2.0 million in cash and
promissory notes due through the second anniversary of the closing, common
shares of the Company having a value (based on a per common share price of
$8.70) of $2.5 million, and $3.0 million in "capital notes" due through the
fifth anniversary of the closing. Payments by the Company under the capital
notes will be used by the sellers to fund their continuing 40% share of any
additional equity capital required by the Guatemalan holding company to meet its
working capital, expansion and operating requirements. The purchase price is
subject to adjustment under certain conditions.
El Salvador Acquisition Note Refinancing - In February 1999, the first
note payable payment of approximately $5.2 million was due to the previous owner
of the El Salvador Entities. The note payable was reduced by approximately
$432,000 for certain purchase price adjustments allowed under the acquisition
contract. FondElec loaned the Company the funds to satisfy the payment. The
FondElec loan was in the form of a 90-day promissory note bearing interest at
12.0%.
In May 1999, Chispa obtained a long-term loan from a third party lender
of approximately $4.3 million which was used to pay the second note payable
payment of approximately $3.5 million. 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, the FondElec loan 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.
GBM Agreement - In March 1999, the Company reached an arrangement with
GBM Corporation, an IBM alliance company which is the exclusive provider of IBM
computer hardware and software in El Salvador ("GBM"), to provide data
transmission services to GBM's 120 business customers, which cumulatively have
over 20,000 separate connections. Under the terms of the arrangement, GBM will
act as a reseller of the Company's services and will be entitled to a fixed
percentage of the revenues generated by each of its customers. Also, GBM will
have exclusivity to market the Company's services to a pre-agreed number of
potential business clients for a period of six months.
MetroNet Agreement - In April 1999, the Company entered into an
agreement for the acquisition and joint development of fiber optic network
capacity in Mexico City, Mexico. When it is closed, the Company will have the
irrevocable use of 10% (with an option to use up to a total of 33%) of a 7,000
fiber-kilometer backbone and last-mile ring in Mexico City. In addition, the
parties to the agreement agreed to jointly develop additional new fiber optic
networks in seven other major Mexican cities and in such other locations in the
Republic of Mexico as the parties may agree. The agreement is subject to due
diligence. The Company intends to finance the acquisition through a third-party
loan.
Costa Rica Update - In the Company's annual report on Form 10-KSB for
the year ended Decemeber 31, 1998, the Company stated its belief that the
telecommunications market deregulation in Costa Rica would occur between the
second and third quarter of 1999. Based on developments in the market, the
Company now estimates that market deregulation in Costa Rica will not occur
before the fourth quarter of 1999 at the earliest. The effects of any such
deregulation are unknown. The Company's ability to market its LMDS-based
telecommunications services in Costa Rica is contingent on such market
deregulation.
ITEM 6. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
A. EXHIBITS.
None
B. REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WIRELESS CABLE & COMMUNICATIONS, INC.
Date: May 21, 1999 BY /s/ JERRY SLOVINSKI
--------------------------------------
Jerry Slovinski
Chief Financial Officer
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