SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 2
AMENDED CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): December 15, 1999
-----------------
CONVERGENCE COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Nevada 00-21143 87-0545056
- ------ -------- ----------
(State or other jurisdiction of (Commission (I. R. S. Employer
incorporation or organization) File Number) Identification Number)
102 West 500 South, Suite 320, Salt Lake City, Utah 84101
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (801) 328-5618
--------------
<PAGE>
Amendment No. 2
Convergence Communications, Inc. (the "Company") hereby amends the following
items, financial statements, exhibits or other portions of its Current Report on
Form 8-K/A filed January 6, 2000 as follows:
Item 7. Financial statements and exhibits
Item 7(a): Financial statements of businesses acquired
GBnet Corporation ("GBnet") audited consolidated statement of assets and
liabilities sold as of November 30, 1999, and the related consolidated
statements of operations and of cash flows for the eleven months ended November
30, 1999 and related notes and report of independent auditors.
Item 7(b): Pro forma financial information
Pro forma consolidated balance sheet of the Company as of September 30, 1999 and
pro forma consolidated statements of operations for the year ended December 31,
1998 and nine month period ended September 30, 1999.
Item 7(c): Exhibits
None
Signatures
Pursuant to the requirements of the Securities and 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. (Registrant)
/S/
---------------------------------------
By: Jerry Slovinski, Chief Financial Officer
Dated: February 28, 2000
<PAGE>
Item 7(a): Financial statements of businesses acquired
The GBnet audited consolidated statement of assets and liabilities sold as of
November 30, 1999 and the related consolidated statements of operations and of
cash flows for the eleven months ended November 30, 1999, are all included
herein.
<PAGE>
INDEPENDENT AUDITORS' REPORT
Convergence Communications, Inc.
and its Board of Directors
We have audited the consolidated statement of assets and liabilities sold of the
GBnet Corporation (wholly-owned subsidiaries of General Business Machines
Corporation) (together with its subsidiaries, "GBnet") as of November 30, 1999,
and the related consolidated statement of operations and of cash flows for the
eleven months ended November 30, 1999. These consolidated financial statements
are the responsibility of GBnet's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated assets and liabilities sold of the GBnet
Corporation as of November 30, 1999, and the results of their consolidated
operations and cash flows for the eleven months ended November 30, 1999 in
conformity with generally accepted accounting principles.
As explained in Note 1, the GBnet Corporation are wholly-owned operating units
of General Business Machines Corporation and the results of their consolidated
operations are not necessarily indicative of those which may have resulted had
the consolidated operations been a stand alone company.
As discussed in Note 9, GBnet was acquired on December 15, 1999 by Convergence
Communications, Inc.
Deloitte & Touche LLP
February 17, 2000
Guatemala City, Guatemala
<PAGE>
-
GBNET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES SOLD
NOVEMBER 30, 1999
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Accounts receivable - net $ 329,202
Other current assets 43,309
------------
Total current assets 372,511
------------
NON-CURRENT ASSETS:
Network equipment 6,197,488
Less accumulated depreciation (3,237,638)
------------
Total network equipment - net 2,959,850
------------
TOTAL ASSETS $ 3,332,361
============
LIABILITIES AND NET INVESTMENT
LIABILITIES NONE
NET INVESTMENT - Net investment in GBnet Corporation (Note 5) $ 3,332,361
-----------
TOTAL LIABILITIES AND NET INVESTMENT $ 3,332,361
===========
See notes to consolidated financial statements.
<PAGE>
GBNET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1999
- --------------------------------------------------------------------------------
REVENUES
High speed data $ 4,769,540
Hardware sales, installation, and initial charges 3,328,555
------------
Total revenues 8,098,095
------------
COST OF SERVICE AND OPERATING EXPENSES
High speed data 1,860,121
Hardware, installation, and initial costs 2,762,844
Salary and benefits 450,788
Other operating expenses 498,323
Depreciation 1,195,033
------------
Total cost of service and operating expenses 6,767,109
------------
INCOME BEFORE INCOME TAXES 1,330,986
INCOME TAXES 464,630
NET INCOME $ 866,356
===========
See notes to consolidated financial statements.
<PAGE>
GBNET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1999
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 866,356
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,195,033
Changes in assets and liabilities:
Accounts receivable 512,221
Other current assets (43,309)
------------
Net cash provided by operating activities 2,530,301
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of computer equipment (522,295)
------------
Net cash used in investing activities (522,295)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in net investment (2,008,006)
------------
Net cash used in financing activities: (2,008,006)
------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS NONE
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD NONE
----
CASH AND CASH EQUIVALENTS, END OF PERIOD NONE
====
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest NONE
====
Cash paid for taxes NONE
====
See notes to consolidated financial statements.
<PAGE>
GBnet Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1999
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The consolidated financial statements of GBnet Corporation, a British
Virgin Islands international business company (together with its
subsidiaries, "GBnet") include the accounts of its wholly-owned
subsidiaries. All significant intercompany balances, transactions and
profits have been eliminated. GBnet is a wholly-owned subsidiary of
General Business Machines Corporation ("GBM"). GBM is the exclusive
distributor of IBM products and services in Central America and the
Dominican Republic, including the countries in which GBnet operates.
The accompanying financial statements present, on a historical cost basis,
the assets, liabilities, revenues, and expenses included in the sale to
Convergence Communications, Inc. (see Note 9). The accompanying
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States; however,
GBnet's accounting records are maintained in accordance with accounting
practices set by tax regulations in the respective countries in which
GBnet and its subsidiaries operate.
2. NATURE OF OPERATIONS
GBnet provides data networking and internet access services through its
subsidiaries to over 1,500 customers in the countries of Guatemala, El
Salvador, Honduras, Nicaragua, Costa Rica, Panama and the Dominican
Republic.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates: 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, disclosure of contingent assets and liabilities and reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Recognition of Revenues, Costs and Expenses: Revenues for high speed data
and other telecommunications services are recognized in the period during
which the services are provided. Costs of service and operating expenses
are recorded on the accrual basis. These costs include allocations made by
GBM, which represent the estimated values of material and services
provided to GBnet.
Network Equipment: Network equipment is recorded at cost. Expenditures for
the maintenance and repair of network equipment are charged to expense as
incurred. Expenditures for major replacement or betterment are
capitalized.
Depreciation is provided over the estimated useful lives of the related
assets using the straight-line method. These lives range from three years
to five years for network equipment. Amounts charged to expense for the
depreciation of network equipment was $1,195,033 for the eleven months
ended November 30, 1999.
Income Taxes: GBnet uses the asset and liability method to account for
income taxes. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
existing tax bases. GBnet operations were included in consolidated tax
returns with GBM. The tax allocation policy provides for each subsidiary
to calculate its own provision on a "separate return basis." Amounts due
to or from GBM are settled through intercompany accounts.
Translation: The functional currency of GBnet and each of its subsidiaries
is the U.S. Dollar, the currency in which GBnet and its subsidiaries
operate. Net foreign currency gains (losses) included in the statement of
operations were not material for the eleven months ended November 30,
1999.
4. INCOME TAXES
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States; however, GBnet's accounting records are maintained in accordance
with accounting practices set by tax regulations in the respective
countries in which GBnet and its subsidiaries operate.
For the eleven months ended November 30, 1999, the income tax expense
consists of the following:
Current $ 464,630
Deferred None
---------
Total $ 464,630
=========
Deferred tax assets and (liabilities) comprise the following as of
November 30, 1999:
Deferred tax assets - net operating loss carryforward $ 96,868
Deferred tax liabilities None
------------
Total deferred tax asset (liability) 96,868
Less valuation allowance (96,868)
------------
Net deferred tax asset (liability) None
A valuation allowance has been provided for those net operating loss
("NOL") carryforward and temporary differences which are estimated to
expire before they are utilized.
5. NET INVESTMENT IN GBNET
GBnet has 50,000 shares of $1 par value stock authorized, of which 50,000
are issued and outstanding.
The net investment in GBnet is comprised of the following:
Balance, January 1, 1999 $ 4,474,011
Net income 866,356
Other capital transactions (2,008,006)
------------
Balance, November 30, 1999 $ 3,332,361
============
6. TRANSACTIONS WITH AFFILIATES
GBnet does not maintain corporate treasury, legal, internal audit, and
other similar corporate support functions. GBnet also does not maintain
departments for billing of revenues, accounts receivable collection,
accounts payable disbursement or other financial and accounting functions.
For the eleven months ended November 30, 1999, GBM charged GBnet
approximately $230,000 for such corporate support functions. The costs
were allocated based upon the proportional use of facilities and
personnel.
During the eleven months ended November 30, 1999, GBM also allocated
certain expenses to GBnet of approximately $1,151,000 relating to salary,
benefits, building rent, utilities, insurance, etc. attributable to GBnet
revenues. Such financial and accounting services provided by GBM have been
recorded as expenses.
7. REVENUE CONCENTRATION
GBnet had one customer which individually accounted for 15% of total
revenue for the eleven months ended November 30, 1999.
8. COMMITMENTS AND CONTINGENCIES
GBnet is party to a number of registrations, licenses, concessions and
contracts with government agencies and non-governmental business entities.
These contracts may be subject to audit by such agencies and business
entities or their representatives. Such audits could result in requests
for reimbursement to the government agencies and business entities for
expenditures disallowed under the terms of the contracts or for damages
for nonperformance of agreed upon standards. Management believes that
disallowed expenditures or damages for nonperformance, if any, would not
be significant.
In the normal course of business, GBnet is subject to claims and
litigation. Management of GBnet believes that current or threatened claims
and litigation with a reasonably possible chance of loss would not,
individually or in the aggregate, result in a materially adverse effect on
GBnet 's results of operations, liquidity or financial condition.
9. SUBSEQUENT EVENTS
Acquisition of GBnet: On December 15, 1999, the Company completed the
acquisition of all of the outstanding capital stock of GBnet for a total
purchase price of $13,000,000, of which the Company paid $4,000,000 in
cash at the closing. The balance of the purchase price, or $9,000,000 was
paid through the delivery of four promissory notes which are due on the
first through fourth anniversaries of the closing. The promissory notes,
which bear no interest, are in face amounts to provide GBM with an imputed
interest rate of 10.75% per annum through their anticipated payment dates.
The Company's obligations to pay the deferred portions of the purchase
price are secured by a pledge of the shares of GBnet, as well as its
operating subsidiaries. A portion of those pledged shares will be released
to the Company as it pays down the promissory notes. GBM will be entitled,
however, to retain at least 51% of the pledged shares until the Company
pays all amounts under the promissory notes.
In connection with the acquisition, GBM and GBnet entered into a number of
ancillary documents, including (1) a commercialization agreement, pursuant
to which each of GBnet and GBM agreed to recommend one another as
preferred providers of services and products (2) an equipment purchase
agreement, pursuant to which GBM agreed to provide GBnet with preferred
purchasing terms for any IBM equipment it acquires from GBM for its
operations, and (3) a network management agreement pursuant to which GBnet
will provide GBM with managed data network services frame relay-based
connections.
<PAGE>
Item 7 (b): Pro forma financial information
The accompanying unaudited pro forma balance sheet as of September 30, 1999 and
unaudited pro forma statements of operations for the year ended December 31,
1998 and the nine month period ended September 30, 1999 are presented to reflect
the acquisition of all of the outstanding shares of capital stock of GBnet from
GBM by the Company for a total purchase price of $13,000,000. The acquisition
was effected pursuant to a Stock Purchase Agreement, dated as of December 15,
1999, among the Company and GBM. The acquisition was accounted for under the
purchase method of accounting. The accompanying unaudited pro forma financial
statements reflect the effects of a preliminary allocation of the purchase
price.
The accompanying unaudited pro forma financial statements should be read in
conjunction with the companies' historical financial statements and notes
thereto. The unaudited pro forma financial statements are presented for
informational purposes only and are not necessarily indicative of actual results
had the foregoing transaction occurred as described in the preceding paragraph,
nor do they purport to represent results of future operations of the
consolidated companies.
The pro forma balance sheet assumes the acquisition occurred on September 30,
1999. The pro forma consolidated statements of operations present the Company's
historical statements of operations for the fiscal year ended December 31, 1998
and the nine month period ended September 30, 1999, along with GBnet's
statements of operations for the same periods adjusted to give effect to the
acquisition as if it had occurred on January 1, 1998. Unaudited pro forma
financial information presented herein reflects adjustments for (i) the
estimated allocation of purchase price to the fair value of assets acquired,
including intangible assets, (ii) the effect of recurring charges related to the
acquisition, primarily the amortization of intangible assets and the recording
of interest expense on borrowings to finance the acquisition.
The preliminary allocation of the purchase price resulted in approximately $9.8
million of intangible assets comprised of subscriber rights, contract rights and
license rights. The actual amount of these intangible assets recorded will vary
based upon the final purchase price allocation resulting from the completion of
the integration plan and the asset valuations discussed above. Changes in the
intangible asset allocation and the related amortization expense resulting from
these plans and assessments may be material.
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
UNAUDITED PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1999
- -----------------------------------------------------------------------------------------------------------------------
Convergence GBnet Pro Forma
Communica- Corporation Purchase Adjusted
ASSETS tions, Inc. Companies Adjustments Balance
CURRENT ASSETS:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 543,510 $ 543,510
Accounts receivable - net 624,161 $ 284,398 908,559
Inventory 380,973 380,973
Other current assets 275,264 275,264
--------- -------
Total current assets 1,823,908 284,398 2,108,306
INVESTMENT IN CENTURION 845,955 845,955
PROPERTY AND
EQUIPMENT - net 18,351,638 2,984,671 21,336,309
INTANGIBLE ASSETS - net 19,582,353 $9,798,931 (a) 29,381,284
OTHER ASSETS 969,087 969,087
----------- ----------- ----------- -----------
TOTAL ASSETS $41,572,941 $3,269,069 $9,798,931 $54,640,941
=========== =========== =========== ===========
See notes to unaudited pro forma consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
UNAUDITED PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1999
- -------------------------------------------------------------------------------------------------------------------------
Convergence GBnet Pro Forma
Communications, Corporation Purchase Adjusted
Inc. Companies Adjustments Balance
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C> <C> <C>
Accounts payable and accrued liabilities $ 5,995,340 $ 68,000 (b) $ 6,063,340
Notes payable 4,861,599 4,000,000 (c) 8,861,599
Notes payable (payable to related parties) 7,165,925 7,165,925
Accrued consulting fees
(payable to related parties) 522,240 522,240
Due to affiliates 835,138 835,138
Unearned revenue 386,568 386,568
------------- ------------- ------------- -------------
Total current liabilities 19,766,810 4,068,000 23,834,810
------------- ------------- ------------- -------------
LONG-TERM LIABILITIES:
Long-term debt (payable to related parties) 6,069,249 6,069,249
Subordinated exchangeable promissory notes
(payable to related parties) 10,000,000 10,000,000
Notes payable 3,497,500 9,000,000 (c) 12,497,500
Accrued foreign severance 224,286 224,286
------------- ------------- ------------- -------------
Total long-term liabilities 19,791,035 9,000,000 28,791,035
MINORITY INTEREST IN SUBSIDIARIES 1,288,180 1,288,180
------------- ------------- ------------- -------------
Total liabilities 40,846,025 13,068,000 53,914,025
------------- ------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series "B" Preferred stock 101 101
Common stock 11,738 11,738
Additional paid-in capital 27,349,360 27,349,360
Accumulated deficit (26,605,221) (26,605,221)
Accumulated other comprehensive loss (29,062) (29,062)
Net investment in GBnet $ 3,269,069 (3,269,069) (d)
------------- ------------- ------------- -------------
Total stockholders' equity 726,916 3,269,069 (3,269,069) 726,916
------------- ------------- ------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 41,572,941 $ 3,269,069 $ 9,798,931 $ 54,640,941
============ ============ =========== =============
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
- ------------------------------------------------------------------------------------------------------------------------
Convergence GBnet Pro Forma
Communica- Corporation Purchase Adjusted
tions, Inc. Companies Adjustments Balance
<S> <C> <C> <C> <C>
NET REVENUES $ 3,113,482 $8,443,882 (g) $ 11,557,364
COST OF SERVICE 1,876,133 4,969,500 6,845,633
------------- ------------ ------------- -------------
GROSS MARGIN 1,237,349 3,474,382 4,711,731
OPERATING EXPENSES:
Professional fees 2,270,588 2,270,588
Depreciation and amortization 2,864,789 1,117,800 $ 1,633,155 (e) 5,615,744
Leased license expense 708,912 708,912
General and administrative 5,261,916 1,003,550 6,265,466
Stock-based compensation expense 753,046 753,046
------------- ------------ ------------- -------------
Total 11,859,251 2,121,350 1,633,155 15,613,756
------------- ------------ ------------- -------------
OPERATING (LOSS) INCOME (10,621,902) 1,353,032 (1,633,155) (10,902,025)
OTHER INCOME AND (EXPENSES):
Interest income 268,996 268,996
Interest expense (677,188) (967,500) (f) (1,644,688)
------------- ------------ ------------- -------------
Total (408,192) (967,500) (1,375,692)
------------- ------------ ------------- -------------
NET (LOSS) INCOME BEFORE
INCOME TAX AND
MINORITY INTEREST (11,030,094) 1,353,032 (2,600,655) (12,277,717)
INCOME TAX 473,561 (h) 473,561
------------- ------------ ------------- -------------
NET (LOSS) INCOME BEFORE
MINORITY INTEREST (11,030,094) 879,471 (2,600,655) (12,751,278)
MINORITY INTEREST IN
LOSS OF SUBSIDIARIES
799,298 799,298
------------- ------------ ------------- -------------
NET (LOSS) INCOME $ (10,230,796) $ 879,471 $ (2,600,655) $(11,951,980)
============= ============ ============= =============
NET (LOSS) INCOME PER
BASIC AND DILUTED
COMMON SHARE $ (0.87) $ (1.02)
=========== ==========
WEIGHTED AVERAGE
COMMON SHARES - BASIC 11,736,927 11,736,927
============ ==========
WEIGHTED AVERAGE
COMMON SHARES - DILUTED 14,102,389 14,102,389
============ ==========
See notes to unaudited pro forma consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------------------------------------------------
Convergence GBnet Pro Forma
Communica- Corporation Purchase Adjusted
tions, Inc. Companies Adjustments Balance
<S> <C> <C> <C> <C>
NET REVENUES $ 6,455,538 $ 6,625,714 (g) $ 13,081,252
COST OF SERVICE 2,371,382 3,771,509 6,142,891
------------- ------------ ------------- -------------
GROSS MARGIN 4,084,156 2,854,205 6,938,361
OPERATING EXPENSES:
Professional fees 2,028,151 2,028,151
Depreciation and amortization 3,661,625 977,754 $ 1,224,866 (e) 5,864,245
Leased license expense 66,796 66,796
General and administrative 6,606,920 787,462 7,394,382
Stock-based compensation expense 1,015,101 1,015,101
------------- ------------ ------------- -------------
Total 13,378,593 1,765,216 1,224,866 16,368,675
------------- ------------ ------------- -------------
OPERATING (LOSS) INCOME (9,294,437) 1,088,989 (1,224,866) (9,430,314)
OTHER INCOME AND (EXPENSES):
Interest income 82,458 82,458
Interest expense (3,029,268) (725,625) (f) (3,754,893)
------------- ------------ ------------- -------------
Total (2,946,810) (725,625) (3,672,435)
------------- ------------ ------------- -------------
NET (LOSS) INCOME BEFORE INCOME
TAX AND MINORITY INTEREST (12,241,247) 1,088,989 (1,950,491) (13,102,749)
INCOME TAX 134,774 381,146 (h) 515,920
------------- ------------ ------------- -------------
NET (LOSS) INCOME BEFORE
MINORITY INTEREST
(12,376,021) 707,843 (1,950,491) (13,618,669)
MINORITY INTEREST IN
LOSS OF SUBSIDIARIES 1,257,337 1,257,337
------------- ------------ ------------- -------------
NET (LOSS) INCOME $ (11,118,684) $ 707,843 $ (1,950,491) $ (12,361,332)
============== ============ ============= ==============
NET (LOSS) INCOME PER BASIC
AND DILUTED COMMON SHARE $ (0.92) $ (1.03)
=========== ===========
WEIGHTED AVERAGE
COMMON SHARES - BASIC 12,022,728 12,022,728
============ ===========
WEIGHTED AVERAGE
COMMON SHARES - DILUTED 14,102,389 14,102,389
============ ==========
See notes to unaudited pro forma consolidated financial statements.
</TABLE>
<PAGE>
CONVERGENCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
Based upon the terms of the acquisition, the transaction is accounted for as a
purchase of GBnet by the Company for financial reporting and accounting
purposes. Accordingly, the Company revalued the basis of GBnet's acquired assets
to fair value. The purchase price of GBnet is calculated as the cash paid, plus
the present value of notes issued plus the Company's transaction costs. The
difference between the purchase price and the fair value of the identifiable
tangible and intangible assets acquired is recorded as intangible assets and
will be amortized over terms ranging from 5-7 years. The preliminary allocation
of the purchase price is subject to completion of certain valuations relating to
tangible and intangible assets, and the completion of the Company's integration
plan. Changes to the preliminary purchase price allocation resulting from the
finalization of the valuations and integration plan may be material. The
preliminary allocation of the purchase price to the fair value of assets
acquired and liabilities assumed is as follows:
Purchase price $ 13,000,000
Transaction costs 68,000
-------------
Total estimated purchase price $ 13,068,000
=============
Purchase price has been allocated as follows:
Fair value of assets acquired:
Current assets $ 396,161
Property and equipment 2,872,908
Intangible assets (subscriber, contract and license rights) 9,798,931
-------------
$ 13,068,000
=============
THE UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999
GIVES EFFECT TO THE FOLLOWING PRO FORMA ADJUSTMENTS:
(a) Represents the excess of the purchase price over the net assets acquired
which has been allocated to intangible assets (subscriber rights, contract
rights and license rights) resulting from the acquisition which will be
amortized over terms ranging from 5-7 years.
(b) Represents transaction costs related to the acquisition of $68,000.
(c) Represents the present value of the non-interest bearing notes issued to
effect the acquisition. The notes were discounted at 10.75%, which
reflects the estimated market rate of interest. The Company paid
$4,000,000 in cash at the closing date. See Form 8-K/A filed on January 6,
2000.
(d) Represents the elimination of the net investment in GBnet.
THE UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 GIVE EFFECT TO
THE FOLLOWING PRO FORMA ADJUSTMENTS:
(e) Represents the increase in intangible amortization expense. The
intangibles and the related amortization expense are subject to adjustment
resulting from the completion of the final purchase price allocation
(f) Represents the adjustment to interest expense related to debt acquired to
finance the acquisition calculated as average borrowings of $9 million,
multiplied by an interest rate of 10.75%.
(g) For the year ended December 31, 1998, hardware, installation and initial
charge revenues and their related cost of sales were $3,502,700 and
$2,877,600, respectively. For the nine months ended September 30, 1999,
hardware, installation and initial charge revenues and their related cost
of sales were $2,723,363 and $2,325,752, respectively. The hardware
related revenue directly relates to network equipment sold to GBnet
customers. Company management believes that potential exists for hardware,
installation and initial charge revenues to be significantly lower under
the Company's ownership due to the utilization of the Company's local IP
networks which will decrease the need for such equipment and services.
(h) Represents the net impact of the income tax benefit for the period and the
valuation allowance, which reduces the deferred tax asset to what
management believes is realizable.
