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, 2000.
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 11, 2000, 11,389,191 shares of registrant's Common Stock, par value
$.001 per share, 29,521 shares of the registrant's Series B Preferred Stock, par
value $.001 per share, and 13,353,806 shares of the registrant's Series C
Preferred Stock, par value $.001 per share, were outstanding.
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS REQUIRED BY FORM 10-QSB
The accompanying unaudited consolidated financial statements of
Convergence Communications, Inc. 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 our annual report on Form
10-KSB for the year ended December 31, 1999, 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 our results of
operations, financial position and changes therein for the periods presented
have been included. The results of operations for the six months ended June 30,
2000 may not be indicative of the results that may be expected for the year
ending December 31, 2000.
[THIS SPACE INTENTIONALLY LEFT BLANK]
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, 2000 AND DECEMBER 31, 1999
-------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2000 1999
----------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,097,310 $ 26,303,296
Accounts receivable - net 5,783,536 3,180,748
Inventory - net 484,562 262,177
Other current assets 4,341,594 1,225,490
----------------- ---------------
Total current assets 16,707,002 30,971,711
PROPERTY AND EQUIPMENT - net 33,066,174 28,446,776
INTANGIBLE ASSETS - net 45,310,616 36,660,025
OTHER ASSETS 5,661,610 1,126,011
----------------- ---------------
TOTAL ASSETS $ 100,745,402 $ 97,204,523
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - current portion $ 16,256,117 $ 11,190,987
Accounts payable and accrued liabilities 13,970,480 6,851,249
Due to affiliates - 122,356
----------------- ---------------
Total current liabilities 30,226,597 18,164,592
LONG-TERM LIABILITIES:
Notes payable - long-term portion 17,946,873 11,389,937
Long-term debt (payable to related parties) 2,654,098 2,595,634
Other long-term liabilities 229,227 185,686
----------------- ---------------
Total long-term liabilities 20,830,198 14,171,257
MINORITY INTEREST IN SUBSIDIARIES 3,965,939 5,493,394
----------------- ---------------
Total liabilities 55,022,734 37,829,243
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series "B" Preferred stock; $0.001 par value; 750,000 shares authorized:
101,374 shares issued and outstanding in 2000 and 1999. 101 101
Series "C" Preferred stock; $0.001 par value; 14,250,000 shares authorized:
9,728,909 shares issued and outstanding in 2000 and 1999. 9,729 9,729
Common stock; $0.001 par value; 100,000,000 shares authorized:
11,717,701 and 11,585,489 outstanding in 2000 and 1999, respectively 11,717 11,585
Additional paid-in capital 96,676,447 95,147,893
Accumulated deficit (50,338,503) (35,764,016)
Accumulated other comprehensive loss (636,823) (30,012)
----------------- ---------------
Total stockholders' equity 45,722,668 59,375,280
----------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 100,745,402 $ 97,204,523
================= ===============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000, 1999 AND 1998
----------------------------------------------------------------------------------------------------------------------
Six Months Six Months Six Months
Ended Ended Ended
June 30 June 30 June 30
2000 1999 1998
---------------- ---------------- --------------
<S> <C> <C> <C>
NET REVENUES FROM SERVICES $ 15,851,933 $ 4,144,575 $ 44,911
---------------- ---------------- --------------
COSTS AND EXPENSES:
Variable cost of services 8,997,860 1,439,805 197,553
Salaries, wages and benefits 6,793,648 2,353,694 173,536
Selling, general and administrative 7,525,053 3,417,683 1,854,250
Depreciation and amortization 6,885,851 2,420,985 865,555
Stock option compensation expense 510,367 634,009 -
---------------- ---------------- --------------
Total costs and expenses 30,712,779 10,266,176 3,090,894
---------------- ---------------- --------------
OPERATING LOSS (14,860,846) (6,121,601) (3,045,983)
OTHER INCOME AND (EXPENSES):
Interest expense, net (1,236,669) (1,441,706) 137,026
Net gain (loss) on foreign exchange and other 89,720 (20,186) -
---------------- ---------------- --------------
Total other expense (1,146,949) (1,461,892) 137,026
---------------- ---------------- --------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (16,007,795) (7,583,493) (2,908,957)
PROVISION FOR INCOME TAXES (94,147) (34,773) -
---------------- ---------------- --------------
LOSS BEFORE MINORITY INTEREST (16,101,942) (7,618,266) (2,908,957)
MINORITY INTEREST IN LOSS OF SUBSIDIARIES 1,527,455 753,956 8,076
---------------- ---------------- --------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (14,574,487) $ (6,864,310) $ (2,900,881)
================ ================ ==============
Net loss per basic and diluted common share $ (0.68) $ (0.57) $ (0.25)
================ ================ ==============
Weighted-average number of common shares:
Basic and diluted 21,480,240 12,022,728 11,469,119
================ ================ ==============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 2000, 1999 AND 1998
---------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Three Months
Ended Ended Ended
June 30 June 30 June 30
2000 1999 1998
---------------- ----------------- ---------------
<S> <C> <C> <C>
NET REVENUES FROM SERVICES $ 8,635,510 $ 2,102,087 $ 16,575
---------------- ----------------- ---------------
COSTS AND EXPENSES:
Variable cost of services 4,897,700 459,453 105,753
Salaries, wages and benefits 3,638,927 1,768,709 87,768
Selling, general and administrative 3,844,845 1,486,996 998,100
Depreciation and amortization 3,977,136 1,215,114 436,658
Stock option compensation expense 246,144 317,004 -
---------------- ----------------- ---------------
Total costs and expenses 16,604,752 5,247,276 1,628,279
---------------- ----------------- ---------------
OPERATING LOSS (7,969,242) (3,145,189) (1,611,704)
OTHER INCOME AND (EXPENSES): - - -
Interest expense, net (791,730) (856,633) 82,977
Net gain (loss) on foreign exchange and other 51,439 (20,186) -
---------------- ----------------- ---------------
Total other expense (740,291) (876,819) 82,977
---------------- ----------------- ---------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (8,709,533) (4,022,008) (1,528,727)
PROVISION FOR INCOME TAXES (40,388) - -
---------------- ----------------- ---------------
LOSS BEFORE MINORITY INTEREST (8,749,921) (4,022,008) (1,528,727)
MINORITY INTEREST IN LOSS OF SUBSIDIARIES 869,714 398,696 3,980
---------------- ----------------- ---------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (7,880,207) $ (3,623,312) $ (1,524,747)
================ ================= ===============
Net loss per basic and diluted common share $ (0.37) $ (0.30) $ (0.13)
================ ================= ===============
Weighted-average number of common shares:
Basic and diluted 21,541,324 12,022,728 11,937,014
================ ================= ===============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock
Series "A" Series "B" Series "C" Common Stock
--------------- ------------------ ----------------- ------------------
Total Shares Amount Shares Amount Shares Amount Shares Amount
---------- ------- ------- -------- ------- --------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ (661,018) 428,571 $ 429
Reverse acquisition of TIC:
Exchange of TIC common shares for CCI
Series "A" Preferred shares 14,571 685,063 $ 685 (428,571) (429)
Addition of CCI common stock 86,990 1,041,494 1,041
Exchange of CVV common stock for CCI common
shares and Series "B" Preferred shares 7,096,500 101,374 $ 101 450,563 451
Issuance of CCI common stock and Series
"A" Preferred shares for cash 10,000,000 150,380 150 228,658 229
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 24,284 24
Issuance of options for common shares and
Series "A" Preferred shares below
fair value 1, 1,479,074
Net loss for the year ended December (4,594,294)
---------- ------- ------- -------- ------- --------- ------- ---------- -------
BALANCE, DECEMBER 31, 1997 14,378,966 839,526 839 101,374 101 - - 1,744,999 1,745
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 91 600,504 600
Conversion of Series "A" Preferred shares into
common shares - 930,706) (930) 9,307,060 9,307
Exchange of Telecom common stock for CCI
common shares 600,000 85,714 86
Issuance of options for common shares
below fair value 1,000,245
---------- ------- ------- -------- ------- --------- ------- ---------- -------
BALANCE, DECEMBER 31, 1998 10,684,526 - - 101,374 101 - - 11,738,277 11,738
Comprehensive loss:
Net loss for the year ended
December 31, 1999 (20,277,479)
Other comprehensive loss consisting of
foreign currency translation adjustment (9,497)
---------- ------- ------- -------- ------- --------- ------- ---------- -------
Total comprehensive loss (20,286,976) - - - - - - - -
Issuance of Series "C" Preferred Stock, net 67,794,198 9,728,909 $9,729
Issuance of warrants 750,677
Repurchases and retirements of common stock (1,215,860) (152,788) (153)
Forgiveness of related party liability 235,175
Issuance of warrants on debt 162,191
Issuance of options for common shares
below fair value 1,251,349
---------- ------- ------- -------- ------- --------- ------- ---------- -------
BALANCE, DECEMBER 31, 1999 59,375,280 - - 101,374 101 9,728,909 9,729 11,585,489 11,585
Comprehensive loss:
Net loss for six months ended
June 30, 2000 (14,574,487)
Other comprehensive loss consisting of
foreign currency translation adjustment (606,811)
---------- ------- ------- -------- ------- --------- ------- ---------- ------
Total comprehensive loss (15,181,298) - - - - - - -
Exchange of Metrotelecom stock for
CCI common shares 1,000,000 121,212 121
Exercise of stock options 241 11,000 11
Issuance of options for common shares
below fair value 528,445
---------- ------- ------- -------- ------- --------- ------- ---------- -------
BALANCE, JUNE 30, 2000 $ 45,722,668 - - 101,374 $ 101 9,728,909 $9,729 11,717,701 $ 11,717
========== ======= ======= ======== ======= ========= ======= ========== =======
</TABLE>
(CONTINUED)
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Compre-
Paid-In Accumulated hensive Income
Capital Deficit (Loss)
---------- ----------- ------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ (661,447)
Reverse acquisition of TIC:
Exchange of TIC common shares for CCI
Series "A" Preferred shares $ 14,315
Addition of CCI common stock 85,949
Exchange of CVV common stock for CCI common
shares and Series "B" Preferred shares 7,095,948
Issuance of CCI common stock and Series
"A" Preferred shares for cash 9,999,621
Issuance of warrants below fair value 657,143
Issuance of CCI common stock and Series
"A" Preferred shares for cash 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 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 4,955,935
Conversion of Series "A" Preferred shares into
common shares - (8,377)
Exchange of Telecom common stock for CCI
common shares 599,914
Issuance of options for common shares
below fair value 1,000,245
---------- ----------- ------------
BALANCE, DECEMBER 31, 1998 26,179,739 (15,486,537) (20,515)
Comprehensive loss:
Net loss for the year ended December 31, 1999 (20,277,479)
Other comprehensive loss consisting of
foreign currency translation adjustment $ (9,497)
---------- ----------- ------------
Total comprehensive loss - (20,277,479) (30,012)
Issuance of Series "C" Preferred Stock, net 67,784,469
Issuance of warrants 750,677
Repurchases and retirements of common stock (1,215,707)
Forgiveness of related party liability 235,175
Issuance of warrants on debt 162,191
Issuance of options for common shares
below fair value 1,251,349
---------- ----------- ------------
BALANCE, DECEMBER 31, 1999 95,147,893 (35,764,016) (30,012)
Comprehensive loss:
Net loss for six months ended June 30, 2000 (14,574,487)
Other comprehensive loss consisting of
foreign currency translation adjustment $ (606,811)
---------- ----------- ------------
Total comprehensive loss - (14,574,487) (636,823)
Exchange of Metrotelecom stock for
CCI common shares 999,879
Exercise of stock options 230
Issuance of options for common shares
below fair value 528,445
---------- ----------- ------------
BALANCE, JUNE 30, 2000 $96,676,447 $(50,338,503) $ (636,823)
========== =========== ============
See notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000, 1999 AND 1998
-----------------------------------------------------------------------------------------------------------------------------
Six Months Six Months Six Months
Ended Ended Ended
June 30 June 30 June 30
2000 1999 1998
--------------- --------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(14,574,487) $ (6,864,310) $ (2,900,881)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 6,885,851 2,420,985 865,555
Provision for bad debts 439,057 114,676 -
Minority interest in loss of subsidiaries (1,527,455) (553,956) (8,076)
Issuance of options for common shares below fair value 528,445 634,009 -
Amortization of discount on notes payable 1,091,473 392,350 -
Issuance of warrants below fair value - 104,110 -
Change in assets and liabilities, net of effects
of acquisitions:
Accounts receivable (2,316,193) (272,064) 9,275
Due from affiliates - 5,000,000 (2,121)
Inventory (222,385) (222,649) 7,679
Other current assets (2,415,284) (256,356) (5,932)
Other assets (1,656,593) (374,093) (139,625)
Accounts payable and accrued liabilities 3,362,037 588,149 435,476
Due to affiliates (102,699) (266,798) 100,666
Other long-term liabilities 43,541 9,078 -
--------------- --------------- -----------------
Net cash used in operating activities (10,464,692) 453,131 (1,637,984)
--------------- --------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in Metrotelecom acquisition, net (3,417,851) - -
Purchases of property and equipment (5,879,732) (9,271,736) (765,748)
--------------- --------------- -----------------
Net cash used in investing activities (9,297,583) (9,271,736) (765,748)
--------------- --------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock - - 3,161,661
Net proceeds from exercise of stock options 241 - -
Increase in minority interest from issuance of subsidiary common stock - 200,000 -
Net proceeds from issuance of Series "A" Preferred Stock - - 1,794,965
Proceeds from related party note - 9,966,115
Payments on related party notes (126,000) (52,500)
Proceeds from related party borrowings - - 45,603
Proceeds from promissory notes - 4,335,000
Payments on promissory notes (322,917) (8,349,642) -
--------------- --------------- -----------------
Net cash (used by) provided by financing activities (448,676) 6,098,973 5,002,229
--------------- --------------- -----------------
EFFECT OF EXCHANGE RATES ON CASH 4,965 - -
--------------- --------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (20,205,986) (2,719,632) 2,598,497
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 26,303,296 4,315,281 6,171,515
--------------- --------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,097,310 $ 1,595,649 $ 8,770,012
=============== =============== =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 218,325 $ 7,100 $ -
=============== =============== =================
Cash paid during the period for income taxes (including prepaid) $ 69,366 $ 58,805 $ -
=============== =============== =================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
1. Basis of Presentation
Convergence Communications, Inc. and subsidiaries is a provider of
integrated broadband communications and Internet services through its own
metropolitan area networks. We operate in recently deregulated and high growth
markets, principally Mexico, Central America and the Andean region of South
America. We offer business entities, governmental agencies and residential
customers high-speed broadband data connections, high-speed and dial-up Internet
access, voice and video services. Our networks use technology based on the
Internet Protocol, or "IP", and asynchronous transfer mode, or "ATM",
technology.
From our inception, we have focused on providing telecommunications
services using high speed transmission networks within and across national
borders. We intend 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.
Our consolidated financial statements include the accounts of our all
wholly- and majority-owned subsidiaries, as well as Chispa Dos, Inc. ("Chispa"),
the holding entity of Cablevisa, S.A., Multicable S.A. and Cybernet de El
Salvador S.A. We own 32.6% of the capital stock of Chispa, but we have operating
control and 50% of the Board of Directors seats of Chispa. 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
our annual report on Form 10-KSB for the year ended December 31, 1999.
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 and Series C
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
Alcatel Notes - In June 2000, we closed a vendor financing facility
with Alcatel giving us the ability to borrow up to $175,000,000 for the purchase
of telecommunications equipment and design, engineering, installation and
testing services from Alcatel for the deployment of our pan-regional high
bandwidth metropolitan area network. As of June 30, 2000, we had drawn down
$2,788,833 of that facility. The amounts drawn under the facility are
represented by promissory notes which are secured by a comprehensive security
package including a pledge of the stock of our subsidiaries and other equity
interests in our subsidiaries and equipment, supplies, inventory, accounts
receivable and other personal property. We will be required to repay the
principal amounts in quarterly installments, commencing 30 months from the
closing date. The final maturity date for the facility is in January, 2007.
MetroTelecom Notes - In April 2000, we financed amounts not paid at
closing in the MetroTelecom Acquisition through the delivery of four promissory
notes totaling $8,750,000. The promissory notes are due on the first through
fourth anniversaries of the closing. The promissory notes bear interest at the
rate of 7% per annum. The notes were recorded at the present value of
approximately $8,200,000, which reflects the estimated market rate of interest
of 10.75%. Our obligation to pay the deferred portions of the purchase price is
secured by a pledge of the shares of MetroTelecom, as well as its operating
subsidiaries. A portion of those pledged shares will be released to us as we pay
down the promissory notes. MetroTelecom will be entitled to retain at least 51%
of the pledged shares until we pay all amounts due under the promissory notes.
5. Operating Segment Information
We make key financial decisions based on certain operating results of
our subsidiaries and revenue types. Our operating segment information is as
follows for the six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
NET REVENUES FROM SERVICES BY SUBSIDIARY:
DIAL UP INTERNET ACCESS June 30, 2000 June 30, 1999
------------------ -----------------
<S> <C> <C>
Intervan (in Mexico) $ 236,093 $ -
GBnet (in Central America) 239,724 -
Inter@net (in Venezuela) 512,598 572,308
Chispa Dos (in El Salvador) 30,243 24,801
MetroTelecom (in Guatemala) 317,901 -
Parent Company, elim. and others 2,434 -
------------------ -----------------
Consolidated total $ 1,338,993 $ 597,109
================== =================
HIGH SPEED DATA June 30, 2000 June 30, 1999
INTERNET ACCESS
------------------ -----------------
Intervan (in Mexico) $ 5,222,755 $ -
GBnet (in Central America) 1,721,960 -
Inter@net (in Venezuela) 57,504 -
Chispa Dos (in El Salvador) 420,896 -
MetroTelecom (in Guatemala) 225,409 -
Parent Company, elim. and others (24,065) -
------------------ -----------------
Consolidated total $ 7,624,459 $ -
================== =================
CABLE TELEVISION June 30, 2000 June 30, 1999
------------------ -----------------
Intervan (in Mexico) $ - $ -
GBnet (in Central America) - -
Inter@net (in Venezuela) - -
Chispa Dos (in El Salvador) 3,197,209 3,128,558
MetroTelecom (in Guatemala) 329,656 -
Parent Company, elim. and others - -
------------------ -----------------
Consolidated total $ 3,526,865 $ 3,128,558
================== =================
OTHER (primarily equipment financing,
installation and advertising) June 30, 2000 June 30, 1999
------------------ -----------------
Intervan (in Mexico) $ 2,145,258 $ -
GBnet (in Central America) 231,811 -
Inter@net (in Venezuela) 30,371 17,668
Chispa Dos (in El Salvador) 563,879 397,775
MetroTelecom (in Guatemala) 281,120 -
Parent Company, elim. and others 109,178 3,465
------------------ -----------------
Consolidated total $ 3,361,616 $ 418,908
================== =================
TOTAL REVENUES June 30, 2000 June 30, 1999
------------------ -----------------
Intervan (in Mexico) $ 7,604,106 $ -
GBnet (in Central America) 2,193,494 -
Inter@net (in Venezuela) 600,472 589,976
Chispa Dos (in El Salvador) 4,212,228 3,551,134
MetroTelecom (in Guatemala) 1,154,086 -
Parent Company, elim. and others 87,547 3,465
------------------ -----------------
Consolidated total $ 15,851,933 $ 4,144,575
================== =================
OPERATING June 30, 2000 June 30, 1999
INCOME (LOSS)
------------------ -----------------
Intervan (in Mexico) $ (3,997,897) $ -
GBnet (in Central America) (1,526,007) -
Inter@net (in Venezuela) (857,364) (341,266)
Chispa Dos (in El Salvador) (1,548,951) (659,960)
MetroTelecom (in Guatemala) (506,977) -
Parent Company, elim. and other (6,423,650) (5,120,375)
------------------ -----------------
Consolidated total $ (14,860,846) $ (6,121,601)
================== =================
</TABLE>
6. Acquisition
MetroTelecom Acquisition - On April 5, 2000, we completed the
acquisition of all of the outstanding stock of a group of companies that
conduct, through directly or indirectly held operating subsidiaries, high speed
data, dial-up Internet, high speed Internet, telephony and subscription cable
television services in Guatemala. The purchase price for the acquisition was
$13.5 million. For a more detailed description of the transaction, see our
report on Form 8-K dated April 5, 2000.
7. Recently Issued Accounting Standards
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements.
SAB 101 establishes accounting and reporting standards for the recognition of
revenue. It states that revenue generally is realized or realizable and earned
when all of the following criteria are met: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services have been rendered;
(3) the seller's price to the buyer is fixed or determinable; (4) collection is
reasonably assured. SAB 101 is effective for our financial statements for the
year ending December 31, 2000. Effective January 1, 2000, we adopted SAB 101.
The adoption of SAB 101 did not have a material impact on our financial
statements.
8. Subsequent Event
Option Exercise - In July 2000, we received approximately $27.2 million
of cash from the exercise of options granted pursuant to an option agreement
dated October 1999, as amended, to a group of shareholders who invested $109.5
million of equity and debt financing in October 1999 (see the section entitled
"Subsequent Financings and Other Transactions" in our report on Form 10-KSB for
the year ended December 31, 1999 for a more detailed description) and issued
3,624,897 shares of our Series C preferred stock. We also have been notified by
this group of shareholders that the remaining $2 million of options under the
October 1999 financing will be exercised by mid-August.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis relates to our financial
condition and results of operations for the six months ended June 30, 2000 and
1999. This information should be read in conjunction with our consolidated
financial statements and the notes related thereto appearing elsewhere in the
document.
A. OVERVIEW
We are a provider of telecommunications services to business and
residential customers over MANs in Latin America. From our inception, we have
focused on providing telecommunications services in emerging markets, primarily
in Latin America, using a high speed transmission network within and across
national borders. We intend 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 our business strategy, we expect to continue to expand
through additional significant acquisitions and strategic alliances. We believe
that additional attractive acquisition opportunities currently exist in Latin
America and we are continually evaluating these opportunities. Certain of these
transactions, if consummated, may be material to our operations and financial
condition. Those acquisitions may not be successfully integrated into our
business operations or result in projected benefits.
B. MATERIAL CHANGES IN RESULTS OF OPERATIONS
Six months ended June 30, 2000 compared to the six months ended June 30, 1999:
Revenues. Our Revenues for the six months ended June 30, 2000 totaled
$15.85 million, compared to $4.15 million for the same period in 1999,
representing a $11.7 million increase. The following table shows our revenues by
operating subsidiary for the first quarters in 2000 and 1999:
TOTAL REVENUES JUNE 30, 2000 JUNE 30, 1999
(in thousands)
Intervan (1) $ 7,604 -
GBNet (1) 2,193 -
Inter@net 601 $ 590
Chispa 4,212 3,551
MetroTelecom (2) 1,154 -
Parent Company, elim. & others 88 4
------------ ------------
Consolidated total $ 15,852 $ 4,145
============ ===========
-----------------
(1) Intervan and GBNet subsidiaries were acquired in December 1999.
(2) MetroTelecom subsidiary was acquired in April 2000.
The increase in revenues was primarily attributable to ownership of the
Intervan, GBNet and MetroTelecom entities during the respective six months ended
June 30, 2000. Chispa's customer base grew from 27,325 customers as of June 1999
to 29,047 customers as of June 2000, an increase of 1,722 customers, or 6%. In
addition to the growth of the customer base during 1999, Chispa began offering
dial-up internet services and high speed data services to residential and
corporate customers during the latter half of 1999.
Variable Cost of Services. Variable cost of services consists
primarily of bandwidth and cable programming charges. The cost of these services
totaled $9.0 million for the six months ended June 30, 2000, an increase of $7.6
million over June 1999. Of total variable cost of services for the six months
ended June 30, 2000, $5.6 million related to our Intervan operations in Mexico,
$1.3 million related to our GBnet operations in Central America, $0.4 million
related to our Inter@net operations in Venezuela, $1.4 million related to our
Chispa operations in El Salvador and $0.4 million related to MetroTelecom
operations in Guatemala.
Salaries, Wages and Benefits. Our salaries, wages and benefits totaled
$6.8 million for the six months ended June 30, 2000, an increase of $4.4 million
over the six months ended June 30, 1999. We maintained a total of almost 700
employees at June 30, 2000, compared to less than 300 employees at June 30,
1999. The increase in headcount reflects both the normal increases associated
with our growing operations and the employees we acquired during the month of
December 1999 with our purchases of Intervan and GBnet, which had 153 and 46
employees, respectively, at June 30, 2000. The increase also reflects the
employees we hired in April 2000 with our purchase of MetroTelecom, which had
170 employees at June 30, 2000.
Selling, General and Administrative Expenses. We incurred SG&A expenses
of $7.5 million during the six months ended June 30, 2000, an increase of $4.1
million compared to the six months ended June 30, 1999. The increase in SG&A
expenses reflects growth in our operations, including completing significant
acquisitions in December 1999 and April 2000, as well as the increased
development of our networks. The increase in SG&A reflects:
o Consulting and legal fees, which totaled $2.1 million for the six
months ended June 30, 2000, compared with $1.1 million for the six
months ended June 30, 1999.
o Travel, advertising and promotion costs increased 189%, to $1.7
million for the six months ended June 30, 2000, compared to $0.6
million for the six months ended June 30, 1999. These expenses relate
primarily to the expansion of our operations into Central America,
Mexico and Venezuela.
o Other operating expenses such as contract labor, rents, office
expenses, utilities, etc. combined to increase approximately $1.7
million as a result of acquisitions and increased operations.
o On a consolidated basis, we recorded a provision for doubtful accounts
of $0.4 million for the six months ended June 30, 2000, compared to
$0.1 for the six months ended June 30, 1999 as a result of
acquisitions, increased operations and payment in arrears.
Stock Compensation Expense. We incurred non-cash stock compensation
expense in the six months ended June 30, 2000 of $0.5 million which is slightly
lower that that recorded in the six months ended June 30, 1999.
Depreciation and Amortization. Our depreciation and amortization
expense totaled $6.9 million in the six months ended June 30, 2000, representing
an increase of $4.5 million over the six months ended June 30, 1999. The
significant increase reflects the amortization of intangible assets relating to
our three acquisitions in December 1999 and April 2000. Additionally, the
increase reflects the depreciation expense from network assets obtained through
acquisitions and foreign subsidiary network asset purchases.
Interest Expense, Net. Our net interest expense totaled $1.2 million
during the six months ended June 30, 2000, consisting of interest expense of
$1.6 million and interest income of $0.4 million. Net interest expense during
the six months ended June 30, 2000 decreased $0.2 million over the six months
ended June 30, 1999. The June 30, 2000 decrease in net interest expense was
primarily attributable to the recording of imputed interest for warrants issued
in conjunction with the December 1998 Notes. The average interest rate recorded
on our indebtedness outstanding during the six months ended June 30, 2000 was
approximately 10.75%, compared to approximately 10% for the six months ended
June 30, 1999.
Provision for Income Taxes. We recorded a provision for income taxes of
$0.1 million during the six months ended June 30, 2000, compared to $0.03
million for the six months ended June 30, 1999. Intervan, which operates in
Mexico, recognized the majority of this income tax expense.
Net Loss. We incurred a net loss of $14.6 million for the six months
ended June 30, 2000, an increase of $7.7 million compared to the same period in
1999. The principal reasons for the increased loss were:
o the $4.5 million increase in depreciation and amortization expense as
a result of acquisitions and build-out of network.
o the $4.4 million increase in salary and benefits expense attributable
to acquisitions and as a result of growth in operations
o the $4.1 million increase in SG&A expenses due to the growth in our
operations and as a result of acquisitions
o the above increases were offset by a $4.1 million increase in net
revenues over variable cost of services. Minority interest in loss of
subsidiaries also offset the increase by $0.8 million.
Six months ended June 30, 1999 compared to the six months ended June 30, 1998:
During the six months ended June 30, 1999, we had only recently
completed our development activities and commenced planned principal operations.
We were still in the development stage during the six months ended June 30,
1998.
Revenues. Our revenues for the six months ended June 30, 1999 totaled
$4.1 million, compared to $0.05 million for 1998, representing a $4.1 million
increase. The following table shows our revenues by operating subsidiary for
1999 and 1998:
TOTAL REVENUES JUNE 30, 1999 JUNE 30, 1998
(in thousands)
Inter@net(1) $ 590 $ -
Chispa (1) 3,551 -
Parent Company, elim. & others 4 45
----------- - ----------
Consolidated total $4,145 $ 45
========== =========
----------------
(1) Inter@net and Chispa were both acquired in the
third fiscal quarter of 1998.
The increase in revenues for the six months ended June 30, 1999 was
primarily attributable to our ownership interests in Inter@net and Chispa during
the six months ended June 30, 1999.
Variable Cost of Services. Our variable cost of services totaled $1.4
million in the six months ended June 30, 1999, an increase of $1.2 million over
the same period in 1998.
Salaries, Wages and Benefits. Our salaries, wages and benefits totaled
$2.4 million for the six months ended June 30, 1999, an increase of $2.2 million
from the same period in 1998. We maintained a total of almost 300 employees at
June 30, 1999, compared to fewer than 25 employees at June 30, 1998. The
increase in headcount reflects normal increases in our employee count as our
operations matured and the employees we acquired through our acquisitions during
the months of July and August of 1998 of Chispa and Inter@net, which had 241 and
37 employees, respectively, at June 30, 1999.
Selling, General and Administrative Expenses. We incurred SG&A expenses
of $3.4 million in the six months ended June 30, 1999, an increase of $1.6
million (or 84%) compared to the same period in 1998. The increase in SG&A
expenses reflects growth in our operations, including completing significant
acquisitions in 1998 and increased development of our networks. The increase in
SG&A reflects:
o Consulting and legal fees, which totaled $1.1 million for the six
months ended June 30, 1999, compared with less than $0.6 million for
the same period in 1998 for an increase of $0.5 million.
o Travel, advertising and promotion costs increased to $0.6 million,
compared to less than $0.2 million for the same period in 1998, for an
increase of $0.4 million. The increase in travel was due to
researching potential business acquisitions in Central America.
o Other operating expenses, such as contract labor, rents, office
expenses, utilities, etc., all increased as result of acquisitions in
El Salvador and Venezuela in the third fiscal quarter of 1998.
Stock Compensation Expense. We incurred non-cash stock compensation
expense in the six months ended June 30, 1999 totaling $0.6 million compared to
none in the same period of 1998.
Depreciation and Amortization. Our depreciation and amortization
expense totaled $2.4 million for the six months ended June 30, 1999,
representing an increase of $1.6 million compared to the same period in 1998.
The significant increase relates primarily to the amortization of intangible
assets relating to acquisitions.
Interest Expense, Net. Our net interest expense totaled $1.4 million in
the six months ended June 30, 1999, consisting of interest expense of $1.5
million and interest income of $0.1 million. Net interest income was less than
$0.2 million for the same period in 1998. The significant increase in net
interest expense relates primarily to the interest from debt issued to complete
acquisitions in the third fiscal quarter of 1998.
Net Loss. We incurred a net loss of $6.9 million in the six months
ended June 30, 1999, an increase of $4.0 million over the same period in 1998.
The principal reasons for the increased loss were:
o the $2.2 million increase in salary, wages and benefit expenses due to
the growth in our operations and as a result of acquisitions in 1998
o the $1.6 million increase in SG&A expenses due to the growth in our
operations and as a result of
acquisitions in 1998
o the $0.6 million increase in stock-based compensation expense to
attract key management
o the $1.6 million increase in our depreciation and amortization expense
on intangible assets as a result
of acquisitions in 1998
o the $1.2 million increase in net interest expense as a result of debt
related to acquisitions and financing of operational growth.
o the above increases wereh offset by a $2.9 million increase in net
revenues over variable cost of services. Minority interest in loss of
subsidiaries also offset the increase by $0.7 million
C. LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have generally funded our cash requirements at the
parent company level through debt and equity transactions. The proceeds from
these transactions were primarily used to fund our investments in, and
acquisition of, start-up network operations, to provide working capital, and for
general corporate purposes, including the expenses we incurred in seeking and
evaluating new business opportunities. Our foreign subsidiary operations have
been financed by a combination of equity investments, third party debt and
shareholder loans.
We will continue to make significant capital expenditures in the next
several years in connection with building our networks, the further development
of our operations in Mexico, Venezuela and Central America, and new customer
accounts (for which we install our equipment on customer premises). We intend to
meet our capital requirements during 2000 from a combination of the following:
o unused proceeds from our October 1999 Financing including the $26
million credit facility for use in Venezuela provided by one of the
investors in that financing which has not been drawn upon.
o borrowings under the $175 million vendor financing facility with
Alcatel (see Note 4).
o $27.2 million of proceeds from the exercise of options in July 2000
issued to the six accredited investors in connection with our October
1999 financing transactions.
o additional private equity transactions relating to the exercise of
outstanding options and warrants.
We anticipate that we will require approximately $46.5 million during
2000 for capital expenditures related to the expansion of our existing
telecommunications business, and that we will require significant amounts
thereafter.
During the six months ended June 30, 2000, our operating activities
used $10.5 million, compared with providing $0.5 million during the six months
ended June 30, 1999. Our investing activities, consisting of the cash component
of the MetroTelecom acquisition in Guatemala and capital expenditures for
network equipment used $9.3 million during the six months ended June 30, 2000,
compared with $9.3 million for capital expenditures for network equipment and
fiber capacity during the six months ended June 30, 1999. Our financing
activities in the six months ended June 30, 2000 used $0.5 million to repay
amounts owed to third-party bank and pre-paid amounts owed on the IAN
acquisition debt compared to $6.1 million that was provided from proceeds from
related party note and borrowing activity (net of payments) during the quarter
ended June 30, 1999.
As of June 30, 2000, we had current assets of $16.7 million, compared
to $31.0 million as of December 31, 1999, for a decrease of $14.3 million. The
decrease in current assets was due to decreases in cash relating to the
MetroTelecom acquisition in April 2000, capital expenditures for network
equipment and disbursements for consolidated operational expenses. In July 2000,
we received $27.2 million of proceeds from the exercise of options issued to the
six accredited investors from the October 1999 financing transactions.
We have the ability to moderate our capital spending and losses by
varying the number and extent of our market build out activities and the
services we offer in our various markets. If we elect to slow the speed, or
narrow the focus, of our business plan, we will be able to reduce our capital
requirements and losses. The actual costs of building out and launching our
markets would depend on a number of factors, however, including our ability to
negotiate favorable prices for purchases of network equipment, the number of
customers and the services for which they subscribe, the nature and success of
the services that we may offer, regulatory changes and changes in technology. In
addition, actual costs and revenues could vary from the amounts we expect or
budget, possibly materially, and such variations are likely to affect how much
additional financing we will need for our operations. Accordingly, there can be
no assurance that our actual financial needs will not exceed the anticipated
amounts available to us, including from new, third parties, described above.
To the extent we acquire the amounts necessary to fund our business
plan through the issuance of equity securities, our shareholders may experience
dilution in the value per share of their equity securities. The acquisition of
funding through the issuance of debt could result in a substantial portion of
our cash flow from operations being dedicated to the payment of principal and
interest on that indebtedness, and could render us more vulnerable to
competitive and economic downturns. Our subsidiaries or affiliates could also
obtain financing from third parties, but there can be no assurance our
subsidiaries or affiliates will be able to obtain the financing required to make
planned capital expenditures, provide working capital or meet other cash needs
on terms which are economically acceptable to us.
D. SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in "Management's Discussion and Analysis"
constitute forward-looking statements concerning our operations, economic
performance and financial condition. Because those statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by those forward-looking statements.
In addition, any statements that express or involve discussions as to
expectations, beliefs, plans, objectives, assumptions or future events or
performance are not historical facts and may be forward-looking and,
accordingly, those statements involve estimates, assumptions and uncertainties
which could cause actual results to differ materially from those expressed in
the forward-looking statements. Accordingly, those types of statements are
qualified in their entirety by reference to, and are accompanied by, the factors
discussed throughout this report. Among the key factors that have a direct
bearing on our results of operations are the potential risk of delay in
implementing our business plan; the political, economic and legal aspects of the
markets in which we operate; competition; and our need for additional
substantial financing. We have no control over some of these factors.
The factors described in this report could cause our actual operating
results to differ materially from those expressed in any forward-looking
statements made by or on behalf of us. Persons reviewing this report, therefore,
should not place undue reliance on those forward-looking statements. Further, to
the extent this report contains forward-looking statements, they speak only as
of the date of this report, and we undertake no obligation to update any
forward-looking statement or statements to reflect the occurrence of
unanticipated events. New factors may emerge from time to time, and it is not
possible for management to predict all of such factors. Further, management
cannot assess the impact of each such factor on our business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Effective July 5, 2000, we settled our arbitration proceeding against
Donald Williams. Under the terms of the settlement, we canceled 328,510 common
shares and 71,853 Series B preferred shares formally owned by Mr. Williams and
affiliates. See our report on Form 8-K filed on July 7, 2000 for a more detailed
description.
Also see the section entitled "Legal Proceedings" in our report on Form
10-KSB for the year ended December 31, 1999.
ITEM 2. CHANGES IN SECURITIES
In April 2000, we issued 121,212 shares of our common stock to one
investor in connection with the closing of the Metrotelecom Acquisition. In July
2000, we issued a total of 3,624,897 shares of our Series C Convertible
Preferred Stock to five investors for approximately $27.2 million upon their
exercise of certain options we granted them in October 1999 in connection with a
$109 million equity and debt financing round.
In each case, we believe (and received representations and warranties
to the effect) that (i) the investor was an "accredited investor", as that term
is defined under the Securties Act of 1933, as amended (the "Act"), (ii)
acquired the securites for investment purposes, and without a view to resale or
distribution in violation of the federal securities laws, (ii) understood that
the securities were subject to severe restrictions on resale or further
disposition, and that any such disposition would be subject to the dispostion
qualifying for an exemption from registration or the securities being registered
under the Act, and (iv) understood that the certificates representing the
securities would bear restrictive legends typically placed on unregistered
securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MATTERS SUBMITTED TO A VOTE OF THE COMPANY'S SHAREHOLDERS
In May 2000, we received the written consent from the holders of
approximately 84.3% or the voting power of our outstanding capital stock to the
transfer by our parent corporation, Convergence Communications, Inc., of
substantially all of its assets to a newly formed, wholly-owned subsidiary,
Latin American Broadband, Inc. The transferred assets consisted primarily of
Convergence Communications, Inc.'s stock interests in its various subsidiaries.
The transfer was effected at the request of Alcatel and in connection with the
closing of our vendor financing package with Alcatel. On May 21, 2000, we filed
an Information Statement on Schedule 14C with the Commission which described the
transaction, the reasons for it, the number of shares consenting to the
transaction, the percentage of the voting power of our securites represented by
those shares, and that the number of shares consenting to the transaction was
sufficient to authorize the transaction at any duly called and convened meeting
of our shareholders. On June 21, 2000, we effected the transactions and closed
the Alcatel vendor financing transaction.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
A. EXHIBITS.
None.
B. REPORTS ON FORM 8-K
We filed two reports on Form 8-K for transactions occurring during the
quarter ended June 30, 2000.
1. On July 7, 2000, we filed a report on Form 8-K describing the
execution of documents with Alcatel relating to a $175 million
financing facility.
2. On May 1, 2000, we filed a report on Form 8-K describing the
MetroTelecom Acquisition.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONVERGENCE COMMUNICATIONS, INC.
Date: August 14, 2000 BY /s/ JERRY SLOVINSKI
-------------------
Jerry Slovinski
Chief Financial Officer
