U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended June 30, 1999
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ___________ to _____________
Commission file number 0-20843
POINTE COMMUNICATIONS CORPORATION
(Exact Name of Small Business Issuer as Specified in Its Charter)
NEVADA 84-1097751
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1325 NORTHMEADOW PARKWAY
ROSWELL, GEORGIA 30076
(Address of Principal Executive Offices)
(770) 432-6800
(Issuer's Telephone Number, Including Area Code)
________________________________________________________
(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
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of August 23, 1999: 45,465,792
Transitional Small Business Disclosure Format:
Yes No X
--- ---
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
June 30, December 31,
1999 1998
------------ --------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . $19,706,696 $ 1,255,199
Restricted cash . . . . . . . . . . . . . . . . . . . . 348,900 185,000
Accounts receivable, net of allowance for
doubtful accounts of $1,016,000 and $900,000
at June 30, 1999 and December 31, 1998, respectively. 4,187,480 3,686,153
Accounts receivable-- affiliate, net. . . . . . . . . . 344,720 215,337
Notes receivable. . . . . . . . . . . . . . . . . . . . 574,050 -
Inventory, net. . . . . . . . . . . . . . . . . . . . . 1,406,807 652,187
Prepaid expenses and other. . . . . . . . . . . . . . . 490,670 263,249
------------ --------------
Total current assets. . . . . . . . . . . . . . . . . 27,059,322 6,257,125
------------ --------------
PROPERTY AND EQUIPMENT, at cost:
Equipment and machinery . . . . . . . . . . . . . . . . 16,743,250 14,168,428
Earth station facility. . . . . . . . . . . . . . . . . 1,193,812 835,527
Software. . . . . . . . . . . . . . . . . . . . . . . . 1,984,010 1,732,700
Furniture and fixtures. . . . . . . . . . . . . . . . . 785,798 578,698
Other . . . . . . . . . . . . . . . . . . . . . . . . . 1,291,224 1,157,344
------------ --------------
21,998,095 18,472,697
Accumulated depreciation and amortization . . . . . . . (5,299,277) (3,984,392)
------------ --------------
Property and equipment, net . . . . . . . . . . . . . 16,698,818 14,488,305
------------ --------------
OTHER ASSETS:
Goodwill, net of accumulated amortization
of $1,863,043 and $1,544,360,
at June 30, 1999 and December 31, 1998, respectively. 17,397,428 17,709,865
Acquired customer bases, net of accumulated
amortization of $1,147,210 and $969,182
at June 30, 1999 and December 31, 1998, respectively. 788,783 844,543
Other intangibles, net of accumulated
amortization of $1,456,531 and $1,184,062
at June 30, 1999 and December 31, 1998, respectively. 1,597,099 1,848,762
Other . . . . . . . . . . . . . . . . . . . . . . . . . 1,582,407 1,073,279
------------ --------------
Total other assets. . . . . . . . . . . . . . . . . . 21,365,717 21,476,449
------------ --------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . $65,123,857 $ 42,221,879
============ ==============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Balance Sheets.
2
<PAGE>
<TABLE>
<CAPTION>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
June 30, December 31,
1999 1998
------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of notes payable . . . . . . . . . . . . . $ 6,397,337 $ 3,728,062
Current portion of lease obligations . . . . . . . . . . . 2,044,892 1,273,298
Lines of credit. . . . . . . . . . . . . . . . . . . . . . 750,000 1,000,000
Loans from stockholders. . . . . . . . . . . . . . . . . . 200,000 670,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . 5,645,224 6,214,952
Accounts payable-- affiliate . . . . . . . . . . . . . . . - 68,000
Accrued liabilities. . . . . . . . . . . . . . . . . . . . 3,046,790 2,346,622
Unearned revenue . . . . . . . . . . . . . . . . . . . . . 2,173,039 2,928,990
------------- -------------
Total current liabilities. . . . . . . . . . . . . . . . 20,257,282 18,229,924
------------- -------------
LONG TERM LIABILITIES:
Capital and financing lease obligations. . . . . . . . . . 7,456,381 7,128,451
Convertible debentures . . . . . . . . . . . . . . . . . . 1,180,000 1,180,000
Senior subordinated notes. . . . . . . . . . . . . . . . . 705,278 690,278
Notes payable and other long term obligations. . . . . . . 1,035,959 626,022
------------- -------------
Total long term liabilities. . . . . . . . . . . . . . . 10,377,618 9,624,751
------------- -------------
MINORITY INTEREST. . . . . . . . . . . . . . . . . . . . . 1,981,959 1,981,959
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 100,000 shares
authorized, 10,229 and -
shares outstanding at June 30 1999 and
December 31, 1998, respectively. . . . . . . . . . . . . 101 -
Common stock, $0.00001 par value; 100,000,000 shares
authorized; 45,465,792 and 45,339,839 shares outstanding
at June 30, 1999 and December 31, 1998, respectively . . 455 454
Additional paid-in-capital . . . . . . . . . . . . . . . . 72,823,058 43,137,654
Accumulated deficit. . . . . . . . . . . . . . . . . . . . (40,316,615) (30,752,863)
------------- -------------
Total stockholders' equity . . . . . . . . . . . . . . . 32,506,998 12,385,245
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . $ 65,123,857 $ 42,221,879
============= =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Balance Sheets.
3
<PAGE>
<TABLE>
<CAPTION>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX
MONTHS ENDED JUNE 30, 1999 AND 1998
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1999 June 30, 1998 June 30, 1998
--------------- --------------- --------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Communications services and products $ 12,579,256 $ 23,513,143 $ 4,553,627 $ 7,898,332
Internet connection services . . . . 574,810 1,194,449 721,677 1,475,838
--------------- --------------- --------------- ---------------
Total revenues . . . . . . . . . . . 13,154,066 24,707,592 5,275,304 9,374,170
--------------- --------------- --------------- ---------------
COSTS AND EXPENSES:
Cost of services and products. . . . 12,134,132 22,381,160 3,739,838 7,150,230
Selling, general, and administrative 3,874,280 6,707,432 2,141,776 4,139,899
Depreciation and amortization. . . . 1,065,447 2,111,394 754,582 1,506,566
--------------- --------------- --------------- ---------------
Total costs and expenses . . . . . . 17,073,859 31,199,986 6,636,196 12,796,695
--------------- --------------- --------------- ---------------
OPERATING LOSS . . . . . . . . . . . . (3,919,793) (6,492,394) (1,360,892) (3,422,525)
--------------- --------------- --------------- ---------------
INTEREST EXPENSE, NET. . . . . . . . . (1,537,618) (2,624,056) (276,902) (537,969)
OTHER INCOME . . . . . . . . . . . . . - - 1,645,769 1,645,769
--------------- --------------- --------------- ---------------
NET LOSS BEFORE INCOME TAXES . . . . . (5,457,412) (9,116,451) 7,975 (2,314,725)
INCOME TAX BENEFIT . . . . . . . . . . - - - -
--------------- --------------- --------------- ---------------
NET LOSS . . . . . . . . . . . . . . . $ (5,457,412) $ (9,116,451) $ 7,975 $ (2,314,725)
=============== =============== =============== ===============
NET LOSS PER SHARE -
BASIC AND DILUTED . . . . . . . . . $ (0.13) $ (0.21) $ 0.00 $ (0.06)
=============== =============== =============== ===============
SHARES USED IN COMPUTING
NET LOSS PER SHARE . . . . . . . . . . 45,403,606 45,373,624 43,468,109 39,698,107
=============== =============== =============== ===============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
4
<PAGE>
<TABLE>
<CAPTION>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Six Months Six Months
Ended Ended
June 30, 1999 June 30, 1998
--------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . $ (9,116,451) $ (2,314,725)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization. . . . . . . . . . . 2,111,394 1,506,566
Bad debt expense . . . . . . . . . . . . . . . . . 116,826 148,478
Amortization of discounts on debt and lease
obligations. . . . . . . . . . . . . . . . . . . 1,444,708 95,467
Deferred settlement gain . . . . . . . . . . . . . - (2,757,132)
Changes in operating assets and liabilities:
Accounts receivable, net. . . . . . . . . . . . (618,153) (627,066)
Accounts receivable-- affiliate, net. . . . . . (129,382) (82,408)
Notes receivable (574,050) -
Inventory . . . . . . . . . . . . . . . . . . . (754,620) (150,774)
Prepaid expenses. . . . . . . . . . . . . . . . (227,422) (93,995)
Other assets. . . . . . . . . . . . . . . . . . (942,350) (230,781)
Accounts payable, accrued and other liabilities 130,355 (275,106)
Accounts payable-- affiliate. . . . . . . . . . (68,000) (249,655)
Unearned revenue. . . . . . . . . . . . . . . . (755,951) (92,971)
--------------- ---------------
Total Adjustments. . . . . . . . . . . . . (266,645) (2,809,377)
--------------- ---------------
Net cash used in operating activities. . . (9,383,095) (5,124,102)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment. . . . . . . . . . (2,179,792) (1,276,579)
Restricted cash . . . . . . . . . . . . . . . . . . . (163,900) -
Acquisition of businesses . . . . . . . . . . . . . . - (112,500)
--------------- ---------------
Net cash used in investing activities. . . (2,343,692) (1,389,079)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock . . . . . . . - 5,250,000
Proceeds from issuance of preferred stock, net . . . 28,081,903
(Repayment of)/Proceeds from lease obligations, net. (305,105) 187,938
Proceeds from receivable facility, net . . . . . . . - 574,500
Repayment of lines of credit, net. . . . . . . . . . (250,000) (30,000)
(Repayment of)/Proceeds from loans from shareholders (470,000) 150,000
Proceeds from notes payable, net. . . . . . . . . . . 3,121,486 682,184
--------------- ---------------
Net cash provided by financing activities. 30,178,284 6,814,622
--------------- ---------------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS. . . . 18,451,497 301,441
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . 1,255,199 155,503
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . . . $ 19,706,696 $ 456,944
=============== ===============
Supplemental Disclosures:
- --------------------------------------------------------
Cash paid for interest . . . . . . . . . . . . . . . . . 493,674 $ 542,715
Cash paid for income taxes . . . . . . . . . . . . . . . - -
Supplemental Non-Cash Disclosures:
- --------------------------------------------------------
Assets acquired in excess of liabilities assumed . . . . 75,000 136,302
Value of warrants issued . . . . . . . . . . . . . . . . 314,921 68,465
Valued of stock issued for acquisition . . . . . . . . . 56,383 112,500
Assets acquired under capital leases . . . . . . . . . 1,345,606 -
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
5
<PAGE>
POINTE COMMUNICATIONS CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
1. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to Section 310 of Regulation
S-B of the Securities and Exchange Commission ("SEC"). The accompanying
unaudited condensed consolidated financial statements reflect, in the opinion of
management, all adjustments necessary to achieve a fair statement of financial
position and results for the interim periods presented. All such adjustments are
of a normal recurring nature. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-KSB for the year ended December 31, 1998.
2. Certain amounts in the prior period financial statements have been
reclassified to conform to the current year presentation.
3. Basic net loss per share is computed using the weighted average number of
shares outstanding. Diluted net loss per share is computed using the weighted
average number of shares outstanding, adjusted for common stock equivalents,
when dilutive. For the periods presented, the effect of common stock equivalents
was antidilutive, as a result, basic and diluted net loss per share are the
same. The following table has been added to reconcile Net income/(loss) per the
operating statement and net income/(loss) used in calculating Net loss per
share. The difference represents payment of dividends due June 30 1999 on the
Preferred Stock (see Note 5) with additional shares of Preferred Stock.
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income/(loss). . . . . . . . (5,457,412) 7,975 (9,116,451) (2,314,725)
Preferred stock dividend . . . . (447,386) - (447,386) -
--------------- -------------- --------------- ---------------
Net income/(loss) available for
common stockholders. . . . . . (5,904,798) 7,975 (9,563,837) (2,314,725)
=============== ============== =============== ===============
Net loss per share . . . . . . . $ (0.13) $ 0.00 $ (0.21) $ (0.06)
=============== ============== =============== ===============
Shares used in computing
net loss per share . . . . . . 45,403,606 43,468,109 45,373,624 39,698,107
=============== ============== =============== ===============
</TABLE>
4. There was no provision for or cash payment of income taxes for the three
or six months ended June 30, 1999 and 1998, respectively, as the Company had net
taxable losses for 1999 and 1998, respectively, and anticipates a net taxable
loss for the year ended December 31, 1999.
5. During the quarter ended June 30 1999, the Company completed a $30
million private placement offering of 10,080 shares of the Company's $0.01 par
value Class A Convertible Senior Preferred Stock (the "Preferred Stock") and
warrants to purchase 10,800,000 shares of common stock. The private placement
was co-managed by investment bankers headquartered in New York and Atlanta. Net
proceeds from this offering totaled $28.1 million and will be used to fund
network expansion, repay indebtedness and fund operations. The Preferred Stock
earns dividends at a rate of 12% per annum, which are cumulative and payable in
either cash or shares of Preferred Stock at the Company's discretion. Each
share of Preferred Stock is convertible at the holders option into common stock
at a conversion price of $1.40 per share (subject to adjustment for certain
diluting issues) at any time while the Preferred Stock remains outstanding. The
Company may require the conversion of all of the Preferred Stock as follows: (a)
in conjunction with an offering of the Company's common stock in a firm
commitment underwritten public offering at a purchase price in excess of $4.00
per share (subject to adjustment for certain diluting issues) yielding net
proceeds of $30 million; or (b) one year after issuance if the common stock
6
<PAGE>
shall have been listed for trading on the New York Stock Exchange, American
Stock Exchange or the Nasdaq National Market System and the common stock shall
have traded on such exchange at a price of at least $5.00 per share (subject to
adjustment for certain diluting issues) for twenty consecutive trading days and
the average daily value of shares traded during that twenty day period was at
least $1.0 million. On the twelfth anniversary, if the Preferred Stock is still
outstanding and the underlying common stock has been listed on one of the
aforementioned exchanges, the Company is required to exchange the Preferred
Stock for common stock at a conversion price equal to the average trading price
for the twenty consecutive trading days immediately prior to the exchange date.
The warrants give the holders the right to purchase 10,800,000 shares at
a price of $1.625 per share for a period of five years after the issuance date.
The Company may require exercise of the warrants if the underlying common stock
has been registered with the SEC and is listed on one of the aforementioned
exchanges and has traded on such exchange at a price of at least $5.00 per share
(subject to adjustment for certain diluting issues) for twenty consecutive
trading days. The Company is required to file a registration statement with the
SEC within 120 days after closing the private offering of Preferred Stock and
warrants to register the shares of common stock issued or issuable upon
conversion of the Preferred Stock (including shares issued as dividends) and the
exercise of the warrants. The warrants were valued using the Black-Scholes
model and a portion of the gross proceeds were allocated to the warrants in
order to determine whether the Preferred Stock contained a beneficial conversion
feature. Based upon the calculations it was determined that no beneficial
conversion feature existed on the commitment date.
6. Simultaneous with closing the completion of the Preferred Stock private
placement, the Company repaid three short-term bridge loans entered into on
December 17, 1998, January 4 and February 17, 1999 totaling $5 million. Also,
during the quarter the Company drew $1 million upon a $3 million working capital
line. The borrowing bears interest at prime and is due September 30, 1999. In
conjunction with the drawdown, the Company granted 166,667 warrants to purchase
common stock at $1.125 per share which are exercisable for five years. The
value of the warrants was determined to be $98,751 and has been recorded as a
discount, which will be amortized over the life of the debt.
7. Also during the quarter, the Company rolled over a short-term loan of
$750,000, which came due on May 31, 1999. The new loan earns interest at 10%
and is due on May 31, 2001. In conjunction with the note, the Company issued
545,455 warrants exercisable at $1.325 per share for two years. The value of the
warrants was determined to be $216,170 and has been recorded as a discount,
which will be amortized over the life of the debt.
8. Subsequent to the second quarter, the Company announced that it had
agreed in principle to merge with Pensat International Communications, Inc.
(Pensat). Pensat, headquartered in Washington, D.C., is an FCC approved, 214
facilities-based licensed carrier, and an international provider of
telecommunications services and products. Pensat has developed a Global Network
Consortium (GNC), a strategic alliance of communications products and services.
Pensat's principal markets are in Latin America and the Caribbean and it has
offices in Washington, D.C., New York City and Omaha. In addition to its U.S.
operations, Pensat also has network facilities and operations in Spain and
Brazil. The closing of the transaction is subject to completion of due
diligence, negotiation, execution of a definitive agreement and shareholder
approval.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Pointe Communications Corporation (formerly Charter Communications
International, Inc., "PointeCom" or the "Company") is an international,
facilities-based communications company serving residential and commercial
customers in the U.S., Central America and South America. The Company's
products and services include long distance, Internet access, data transmission,
private line services and local dial tone services. The Company also offers
prepaid calling cards to specifically targeted demographic groups and
telecommuting services to corporate clients.
PointeCom began operations in 1995 predominately offering International
Private Line ("IPL") services between the U.S. and Panama. Subsequently, the
Company has secured various communications licenses in the U.S., Panama, Costa
Rica, Venezuela, El Salvador, Nicaragua, Mexico, and Honduras, has acquired nine
7
<PAGE>
companies, and increased revenue from $544,000 in 1995 to $27.6 million in 1998.
Licenses held by the Company, which vary by country, typically allow the Company
to offer an array of services including international private line, long
distance, Internet access, and data transmission. The Company has established
an infrastructure including satellite earth stations, interconnection
agreements, peripheral infrastructure, and sales and marketing channels in all
of the above countries, except Honduras, to service existing and future
customers. The Company also enjoys strong relationships with the responsible
government agencies, telephone company authorities and international carriers.
Since its inception, the Company has been focused on providing businesses
with dedicated voice and data services via its private line network. The
Company's primary retail offerings have been Internet access and prepaid calling
cards. As a result of a growing trend in the industry brought on by the
Telecommunications Act of 1996 and identification of an underserved market
niche, the Company has adopted a strategy to provide a full array of bundled
telecommunications and network services to both commercial and residential
customers with particular focus on ethnic communities in "paired" U.S and
international markets. In the U.S., the Company's focus is on communities with
large Hispanic populations. Internationally, the Company has targeted
complementary markets with telecommunications traffic patterns that correspond
with the paired U.S. target markets. Management believes that originating and
terminating traffic between domestic and international cities that share the
Company as a common network carrier will provide significant competitive,
marketing, and cost advantages.
The Company's strategy assumes that there exists (i) a significant
population in the U.S. that is dissatisfied with its current telecommunications
service, (ii) substantial demand for telecommunications services in the U.S.
Hispanic population, (iii) a lack of ready access to telephony services in Latin
America for a substantial portion of the population, and (iv) a natural synergy
in providing local services in both the U.S. and Latin America to meet basic
telephony needs along with bundled services to meet more advanced communications
requirements between the U.S. and Latin America.
The Company anticipates that its strategy will permit it to establish and
maintain profitable growth while developing as a local service provider and long
distance carrier. The Company is attempting to position itself as a cost
efficient, reliable alternative to Incumbent Local Exchange Carriers ("ILECs")
by providing bundled telecommunication services tailored specifically to the
needs of certain ethnic groups in paired domestic and international markets.
The Company is implementing a facilities based infrastructure on a staged basis
in certain identified markets with the ultimate objective of being a
full-service Competitive Local Exchange Carrier ("CLEC") with a low-cost base of
operations.
As part of its implementation plan, the Company is currently establishing
an international backbone for both voice and data switching in and between
Houston, Texas; Atlanta, Georgia; Miami, Florida; New York, New York; Los
Angeles, California; San Juan, Puerto Rico; and San Salvador, El Salvador.
Future plans include similar network infrastructure in other U.S. and South
American and Central American locations. The Company anticipates that this
network will provide PointeCom with a lower cost basis for its existing business
and a unique partnering opportunity with foreign Postal, Telephone and Telegraph
companies ("PTTs"). The network should also provide significant marketing
advantages and cost savings to its existing prepaid calling card and telecommute
solutions product lines. Failure of the Company to raise all or a significant
portion of the funds needed to build this network could materially adversely
affect the Company's planned and continuing operations.
8
<PAGE>
Subsequent to the second quarter, the Company announced that it had agreed
in principle for Pensat International Communications, Inc. ("Pensat") to merge
with and into the Company. Pensat, headquartered in Washington, D.C., is an FCC
approved, 214 facilities-based licensed carrier, and an international provider
of telecommunications services and products. Pensat has developed a Global
Network Consortium (GNC), a strategic alliance of international
telecommunication providers from various countries that offer communications
products and services. Pensat's principal markets are in Latin America and the
Caribbean and it has offices in Washington, D.C., New York City and Omaha. In
addition to its U.S. operations, Pensat also has network facilities and
operations in Spain, Venezuela, Chile and Brazil. Pensat's management comes
with many combined years of experience focused on the international
telecommunications market. Pensat provides expanded network capacity to
countries where the Company currently does not have a presence, which would
enable the Company to expand upon its US Hispanic to Latin America "paired
market" strategy. The merger would enable the Company to increase revenue while
at the same time reduce marginal cost as a result of network efficiencies.
Additionally, the merger would enable the Company to capitalize on economies of
scale as duplicate overhead costs are identified and eliminated. The closing of
the transaction is subject to completion of due diligence, negotiation and
execution of a definitive agreement, and shareholder approval.
See "Liquidity and Capital Resources" for a discussion of the Company's
ability to meet the capital requirements associated with its expansion plans.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the three months
ended June 30, 1999 and 1998. Operating results for any period are not
necessarily indicative of results for any future period. Dollar amounts (except
per share data) are shown in thousands.
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
% of % of
Revenues Revenues
--------- --------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Communications
services & products $ 12,579 95.6% $ 4,553 86.3%
Internet connection
services. . . . . . 575 4.4 722 13.7
--------- --------- -------- -------
Total revenues. 13,154 100.0 5,275 100.0
Cost and expenses:
Cost of services
& products. . . . . 12,135 92.2 3,740 70.9
Selling, general and
Administrative. . . 3,874 29.5 2,142 40.6
Depreciation and
Amortization. . . . 1,065 8.1 754 14.3
--------- --------- -------- -------
Total costs
and expenses . . 17,074 129.8 6,636 125.8
--------- --------- -------- -------
Operating loss . . . . <3,920> <29.8> <1,361> <25.8>
Interest expense, net . . <1,537> <11.7> <277> <5.3>
Other income. . . . . . . <-> <-> 1,646 31.2
Net loss. . . . . . . . . <5,457> <41.5> 8 -
Net loss per share. . . . $ <0.13> $ 0.00
Shares used in computing:
net loss per share. . . . 45,404 43,468
</TABLE>
9
<PAGE>
Consolidated revenues for the combined lines of business for the three
months ended June 30, 1999 and 1998 were $13,154,000 and $5,275,000
respectively. The increase in revenue was principally the result of increased
prepaid calling card sales, primarily driven by increased distribution of
"off-net" card sales within the U.S. Hispanic community. Other increases came
from international private line, mainly to Costa Rica, and the telecommuting
services business, which began operations in the first quarter of 1998. Cost of
services and products for the quarter ended June 30, 1999 were $12,135,000 and
$3,740,000 for the comparable quarter in 1998, yielding gross profit margins of
7.7% for 1999 and 29.1% for the same period in 1998. Gross profit margins were
adversely affected by the fact that prepaid calling card revenues, which
generally carry a lower margin than the Company's other products, represented a
higher proportion of total revenues in 1999 than in 1998. Also, contributing to
the lower margins were sales of "off-net" prepaid calling cards (i.e., other
carriers cards, by a distributor acquired during 1999, which carry a lower
margin than revenues earned on Company provided cards). Contributing further to
the decreased margins were significant dedicated costs associated with the
carrier terminating services business, which were incurred in advance of
revenues. Management anticipates margins to increase during the third quarter
of 1999 as carrier terminating revenues are added with little additional fixed
cost and as the Company expands its ATM based network.
Selling, general, and administrative ("SG&A") expenses for the second
quarter of 1999 were $3,874,000 or 29.5% of sales compared to $2,142,000 or
40.6% of sales for the same quarter in 1998. The overall increase in expenses
was primarily attributable to expansion of the Company's operations. This trend
is expected to continue throughout the year as the Company executes upon its
plan to build a US based CLEC operation. While SG&A increased nominally, the
Company was able to gain economies of scale reflected by the lower SG&A as a
proportion of sales in 1999. The Company anticipates benefiting further from
economies of scale.
Depreciation and amortization expense was $1,065,000 for the second quarter
of 1999 compared to $754,000 for the second quarter of 1998. The increase is
attributable to the increase in property, plant and equipment and amortization
associated with the acquisitions completed during 1998.
Interest expense was $1,537,000 and $277,000 for the quarters ended June
30, 1999 and 1998, respectively. Interest expense increased significantly
during 1999 because of a number of new debt instruments entered into in late
1998 and during the first quarter of 1999. These include $10.0 million in
bridge loans, $6.2 million in capital leases and $900,000 in promissory notes.
Approximately $650,000 of the interest expense during the second quarter of 1999
was related to amortization of discounts associated with warrants issued in
conjunction with various debt instruments.
There was no income tax benefit recorded in either 1999 or 1998, as
management recorded a valuation reserve because of the uncertainty of the timing
of future taxable income. The net loss and gain for the quarters ended June 30,
1999 and 1998, were approximately $5,457,000 or $0.13 per share and $8,000 or
$0.00 per share, respectively.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has not generated net cash from operations for any period
presented. The Company has primarily financed its operations to date through
private sales of equity securities and debt to affiliates and outside investors.
During the first quarter of 1999, in private placement offerings, the
Company entered into three promissory notes with a principal amount totaling
$9.0 million. In conjunction with the notes, the Company issued warrants to
purchase 1.52 million and 5 million shares of common stock at $1.00 per share
for three years and eight months, respectively. During the second quarter, the
Company completed a private placement of $30.24 million of $0.01 par value Class
A Convertible Senior Preferred Stock (the "Preferred Stock") and warrants to
purchase 10,800,000 shares of common stock. The net proceeds from the private
placement totaled $28.1 million and have been used to repay $4.0 million of
promissory notes as well as $1.4 million of other various debts, purchase assets
of approximately $3.5 million and offset the Company's operating cash flow
deficit of approximately $8.0 million.
The Company estimates that it will need approximately $65.5 million to fund
existing operations during the next year, including approximately $9.5 million
to fund debt due over the next twelve months and $56.0 million to fund capital
expenditures for the upcoming year. As of the end of the second quarter the
Company had approximately $20.0 million on hand. During 1998, a subsidiary of
the Company entered into a master lease facility with a major telecommunications
equipment vendor to purchase $10.0 million of equipment. As of June 30, 1999,
$762,000 had been drawn upon under this facility. During the first quarter of
1999, the Company entered into a $25.0 million master lease facility and $3.0
million working capital line of credit with this same vendor. As of June 30,
1999, the Company had drawn down only $1.3 under the master lease and $1.0
million under the working capital line of credit. Additionally, the Company is
working on negotiating a $15.0 million line of credit with another major vendor.
The Company intends to use these vendor lines of credit to finance most of its
acquisition of capital assets for the next year. Additional means of financing
will be sought if necessary and may include but would not be limited to bank
loans and private placements of debt and/or equity. Additionally, the Company
may realize proceeds from exercise of outstanding warrants and options.
However, there can be no assurance that the Company will be able to raise any
such capital on terms acceptable to the Company, or at all. Failure of the
Company to raise all or a significant portion of the funds needed could
materially and adversely affect the Company's continuing and its planned
operations.
While the Company believes it currently has adequate resources available to
achieve its potential expansion plans noted in "Management's Discussion and
Analysis" for the upcoming year, any increases in the Company's growth rate,
shortfalls in anticipated revenues or increases in anticipated expenses could
have a material adverse effect on the Company's liquidity and capital resources
and would either require the Company to raise additional capital from public or
private debt or equity or scale back operations. Additionally, the Company does
not currently have adequate resources available to achieve all of its potential
expansion plans noted in "Management's Discussion and Analysis" subsequent to
the upcoming year and will not engage in such expansion until adequate capital
sources have been arranged. Accordingly, the Company anticipates additional
future private placements and/or public offerings of debt or equity securities
will be necessary to fund such plans. If such sources of financing are
insufficient or unavailable, the Company will be required to significantly
change or scale back its operating plans to the extent of available funding.
The Company may need to raise additional funds in order to take advantage of
unanticipated opportunities, such as acquisitions of complementary businesses or
the development of new products, or to otherwise respond to unanticipated
competitive pressures. There can be no assurance that the Company will be able
to raise any such capital on terms acceptable to the Company or at all.
11
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued a Statement of Position, Accounting for Costs of Computer
Software Developed of Obtained for Internal Use. This statement requires
capitalization of certain costs of internal-use software. The Company adopted
this statement during the first quarter of 1999 and it did not have a material
impact on the Company's financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of
Start-Up Activities," which is effective for fiscal years beginning after
December 15, 1998. SOP 98-5 requires entities to expense certain start-up costs
and organization costs as they are incurred. The Company adopted this statement
during the first quarter of 1999 and it did not have a material impact on the
Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 "Accounting for Derivative Instruments and Hedging Activities," which is
effective for fiscal years beginning after June 15, 1999. In June 1999, the FASB
issued Statement No. 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB No. 133", which amends
statement No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The statement establishes accounting and
reporting standards for derivative instruments and transactions involving hedge
accounting. The Company does not expect it to have a material impact on its
financial statements.
YEAR 2000
The Year 2000 Issue is a problem resulting from computer programs being
written using two digits rather than four digits to define the applicable year.
Date-sensitive software may recognize a date using 00 as the year 1900 rather
than 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, or engage in similar normal business
activities. The Company continues to address this issue on several different
fronts. First of all, a team has been assigned to evaluate risks to the
Company's internal systems used in the provisioning of telecommunications
services through a five phase process including Awareness, Assessment,
Renovation, Validation and Implementation. A web page has been established at
www.y2k.c-com.net containing additional information about the Year 2000 problem
and the Company's compliance program. Second, the Company has requested Year
2000 compliance certification from each of its major vendors and suppliers for
their hardware or software products and for their internal business applications
and processes. Finally, the Company has established a team to coordinate
solutions to the Year 2000 issue for its own internal information systems and
physical facilities. The Company currently does not expect that the cost of its
Year 2000 compliance program will be material to its financial condition or
results of operations or that its business will be adversely affected by the
Year 2000 issue in any material respect. Nevertheless, achieving Year 2000
compliance is dependent on many factors, some of which are not completely within
the Company's control. Should either the Company's internal systems or the
internal systems of one or more significant vendors or suppliers fail to achieve
Year 2000 compliance, the Company's business and its results of operations could
be adversely affected.
MARKET RISKS
Management believes the Company's exposure to market rate fluctuations on
its investments is nominal due to the short-term nature of those investments.
To the extent the Company has borrowings outstanding under credit facilities
which bear variable interest rates there is market risk relating to changes in
these rates. The Company does not believe its exposure represents a material
risk to the financial statements.
The Company has operations in Central and South America, which expose it to
currency exchange rates risks. To manage the volatility attributable to these
exposures, the Company nets the exposures to take advantage of natural offsets.
Currently, the Company does not enter into any hedging arrangements to reduce
this exposure. The Company is not aware of any facts or circumstances that
would significantly impact such exposures in the near-term principally as the
significant majority of the Company's activities are settled in the US Dollar.
If, however, there was a 10 percent sustained decline in these currencies versus
the U.S. dollar, then the consolidated financial statements could be affected as
our international operations represented approximately 3.5% of our total assets
as of June 30, 1999 and 8.0% and 7.7% of our total revenues and net loss for the
year ended June 30, 1999, respectively.
12
<PAGE>
FORWARD-LOOKING STATEMENTS
This report on Form 10-QSB contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Actual results could
differ from those projected in any forward-looking statements for the reasons
set forth herein and as set forth in the "Risk Factors" as well as in other
sections of the Company's report filed on Form 10-KSB for the year ended
December 31, 1998, or for other unforseen reasons. The forward-looking
statements contained herein are made as of the date of this report and the
Company assumes no obligation to update such forward-looking statements, or to
update the reasons why actual results could differ from those projected in such
forward-looking statements.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
1. In the second quarter, the Company completed a $30 million
private placement offering of 10,080 shares of the Company's $0.01 par value
Class A Convertible Senior Preferred Stock (the "Preferred Stock") and warrants
to purchase 10,800,000 shares of common stock to accredited investors including
institutional investors. The private placement was exempt under section 4(2) of
the Act. The private placement was co-managed by Credit Suisse First Boston and
Breckenridge Securities Corporation. Net proceeds from this offering totaled
$28.1 million and will be used to fund network expansion, repay indebtedness and
fund operations. Commissions paid totaled $1.8 million and 432,000 warrants to
purchase common stock at $1.40 per share. The Preferred Stock earns dividends
at a rate of 12% per annum, which are cumulative and payable in either cash or
shares of Preferred Stock at the Company's discretion. Each share of Preferred
Stock is convertible at the holders option into common stock at a conversion
price of $1.40 per share (subject to adjustment for certain diluting issues) at
any time while the Preferred Stock remains outstanding. The Company may require
the conversion of all of the Preferred Stock as follows: (a) in conjunction with
an offering of the Company's common stock in a firm commitment underwritten
public offering at a purchase price of $4.00 per share (subject to adjustment
for certain diluting issues) yielding net proceeds of $30 million or (b) one
year after issuance if the common stock shall have been listed for trading on
the New York Stock Exchange, American Stock Exchange or the Nasdaq National
Market System and the common stock shall have traded on such exchange at a price
of at least $5.00 per share (subject to adjustment for certain diluting issues)
for twenty consecutive trading days and the average daily value of shares traded
during that twenty day period was at least $1.0 million. On the twelfth
anniversary, if the Preferred Stock is still outstanding and the underlying
common stock has been listed on one of the aforementioned exchanges, the Company
is required to exchange the Preferred Stock for common stock at a conversion
price equal to the average trading price for the twenty consecutive trading days
immediately prior to the exchange date.
The warrants give the holders the right to purchase 10,800,000 shares at a
price of $1.625 per share for a period of five years after the issuance date.
The Company may require exercise of the warrants if the underlying common stock
has been registered with the SEC and is listed on one of the aforementioned
exchanges and has traded on such exchange at a price of at least $5.00 per share
(subject to adjustment for certain diluting issues) for twenty consecutive
trading days. The Company is required to file a registration statement with the
SEC within 120 days after closing the private offering of the Preferred Stock
and warrants to register the shares of common stock issued or issuable upon
conversion of the Preferred Stock (including shares issued as dividends) and the
exercise of the warrants.
13
<PAGE>
2. Also during the quarter, the Company rolled over a short-term loan of
$750,000, which came due on May 31, 1999. The new loan earns interest at 10%
and is due on May 31, 2001. In conjunction with the note, the Company issued
545,455 warrants exercisable at $1.325 per share for two years. The warrants
were issued in a private placement to an accredited investor, which was exempt
under section 4(2) of the Act. No underwriter was used in the placement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
Reports on Form 8-K were filed during the quarter for which this report is
filed as follows:
None.
14
<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.
POINTE COMMUNICATIONS CORPORATION
Date: August 23, 1999 By: /s/ Stephen E. Raville
----------------------------------
Stephen E. Raville
Chief Executive Officer
Date: August 23, 1999 By: /s/ Patrick E. Delaney
----------------------------------
Patrick E. Delaney
Chief Financial Officer
15
<PAGE>
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<FISCAL-YEAR-END> DEC-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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0
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