U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the quarterly period ended March 31, 2000
[ ] 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 Registrant as Specified in Its Charter)
NEVADA 84-1097751
------------------------------- -------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1325 NORTHMEADOW PARKWAY, SUITE 110,
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 stock, as of May 11, 2000: 53,244,428
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................................................. $ 5,771,920 $ 21,219,684
Restricted cash ............................................................................ 184,000 542,913
Accounts receivable, net of allowance for
doubtful accounts of $1,541,414 and $1,508,458,
respectively ............................................................................. 3,339,120 3,639,378
Notes receivable, net ...................................................................... 11,215,859 2,270,750
Inventory, net ............................................................................. 1,948,013 1,742,543
Prepaid expenses and other ................................................................. 818,684 629,787
------------ ------------
Total current assets ................................................................... 23,277,596 30,045,055
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Equipment and machinery .................................................................... 19,895,274 23,090,486
Earth station facility ..................................................................... 1,475,124 1,471,822
Software ................................................................................... 2,136,207 2,176,944
Furniture and fixtures ..................................................................... 1,553,075 1,257,666
Other ...................................................................................... 2,137,009 1,695,861
Construction in progress ................................................................... 11,411,900 1,452,303
------------ ------------
38,608,589 31,145,082
Accumulated depreciation and amortization .................................................. (7,273,976) (6,827,740)
------------ ------------
Property and equipment, net ............................................................ 31,334,613 24,317,342
------------ ------------
OTHER ASSETS:
Goodwill, net of accumulated amortization
of $1,544,360 and $2,190,266, respectively ............................................... 17,076,997 17,237,653
Acquired customer bases, net of accumulated
amortization of $969,182 and $1,131,507, respectively .................................... 858,561 890,271
Other intangibles, net of accumulated amortization
of $1,184,062 and $1,946,521, respectively ............................................... 1,576,599 1,723,225
Other ...................................................................................... 2,481,349 2,676,217
------------ ------------
Total other assets ..................................................................... 21,993,505 22,527,366
------------ ------------
TOTAL ASSETS ........................................................................... $ 76,605,714 $ 76,889,763
============ ============
</TABLE>
The accompanying Condensed Notes to Consolidated Financial Statements
are an integral part of these balance sheets.
2
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of notes payable ................................................. $ 1,349,739 2,795,255
Current portion of lease obligations ............................................. 2,345,864 3,242,776
Accounts payable ................................................................. 14,798,555 6,233,914
Accrued liabilities .............................................................. 5,495,745 6,132,570
Unearned revenue ................................................................. 1,526,098 1,514,329
------------- -------------
Total current liabilities .................................................... 25,516,001 19,918,844
------------- -------------
LONG-TERM LIABILITIES:
Capital and financing lease obligations .......................................... 7,996,360 10,367,260
Convertible debentures ........................................................... 900,000 900,000
Notes payable and other long-term obligations .................................... 888,267 866,974
------------- -------------
Total long-term liabilities .................................................. 9,784,627 12,134,234
------------- -------------
MINORITY INTEREST ................................................................ -- 2,014,959
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 100,000 shares
authorized, 0 and 18,121 shares issued and
outstanding, respectively ...................................................... 187 181
Common stock, $0.00001 par value; 100,000,000 shares
authorized; 45,339,839 and 52,152,426 shares issued and
outstanding, respectively ...................................................... 521 517
Additional paid-in-capital ....................................................... 142,644,169 136,370,654
Accumulated deficit .............................................................. (101,339,791) (93,549,626)
------------- -------------
Total stockholders' equity ................................................... 41,305,086 42,821,726
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....................................... $ 76,605,714 $ 76,889,763
============= =============
</TABLE>
The accompanying Condensed Notes to Consolidated Financial Statements
are an integral part of these balance sheets.
3
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
AND 1999
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES:
Communications services and products ............................................... $ 13,761,470 $ 10,933,887
Internet connection services ....................................................... 471,602 619,639
------------ ------------
Total revenues ..................................................................... 14,233,072 11,553,526
------------ ------------
COSTS AND EXPENSES:
Cost of services and products ...................................................... 13,553,852 10,247,028
Selling, general, and administrative expenses ...................................... 5,757,838 2,833,152
Depreciation and amortization ...................................................... 1,153,841 1,045,947
------------ ------------
Total costs and expenses ........................................................... 20,465,531 14,126,127
------------ ------------
OPERATING LOSS ......................................................................... (6,232,459) (2,572,601)
------------ ------------
INTEREST EXPENSE, net .................................................................. 64,286 (1,086,438)
OTHER (EXPENSE)INCOME .................................................................. -- --
------------ ------------
NET LOSS BEFORE INCOME TAXES ........................................................... (6,168,173) (3,659,039)
INCOME TAX BENEFIT ..................................................................... -- --
------------ ------------
NET LOSS ............................................................................... $ (6,168,173) $ (3,659,039)
============ ============
NET LOSS PER SHARE -
BASIC AND DILUTED ................................................................... $ (0.15) $ (0.08)
============ ============
SHARES USED IN COMPUTING
NET LOSS PER SHARE ..................................................................... 51,841,344 45,343,348
============ ============
</TABLE>
The accompanying Condensed Notes to Consolidated Financial Statements are
an integral part of these statements.
4
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
AND 1999
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................................... $ (6,168,173) $ (3,659,039)
------------ ------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................................ 1,153,841 1,045,947
Bad debt expense ......................................................................... 76,329 58,894
Amortization of discounts on debt and lease
obligations ............................................................................ 79,693 525,479
Non-cash stock compensation .............................................................. 516,942 --
Changes in operating assets and liabilities:
Accounts receivable, net .............................................................. (73,004) 211,874
Notes receivable ...................................................................... (8,945,109) (64,658)
Inventory ............................................................................. (250,491) (591,338)
Prepaid expenses ...................................................................... (202,853) (72,452)
Other assets .......................................................................... 60,388 (522,996)
Accounts payable, accrued, and other liabilities ...................................... 8,299,691 225,587
Unearned revenue ...................................................................... 11,768 (793,371)
------------ ------------
Total adjustments ................................................................ 727,195 22,966
------------ ------------
Net cash used in operating activities ............................................ (5,440,978) (3,636,073)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .......................................................... (11,975,662) (2,106,781)
Restricted cash ............................................................................. 358,913 (163,900)
Repayment of intercompany debt by deconsolidated subsidiary ................................. 1,909,596 --
Reduction in cash due to deconsolidation of subsidiary, net ................................. (48,968) --
------------ ------------
Net cash used in investing activities ............................................ (9,756,121) (2,270,681)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants and options ............................................. 429,764 --
(Repayment of)/Proceeds from leases and notes payable, net ................................. (680,429) 7,524,420
------------ ------------
Net cash provided by financing activities ........................................ (250,665) 7,524,420
(DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS ............................................... (15,447,764) 1,515,995
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ............................................................................. 21,219,684 1,255,199
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF QUARTER ................................................... $ 5,771,920 $ 2,872,865
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest ......................................................................... $ 391,926 $ 552,883
Cash paid for income taxes ..................................................................... -- --
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these Consolidated Statements.
5
<PAGE>
POINTE COMMUNICATIONS CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
1. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to Rule 10-01 of
Regulation S-X 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. Preparing financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. Actual results could
differ from those estimates. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
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) to Net
income/(loss) available to common stockholders. The difference represents
payment of dividends issued on Class A and B Senior Convertible Preferred Stock
("Preferred Stock") during the quarter. The dividends were paid with additional
shares of Preferred Stock.
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
Net Income/(loss) .......................... (6,168,173) (3,659,039)
Preferred stock dividend ................... (1,621,992) --
-------------- --------------
Net income/(loss) available
for common stockholders .................. (7,790,165) (3,659,039)
============== ==============
Net loss per share ......................... $ (0.15) $ (0.08)
============== ==============
Shares used in computing
net loss per share ....................... 51,841,344 45,343,348
============== ==============
4. There was no provision for or cash payment of income taxes for the three
months ended March 31, 2000 and 1999, respectively, as the Company had net
taxable losses for 1999 and anticipates a net taxable loss for the year ended
December 31, 2000.
5. During the quarter ended March 31, 2000, the Company entered into an
Agreement and Plan of Merger ("Merger Agreement") with Telscape International,
Inc. ("Telscape") in an all-stock transaction in which each share of PointeCom
will be exchanged for 0.223514 shares of Telscape common stock. The merger is
expected to become effective in the second quarter of 2000. Pointe will be
viewed as the acquiror for accounting purposes. The following table presents the
unaudited pro forma consolidated results of operations of the Company as though
the merger took place on January 1, 1999:
6
<PAGE>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1999 2000
-------------- --------------
Revenues ................................. $ 157,088,000 $ 37,457,000
============== ==============
Net loss from continuing operations ...... $ (123,166,000) $ (18,165,000)
============== ==============
Net loss per share from continuing
operations, basic and diluted ............ $ (6.74) $ (0.92)
============== ==============
The pro forma financial information does not purport to represent what the
consolidated results of operations would have been if the acquisitions had in
fact occurred on these dates, nor does it purport to indicate our future
consolidated financial position or future consolidated results of operations.
The pro forma adjustments are based on currently available information and
certain assumptions that management believes to be reasonable.
In conjunction with the Merger Agreement, the Company executed a $10.0 million
convertible promissory note with Telscape to evidence Telscape's obligation to
repay the Company by June 30, 2000. This note replaces the promissory note
entered into with Telscape during the fourth quarter of 1999, under which the
Company advanced Telscape $1.5 million. The excess of $8.5 million over the $1.5
million previously advanced was placed in escrow for Telscape. As of March 31,
2000, $2.3 million remained in escrow. If Telscape fails to make principle or
interest payments when due, fails to comply with the note, becomes insolvent or
is in bankruptcy, or the Merger Agreement with the Company is terminated
Telscape will be in default and the Company may demand full payment.
Additionally, the note is convertible at the Company's option into 100,000
shares of Class C preferred stock and warrants to purchase 500,000 shares of
Telscape common stock at $7.00 per share. Each share of Class C preferred stock
is convertible into 12.195 shares of Telscape common stock.
6. During the quarter ended March 31, 2000, the Company's subsidiary,
Telecommute Solutions Inc. ("TCS"), completed a private placement of its
Series B Convertible Preferred Stock for gross proceeds totaling approximately
$19 million. The preferred stock is convertible into shares of TCS common stock
and votes with common stockholders on an as converted basis. Upon issuance of
the Series B Preferred Stock, the TCS Series A convertible non-voting preferred
stockholders converted their stock into TCS common stock. As a result of these
transactions the Company's ownership of TCS was reduced from 100% to
approximately 23%. Therefore, TCS is no longer a consolidated subsidiary and the
Company will account for its ownership using the equity method. As of the date
of deconsolidation, TCS's cumulative losses exceeded the Company's investment.
Therefore, the investment account was a credit balance of approximately $3.5
million, which has been reclassed to additional paid in capital along with the
minority interest related to the Class A preferred stock of approximately $2.0
million, in accordance with Staff Accounting Bulletin No. 51. As a result of the
TCS cumulative losses exceeding the Company's original investment in TCS the
Company's basis in the TCS investment is $0.
7. Effective January 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which established revised
standards for the reporting of financial and descriptive information about
operating segments in financial statements. During 1998, the Company's
management did not utilize segment data for making decisions and assessing
performance because it provided various services over a single interconnected
network. During 1999, management identified segments, changed its focus, and
began using segment data in its decision-making process and for assessing
performance.
While management of the Company monitors the revenue and costs of services
generated from each of the various services, operations are managed and
financial performance is evaluated based on the delivery of multiple services
provided over a single network. As a result of multiple services being provided
over a single network, there are many shared administrative expenses and shared
assets related to the provision of various services to customers. Management
believes that any allocation of the shared expenses or assets to
7
<PAGE>
the segments would be arbitrary and impractical. The operating segments were
aggregated into reportable segments based upon such characteristics as products
and services, operating methods, customers, and distribution methods. The
segments include Retail Services, Wholesale/International Services, Prepaid
Calling Card Services, and Corporate and Network overhead. Retail services
include local, long distance, and Internet access services provided primarily to
Hispanic residential and commercial customers. Wholesale/International Services
include carrier terminating services and International private line provided
between the US and various South and Central American countries as well as voice
and data services provided within various Latin American countries. Prepaid
Calling Card services include the sale of both "on-net" (calls carried on the
Company's network) and "off-net" (calls carried on other Companies networks)
prepaid calling cards. Corporate and Network includes corporate and network
overhead including finance and accounting, human resources, legal, information
technology, lan administration, and engineering overhead. Intersegment sales and
transfers occur as segments utilize carrier capacity of other segments.
Intersegment transactions are accounted for on the same basis as transactions
with third parties.
Revenues, cost of services and selling general and administrative expenses
for each segment for the quarter ended March 31, 2000 are as follows:
<TABLE>
<CAPTION>
PREPAID WHOLESALE/
CARD RETAIL INTERNATIONAL CORPORATE &
SERVICES SERVICES SERVICES OTHER NETWORK TOTAL
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues ................... 10,872,743 1,162,236 2,068,826 129,268 -- 14,233,073
Cost of
revenues ................... 9,784,822 1,084,861 2,552,318 131,852 -- 13,553,853
---------- ---------- ---------- ---------- ---------- ----------
Gross Margin ............. 1,087,921 77,375 (483,492) (2,584) 679,220
SG&A ....................... 1,212,359 1,703,153 663,985 395,484 1,782,858 5,757,839
</TABLE>
Revenues, cost of services and selling general and administrative expenses
for each segment for the quarter ended March 31, 1999 are as follows:
<TABLE>
<CAPTION>
PREPAID WHOLESALE/
CARD RETAIL INTERNATIONAL CORPORATE &
SERVICES SERVICES SERVICES OTHER NETWORK TOTAL
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues ................... 8,989,363 1,009,435 1,162,094 392,634 -- 11,553,526
Cost of
revenues ................... 8,248,607 724,923 1,000,409 273,089 -- 10,247,028
---------- ---------- ---------- ---------- ---------- ----------
Gross Margin ............. 740,756 284,512 161,685 119,545 1,306,498
SG&A ....................... 663,289 360,985 636,571 520,688 651,619 2,833,152
</TABLE>
8. During the first quarter of 1999, the Company issued 400,416 shares of common
stock in conjunction with the exercise of employee stock options. Certain of the
options were issued in cashless exercise transactions in which the Company
withheld from the issuance the number of shares which market value was equal to
the aggregate exercise price of the options exercised. In conjunction with these
cashless exercises, the Company recognized $264,524 in compensation expense.
Additionally, the Company recognized compensation expense with regard to
variable options in the amount of $252,418, which represents the appreciation in
market price over the exercise price amortized over the vesting period of the
options. Also during the quarter, the Company issued 57,821 shares of common
stock in conjunction with the exercise of warrants.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
8
<PAGE>
Pointe Communications Corporation (formerly Charter Communications
International, Inc., "PointeCom" or the "Company") 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, and
Mexico, acquired ten companies, entered the prepaid long distance and
telecommuting services markets and increased revenue from $113,000 for the year
ended December 31, 1995 to $51.9 million for the year ended December 31, 1999.
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, to service existing and future customers. The Company also enjoys
strong relationships with the responsible government agencies, telephone company
authorities and international carriers.
During late 1998, the Company adopted a strategy to position itself as a
cost efficient, reliable, full-service Competitive Local Exchange Carrier
("CLEC") tailored specifically to the needs of the Hispanic Community in the US
and in South and Central America. In the U.S., the Company's focus is on major
cities with large Hispanic populations. Internationally, the Company targets
complementary markets with telecommunications traffic patterns that correspond
with the paired U.S. target markets. 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 and cost advantage 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.
In an effort to enhance its CLEC management team and to gain accelerated
access to the West Coast during the third quarter of 1999, HTC Communications,
LLC ("HTC"), a California limited liability company licensed as a Competitive
Local Exchange Carrier ("CLEC") in California merged with and into the Company.
The management team from HTC assumed leadership of the Company's CLEC
operations. Their management team has over 70 years of combined experience in
the telecommunications industry including a CEO who was formerly General Manager
of a division at Pacific Bell, responsible for marketing and offering services
to more than 1.1 million Hispanic customers and generating over $350 million in
annual revenues. Funding for the newly adopted strategy was obtained during the
second and third quarters of 1999. Construction of central switching facilities
and co-location sites at the various Incumbent Local Exchange Carriers ("ILECs")
end offices is currently under way in Los Angeles, Miami, San Diego and Houston.
These initial sites are expected to be operational during the second and third
quarters of 2000. Future target markets include, but are not limited to, New
York City, Chicago, San Francisco, Dallas and San Juan, Puerto Rico.
As a complement to its strategy to become a full-service CLEC in the US and
Latin America, the Company is establishing an Asynchronous Transfer Mode ("ATM")
fiber transport network for both voice and data switching. The network initially
connects Houston, Texas; Atlanta, Georgia; Miami, Florida; New York, New York;
Los Angeles, California; San Salvador, El Salvador; and Lima; Peru (the latter
two via satellite). Future plans include similar network infrastructure in other
U.S. and South American and Central American locations. The network will allow
the Company to efficiently carry traffic for its CLEC operations and will also
serve to expand the market reach and lower the cost basis of its existing
prepaid long distance services business. Additionally, the network allows the
Company to enter the wholesale carrier business by capitalizing on unique
partnering opportunities with interconnected foreign Postal, Telephone and
Telegraph companies ("PTTs"). The network became partially operational during
the first quarter of 1999, however, due to unforeseen technical difficulties
with the leading edge technology, the Company has yet to realize significant
revenues or cost efficiencies.
During the first quarter of 2000, the Company agreed to merge with Telscape
International, Inc. ("Telscape") in an all-stock transaction in which each share
of PointeCom will be exchanged for 0.223514 shares of Telscape common stock. The
surviving company will trade under the ticker symbol "TSCP" on
9
<PAGE>
the NASDAQ National Market System. The board of directors of both companies have
agreed to the merger; however, the closing is subject to shareholder approval
and certain other conditions precedent, such as Securities Exchange Commission
and regulatory approval. Management believes that the merger of the combined
companies creates one of the leading providers of bundled communications
services in the U.S. Hispanic and paired-Latin American markets. Some of the
benefits of the combined companies are:
o An experienced management team with a significant Latin component.
o Creates an integrated communications provider catering to Hispanics in
both the US and Latin America, including a Telscape concession to provide
domestic and international long distance service in Mexico granted to
Telscape by Mexican regulators.
o Infrastructure-based strategy utilizing a "Smart Build" approach including
a fiber optic network under construction by Telscape in Mexico.
o Greater critical mass and compelling synergies and cost savings.
o One of the few companies that can compete in the U.S. and Latin America as
one company.
o Combined company strategy addresses rapidly growing and deregulating
markets with significant competitive opportunities.
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 March 31, 2000 and 1999. Operating results for any period are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS MONTHS
ENDED 3/31/2000 ENDED 3/31/1999
---------------------------------- ----------------------------------
$ % $ %
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Retail Services ................................. 1,162,236 8.2% 1,009,435 8.7%
Wholesale/International Services................. 2,068,826 14.5% 1,162,094 10.1%
Prepaid Card Services ........................... 10,872,743 76.4% 8,989,363 77.8%
Other ........................................... 129,268 0.9% 392,634 3.4%
-------------- -------------- -------------- --------------
Total revenues .............................. 14,233,073 100.0% 11,553,526 100.0%
Cost of Services:
Retail Services ................................. 1,084,861 93.3% 724,924 71.8%
Wholesale/International Services................. 2,552,318 123.4% 1,000,409 86.1%
Prepaid Card Services ........................... 9,784,822 90.0% 8,248,607 91.8%
Other ........................................... 131,852 102.0% 273,088 69.6%
-------------- -------------- -------------- --------------
Total cost of services ...................... 13,553,853 95.2% 10,247,028 88.7%
Gross Margin:
Retail Services ................................. 77,375 6.7% 284,512 28.2%
Wholesale/International Services................. (483,492) -23.4% 161,685 13.9%
Prepaid Card Services ........................... 1,087,921 10.0% 740,755 8.2%
Other ........................................... (2,584) -2.0% 119,546 30.4%
-------------- -------------- -------------- --------------
Total Gross Margin .......................... 679,220 4.8% 1,306,498 11.3%
Selling General & Administrative:
Retail Services ................................. 1,703,153 146.5% 360,985 35.8%
Wholesale/International Services................. 663,985 32.1% 636,571 54.8%
Prepaid Card Services ........................... 1,212,359 11.2% 663,289 7.4%
Other ........................................... 395,484 305.9% 520,688 132.6%
Corporate & Network ............................. 1,782,858 12.5% 651,619 5.6%
-------------- -------------- -------------- --------------
Total SG&A .................................. 5,757,839 40.5% 2,833,152 24.5%
Depreciation & amortization ..................... 1,153,841 8.1% 1,045,947 9.1%
-------------- -------------- -------------- --------------
Total costs and expenses ................. 20,465,532 143.8% 14,126,127 122.3%
-------------- -------------- -------------- --------------
Operating loss ..................................... (6,232,459) -43.8% (2,572,601) -22.3%
Interest expense, net .............................. 64,286 0.5% (1,086,438) -9.4%
-------------- -------------- -------------- --------------
Net loss ........................................... $ (6,168,173) -43.3% $ (3,659,039) -31.7%
Preferred dividends ................................ $ (1,621,992) -11.4% -- --
-------------- -------------- -------------- --------------
Net loss available to common shareholders .......... $ (7,790,165) -54.7% $ (3,659,039) -31.7%
-------------- -------------- -------------- --------------
Net loss per share ................................. $ (0.15) $ (0.08)
-------------- --------------
Shares used in computing net loss per share ........ 51,841,344 45,343,348
-------------- --------------
</TABLE>
10
<PAGE>
Consolidated revenues for the combined lines of business for the three
months ended March 31, 2000 and 1999 were $14,233,000 and $11,554,000
respectively. The increase in revenue was principally the result of an increase
in the Prepaid Card Services segment, primarily driven by increased distribution
of "off-net" cards within the U.S. Hispanic community. Other increases came from
Wholesale/International Services segment principally from carrier terminating
services to Peru and Mexico and international private line to various South and
Central American countries. Retail Services sales remained relatively flat and
Other revenues, which principally represent telecommuting services, declined as
a result of deconsolidating TCS during the first quarter of 2000. Cost of
services for the quarter ended March 31, 2000 were $13,554,000 and $10,247,000
for the comparable quarter in 1999, yielding gross profit margins of 4.8% for
2000 and 11.3% for the same period in 1999. Gross profit margins were adversely
affected primarily by the high fixed costs associated with the
Wholesale/International Services segment with disproportionately lower revenues
from the segment. The Retail Services segment was also adversely affected by
high fixed costs without corresponding revenues. The Company believes that it
will be able to add revenues in both segments without the need to significantly
increase its fixed costs.
Selling, general, and administrative ("SG&A") expenses for the first
quarter of 2000 were $5,758,000 or 40.5% of revenues compared to $2,833,000 or
24.5% of revenues for the same quarter in 1999. The overall increase in expenses
was primarily attributable to expansion of the Company's operations particularly
in the Retail Services segment, which is increasing staff in preparation for the
launch of the CLEC business during the second quarter of 2000. The increase was
also caused by the accrual of severance charges in conjunction with the
termination of employees in the Prepaid Card Services and
Wholesale/International Services segments. The Company terminated these
employees in an effort to reduce overhead in these lower margin business
segments. Also contributing to higher SG&A costs in the Corporate and Network
Overhead segment was approximately $564,000 of non-cash compensation charges
related to variable incentive stock options.
Depreciation and amortization expense was $1,154,000 for the first three
months of 2000 compared to $1,046,000 for the first three months of 1999. The
increase is primarily attributable to the increase in property, plant and
equipment.
Interest income (expense) was $64,000 and ($1,086,000) for the quarters
ended March 31, 2000 and 1999, respectively. Interest expense decreased
significantly during 2000 because a number of debt facilities in place during
the first quarter of 1999 were retired. Additionally, during the first quarter
of
11
<PAGE>
2000, the Company earned interest on the $10 million promissory note with
Telscape and on the cash on hand, which exceeded the interest on its various
debt facilities.
There was no income tax benefit recorded in either 2000 or 1999, as
management recorded a valuation reserve due to the uncertainty of the timing of
future taxable income. The net losses for the quarters ended March 31, 2000 and
1999 were approximately $6,168,000 or $0.15 per share and $3,659,000 or $0.08
per share. Also contributing to net loss per share during 2000 was approximately
$1,622,000 in preferred stock dividends on the Class A and B Senior Convertible
Preferred Stock.
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 both affiliates and outside
investors. During 1999, the Company completed a private placement of $51.24
million of $0.01 par value Class A and Class B Convertible Senior Preferred
Stock (the "Preferred Stock"). As of December 31, 1999, the Company had $21.2
million cash on hand. Cash available at year end has been used to offset the
Company's operating cash flow deficit during the first quarter of approximately
$5.4 million. The operating cash deficit includes funding of an $8.5 million
promissory note to Telscape (explained below), offset by approximately $7.0
million of switching equipment purchases in accounts payable pending the closing
of a vendor line of credit of approximately $15 million. The Company anticipates
the vendor line will be completed during the second quarter of 2000.
Additionally, the Company received $1.9 million in repayment of an intercompany
note payable from its subsidiary Telecommute Solutions Inc. ("TCS") upon
completion of the private placement of the Series B Preferred Stock by TCS. As a
result of the private placement, the Company's ownership in TCS was reduced from
100% to approximately 23% and TCS will no longer be consolidated. Additionally,
during the quarter the Company used approximately $5.0 million to fund property
and equipment purchases.
The Company estimates that it will need approximately $60 million to fund
existing operations through March 31, 2001, including approximately $3.7 million
to fund debt due over the next twelve months, $40.0 million to fund capital
expenditures and $14.3 million to fund operating cash flow requirements. As of
March 31, 2000, the Company had approximately $5.7 million of cash on hand.
During the quarter, the Company entered into an agreement to merge with Telscape
International, Inc., ("Telscape") as part of the merger, the Company entered
into a Promissory Note with Telscape to provide $10.0 million to Telscape. The
promissory note matures on June 30, 2000 and is convertible at the Company's
option into 100,000 shares of Class C preferred stock and warrants to purchase
500,000 shares of Telscape common stock at $7.00 per share. Each share of Class
C preferred stock is convertible into 12.195 shares of Telscape common stock.
The Company entered into a $25.0 million master lease with a significant vendor
during 1999. As of March 31, 2000, the Company had drawn down $4.0 million under
the master lease. Additionally, the Company is negotiating a $15.0 million line
of credit with another significant vendor, which it expects to be completed
during the second quarter of 2000. The Company intends to use these vendor lines
of credit to finance the majority of its capital asset purchases for the next
year. The Company is currently seeking to raise additional capital through the
private placement of equity. Additional means of financing will be sought if
necessary and may include, but would not be limited to, vendor financing
agreements, bank loans and private placements of debt and/or equity.
Additionally, the Company may realize proceeds from the 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, if 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.
The Company has not generated net cash from operations for any period
presented. The net cash used in operating activities for the quarter ended March
31, 2000 was $5.4 million. Management anticipates that the Company will not
generate cash from operations during 2000. The Company does not currently have
adequate resources available to achieve all of its potential expansion plans
noted in "Management's Discussion and Analysis" and will not engage in such
expansion until adequate capital sources have been arranged. Accordingly, the
Company anticipates additional 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
12
<PAGE>
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.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." The Company is required to adopt this accounting guidance no later
than June 30, 2000. SAB 101 provides additional guidance on revenue recognition
as well as criteria for when revenue is generally realized and earned. The
Company believes the adoption of SAB No. 101 will not have a material impact on
future operating results.
YEAR 2000
To date, year 2000 problems have had a minimal effect on our business.
However, we may not have identified and remediated all significant year 2000
problems. Further remediation efforts may involve significant time and expense,
and unremediated problems may have a material adverse effect on our business.
Finally, although we have not been made a party to any litigation or arbitration
proceeding to date involving our products or services related to year 2000
compliance issues, we may in the future be required to defend our products or
services in such proceedings, or to negotiate resolutions of claims based on
year 2000 issues. The costs of defending and resolving year 2000-related
disputes, regardless of the merits of such disputes, and any liability for year
2000 related damages, including consequential damages, would negatively affect
our business, results of operations, financial condition and liquidity, perhaps
materially.
ITEM 3. - QUALTITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
As of March 31, 2000, we had both variable and fixed interest bearing
notes. All of our debt obligations are denominated in U.S. dollars and,
represent interest rate risk. All of our debt obligations are segregated in
fixed and variable rate instruments as shown on the table below. The table shows
the amounts of principal payments due on our various debt instruments and the
weighted average rate for the principal payments then due using the rates in
effect at March 31, 2000. The table set forth below summarizes the fair values
and payment terms of financial instruments subject to interest rate risk
maintained by us as of March 31, 2000.
<TABLE>
<CAPTION>
FAIR VALUE
DEBT 2001 2002 2003 2004 2005 TOTAL AT 3/31/00
- ---- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
NON-INTEREST
BEARING OR
FIXED RATE ................. $3,691,083 4,032,962 4,630,927 440,900 134,358 12,930,230 12,930,230
WTD. AVG
INTEREST RATE .............. 11.39% 11.06% 12.47% 12.16% 12.00% 11.71% --
VARIABLE ................... $ 600,000 0 0 0 0 600,000 1,350,000
WTD. AVG
INTEREST RATE .............. 10.5% 0.00% 0.00% 0.00% 0.00% 10.5% --
---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL ...................... $4,291,083 4,032,962 4,630,927 440,900 134,358 13,530,230 13,530,230
========== ========== ========== ========== ========== ========== ==========
</TABLE>
13
<PAGE>
FOREIGN CURRENCY RISK
The Company has operations in Central and South America, mainly Panama,
Venezuela, Costa Rica and Mexico, which expose it to currency exchange rate
risks (except Panama, whose currency is equal to the US dollar). 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 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 international operations represented approximately 2.2% of
total assets as of March 31, 2000 and 12.8% and 3.5% of total revenues and net
loss respectively for the quarter ended March 31, 2000.
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q 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-K for the year ended December
31, 1999, 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.
14
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
1. During the first quarter of 1999, the Company issued 400,416 shares of common
stock in conjunction with the exercise of employee stock options. The common
stock was registered pursuant to an S-8 filed during the third quarter on
1998 and amended during the third quarter of 1999.
2. Also during the quarter, the Company issued 57,821 shares of common stock in
conjunction with the exercise of warrants. The warrant holders were directors
of the Company and are accredited investors. The issuance was exempt under
section 4(2) of the Act.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
None.
(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.
15
<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: May 12, 2000 By: /s/ Stephen E. Raville
---------------------------------------------
Stephen E. Raville
Chief Executive Officer
Date: May 12, 2000 By: /s/ Richard P. Halevy
---------------------------------------------
Richard P. Halevy
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 5,771,920
<SECURITIES> 0
<RECEIVABLES> 3,339,120
<ALLOWANCES> (1,541,414)
<INVENTORY> 1,948,013
<CURRENT-ASSETS> 23,277,596
<PP&E> 38,608,589
<DEPRECIATION> (7,273,976)
<TOTAL-ASSETS> 76,605,714
<CURRENT-LIABILITIES> 25,516,000
<BONDS> 9,784,627
0
187
<COMMON> 521
<OTHER-SE> 142,644,169
<TOTAL-LIABILITY-AND-EQUITY> 41,305,086
<SALES> 14,233,072
<TOTAL-REVENUES> 14,233,072
<CGS> 13,553,852
<TOTAL-COSTS> 13,553,852
<OTHER-EXPENSES> 6,911,679
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,286
<INCOME-PRETAX> (6,168,173)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,168,173)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,168,173)
<EPS-BASIC> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
