UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(Mark One)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1998
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to ____________
Commission file number 0-20843
POINTE COMMUNICATIONS CORPORATION
(Name of Small Business Issuer in Its Charter)
NEVADA 84-1097751
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1325 Northmeadow Parkway, Suite 110
Roswell, Georgia 30076
(Address of Principal Executive Offices) (Zip Code)
770-468-6800
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.00001 PAR VALUE
Check whether the issuer (1) has 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 .
----- -----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB ____.
State issuer's revenues for its most recent fiscal year: $27,620,202
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
The aggregate market value of such stock on April 13, 1999, based on the
average of the bid and asked prices on that date was $37,653,114.
The number of shares of the issuer's common stock outstanding on April 31,
1999 was 45,339,839.
This Form 10-KSB/A amends the Form 10-KSB filed with the Commission on
April 15, 1999, and the Form 10-KSB/A filed with the Commission on April 30,
1999, pursuant to the filing requirements under Rule 12b-15 promulgated under
the Securities Exchange Act, as amended, for the purpose of amending Items
disclosed in this filing.
<PAGE>
PART II
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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, acquired nine
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 includung international private line, long
distance, Internet access and data transmission, especially between the U.S. and
Latin America. 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. The Company's recently adopted strategy is 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.
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<PAGE>
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 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 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; San Juan,
Puerto Rico; Managua, Nicaragua; and San Salvador, El Salvador. Future plans
include similar network infrastructure in other U.S. and South and Central
American locations. 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 will 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.
See "Liquidity and Capital Resources" for a discussion of the Company's
ability to meet the capital requirements associated with its expansion plans.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the years ended
December 31, 1998 and 1997. 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>
DECEMBER 31, DECEMBER 31,
1998 1997
------------------- -------------------
% of % of
Revenues Revenues
-------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Communications services $24,392 88.3% $ 9,379 72.5%
Hardware and
Software sales 393 1.4 369 2.8
Internet connection
Services 2,835 10.3 2,748 21.2
Network services - - 455 3.5
-------- --------- --------- --------
Total revenues 27,620 100.0 12,951 100.0
Cost and expenses:
Cost of services 22,972 83.2 9,482 73.2
Cost of hardware
and oftware 274 0.9 284 2.2
Selling, general
and administrative 9,933 36.0 8,766 67.7
Nonrecurring
Charge - - 2,677 20.7
Depreciation and
Amortization 3,452 12.5 2,995 23.1
-------- --------- --------- --------
Total costs
and expenses 36,631 132.6 24,204 186.9
-------- --------- --------- --------
Operating loss <9,011> <32.6> <11,253> <86.9>
-------- --------- --------- --------
Interest expense, net <1,760> <6.4> <481> <3.7>
Other income (loss) 1,624 5.9 <242> <1.9>
-------- --------- --------- --------
Net Loss <9,147> <33.1> <11,976> <92.5>
-------- --------- --------- --------
Net loss per share $ <.22> $ <.39>
Shares used in computing:
net loss per share 42,144 31,085
</TABLE>
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<PAGE>
Consolidated revenues for the combined lines of business for the years
ended December 31, 1998 and 1997 were $27,620,000 and $12,951,000, respectively.
The most significant increase in revenue came from communications services which
increased from $9,379,000 in 1997 to $24,392,000 in 1998. The increase in
communications services revenue was principally the result of increased prepaid
calling card sales, primarily driven by competitive rates to Latin America,
increased quality that resulted from a new calling card platform purchased
during the year, and acquisitions during 1998. Other increases in communications
services came from International Private Line, mainly to Costa Rica, and the
start up of the Telecommuting Services business. Revenues from hardware and
software sales remained relatively flat. Internet connection services revenues
increased from $2,748,000 in 1997 to $2,835,000 in 1998. The Internet revenues
increased primarily in Venezuela offset by a decline in Panama and in the U.S.
Cost of services and hardware and software costs for the year ended December 31,
1998 were $23,246,000 and $9,766,000 for the comparable period in 1997, yielding
gross profit margins of 15.9% for 1998 and 24.6% for the same period in 1997.
The gross profit margin on communication and Internet connection services was
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 1998 than in 1997. Also contributing to
the lower margin was sales of "off-net" prepaid calling cards i.e., other
carriers cards, by a distributor acquired during 1998, which carry a lower
margin than revenues earned on Company provided cards. Management expects the
margin on communications and Internet connection services to increase as higher
margin businesses increase in proportion to prepaid calling cards and as the
Company expands its network thereby lowering the marginal cost of terminating
voice and data traffic. Margins on hardware and software sales increased from
23.0% in 1997 to 30.3% in 1998.
Selling, general, and administrative ("SG&A") expenses for 1998 were
$9,933,000 or 36% of sales compared to $8,766,000 or 67.7% of sales for 1997.
The overall increase in expenses was primarily attributable to expansion of the
Company's operations; however, the Company was able to gain economies of scale
while expanding operations as represented by the lower SG&A as a proportion of
sales in 1998. The Company anticipates benefiting further from economies of
scale, as costs such as salaries and wages are not expected to increase in
direct proportion to increases in revenues. Additionally, management
anticipates cost reductions as a result of certain cost control efforts,
including a reduction of the workforce, implemented during the last quarter of
1998.
The non-recurring charge during 1997, was primarily the result of a write
off of the assets related to a business that was exited during the year. In an
effort to narrow the scope of the Company's product offering and to focus
resources on its core competencies, the Company decided to exit the computer
network integration business. As a result, the assets related to PDS, including
approximately $1,889,000 of goodwill and other intangibles and $250,000 of
hardware and software inventory, were written off and approximately $80,000 in
severance and other related costs were accrued.
Depreciation and amortization expense was $3,452,000 for 1998 compared to
$2,995,000 for the prior year. The increase is attributable to the increase in
property, plant and equipment and amortization associated with the acquisitions
completed during 1998.
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<PAGE>
Other income in 1998 resulted from a gain recognized on the settlement of
an account payable to Sprint (see "Legal Proceedings"). An agreement in
principal was reached during 1997 to restructure the Company's payable to
Sprint. At year end 1997, the disputed amount was accrued as a deferred credit.
During 1998, the Company signed a settlement agreement requiring it to pay $1.0
million, at which time the deferred credit was recognized in the statement of
operations. The settlement agreement obligates the Company to pay $100,000 at
settlement and $50,000 per month over the succeeding 18 months. As of December
31, 1998, $700,000 was included in accounts payable, current portion of notes
payable and long term portion of notes payable related to this matter.
Interest expense was $1,760,000 and $481,000 for the years ended December
31, 1998 and 1997, respectively. Interest expense increased significantly
during 1998 because of a number of new debt instruments entered into in late
1997 and during 1998. These include $6.2 million in capital leases, $3.0
million in financing type leases, $2.0 million in bridge loans, $900,000 in
promissory notes and a $600,000 receivable facility. Also included in interest
during 1998 was approximately $400,000 related to a guarantee with regard to
shares issued in conjunction with the 1997 financing type leases. The guarantee
obligated the Company to reimburse the holder of these shares for the difference
between $2.33 and the average closing price of the Company's stock for the
twenty trading days prior to June 30, 1998. The average closing price for this
period was below $2.33 resulting in an approximate $400,000 liability, which is
included in the current portion of notes payable at December 31, 1998.
There was no income tax benefit recorded in either 1998 or 1997, as
management recorded a valuation reserve due to the uncertainty of the timing of
future taxable income. The net losses for the years ended December 31, 1998 and
1997 were approximately $9,147,000 and $11,976,000, respectively.
The Company's International operations, conducted mainly in Panama,
Venezuela, Costa Rica and Mexico accounted for approximately 17.9% of the
Company's overall revenues and 3.2% of the Company's net loss in 1997 and
approximately 16.7% of the Company's revenues and 16.8% of the Company's net
loss in 1998. The increase in the International operations proportionate net
loss from 3.2% in 1997 to 16.7% in 1998 was driven mainly by the negative
operating results incurred in Panama during 1998. Panama conducts international
private line (IPL), internet connection and call center services on US Military
bases. During the year ended 1998, Panama operations were adversely affected by
a decrease in revenues in each of its businesses. IPL revenues decreased as a
result of both a price decline in switched services making IPL less cost
effective and increased competition from Cable & Wireless, the local PTT. The
decrease in both internet connection services revenues and call center services
revenues resulted from a reduction of the US Armed Forces presence in Panama.
Fixed cost of services and selling, general and administrative costs continued
to be incurred despite the decrease in revenues.
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 1998, the Company issued shares of common stock through various
private placement offerings as follows: 9.0 million shares at $0.50 per share,
850,000 shares at $1.00 per share and 500,000 shares at $1.30 per share for
gross proceeds totaling $6.0 million. Also during the year, the Company issued
short-term promissory notes, ranging in term from on demand to one year, for
gross proceeds totaling $2.9 million. During the third quarter, the Company's
subsidiary, Telecommute Solutions, Inc. ("TCS"), completed a private placement
of 2,000 shares of its $1.00 par value Series A Preferred Stock, which is
convertible into TCS or Pointe common stock at the holder's discretion. Gross
proceeds totaled $2.0 million. Finally, the Company entered into a Receivable
purchase facility for gross proceeds of $600,000 and two financing type lease
transactions for gross proceeds totaling $778,000, to complete the $3.0 million
facility entered into in 1997. These funds were used to offset an operating
cash flow deficiency of $7.5 million, purchase assets of $3.5 million, acquire
businesses for approximately $350,000, pay the principal portion of leases of
approximately $403,000, repay lines of credit of approximately $85,000 and repay
notes payable of approximately $158,000. Additionally, during the year, the
Company acquired assets under capital leases for approximately $6.2 million.
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<PAGE>
The Company estimates that it will need to raise approximately $69.7
million to fund existing operations during 1999, including approximately $14.7
million to fund debt due in 1999 and $55 million to fund 1999 capital
expenditures. Prior to year end, a subsidiary of the Company entered into a
master lease facility with a major telecommunications equipment vendor to
purchase $10 million of equipment. As of December 31, 1998, $762,000 had been
drawn upon under this facility. Subsequent to year end, the Company entered
into a $25 million master lease facility and $3 million working capital line of
credit with this same vendor. Also, subsequent to December 31, 1998, the
Company raised $9.0 million in a private placement of short-term bridge
financing to fund network expansion, repay indebtedness and fund operations in
advance of completing a preferred stock private placement. Subsequent to year
end, the Company obtained letters of intent from investors to purchase $30
million of the Company's convertible preferred stock, a portion of which will
be utilized to repay the interim borrowings. The Company anticipates closing
this private placement in April 1999. 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. 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. At December 31, 1998, the
Company had a significant working capital deficit and, at times, has borrowed
funds and sold equity to affiliates/shareholders to fund essential obligations.
While the Company has been able to fund such essential obligations to date and
while management believes its current business activity is such that operating
funds will be available to it as needed to continue operations and to fund
planned growth, no assurance can be given that the Company will be able to raise
such funds on a timely basis or at all. Failure to raise such funds could have
material adverse consequences to the Company and its continuing and planned
operations.
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. The funds raised subsequent to year end, including the
$30 million private placement of the Company's Prefered Stock for which letters
of intent have been received from investors and is expected to close in April
1999, should allow the Company to achieve its potential expansion plans noted in
"Management's Discussion and Analysis"; however if there is any shortfall, the
Company 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.
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<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 in 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 does not expect SOP
98-5 to 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. The statement
establishes accounting and reporting standards for derivative instruments and
transactions involving hedge accounting. The Company adopted the Statement in
the first quarter and it did not 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 is addressing 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.
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<PAGE>
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 (or
other variable lines), there is market risk relating to such amounts because
the interest rates under the credit facility are variable. The Company does not
believe its exposure represents a material risk to the financial statements.
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 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 effected as international operations
represented approximately 4.6% of total assets as of December 31, 1998 and
16.8% and 16.7% of total revenues and net loss for the year ended December 31,
1998, respectively (see Results of Operations for a discussion of the
significant International net loss).
This report on Form 10-KSB/A contains forward looking statements within the
meaning of the 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 unforseen reasons. The forward looking statements
contained herein are made as of the date of the original report, which is
amended hereby, and the Company assumes no obligation to update forward looking
statements or update the reasons why actual results could differ from those
projected in such forward looking statements.
ITEM 7. FINANCIAL STATEMENTS.
Attached following the Signature Pages and Exhibits, see the index to the
financial statements.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company has not had any disagreements with its independent accountants
and auditors.
PART III
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Exhibit No. Description Location
- ----------- --------------------------------------- -----------------------------
<C> <S> <C>
3.01 Articles of Incorporation Form 10-QSB for the quarter
ended March 31, 1996
3.01.01 Certificate of Amendment to Form 10-KSB for the year
Articles of Incorporation ended December 31, 1998
3.03 Bylaws Form 10-QSB for the quarter
ended June 30, 1996
4.2 Form of 18% Convertible, Form 10-KSB for year ended
Subordinated Debenture 12/31/97
10.1 Contract with INTEL Form 10-KSB for the year
ended 12/31/95
10.2 Employee Incentive Stock Option Plan Form S-8 filed August 7, 1998
10.3 Executive Long Term Stock Option Plan Form S-8 filed August 7, 1998
10.4 Non-employee Director Stock Form S-8 filed August 7, 1998
Option Plan
10.5 Agreement with Hondutel Form 10-QSB for the quarter
ended June 30, 1996
10.6 Agreement with Telecommunicaciones Form 10-QSB for the quarter
de Mexico ended June 30, 1996
10.7 Agreement with Comison Nacional de Form 10-QSB for the quarter
Telecommunications (Conatel) ended June 30, 1996
10.8 Form of Purchase and Sale Agreement Form 10-KSB for the year end
December 31, 1997
10.9 Form of Equipment Lease Agreement Form 10-KSB for the year end
December 31, 1997
10.10 Form of Security Agreement Form 10-KSB for the year end
December 31, 1997
10.11 Receivable Purchase Facility Agreement Form 10-KSB for the year end
December 31, 1997
10.12 Registration Rights and Minimum Value Form 10-KSB for the year end
Guarantee Agreement December 31, 1997
10.13 Master Lease Agreement and Warrant Form 10-KSB for the year end
December 31, 1997
10.14 Promissory Note, Security Agreement Form 10-KSB for the year
and Warrant Agreement - Cordova ended December 31, 1998
10.15 Promissory Note, Security Agreement Form 10-KSB for the year
and Warrant Agreement - FSE ended December 31, 1998
10.16 Promissory Note, Security Agreement Form 10-KSB for the year
and Warrant Agreement - Gibralt ended December 31, 1998
10.17 Promissory Note, Security Agreement Form 10-KSB for the year
and Warrant Agreement - EGL ended December 31, 1998
10.18 Telecommute Solutions Stock Option Form 10-KSB for the year
Option Plan ended December 31, 1998
10.19 Purchase of Preferred Stock in Form 10-KSB for the year
Telecommute Solutions Inc. ended December 31, 1998
11.1 Net Loss Per Share Calculation Form 10-KSB for the year
ended December 31, 1998
21.1 List of subsidiaries Form 10-KSB for the year
ended December 31, 1998
23.1 Consent of Arthur Andersen LLP Form 10-KSB for the year
ended December 31, 1998
23.2 Consent of Arthur Andersen LLP Filed herewith
27 Financial Data Schedule Form 10-KSB for the year
ended December 31, 1998
</TABLE>
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
POINTE COMMUNICATIONS CORPORATION
By: /s/ STEPHEN E. RAVILLE Date: May 15, 2000
-------------------------
STEPHEN E. RAVILLE, CHIEF EXECUTIVE OFFICER
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<PAGE>
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
<S> <C>
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997 F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pointe Communications Corporation:
We have audited the accompanying consolidated balance sheets of POINTE
COMMUNICATIONS CORPORATION and subsidiaries (a Nevada corporation) (formerly,
"Charter Communications International, Inc.") as of December 31, 1998 and 1997
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the two years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pointe Communications
Corporation and subsidiaries as of December 31, 1998 and 1997 and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 15, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
1998 1997
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 1,255,199 $ 155,503
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . 185,000 135,000
Accounts receivable, net of allowance for
doubtful accounts of $900,000 and $650,000
at December 31, 1998 and 1997, respectively. . . . . . . . 3,686,153 2,606,104
Accounts receivable-- affiliate, net . . . . . . . . . . . . 215,337 -
Inventory, net . . . . . . . . . . . . . . . . . . . . . . . 652,187 252,120
Prepaid expenses and other . . . . . . . . . . . . . . . . . 263,249 224,595
------------- -------------
Total current assets . . . . . . . . . . . . . . . . . . . 6,257,125 3,373,322
------------- -------------
PROPERTY AND EQUIPMENT, at cost:
Equipment and machinery. . . . . . . . . . . . . . . . . . . 14,168,428 6,058,943
Earth station facility . . . . . . . . . . . . . . . . . . . 835,527 618,497
Software . . . . . . . . . . . . . . . . . . . . . . . . . . 1,732,700 1,121,248
Furniture and fixtures . . . . . . . . . . . . . . . . . . . 578,698 360,694
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,157,344 583,861
------------- -------------
18,472,697 8,743,243
Accumulated depreciation and amortization. . . . . . . . . . (3,984,392) (2,113,198)
------------- -------------
Property and equipment, net. . . . . . . . . . . . . . . . 14,488,305 6,630,045
------------- -------------
OTHER ASSETS:
Goodwill, net of accumulated amortization
of $1,544,360 and $865,087,
at December 31, 1998 and 1997, respectively. . . . . . . . 17,709,865 17,391,398
Acquired customer bases, net of accumulated
amortization of $969,182 and $579,369
at December 31, 1998 and 1997, respectively. . . . . . . . 844,543 1,181,651
Other intangibles, net of accumulated
amortization of $1,184,062 and $590,884
at December 31, 1998 and 1997, respectively. . . . . . . . 1,848,762 1,938,582
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,073,279 551,087
------------- -------------
Total other assets . . . . . . . . . . . . . . . . . . . . 21,476,449 21,062,718
------------- -------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . $ 42,221,879 $ 31,066,085
============= =============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Balance Sheets.
F-2
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
1998 1997
------------- -------------
CURRENT LIABILITIES:
Current portion of notes payable . . . . . . . . . . . . . . $ 3,728,062 $ 175,001
Current portion of lease obligations . . . . . . . . . . . . 1,273,298 342,249
Lines of credit. . . . . . . . . . . . . . . . . . . . . . . 1,000,000 485,000
Loans from stockholders. . . . . . . . . . . . . . . . . . . 670,000 520,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 6,214,952 4,889,518
Accounts payable-- affiliate . . . . . . . . . . . . . . . . 68,000 249,655
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . 2,346,622 1,676,547
Unearned revenue . . . . . . . . . . . . . . . . . . . . . . 2,928,990 1,645,722
------------- -------------
Total current liabilities. . . . . . . . . . . . . . . . . 18,229,924 9,983,692
------------- -------------
LONG TERM LIABILITIES:
Capital and financing lease obligations. . . . . . . . . . . 7,128,451 1,397,473
Convertible debentures . . . . . . . . . . . . . . . . . . . 1,180,000 1,180,000
Senior subordinated notes. . . . . . . . . . . . . . . . . . 690,278 660,278
Notes payable and other long term obligations. . . . . . . . 626,022 711,110
------------- -------------
Total long term liabilities. . . . . . . . . . . . . . . . 9,624,751 3,948,861
------------- -------------
Deferred settlement gain . . . . . . . . . . . . . . . . . . - 2,757,132
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 11)
MINORITY INTEREST. . . . . . . . . . . . . . . . . . . . . . 1,981,959 -
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 100,000 shares
authorized, 550 shares issued, - shares
outstanding at both December 31, 1998 and 1997 . . . . . . - -
Common stock, $0.00001 par value; 100,000,000
shares authorized; 45,339,839 and 34,134,776 shares
outstanding at December 31, 1998 and 1997, respectively. . 454 341
Additional paid-in-capital . . . . . . . . . . . . . . . . . 43,137,654 35,981,440
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . (30,752,863) (21,605,381)
------------- -------------
Total stockholders' equity . . . . . . . . . . . . . . . . 12,385,245 14,376,400
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . $ 42,221,879 $ 31,066,085
============= =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Balance Sheets.
F-3
<PAGE>
<TABLE>
<CAPTION>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
------------ -------------
<S> <C> <C>
REVENUES:
Communications services. . . . . . . $24,391,803 $ 9,379,496
Internet connection services . . . . 2,835,446 2,747,635
Hardware and software. . . . . . . . 392,953 368,818
Network services . . . . . . . . . . - 455,473
------------ -------------
Total revenues . . . . . . . . . . . 27,620,202 12,951,422
------------ -------------
COSTS AND EXPENSES:
Cost of services . . . . . . . . . . 22,972,312 9,481,498
Cost of hardware and software. . . . 274,120 284,358
Selling, general, and administrative 9,933,265 8,766,282
Nonrecurring charge. . . . . . . . . - 2,677,099
Depreciation and amortization. . . . 3,451,982 2,995,334
------------ -------------
Total costs and expenses . . . . . . 36,631,679 24,204,571
------------ -------------
OPERATING LOSS . . . . . . . . . . . . (9,011,477) (11,253,149)
------------ -------------
INTEREST EXPENSE, NET. . . . . . . . . (1,760,315) (480,924)
OTHER INCOME/(EXPENSE), NET. . . . . . 1,624,310 (241,785)
------------ -------------
NET LOSS BEFORE INCOME TAXES . . . . . (9,147,482) (11,975,858)
INCOME TAX BENEFIT . . . . . . . . . . - -
------------ -------------
NET LOSS . . . . . . . . . . . . . . . $(9,147,482) $(11,975,858)
============ =============
NET LOSS PER SHARE -
BASIC AND DILUTED . . . . . . . . . $ (0.22) $ (0.39)
============ =============
SHARES USED IN COMPUTING
NET LOSS PER SHARE . . . . . . . . . . 42,143,733 31,084,693
============ =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Preferred Stock Common Stock Additional
---------------- --------------------- Paid-In
Shares Amount Shares Amount Capital
------- ------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 . . . . . . . . . . . . . . - $ - 24,202,779 $ 242 $28,302,025
Issuance of common stock ($1.00 per share) (Note 7). . . - - 9,283,997 93 9,203,844
Retirement of shares in conjunction with a contribution
agreement executed by certain members of management. . - - (2,500,000) (25) (3,538,698)
Issuance of common stock in conjunction with
conversion of debenture, net ($.50 per share) (Note 7). - - 2,200,000 22 999,978
Issuance of common stock in conjunction with
the acquisition of communications operating licenses. . - - 400,000 4 399,996
Issuance of common stock in conjunction with
financing lease transaction (Note 4). . . . . . . . . . - - 450,000 5 449,995
Issuance of common stock in conjunction with debt
issuance. . . . . . . . . . . . . . . . . . . . . . . . - - 98,000 - 98,000
Issuance of common stock warrants in conjunction with
operating lease ($0.34 per warrant) . . . . . . . . . . - - - - 66,300
Net loss . . . . . . . . . . . . . . . . . . . . . . . . - - - - -
------- ------- ----------- -------- ------------
Balance at December 31, 1997 . . . . . . . . . . . . . . - - 34,134,776 341 35,981,440
Issuance of common stock ($.50 per share) (Note 7) . . . - - 9,500,000 95 4,499,905
Issuance of common stock ($1.00 per share) (Note 7). . . - - 850,000 9 849,991
Issuance of common stock warrants in conjunction with
promissory note ($0.21 per warrant) (Note 4). . . . . . - - - - 114,069
Issuance of common stock in conjunction with a
merger ($0.90 per share) (Note 3) . . . . . . . . . . . - - 206,250 2 186,761
Issuance of common stock ($1.30 per share) (Note 7). . . - - 500,000 5 649,995
Issuance of common stock warrants in conjunction with
a merger ($0.49 per warrant) (Note 3) . . . . . . . . . - - - - 289,100
Exercise of warrants ($0.70 per share) . . . . . . . . . - - 10,354 - 7,248
Exercise of warrants ($0.70 per share) . . . . . . . . . - - 20,709 1 14,496
Exercise of stock options ($1.00 per share). . . . . . . - - 117,750 1 117,749
Issuance of common stock rights in conjunction with
a merger ($0.44 per warrant) (Note 3) . . . . . . . . . - - - - 272,500
Issuance of common stock warrants in conjunction with
promissory note ($0.18 per warrant) (Note 4). . . . . . - - - - 68,400
Issuance of common stock warrants in conjunction with
promissory note ($0.16 per warrant) (Note 4). . . . . . - - - - 60,800
Issuance of common stock warrants in conjunction with
promissory note ($0.21 per warrant) (Note 4). . . . . . - - - - 25,200
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . - - - - -
------- ------- ----------- -------- ------------
Balance at December 31, 1998 . . . . . . . . . . . . . . - $ - 45,339,839 $ 454 $43,137,654
======= ======= =========== ======== ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Accumulated Stockholders'
Deficit Equity
------------- ---------------
<S> <C> <C>
Balance at December 31, 1996 . . . . . . . . . . . . . . ($9,629,523) $ 18,672,744
Issuance of common stock ($1.00 per share) (Note 7). . . - 9,203,937
Retirement of shares in conjunction with a contribution
agreement executed by certain members of management. . - (3,538,723)
Issuance of common stock in conjunction with
conversion of debenture, net ($.50 per share) (Note 7). - 1,000,000
Issuance of common stock in conjunction with
the acquisition of communications operating licenses. . - 400,000
Issuance of common stock in conjunction with
financing lease transaction (Note 4). . . . . . . . . . - 450,000
Issuance of common stock in conjunction with debt
issuance. . . . . . . . . . . . . . . . . . . . . . . . - 98,000
Issuance of common stock warrants in conjunction with
operating lease ($0.34 per warrant) . . . . . . . . . . - 66,300
Net loss . . . . . . . . . . . . . . . . . . . . . . . . (11,975,858) (11,975,858)
------------- ---------------
Balance at December 31, 1997 . . . . . . . . . . . . . . (21,605,381) 14,376,400
Issuance of common stock ($.50 per share) (Note 7) . . . - 4,500,000
Issuance of common stock ($1.00 per share) (Note 7). . . - 850,000
Issuance of common stock warrants in conjunction with
promissory note ($0.21 per warrant) (Note 4). . . . . . - 114,069
Issuance of common stock in conjunction with a
merger ($0.90 per share) (Note 3) . . . . . . . . . . . - 186,763
Issuance of common stock ($1.30 per share) (Note 7). . . - 650,000
Issuance of common stock warrants in conjunction with
a merger ($0.49 per warrant) (Note 3) . . . . . . . . . - 289,100
Exercise of warrants ($0.70 per share) . . . . . . . . . - 7,248
Exercise of warrants ($0.70 per share) . . . . . . . . . - 14,497
Exercise of stock options ($1.00 per share). . . . . . . - 117,750
Issuance of common stock rights in conjunction with
a merger ($0.44 per warrant) (Note 3) . . . . . . . . . - 272,500
Issuance of common stock warrants in conjunction with
promissory note ($0.18 per warrant) (Note 4). . . . . . - 68,400
Issuance of common stock warrants in conjunction with
promissory note ($0.16 per warrant) (Note 4). . . . . . - 60,800
Issuance of common stock warrants in conjunction with
promissory note ($0.21 per warrant) (Note 4). . . . . . - 25,200
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . (9,147,482) (9,147,482)
------------- ---------------
Balance at December 31, 1998 . . . . . . . . . . . . . . $(30,752,863) $ 12,385,245
============= ===============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . $(9,147,482) $(11,975,858)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization. . . . . . . . . . . 3,451,982 2,995,334
Bad debt expense . . . . . . . . . . . . . . . . . 883,462 586,687
Amortization of discounts on debt and lease
obligations. . . . . . . . . . . . . . . . . . . 250,244 56,891
Loss on extinguishment of debt . . . . . . . . . . - 241,785
Nonrecurring charge. . . . . . . . . . . . . . . . - 2,677,099
Deferred settlement gain . . . . . . . . . . . . . (2,757,132) -
Changes in operating assets and liabilities:
Accounts receivable, net. . . . . . . . . . . . (1,820,958) (1,645,919)
Accounts receivable-- affiliate, net. . . . . . (215,337) 63,802
Inventory . . . . . . . . . . . . . . . . . . . (155,880) (194,180)
Prepaid expenses. . . . . . . . . . . . . . . . (38,654) 23,832
Other assets. . . . . . . . . . . . . . . . . . (640,641) (225,135)
Accounts payable, accrued and other liabilities 1,642,165 971,375
Accounts payable-- affiliate. . . . . . . . . . (181,655) 26,656
Unearned revenue. . . . . . . . . . . . . . . . 1,283,268 (185,009)
------------ -------------
Total Adjustments. . . . . . . . . . . . . 1,700,864 5,393,218
------------ -------------
Net cash used in operating activities. . . (7,446,618) (6,582,640)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment. . . . . . . . . . (3,505,889) (2,577,080)
Restricted cash . . . . . . . . . . . . . . . . . . . (50,000) (135,000)
Acquisition of businesses . . . . . . . . . . . . . . (350,633) -
------------ -------------
Net cash used in investing activities. . . (3,906,522) (2,712,080)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock . . . . . . . 6,000,000 5,831,604
Proceeds from issuance of preferred stock. . . . . . 1,981,959 -
Proceeds from lease obligations, net . . . . . . . . 352,160 2,086,096
Proceeds from receivable facility, net . . . . . . . 574,500 -
Proceeds from issuance of convertible debentures . . - 2,180,000
Proceeds from exercise of stock warrants . . . . . . 25,495 -
Repayment of lines of credit, net. . . . . . . . . . (85,000) (1,161,092)
Proceeds from loans from shareholders. . . . . . . . 150,000 (282,683)
Proceeds from (Repayment of) notes payable, net. . . 3,453,722 476,046
------------ -------------
Net cash provided by financing activities. 12,452,836 9,129,971
------------ -------------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS. . . . 1,099,696 (164,749)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . 155,503 320,252
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . . . $ 1,255,199 $ 155,503
============ =============
Supplemental Non-Cash Disclosures:
- --------------------------------------------------------
Cash paid for interest . . . . . . . . . . . . . . . . . 1,238,442 339,874
Cash paid for income taxes . . . . . . . . . . . . . . . - -
Capital Leases . . . . . . . . . . . . . . . . . . . . . 6,219,977 -
Assets acquired in excess of liabilities assumed . . . . 1,381,531 -
Purchase price adjustments . . . . . . . . . . . . . . . - 864,612
Value of warrants issued . . . . . . . . . . . . . . . . 830,069 -
Value of stock issued for acquisition. . . . . . . . . . 186,761 -
Incurrance of notes payable to pay operating obligations 1,397,000
Conversion of liabilities to equity
Subordinated debentures . . . . . . . . . . . . . . - 2,115,000
Stockholder loans . . . . . . . . . . . . . . . . . - 937,865
Accrued liabilities . . . . . . . . . . . . . . . . - 319,468
Giveback of shares by members of management . . . . . . - 3,538,723
Deferred settlement gain. . . . . . . . . . . . . . . . - 2,757,132
Conversion of subordinated debenture. . . . . . . . . . - 1,000,000
Shares issued for operating licenses. . . . . . . . . . - 400,000
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
F-7
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. ORGANIZATION AND NATURE OF BUSINESS
Pointe Communications Corporation ("Pointe" or the "Company", formerly
Charter Communications International, Inc.), was incorporated in Nevada on April
10, 1996, as a wholly owned subsidiary of Maui Capital Corporation, a Colorado
Corporation ("Maui Capital"), which incorporated on August 8, 1988. On April
21, 1996, Maui Capital and the Company merged with the Company being the
surviving corporation and succeeding to all the business, properties, assets and
liabilities of Maui Capital. The purpose of the merger of Maui Capital and the
Company was to change the name and state of incorporation of Maui Capital. Maui
Capital had no business or assets prior to September 21, 1995, when it acquired
TOPS Corporation, a Nevada corporation ("TOPS") (TOPS was named Charter
Communications International, Inc., until April 10, 1996, when its name was
changed so that the Company could be formed in Nevada with the same name). At
the time of the acquisition, TOPS was the sole stockholder of Charter
Communicaciones Internacionales Grupo, S.A., a Panama corporation ("Charter
Panama"), which was engaged in developing a private line telecommunication
system in Panama and pursuing licenses to provide such services in various other
Latin American countries. Since the acquisition of TOPS, the Company (and Maui
Capital, its predecessor) has endeavored to grow both through the development of
its existing businesses and through the acquisition of complementary businesses.
Proceeds from private placements of securities with principals and outside
investors have funded the development of the Company to date.
The Company is an international facilities based communications company
serving residential and commercial customers in the U.S., Central and South
America. The Company and its subsidiaries provide enhanced telecommunications
products and services, including local, long distance, internet, international
private line, carrier services, prepaid calling card and telecommuting services,
with a focus on the Hispanic community both domestically and internationally.
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 CLEC with a low-cost base of operations.
On January 8, 1996, Pointe completed the cash acquisition of 90% of Phoenix
DataNet ("PDN"), a provider of domestic and international Internet access. On
March 21, 1996, the Company acquired Phoenix Data Systems ("PDS") and the
remaining 10% of PDN in a stock transaction that allowed the Company to enter
the network integration business. During 1997, the Company exited the network
integration business and the assets related to PDS were written off and included
in the statement of operations as a non-recurring charge (Note 9). On July 31,
1996, the Company acquired Telecommute Solutions, Inc. ("Telecommute") in a
stock transaction that allowed the Company to offer various telecommuting
services. On September 21, 1996, the Company acquired Overlook Communications
International Corporation ("OCI") in a stock transaction that allowed the
Company to offer a variety of both domestic and international enhanced
telecommunications and long distance services, including prepaid phone calling
cards. On October 5, 1996, the Company acquired Worldlink Communications, Inc.
("Worldlink"), a provider of prepaid long-distance calling cards in a stock
transaction. All of these transactions were accounted for as purchases.
F-8
<PAGE>
On June 1, 1998, the Company acquired Galatel Inc. ("Galatel"), a
distributor of prepaid calling cards primarily to the Hispanic community, in a
cash and stock transaction. On July 30, 1998, the Company acquired Pointe
Communications Corporation ("Pointe"), a Delaware Corporation, in a cash and
warrant transaction. Pointe did not have revenue from operations prior to its
acquisition. On August 31, 1998, the Company's stockholders approved an
amendment to the Company's Articles of Incorporation to effect a change in the
Company's name from Charter Communications International, Inc. to Pointe
Communications Corporation. On August 12, 1998, the Company acquired
International Digital Telecommunications Systems, Inc. ("IDTS"), in a cash and
stock transaction. IDTS is a facilities based long distance carrier of voice,
data and other types of telecommunications in the Miami, Florida market. On
October 1, 1998, the Company acquired Rent-A-Line Telephone Company, LLC, in a
stock rights transaction. Rent-A-Line is a reseller of prepaid local telephone
service. All of these transactions were accounted for as purchases (See Note
3).
Some of the telecommunication services offered by Pointe require licensing
by United States federal and state agencies and the foreign countries wherein
services are offered. Pointe has formed wholly owned or majority owned foreign
corporations. Pointe maintains financial control of all subsidiaries. The
Company has been licensed by the United States Federal Communication Commission
as an International facilities based carrier. Pointe has selected the Mexican
Solidaridad system as its primary satellite carrier. A variety of U.S. carriers
are used to provide domestic long-distance services. The Company is licensed to
provide enhanced communications services in Panama, Mexico, Honduras, Venezuela,
El Salvador, Nicaragua, and Costa Rica. Generally, licensing of enhanced
services in the United States is not required. As of December 31, 1998, the
Company was operating in the United States, Panama, Venezuela, Costa Rica,
Mexico, El Salvador and Nicaragua.
The Company is seeking international telecommunication licenses in various
foreign countries. The Company faces competition for such licenses from major
international telecommunications entities as well as from local competitors in
each country. If a communications license is obtained, the Company's
international telecommunications operations will face competition from existing
government owned or monopolistic telephone service companies and from other
operators who receive licenses. The Company may also face significant potential
competition from other communication technologies that are being or may be
developed or perfected in the future. Some of the Company's competitors have
substantially greater financial, marketing, and technical resources than does
the Company. Accordingly, there can be no assurance that the Company will be
able to obtain any additional licenses or that its international
telecommunications operations will be able to compete effectively.
Operations prior to 1996 consisted primarily of raising capital, obtaining
financing, locating and acquiring equipment, obtaining customers and suppliers,
installing and testing equipment, and administrative activities. Since the
Company has only recently made the transition to an operating company, the
Company's ability to manage its growth and expansion will require it to
implement and continually expand its operational and financial systems, recruit
additional employees, and train and manage both current and new employees.
Growth may place a significant strain on the Company's operational resources and
systems, and failure to effectively manage this projected growth would have a
material adverse effect on the Company's business.
F-9
<PAGE>
The Company, which has never operated at a profit, has experienced
operating losses since its inception as a result of efforts to build its
customer base and develop its operations. The Company estimates that its cash
and financing needs for its current business through 1999 will be met by the
cash on hand following the bridge loans secured during the last quarter of 1998
and first quarter of 1999, the $30 million private placement offering of its
preferred stock expected to close in April 1999, vendor sponsored credit
facilities set in place during the first quarter of 1999 and cash flows from
operations. However, any increases in the Company's growth rate, shortfalls in
anticipated revenues, increases in anticipated expenses, or significant
acquisition or expansio opportunities could have a material adverse effect on
the Company's liquidity and capital resources and would require the Company to
raise additional capital from public or private equity or debt sources in order
to finance operating losses, anticipated growth, and contemplated capital
expenditures and expansions. The Company has significant expansion plans which
it intends to fund with funds raised subsequent to year end, including the $30
million private placement of the Company's preferred stock for which letters
of intent have been received from investors; however, if there is any delay in
the anticipated closing of the preferred stock private placement or any
shortfall the Company will not engage in such expansion until adequate capital
sources have been arranged. Accordingly, the Company may need additional
future private placements and/or public offerings of debt or equity securities
to fund such plans. If such sources of financing are insufficient or
unavailable, the Company will be required to modify its growth and operating
plans or scale back operations 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 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.
The Company expects to continue to focus on developing and expanding its
enhanced telecommunication services offerings, while continuing to expand its
current operation market penetration. Accordingly, the Company expects its
capital expenditures and cost of revenues and depreciation and amortization
expenses will continue to increase significantly, all of which could have a
negative impact on short-term operating results. In addition, the Company may
change its strategy to respond to a changing competitive environment. There can
be no assurance that growth in the Company's revenue or market penetration will
continue, that its expansion efforts will be profitable, or that the Company
will be able to achieve or sustain profitability or positive cash flow. Further,
the Company may require substantial financing to accomplish any significant
acquisition or merger transaction and for working capital to operate its current
and proposed expanded operations until profitability is achieved, if ever.
While the Company currently expects to meet its 1999 operating cash flow and
capital expenditure requirements through cash on hand after the various first
and second quarter 1999 financing activities and vendor financing and internally
generated funds, there can be no assurance that this will be achieved. The
availability of such financing on terms acceptable to the Company is not
assured. Accordingly, there can be no assurance that the Company's planned
expansion of its operations will be successful.
F-10
<PAGE>
2. SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements are prepared on the
accrual basis of accounting and include the accounts of the Company and all of
its majority-owned subsidiaries. All significant intercompany balances have been
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
SOURCE OF SUPPLIES
The Company relies on local and long distance telephone companies to
provide certain communications services. Although management feels alternative
telecommunication facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results. During
December 1996, the Company's long-distance provider discontinued service in a
dispute over payment of invoices resulting in the Company's prepaid calling card
platform not being accessible for a period of approximately ten days.
Subsequently, alternative long distance providers were found, but any such
recurrence of this situation could have a material adverse effect on the
Company's operating results.
PRESENTATION
Certain prior year amounts have been reclassified to conform with the
current year presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits, and
short-term investments with original maturities of three months or less. The
carrying value of the cash and cash equivalents approximates fair market value
at December 31, 1998 and 1997.
RESTRICTED CASH
The Company's restricted cash represents deposits on hand with a bank as
security for letters of credit.
F-11
<PAGE>
CONCENTRATION OF RISK
A portion of the Company's assets and operations are located in various
South and Central American countries. The Company's business cannot operate
unless the governments of these countries provide licenses, privileges or other
regulatory clearances. No such assurance can be given that such rights, once
granted, could not be revoked without due cause.
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to customers for services and the ability to
terminate access on delinquent accounts. The concentration of credit risk is
mitigated by the large number of customers comprising the customer base;
however, one significant customer comprises approximately 17% of the total
receivable balance. The carrying amount of the Company's receivables
approximates their fair value.
INVENTORIES
Inventories consist primarily of prepaid calling cards. All inventory is
recorded as finished goods and is available for sale. Inventories are
stated at the lower of cost or market. Cost is determined on the first-in,
first-out method.
PROPERTY AND DEPRECIATION
Property and equipment are recorded at cost, including certain engineering
and internal software development costs. Engineering costs totaled $877,469
with $665,909 allocated to Machinery and Equipment and $211,560 allocated to
Other Property and Equipment. The engineering costs incurred represent salaries
and related taxes and benefits paid to engineers to design and install the
Company's network infrastructure, as well as building improvements necessary to
allow for equipment installations. Internal software development costs incurred
totaled $334,243. Software costs represent salaries and related taxes and
benefits paid to employees during the application development stage for software
used internally. The property and equipment acquired in conjunction with the
acquisitions was recorded on the Company's books at net book value, which
approximated fair market value at the dates of acquisition. The Company
records depreciation using the straight-line method over the estimated useful
lives of the assets, which are:
Classification Estimated Useful Lives
Equipment and machinery 5-10 years
Earth station facility 10 years
Software 5-7 years
Furniture and fixtures 5-7 years
Other property 3-10 years
Leasehold improvements are amortized over the shorter of the useful life of
the improvement or the life of the lease. The Company's policy is to remove the
cost and accumulated depreciation of retirements from the accounts and recognize
the related gain or loss upon the disposition of assets. Such gains and losses
were not material for any period presented. Property and equipment recorded
under capital and financing leases are included with the Company's owned assets.
Amortization of assets recorded under capital leases is included in depreciation
expense.
F-12
<PAGE>
INTANGIBLES
In conjunction with its acquisitions in 1998 (see Note 3), the Company
recorded intangible assets of approximately $1,382,000 due to the purchase
prices exceeding the values of the tangible net assets acquired. After
identifying the tangible assets and liabilities, the Company allocated the
excess to identifiable intangible assets and the remainder to goodwill.
Allocation of the purchase price among tangible and intangible assets is
performed based upon information available at the time of acquisition and is
subject to adjustment for up to one year after acquisition in accordance with
Accounting Principles Board ("APB") Opinion No. 16. Amortization of these costs
is included in depreciation and amortization in the accompanying statements
of operations. The following table summarizes the intangible assets' respective
amortization periods:
Category Amortization Period
Acquired Customer Base 3-10 years
Other Intangibles 3-10 years
Goodwill 3-30 years
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically reviews the values assigned to long-lived assets,
including property and equipment and intangibles, to determine if any
impairments have occurred in accordance with SFAS 121. If events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable, the future cash flows expected to result from the use of the asset
and its eventual disposition are estimated. Future cash flows are the future
cash inflows expected to be generated by an asset less the future cash outflows
expected to be necessary to obtain those inflows. If the sum of the expected
future cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, an impairment loss is recognized in accordance
with this Statement of Financial Accounting Standards No. 121.
An impairment loss is measured as the amount by which the carrying amount
of the asset exceeds the fair value of the asset. The fair value of an asset is
the amount at which the asset could be bought or sold in a current transaction
between willing parties, that is, other than in a forced or liquidation sale.
The fair value of an asset is determined using various techniques including, but
not limited to, the present value of estimated expected future cash flows and
fundamental analysis. Management believes that the long-lived assets in the
accompanying balance sheets are appropriately valued.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). The Company adopted the disclosure option of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") (Note 8), for all options granted subsequent to
January 1, 1995. SFAS 123 defines a fair value based method of accounting for an
employee stock option or similar equity instrument and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. SFAS 123 requires that companies which do not choose to account for
stock-based compensation as prescribed by this statement shall disclose the pro
forma effects on earnings and earnings per share as if SFAS 123 had been
adopted. Additionally, certain other disclosures are required with respect to
stock compensation and the assumptions used to determine the pro forma effects
of SFAS 123.
REVENUE RECOGNITION
Revenues from telecommunications, Internet access services, and network
computer sales and services are generally recognized when the services are
provided. Invoices rendered and payments received for telecommunications
services and Internet access in advance of the period when revenues are earned
are recorded as unearned revenues and are recognized ratably over the period the
services are provided or the term of the Internet subscription agreements, which
are generally 3 to 12 months. Sales of prepaid phone calling cards are recorded
as unearned revenues and revenue is recognized as minutes are used or when the
cards expire.
F-13
<PAGE>
ADVERTISING COSTS
The Company expenses all advertising costs as incurred.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
exchange rates in effect at the balance sheet date, except that fixed assets are
translated at exchange rates in effect when these assets are acquired. Revenues
and expenses of foreign operations are translated at average monthly exchange
rates prevailing during the year, except that depreciation and amortization
charges are translated at the exchange rates in effect when the related assets
are acquired.
The national currency of Panama is the U.S. dollar. The currencies of
Venezuela and Mexico are considered hyper-inflationary; therefore, the U.S.
dollar is the functional currency. Accordingly, no foreign currency translation
is required upon the consolidation of the Company's Panamanian, Venezuelan or
Mexican operations. The effects of foreign currency translation on the
Company's El Salvadoran, Nicaraguan and Costa Rican operations were not
material.
NET LOSS PER SHARE
Effective with the fourth quarter of 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." This standard
requires the computation of basic earnings per share using only the weighted
average common shares outstanding, and diluted earnings per share, using the
weighted average common shares outstanding, adjusted for potentially dilutive
instruments using either the if converted or treasury stock method as
appropriate if dilutive. This statement required retroactive restatement of all
prior period earnings per share data presented. The adoption of this statement
had no effect on the Company, as for all periods, the effect of any dilutive
instruments was antidilutive. Accordingly, for all periods presented basic and
diluted earnings per share are the same.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Company was subject to the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130") and SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information". SFAS 130 and 131 had no impact on the Company's
financial statements as it has no comprehensive income elements other than
distributions to owners and returns on equity and it operates in one segment
offering a variety of products. The Company will continue to review these
statements over time to determine if any additional disclosures are necessary
based on evolving circumstances.
F-14
<PAGE>
3. BUSINESS COMBINATIONS AND ACQUISITIONS
During 1998, the Company acquired 100% of the outstanding capital stock in
four companies for cash, stock and warrants/stock rights. All of these
transactions were accounted for as purchases. On June 1, 1998, the Company
acquired Galatel Inc. ("Galatel"), a distributor of prepaid calling cards, for
up to $200,000 and 300,000 shares of common stock, of which $162,500 and 206,250
shares had been earned as of year end. The shares have been valued at a
weighted average price of $0.90 per share, the estimated fair value at the date
issuance. On July 30, 1998, the Company acquired Pointe Communications
Corporation ("Pointe"), a Delaware Corporation, for $168,000 and 590,000
warrants to purchase common stock at $1.50 for five years. The warrants have
been valued at $0.49 per warrant. On August 12, 1998, the Company acquired
International Digital Telecommunications Systems, Inc. ("IDTS"), for $150,000
and 50,000 shares of stock, which were retained by the Company in order to
secure representations and warranties and covenants of IDTS and IDTS
shareholders and will be subject to offset against claims against IDTS. IDTS is
a facilities based long distance carrier of voice, data and other types of
telecommunications in the Miami, Florida market. On October 1, 1998, the
Company acquired Rent-A-Line Telephone Company, LLC, in a stock transaction for
rights to purchase 625,000 shares at prices that range from $0.01 to $0.63 until
December 31, 2000. The rights have been valued at a weighted average price of
$0.44 per share. Rent-A-Line is a reseller of prepaid local telephone service.
All of these transactions were accounted for as purchases and were not
considered to be significant business combinations. Accordingly, no pro forma
information is presented.
4. LONG-TERM OBLIGATIONS
Obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
18% Convertible Debentures due October 1, 2002 $ 1,180,000 $ 1,180,000
Financing Lease Obligation, net of discount
of $306,672 and $429,308 as of December 31, 1998
and 1997, respectively 2,230,029 1,739,722
12% Senior Subordinated Notes due December
2000, net of discount of $39,722 and $69,722
as of December 31, 1998 and 1997, respectively 690,278 660,278
Notes Payable and other 2,458,584 886,111
Lines of Credit:
Due November, 1998 400,000 485,000
Due January, 1999 600,000 0
Loans from stockholders 670,000 520,000
Bridge Loans due April, 1999 net of discount of
$104,500 at December 31, 1998 1,895,500 0
Capital Lease Obligations 6,171,720 0
- ----------------------------------------------------------------------------------------------------------
16,296,111 5,471,111
Less current portion 6,671,360 1,522,250
- ----------------------------------------------------------------------------------------------------------
Long-term obligations $ 9,624,751 $ 3,948,861
------------- -------------
</TABLE>
F-15
<PAGE>
During the last quarter of 1998, the Company entered into two promissory
notes totaling $2,000,000, which earn interest at 10% and are due in April 1999.
In conjunction with these notes, the Company issued 760,000 warrants to purchase
common stock at $1.00 per share for three years. The fair market value of these
warrants was estimated to be $129,200, which has been recorded as additional
paid in capital and a discount on the notes to be amortized over the term of the
notes. These notes are secured by a blanket interest in all personal property in
which the Company has an interest as well as shares of Company stock owned by
officers of the Company. On March 8, 1999, one of the notes for $1,000,000 was
refinanced with a $5,000,000 promissory note (see Note 14). The Company
undertook these short-term obligations in order to fund operations and network
requirements in advance of a private placement of $30,000,000 of the Company's
convertible preferred stock which is expected to close early in the second
quarter of 1999.
During 1998, the Company entered into a Receivable Purchase Facility
Agreement, which enables it to sell its receivables to the purchaser, up to the
maximum facility amount of $600,000. Receivables are sold at 60% of book value
with the additional 40% representing collateral until the receivables are paid,
repurchased or substituted with other receivables, at which time the 40% is
returned to the Company. Interest accrues on the purchase amount at a rate of
prime (8.25% at December 31, 1998) plus 2%, per annum, until the receivables are
paid, repurchased or substituted. As of the date of this report, the Company
has received $600,000 for receivables sold under this facility.
During 1998, the Company issued a $750,000 Promissory Note to a member of
the Company's Board of Directors (Note 12), which is non-interest bearing and
matures June 1, 1999. In conjunction with the promissory note, the Company
issued 545,455 warrants to purchase common stock at $1.375 for a period of one
year from issuance. The fair market value of these warrants was estimated to be
$114,069, which has been recorded as additional paid in capital and a discount
on the note to be amortized over the term of the note. This note is unsecured.
Also during 1998, the Company reached a settlement with Sprint over its
disputed trade payable. The settlement agreement obligated the Company to pay
Sprint $1,000,000, $100,000 of which was paid at the time of settlement. The
remaining $900,000 was converted into a non-interest bearing promissory note,
under which the Company is obligated to pay $50,000 per month for 18 months. At
December 31, 1998, the remaining $700,000 liability was recorded as follows:
$50,000 in accounts payable, $600,000 in the current portion of notes payable
and $50,000 in the long-term portion of notes payable.
F-16
<PAGE>
During 1997, the Company entered into a $3,000,000 sale-leaseback facility
with regard to certain of its assets included in property and equipment.
Through December 31, 1997, $2,222,000 of the facility had been drawn down.
During 1998, the remaining $778,000 was used. For accounting purposes, the
leases are being accounted for as financing type leases as they do not meet the
criteria for sale. The lease term is five years commencing December 1, 1997,
February 1, 1998 and December 1, 1998, respectively. Lease payments are due
monthly, in arrears. The lease obligations are stated net of discount, which is
being amortized over the term of the lease. The leases include options for the
Company to repurchase the equipment at the end of the lease term for $100. In
conjunction with the lease, a security agreement was signed granting the lessor
a security interest in all current and future purchases (for the life of the
lease) of plant and equipment, receivables and inventory. Also, in conjunction
with the lease, 450,000 shares of common stock were granted to the lessor and
its agent. The Company issued a guarantee with regard to these shares stating
that it would reimburse the holder of these shares for the difference between
$2.33 and the average closing price of the Company's stock for the twenty
trading days prior to June 30, 1998. The average closing price for this period
was below $2.33 resulting in an approximate $400,000 liability to the Company,
which was converted into an unsecured promissory note due June 30, 1999 earning
interest at 14%. In conjunction with the promissory note, the holders received
120,000 warrants to purchase common stock at $0.78 for three years. The fair
market value of these warrants was estimated to be $25,200, which has been
recorded as additional paid in capital and a discount on the notes to be
amortized over the term of the notes.
Also, during 1998, the Company entered into five capital leases for a total
value of approximately $6.2 million. The leases range from three to seven years
and are payable monthly, in arrears. The Company holds options to purchase the
equipment at the end of the lease period for $1.00 with respect to $3.0 million,
10% with respect to $1.0 million, 15% with respect to $0.7 million and fair
market value with respect to $1.5 million.
During 1997, the Company issued, in a private offering, $1,180,000
principal amount 18% Convertible Subordinated Debentures due October 1, 2002.
The Debentures are convertible at any time into shares of common stock at a
price of $1.20 per share. Interest is payable quarterly at a rate of 18% per
annum, in arrears. The debentures were non-callable for a period of one year
from issuance and are not secured by any assets of the Company or guaranty.
During 1995 and 1996, the Company issued, in a private offering, $2,845,000
12% Senior Subordinated Notes due December 31, 2000 with attached warrants which
grant the purchasers of the Notes the right to buy 2,244,000 shares of the
Company's common stock at $2.25 in 1999 and $2.50 in 2000. As of December 31,
1998, 758,400 of these warrants remained outstanding. Interest is payable
quarterly at the rate of 12% per annum, in arrears. The fair market value of
the 2,244,000 warrants issued in conjunction with the notes was estimated by the
Company to be $345,000 and was recorded as additional paid-in capital and a
discount on the notes. The notes are stated net of discount, which is being
amortized over the term of the notes. Amortization of this discount is included
in the accompanying financial statements as interest expense. The notes are not
secured by any assets of the Company or guaranty. During 1997, principal
amounts of $2,115,000 of the Senior Subordinated Notes were converted to common
stock in the January 1997 private placement.
The Company has $670,000 in loans from stockholders outstanding at December
31, 1998. Interest rates on the loans range from 10% - 12%. During 1998, the
Company issued a promissory note to Peachtree Capital Corporation, a company
affiliated with the Chairman of the Board of Directors, and another member of
the Company's Board of Directors for $150,000 payable on demand (Note 12). The
note was repaid on March 15, 1999. The Company had stockholder loans of
$520,000 outstanding at December 31, 1997, all of which remained outstanding at
December 31, 1998.
F-17
<PAGE>
The Company has established one line of credit with a commercial bank that
provides for borrowings up to $500,000. The revolving credit line is secured by
marketable securities of an affiliate of a shareholder of the Company and
guaranteed by that stockholder. Interest is payable quarterly at the bank's
prime rate (8.25% at December 31, 1998) plus 1.5%. The line of credit matured in
November 1998, all interest is current and the Company is currently in
negotiation with the lender to extend the payment term of the line.
At December 31, 1998, the Company had other outstanding term notes payable
with varying terms and conditions in the total amount of $755,407. The interest
rates on these notes range from 6.5% to prime 9.7%, with maturity dates between
March 1999 and November 2007. A portion of these notes is secured by the
guaranties of shareholders and property of one of the Company's subsidiaries.
The portion of the total notes payable, including other notes discussed above,
that will become due within the next twelve months amounted to $3,728,062 at
December 31, 1998.
The carrying value of the Notes and Lines of Credit approximated
market value at December 31, 1998.
Scheduled maturities of long-term obligations including capital and
financing leases are as follows for years ended December 31:
<TABLE>
<CAPTION>
Notes & Lease
Debt Obligations Total
<S> <C> <C> <C>
1999 5,678,864 2,115,753 7,794,617
2000 1,011,260 2,970,228 3,981,488
2001 43,489 3,592,823 3,636,312
2002 1,183,317 1,470,031 2,653,348
2003 3,646 660,012 663,658
Thereafter 353,425 - 353,425
------------ ----------- -----------
Sub-total 8,274,001 10,808,847 19,082,848
Interest Portion - (2,111,277) (2,111,277)
Discounts (368,788) (306,672) (675,460)
------------ ----------- -----------
Total 7,905,213 8,390,898 16,296,111
</TABLE>
5. OTHER INCOME
Since mid-1996, a subsidiary has been negotiating with Sprint
Communications L.P. ("Sprint") to resolve a dispute involving Sprint's past
services to the subsidiary. The Company had accrued the entire amount which
Sprint claimed. During 1997, OCI reached an agreement in principal with Sprint
to pay $100,000 down and $50,000 per month for 18 months for a total of
$1,000,000 with release of all claims regarding the remaining balance. As of
December 31, 1997, the disputed balance was recorded as a deferred settlement
gain on the Company's balance sheet. A definitive settlement agreement was
signed during the second quarter of 1998, at which time payments commenced and
the Company recognized the deferred settlement gain of $2,757,132 in other
income and cost of services. This is offset by approximately $232,000 for legal
fees and settlement of a lawsuit with the Company's former President over
certain agreements, including an Executive Employment Agreement.
F-18
<PAGE>
6. MINORITY INTEREST
The Company's subsidiary, Telecommute Solutions, Inc. ("TCS"), completed a
private placement of 2,000 shares of its $1.00 par value Series A Preferred
Stock. The Preferred Stock is convertible at any time on or prior to the third
anniversary date of issuance into 2,643 shares of TCS's common stock or 666,667
shares of Company common stock. At the same time, the purchaser also received an
option to purchase 2,000 shares of Series B Preferred Stock at any time prior to
August 7, 1999. The Series B shares are convertible at any time until August 7,
2001 into 1,057 shares of TCS or 500,000 shares of Company common stock. The
Preferred Stock is non-redeemable, non-voting and does not pay dividends. Total
proceeds received in the private placement were $2,000,000, which is recorded
net of issuance costs of $18,041, as Minority Interest in the accompanying
balance sheet.
7. STOCKHOLDERS' EQUITY
The Articles of Incorporation provide for the issuance of 100,000,000
shares of $0.00001 par value Common Stock and 100,000 shares of $0.01 par value
preferred stock. All of the preferred stock has been designated as Series A
Convertible Preferred Stock by the Board of Directors. There are no shares of
Series A outstanding during the periods presented. The $0.00001 Common Stock
authorized for issuance represents an increase from 45,000,000 shares authorized
as of December 31, 1997. The increase was approved by the Company's
shareholders at a meeting on August 31, 1998.
COMMON STOCK
During 1998, the Company issued shares of common stock through various
private placement offerings as follows: 9,000,000 shares at $0.50 per share,
850,000 shares at $1.00 per share and 500,000 shares at $1.30 per share for
gross proceeds totaling $6,000,000. Additionally, during the year the Company
issued 500,000 shares as commission for one of the private placements, 206,250
shares in conjunction with a merger, 31,063 shares for warrant exercises at
$0.70 per share and 117,750 shares for option exercises at $1.00 per share. In
conjunction with certain of the private placements, warrants to purchase
additional shares of common stock were granted to the purchasers. The warrants
granted the holders the right to purchase 500,000 shares at $1.25 for a period
of two years, 150,000 shares at $1.50 for three years and 600,000 shares for
$3.00 for a period of three years.
During 1997, the Company issued 5,911,664 shares of common stock at $1 per
share, or $5,911,664 gross proceeds; 2,115,000 shares of common stock for
conversion of senior subordinated debt; 937,865 shares of common stock for
conversion of shareholder loans; 319,468 shares of common stock for conversion
of other accrued liabilities; and 400,000 shares of common stock to an agent in
conjunction with securing licenses to operate in two Latin American countries.
All of the preceding conversions of stock for liabilities were executed at a
rate of $1 of the related liability for $1 of common stock. Also, during 1997,
the Company issued 2,000,000 shares of common stock for conversion of the
$1,000,000 par value subordinated debenture issued to offshore investors at a
rate of $.50 per share. In conjunction with the issuance of these shares,
holders were granted 2,000,000 warrants to purchase the Company's common stock
at $1.50 per share. In conjunction with the placement of the subordinated
debenture, the Company issued 200,000 shares to the placement agent in an
offshore market. In conjunction with the January 1997 private placement,
certain major stockholders returned 2,500,000 shares of common stock to the
Company for no consideration and such shares were retired.
F-19
<PAGE>
COMMON STOCK WARRANTS
At December 31, 1998, the Company had outstanding warrants that gave the
holders the right to purchase a total of 7,352,023 shares of common stock at
prices ranging from $0.70 to $4.00 per share as summarized in the table below.
<TABLE>
<CAPTION>
Number of Exercise Remaining Weighted
Shares Price Average Life
<S> <C> <C>
1,831,568 $ 0.70 1.1 years
2,920,000 $ 1.00 1.9 years
500,000 $ 1.25 1.5 years
545,454 $ 1.37 1.4 years
590,000 $ 1.50 5.0 years
150,000 $ 2.50 2.7 years
795,000 $ 3.00 2.4 years
20,000 $ 4.00 2.5 years
</TABLE>
The 2,000,000 warrants at $1.00 per share were issued in conjunction
with the common stock issued to offshore investors pursuant to the conversion of
the convertible debenture. The Company retains the right to require exercise of
these warrants since the criteria that the stock price trade above $1.75 for at
least 20 of 30 trading days was met in the third quarter of 1997.
8. STOCK OPTION PLANS
1995 OPTIONS
During 1995, the Company granted 1,250,000 stock options to certain key
employees and directors. The director shares were subsequently changed to be
issued under the Non-employee Director Stock Option Plan ("NEDSOP"). The
exercise price of the stock options granted to the employees and directors is
$0.70 per share, the estimated fair market value of the Company's common stock
at the date of grant. Options generally vest ratably over four years and expire
five years after becoming fully vested. As of December 31, 1998, 250,000
non-NEDSOP issued in 1995 were still outstanding, of which, 190,000 were
exercisable.
F-20
<PAGE>
STOCK OPTION PLANS
The Company has established three stock option plans: Long-Term Stock
Option Plan ("LTSOP"), the Incentive Stock Option Plan ("ISOP"), and the NEDSOP
(collectively, the "Plans"); 3.0 million, 5.0 million and 2.0 million shares of
Common Stock are authorized for issuance in each plan, respectively. The shares
authorized for issuance were increased to their current amounts from 500,000
each at December 31, 1997 by shareholder approval at the special meeting held
August 31, 1998. Options are exercisable at the fair market value of the Common
Stock (as determined by the Board of Directors) on the date of grant. Options
generally vest ratably over four years and expire seven years after date of
grant. The plans contain various provisions pertaining to accelerated vesting
in the event of significant corporate changes. The following table summarizes
the status of the Plans as of December 31, 1998:
<TABLE>
<CAPTION>
LTSOP ISOP NEDSOP
<S> <C> <C> <C>
Balance at December 31, 1996 260,002 392,000 400,000
Granted 464,000 1,380,964 200,000
Forfeited (120,002) (376,500) 0
Exercised 0 0 0
Balance at December 31, 1997 604,000 1,396,464 600,000
Granted 0 755,000 0
Forfeited 0 (603,250) 0
Exercised (114,000) (3,750) 0
Balance at December 31, 1998 490,000 1,544,464 600,000
Exercisable 446,668 812,048 325,000
</TABLE>
In addition to the amounts under the above plans, the Company had 80,000
options outstanding as of December 31, 1998 at a price of $6.00 per share, which
vest ratably over three years.
The exercise price of the stock options granted to the employees is equal
to the estimated fair market value of the Company's common stock at the date of
grant. During the first quarter of 1998, the Company re-established the
exercise price of all existing employees options granted under the ISOP, with a
strike price greater than $1.00, at $1.00 per share, which was the fair market
value on the date of re-pricing.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
The Company accounts for its stock-based compensation related to the Plans
under APB 25; accordingly, no compensation expense has been recognized, as all
options have been granted with an exercise price equal to the fair value of the
Company's stock on the date of grant. For SFAS 123 pro forma purposes, the fair
value of each option grant has been estimated as of the date of grant using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Risk-free interest rate 5.00% 5.70%
Expected dividend yield 0 0
Expected lives 5.0 years 5.0 years
Expected volatility 80% 64%
</TABLE>
F-21
<PAGE>
Using these assumptions, the fair value of the stock options granted in
1998 and 1997 is $685,023 and $1,274,520, respectively, which would be amortized
as compensation expense over the vesting period of the options. The 1997 fair
value of stock options granted was calculated using the revised price of $1 per
share. Had compensation cost been determined consistent with the provisions of
SFAS 123, the Company's net loss and pro forma net loss per share for 1998 and
1997 would have been as follows :
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net loss:
As reported ($9,147,482) ($11,975,858)
Pro forma ($9,691,957) ($12,421,433)
Net loss per share:
As reported ($0.22) ($0.39)
Pro forma ($0.23) ($0.40)
</TABLE>
There were no issues prior to January 1, 1995 and the resulting pro forma
compensation cost may not be representative of that expected in future years.
A summary of the status of the Company's Stock Plans at December 31, 1997
and 1998 and changes during the years ended December 31, 1997 and 1998 is
presented in the following table:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
----------- ---------------
<S> <C> <C>
Outstanding at December 31, 1996 2,432,002 $ 1.27
Granted 2,049,964 1.06
Forfeited (1,551,502) 1.05
Exercised 0 0.00
Outstanding at December 31, 1997 2,930,464 $ 1.22
Granted 755,000 1.26
Forfeited (603,250) 1.06
Exercised (117,750) 1.00
Outstanding at December 31, 1998 2,964,464 $ 1.27
</TABLE>
The following table summarizes, as of December 31, 1998, the number of
options outstanding, the exercise price range, weighted average exercise price,
and remaining contractual lives by year of grant:
F-22
<PAGE>
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise Weighted Remaining
Grant Shares Price Range Average Price Contractual Life
<C> <S> <C> <C> <C>
1998 687,000 $ 1.00-$2.00 $ 1.28 6.0 years
1997 1,024,000 $ 1.00-$1.25 $ 1.05 5.2 years
1996 703,464 $ 1.00-$7.00 $ 2.03 3.9 years
1995 550,000 $ 0.70 $ 0.70 2.4 years
</TABLE>
Total stock options exercisable at December 31, 1998 were 1,773,716 at a
weighted average exercise price of $1.20.
TELECOMMUTE SOLUTIONS STOCK OPTION PLAN
During 1998, the Company's subsidiary Telecommute Solutions established a
stock option plan, the Telecommute Solutions Stock Option Plan ("TCS Plan").
The number of shares authorized for issuance under the TCS Plan is 600,000.
Options are exercisable at the fair market value of the Common Stock (as
determined by the Board of Directors of Telecommute Solutions) on the date of
grant. Options generally vest ratably over three years and expire seven years
after date of grant. The plans contain various provisions pertaining to
accelerated vesting in the event of significant corporate changes. During 1998,
options to purchase 547,900 were granted at an exercise price of $1.51 per
share. As of December 31, 1998, all options granted were outstanding and none
were exercisable. Using the assumptions below, the fair value of the stock
options granted in 1998 was $627,466, which would be amortized as compensation
expense over the vesting period of the options; thereby, increasing the
historical net loss by approximately $209,000.
<TABLE>
<CAPTION>
. 1998
---------
<S> <C>
Risk-free interest rate 5.00%
Expected dividend yield 0
Expected lives 7.0 years
Expected volatility 80%
</TABLE>
9. NONRECURRING CHARGE
In March 1996, the Company purchased PDS (Note 3), which engaged in the
business of providing computer network integration. During 1997, in an effort
to narrow the scope of the Company's product offering and to focus resources on
its core competencies, the Company decided to exit the computer network
integration business. As a result, the assets related to PDS, including
approximately $1,889,000 of goodwill and other intangibles, and $250,000 of
hardware and software inventory, were written off and approximately $80,000 in
severance and other related costs were accrued. The associated charges to
operations are included in the nonrecurring charge to operations.
F-23
<PAGE>
Also during 1997, the Company was party to arbitration proceedings related
to an employee terminated subject to an employment contract. The arbitrator
ruled in favor of the employee and awarded approximately $300,000 plus 80,000
options to purchase the Company's stock at a price of $6.00 per share. The
liability is included in accrued liabilities at December 31, 1997, and the
associated charge, including related legal fees, is included in the nonrecurring
charge to operations.
10. INCOME TAXES
The following is a summary of the items which caused recorded income
taxes to differ from taxes computed using the statutory federal income tax rate:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1998 1997
<S> <C> <C>
Statutory federal tax benefit (34)% (34)%
Increase (decrease) in tax benefit
resulting from --
State taxes, net of Federal benefit (3) (3)
Nonrecurring charges 0 6
Goodwill amortization 7 5
Other 1 1
Valuation Allowance 29 25
--- ---
Actual income tax benefit 0% 0%
--- ---
--- ---
</TABLE>
The sources of differences between the financial accounting and tax
bases of assets and liabilities which gave rise to the net deferred tax asset
are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------------------------
<S> <C> <C>
Deferred assets:
Net operating loss carryforwards $8,166,000 $4,662,000
Unearned Revenue 964,000 624,000
Accrued expenses 385,000 1,244,000
Accounts Receivable 333,000 422,000
Other 97,000 106,000
------------ -----------
9,945,000 7,058,000
------------ -----------
Deferred liabilities
Depreciation (405,000) (236,000)
------------ -----------
Net Deferred Tax Asset Before Valuation
Allowance 9,540,000 6,822,000
Valuation Allowance (9,540,000) (6,822,000)
------------ -----------
Net Deferred Tax Asset $ 0 $ 0
============ ===========
</TABLE>
F-24
<PAGE>
The Tax Reform Act of 1986 provided for certain limitations on the
utilization of net operating loss carryforwards ("NOLs") if certain events
occur, such as a 50% change in ownership. The Company has had changes in
ownership and accordingly, the Company's ability to utilize the carryforwards is
limited. Also, the NOLs used to affect any taxes calculated as alternative
minimum tax could be significantly less than the regular tax NOLs. The NOLs
will be utilized to offset taxable income generated in future years, subject to
the applicable limitations and their expiration between 2006 and 2018. Since it
currently cannot be determined that it is not more likely than not that the net
deferred tax assets resulting from the NOLs and other temporary items will be
realized, a valuation allowance for the full amount of the net deferred tax
asset has been provided in the accompanying consolidated financial statements.
11. COMMITMENTS AND CONTINGENCIES
LEASES
During 1998, the Company entered into approximately $6.2 million in capital
leases related to the acquisition of machinery and equipment, see Note 4 for a
discussion of the transactions as well as a table of future minimum lease
payments related to the leases. Lease expenses primarily relate to the lease of
office space and equipment and include leases with affiliates. Rents charged to
expense were approximately $832,000 and $680,000 for the years ended December
31, 1998 and 1997, respectively.
At December 31, 1998, future minimum lease payments under non-cancelable
operating leases with initial remaining terms of more than one year are as
follows for the years ended December 31:
1999 $1,155,653
2000 876,015
2001 463,791
2002 206,344
2003 & Thereafter 768,914
----------
Total $3,470,717
==========
During 1997, the Company entered into an agreement to sublease the office
space formerly utilized by Worldlink at a price equal to the scheduled lease
payments ($8,369 per month) exclusive of the escalation provisions of the
original lease. During 1998, the Company entered into an agreement to sublease a
portion of its office space in Atlanta for an amount equal to its current lease
payment ($6,021 per month).
F-25
<PAGE>
During 1998, the Company entered into approximately $6.2 million in capital
leases related to the acquisition of machinery and equipment, see Note 4 for a
discussion of the transactions as well as a table of future minimum lease
payments related to the leases.
LITIGATION
The Company is subject to litigation related to matters arising in the
normal course of business. Management is not aware of any asserted or pending
litigation or claims against the Company that would have a material adverse
effect on the results of operations or liquidity.
12. TRANSACTIONS WITH AFFILIATES
During 1998, the Company entered into various equity and debt private
placements with officers and directors. During the first quarter, the Chairman
of the Board of Directors and another Director, purchased 3,400,000 and 600,000
shares of stock for $1,700,000 and $300,000, respectively. During the second
quarter, the Company issued a promissory note to a Director for $750,000, which
is non-interest bearing and matures June 1, 1999. In conjunction with the
promissory note, the Company issued 545,455 warrants to purchase common stock at
$1.375 for a period of one year from issuance. During the third quarter, the
Company issued a promissory note to Peachtree Capital Corporation, a company
affiliated with the Chairman, and a Director, for $150,000 payable on demand.
The note was repaid on March 15, 1999. During the fourth quarter, the Company
issued a $1 million promissory note to Cordova Capital Partners LP - Enhanced
Appreciation, which is an entity affiliated with a Director. In conjunction
with the notes, the Company issued 380,000 warrants to purchase common stock at
$1.00 per share.
During 1998, the Chairman of the Company's Board of Directors and its Chief
Financial Officer pledged shares of their Company common stock as collateral for
the $2.0 million bridge loans entered into during the fourth quarter. Also
during the year, the Company provided loans to certain of its officers and key
employees in the amount of $215,337.
The Company had a consulting agreement with Charter Trading Corporation
("CTC"), an unaffiliated company whose president and principal stockholder is a
former director. The Company compensated CTC $100,000 per annum for consulting
services through December 31, 1997.
As discussed in Note 4, the Company's lines of credit and certain notes
payable have been guaranteed by a stockholder, the Chairman of the Company's
Board of Directors and its Chief Financial Officer. 100,000, 30,000, and 30,000
warrants to purchase shares of Common Stock at $1 per share have been granted to
this group and individuals, respectively.
During 1997, the Company entered into a five year operating lease of earth
station equipment located in Panama, Costa Rica and Nicaragua. There are two
lessors, one of which is a company whose principal shareholder is the Chairman
of the Company's Board of Directors, and the other is a director. The lease
obligations total approximately $70,000 per annum payable quarterly in arrears.
In conjunction with the lease, the Company issued 195,000 warrants, which grant
the holders the right to purchase shares of the Company's common stock at a
price of $3.00 per share. The Company has reflected the fair value of these
warrants (computed using the Black-Scholes model) in the accompanying financial
statements.
F-26
<PAGE>
Accounts payable-affiliate at December 31, 1998, represents payables to
the Company's President for the unpaid portion of the Pointe Communications
Corporation acquisition price.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table summarizes the Company's quarterly results of
operations for 1998 and 1997:
<TABLE>
<CAPTION>
1998 Quarters FIRST SECOND THIRD FOURTH
<S> <C> <C> <C> <C>
Revenues $4,098,866 $5,275,304 $ 9,008,987 $9,237,045
Operating Loss (2,061,633) (1,360,892) (1,521,831) (4,067,121)
Net Loss (2,322,700) 7,975 (1,835,418) (4,997,339)
Net Loss Per Share ($0.06) $ 0.00 ($0.04) ($0.11)
</TABLE>
<TABLE>
<CAPTION>
1997 Quarters FIRST SECOND THIRD FOURTH
<S> <C> <C> <C> <C>
Revenues $2,749,355 $3,321,055 $3,197,172 $3,683,840
Operating Loss (2,156,847) (1,778,036) (1,516,171) (5,802,095)
Net Loss (2,540,621) (1,857,555) (1,405,009) (6,172,673)
Net Loss Per Share ($0.09) ($0.06) ($0.04) ($0.18)
</TABLE>
F-27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of POINTE COMMUNICATIONS CORPORATION and
its subsidiaries as of and for the year ended December 31, 1998 included in this
Form 10-KSB and have issued our report thereon dated March 31, 1999. Our audit
was made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedule listed in the index is the responsibility of the
Company's management, and is presented for purposes of complying with the
Securities and Exchange Commission's rules, and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 31, 1999
F-28
<PAGE>
<TABLE>
<CAPTION>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- ------------------------------------ ---------- --------- ------------ ----------
Balance at Write-offs, Balance at
Beginning Net of End of
Classification of Period Additions Recoveries Period
- ------------------------------------ ---------- --------- ------------ ----------
<S> <C> <C> <C> <C>
For the Year Ended December 31, 1998
Allowance for Doubtful Accounts 650,000 883,462 (633,462) 900,000
Allowance for Obsolete Inventory 320,000 0 (13,000) 307,000
---------- --------- ------------ ----------
970,000 883,462 (646,462) 1,207,000
---------- --------- ------------ ----------
For the Year Ended December 31, 1997
Allowance for Doubtful Accounts 435,000 715,737 (507,737) 650,000
Allowance for Obsolete Inventory 70,000 250,000 0 320,000
---------- --------- ------------ ----------
505,000 965,737 (507,737) 970,000
---------- --------- ------------ ----------
</TABLE>
F-29
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in
this Form 10-KSB/A for the year ended December 31, 1998 and to the incorporation
by reference in the previously filed Registration Statements (Nos. 333-61061,
333-84927, and 333-61037) of our reports dated April 15, 1999.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
May 10 2000
