U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 30, 1999
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ___________ to _____________
Commission file number 0-20843
POINTE COMMUNICATIONS CORPORATION
(Exact Name of Small Business Issuer as Specified in Its Charter)
1325 Northmeadow Parkway
Roswell, Georgia 30076
(Address of Principal Executive Offices)
(770) 432-6800
(Issuer's Telephone Number, Including Area Code)
________________________________________________________
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
(770) 432-6800
(Issuer's Telephone Number, Including Area Code)
________________________________________________________
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of April 14, 1999: 51,694,189
Transitional Small Business Disclosure Format:
Yes No X
--- ---
This Form 10-QSB/A amends the Form 10-QSB filed with the Commission on
November 15, 1999, pursuant to the filing requirements under Rule 12b-15
promulgated under the Securities Exchange Act, as amended, for the purpose of
amending the Items disclosed in this filing. Pointe Communications Corp
has recorded adjustments to its previously reported interim results. The
adjustments affecting the quarterly and nine month periods ended September 30,
1999 relate to implied beneficial conversion features in the Class A Preferred
Stock on notes converible into Class B Preferred Stock. This Form 10-QSB/A
reflects the effects of these adjustments.
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
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POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1999
September 30, December 31,
1999 1998
--------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 31,204,888 $ 1,255,199
Restricted cash 720,028 185,000
Accounts receivable, net of allowance for
doubtful accounts of $1,038,074 and $900,000
at September 30, 1999 and December 31, 1998, respectively 4,679,614 3,686,153
Accounts receivable-- affiliate, net 371,204 215,337
Notes receivable 690,030 -
Inventory, net 1,453,075 652,187
Prepaid expenses and other 586,720 263,249
--------------- --------------
Total current assets 39,705,559 6,257,125
--------------- --------------
PROPERTY AND EQUIPMENT, at cost:
Equipment and machinery 20,490,456 14,168,428
Earth station facility 1,234,071 835,527
Software 2,171,713 1,732,700
Furniture and fixtures 930,974 578,698
Other 1,464,093 1,157,344
--------------- --------------
26,291,306 18,472,697
Accumulated depreciation and amortization (5,987,954) (3,984,392)
--------------- --------------
Property and equipment, net 20,303,352 14,488,305
--------------- --------------
OTHER ASSETS:
Goodwill, net of accumulated amortization
of $2,032,386 and $1,544,360,
at September 30, 1999 and December 31, 1998, respectively 17,798,578 17,709,865
Acquired customer bases, net of accumulated
amortization of $1,232,661 and $969,182
at September 30, 1999 and December 31, 1998, respectively 913,835 844,543
Other intangibles, net of accumulated
amortization of $1,590,981 and $1,184,062
at September 30, 1999 and December 31, 1998, respectively 1,453,496 1,848,762
Other 2,032,025 1,073,279
--------------- --------------
Total other assets 22,197,934 21,476,449
--------------- --------------
TOTAL ASSETS $ 82,206,845 $ 42,221,879
=============== ==============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Balance Sheets.
<PAGE>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1999
September 30, December 31,
1999 1998
--------------- --------------
(Unaudited)
CURRENT LIABILITIES:
Current portion of notes payable $ 5,487,130 $ 3,728,062
Current portion of lease obligations 2,319,650 1,273,298
Lines of credit 750,000 1,000,000
Loans from stockholders 200,000 670,000
Accounts payable 4,734,389 6,214,952
Accounts payable-- affiliate - 68,000
Accrued liabilities 4,459,181 2,346,622
Unearned revenue 2,209,168 2,928,990
--------------- --------------
Total current liabilities 20,159,518 18,229,924
--------------- --------------
LONG TERM LIABILITIES:
Capital and financing lease obligations 9,487,028 7,128,451
Convertible debentures 1,000,000 1,180,000
Senior subordinated notes 712,778 690,278
Notes payable and other long term obligations 20,122,921 626,022
--------------- --------------
Total long term liabilities 31,322,727 9,624,751
--------------- --------------
MINORITY INTEREST 1,981,959 1,981,959
--------------- --------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 100,000 shares
authorized, 10,539 and - shares issued and
outstanding at September 30, 1999 and
December 31, 1998, respectively 101 -
Common stock, $0.00001 par value; 100,000,000 shares
authorized; 46,017,963 and 45,339,839 shares outstanding
at September 30, 1999 and December 31, 1998, respectively 460 454
Additional paid-in-capital 98,837,075 43,137,654
Accumulated deficit 70,094,995 (30,752,863)
--------------- --------------
Total stockholders' equity 28,742,641 12,385,245
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 82,206,845 $ 42,221,879
=============== ==============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Balance Sheets.
<PAGE>
<TABLE>
<CAPTION>
POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
Sept. 30, 1999 Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1998
----------------- ----------------- ----------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Communications services and products $ 12,429,472 $ 35,942,615 $ 8,274,547 $ 16,092,879
Internet connection services 535,979 1,730,428 734,440 2,210,278
----------------- ----------------- ----------------- -----------------
Total revenues 12,965,451 37,673,042 9,008,987 18,303,157
----------------- ----------------- ----------------- -----------------
COSTS AND EXPENSES:
Cost of services and products 12,504,624 34,885,784 7,234,752 14,304,982
Selling, general, and administrative 4,869,379 11,576,811 2,317,111 6,457,010
Nonrecurring Charge - - 185,812 185,812
Depreciation and amortization 1,109,634 3,221,028 793,143 2,299,709
----------------- ----------------- ----------------- -----------------
Total costs and expenses 18,483,637 49,683,623 10,530,818 23,247,513
----------------- ----------------- ----------------- -----------------
OPERATING LOSS (5,518,186) (12,010,581) (1,521,831) (4,944,356)
----------------- ----------------- ----------------- -----------------
INTEREST EXPENSE, NET (1,033,467) (3,657,523) (313,587) (851,556)
OTHER INCOME 15,532 15,532 - 1,645,769
----------------- ----------------- ----------------- -----------------
NET LOSS BEFORE INCOME TAXES (6,536,122) (15,652,572) (1,835,418) (4,150,143)
INCOME TAX BENEFIT - - - -
----------------- ----------------- ----------------- -----------------
NET LOSS $ (6,536,122) $ (15,652,572) $ (1,835,418) $ (4,150,143)
================= ================= ================= =================
NET LOSS PER SHARE -
BASIC AND DILUTED $ (0.16) $ (0.86) $ (0.04) $ (0.10)
================= ================= ================= =================
SHARES USED IN COMPUTING
NET LOSS PER SHARE 45,595,251 45,465,792 44,650,816 40,800,401
================= ================= ================= =================
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
<PAGE>
<TABLE>
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POINTE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
Nine Months Nine Months
Ended Ended
Sept. 30, 1999 Sept. 30, 1998
---------------- ----------------
<S> <C> <C>
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (15,652,572) $ (4,150,143)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,221,028 2,299,709
Bad debt expense 203,413 189,092
Amortization of discounts on debt and lease
obligations 2,302,531 143,027
Other (64,550) -
Deferred settlement gain - (2,757,132)
Changes in operating assets and liabilities:
Accounts receivable, net (1,196,874) (1,068,573)
Accounts receivable-- affiliate, net (155,866) (140,863)
Notes receivable (690,030) -
Inventory (800,888) (116,889)
Prepaid expenses (323,471) (232,870)
Other assets (1,432,275) (251,361)
Accounts payable, accrued and other liabilities 587,265 902,175
Accounts payable-- affiliate (68,000) (249,655)
Unearned revenue (719,822) (642,537)
---------------- ----------------
Total adjustments 862,461 (1,925,877)
---------------- ----------------
Net cash used in operating activities (14,790,112) (6,076,020)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,647,733) (2,145,968)
Restricted cash (557,028) (50,000)
Acquisition of businesses (137,140) (310,000)
---------------- ----------------
Net cash used in investing activities (4,341,901) (2,505,968)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock - 6,000,000
Proceeds from issuance of preferred stock in subsidiary - 2,000,000
Proceeds from issuance of Class B Notes 20,836,296 -
Proceeds from issuance of preferred stock, net 28,068,784 -
Proceeds from exercise of warrants and options - 25,517
Repayment of lease obligations, net (827,563) 85,523
Repayment of lines of credit, net (250,000) 524,500
(Repayment of)/Proceeds from loans from shareholders, net (470,000) 150,000
Repayment of convertible debentures (80,000) -
Proceeds from notes payable, net 1,804,185 682,184
---------------- ----------------
Net cash provided by financing activities 49,081,702 9,467,724
---------------- ----------------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 29,949,689 885,736
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,255,199 155,503
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 31,204,888 $ 1,041,239
================ ================
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
</TABLE>
<PAGE>
POINTE COMMUNICATIONS CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS
1. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to Section 310 of Regulation
S-B of the Securities and Exchange Commission ("SEC"). The accompanying
unaudited condensed consolidated financial statements reflect, in the opinion of
management, all adjustments necessary to achieve a fair statement of financial
position and results for the interim periods presented. All such adjustments are
of a normal recurring nature. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-KSB for the year ended December 31, 1998.
The Company has recorded certain adjustments to its previously reported interim
results. The adjustments affecting the quarterly and nine months periods ended
September 30, 1999 relate to an implied beneficial conversion feature in the
Class A preferred stock and the Notes convertible into Class B preferred stock.
As a result of the adjustments recorded by the Company, previously reported
interim results of operations for the three and nine month periods ending
September 30, 1999 have been revised. This Form 10-Q-SB/A reflects the effects
of these adjustments.
2. Certain amounts in the prior period financial statements have been
reclassified to conform to the current period presentation.
3. Basic net loss per share is computed using the weighted average number of
shares outstanding. Diluted net loss per share is computed using the weighted
average number of shares outstanding, adjusted for common stock equivalents,
when dilutive. For the periods presented, the effect of common stock equivalents
was antidilutive, as a result, basic and diluted net loss per share are the
same. The following table has been added to reconcile Net loss per the
Statement of Operations to Net loss used in calculating Net loss per share. The
difference represents the beneficial conversion feature recognized upon
issuance of the Class A Preferred Stock (Note 5) and payment of dividends on the
Class A Preferred Stock with additional shares of Preferred Stock.
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income/(loss). . . . . . (6,536,122) (1,835,418) (15,652,572) (4,150,143)
Beneficial Conversion Feature - (22,174,075) -
Preferred stock dividend . . (928,188) - (1,375,574) -
---------------- ---------------- ---------------- ----------------
Net income/(loss) available
for common stockholders . (7,464,310) (1,835,418) (39,202,221) (4,150,143)
================ ================ ================ ================
Net loss per share . . . . . $ (0.16) $ (0.04) $ (0.86) $ (0.10)
================ ================ ================ ================
Shares used in computing
net loss per share . . . . 45,595,251 44,650,816 45,449,923 40,800,401
================ ================ ================ ================
</TABLE>
<PAGE>
4. There was no provision for or cash payment of income taxes for the three
or nine months ended September 30, 1999 and 1998, respectively, as the Company
had net taxable losses for 1999 and 1998, respectively, and anticipates a net
taxable loss for the year ended December 31, 1999.
5. During the quarter ended June 30 1999, the Company completed a $30
million private placement offering of 10,080 shares of the Company's $0.01 par
value Class A Convertible Senior Preferred Stock (the "Preferred Stock") and
warrants to purchase 10,800,000 shares of common stock. The private placement
was co-managed by investment bankers headquartered in New York and Atlanta. Net
proceeds from this offering totaled $28.1 million and will be used to fund
network expansion, repay indebtedness and fund operations. The Preferred Stock
earns dividends at a rate of 12% per annum, which are cumulative and payable in
either cash or shares of Preferred Stock at the Company's discretion. Each
share of Preferred Stock is convertible at the holders option into approximately
2,143 shares of common stock (subject to adjustment for certain diluting issues)
at any time while the Preferred Stock remains outstanding. The Company may
require the conversion of all of the Preferred Stock as follows: (a) in
conjunction with an offering of the Company's common stock in a firm
commitment underwritten public offering at a purchase price in excess of $4.00
per share (subject to adjustment for certain diluting issues) yielding net
proceeds of $30 million; or (b) one year after issuance if the common stock
shall have been listed for trading on the New York Stock Exchange, American
Stock Exchange or the Nasdaq National Market System and the common stock shall
have traded on such exchange at a price of at least $5.00 per share (subject to
adjustment for certain diluting issues) for twenty consecutive trading days and
the average daily value of shares traded during that twenty day period was at
least $1.0 million. On the twelfth anniversary, if the Preferred Stock is still
outstanding and the underlying common stock has been listed on one of the
aforementioned exchanges, the Company is required to exchange the Preferred
Stock for common stock at a conversion price equal to the average trading price
for the twenty consecutive trading days immediately prior to the exchange date.
The warrants give the holders the right to purchase 10,800,000 shares at a
price of $1.625 per share for a period of five years after the issuance date.
Approximately $11.9 million of the total proceeds were allocated to the warrants
and have been included in additional paid in capital. The value of the warrents
was determined using the Black Scholles Model. The Company may require exercise
of the warrants if the underlying common stock has been registered with the SEC
and is listed on one of the aforementioned exchanges and has traded on such
exchange at a price of at least $5.00 per share (subject to adjustment for
certain diluting issues) for twenty consecutive trading days. The Company is
required to file a registration statement with the SEC within 120 days after
closing the private offering of Preferred Stock and warrants to register the
shares of common stock issued or issuable upon conversion of the Preferred Stock
(including shares issued as dividends) and the exercise of the warrants. The
120 days has passed and the Company has not yet filed the registration
statement. The holders of the prefered stock have each signed a waiver to
extend the date by which the Company must file the required registration
statement to the date that is 90 days after either the date of consumation
of the merger with Telescape International Inc. (see Note 10) or the termination
of the merger agreement.
In conjunction with the issuance of the Preferred Stock, the Company
evaluated whether a beneficial conversion feature existed on the date of
issuance, as defined in Emerging Issues Task Force ("EITF") 98-5. The
proceeds received in conjunction with the issuance were first allocated to the
$11.9 million fair value of the warrants, as calculated using the Black-scholles
model. The remaining proceeds of $18.3 were allocated to the Preferred Stock.
This amount was then compared to the fair market value of the shares underlying
the Preferred Stock of $40.5 million, determined by multiplying the number of
shares by the undiscounted market price on the date of issuance of $1.875. The
difference of $22.2 million has been recognized as a beneficial conversion
feature on the Preferred Stock and recorded as a non-operating non-cash charge
directly to accumulated deficit and an increase in additional paid in capital.
6. During the quarter ended September 30, 1999, the Company completed a $21
million private placement offering of Convertible Promissory Notes (the
"Notes"). The Notes accrue interest at 12% per annum compounded quarterly and
payable in kind at maturity. The Notes are manditorily convertible upon the
earlier of December 31, 1999, or the closing of the Pensat Transaction (which
includes a merger with Pensat Communications International, Inc. and the
issuance of Class C Convertible Senior Preferred Stock) at which time they
automatically convert into 7,000 shares of the Company's $0.01 par value Class B
Convertible Senior Preferred Stock (the "Preferred Stock") and warrants to
purchase Common Stock. The Preferred Stock is convertible into Common Stock of
the Company at a conversion price equal to the conversion price of the Class C
Convertible Preferred Stock contemplated to be issued in connection with the
Pensat Transaction, not to exceed $2.16 per share. If the Notes have not been
converted prior to December 31, 1999, the conversion price of the Preferred
Stock will be equal to $1.75. The number of warrants to be issued to the Holders
of the Notes will be equal to 75% of the number of shares of Common Stock to be
issued upon conversion of the Preferred Stock. The exercise price of the
warrants will be 108% of the conversion price of the Preferred Stock. There was
no underwriter used in the transaction. Net proceeds from this offering totaled
$20.8 million and will be used to fund network expansion, repay indebtedness and
fund operations. The Preferred Stock earns dividends at a rate of 12% per annum,
which are cumulative and payable in either cash or shares of Preferred Stock at
the Company's discretion. The dividend and liquidation rights of the Preferred
Stock will be parri passu with the Class A Convertible Senior Preferred Stock.
The Company will be required to file a registration statement with the SEC
within 120 days after conversion of the Notes to register the shares of common
stock issued or issuable upon conversion of the Preferred Stock (including
shares issued as dividends) and the exercise of the warrants.
In conjunction with the issuance of the Notes, the Company evaluated
whether a beneficial conversion feature existed on the date of issuance, as
defined in EITF 98-5 As explained above, the Notes were convertible into Class B
Preferred Stock and warrants, with an initial conversion price and exercise
price of $2.16 and $2.33, respectively. In order to calculate the beneficial
conversion feature the Company compared the total proceeds received with respect
to the preferred stock and warrants underlying the Notes, including the proceeds
to be received upon exercise of the warrants. The aggregate proceeds were
determined to be $38.0 million. This amount was then compared to the fair
market value of shares underlying the preferred stock and warrants of $40.4
million, determined by multiplying the number of shares by the undiscounted
market price on the date of issuance of $2.375. This resulted in a $2.4 million
beneficial conversion included as a discount to the Notes, which has been
amortized into interest expense over the period from issuance to maturity. The
calculation was prepared using the initial terms and was re-evaluated during
the quarter ended December 31, 1999, when the final terms were known.
See the Company's 10-K for the year ended December 31, 1999 for further
discussion.
7. During the quarter, HTC Communications, LLC ("HTC"), a California limited
liability company licensed as a Competitive Local Exchange Carrier ("CLEC") in
California merged with and into the Company. As consideration for the merger
the Company will issue 600,000 shares of common stock to the members of HTC
subject to the satisfaction by the members of opening two competitive local
exchange markets for the Company within twelve months of the closing date of the
merger. At the same time, the Company entered into thirty-six month employment
agreements with two of the members of HTC for the purpose of development and
oversight of the Company's CLEC operations. In addition to base compensation
and participation in the recently adopted Market Value Appreciation Stock Option
Plan (Note 7), the agreements entitle the employees to receive options to
purchase up to a total of 1.1 million shares of the Company's Common Stock at a
strike price of $1.90, under the Company's Pay for Performance plan (note 7).
Vesting of such options is according to a schedule, which includes a specified
number of shares for opening each of eight CLEC markets for the Company over
the term of the employment agreements.
8. During the quarter, the Company's Board of Directors adopted two new
stock option plans and an employee stock purchase plan. The new option plans
include the Executive Market Value Appreciation Plan (the "Market Value Plan")
and the Pay for Performance Stock Option Plan (the "Pay for Performance Plan";
collectively the "Plans"). Options granted under the Plans are intended to
qualify as Incentive Stock Options to the extent possible within the meaning of
section 422 of the Code. The Market Value Plan calls for a maximum aggregate
number of 5,000,000 shares of the Company's common stock to be optioned under
the plan. The Term of the plan is from adoption by the Board until January 31,
2009. The term of the options shall not exceed ten years from the date of
grant. Options become vested on December 31st of each year outstanding at the
rate of 5% of the options granted for each $1.00 of increase in the Company's
stock price, and they become contingently vested in an equal number of shares
but may not exercise until fully vested. The contingently vested options become
fully vested on the following December 31st assuming the stock price is at least
the same as that on the previous December 31st when they became contingently
vested. Any optioned shares that have not vested after the seventh full year
shall vest pro rata on December 31st of years eight, nine and ten. The Pay for
Performance Plan calls for a maximum aggregate number of 2,000,000 shares of the
Company's common stock to be optioned under the plan. The Term of the plan is
from adoption by the Board until January 31, 2009. The term of the options
shall not exceed ten years from the date of grant. Options become eligible for
accelerated vesting based upon achievement of Company, division and individual
objectives as determined on December 31st of the year of grant. Options
eligible for accelerated vesting vest ratably on three consecutive December 31st
beginning in the year of grant. Optionees are eligible to vest in up to 120% of
the amount granted. Any optioned shares that have not vested after the fifth
year shall vest pro rata on December 31st of years six and seven. During the
quarter, the Company granted options to purchase 3.6 million shares under the
Market Value Plan and options to purchase approximately 600,000 shares under
the Pay for Performance plan all at an exercise price of $1.75.
<PAGE>
9. During the quarter, the Company issued 300,000 shares of Common Stock to
acquire the remaining 22% minority ownership in Charter Communications de
Venezuela.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Pointe Communications Corporation (formerly Charter Communications
International, Inc., "PointeCom" or the "Company") 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 ten companies, entered the prepaid long distance
and telecommuting services markets and increased revenue from $544,000 for the
year ended 31, 1995 to $37.6 million for the nine months ended September 30,
1999. Licenses held by the Company, which vary by country, typically allow the
Company to offer an array of services including international private line, long
distance, Internet access, and data transmission. The Company has established
an infrastructure including satellite earth stations, interconnection
agreements, peripheral infrastructure, and sales and marketing channels in all
of the above countries, 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.
During late 1998, the Company adopted a strategy to position itself as a
cost efficient, reliable, full-service Competitive Local Exchange Carrier
("CLEC") tailored specifically to the needs of the Hispanic Community in the US
and in South & Central America. In the U.S., the Company's focus is on
major cities with large Hispanic populations. Internationally, the Company
targets complementary markets with telecommunications traffic patterns that
correspond with the paired U.S. target markets. The Company's strategy assumes
that there exists (i) a significant population in the U.S. that is dissatisfied
with its current telecommunications service, (ii) substantial demand for
telecommunications services in the U.S. Hispanic population, (iii) a lack of
ready access to telephony services in Latin America for a substantial portion of
the population, and (iv) a natural synergy and cost advantage in providing local
services in both the U.S. and Latin America to meet basic telephony needs along
with bundled services to meet more advanced communications requirements between
the U.S. and Latin America.
In an effort enhance its CLEC management team and to gain accelerated
access to the West Coast during the third quarter, HTC Communications, LLC
("HTC"), a California limited liability company licensed as a Competitive Local
Exchange Carrier ("CLEC") in California merged with and into the Company. The
management team from HTC assumed leadership of the Company's CLEC operations.
Their management team has over 70 years of combined experience in the
telecommunications industry including a CEO who was formerly General Manager of
a division at Pacific Bell, responsible for marketing and offering services to
more than 1.1 million Hispanic customers and generating over $350 million in
annual revenues. Funding for the newly adopted strategy was obtained during the
second and third quarters of 1999. Construction of central switching facilities
and co-location sites at the various Incumbent Local Exchange Carriers ("ILECs")
end offices is currently under way in Los Angeles and Miami. These initial
sites are expected to be operational by the end of the first quarter of 2000.
As a complement to its strategy to become a full-service CLEC in the US and
Latin America, the Company is establishing an Asynchronous Transfer Mode ("ATM")
fiber transport network for both voice and data switching. The network
initially includes Houston, Texas; Atlanta, Georgia; Miami, Florida; New York,
New York; Los Angeles, California; San Salvador, El Salvador; and Lima; Peru.
Future plans include similar network infrastructure in other U.S. and South
American and Central American locations. The network will allow the Company to
efficiently carry traffic for its CLEC operation and will also serve to expand
the market reach and lower the cost basis of its existing prepaid long distance
services business. Additionally, the network allows the Company to enter the
wholesale carrier business by capitalizing on unique partnering opportunities
with interconnected foreign Postal, Telephone and Telegraph companies ("PTTs").
The network became partially operational during the first quarter of 1999,
however, due to unforeseen technical difficulties with the leading edge
technology, the Company has yet to realize the anticipated results. The network
is expected to carry significant traffic toward the end of the fourth quarter or
beginning of the first quarter of 2000.
<PAGE>
See "Liquidity and Capital Resources" for a discussion of the Company's
ability to meet the capital requirements associated with its expansion plans.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the three and
nine months ended September 30, 1999 and 1998. Operating results for any period
are not necessarily indicative of results for any future period. Dollar amounts
(except per share data) are shown in thousands.
<TABLE>
<CAPTION>
1999 THREE MONTHS 1998 THREE MONTHS 1999 NINE MONTHS 1998 NINE MONTHS
---------------- ---------------- ----------------- ----------------
$ % $ % $ % $ %
-------- ------ -------- ------ --------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
COMMUNICATIONS SERVICES
& PRODUCTS 12,429 95.9% 8,275 91.9% 35,943 95.4% 16,093 87.9%
INTERNET CONNECTION SERVICES 536 4.1% 734 8.1% 1,730 4.6% 2,210 12.1%
-------- ------ -------- ------ --------- ------ -------- ------
TOTAL REVENUES 12,965 100.0% 9,009 100.0% 37,673 100.0% 18,303 100.0%
COST AND EXPENSES:
COST OF SERVICES & PRODUCTS 12,505 96.5% 7,235 80.3% 34,886 92.6% 14,305 78.2%
SELLING, GENERAL & ADMINISTRATIVE 4,869 37.6% 2,317 25.7% 11,576 30.7% 6,457 35.3%
NONRECURRING CHARGE - 0.0% 186 2.1% - 0.0% 186 1.0%
DEPRECIATION & AMORTIZATION 1,109 8.6% 793 8.8% 3,221 8.5% 2,300 12.6%
-------- ------ -------- ------ --------- ------ -------- ------
TOTAL COSTS AND EXPENSES 18,483 142.6% 10,531 116.9% 49,683 131.9% 23,248 127.0%
OPERATING LOSS (5,518) -42.6% (1,522) -16.9% (12,010) -31.9% (4,945) -27.0%
-------- ------ -------- ------ --------- ------ -------- ------
INTEREST EXPENSE, NET (1,033) -8.0% (313) -3.5% (3,657) -9.7% (851) -4.6%
OTHER INCOME 15 0.1% - 0.0% 15 0.0% 1,646 9.0%
NET LOSS $(6,536) -50.4% $(1,835) -20.4% $(15,652) -41.5% $(4,150) -22.7%
======== ====== ======== ====== ========= ====== ======== ======
NET LOSS PER SHARE $ (0.16) $ (0.04) $ (0.86) $ (0.10)
======== ======== ========= ========
SHARES USED IN COMPUTING
NET LOSS PER SHARE 45,595 44,651 45,466 40,800
======== ======== ========= ========
</TABLE>
<PAGE>
Consolidated revenues for the combined lines of business for the three
months ended September 30, 1999 and 1998, were $12,965,000 and $9,009,000
and for the nine months ended September 30, 1999 and 1998, were $37,673,000 and
$16,093,000 respectively. The increase in revenue for both the quarter and
year to date was principally the result of increased prepaid calling card
sales, primarily driven by increased distribution of "off-net" card sales
within the U.S. Hispanic community. Other increases came from international
private line, mainly to Costa Rica. Cost of services and products for the
quarter ended September 30, 1999, were $12,505,000 and $7,235,000 for the
comparable quarter in 1998, yielding gross profit margins of 3.5% for 1999 and
19.7% for the same period in 1998. The increase in overall revenue for the
three and nine months ended September 30, 1999 was offset by a decline in
Internet connection service revenues. The decline came mainly from Panama
sales, which resulted from the withdrawal of the US Armed Forces in the first
quarter of 1999, and from the U.S. where the Company is realigning its Internet
offering to coincide with the overall business plan to serve the US Hispanic
community. Cost of services and products for the nine months ended
September 30, 1999, were $34,886,000 and $14,305,000 for the comparable
quarter in 1998, yielding gross profit margins of 7.4% for 1999 and 21.8% for
the same period in 1998. Gross profit margins for the three and nine months
were adversely affected by the fact that prepaid calling card revenues,
which generally carry a lower margin than the Company's other products,
represented a higher proportion of total revenues in 1999 than in 1998.
Also negatively impacting margins for the three and nine months ended September
30, 1999 was an increase in dedicated line cost without a corresponding increase
in traffic carried on the network. This increase in cost was incurred mainly as
a result of anticipated carrier terminating services, which have not yet been
realized. Further, adversely affecting margins was unused satellite space
segment also incurred as fixed commitments in anticipation of increased traffic
which has not been realized. The unused satellite cost includes a one-time
charge of approximately $450,000 related to a settlement with Satelites
Mexicanos, SA de CV for satellite services on their Region I satellite. The
settlement entitles the Company to use the space segment for approximately
another year; however, the Company is not able to use the space at this time
since all international satellite traffic is carried on the Region II and
Satmex V satellites. Therefore, management has accrued for future satellite
lease costs in this quarter.
Selling, general, and administrative ("SG&A") expenses for the three
and nine months ended September 30, 1999 were $4,869,000 or 37.5% of sales
and $11,576,000 or 30.7% of sales compared to $2,317,000 or 25.7% of sales and
$6,457,000 or 35.3% of sales for the same periods in 1998. The overall increase
in expenses was primarily attributable to expansion of the Company's
operations. A significant area of increase came from addition of
management, marketing, engineering and administrative additions necessary
to fulfill the Company's Competitive Local Exchange Carrier ("CLEC")
business plan. This trend is expected to continue throughout the year as
the Company executes upon its plan which anticipates revenues from its CLEC
operations beginning during the second quarter of 2000.
Depreciation and amortization expense was $1,109,000 and $3,221,000 for
the three and nine months ended September 30, 1999 compared to $793,000 and
$2,300,000 for the three and nine months ended September 30, 1998. The increase
is attributable to the increase in property, plant and equipment and
amortization of intangibles resulting from acquisitions completed during
1998 and 1999.
Interest expense was $1,033,000 and $313,000 for the quarters ended
September 30, 1999 and 1998, respectively and $3,657,000 and $851,000 for the
nine months ended September 30, 1999 and 1998, respectively. Interest expense
increased during 1999 because of a number of new debt instruments entered into
in late 1998 and during 1999. These include $11.0 million in bridge loans, $6.2
million in capital leases, $750,000 in new promissory notes and $21,000,000
in convertible promissory notes. Approximately $725,000 of the interest expense
during the third quarter of 1999 and $1,775,000 for the nine months ended
September 30, 1999 was related to non-cash amortization of discounts associated
with warrants issued in conjunction with various debt instruments and the
beneficial conversion feature on the convertible notes issued during the third
quarter of 1999.
There was no income tax benefit recorded in either 1999 or 1998, as
management recorded a valuation reserve because of the uncertainty of the timing
of future taxable income. The net loss for the quarters ended September 30,
1999 and 1998, were approximately $6,536,000 or $0.16 per share and $1,835,000
or $0.04 per share, respectively and the nine months ended September 30,
1999 and 1998 were approximately $15,652,000 or $0.86 per share and $4,150,000
or $0.10 per share, respectively. Approximately, $0.49 of the total $0.86 net
loss per share for 1999 is attributable to the non-cash non-operating charge
recognized in conjunction with the beneficial conversion feature on the Class A
preferred stock issuance during the second quarter of 1999.
During the third quarter, the Company evaluated its business focus and
organizational structure. In doing so, it was determined that the Company
operates in three distinct business segments, which include Retail Services,
Wholesale/International Services and Prepaid Calling Card Services. Retail
services include local, long distance, and Internet access services provided
primarily to Hispanic residential and commercial customers.
Wholesale/International Services include carrier terminating services and
International private line provided between the US and various South and Central
American countries as well as voice and data services provided within the
various Latin American countries listed above. Prepaid Calling Card services
include the sale of both "on-net" (calls carried on the Company's network) and
"off-net" (calls carried on other Companies networks) prepaid calling cards.
The management team and each employee were allocated to the various business
segments and goals and objectives were established for each segment and each
employee. Management will evaluate performance of the Company and its employees
in part based upon the performance of these individual segments. The segments
were still developing through the end of the quarter, as such, segment
information has not been presented for the quarter. The Company will present
segment information for the fiscal year in its 1999 Form 10-K.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has primarily financed its operations to date through private
sales of equity securities and debt to affiliates and outside investors. During
the first quarter of 1999, in private placement offerings, the Company entered
into three promissory notes with principal amounts totaling $9.0 million. In
conjunction with the notes, the Company issued warrants to purchase 1.52 million
and 5 million shares of common stock at $1.00 per share exercisable for three
years and eight months, respectively. During the second quarter, the Company
completed a private placement of $30.24 million of $0.01 par value Class A
Convertible Senior Preferred Stock (the "Preferred Stock") and warrants to
purchase 10,800,000 shares of common stock. The net proceeds from the private
placement totaled $28.1 million. During the third quarter of 1999, the Company
completed a $21.0 million private placement offering of 12% Convertible
Promissory Notes (convertible into Class B Convertible Senior Preferred Stock).
Proceeds from these offerings have been used to repay $6.0 million of promissory
notes as well as $2.8 million of other various notes and capital leases,
purchase assets of approximately $4.0 million and offset the Company's operating
cash flow deficit of approximately $14.8 million.
The Company estimates that it will need approximately $55.0 million to fund
existing operations through the end of 2000, including approximately $3.7
million to fund debt due over the next twelve months, $50.0 million to fund
capital expenditures and $1.3 million to fund operating cash flow. As of the
end of the third quarter, the Company had approximately $31.2 million on hand.
During the first quarter of 1999, the Company entered into a $25.0 million
master lease facility. As of September 30, 1999, the Company had drawn down
$6.0 million under the master lease. Additionally, the Company is negotiating a
$15.0 million line of credit with another major vendor. The Company intends to
use these vendor lines of credit to finance the majority of its acquisition of
capital assets for the next year. To fund the Company's operations, 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 the exercise of outstanding
warrants and options. However, there can be no assurance that the Company will
be able to raise any such capital on terms acceptable to the Company, if at all.
Failure of the Company to raise all or a significant portion of the funds needed
could materially and adversely affect the Company's continuing and its planned
operations.
The Company has not generated net cash from operations for any period
presented. The net cash used in operating activities for the nine months ended
September 30, 1999 was $14.7 million. Management anticipates that the Company
will not generate cash from operations during 2000. However, anticipated net
operating cash generated from prepaid calling card products and services as well
as carrier wholesale services are anticipated to mitigate net operating cash
expenditures expected during the development of the CLEC business. While the
Company believes it currently has adequate resources available to achieve its
potential expansion plans noted in "Management's Discussion and Analysis"
through the end of 2000, any increases in the Company's growth rate, shortfalls
in anticipated revenues or increases in anticipated expenses could have a
material adverse effect on the Company's liquidity and capital resources and
would either require the Company to raise additional capital from public or
private debt or equity or scale back operations. Additionally, the Company does
not currently have adequate resources available to achieve all of its potential
expansion plans noted in "Management's Discussion and Analysis" subsequent to
the 2000 and will not engage in such expansion until adequate capital sources
have been arranged. Accordingly, the Company anticipates additional future
private placements and/or public offerings of debt or equity securities will be
necessary to fund such plans. If such sources of financing are insufficient or
unavailable, the Company will be required to significantly change or scale back
its operating plans to the extent of available funding. The Company may need to
raise additional funds in order to take advantage of unanticipated
opportunities, such as acquisitions of complementary businesses or the
development of new products, or to otherwise respond to unanticipated
competitive pressures. There can be no assurance that the Company will be able
to raise any such capital on terms acceptable to the Company or at all.
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use", which is effective for fiscal
years beginning after December 15, 1998. This statement requires capitalization
of certain costs of internal-use software. The Company adopted this statement
during the first quarter of 1999 and it did not have a material impact on the
Company's financial statements.
In April 1998, the AICPA issued Statement of Position 98-5 (SOP 98-5),
"Reporting on the Costs of Start-Up Activities," which is effective for fiscal
years beginning after December 15, 1998. SOP 98-5 requires entities to expense
certain start-up costs and organization costs as they are incurred. The Company
adopted this statement during the first quarter of 1999 and it did not have a
material impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 "Accounting for Derivative Instruments and Hedging Activities," which is
effective for fiscal years beginning after June 15, 1999. In June 1999, the FASB
issued Statement No. 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB No. 133", which amends
statement No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The statement establishes accounting and
reporting standards for derivative instruments and transactions involving hedge
accounting. The Company does not expect it to have a material impact on its
financial statements.
YEAR 2000
To date, year 2000 problems have had a minimal effect on our business.
However, we may not have identified and remediated all significant year 2000
problems. Further remediation efforts may involve significant time and expense,
and unremediated problems may have a material adverse effect on our business.
Finally, although we have not been made a party to any litigation or arbitration
proceeding to date involving our products or services related to year 2000
compliance issues, we may in the future be required to defend our products or
services in such proceedings or to negotiate resolutions of claims based on year
2000 issues. The costs of defending and resolving year 2000-related disputes,
regardless of the merits of such disputes, and any liability for year 2000
related damages, including consequential damages, would negatively affect our
business, results of operations, financial condition and liquidity, perhaps
materially.
FORWARD-LOOKING STATEMENTS
This report on Form 10-QSB/A contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Actual results could
differ from those projected in any forward-looking statements for the reasons
set forth herein and as set forth in the "Risk Factors" as well as in other
sections of the Company's report filed on Form 10-KSB for the year ended
December 31, 1998, or for other unforseen reasons. The forward-looking
statements contained herein are made as of the date the original report, which
is amended hereby, and the Company assumes no obligation to update such
forward-looking statements, or to update the reasons why actual results could
differ from those projected in such forward-looking statements.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POINTE COMMUNICATIONS CORPORATION
Date: May 15, 2000 By: /s/ Stephen E. Raville
----------------------------------
Stephen E. Raville
Chief Executive Officer
Date: May 15, 2000 By: /s/ Richard P. Halevy
----------------------------------
Richard P. Halevy
Chief Financial Officer
<PAGE>
