SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark one)
(X) Annual report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1998.
( ) Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from __________ to ___________.
Commission file number 00-21143
CONVERGENCE COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
Nevada 87-0545056
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 West 500 South, Suite 320
Salt Lake City, Utah 84101
(Address of principal executive office) (Zip Code)
(Issuer's telephone number) (801) 328-5618
Securities to be registered under
Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, Par Value $.001 None
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
Yes X No , 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
Regulations S-B is not 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 the registrant's net revenue for its most recent fiscal year: $3,113,482.
The aggregate market value of voting stock held by non-affiliates of the
registrant 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, was $11,936,992.
As of March 1, 1999, 11,738,277 shares of registrant's Common Stock, par value
$.001 per share and 101,379 shares of the registrant's Series B Preferred
Shares, par value $.001 per share, were outstanding.
<PAGE>
CONVERGENCE COMMUNICATIONS, INC.
April 14, 1999
Form 10-KSB
PART 1.
THE COMPANY
Exact corporate name: Convergence Communications, Inc.
State and date of incorporation: Nevada - July 23, 1995
Street address of principal office: 102 West 500 South, Suite 320
Salt Lake City, Utah 84101
Company telephone number: (801) 328-5618
Fiscal year end: December 31
BUSINESS AND PROPERTIES
OVERVIEW
Convergence Communications, Inc. (the "Company") is a facilities-based
provider of high-quality, low-cost integrated communications services through
its own metropolitan area networks. The Company operates in recently deregulated
and high growth markets, principally in Central America and the Andean region,
and intends to expand its operations to Mexico. The Company currently offers
business, governmental and residential customers high-bandwidth, high-speed data
connections, high-speed and dial-up Internet access, voice and video services.
The Company uses technology that is based on the Internet Protocol ("IP") and
employs networks that consist, assuming the consummation of certain transactions
described herein, of over 600 route kilometers of fiber-optic and hybrid fiber
coaxial cable, plus "last mile" high-bandwidth fixed wireless connectivity.
These networks cover a majority of the central business districts in each of the
Company's current major markets. The Company currently provides services to in
excess of 29,000 subscribers and, upon the completion of certain transactions
for which it has entered into acquisition agreements, it will have over 42,000
subscribers. See "Description of the Company's Business - Note Regarding
Acquisitions," below.
The Company believes many underdeveloped countries, particularly
countries in Latin America, are experiencing rapid economic and population
growth, as well as unparalleled demand for expanded telecommunications services.
In many instances, however, the operators of incumbent telecommunications
systems in the Company's market areas have difficulty responding to market
demands for efficient service, new fixed lines and the bandwidth necessary for
data transmission and high-speed Internet access. The Company believes the
market penetration in those countries by telecommunications services providers
has been limited in comparison to developed countries, such as the United
States.
The Company's business goal is to establish itself as one of the first
facilities-based providers of bundled telecommunication services to business,
governmental and residential customers in Central America, the Andean region and
Mexico. The total population of these markets exceeds 140 million people. The
Company's strategy for achieving this goal is based on (i) the development or
acquisition of high-bandwidth metropolitan area networks, (ii) strategic
acquisitions of existing Internet service providers ("ISPs"), cable television
networks and telephony service providers, (iii) maximizing subscriber
penetration through careful segmentation of each market's customer base,
customized services, competitive pricing and customer service and support, and
(iv) strategic alliances with strong local partners. The Company believes its
first mover advantage will allow it to obtain access to high-end customers in
both the business and residential markets. The Company also believes rapid
implementation of its business strategy will create higher barriers to entry,
thereby limiting competition, and that its lowest operating cost strategy and
highly differentiated service offerings will provide it with a sustainable
competitive advantage.
Through strategic acquisitions and partnerships, the Company has gained
access to an existing customer base, experienced local management teams, and
knowledge of the regulatory and market environments in which it intends to
operate. Once the Company establishes an operating platform in a market, its
next step is to focus on maximizing subscriber growth through careful
segmentation of the customer base, customizing the services offered to each
identified segment, and competitive pricing. The Company intends to develop
brand awareness by offering network reliability and high quality customer
support.
The Company employs an IP-based technology platform that utilizes
packet switching to transmit voice, video and data elements over the same
network. The Company combines this technology with a delivery network that uses
fiber-optic and coaxial cable networks with wireless distribution systems. The
Company believes this approach allows the most efficient delivery of high-speed
"last mile" connectivity with IP-based service offerings, and provides an
economical method of delivering high quality bundled communications services.
The Company ultimately plans to provide voice, data, Internet and video services
over the same network architecture in each of its markets.
The Company was incorporated in Nevada in 1995 as "Wireless Cable &
Communications, Inc." On August 24, 1998, the Company changed its name to
"Convergence Communications, Inc." All references to the Company in this report
include the Company's direct and indirect partially and wholly owned
subsidiaries. The Company's principal executive offices are located at 102 West
500 South, Suite 320, Salt Lake City, Utah 84101, and its telephone number is
(801) 328-5618. The Company's principal operating offices are located at 9050
Pembroke Pines Blvd., Pembroke Pines, Florida 33024, and its telephone number is
(954) 430-9393. The Company's web site is located at www.convergence-comm.net.
DESCRIPTION OF THE COMPANY'S BUSINESS
General
The Company is a facilities-based provider of high-quality, low-cost
integrated communications services through its own metropolitan area networks.
The Company intends to operate in recently deregulated and high growth markets,
principally in Central America, the Andean region and Mexico. The Company
currently offers or, upon the consummation of certain transactions described
below, will have the ability to offer, business, governmental and residential
customers bundled high-bandwidth, high-speed data connections, high-speed and
dial-up Internet access, voice and video services in a number of its markets,
including Guatemala, El Salvador, Venezuela, Costa Rica, and Panama. The Company
uses technology that is based on the Internet Protocol ("IP") platform and
employs networks that consist, upon the closing of certain acquisitions
described herein, of over 600 route kilometers of fiber-optic, hybrid fiber
coaxial cable, plus "last mile" high-bandwidth fixed wireless connectivity.
These networks cover a majority of the central business districts in each of its
major markets. See "Description of the Company's Business - Note Regarding
Acquisitions."
Market Opportunity
The combined telecommunications market worldwide is believed to be in
excess of $600 billion and is expected to grow to $1.0 trillion by the year
2002. Growth in this industry is driven by the increased demand for bandwidth
intensive applications such as e-commerce, video-on-demand, and video
conferencing. Internet access and data services are arguably one of the fastest
growing segments of the global telecommunications market, with an estimated 116
million Internet users worldwide. One of the most notable trends in the industry
as a result of the growth of the Internet is the adoption of IP as the standard
for wide-area corporate communications. IP allows computers with different
architectures and operating systems to communicate with one another over the
Internet. Telecommunication companies are expected to shift from the traditional
circuit-switched networks to the operation of packet-switched networks by
incorporating IP into their backbone. Several companies (including Level 3) are
working on new products and developing end-to-end IP-based networks, while
others (such as Qwest Communications and IXC Communications) already offer
long-distance services over the Internet at rates that are lower than those of
traditional carriers. In addition, as packet-switched technology is further
developed and it becomes more cost effective to move voice and data traffic over
the same network, the Company believes there should be a significant increase in
the use of IP-based networks. According to Ovum, an independent analyst group,
the worldwide market for IP will reach over $60 billion by 2005. The global
usage of IP telephony and facsimile services is expected to increase from 30
million minutes in 1997 to 4.4 billion minutes in 1999.
The Latin American telecommunications industry is also undergoing
dramatic change, including widespread privatization of existing networks (such
as Telebras in Brazil and Telecomunicaciones de Guatemala in Guatemala). In many
instances, however, the Company believes the operators of incumbent
telecommunications systems have difficulty responding to market demands for
efficient service, new fixed lines and the bandwidth necessary for data
transmission and high-speed Internet access. The Company also believes the
market penetration in those countries by telecommunications services providers
has been limited in comparison to developed countries such as the United States.
For example, telephone penetration in Latin America remains low, averaging less
than 13% (ranging from 23% in Southern Argentina to 5% in Guatemala), compared
to more developed markets such as the United States, where telephone penetration
is 64%.
Recent developments in the Company's markets have focused on the
improvement of basic services and growth in lines. The Company believes the
Internet market can be seen as both a result of market deregulation and a driver
for more pervasive deregulation and infrastructure improvement. Internet usage
in Latin America is estimated to grow from approximately 10 million users in
1996 to nearly 34 million users in 2000 and countries with antiquated networks
are realizing the need to install higher bandwidth networks (i.e., fiber-optic
networks). This is expected to result in a significant growth in the revenues
generated in the Latin American telecommunications market, which is expected to
total $63.7 billion in 2000 and $74.2 billion in 2001, up from $33.2 billion in
1996.
The Company believes the demand for data transmission services and
high-speed Internet access will grow at unprecedented rates. The Company also
believes incumbent telecommunications networks in Latin America are unable to
meet the current, let alone the expected, bandwidth demands (in large part
because of the relatively poor state of their infrastructures) and that they
will also be unable to evolve to support new, next-generation, integrated
communications services. Based on the Company's market research, it believes
businesses, governments and households desire those types of services, but in
many instances are unable to obtain them because of inadequate infrastructure.
The Company believes its market opportunities in Latin America will be further
enhanced by the deregulation of other industries, and increased foreign
investment, which will increase the demand for private networks with more
bandwidth.
The Company's Business Solution
The Company believes emerging technologies have significantly enhanced
the value and capacity of networks that combine fiber-optic and coaxial cable
with wireless communications systems, in part because of the convergence of
traditional voice, data and video switching technologies. The Internet has
played a key role in this evolutionary trend. The Company employs an IP-based
technology platform that utilizes packet switching to transmit voice, video and
data elements over the same network. The Company uses this technology with
delivery networks that combine fiber-optic, coaxial cable networks and wireless
communication systems. This approach allows "last mile" connectivity with
IP-based service offerings, providing an economical method of delivering
high-quality, high-speed bundled communications services.
The Company offers a wide variety of telecommunications services,
including high-bandwidth, high-speed data transmission, high-speed and dial-up
Internet access, voice, video and value-added services in many of its markets.
The Company intends to allow subscribers to combine or bundle services into
packages, rather than offering only telecommunications service packages designed
for a "typical" customer. The Company believes this flexible sales strategy will
reduce switching barriers for potential subscribers who may be reluctant to
switch all of their telecommunications services, or for subscribers with
existing contracts with other service providers. The Company's customers will
benefit from having a single provider of telecommunication solutions on a single
bill.
Business Strategies
The Company's business objective is to establish itself as a premier
facilities-based provider of integrated high-bandwidth telecommunication
solutions to business, governmental and residential customers in Central
America, the Andean region and Mexico. The Company will employ the following
strategies to achieve its overall objective:
Focus on Underserved Markets in Central America, the Andean Region and
Mexico. The Company provides and intends to expand its integrated communication
solutions in under-served markets in Central America, the Andean region and
Mexico. The Company believes there is a large and growing demand for high-speed
and dial-up Internet access, high-speed data transmission, voice and video
services in these markets. The Company also believes that, as a first provider
of competitively priced bundled telecommunications services in many of these
rapidly deregulating markets, it will be able to secure a significant subscriber
base and market share of high-end customers with minimal turnover.
Pursue Strategic Acquisitions of Subscriber Bases and Ancillary
Services. In addition to developing its own subscriber base through the
promotion of its telecommunications services, the Company intends to engage in
selective acquisitions of existing telecommunications subscriber bases, or the
acquisition of existing CATV operations, ISPs or local and long distance
telephone companies. See, e.g., "Description of the Company's
Business-Markets-Guatemala," below. The Company believes these strategic
acquisitions will provide it with positive cash flow. In addition, the Company
believes it can benefit from the vertical integration of key service providers
in the telecommunications industry and, in cases where the acquired company
relies primarily on antiquated networks, it can provide the acquired company
with a viable method of increasing its existing subscriber base through the
promotion of the Company's high-bandwidth telecommunications networks.
Initial Focus on Internet and Data Services. The Company is focusing
its initial network development and acquisition activities on the provision of
high-speed and dial-up Internet access, high-speed data connections and
value-added services. The Company believes the subscriber base for these
services is, in general, more affluent and stable. As a result, the Company
believes that, by first emphasizing those services, it will be able more quickly
to achieve positive cash flow.
Use of Lower Cost, High-Bandwidth Communications Networks. The Company
intends to provide its telecommunications services through the integrated use of
its own next-generation transmission networks that use fiber-optics, coaxial
cable and wireless communications systems. The Company believes this approach
allows the most efficient delivery of high-speed "last mile" connectivity with
IP-based service offerings, providing a lower overall network cost of delivering
bundled communications services. The Company also believes its lower cost
structure will allow it to economically access smaller buildings and more
customers than by using only one type of delivery system and, therefore, that it
will enjoy more price flexibility. Further, the flexibility of the Company's
network architecture should allow it to minimize the deployment of network
equipment not associated with revenues, since a significant portion of its
planned capital expenditures will be for the purchase of subscriber premises
equipment (which is generally deployed only when subscribers are acquired). In
addition, the Company's systems will not need to cover an entire market before
the Company can initiate service in that market. By contrast, competitive
wireline networks incur the majority of their costs before the first paying
customer is switched on.
Customized Approach to Bundled Services. The Company offers a wide
variety of telecommunications services, including high-bandwidth, high-speed
data transmission, high-speed and dial-up Internet access, voice, video and
value-added services. The Company intends to allow customers to combine or
bundle services into customized packages, rather than offering only bundled
packages designed for a "typical" customer.
End User Focus. The Company offers its services directly to end users,
rather than positioning itself as a wholesale network service provider. By
deriving the majority of its revenues from providing telecommunications services
directly to end user customers, the Company believes it will quickly establish a
sustainable and broad customer base. In addition, the Company believes that, by
offering last-mile connectivity, it will create higher barriers to entry,
thereby limiting competition. The Company believes this strategy will minimize
the risk of generating substantial revenues from only a limited number of
sources, and that it will maximize revenues and profitability by accessing the
higher priced retail market.
Maximize Subscriber Penetration. In order to more rapidly become cash
flow positive, the Company plans initially to offer services in those markets
which it believes have the most potential to generate significant subscriber
growth. These markets include the major metropolitan areas in Guatemala, El
Salvador, Venezuela, Costa Rica, Panama and Mexico, which have denser
populations with higher disposable income and a potentially greater demand and
use of telecommunications services. The Company also intends to rapidly develop
its own high-bandwidth metropolitan area networks for the delivery of bundled
communications services. See "Description of the Company's Business-Markets,"
below. The Company believes its first mover advantage will allow it to obtain
access to high-end customers in both the business and residential markets. Once
the Company establishes an operating platform in a market, its next step is to
focus on maximizing subscriber growth through careful segmentation of the
customer base, customizing the services offered to each identified segment, and
competitive pricing. The Company intends to develop brand awareness by offering
network reliability, complemented by high quality customer support. The Company
also believes rapid implementation of its business strategy will yield more
control over the end user, and create higher barriers to entry.
Utilize and Support Local Management. The Company relies on local
managers in the countries where it operates. These local managers play an active
role in securing network rights and obtaining necessary regulatory approvals,
assisting in arranging, identifying and evaluating opportunities for the
Company's business, and providing local advocacy for the Company's operations.
The Company's local management, which typically have managerial and operating
experience in the telecommunications industry, will be supported by the
Company's corporate operations staff, which is located in Florida. The Company
believes the use of local managers allows it to respond rapidly and effectively
to operational matters, develop and maintain effective working relationships
with local partners and capitalize on telecommunications opportunities. The
Company has recently acquired several companies and has been able to retain
their local experienced management.
Strategic Alliances. The Company has entered into strategic alliances
with a number of companies and entities already active in the Latin American
telecommunications markets. The Company believes these partners are both
influential and respected within their countries or regions, and they typically
work closely with the Company's senior management.
Network Technology
The Company employs an Internet Protocol ("IP") based technology
platform that utilizes packet switching to transmit voice, video and data
elements over the same network. The Company combines this technology with a
delivery network that uses fiber-optic, coaxial cable networks and wireless
telecommunication networks. The Company believes this network architecture
allows the most efficient delivery of high-speed "last mile" connectivity with
IP-based service offerings, providing an economical method of delivering high
quality bundled communications services. The Company ultimately plans to provide
voice, data, Internet and video services over the same network architecture in
each of its markets. The Company believes emerging technologies have
significantly enhanced the value and capacity of networks that combine
fiber-optic, coaxial and fixed wireless communications systems.
The strong demand for higher transmission speed and bandwidth and the
emergence of a number of new technologies applicable to the communications
industry have resulted in a convergence of data and voice transmission. The
Company believes this convergence is creating a fundamental change in the
telecommunications industry--a move from the traditional circuit-switched
networks that were primarily designed for voice communications to
packet-switched networks using IP technology. This technology makes it possible
to move information at a lower cost, because IP makes more efficient use of the
network capacity.
Circuit-switched networks use a single circuit for each conversation,
while conventional data networks route each data transmission separately,
occupying an entire circuit or portion of the network for the duration of the
call or data transmission. Packet switching technology also allows the
transmission of both voice and data elements over the same network. In a
packet-switched network, there is no single unbroken connection between sender
and receiver. When information is sent, it is broken into small packets that are
mixed with other transmissions, sent over many different routes at the same
time, and then reassembled at the receiving end. In this process, IP is used as
the basic form of creating and reassembling the packets and ensuring the packets
reach the correct destination. Because IP packet switching makes it possible to
fill a network's entire capacity with packets, it can move large amounts of
information efficiently and, the Company believes, at lower cost than
traditional circuit-switched networks.
Packet-switched networks have less overhead than traditional
circuit-switched networks, which translates into cost savings. Sprint
Corporation, for example, estimates it will save 70% over circuit switching with
its packet-switched network. For a provider with both local and long distance
facilities to move a 650-megabit CD ROM worth of information (the equivalent of
the contents of eight encyclopedia volumes) from New York to London over the
traditional public switched telephone network would cost the provider
approximately $27.00. However, to move the same amount of information over an IP
network would cost the provider only about $2.00.
The Company believes that another significant advantage of packet
switching technologies over circuit switching is the perceived difference in the
improvement rate of the technology. The rate of improvement of technologies is
measured by the time required to double the performance/cost ratio
(switched/second/dollar). Historically, circuit switching technologies have
doubled their performance cost ratio approximately every 40 to 80 months,
depending on the specific nature of the switch, while packet switching
technologies currently double this ratio every 10 to 20 months.
The Company also believes its IP-based architecture facilitates a
significantly more sophisticated bandwidth management capability. While
competitors can offer limited bandwidth guarantees (e.g. high-level voice, video
and data management), the Company can actively manage bandwidth at a services
layer. This effectively means that the Company can allocate bandwidth on demand
to a particular data stream, voice conversation or video stream, as needed. The
Company believes this capability may be a significant service differentiator in
the market place.
The Company combines packet-switched technology with a delivery network
that uses hybrid fiber-optic and coaxial cable networks with wireless
telecommunications systems. Over the last few years, high-frequency radio
transmission has proven to be a reliable, high-capacity, scalable
telecommunications transport network method. Standardized point-to-point and
point-to-multipoint equipment is now available from multiple vendors such as
Lucent, Nortel and Bosch. Having garnered market recognition for the ability to
achieve transport speeds in excess of OC-48 (2,488 megabits per second), the
Company believes high-bandwidth wireless networks present an excellent
alternative and complement to both fiber and hybrid-fiber coaxial networks.
Note Regarding Acquisitions
As noted in more detail below, the Company has entered into a number of
agreements to acquire assets, operations or subscribers in its various markets.
These agreements include the Company's agreements to acquire an ISP and CATV
operation in Guatemala under the terms of the Metro Transaction, as defined
below, the Company's strategic alliance with MetroNet, S.A. in Mexico, and the
customer base acquisition with GBM Corporation in El Salvador under the terms of
an agreement with that entity. Unless otherwise noted in this report, the
information (narrative and qualitative) presented in this report, including
without limitation the information set forth in the section entitled
"Description of the Company's business-Markets," assumes the consummation of
those transactions. Although the Company has entered into definitive agreements
requiring the consummation of certain of these transactions upon the
satisfaction of certain events, there can be no assurance that the Company will
actually complete the transactions on the anticipated terms, or at all, or that
the other parties to those arrangements will not breach their obligation to
consummate the acquisitions.
Markets
The Company has identified several markets, including Guatemala, El
Salvador, Venezuela, Costa Rica, Panama, and Mexico, where it already operates
or intends to operate and expand its telecommunications services in the next
three years. The total population of these markets exceeds 140 million people.
The table below provides summary information regarding the operations,
customers and ownership of the Company and the GDP and population of these
countries:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------
Country Company Operation Customers Ownership 1998e GDP Population
Guatemala Cybernet Guatemala(2) ISP(1)/HSD(1) 4,986 60.0% $18.6bn 11,500,000
/Telephony
STS(2) CATV(1) 7,500 60.0%
El Salvador Cablevisa CATV 26,000 44.0%(3) $11.8bn 6,200,000
Cybernet Salvador ISP/HSD 330(4) 44.0%(3)
Venezuela Inter@net ISP/HSD 3,440 100.0% $86.6bn 22,800,000
Costa Rica Television ISP/HSD Market 100.0% $9.7bn 3,700,000
Interactiva Trials(5)
Panama Wireless Panama ISP/HSD Market 90.0% $8.7bn 2,700,000
Trials(5)
-------------------------------------------------------------------------------------------------------------------
(1) "HSD" means high-speed data transmission, "ISP" means Internet services provider and "CATV" means cable
television.
(2) Pending acquisition, see "Description of the Company's Business - Markets - Guatemala."
(3) Under the terms of the Company's acquisition of its interests in Cablevisa and Cybernet Salvador, the
Company also obtained the operational and management control of those entities. See "Description of the
Company's Business-Markets-El Salvador."
(4) Cybernet Salvador began offering ISP and data transmission services in February 1999.
(5) Television Interactiva and Wireless Panama recently completed the build out of their infrastructure for ISP
and data transmission services and are currently conducting market trials.
</TABLE>
Guatemala
General. In February 1999, the Company entered into an agreement to
acquire 60% of Metrotelecom, S.A. ("Metro"), a Guatemalan holding company that
owns Cybernet S.A. ("Cybernet Guatemala"), an ISP, and has negotiated the right
to acquire the assets of Servicio de Television Via Satelite, S.A. ("STS"), a
CATV company. See "Description of the Company's Business - Note Regarding
Acquisitions." Metro also initiated local and long distance telephony services
in February 1999, through an interconnect agreement with Telgua. As of March 1,
1999, the combined subscribership of Cybernet Guatemala and STS exceeded 12,400
customers. Upon the closing of the Metro acquisition (the "Metro Transaction"),
the Company believes it will establish itself as a premier provider of
high-bandwidth, high-speed Internet access and data transmission services, voice
and video services to business and residential customers in Guatemala.
The table below provides an overview of the Company's operations in
Guatemala assuming the consummation of the Metro Transaction:
- --------------------------------------------------------------------------------
Profile
- --------------------------------------------------------------------------------
Services offered Dial-up Internet access, e-mail
Video services
High-speed dedicated and shared data transmission
Telephony services
- ----------------------------- --------------------------------------------------
Markets served Guatemala City
- ----------------------------- --------------------------------------------------
Number of accounts 12,486
- ----------------------------- --------------------------------------------------
Wireless spectrum 375 MHz in the 25GHz range
200 MHz in the 38 GHz range
- ----------------------------- --------------------------------------------------
Network infrastructure Fiber-optic infrastructure w/6 nodes/access points
60 km of fiber-optic cable
200 km of coaxial cable
1 video head-end
Network Operations Center
29 E1 circuits (12 in operation)
600 analog lines
Network Point of Presence
- ----------------------------- --------------------------------------------------
Network coverage 80% of the central business district
- ----------------------------- --------------------------------------------------
Source: Convergence Communications, Inc.
Market Opportunity. The Company believes that Guatemala, Central
America's largest economy, offers significant opportunities for bundled
telecommunications services, as evidenced by (i) its rapid economic and
population growth, (ii) low penetration of telephone and data transmission
services, and (iii) an open regulatory regime.
At present, Guatemala's teledensity is 5.3%, the lowest in Central
America after Honduras. However, the Company believes Guatemala's relatively
large population, combined with recently favorable economic conditions, provides
a significant telecommunications services growth potential. According to
industry experts, Guatemala's telecommunications sector will experience
significant growth following the successful privatization of Telecomunicaciones
de Guatemala ("Telgua") in October 1998 and the entry of new service providers
such as the Company into the market. Telgua estimates current demand for phone
lines totals one million lines and the official waiting list is for 400,000
lines. Teledensity is expected to double by the end of 2001.
Guatemala has the largest economy in Central America, with a total GDP
of $18.6 billion. It has shown relatively strong, sustained growth, averaging
4.1% over the past four years. The Company believes that infrastructure
deficiencies, particularly in education, electricity, telecommunications, and
transportation, constrain more rapid development; however, the Guatemalan
government recently liberalized several segments of the financial services
industry, deregulated petroleum prices, and revised the commercial code. In 1996
Guatemala's government passed legislation to liberalize the telecommunications
and electricity sectors, and these industries are in the process of
privatization.
The population of Guatemala is 11.5 million. Guatemala City, the
capital city of Guatemala, has a total population of 2.1 million and is the
industrial and political center of the country. The total number of urban
households in Guatemala is approximately 719,000, and the average buying power
per urban household totals $14,138. The top three (out of five) urban
socioeconomic segments ("SES") in Guatemala represent 33% of the total
households.
Regulatory Environment. Guatemala's telecommunications sector underwent
a major transformation with the passage of the November 1996 General Law of
Telecommunications, which established a new framework for telecommunication
services provision and regulation. As of May 1997, operators of
telecommunication services have been obligated to provide access to essential
telecommunications resources to other providers, opening the market for local,
domestic and international services. In March 1998, the then government-owned
incumbent local and international exchange carrier, Telgua, signed
interconnection agreements with a number of competitive providers (including
Metro). These agreements obligated Telgua to provide interconnection services by
July 1998. Telgua initiated performance under these agreements in February 1999.
Telgua was privatized in October 1998 when a consortium of financial investors
from Central America purchased 95% of the company. Competitive providers are
free to set their own tariffs on the services they provide.
The table below sets forth the regulatory environment of the
telecommunications market in Guatemala:
<TABLE>
<CAPTION>
- ---------------------------------- -------------------------- --------------------------- --------------------------
Markets Currently Open Markets Currently Closed Markets Open Pending Regulation Undefined
Auctions In 1999
- ---------------------------------- -------------------------- --------------------------- --------------------------
<S> <C> <C> <C>
Wireline voice services (local, Mobile voice licenses PCS IP telephony
long-distance) currently limited Wireless local loop
Data services One AMPS license
Dial-up Internet services One PCS license (Telgua)
Dedicated data services
Private network services
Value-added services
- ---------------------------------- -------------------------- --------------------------- --------------------------
Source: Booz, Allen & Hamilton.
</TABLE>
Operations Overview. The Company is scheduled to acquire 60% of Metro
in the second quarter of 1999. The acquisition will combine the operations of
Cybernet Guatemala, Guatemala's leading ISP, with the operations of STS, the
second largest provider of cable television in the country. The Company has been
providing operational, financial and management support to these entities since
April 1998. As of March 1, 1999, Metro had 4,986 Internet accounts, and STS had
over 20,000 homes passed and 7,500 active cable subscribers in Guatemala City.
In addition, Metro recently implemented an interconnection agreement with the
incumbent local exchange carrier, which enables it to offer telephone services.
The Company is currently exchanging telephone traffic with Telgua. Metro
currently processes approximately 6.5 million minutes a month on local dial-up
Internet calls, making it the largest aggregator of local minutes after Telgua
and the nationalized cellular phone company.
The purchase price for the Company's 60% interest in Metro will be $7.5
million, consisting of $2.0 in cash and promissory notes due through the second
anniversary of the closing, Common Shares of the Company having a value (based
on a per Common Share price of $8.70) of $2.5 million, and $3.0 million in
"capital notes" due through the fifth anniversary of the closing. Payments by
the Company under the capital notes will be used by the sellers to fund their
continuing 40% share of any additional equity capital required by Metro to meet
its working capital, expansion and operating requirements. The purchase price is
subject to adjustment under certain conditions. See "Description of the
Company's Business - Note Regarding Acquisitions."
Employing a total of 83 professionals, upon its acquisition, Metro will
be the Company's most developed data operation and will be the model for the
Company's other operations in the region. The Company expects to transfer
Metro's operational and technical skills to its other markets.
o Internet. Metro's Internet services include dial-up and high-speed
Internet access and other value-added services such as e-mail, pre-paid dial-up
Internet cards, Internet web-page design, hosting and tutorials. These services
are offered at various price points and usage plans that are designed to meet
the differing needs of its customers. These plans, which include an e-mail
address, are for limited or unlimited access, weekend-only use, multilogin
access and high-speed access. Each plan requires a monthly set-up fee, a monthly
usage fee, and a per-minute usage fee above a set hour limit for limited access
accounts. These amounts can be paid directly to the Company or with a credit
card. Currently, the standard set-up fee for dial-up Internet-access is $22.00,
the monthly usage fee is $33.00, and users pay an hourly usage fee of $4.95 for
every hour over 30 hours per month of use. Metro's unlimited usage fee is
currently $66.00. Metro also offers a prepaid Internet access card, which
provides a predefined number of minutes of access. The Company believes that
these rates will decrease in the future as additional competitors enter the
market.
The Company believes that an important component for Metro's dial-up
Internet services is the starter kit it provides its subscribers. The starter
kit includes the installation program, software and a start-up manual. The
market for individual Internet access in Guatemala is heavily influenced by
person-to-person referrals. Given the relative novelty of the Internet in
Guatemala, Metro has attempted to maintain a high degree of contact with the
community by offering tutorials, presentations to potential clients and free
trials. Metro advertises its services through local newspapers, television,
cable television, radio, and fliers. Metro also sells its services, including
prepaid Internet cards, through an arrangement with retail stores, universities
and other distribution points.
o Data Transmission. Metro offers high-speed data transmission through
a hybrid fiber-optic coaxial metropolitan area network to large and small
businesses and governmental entities, as well as to residential customers at
different price points according to their bandwidth requirements. The network is
currently owned by STS, but will be acquired by the Company in connection with
its acquisition of its 60% interest in Metro. Metro's dedicated business data
connectivity services currently start at a minimum of 256 Kbps. Metro can also
offer services at 512 Kbps, and up to E1 speeds. Metro offers three levels of
high-speed Internet service: residential, small business and large business.
Residential users currently pay a one-time set-up fee of $440 (which may be
financed using a credit card) and a monthly usage fee of $88.00. Small
businesses (up to 4 customers and no more than 256 Kbps of speed) currently pay
a set-up fee of $550 and a monthly usage fee starting at $150 (for 128 kbps).
Large businesses usually pay a one-time set-up fee of $1,850 (which includes a
router on loan) for all dedicated speeds, plus a monthly usage fee ranging from
$735 for 128 Kbps to $2,320 for E1 speeds. Additionally, the Company plans to
offer virtual private networks ("VPN") with speeds ranging from 128 Kbps to 100
Mbps to its high-speed data customers. VPNs provide secure transmission of
private IP traffic using shared network capacity. Customers will have the
ability to connect multiple business locations with IP-based technology at
defined levels of data transmission rates and security.
o CATV. STS, which the Company will acquire in connection with its 60%
interest in Metro, currently offers a total of 60 television channels with
varied programming content, including movies, serials, sports, children's
programming, general interest, news, music, locally produced programming and
channels from Europe and the United States. Pricing is tiered according to
location of the service delivery area. STS currently offers basic cable service
at a rate of approximately $15.70 per month, with an installation fee of $29.
After the acquisition of Metro, the Company intends to reposition the CATV
operations and alter the pricing structure accordingly.
o Telephone Services. Metro recently began offering telephony services
after successfully implementing its interconnect agreement with the incumbent
local exchange carrier, Telgua. After activation of its Ericsson ANS switch in
mid-February, 1999, Metro successfully processed a total of 300,000 minutes of
dial-up traffic in its first two weeks of operation. Metro also intends to offer
a broad range of telephony services, including toll free services and voice
mail. The Company's existing billing capabilities will be shared with its new
telephone services to measure the length of the calls and generate accurate
billing. The Company intends to charge competitive telephony installation fees
and telephone rates to its business, governmental and residential customers. The
installation charge for a minimum of two lines for a business customer is
currently $200 (plus $5 per line per month), while a residential customer will
be installed for $100 (plus $5 per line per month) for one line. Customers are
currently charged $0.023 per minute for a local call and no less than $0.36 per
minute for a call to the United States, based on current rates. The interconnect
agreement requires the parties to pay each other 50% of the local retail rate
for termination services in Guatemala City and 50% of the intra-urban rates for
termination on a national basis. International rates are not regulated, and
incoming international minutes are levied with a termination rate by the
terminating network of 70% of the current settlement rate (currently $0.38 for
the United States), minus a discount of approximately $0.09 per minute.
Metro believes that customer support is a critical element to its
success in retaining customers and attracting new users. Metro provides customer
service and technical support at a call center located on its premises, where a
customized billing system integrates functionality for each stage of customer
interaction around a single, unified Oracle customer database. This database
acts as a central repository for all user data collected during each stage of
the customer lifecycle, eliminating the need for multiple databases.
Network Architecture. STS recently completed the construction of its
network in Guatemala City, which consists of a 60-kilometer fiber-optic
infrastructure with six nodes interconnected with 200 kilometers of coaxial
cable. Its all-underground network utilizes coaxial cable for "last mile"
connectivity to its subscriber locations. See "Description of the Company's
Business - Note Regarding Acquisitions." The Company (through presently owned
subsidiaries) also recently received two blocks of spectrum for a high-bandwidth
point-to-multipoint wireless network, and recently leased a 256 MHz (which will
be increased to 512 MHz) microwave connection between the network in Guatemala
and its network in El Salvador, which provides the Company with a long distance
interconnection for all its services. In order to provide its telephony
services, Metro entered into an interconnection agreement with Telgua and
currently operates 12 E1 circuits. The Company also built a central Network
Operation Center ("NOC"), which monitors the Guatemalan network 24 hours a day,
seven days a week and provides real-time alarm, status and performance
information. The network covers 80% of the business community of Guatemala City.
Customers. As of March 1, 1999, Metro's top business customers were as
follows:
Operations Overview. The Company is scheduled to acquire 60% of Metro
in the second quarter of 1999. The acquisition will combine the operations of
Cybernet Guatemala, Guatemala's leading ISP, with the operations of STS, the
second largest provider of cable television in the country. The Company has been
providing operational, financial and management support to these entities since
April 1998. As of March 1, 1999, Metro had 4,986 Internet accounts, and STS had
over 20,000 homes passed and 7,500 active cable subscribers in Guatemala City.
In addition, Metro recently implemented an interconnection agreement with the
incumbent local exchange carrier, which enables it to offer telephone services.
The Company is currently exchanging telephone traffic with Telgua. Metro
currently processes approximately 6.5 million minutes a month on local dial-up
Internet calls, making it the largest aggregator of local minutes after Telgua
and the nationalized cellular phone company.
The purchase price for the Company's 60% interest in Metro will be $7.5
million, consisting of $2.0 in cash and promissory notes due through the second
anniversary of the closing, Common Shares of the Company having a value (based
on a per Common Share price of $8.70) of $2.5 million, and $3.0 million in
"capital notes" due through the fifth anniversary of the closing. Payments by
the Company under the capital notes will be used by the sellers to fund their
continuing 40% share of any additional equity capital required by Metro to meet
its working capital, expansion and operating requirements. The purchase price is
subject to adjustment under certain conditions. See "Description of the
Company's Business - Note Regarding Acquisitions."
Employing a total of 83 professionals, upon its acquisition, Metro will
be the Company's most developed data operation and will be the model for the
Company's other operations in the region. The Company expects to transfer
Metro's operational and technical skills to its other markets.
o Internet. Metro's Internet services include dial-up and high-speed
Internet access and other value-added services such as e-mail, pre-paid dial-up
Internet cards, Internet web-page design, hosting and tutorials. These services
are offered at various price points and usage plans that are designed to meet
the differing needs of its customers. These plans, which include an e-mail
address, are for limited or unlimited access, weekend-only use, multilogin
access and high-speed access. Each plan requires a monthly set-up fee, a monthly
usage fee, and a per-minute usage fee above a set hour limit for limited access
accounts. These amounts can be paid directly to the Company or with a credit
card. Currently, the standard set-up fee for dial-up Internet-access is $22.00,
the monthly usage fee is $33.00, and users pay an hourly usage fee of $4.95 for
every hour over 30 hours per month of use. Metro's unlimited usage fee is
currently $66.00. Metro also offers a prepaid Internet access card, which
provides a predefined number of minutes of access. The Company believes that
these rates will decrease in the future as additional competitors enter the
market.
The Company believes that an important component for Metro's dial-up
Internet services is the starter kit it provides its subscribers. The starter
kit includes the installation program, software and a start-up manual. The
market for individual Internet access in Guatemala is heavily influenced by
person-to-person referrals. Given the relative novelty of the Internet in
Guatemala, Metro has attempted to maintain a high degree of contact with the
community by offering tutorials, presentations to potential clients and free
trials. Metro advertises its services through local newspapers, television,
cable television, radio, and fliers. Metro also sells its services, including
prepaid Internet cards, through an arrangement with retail stores, universities
and other distribution points.
o Data Transmission. Metro offers high-speed data transmission through
a hybrid fiber-optic coaxial metropolitan area network to large and small
businesses and governmental entities, as well as to residential customers at
different price points according to their bandwidth requirements. The network is
currently owned by STS, but will be acquired by the Company in connection with
its acquisition of its 60% interest in Metro. Metro's dedicated business data
connectivity services currently start at a minimum of 256 Kbps. Metro can also
offer services at 512 Kbps, and up to E1 speeds. Metro offers three levels of
high-speed Internet service: residential, small business and large business.
Residential users currently pay a one-time set-up fee of $440 (which may be
financed using a credit card) and a monthly usage fee of $88.00. Small
businesses (up to 4 customers and no more than 256 Kbps of speed) currently pay
a set-up fee of $550 and a monthly usage fee starting at $150 (for 128 kbps).
Large businesses usually pay a one-time set-up fee of $1,850 (which includes a
router on loan) for all dedicated speeds, plus a monthly usage fee ranging from
$735 for 128 Kbps to $2,320 for E1 speeds. Additionally, the Company plans to
offer virtual private networks ("VPN") with speeds ranging from 128 Kbps to 100
Mbps to its high-speed data customers. VPNs provide secure transmission of
private IP traffic using shared network capacity. Customers will have the
ability to connect multiple business locations with IP-based technology at
defined levels of data transmission rates and security.
o CATV. STS, which the Company will acquire in connection with its 60%
interest in Metro, currently offers a total of 60 television channels with
varied programming content, including movies, serials, sports, children's
programming, general interest, news, music, locally produced programming and
channels from Europe and the United States. Pricing is tiered according to
location of the service delivery area. STS currently offers basic cable service
at a rate of approximately $15.70 per month, with an installation fee of $29.
After the acquisition of Metro, the Company intends to reposition the CATV
operations and alter the pricing structure accordingly.
o Telephone Services. Metro recently began offering telephony services
after successfully implementing its interconnect agreement with the incumbent
local exchange carrier, Telgua. After activation of its Ericsson ANS switch in
mid-February, 1999, Metro successfully processed a total of 300,000 minutes of
dial-up traffic in its first two weeks of operation. Metro also intends to offer
a broad range of telephony services, including toll free services and voice
mail. The Company's existing billing capabilities will be shared with its new
telephone services to measure the length of the calls and generate accurate
billing. The Company intends to charge competitive telephony installation fees
and telephone rates to its business, governmental and residential customers. The
installation charge for a minimum of two lines for a business customer is
currently $200 (plus $5 per line per month), while a residential customer will
be installed for $100 (plus $5 per line per month) for one line. Customers are
currently charged $0.023 per minute for a local call and no less than $0.36 per
minute for a call to the United States, based on current rates. The interconnect
agreement requires the parties to pay each other 50% of the local retail rate
for termination services in Guatemala City and 50% of the intra-urban rates for
termination on a national basis. International rates are not regulated, and
incoming international minutes are levied with a termination rate by the
terminating network of 70% of the current settlement rate (currently $0.38 for
the United States), minus a discount of approximately $0.09 per minute.
Metro believes that customer support is a critical element to its
success in retaining customers and attracting new users. Metro provides customer
service and technical support at a call center located on its premises, where a
customized billing system integrates functionality for each stage of customer
interaction around a single, unified Oracle customer database. This database
acts as a central repository for all user data collected during each stage of
the customer lifecycle, eliminating the need for multiple databases.
Network Architecture. STS recently completed the construction of its
network in Guatemala City, which consists of a 60-kilometer fiber-optic
infrastructure with six nodes interconnected with 200 kilometers of coaxial
cable. Its all-underground network utilizes coaxial cable for "last mile"
connectivity to its subscriber locations. See "Description of the Company's
Business - Note Regarding Acquisitions." The Company (through presently owned
subsidiaries) also recently received two blocks of spectrum for a high-bandwidth
point-to-multipoint wireless network, and recently leased a 256 MHz (which will
be increased to 512 MHz) microwave connection between the network in Guatemala
and its network in El Salvador, which provides the Company with a long distance
interconnection for all its services. In order to provide its telephony
services, Metro entered into an interconnection agreement with Telgua and
currently operates 12 E1 circuits. The Company also built a central Network
Operation Center ("NOC"), which monitors the Guatemalan network 24 hours a day,
seven days a week and provides real-time alarm, status and performance
information. The network covers 80% of the business community of Guatemala City.
<TABLE>
<CAPTION>
Customers. As of March 1, 1999, Metro's top business customers were as follows:
<S> <C> <C> <C>
- ------------------------------ ---------------------------- --------------------------- ----------------------------
Texaco Guatemala Hyatt Gillette IGSS
KLM Coca Cola Avis Rent-a-car UFM
Xerox Bayer KPMG INGUAT
Shlumberger Siemens UPS Banco de Guatemala
Lloyd's Bank Delta Airlines Ericksson UNICEF
Price Waterhouse Chevron Shell U.S. Embassy
Avon Pepsi Cola Mitsubishi Austrian Embassy
Glaxo McDonalds Holiday Inn Colombian Embassy
- ------------------------------ ---------------------------- --------------------------- ----------------------------
</TABLE>
Competition. Internet services were introduced in Guatemala in 1995.
There are currently no regulatory barriers to prevent companies from offering
value-added services, private network services or Internet services. The Company
views the market for provision of Internet access to individuals as competitive
and somewhat fragmented, while it believes the market for high-speed data
services is concentrated among fewer providers.
Until January 1999, Telgua was the sole operator for local,
long-distance and international telecommunications services in Guatemala. At the
end of 1997, Telgua had 430,000 lines in service out of a total 630,000
installed lines. All lines in the capital of Guatemala City were digital as of
year-end 1997, with 70% digitalization in the rest of the country. In addition
to Telgua's core business of providing local, long-distance and international
telecommunications services, it also provides leased lines, data network
services, and telegraph services. Telgua has executed a number of access
agreements with operators that are planning to provide domestic or international
voice services. These are now being implemented. Metro expects to compete
against the recently privatized Telgua on basic telephony services by providing
a more reliable and cost effective alternative to its services.
In the cable television market there are two main providers operating
in Guatemala City, including STS, with approximately 40,000 subscribers on a
combined basis, and hundreds of smaller providers operating in rural areas
throughout the country. The Company believes that STS, with approximately 7,500
customers, is the second largest cable television provider in the country.
The following table shows the composition of the Guatemala telecommunications
market in each segment, the approximate market shares of the principal
competitors and a price comparison of the products offered:
<TABLE>
<S> <C> <C> <C>
- ---------------------- ----------------- ---------------- ----------------------------------------------------------
Segment Competitor Market Share Products / Price
Internet access Metro 35% Limited (30 hrs) $33.00 + $4.95 / Unlimited $66.00(1)
Infovia 23% Limited $38.00 / Unlimited $135.00(2)
Quicknet 13% N/A
Data transmission Telgua 73% N/A
Metro 13% 256 Kbps / $212 + $1,575 installation(3)
Totalcom 7% N/A
Cablenet 7% N/A
Cable television Maya Cable 77% 117 channels / $27.91 + $37.31 installation(3)
STS 19% 60 channels / $15.70 + $29.00 installation(3)
Telephony Telgua 100% Local $0.022-0.03 / l.d.$0.037-0.052 +$224
Metro - installation(4)
Local $0.023 / l.d. (U.S.) $0.36 + $100 installation(4)
- ---------------------- ----------------- ---------------- ----------------------------------------------------------
(1) Subscription fee (monthly charge) plus hourly usage fee (30 hrs free) or unlimited usage fee.
(2) Subscription fee (monthly charge) or unlimited usage fee.
(3) Monthly charge plus installation fee.
(4) Local and long distance rates per minute plus residential installation fee (fees for Telgua are peak and off-peak).
Source: Convergence Communications, Inc.;Booz, Allen & Hamilton.
</TABLE>
El Salvador
General. The Company owns 44% of Chispa Dos Inc. ("Chispa"), which is
the holding company for the Company's El Salvador operations. Chispa owns three
operating subsidiaries, Cablevisa S.A. and Multicable S.A. (together
"Cablevisa") and Cybernet S.A. (Cybernet Salvador'). Chispa also owns a fourth
subsidiary which it is currently anticipated to be used to provide telephony
services in El Salvador. Under the terms of the Company's acquisition of its
interest in Chispa, it also acquired operating and management control of the
entity. See the Company's current report on Form 8-K dated August 3, 1998 for a
more detailed description of the Company's acquisition of its interest in
Chispa.
Cablevisa is the largest CATV provider in El Salvador, with over 26,000
subscribers. Cybernet Salvador recently launched its Internet access and data
transmission services and signed-up approximately 330 subscribers in its first
two weeks of operation. The Company intends to leverage the existing
infrastructure of Cablevisa and Cybernet Salvador to become El Salvador's
largest provider of bundled high-bandwidth, high-speed Internet access, data
transmission, voice and video services to high-end businesses, governmental and
residential customers. The Company's operations in El Salvador are its most
developed cable operations.
The table below provides an overview of the Company's current operations in El
Salvador:
- --------------------------------------------------------------------------------
Profile
- ----------------------------- --------------------------------------------------
Services offered Cable television
Data transmission
Dial-up and high-speed Internet access
E-mail, web hosting
- ----------------------------- --------------------------------------------------
Markets served San Salvador
- ----------------------------- --------------------------------------------------
Number of accounts 26,330
- ----------------------------- --------------------------------------------------
Wireless spectrum 186 MHz in the 2.5 to 2.7 GHz range
- ----------------------------- --------------------------------------------------
Network infrastructure 4 fiber-optic rings w/22 nodes/access points
90 km of 144 strand fiber-optic cable
300 km of coaxial cable
Wireless MMDS hub
3 video head-ends
Network Operations Center
Network Point of Presence
- ----------------------------- --------------------------------------------------
Network coverage 85% of the Central Business District
- --------------------------------------------------------------------------------
Source: Convergence Communications, Inc.
Market Opportunity. The Company believes El Salvador presents
significant opportunities for providers of bundled telecommunications services,
as evidenced by (i) significant unmet demand for basic telephone services,
reliable data transmission and Internet access services, (ii) favorable economic
conditions, (iii) open regulatory regime, and (iv) the absence of one company
offering integrated communications services.
Despite increased investment in the telecommunications sector since the
end of the civil war in 1992, the El Salvadoran telecommunications market
remains significantly underserved by existing operators. As of 1998, El Salvador
had a wireline penetration of only 8.7%, and the average waiting time for a new
line was over five years. Unmet demand for telephone lines is estimated to be
between 500,000 and 800,000 lines. This unmet need will contribute to strong
demand for new telephone services. In addition, the market for international
long-distance services benefits from the approximately one million Salvadorans
living in the United States; currently approximately 80% of the international
long-distance revenues from calls to El Salvador are generated by traffic from
the United States.
El Salvador is Central America's second largest economy. In 1998, El
Salvador had an annual growth in real GDP of 4.1%, to $11.8 billion.
Additionally, El Salvador is one of only four investment grade countries in
Latin America, as recognized by a Baa3 rating from Moody's Investor Services. El
Salvador had a relatively low inflation rate of 4.1% per annum in 1998 and has a
historically stable exchange rate.
The population of El Salvador is approximately 6.2 million. With a
population of approximately 625,000, the capital city of San Salvador is the
financial, commercial and political center of El Salvador and has Central
America's highest population density. The total number of urban households in El
Salvador is approximately 725,000, and the average buying power per urban
household totals $9,619. The top three (out of five) urban SES represent
approximately 42% of total households.
Regulatory Environment. El Salvador's telecommunication sector is
considered to be one of the most liberal in Central America. In September 1996,
the El Salvadoran Assembly enacted the Telecommunications Framework Law, which
established a new regulatory environment and paved the way for the breakup and
privatization of the government-owned monopoly on telecommunication services.
The Superintendent General for Electricity and Telecommunications is responsible
for the regulation and oversight of the telecommunications sector, resolving
conflicts on interconnection and access issues, awarding concessions and
allocating frequencies. Concessions or licenses are required to provide local,
long-distance services and wireless services, although there are no build-out
requirements, and the 49% limitation on foreign ownership is only applicable to
radio broadcasting and television. Rates for the services provided are capped,
while, below the cap operators are free to set their rates. Data service
providers, including ISPs, are not required to obtain a concession or license to
offer services.
<TABLE>
<CAPTION>
The table below sets forth the current regulatory environment of the telecommunications market in El Salvador:
- ------------------------------ --------------------------- --------------------------- ----------------------------
Markets Currently Open Markets Currently Closed
Markets Opening Undefined Markets
- ------------------------------ --------------------------- --------------------------- ----------------------------
<S> <C> <C> <C>
Wireline voice services None None None
(local and long-distance)
Data services
Internet access
Value-added services
Wireless services
Cable television
- ------------------------------ --------------------------- --------------------------- ----------------------------
Source: Booz, Allen & Hamilton.
</TABLE>
Operations Overview. In July 1998, the Company acquired 49.5% of
Chispa, the holding company for the El Salvadoran operations. The other 50.5% of
Chispa was acquired by FondElec Essential Serviced Growth Fund, L.P. which,
together with its affiliates (collectively, "FondElec"), is a significant
shareholder in the Company. See "Principal Stockholders." In connection with its
acquisition of its interest in Chispa, the Company also acquired operating and
management control of Chispa. In December 1998, Chispa sold additional shares of
its capital stock to a third party, resulting in the Company's present ownership
of 44% of Chispa.
Cablevisa is the largest cable television provider in the country.
Cablevisa has approximately 58,000 homes passed and over 26,000 subscribers in
San Salvador. These subscribers, most of whom belong to the upper three (out of
five) socioeconomic groups, represent 47% of the cable market. Cablevisa plans
to increase its penetration at the third socioeconomic tier of the market, and
to expand its services to the cities of San Miguel and Santa Ana utilizing
existing, redeployed equipment and its wireless network rights.
To complement its cable television services, the Company recently
launched dial-up Internet and high-speed data services to business, governmental
and residential customers in El Salvador through Cybernet Salvador.
Additionally, Cablevisa is negotiating an interconnection agreement for
telephony services. If Cablevisa obtains that contract, the Company intends to
offer local and long-distance voice services in the San Salvador area.
Cablevisa offers its services through its own sales force, which
targets residential customers, corporate accounts and governmental accounts. A
telemarketing group offers the complete selection of products to customers,
whose information is sourced through available databases, while an on-the-ground
sales group offers the Company's services door-to-door. The Company's sales
efforts are supported by advertising campaigns that use television, newspapers,
promotions on the Company's own cable network and inserts in its cable guide.
The Company also believes its 22 installation and repair vehicles roaming around
the city of San Salvador act as efficient moving banners. To enhance brand
recognition, Cablevisa installs free televisions in high-traffic areas, such as
airports. The Company offers customer support through a call center located in
its offices, where its service staff handles all questions regarding subscriber
accounts and dispatch service calls 24 hours a day, seven days a week. With a
total of 8 technicians on the ground, Cablevisa can handle up to 1,000 service
calls in any given month.
o CATV. Cablevisa offers a diverse line-up of high quality basic and
premium video programming of up to 64 channels. The Company's basic video
programming package of 62 channels provides extensive channel selection
featuring diverse cable and broadcast programming. Cablevisa's premium services
consist of Playboy and Movie City. To achieve faster penetration in the third
socioeconomic segment, the Company is offering free installations, free extra
outlets and either a 50% discount on the first month's installment or a free
cable guide for two months. The Company offers competitive pricing tiered
according to target market and product offerings. The Company currently charges
an installation fee of $14.27, a monthly charge of $24.59 for the basic package
and an additional monthly charge of $11.87 for premium channels.
o Data Transmission. The Company initiated high-speed data transmission
and Internet-access services to business and governmental customers in El
Salvador in February 1999. The Company offers competitive pricing according to
the bandwidth requirements of its business clients, ranging currently from $220
per month for 128 Kbps to $5,999 for 100 Mbps of capacity, while the
installation fee is currently $500. Residential high-speed users will initially
pay approximately $75 a month, plus a set-up fee of $199.
The Company also has an arrangement with GBM Corporation, an IBM
Alliance Company, the exclusive provider of IBM computer hardware and software
in El Salvador, to provide data transmission services to GBM's 120 business
customers. These customers have over 20,000 separate connections, which
represent between 15% and 20% of the market. The Company expects to migrate the
first group of 35 clients to its networks in the second quarter of 1999. The
remaining 85 clients will be transferred over the remainder of 1999. Under the
terms of the arrangement, GBM will act as a reseller of the Company's services
and will be entitled to a fixed percentage of the revenues generated by each of
its customers. Also, GBM will have exclusivity to market the Company's services
to a pre-agreed number of potential business clients for a period of six months;
thereafter, the Company will be free to offer its bundled services to those
customers. Since GBM is considered to have the most reliable network in the
country, the Company believes that the GBM relationship will represent an
important step in the Company's effort to establish itself as the premier
provider of high-speed data transmission services in El Salvador. The GBM
relationship will allow the Company to begin its data transmission operations in
El Salvador with a select customer-base and to market its alliance with GBM to a
wide range of potential business customers. See "Description of the Company's
Business-Note Regarding Acquisitions."
o Internet Services. In February 1999, the Company formed Cybernet
Salvador to offer Internet access services to business and residential
customers. As of March 1, 1999, the Company had approximately 330 ISP customers.
Cybernet Salvador provides its customers with dial-up Internet access through
the public switched network. The services allow customers access to electronic
mail, the Internet and file transfer services. Customers can choose from
different plans starting at current monthly rates of $15.00 for weekend-only
usage, $26.00 per month for limited usage (for up to 30 hours) and $35.00 per
month for unlimited usage. High-speed Internet connections currently start at
$75.00 per month. The Company anticipates that Cybernet Salvador will make use
of different promotions to sign up new customers, such as free dial-up time,
upfront discounts, credit card discounts and free installations. The Company
expects to commence offering a high-speed Internet access services in April of
1999.
Network Architecture. As part of its strategy to provide bundled
high-speed Internet access and data connectivity to its customers, the Company
recently completed the construction of the El Salvadoran network, which consists
of a fully redundant 90-kilometer fiber-optic ring interconnected with 300
kilometers of coaxial cable. The all-aerial network utilizes coaxial cable for
"last mile" connectivity to its subscriber locations. The Company's network
covers 85% of the business community of San Salvador. In areas of new
development, the Company will initially use wireless communications (using
Cablevisa's 186 MHz in the 2.5 to 2.7 GHz wireless frequency band) to deliver
the signal, and then deploy cable through areas of higher density. The Company
has also completed the construction of a central NOC, which monitors its
networks 24 hours a day, seven days a week and provides real-time alarm, status
and performance information.
Customers. Chispa has achieved significant penetration levels among its
targeted customers, and is now expanding its marketing efforts for its cable
television services to a broader residential customer base. For high-speed
Internet and data transmission services, the Company targets multinationals,
government agencies and other businesses in different industries including
banking, manufacturing, tourism and retail. In addition, the Company intends to
market its dial-up Internet services to its existing cable customers.
The Company's initial customers since starting its high-speed data
services in mid-February included Banco Cuscatlan, Banco Agricola and Kismet.
Competition. Until its privatization, the national telephone company
supplied all public telecommunications services in El Salvador. In July 1998,
France Telecom acquired control of the wireline company, Compania de
Telecomunicaciones de El Salvador, S.A. ("CTE"), and Telefonica de Espana
acquired control of the wireless company, Compania Internacional de
Telecomunicaciones, S.A. ("Intel").
Today, Cablevisa has a number of competitors in each of its markets.
The Company believes, however, that its El Salvadoran operations are currently
the only integrated service provider capable of delivering bundled
high-bandwidth, high-speed Internet access, data transmission, voice and video
services to businesses, governmental and residential customers.
The following table shows the composition of the telecommunications
market in El Salvador in each segment, the approximate market shares of the
principal competitors and a price comparison of the products offered:
<TABLE>
<CAPTION>
- ------------------- -------------------- ------------------- -------------------------------------------------------
Segment Competitor Market Share Products / Price
- ------------------- -------------------- ------------------- -------------------------------------------------------
<S> <C> <C> <C>
Cable television Cablevisa 47% 62 channels / $24.59 + $14.27 installation(1)
Cablecolor 34% 64 channels / $21.00 + $11.41 installation(1)
Telsat 16% N/A
Direct TV 3% 300 channels / $29.84(2)
- ------------------- -------------------- ------------------- -------------------------------------------------------
Internet access Salnet 21% Limited (30 hrs) $22.00 / Unlimited $40.00
CTE 12% N/A
Vianet 12% Limited (15 hrs) $10.00 / Unlimited $30.00
Cytec 7% Limited (15 hrs) $10.00 / Unlimited $40.00
Cybernet Salvador <1%(3) Limited (30 hrs) $26.00 / Unlimited $35.00
- ------------------- -------------------- ------------------- -------------------------------------------------------
Data transmission CTE N/A 128 Kbps / $713 + $1,500 installation(1)
Intsatelsa N/A N/A
GBM 15-20% N/A
Cybernet Salvador <1%(3) 256 Kbps / $280 + $500 installation(1)
- ------------------- -------------------- ------------------- -------------------------------------------------------
(1) Monthly charge, plus installation fee.
(2) Monthly charge; installation fee not available.
(3) Cybernet Salvador initiated Internet and data service operations in February 1999.
Source: Convergence Communications, Inc.; Booz, Allen & Hamilton.
</TABLE>
Venezuela
General. The Company launched its Venezuelan dial-up Internet access
and data transmission and value-added services in August 1998 through the
acquisition of Interamerican Telecom, Inc. ("Telecom"), the parent company of
Interamerican Net de Venezuela, S.A. ("Inter@net"). Inter@net is a
Venezuelan-based ISP which provides services to over 3,440 customers in the
cities of Maracaibo, Puerta La Cruz and Ciudad Ojeda. See the Company's report
on Form 8-K dated September 1, 1998 for a more complete description of the
Company's acquisition of Telecom and Inter@net. The Company is also expanding
its services to Caracas, where it has initiated dial-up Internet access services
and constructed the first of five wireless hubs to provide high-speed Internet
access and data transmission services.
The table below provides an overview of the Company's current operations in
Venezuela:
<TABLE>
<CAPTION>
The table below provides an overview of the Company's current operations in Venezuela:
- --------------------------------------------------------------------------------------
Profile
- --------------------------------------------------------------------------------------
<S> <C>
Services offered Dial-up Internet access, e-mail
Video services
- ----------------------------- --------------------------------------------------------
Markets served Maracaibo, Puerto La Cruz, Ciudad Ojeda, Caracas
- ----------------------------- --------------------------------------------------------
Number of accounts 3,442
- ----------------------------- --------------------------------------------------------
Wireless spectrum 1GHz in the 27.5 GHz range
400 MHz in the 29 GHz range
- ----------------------------- --------------------------------------------------------
Network infrastructure Caracas:
- 1 Wireless hub
- 2 E1 circuits, 2 DSP cards
- Network Operations Center
- Network Point of Presence
- Satellite Earth Station
Maracaibo:
- 4 E1 circuits, 1 DSP card
- Network Point of Presence
- Satellite Earth Station
Ciudad Ojeda:
- Network Point of Presence
- 128 Kbps clear channel connectivity to Maracaibo
- 1 E1 Circuit
Puerto La Cruz:
- Network Point of Presence
- 1 E1 Circuit
- Frame relay connectivity to Maracaibo
- ----------------------------- --------------------------------------------------------
Network coverage 9 square kilometers, representing approximately 20% of
the Caracas Central Business District
- ----------------------------- --------------------------------------------------------
Source: Convergence Communications, Inc.
</TABLE>
Market Opportunity. The Company believes the Venezuelan
telecommunications market offers growth opportunities for bundled
next-generation telecommunication services, given (i) the significant unmet
demand for telephone communications services, and (ii) the growing demand for
new services.
Telecommunications is one of the fastest growing sectors in Venezuela
(117% growth between 1991 and 1996). The growth of the telecommunications market
was prompted in part by the privatization of the state-owned monopoly telephone
services provider, Compania Anonima Telefonos de Venezuela ("CANTV"), and the
liberalization of enhanced telecommunications services in 1991. The sector has
benefited during the last several years from annual investments of more than $1
billion. Despite this recent growth, however the population of Venezuela remains
largely unwired, as evidenced by a teledensity of only 12.3%. Demand for basic
telephone services is expected to reach 4.8 million subscribers by 2000, an
increase of 1.4 million lines based on the capacity installed as of year-end
1998. Demand for value-added services is also expected to grow substantially in
the next few years and the number of users for such services is expected to
reach 1.2 million by 2000, up from 16,000 users in 1996. It is also estimated
that cellular mobile telephone penetration will grow to 6% by 2000, up from 4.1%
in 1997.
Venezuela experienced an economic slowdown in 1998 due to a sharp
(30-40%) decline in oil prices, reduced government spending, and high interest
rates. Venezuela's economic performance in 1998 was considerably weaker than in
1997; after Venezuela's strong real GDP growth of 5.1% in 1997, GDP for 1998 is
predicted to decrease by 0.1%, to $86.6 billion.
Venezuela has a population of 22.8 million, of which 4.9 million are in
Caracas. In Venezuela, the top three (of five) urban SES represent 25% of
households and the average buying power per household totals $10,594. The
relatively high average buying power per household in the top two SES, suggests
that, if made available, a significant number of households could afford to
purchase an increased range of communications services, such as wireline voice
services, mobile voice services, Internet, and video services.
Regulatory Environment. The expiration of CANTV's exclusive right to
provide basic telephone services in late 2000 will mark the opening of basic
telephony services to competitors in the Venezuelan market. By 2001, the Company
believes operators will be competing for subscribers in all service areas. The
Company also believes several companies are positioning themselves to enter the
local and long-distance markets at the onset of liberalization, creating a
highly competitive future market environment.
<TABLE>
<CAPTION>
The table below sets forth the regulatory environment of the telecommunications market in Venezuela:
- ------------------------------ ---------------------------- --------------------------- ----------------------------
Markets Currently Open Markets Currently Closed Markets Opening Pending Markets Undefined
Liberalization
- ------------------------------ ---------------------------- --------------------------- ----------------------------
<S> <C> <C> <C>
Data services Basic local telephone Basic telephone services IP telephony
Dedicated network services services in late 2000 Resale of fiber
Dial-up Internet services Domestic long-distance and Local, long distance and Data services via cable
Value-added services international voice international voice
Mobile satellite services services services
Trunking Market limited to 2 Award of a nationwide PCS
Rural Telephony national cellular operators concession expected by
end of Q2 1999
- ------------------------------ ---------------------------- --------------------------- ----------------------------
Source: Booz, Allen & Hamilton.
</TABLE>
Operations Overview. The Company launched its dial-up Internet access,
data transmission and value-added services through the acquisition of Inter@net
in August 1998. Inter@net, which is based in Maracaibo, holds two governmental
concessions through which it is authorized to provide services throughout
Venezuela. Inter@net began offering dial-up Internet access services in November
1996 and currently has approximately 3,440 subscribers located primarily in the
cities of Maracaibo, Puerta La Cruz and Ciudad Ojeda. Based on its market
research, the Company believes the Venezuelan Internet market has a current
total market size of approximately 130,000, of which the Company has a market
share of approximately 3%. Inter@net intends to launch Internet access and data
transmission services in Caracas in the second quarter of 1999, and intends to
expand data transmission services to subscribers in Maracaibo during 1999. In
addition to its metropolitan area networks in those cities, the Company intends
to interconnect its networks through a leased interconnect network.
In Caracas, Inter@net is currently constructing five wireless hubs,
which will be interconnected by a fiber-optic network, to provide Internet
access and high-speed data transmission services to its commercial, governmental
and residential customers. The Company is currently testing one operational hub,
and expects to launch its Internet access services in Caracas in the second
quarter of 1999. The Company also recently installed a central NOC in Caracas,
which will monitor its networks 24 hours a day, seven days a week and provide
real-time alarm, status and performance information on its operations. In
addition, it recently installed a 7.3M satellite dish on top of its NOC, which
will provide the Company with up/down-link connectivity.
In Maracaibo, which has a population of 1.7 million, Inter@net
currently provides dial-up and high-speed Internet access to approximately 3,000
residential customers and approximately 400 commercial customers. The Company
expects to launch high-speed Internet access and data transmission services to
its customers on its own network upon completion of its first wireless hub in
Maracaibo by August 1999. The Company intends to install a total of three
wireless hubs in order to cover the city of Maracaibo.
The Company has a NOC in Maracaibo, which monitors its networks.
Inter@net is expected to launch its Internet services in Valencia,
which has a population of 1.3 million, by October 1999. Upon construction of a
point of presence in Valencia, it will offer residential and commercial
customers dial-up and high-speed Internet access services. The Company intends
to construct a wireless hub in Valencia in the fourth quarter of 1999.
Puerto La Cruz, which has a population of 1.0 million, is currently
served by an ISP node. The Company anticipates that its Puerto La Cruz
operations will become the platform for the expansion of its operations into
Eastern Venezuela.
The Company intends to market a wide range of Internet and data
transmission services in Venezuela by promoting its high-speed Internet
connections and competitive pricing structures, while offering a high degree of
reliability. Inter@net intends to offer its commercial customers dedicated data
transmission services at connectivity speeds ranging from 256 Kbps to 2 Mbps,
while its direct competitors offer speeds of only up to 128 Kbps. In addition,
Inter@net's services are offered in various price and usage plans designed to
meet the differing needs of the customers. It currently offers several dial-up
Internet services, including limited dial-up (up to 40 hours) for $35.00,
unlimited dial-up for $43, or pre-paid dial-up Internet access services for
residential customers and corporate limited for $40, unlimited for $60, and
multi-login accounts services for commercial customers. Inter@net intends to
offer a complete business package, which includes web page design, web hosting,
video conferencing and up to 2 Mbps of Internet connectivity.
The Company also intends to launch voice services in its Venezuelan
metropolitan markets. The launch of its voice services will be contingent upon
its receipt of governmental approval to provide those services. Venezuela is
scheduled to privatize its telephony services rights in the year 2000.
Network Architecture. Inter@net provides its Internet access and data
transmission services through a system owned by the state-owned telephone
service provider. The Company is also building, or expects to build, several
wireless hubs in Caracas, Maracaibo and Valencia to provide high-speed data
services in all of its current Venezuelan markets. Through its first wireless
hub, the Company covers over nine square kilometers, reaching approximately 20%
of the central business district in Caracas. Once all five wireless hubs have
been completed (which the Company anticipates will be in 1999), the network will
cover approximately 85% of the central business district in Caracas.
Customers. The Company targets the higher socioeconomic segments in
Caracas, Maracaibo and Valencia for its Internet access services. For high-speed
Internet and data transmission services, the Company targets multinationals,
government agencies and other businesses in different industries, including
banking, manufacturing, tourism, and retail. These customers are mainly located
in the central business district of Caracas and business districts in Maracaibo
and Valencia.
<TABLE>
<CAPTION>
As of March 1, 1999, the Company's top business customers were as follows:
<S> <C> <C>
- --------------------------------------- --------------------------------------- ---------------------------------
Dresser de Venezuela Hotel del Lago Intercontinental Corpozulia
ABB Vetco Gray Novell Drilling Transporte Faga Bobinelli
Servicio Halliburton Air Drilling Televiza
Union Texas Diario C.A. Panorama Telecolor Canal 41
Propilven Diario El Regional Web cafe
- --------------------------------------- --------------------------------------- ---------------------------------
</TABLE>
Competition. CANTV has provided full service telecommunications since
1894. CANTV's monopoly for basic telephone services is scheduled to end in late
2000. By 2000, CANTV plans to have approximately 3.2 million main lines in
service. There are currently two providers of cellular voice services, with two
additional providers scheduled to launch service in the first quarter of 1999.
Internet service was first introduced in Venezuela in the mid-1990s by
a group of small and medium size ISPs. By March 1998, there were approximately
38 ISPs in operation. As of year-end 1998, the total number of Internet
subscribers was estimated to be 130,000. The Company believes the data
transmission services market in Venezuela is fragmented, with at least seven
major competitors offering dedicated value-added and private network data
services to corporate customers.
<TABLE>
<CAPTION>
The following table shows the composition of the Venezuelan telecommunications market in each segment, the
approximate market shares of the principal competitors and a price comparison of the products offered:
<S> <C> <C> <C>
- ------------------- -------------------- -------------------- ------------------------------------------------------
Segment Competitor Market share Product / Price
- ------------------- -------------------- -------------------- ------------------------------------------------------
Internet access T-Net 35% Limited (10 hrs) $15.58 / Unlimited $52.64
CANTV 23% Limited (10 hrs) $15.84 / Unlimited $57.22
Netpoint 6% Limited (10 hrs) $20.07 / Unlimited N/A
Inter@net 3%(1) Limited (40 hrs) $35.00 / Unlimited $43.00
Compuserve 3% N/A
- ------------------- -------------------- -------------------- ------------------------------------------------------
Data transmission CANTV N/A 256 Kbps / $1,183(2)
Bantel N/A 256 Kbps / $2,000(2)
C-Com N/A 256 Kbps / $3,400(2)
Inter@net N/A 256 Kbps / $499 + $199 installation
- ------------------- -------------------- -------------------- ------------------------------------------------------
(1) Represents market share on a national basis. In the Maracaibo, Ciudad Ojeda region, where Inter@net started its
operations, the Company has an approximate market share of 30% for Internet access services.
(2) Monthly rates, not including installation fee.
Source: Convergence Communications, Inc.; Booz, Allen & Hamilton.
</TABLE>
Costa Rica
General. The Company's wholly owned subsidiary, Television Interactiva,
S.A. ("Television Interactiva"), is developing a metropolitan area network in
San Jose using 2 GHz of bandwidth in the 28 GHz frequency range. The Company
intends to offer Internet and high-speed data services over this network, and is
currently conducting tests on it.
<TABLE>
<CAPTION>
The table below provides an overview of the Company's current operations in Costa Rica:
- ---------------------------------------------------------------------------------------
Profile
- ---------------------------------------------------------------------------------------
<S> <C>
Services offered Data transmission
Dial-up Internet access
- ----------------------------- ---------------------------------------------------------
Markets served San Jose
- ----------------------------- ---------------------------------------------------------
Number of accounts Market trials
- ----------------------------- ---------------------------------------------------------
Wireless spectrum 2 GHz in the 27.5 GHz range
- ----------------------------- ---------------------------------------------------------
Network infrastructure San Jose:
- 2 Wireless hubs installed; 1 under construction
- 5 km of fiber-optic cable
- Network Operations Center
- Network Point of Presence
- 120 Analog lines
- ----------------------------- ---------------------------------------------------------
Network coverage 70% of the Central Business District
- ----------------------------- ---------------------------------------------------------
Source: Convergence Communications, Inc.
</TABLE>
Market Opportunity. The Company believes that the Costa Rican
telecommunications market presents strong opportunities for providers of bundled
telecommunications services, based on: (i) the anticipated deregulation of the
market, (ii) favorable economic conditions and (ii) absence of a single company
offering combined telecommunications services.
The Company believes the telecommunications sector in Costa Rica is
more developed than most other countries in the Central American region.
However, the teledensity rate is still relatively low, as evidenced by a total
of 16.1 lines per 100 persons in 1998. The telecommunications sector is expected
to experience significant growth as a result of the upcoming deregulation of the
market and expected increased demand for telecommunications services.
Costa Rica experienced a 46% growth in CATV subscribers in 1997,
equating to a 9.3% penetration of an estimated 600,000 TV households. The
penetration rate is below that of the Latin American average of 13.9%,
indicating a potential for continued subscriber growth. Over the next five
years, the CATV market is forecasted to grow at an average of 28%. As of January
1, 1999, there were 40,000 commercial Internet dial-up subscribers in Costa
Rica, up from 20,000 subscribers in 1997, an annual growth rate of 100%.
Costa Rica, with a population of 3.7 million, has been recovering
steadily from its 1996 economic contraction. GDP growth was 3.2% in 1997 and is
expected to be 4.9% for 1998, resulting in a total GDP of $9.7 billion. The
total number of urban households in Costa Rica is approximately 407,400, and the
average buying power per urban household totals $8,928. The top three (of five)
SES represent approximately 50% of households.
Regulatory Environment. Costa Rica's government is considering
legislation that would significantly restructure the country's
telecommunications sector. The legislation is expected to be adopted in the
second or third quarter of 1999. The underlying approach of the pending
legislation is a gradual liberalization of several key markets during the next 2
to 3 years. The privatization of Instituto Costarricense de Electridad ("ICE"),
the national telephone company, is currently not under consideration.
<TABLE>
<CAPTION>
The table below sets forth the regulatory environment of the telecommunications market in Costa Rica:
- -------------------------- ------------------------------ ---------------------------- --------------------------
Markets Currently Open Markets Currently Closed Markets Open Other Potential
Post-Liberalization Opportunities
('99-'01)
- -------------------------- ------------------------------ ---------------------------- --------------------------
<S> <C> <C> <C>
Cable television Local voice Local voice (2000) IP telephony
Private data networks Domestic long distance International
International long distance long-distance voice (2001)
Data services Data services (1999)
Internet access: bandwidth Internet access (1999)
exclusively provided via ISPs can offer services
RACSA independently
Wireless voice services
(1999)
- -------------------------- ------------------------------ ---------------------------- --------------------------
Source: Booz, Allen & Hamilton; Convergence Communications, Inc.
</TABLE>
Operations Overview. The Company began its investigation of
opportunities in the Costa Rican telecommunications market in 1996. During the
interim period of market deregulation, its acquired Television Interactiva,
which has the rights to operate 2 GHz of bandwidth in the 28 GHz frequency
range. The network right holder of the bandwidth is Papeles de Curcuma, S.A., a
Costa Rican corporation ("PDC"). The license allows the use of the spectrum for
video and data services throughout Costa Rica, but does not currently provide
the Company with the right to provide voice services.
The Company intends to become a leading provider of bundled
high-bandwidth, high-speed Internet access, high-speed data transmission, voice
and video services to business, governmental and residential customers in Costa
Rica. The Company is currently establishing an ISP infrastructure, by using the
Guatemalan operations as a model, and it intends to enter the market, as soon as
the market deregulation takes place. The Company believes there is currently no
other competitor in the market building a comparable infrastructure to provide
bundled telecommunication services. Therefore, the Company believes it will be
well positioned to gain a significant market share in its targeted Costa Rican
markets if the deregulation opens the market to competition.
The Company will initially focus its development efforts in the Costa
Rican capital of San Jose, which has a population of 1.3 million. The Company
initiated construction of high-bandwidth facilities in San Jose in July 1998,
began market tests of its network in February 1999, and anticipates it will
launch its high-speed Internet access and data transmission services in San Jose
in the third quarter of 1999 assuming the receipt of appropriate authorizations.
Television Interactiva is currently building its Costa Rican sales and
marketing team. Prior to the deregulation of the market, the Company intends to
build credibility with selected corporate customers through marketing trials,
product demonstrations, and direct marketing. After the liberalization of the
market, it will aggressively market its services through a radio and newspaper
introductory campaign and through telemarketing. Other promotional introductory
strategies will include discounts per amount of services purchased, free
installations for high-end customers, cybercards and free membership promotions.
The Company intends to offer dedicated high-speed connections to
business customers with private networks at speeds varying from 128 Kbps, for a
current monthly charge of $350, to 1 Mbps for a current charge of $800, plus an
installation fee of $700. In addition to high-speed Internet connections to
business and high-end residential users, the Company intends to offer dial-up
Internet access to middle-class residential customers, students and small
companies. Limited dial-up Internet access will initially be offered at a
monthly fee of $30, while unlimited access will be offered at $40, both with an
installation charge of $35. Several other services will be offered, including
e-mail only, weekend only and multilogin.
Network Architecture. Television Interactiva recently completed two
wireless hubs and has another hub under construction, which will enable it to
deliver (subject to the receipt of appropriate approvals) Internet access, data
transmission and video services using the 2 GHz of bandwidth. In addition, its
has installed over 5 km of fiber-optic cable, connecting its two hubs, and is in
the process of constructing a 19km fiber-optic ring to interconnect its wireless
hubs and NOC. This network will cover 70% of the central business district in
San Jose. Television Interactiva is also currently building a NOC, which will
monitor its networks 24 hours a day, seven days a week, and provide real-time
alarm, status and performance information.
Customers. The Company intends to provide its bundled services
initially to businesses and residential customers in San Jose, which has a
population of 1.3 million. The Company intends to offer its high-speed data
transmission services to corporations, banks and financial institutions, chain
stores and super markets. It will offer its high-speed Internet access to the
top two (of five) SES residential customers, multinationals, universities and
import/export corporations. In addition, it intends to market its dial-up
Internet access services to residential customers in the second and third SES,
to students and to small and medium sized companies.
Competition. There are currently five ISPs operating in Costa Rica, all
of which are licensed agents of Radiografica Costarricense, S.A. ("RACSA"), a
subsidiary of ICE. These ISPs act as resellers for RACSA's Internet access and
data transmission services. Leading market players expect legislation to be
passed in the second or third quarter of 1999, which will liberalize the market
for Internet services and value-added services.
Since RACSA is the sole provider of bandwidth in Costa Rica, there is
presently no developed market for companies to offer dedicated data transmission
services to corporate customers. RACSA's customers routinely experience slow
data transmission speeds, low network reliability, long waiting times for
installation and repair, and poor customer service. If the market for data
services is liberalized in the upcoming telecommunications law, the Company
believes that, with its infrastructure in place and operational, it will be well
positioned to provide dedicated data transmission services to customers.
Television Interactiva believes it can differentiate itself from its potential
competitors by offering (i) speed and network reliability, (ii) integrated
solutions for telecommunication needs, (iii) 24-hour technical and customer
support, and (iv) installation within 48 hours.
<TABLE>
<CAPTION>
The following table shows the Costa Rican telecommunications market and the segments in which the Company
intends to start operations:
- ----------------------- -------------------------- ------------------- ---------------------------------------------
Segment Competitor Market share Product/ Price
- ----------------------- -------------------------- ------------------- ---------------------------------------------
<S> <C> <C> <C>
Internet access RACSA 100% Limited (10 hrs) $20.00
Television Interactiva - Limited $30.00 / unlimited $40.00
- ----------------------- -------------------------- ------------------- ---------------------------------------------
Data transmission RACSA N/A 256 Kbps / $1,485(1)
Television Interactiva - 256 Kbps / $150 + $700(2)
- ----------------------- -------------------------- ------------------- ---------------------------------------------
(1) Monthly charge, does not include installation fee.
(2) Monthly charge, plus installation fee.
Source: Convergence Communications, Inc.; Booz, Allen & Hamilton.
</TABLE>
Panama
General. The Company owns 90% of Wireless Communications Panama S.A.
("Wireless Panama"), which holds or has rights to use 1.4 GHz of high-frequency
radio spectrum in the 28GHz range to provide data services, video services and
"value added" services in Panama. The Company initiated construction of a
broadband facility in Panama City in May 1998 and has two operational wireless
hubs. The Company anticipates that it will offer a full range of data and
Internet services in Panama by June 1999.
<TABLE>
<CAPTION>
The table below provides an overview of the Company's operations in Panama:
- ---------------------------------------------------------------------------------------
Profile
- ----------------------------- ---------------------------------------------------------
<S> <C>
Services offered Data transmission
Dial-up Internet access
- ----------------------------- ---------------------------------------------------------
Markets served Panama City
- ----------------------------- ---------------------------------------------------------
Number of accounts Market trials
- ----------------------------- ---------------------------------------------------------
Wireless spectrum 1.4 GHz in the 28Ghz range
- ----------------------------- ---------------------------------------------------------
Network infrastructure Panama City:
- 2 Wireless hubs operational
- ----------------------------- ---------------------------------------------------------
Network coverage 80% of the central business district
- ----------------------------- ---------------------------------------------------------
Source: Convergence Communications, Inc.
</TABLE>
Market Opportunity. The Company believes that the Panama market
provides significant opportunities for bundled telecommunications services. The
Company's belief is premised on (i) the significant unmet demand in Panama for
basic telephone services, reliable data transmission and Internet services, (ii)
favorable economic conditions and an economy dominated by the service industry,
(iii) open regulatory regime for Internet access, data transmission and
value-added services, and (iv) deregulation of the telecommunications market in
the near future.
Cable & Wireless Panama currently dominates the market for basic local,
national and international voice services through its exclusive license, which
will expire on January 1, 2003. It has announced an aggressive network build-out
over the next few years as it attempts to gain market share prior to losing its
exclusive market position. However, Panama's teledensity of 15.4% indicates that
there is still a high, unmet demand and growth opportunities for telephone
services. In addition, the Company believes that the deregulated market for
Internet access, data transmission and value-added services, in connection with
the service sector, provides opportunities for a company like the Company to
become a significant provider of bundled high-bandwidth, high-speed Internet
access and data transmission services.
Panama's economy is based on a well-developed services sector that
accounts for approximately 70% of its GDP. Services include the Panama Canal,
banking, insurance, government, the Transisthmian Oil Pipeline, and the Colon
Free Zone (CFZ). Panama's economy grew by 4.4% in 1997 and is expected to
increase by 3.0% in 1998, resulting in total GDP of $8.7 billion. In Panama,
which has a population of 2.7 million, the top three urban SES represent 43% of
total households. The total number of urban households is approximately 366,400,
and the average buying power per urban household totals $8,863.
Regulatory Environment. The new telecommunications law of 1996, and the
subsequent sale of a controlling stake of Panama's national telecommunications
monopoly, have changed the face of the telecommunications industry in Panama.
These two developments marked the start of a liberalization of the
telecommunications sector, which is expected to continue on January 1, 2003,
when the exclusive rights granted to Cable & Wireless Panama to provide
telecommunication services will end. At that point, a number of
telecommunications services in Panama will be completely deregulated and open to
competition.
The Ministry of Government in Panama regulates the broadcasting sector,
including all radio stations, television stations, and cable TV. Broadcasting is
defined as one-way, point to multipoint transmission of content, and the
definition applies to radio, television and cable companies. Under current
legislation it is technically feasible for any company to apply for and obtain a
license to provide CATV services. However, in reality, it is very difficult to
obtain a cable license, as the process for entering the cable industry is much
less transparent than the process of obtaining a license.
<TABLE>
<CAPTION>
The table below sets forth the regulatory environment of the telecommunications market in Panama:
- ------------------------------ ------------------------------- --------------------------- -------------------------
Markets Opening post
Markets Currently Open Markets Currently Closed January 2003 Undefined Markets
- ------------------------------ ------------------------------- --------------------------- -------------------------
<S> <C> <C> <C>
Data services Basic voice services All currently closed Provision of data
Internet Basic local; services services services via cable
Value-added services Basic international services installed plant
Trunking Dedicated voice circuits IP telephony
Satellite services Personal telecommunications
VSAT service
Interactive multicasting to Mobile cellular services
private user groups
- ------------------------------ ------------------------------- --------------------------- -------------------------
Source: Booz, Allen & Hamilton.
</TABLE>
Operations Overview. The Company owns 90% of Wireless Panama, which
holds or has the rights to use 1.4 GHz of high-frequency radio spectrum in the
28 GHz range and the required concessions to provide Internet access, data
transmission, video and "value added" services in Panama. The Company initiated
construction of a broadband facility in Panama City in July 1998, is currently
operating two wireless hubs, and is currently performing market trials on its
network. The Company anticipates it will offer Internet access and data
transmission services in Panama by June 1999. After deployment of its services
in Panama City, the Company intends to launch its services programs throughout
the remainder of Panama.
The Company is currently in the process of building its Panamanian
sales and marketing team. Prior to the full deployment of its network, it
intends to aggressively market its services to a wide range of potential
business and governmental customers through an introductory campaign and
telemarketing. The Company intends to offer its high-speed Internet access and
data transmission services. The Company will initially offer its commercial
customers dedicated transmission services of 256 Kbps for $300 per month, plus
an installation fee of $700. It intends to offer dial-up Internet services
initially for a monthly fee of $25.
Dial-up Internet access for businesses will initially cost $56 per month.
In order to more quickly gain a significant market share in Panama, the
Company is pursuing the acquisition of an ISP, as well as actively pursuing
in-country strategic alliances or partnerships.
Network Architecture. The Company recently completed two wireless hubs
in Panama City to deliver Internet access and data transmission services using
the 1.4 GHz of high-frequency radio spectrum it holds or has the right to use.
In addition, the Company is building a NOC in Panama to monitor its networks.
The Company recently received authorization from Cable & Wireless Panama to
deploy a fiber-optic connection between its wireless hubs, and also recently
entered into a pole rights agreement with the local power utility to use its
utility poles. The Company expects to have its network fully deployed by June
1999. When it is completed, the Company anticipates that its network will cover
80% of the central business district of Panama City.
Customers. The Company intends to provide its high-speed Internet
access and data transmission, services to the large business community in Panama
City. The Panamanian economy is dominated by a well-developed services sector
that includes the Panama Canal, banking, insurance, government, the
Transisthmian Oil Pipeline, and the CFZ. In addition, the Company intends to
market its dial-up Internet access services to residential customers, students
and small and medium sized companies.
Competition. Internet services first became available in Panama
following the launch of a microwave link with Costa Rica in June 1994.
Currently, there are five major ISPs active in the Internet services market that
have a combined customer base of approximately 35,000 subscribers. Only one of
these competitors currently provides a combination of Internet access and data
transmission. The Company believes it will be the first integrated provider of
high-bandwidth, high-speed Internet access and data transmission services in
Panama that will be able to compete on the basis of network reliability and
price.
<TABLE>
<CAPTION>
The following table shows the composition of the telecommunications market in Panama in the segments the
Company intends to start operations:
- ---------------------- ----------------------- ----------------------- ---------------------------------------------
Segment Competitor Market share Product / Price
- ---------------------- ----------------------- ----------------------- ---------------------------------------------
<S> <C> <C> <C>
Internet access Sinfonet 51% Limited (10 hrs) $25.00(1)
Orbinet 35% Limited (10 hrs) $29.00(1)
C&W Panama 6% Limited (10 hrs) $20.00 + $1.00 per hour(1)
C-Com 4% N/A
GBM Panama 4% N/A
Wireless Panama N/A Limited $25.00(1)
- ---------------------- ----------------------- ----------------------- ---------------------------------------------
Data transmission Telpan 55% N/A
C&W Panama 27% 128 Kbps / $960 + $1,182 installation(2)
C-Com 18% N/A
Wireless Panama N/A 256 Kbps / $300 + $700 installation(2)
- ---------------------- ----------------------- ----------------------- ---------------------------------------------
(1) Monthly charge.
(2) Monthly charge, plus installation fee.
Source: Convergence Communications, Inc.; Booz, Allen & Hamilton.
</TABLE>
Mexico
Market Opportunity. The Company recently signed a letter of intent with
a Mexican telecommunications company to obtain an interest in its fiber-optic
network in Mexico City. The Company is currently preparing a business plan for
developing operations in six other cities in Mexico. The Company believes the
Mexican market presents an excellent opportunity for expansion of its business.
Mexico has a population of 96 million, with a moderate-to-high per capital
income. The GDP of the country is expended to grow by 3% in 1999 and 5% in 2000.
Additionally, since the signing of the NAFTA treaty, the Mexican economy has
been more closely tied to the United States economy and has weathered the recent
international currency turmoil.
Although the Mexican telecommunications market is one of the largest in
the world, Mexico had a teledensity of less than 10% in 1998. Between 1990 and
1996, the number of installed lines in Mexico increased from 5.4 million to 8.8
million lines, an increase of 60%. The number of installed lines is expected to
increase to 12.1 million in 2002, and teledensity is expected to reach 11%.
Business Strategy. Although the telecommunications market in Mexico is
more competitive than most other markets in which the Company currently
operates, the Company believes there is currently no other provider of bundled
high-bandwidth services in the market focusing on "last-mile" solutions. The
Company believes it can successfully enter the Mexican market by adopting
operating strategies similar to those it uses in its other markets. In Mexico,
the Company intends to (i) develop packet-switched IP-based metropolitan area
networks; (ii) acquire strategic network assets and ISPs to accelerate its
entrance into the market by gaining an existing customer base and cash-flow;
(iii) focus on the end user; (iv) offer bundled services; (v) acquire strong
local management; and (vi) form strategic alliances with strong local partners.
Execution to Date. In 1995, the Company began analyzing the Mexican
telecommunications market and exploring opportunities in it. In November 1998,
the Company hired Luis de la Fuente, the former Chief Operating Officer of
Amaritel, Mexico's largest competitive access provider, to act as CEO of the
Company's Mexico operations. Additionally the Company has retained Sam Nash,
former General Manager of Network Services for Amaritel, as a consultant.
In March 1999, the Company entered into a letter of intent with
MetroNet, S.A. a developer of metropolitan area fiber-optic networks in Mexico.
Under the letter of intent, the Company will acquire an interest in MetroNet's
fiber-optic network in Mexico City, which consists of approximately 80 route
kilometers (or 7,000 fiber kilometers) and is configured in two rings. A third
ring is planned for 1999. When the third ring is deployed, the Mexico City
network will consist of over 270 route kilometers. Under the letter of intent,
the Company and MetroNet also agreed to jointly develop metropolitan area
fiber-optic networks in six additional cities in Mexico by the year 2001. See
"Description of the Company's Business-Note Regarding Acquisitions."
The Company has identified or is exploring several additional Mexican
acquisitions and strategic alliances it believes would be valuable to the
success of its business plan. These acquisition and alliances include (i)
wireless spectrum that can be leased or acquired; (ii) ISPs; and (iii) long-haul
backbone capacity.
Other Company Network Rights
Argentina. In August 1997, in connection with the sale by the Company
of an approximately 18% shareholder position to a third party, the Company and
that third party formed WCI de Argentina, an Argentinean corporation ("WCIA").
See "Legal Formation and Development - Internexus Transaction," below. In 1998,
WCIA was granted a "value added" license to provide data services and video
conferencing services in Argentina. WCIA is owned 80% by the Company and 20% by
the third party shareholder.
Venezuela. In August 1997, the Company acquired a 78% interest in
Caracas Viva Vision, S.A. ("CVV"), a Venezuelan corporation that holds the
exclusive right to commercialize 1GHz of frequency in the Venezuelan 28GHz range
(the "CVV Transaction"). In connection with the transaction, the Company
acquired an 8.46% interest in Comunicaciones Centurion, S.A., the entity that
holds the concession to those rights. CVV currently utilizes the spectrum rights
to provide television programming to approximately 695 subscribers. In September
1998, the Company instituted an arbitration action against a former principal
shareholder of CVV for indemnification for breaches of the representations and
warranties made by CVV and the selling shareholders regarding CVV's operations
in the CVV purchase agreements. See "Litigation," below. The Company and the
shareholder have stayed the arbitration pending the outcome of settlement
negotiations.
New Zealand. The Company acquired network rights in New Zealand in
August 1995. The Company's New Zealand network rights are held by Auckland
Independent Television Services, Ltd. ("AITS"), a New Zealand corporation, which
is owned 94.9% by the Company. AITS holds (under two licenses from network right
holders) four channels in the 2.3 GHz frequency range in the Auckland area. AITS
has also acquired (as the network rights holder) the exclusive rights to utilize
equipment in the 40 GHz frequencies in the Auckland, Christchurch and
Wellington/Petone areas, with countrywide expansion rights as applied for on a
city-by-city basis. AITS's 40 GHz license rights permit the delivery of data,
telephony and video services. The Company intends to enter into a joint venture
with a local operating company in New Zealand, which will operate the network
rights on behalf of the Company, or sell these network rights in the near
future. The terms of the 40 GHz license rights require AITS to pay an annual
renewal fee, which the Company has not paid for 1999.
Utah (U.S.). The Company owns an interest in certain network rights and
a leased transmitter facility in Park City, Utah. The Park City rights were
acquired by the Company in August 1995 and are held by the Company's
wholly-owned subsidiary, Transworld Wireless Television, Inc. ("TWTV"). The Park
City rights consist of four 2.5 GHz channels. The Company intends to enter into
a joint venture with a local operating company in Utah, which will operate the
network rights on behalf of the Company, or sell these network rights in the
near future.
Business Operations
The Company has adopted a number of procedures and policies it believes
will facilitate the efficient operation of its business. These policies and
procedures include the following:
Bundled Service Packages. The Company currently provides a number of
telecommunications services, and anticipates that it will increase the number
and types of the services it provides as it builds out, acquires or launches its
telecommunications systems. These services will include standard
telecommunications services such as high-speed and dial-up Internet access and
high-speed data transmission, local and long distance voice services, and video
services, as well as value-added telecommunications services such as video
conferencing, web hosting and virtual private networks. To the extent it is
possible and consistent with its service offerings in any particular country,
the Company intends to provide subscribers with the ability to bundle the
various services offered by the Company without the constraints of inflexible
package requirements or product-specific boundaries. The Company believes a
flexible sales strategy will help reduce switching barriers for those
subscribers who may initially be reluctant to switch all of their
telecommunications services and vendors at one time or are subject to existing
contracts.
Pre-Launch Activities. Prior to initiating the buildout of a new
market, the Company conducts pre-launch studies to evaluate the population
demographics. The Company has already conducted several such studies in its
markets. The Company has created a development plan that identifies the
subscriber potential of various areas within its markets and, based on such
factors as television, telephone and data penetration rates, income levels,
existing competition and whether or not the Company has access to existing
fiber-optic or coaxial cable networks, it has defined the probable locations of
the network central node transmission facility, any required cell sites for
retransmission and any areas where fiber-optic, coaxial cable or wireless
networks may be required. As the construction of a central node or
retransmission facility nears completion, the Company generally conducts a
marketing program targeted to those areas identified as having the greatest
potential for subscriber growth. The Company's marketing programs typically
include (i) telemarketing, (ii) neighborhood door-to-door sales, including
multiple dwelling unit meetings and door hangers, (iii) marketing tied to
regional events such as high interest sporting events, (iv) telephone,
television and print advertisements, (v) promotional activities such as referral
programs and promotional gifts, (vi) direct mailings, (vii) Internet web pages,
(viii) advertising on installation vehicles, (ix) participation in professional
forums, (x) automated e-mail messages, (xi) free or promotional services to key
or high profile users, (xii) launch promotional activities, and (xiii) where
appropriate, the use of resellers, agents and direct marketing agencies.
Installation. The Company's installation packages for its services
generally include a standard rooftop mounted transceiver for wireless service or
hardwire cable connection and other related equipment, such as cabling and a
data modem, which will be located at the subscriber's location.
Customer Service. The Company believes that by providing high levels of
customer service, it will be able to maintain high levels of customer
satisfaction and minimize subscriber turnover. With this objective in mind, the
Company has adopted operating policies under which it (i) completes
installations promptly, (ii) provides prompt customer service 24 hours a day,
seven days a week using a call center or customer hotline, (iii) provides timely
repair service, and (iv) makes new subscriber follow-up calls after installation
to ensure customer satisfaction. The Company also imparts a "customer service"
mentality in its employees through ongoing in-house training sessions and
intends to establish an employee forum to facilitate an exchange of ideas for
improvements in customer service. The Company also intends to adopt various
employee incentive programs linked to achieving high levels of customer
satisfaction.
Network Operations Centers. The Company deploys central node
transmission and switching equipment in NOCs in each of its principal market
areas. The Company's networks are engineered to provide subscribers with the
ability to interconnect with the Internet, as well as with other locations the
customer may have within the Company's network and, with respect to the
Company's voice services, to interconnect with local exchange networks and long
distance networks. In order to ensure that the Company's networks are working as
efficiently as possible, the Company constructs and maintains NOCs which monitor
its various microwave, fiber-optic and coaxial cable networks on a 24 hour a day
basis and which provide its operating personnel with alarm, status and
performance information. The NOCs include equipment, which allows the Company to
conduct preventive maintenance activities in order to avoid network outages or
to respond promptly to any network disruption that might occur.
Management Information Systems and Billing. The Company uses commercial
management information systems in its operations, which are tailored to meet the
requirements of the subscription telecommunications industry. The Company
intends to standardize these systems, and anticipates that the integrated system
will allow the Company to monitor customer service and customer payment
patterns, monitor subscriber equipment and installations, and manage each
operating network efficiently. The Company has also adopted credit procedures
and collection policies, which it believes, will minimize subscriber turnover
and uncollectable accounts.
Acquisition Strategy
The Company intends to pursue its expansion strategy in the future by
acquiring high-bandwidth telecommunication networks and ISPs in markets
(principally in Central America, the Andean region and Mexico) that meet its
market selection criteria. The Company has developed a series of complex
criteria to analyze prospective acquisitions of market networks and subscriber
systems. These criteria include (i) the number of potential subscribers in the
market, (ii) the types of telecommunications services in which the subscribers
would most likely be interested, (iii) network frequency availability, (iv) the
existence of established groupings or blocks of network rights, (v) the nature,
quality and extent of service provided by existing and traditional
communications networks in the market, (vi) topography, (vii) demographics,
(viii) the existence of a strong local strategic partner, (ix) political and
economic risk, (x) governmental regulation, (xi) existing microwave, fiber-optic
and/or coaxial cable transmission facilities, and (xii) the potential to add to
the Company's subscriber base by acquiring the acquisition target's existing
operations. The Company also evaluates the potential acquisition's ability to
facilitate the Company's use of economies of scale and to increase its operating
efficiencies, particularly where a market acquisition can add subscribers or add
to existing regional market clusters.
Business and Operating Issues.
In order to operate successfully, the Company will need to deal with a
number of governmental and operational issues. These issues include the
following:
Governmental Regulation. The provision of the Company's services will
be subject to extensive governmental regulation. The amount, type and extent of
that regulation varies from country to country. The information set forth in the
subsection entitled "Regulatory Environment" under each of the market
descriptions summarizes certain governmental regulations affecting the Company's
ability to own and operate its networks and provide its services in those
markets. The regulatory structure for any particular market is subject to change
from time to time, and any such regulatory change could have a material and
adverse effect on the particular market in which that change takes place, and/or
upon the Company's business as a whole.
Risks and Foreign Investment. The Company has invested and intends to
continue to invest substantial resources outside the United States. Governments
of many developing countries have exercised and will continue to exercise
substantial influence over many aspects of private business enterprise. Local
governments own or control companies that are or may become competitors of the
Company or companies upon which the operating companies and network right
holders in which the Company has an interest may depend for required services or
materials. Governmental actions in the future could have a significant effect on
the economic conditions in many of the market areas in which the Company intends
to or has invested, and otherwise may have a material adverse effect on the
Company's business operations, financial condition and operations. The Company's
interests in some or all of its market countries could be adversely affected by
expropriation, confiscatory taxation, nationalization, political, economic or
social instability, changes in laws or other developments over which the Company
has little or no control.
Network Issues. The Company will be required to rely on the existence
of, and continuing ability to use or exploit, telecommunications licenses,
concessions or leases which are typically granted by governmental agencies on an
exclusive or limited basis and for limited terms. There can be no assurance the
governmental agencies will not seek to limit, revoke or otherwise adversely
modify the terms of any such rights. Those rights may be subject to significant
operating restrictions or conditions, including restrictions relating to the
implementation or construction of network improvements, commercialization,
subscriber rates or royalties or other specified deadlines or conditions which,
if not satisfied, could result in a loss or revocation of the network rights.
International Currency Risks. A number of the countries in which the
Company operates, such as Venezuela, have experienced substantial rates of
inflation and resulting high interest rates, sometimes for a period of many
years. Inflation and fluctuations in interest rates could have a material
adverse effect on the Company's operations and business. The Company has adopted
limited foreign currency exchange risk procedures and intends to adopt a country
specific protocol in the near future. There can be no assurance, however, that
the Company's risk procedures will be adequate or successful. The value of the
Company's interests in these countries will depend, in part, on currency
restrictions and controls that these countries may impose.
International Tax Risks. The Company currently has operations in
several Latin American countries and maintains its principal business offices in
the United States. Each of these countries has its own taxing laws, regulations
and policies. These laws, regulations and policies may differ significantly from
country to country. In addition, although tax treaties currently exist between
and among a number of the countries in which the Company does business, there is
no universal method or rate of taxation among the Company's various market
countries. In addition, distributions or other payments the Company receives
from its operating subsidiaries or affiliates may be subject to withholding
taxes imposed by the jurisdictions in which such entities are formed or are
operating. United States corporations may generally claim foreign tax credits
against their United States federal income tax expenses for any foreign
withholding taxes held or actually paid with respect to companies in which the
Company owns 10% or more of the voting stock, but the Company's ability to claim
any such foreign tax credits and to utilize net foreign losses may be subject to
limitations and restrictions. The Company has adopted limited tax planning
procedures to mitigate the international tax risks to which it is subject, and
intends to adopt a comprehensive set of planning and operational procedures in
the future. There can be no assurance that the Company's tax planning will be
adequate or successful.
Properties and Facilities
Equipment. The Company believes it will have the ability to source key
network components from a number of equipment vendors. Fixed local wireless
networks can be constructed using equipment from different manufacturers and can
utilize different technologies. Fiber-optic and coaxial cable systems can also
generally be constructed using equipment from different manufacturers. This is
particularly true with equipment such as switches, routers and servers where
there are many manufacturers that distribute their products through a number of
resellers. The Company believes that, by employing standardized equipment, the
Company will be able to make appropriate decisions based on the price of the
equipment, with less emphasis on the manufacturer.
Office Space. The Company leases approximately 2,500 square feet of
office space in Salt Lake City, Utah under a lease agreement expiring in
September 2000, approximately 3,500 square feet of office space in Pembroke
Pines, Florida under a lease expiring in 2001 and approximately 3000 square feet
of office space in San Jose, California under a lease expiring in 2001. The
Company believes its office space is adequate for its current needs. The Company
also maintains, through its various subsidiaries and affiliates, office space in
a number of the countries in which it operates.
Network and Other Rights. The Company holds license rights (either
directly or derivatively) for microwave point-to-multi-point telecommunications
networks and interests in fiber-optic and coaxial cable networks in its markets.
It generally has acquired those rights pursuant to (i) the acquisition of direct
ownership rights, (ii) long-term contracts with third parties, (iii)
arrangements where it is the majority or sole owner of the entity that owns
those assets, or (iv) contractual arrangements which it believes provide it with
substantial managerial and operational control of such assets, including
ownership positions in the operating entities for the asset and, where
permissible under local law, ownership positions in the asset holder.
The rights for wireless point-to-multi-point microwave communications
networks in most markets that meet the Company's market selection criteria have
already been granted to (or been applied for by) third parties. Therefore, in
order to build and operate wireless portions of the Company's networks in new
markets where it does not already control network rights, the Company will have
to purchase, lease or otherwise acquire sufficient network capacity from or with
those third parties or rely on other transmission facilities, such as
fiber-optic or coaxial networks.
Telecommunications Services Content
Internet and Data Services Content. The Company intends to operate ISPs
in each of the targeted countries to provide Internet access and data
transmission services to the Company's subscribers in those countries. The
Company will offer the services as part of a bundled offering under the
Company's brand name, through a contractual arrangement (partnership, management
agreement, services arrangements, joint venture or otherwise), or on a transport
basis (where the Company's networks will act as a "pipeline" for the ISP). These
data services include routing, addressing, DNS, registration services, network
security and fire walls, intranet services, e-mail, news services, and hosting
and peering services.
The Company also provides local dedicated data transmission circuits or
virtual private networks. These lines, which typically link customers' computers
together to create larger networks, are used by banks, billing clearing houses,
advertising agencies, hospitals and other business to exchange large data files,
as well as by any business to connect offices for file sharing, e-mail and work
group applications.
The Company is negotiating with a number of ISPs in its markets
regarding their acquisition or for terms under which the Company and those ISPs
would, on a partnering, joint venture or other contractual basis, provide
Internet access and data transmission services using the Company's networks.
Voice Services. The Company intends, subject to local regulation, to
provide a complete range of local exchange and long distance services as part of
its services. The Company anticipates these services will include basic local
services, access to long distance and dedicated lines, direct inward dialing,
custom calling services and, in the case of long distance services, domestic
intramarket, intermarket and international calling, toll free services, calling
card and conference call bridging and other enhanced services.
Television Programming. The Company has entered into a number of
contracts with commercial television programming suppliers and packagers for its
video programming services. These contracts include both master agreements,
under which the Company uses specific programming in most or all of its markets,
and regional specific contracts, pursuant to which the Company uses programming
in regional or country specific markets.
Legal Formation and Development
Company Formation. The Company was formed for the purpose of continuing
the development of certain business assets formerly held by Transworld
Telecommunications, Inc. ("TTI"), a publicly held United States corporation.
Through its joint venture entity, Wireless Holdings, Inc., TTI owns interests in
operating and non-operating wireless communications networks in six United
States markets. TTI also owned an interest in certain New Zealand and Park City,
Utah network rights. See "Business and Properties Litigation."
In July 1995, the board of directors of TTI voted to separate its
business assets into two groups. Under the terms of the business separation, TTI
agreed to form a new corporation -(the Company) to hold TTI's New Zealand and
Park City, Utah network rights, and the stock of that corporation was then to be
distributed to TTI's shareholders. In order to complete the transaction, TTI
formed the Company and, in August 1995, it issued 1,000,000 shares of its common
stock to TTI in exchange for TTI's interest in the New Zealand and Park City,
Utah networks. TTI immediately transferred the shares of the Company to an
escrow agent, to be held for the benefit of TTI's shareholders of record on that
date, until the Company complied with certain securities law requirements. In
December 1996, the Company registered the shares under the federal securities
laws under the Securities Exchange Act of 1934, as amended, pursuant to a
registration statement on Form 10-SB. The Company has not yet distributed the
shares from escrow.
TIC Transaction. Prior to January 31, 1997, the Company's primary
business assets consisted of its New Zealand network rights and a 4.4% equity
interest in Comunicaciones Centurion, S.A., a company that holds wireless
network rights in Venezuela. See "Description of the Company's Business -
Markets - Other Company Network Rights."
In February 1997, the Company merged a newly formed wholly-owned
subsidiary with Telecom Investment Corporation ("TIC"). TIC held or had the
right to acquire wireless telecommunication rights in a number of Latin American
countries, including Venezuela, Costa Rica, Panama, Peru and Guatemala. Under
the terms of the merger, the former shareholders of TIC received 685,062 shares
of the Company's newly designated Series A Preferred Shares and TIC became a
wholly-owned subsidiary of the Company (the "TIC Transaction"). The principal
shareholder of TIC was George D'Ambrosio, the father of the Company's Chief
Executive Officer. The Series "A" Preferred Shares were converted into 6,850,620
Common Shares effective August 21, 1998. See "Matters Submitted to the Vote of
Security Holders," below. As a result of the TIC Transaction, the former
shareholders and option holders of TIC acquired approximately 87% of the voting
control of the Company on a fully diluted common share equivalent basis. As a
result of the Internexus Transaction, the FondElec Transaction and the CVV
Transaction the interests of the former shareholders and option holders of TIC
were reduced to approximately 54.6% of the voting control of the Company. The
TIC Transaction was accounted for as a reverse acquisition for accounting
purposes. See "Management's Discussion and Analysis of Certain Relevant
Factors."
Note and Warrant Offerings. In 1997, the Company sold a series of
secured promissory notes and warrants in private placement transactions. The
aggregate principal amount of the notes (which were retired in full in November
1997) was $871,095. The warrants provide their holders with the right to acquire
the number of Common Shares of the Company having a value equal to the original
principal amount of the notes. Currently, the warrants entitle their holders to
purchase approximately 331,719 Common Shares at a current exercise price of
approximately $2.63 per share. FondElec and certain of its affiliates were the
principal investors in the notes and warrants.
On December 23, 1998, the Company sold $10 million of subordinated
exchangeable promissory notes, to FondElec and Internexus, as defined below. The
Notes are exchangeable, at the election of the Company, for preferred stock
having certain rights and preferences upon the purchase by third parties of at
least $10 million of such preferred stock. See "Management's Discussion and
Analysis of Certain Relevant Factors - Liquidity and Capital Resources" and
"Certain Transactions." The Notes bear interest at 10%, are due December 23,
2001, and include warrants for Common Shares while the Notes are outstanding.
Internexus Transaction. Effective August 1, 1997, the Company sold
Petrolera Argentina San Jorge S.A. 228,658 Common Shares and 150,380 Series "A"
Preferred Shares for $10.0 million pursuant to the Internexus Transaction. The
Series "A" Preferred Shares were converted into 1,503,800 Common Shares
effective August 24, 1998. See "Matters Submitted to the Vote of Security
Holders," below. Petrolera also acquired the right to purchase, for a nominal
purchase price, Common Shares and/or Series "A" Preferred Shares sufficient to
maintain its percentage interest in the voting control of the Company if the
Company entered into transactions for the sale of its securities with certain
specified parties on or before November 1, 1997. As a result of the CVV
Transaction and the FondElec Transaction, Petrolera acquired an additional
199,912 Common Shares and 23,822 Series "A" Preferred Shares for a total
purchase price of $7,831. Petrolera subsequently transferred its Common Shares
and Preferred Shares to Internexus, which is owned by the same shareholders as
Petrolera. The 23,822 Series "A" Preferred Shares were converted into 238,220
Common Shares effective August 24, 1998. Internexus also acquired warrants to
purchase Common Shares under the terms of the Notes. See also "Principal
Stockholders."
FondElec Transaction. Effective November 1, 1997, the Company sold
FondElec an aggregate of 424,876 Common Shares and 71,442 Series "A" Preferred
Shares for a total purchase price of $5,248,795 in the FondElec Transaction. The
Series "A" Preferred Shares were converted into 714,432 Common Shares effective
August 24, 1998. See "Matters Submitted to the Vote of Security Holders," below.
FondElec and its affiliates also hold warrants to purchase an additional 175,953
Common Shares, exclusive of the warrants to acquire Common Shares they will
receive under the terms of the Notes. See also "Principal Stockholders."
EMPLOYEES
As of March 1, 1999, the Company had in excess of 200 full-time
employees. Upon the consummation of the Metro Transaction, the Company will have
approximately 300 employees. The Company's employees are not represented by any
unions or collective bargaining entities.
LITIGATION
In September 1998, the Company filed two arbitration proceedings
against Donald Williams, a former director and officer of the Company. The first
proceeding relates to a claim for indemnification and breach of the
representations and warranties made by Mr. Williams and other parties pursuant
to the Company's acquisition of an interest in certain Venezuelan corporations
that hold and have the right to operate 1 GHz frequency in the 28 GHz range in
Venezuela. The other arbitration proceeding requests a declaratory judgment that
the Company's termination of Mr. Williams as an employee in August 1998 was for
"cause." Both arbitrations have been stayed pending the outcome of settlement
negotiations between the parties. In early April 1999, the Company was named as
a defendant in an action filed in New Jersey by a group of United States
investors who believe they have claims against Mr. Williams with respect to an
investment made in those Venezuelan entities (or certain entities that
previously held or had the right to operate those same network rights). The
plaintiffs have asserted that they have claims against the Company as a result
of the Company's investment in the Venezuelan entities. The Company believes the
claims of the plaintiffs regarding the Company are without merit.
The Company is also involved in, and pursues, routine legal actions
relating to its business operations, including customer collection activities.
Certain of the Company's officers and directors acted as officers and
directors of TTI. See "Management." In December 1997, that entity filed a
petition under Chapter 11 of the United States Bankruptcy Code in connection
with the defense and prosecution of litigation claims relating to a contract by
a third party to acquire certain United States network rights.
DIVIDENDS DISTRIBUTIONS AND REDEMPTIONS
The Company has not declared or paid any dividends to the holders of
its Common Stock or Series B Preferred Stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information summarizes certain transactions either
engaged in by the Company during the past two years, or proposed to be engaged
in by the Company, involving its executive officers, directors, 5% stockholders
and immediate family members of those persons:
In February, 1997, a wholly-owned subsidiary of the Company merged with
and into TIC. TIC was the surviving entity in the transaction. Certain of the
former shareholders of TIC serve as officers and directors of the Company. In
addition, the father of the Company's Chief Executive Officer was the majority
shareholder of TIC. See "Principal Stockholders" below. In connection with the
TIC transaction, the Company assumed an interest-bearing note in the amount of
$180,281 due to an entity controlled by the father of the Company's Chief
Executive Officer. As of December 31, 1998, $138,129 plus accrued interest of
$74,783 were outstanding on the loan. The Company also has a current liability
to an entity owned by that same person in the amount of $100,000 for a
commitment fee related to the entity's investment that secured the New Zealand
channel rights prior to TTI's involvement in New Zealand. TTI assumed this
liability in connection with its acquisition of the New Zealand rights and the
Company subsequently assumed the liability in connection with the its formation.
In addition, prior to the Company's merger with TIC, TIC entered into a services
agreement with Bridgport Financial, Inc. ("Bridgeport"), a principal of which is
the same person. Under the terms of the agreement, TIC retained Bridgeport to
provide advisory services relating to the acquisition, ownership and operation
of telecommunications services in Latin America, Europe and Asia. In
consideration for these services, TIC agreed to pay Bridgport a percentage of
TIC's gross annual revenues. The minimum amount payable to Bridgeport is $20,833
per month. The term of the services agreement extends through December 31, 2001.
Under the terms of the agreement, its terms apply to the gross revenues
generated by the Company. The Company, Bridgeport and its principal are
currently negotiating the terms of the modification or termination of the
services agreement and the satisfaction of all amounts due under the loan and
the commitment fee.
Effective August 20, 1998, the Company and FondElec entered into a
non-exclusive agreement under which FondElec agreed to provide advisory services
to the Company relating to the acquisition of controlling interests in companies
engaged in telecommunication services in Latin America, with particular emphasis
on investments in Mexico, Guatemala, El Salvador, Argentina, and Brazil. The
agreement requires FondElec to provide standard investment advisory services,
but neither FondElec nor any of its principals is required to take part in any
solicitation of investors or otherwise participate in the marketing of any of
the Company's securities. The term of the agreement is one year. Based on
FondElec's belief that its advisory services will enhance the Company's value,
but that the Company's current resources should be used for the launch and
acquisition of its communications networks, FondElec agreed to forego payment
for its services unless the Company raised equity, debt, or other cash
consideration from third parties on or before the termination of the agreement
in August 1999. The fee, in the amount of the lesser of 3% of the amount of the
amount raised or $750,000, will be paid from the gross proceeds of any such debt
or equity proceeds.
In February 1999, Chispa entered into a short term loan transaction
with FondElec pursuant to which it acquired funds that it used to pay an
installment obligation due under the terms of its acquisition of Cablevisa. If
the loan is converted into a long term loan, Chispa has agreed to grant FondElec
warrants to acquire common shares of Chispa and other financial remuneration.
In December 1998, the Company sold the Notes, as defined below, to
FondElec and Internexus. Under the terms of the Notes, FondElec and Internexus
receive warrants to acquire the Company's Common Shares. In addition, in
connection with the placement of the Notes, certain of the Company's
shareholders entered into an agreement with FondElec and Internexus regarding
the designation of, and voting for, directors. Under the agreement, the
shareholder group, FondElec and Internexus are each entitled to designate two
persons to be nominated as members of the Company's board of directors and the
other parties to the agreement are obligated to vote their shares in the Company
for the election of those designees. The voting agreement also contains certain
restrictions on the corporate actions the Company may undertake. The Company is
not a party to the voting agreement.
MANAGEMENT
The Company's directors, executive officers and key employees, as of
the date hereof, and their respective ages and positions with the Company, are
set forth below. Biographical information for each of the senior management
members and directors is also presented below. With the exception of Lance
D'Ambrosio and Troy D'Ambrosio, who are brothers, there are no family
relationships between or among any of the Company's directors or executive
officers. The Company's board of directors is currently comprised of six
members. Executive officers are chosen by, and serve at the discretion of, the
board of directors:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Lance D'Ambrosio...................... 41 Chief Executive Officer and Chairman of the Board of Directors
Brian Reynolds........................ 42 President and Chief Operating Officer
Jerry Slovinski....................... 42 Senior Vice President and Chief Financial Officer
Troy D'Ambrosio....................... 38 Senior Vice President, Legal & Administration, Director
William Levan......................... 44 Senior Vice President, Engineering & Technology
Dennis Gundy.......................... 54 Senior Vice President, Telephony
Ricky Posner.......................... 34 Vice President and Chief Executive Officer, CCI - Central America
Jose Miguel Padron.................... 44 Vice President and Chief Executive Officer, CCI - Andean Region
Luis de la Fuente..................... 52 Vice President and Chief Executive Officer, CCI - Mexico
Anthony Sansone....................... 34 Treasurer and Corporate Secretary
Gerald Peters......................... 58 Controller
Gaston Acosta-Rua..................... 34 Director
Jorge Fucaraccio...................... 54 Director
Peter Schiller........................ 63 Director
George Sorenson....................... 43 Director
</TABLE>
Senior Management Team
Lance D'Ambrosio, Chief Executive Officer and Chairman of the Board of
Directors. Mr. D'Ambrosio is the Chairman of the Board of Directors and Chief
Executive Officer of the Company, and holds other executive officer and director
positions in the Company's subsidiaries and affiliates. Mr. D'Ambrosio has been
involved in the telecommunications business for over eight years and has over 20
years of entrepreneurial business and sales experience. Mr. D'Ambrosio is
responsible for the Company's acquisitions, strategic planning and mergers, and
is responsible for all financing plans for the Company. Mr. D'Ambrosio founded
CCI in 1995 and has led the Company since its inception. Between 1992 and 1995,
Mr. D'Ambrosio served as the President, Chief Executive Officer and a Director
of Transworld Telecommunications, Inc. ("TTI"), a wireless cable television
company in the United States that had operations in six markets. Prior to
entering the telecommunications industry, Mr. D'Ambrosio was the President of
Bridgeport Financial, Inc., a holding company that acquired a full-service
broker/dealer securities operation, which was primarily involved in raising
venture capital for investments in high-tech companies. Prior to that, Mr.
D'Ambrosio held various sales and management positions with Paine Webber, Savin
Corp. and Xerox Corporation. Mr. D'Ambrosio holds a Bachelor of Science in
Marketing and Management from the University of Utah.
Brian Reynolds, President and Chief Operating Officer. Mr. Reynolds
joined the Company, effective July, 1998, as its President and Chief Operating
Officer. Mr. Reynolds has over 18 years of telecommunications experience in the
United States and international markets, focusing on major company start-ups.
Between late 1997 and the effective date of his employment with the Company, Mr.
Reynolds acted as a telecommunications consultant to a number of entities,
including the Company. Between 1994 and 1997 Mr. Reynolds served as Chief
Operating Officer of Wireless Holdings, Inc. ("WHI"), where he was responsible
for start-up and growth of its high-speed data and wireless cable operations.
Between 1993 and 1994, he was Chief Operating Officer for Australia Media LTD.,
a combined direct broadcast and wireless video company that currently serves
over 100,000 customers. Mr. Reynolds was a founder of Sutter Buttes Cablevision
and Pacific Australia West Cable in Northern California. Between 1984 and 1989,
Mr. Reynolds was responsible for the overall construction and profit and loss
operations for Sacramento Cable, taking the operations from construction and
launch to over 150,000 customers. Prior to working for Sacramento Cable, Mr.
Reynolds held various management positions with Warner Cable. Mr. Reynolds
received a Bachelor of Arts Degree from Rutgers University with an emphasis in
Accounting.
Jerry Slovinski, Senior Vice President and Chief Financial Officer. Mr.
Slovinski has 20 years of financial and accounting experience in the
telecommunications industry. After eight years with Arthur Anderson, in 1986,
Mr. Slovinski joined Venango River Corporation, a railroad holding company, as
controller. In 1988, he became Chief Financial Officer and, one year later,
President and Chief Executive Officer of Tel Com International, Inc., a
telecommunications company serving businesses throughout the United States.
Prior to joining CCI, Mr. Slovinski worked for The Network Management Group
providing financial and management consulting services to telecommunications
companies, including e.spire Communications, Ameritech, AT&T Canada, Citizens
Communications and Teligent. Mr. Slovinski received a Bachelor of Science Degree
in Business Administration and Accounting from Western Illinois University and
is a Certified Public Accountant.
Troy D'Ambrosio, Senior Vice President Legal & Administration,
Director. Mr. D'Ambrosio is a Director of the Company and Senior Vice President
Legal & Administration. Mr. D'Ambrosio has 17 years of business and government
experience, including four years of telecommunications experience prior to
joining CCI as an officer in October 1998. Prior to joining CCI, he served as
Vice President of Administration and as a Director of TTI and also served in
executive positions and as a director of WHI and its subsidiaries Between
September 1996 and October 1998, Mr. D'Ambrosio has served as the Manager of
Mutual Fund Operations for Wasatch Advisors, Inc., a registered investment
advisory firm which manages approximately $1 billion dollars in separately
managed accounts and maintains a family of mutual funds. Between July 1992 and
November 1993, Mr. D'Ambrosio was a Vice President and a partner in a public
relations firm specializing in legal, economic and government relations for
business. Between 1985 and 1992, Mr. D'Ambrosio was with American Stores
Company, a food and drug retailer with sales in excess of $20 billion annually,
where he served most recently as a Vice President of Corporate Communications
and Government Relations. Mr. D'Ambrosio received a Bachelor of Arts degree in
Political Science from the University of Utah.
William Levan, Senior Vice President Engineering & Technology. Mr.
Levan joined the Company in March 1998 as its Senior Vice President of
Engineering. Mr. Levan is a 23-year veteran of the telecommunications industry
and holds seven patents. Between July of 1997 and February of 1998, Mr. Levan
acted as the Director, Applications Hybrid Networks in Cupertino, California,
where he was responsible for pre-sales support of its Hybrid Series 2000
broadband modem system. Between 1994 and July 1997, he was the Director of
Hardware Engineering for Hybrid Networks in Cupertino, California. Between 1991
and August 1994, Mr. Levan was the Chief Technology Engineer for the Foothill
College District in Cupertino, California, where he was responsible for the
design, and supervised installation, of the district wide broadband voice, video
and data network. Mr. Levan received his B.S.E.E. from Ohio State University,
with an emphasis in Electrical Engineering.
Dennis Gundy, Senior Vice President Telephony. Mr. Gundy began his
telecommunications career 36 years ago and has served in numerous capacities for
MCI, Sprint, and Pacific Bell in the United States and 22 foreign countries.
Since 1980, Mr. Gundy has been involved with start-up telecommunications
companies. Mr. Gundy is a founding partner of U.S. Sprint and was instrumental
in the start-up and early growth of the company. Mr. Gundy previously served as
Vice President and General Manager of SERSA/GeoComm, a Mexico City-based long
distance and data carrier and Executive Vice President of St. Thomas and San
Juan Telephone Company. Mr. Gundy received his B.S.E.E. from Western Technical.
Ricky Posner, Vice President and Chief Executive Officer CCI Central
America. Mr. Posner is a Vice President and Chief Executive Officer of CCI's
Central American operations. Mr. Posner has over 14 years experience in the
telecommunications and media industries. Prior to joining CCI, Mr. Posner worked
for Metro, starting in 1996. Mr. Posner has also held positions with Warner
Espanola and El Deseo, a Spanish film producer and distributor. Mr. Posner
received a B.S. in Communications from Northwestern University, and is a native
of Colombia.
Jose Miguel Padron, Vice President and Chief Executive Officer CCI
Andean Region. Mr. Padron is Vice President & Chief Executive Officer of CCI's
Andean Region operations. Mr. Padron originally joined CCI in 1998, but took a
leave of absence shortly thereafter to act as Director of CONATEL, the
Venezuelan governmental agency that is the equivalent of the United States
Federal Communications Commission. Mr. Padron rejoined the Company in February
1999. Mr. Pardon is the founder of Inter@net, the Venezuelan ISP which CCI
acquired in July, 1998. Mr. Padron is also a founder and was the Vice President
of Satvenca, a Venezuelan satellite television station telecommunications
company. Mr. Padron received a Bachelor of Science in Mechanical Engineering
from Universidad Metropolitana in Venezuela and a Master of Engineering Sciences
Degree from Lamar University.
Luis de la Fuente, Vice President and Chief Executive Officer CCI
Mexico. Mr. De la Fuente is a Vice President and Chief Executive Officer of
CCI's Mexico operations. Mr. De la Fuente has over 30 years of
telecommunications experience in the Mexican telecommunications and financial
markets. Mr. de la Fuente was responsible for the start-up of Amaritel, Mexico's
largest CLEC, and until 1998, served as its Chief Executive Officer. Prior to
the start-up of Amaritel, Mr. de la Fuente served in various financial and
operational capacities for Grupo Radio Centro, Mexico's largest radio operator,
was the Chief Financial Officer of Salinas y Rocha, a leading household goods
retailer, and was the Chief Executive Officer of First Chicago Costa Rica Bank.
Mr. de la Fuente holds a Master of Science Degree in Industrial Management from
Purdue University.
Anthony Sansone, Treasurer and Corporate Secretary. Mr. Sansone is the
Secretary and Treasurer of the Company and served as its Controller until 1998.
Mr. Sansone has ten years of financial, accounting and business experience,
including seven years of telecommunications experience. Between 1994 and 1997,
he was the Treasurer and Controller of TTI and, during 1996, served as a
director of WHI. During 1993 and 1994, Mr. Sansone was the Controller, Secretary
and the Director of Shareholder Relations for Paradigm Medical Industries, Inc.,
a public manufacturer of ophthalmic cataract removal devices. During 1992 and
1993, he was the Assistant Controller of HGM Medical Lasers, Inc., which
manufactures and sells surgical and dental lasers. Between 1988 and 1992, Mr.
Sansone was the Assistant to the Vice President of Public Relations and the
Assistant to the Chairman of the Board of Directors for American Stores Company,
a large retail grocery and drugstore chain. Mr. Sansone received a Bachelor of
Science degree in Accounting from Utah State University in 1988 and a Master of
Business Administration degree from the University of Utah.
Gerald Peters, Controller. Mr. Peters is the Controller of the Company.
Mr. Peters has 23 years of telecommunications accounting and financial
experience, most recently as Controller of U.S. Diagnostic, Inc. Mr. Peters also
served as Director of Cash Management for Cablevision System Corp., and Vice
President and Controller for Warner Cable Communications, Inc. He holds a B.B.A.
in Accounting from City College of New York.
Gaston Acosta-Rua, Director. Mr. Acosta-Rua is a Director of the
Company. Mr. Acosta-Rua has spent the last eight years in the private equity
investment and management sector in Latin America, primarily as a Director of
FondElec Group, Inc. Before joining FondElec, Mr. Acosta-Rua worked for and
helped create the Latin American Group for Chemical Venture Partners and was
previously an officer with the Chemical Bank Debt/Equity Group, which was
responsible for managing the combined Chemical Bank Manufacturers Hanover
portfolio of Latin American equity investments. Before working for Chemical
Bank, Mr. Acosta-Rua worked as a consultant to the Brookings Institute in
Washington, D.C. Mr. Acosta-Rua received a Juris Doctorate from the George Mason
School of Law in 1991, and a Bachelor of Arts Degree in Computer Science and
Finance from Furman University.
Jorge Fucaraccio, Director. Mr. Fucaraccio is a Director of the
Company. Since 1994, Mr. Fucaraccio has been an advisor to Petrolera Argentina
San Jorge S.A. and Bolland S.A., Argentinean corporations, in software
engineering applications related to oil production and data communications.
Between 1989 and 1991, Mr. Fucaraccio worked as the National Director of
Technology at the National Institute of Industrial Technology in Argentina (the
"INTI") where he was responsible for managing all technical departments and
research centers of the INTI, including its communications, software
engineering, energy, mechanics and building technologies research departments.
Between 1982 and 1988, he was a member of the Board of Advisors at the Ministry
of Science and Technology and the Ministry of Energy in Argentina. During this
period, he was responsible for the creation of a number of research centers and
directed several technical governmental missions between the government of
Argentina and countries in Europe and Asia. Between 1978 and 1985, Mr.
Fucaraccio was a director of an energy transmission and solar energy utilization
research program sponsored by the Organization of American States. Mr.
Fucaraccio received a Licentiate in Physical Sciences from the Buenos Aires
University in 1970. He has also served as "guest worker" at the National
Institutes of Standards and Technology (formerly the National Bureau of
Standards) in Maryland under a fellowship sponsored by the United Nations. Mr.
Fucaraccio also engaged in post-graduate research activities at the Technical
University of Denmark (Lyngby).
Peter Schiller, Director. Mr. Schiller is a Director of the Company.
Since 1993, Mr. Schiller has been employed by Bolland S.A and its affiliates,
Petrolera Argentina San Jorge S.A. and OEA Services, all of which are
Argentinean corporations engaged in oil and gas services, where he currently
serves as the Director of New Business Development. Between 1976 and 1993, Mr.
Schiller held general management positions in the heavy electromechanical
manufacturing, automotive components and non-ferrous metals industries. Between
1961 and 1975, Mr. Schiller held a number of product design and quality control
management positions in the electrical, automotive and tractor industries. Mr.
Schiller received a degree in Electrical Engineering from the University of La
Plata, Argentina and pursued a three year, post-graduate course in Business
Management at the Argentine Catholic University in Buenos Aires, Argentina. Mr.
Schiller engaged in post-graduate studies in oil and gas specialization at the
Argentine Catholic University in Buenos Aires.
George Sorenson, Director. Mr. Sorenson is a Director of the Company
and also served as a Director of TTI. Mr. Sorenson is the Chairman of FondElec
Group, Inc. which, together with its affiliates, invests in energy,
communications, and other essential services in Latin American and Eastern
Europe, and manages private equity funds that invest in those services. Between
1990 and 1992, Mr. Sorenson was the Associate Director of Bear, Sterns & Co.,
Inc., where he was principally responsible for its international investment
banking in the far east and coordinated product development, marketing and
account coverage for Japanese accounts in New York and Tokyo. Between 1983 and
1990, Mr. Sorenson worked for Drexel Burnham & Lambert, Inc., most recently as a
Senior Vice President in Tokyo, Japan, where he managed the company's high yield
bond operations in Asia. Mr. Sorenson received a Bachelor of Arts degree in
Finance from the University of Utah and a Masters in International Business
Management from the American Graduate School of International Management.
Advisory Board
The Company has formed an advisory board for the purpose of assisting
it in the identification of market and product development opportunities,
reviewing with management the progress of the Company's specific projects,
recruiting and evaluating the Company's management and operational systems and,
in general, assisting the Company in its regulatory and strategic planning.
Members of the advisory board are leaders in the fields of business and
telecommunications and generally meet with the Company's management on an
informal basis.
Noe Kenig, Chairman, CCI Advisory Board. Mr. Kenig is chairman of the
Advisory Board. Mr. Kenig is the past Chairman of Motorola de Mexico, S.A. and
Vice President and Director, Latin American Operations, for Motorola, Inc. Prior
to joining Motorola, Mr. Kenig held several executive positions with a number of
large United States corporations or their foreign subsidiaries, including
National Distillers & Chemical Corporation, Tennaco Corporation, Philco, Bendix
and Westinghouse. Mr. Kenig also serves as a member of the World Business
Advisory Council of Thunderbird (the American Graduate School of International
Management) and the International Business Development's Advisory Board of
Northwestern University. Mr. Kenig currently acts as a consultant to Fortune 500
Companies such as Motorola and Proctor & Gamble.
Pete Campbell, Advisory Board. Mr. Campbell is a 35-year veteran of
IBM, where he retired as Manager of Market Analysis and Development of the IBM
Telecommunications Division. In that capacity, Mr. Campbell was responsible for
industrial intelligence, strategic developments and acquisitions, and market,
product and business planning for IBM's Telecommunications Development Division.
Board of Directors and Other Information.
The Company's Amended and Restated Certificate of Incorporation
provides for a classified Board of Directors consisting of three classes. The
directors in each class serve staggered three year terms. The Class 3 directors
(consisting of Troy D'Ambrosio) serve until 1999, the Class 2 directors
(consisting of Messrs. Sorenson and Schiller) serve until 2000, and the Class 1
directors (consisting of Messrs. Lance D'Ambrosio, Acosta-Rua and Fucaraccio)
serve until 2001. At each annual meeting of the shareholders of the Company, the
successors to the class of directors whose term expires at such meeting will be
elected to hold office for a term expiring at the annual meeting of shareholders
held in the third year following the year of their election. The Company's
Amended and Restated Certificate of Incorporation provides that directors may be
removed only for cause and only by the affirmative vote of the holders of
two-thirds of the Common Shares entitled to vote.
Board of Directors Committees
The Board of Directors has established four committees, the Executive
Committee, the Audit Committee, the Compensation Committee and the Special
Committee. Each of these committees is responsible to the full Board of
Directors, and, in general, its activities are subject to the approval of the
full Board of Directors.
The Executive Committee is charged with overseeing the operations of
the Company, and generally has all of the authority of the full Board of
Directors between regularly scheduled meetings of the full Board of Directors.
The Executive Committee is comprised of Messrs. Lance D'Ambrosio, Acosta-Rua and
Troy D'Ambrosio.
The Audit Committee is primarily charged with the review of
professional services provided by the Company's independent auditors, the
determination of the independence of such auditors, the annual financial
statements of the Company and the Company's system of internal accounting
controls. The Audit Committee also reviews such other matters with respect to
the accounting, auditing and financial reporting practices and procedures of the
Company as it may find appropriate or as may be brought to its attention,
including the selection and retention of the Company's independent accountants.
Messrs. Fucaraccio, Sorensen and Troy D'Ambrosio serve as the members of the
Audit Committee.
The Compensation Committee is charged with the responsibility of
reviewing executive salaries, administering bonuses, incentive compensation and
stock option plans of the Company, and approving the other benefits of the
executive officers of the Company. The Compensation Committee also consults with
the Company's management regarding pension and other benefit plans, and the
Company's compensation policies and practices in general. Messrs. Fucaraccio,
Acosta-Rua and Troy D'Ambrosio serve as the members of the Compensation
Committee. There are no interlocking relationships, as described by the
Securities and Exchange Commission, between the Compensation Committee Members.
The Special Committee is a director and non-director committee charged
with overseeing the actions to be taken by the Company with respect to any
registered public offerings of the Company's securities and certain other
matters delegated to it by the Board of Directors or Executive Committee, and
the board members of that committee generally have all of the authority of the
full Board of Directors on issues relating to such matters. The Special
Committee is comprised of Board members Lance D'Ambrosio, and Gaston Accosta-Rua
and non-Board members Jerry Slovinski and Anthony Sansone, who serve as the
Company's Senior Vice President and Chief Financial Officer and Secretary and
Treasurer, respectively.
Director Compensation.
Directors do not receive cash compensation for serving on the Board of
Directors or any committee of the Board, or for any other services rendered to
the Company in their capacity as director of the Company, but are reimbursed for
expenses they incur in connection with attending Board or committee meetings. In
addition, Directors who are not employees of the Company are awarded options
pursuant to the terms of the Company's 1998 Director Stock Plan (the "Director
Plan").
The Board of Directors adopted the Director Plan in June 1998, and the
shareholders approved it at the Company's annual meeting held on August 17,
1998. A total of 100,000 Common Shares are reserved for issuance under the
Director Plan. The Director Plan provides each non-employee director with an
aggregate annual compensation retainer of options (each, a "Director Option") to
acquire 8,000 Common Shares of the Company. Each Director Option is granted on
the first day after the last day of each calendar quarter for services performed
during the preceding quarter. The first director options were granted under the
Director Plan on January 1, 1999 for the annual period which commenced on July
1, 1998. Each non-employee director will continue to receive annual grants as
long as he or she has the status of non-employee director. If a non-employee
director no longer serves as a director of the Company for any reason, that
director is entitled to all unpaid portions of his or her Director Option (which
will accrue on a daily basis through the date of his or her termination as a
director).
Each Director Option vests on the first anniversary of the date of its
grant, and the Director Options expire, if unexercised, five years from the date
of grant. The exercise price of each Director Option is 85% of the fair market
value of the Common Shares on the date of grant. The number of Shares issuable
in connection with the Director Option and the aggregate number of Shares
remaining available for issuance under the Director Plan are proportionately
adjusted to reflect any subdivision or combination of outstanding Common Shares
of the Company.
The Director Plan will continue until May 30, 2008, unless it is
terminated prior to that time by action of the Board of Directors. The Board of
Directors may from time to time amend, modify or suspend the Director Plan for
the purpose of addressing any changes in legal requirements or for any other
purpose permitted by law except that (i) no amendment or alteration of the
Director Plan will be effective prior to the approval by the Company's
shareholders to the extent that approval is then required by applicable legal
requirements, and (ii) the Director Plan will not be amended more than once
every six months to the extent such limitation is required by Rule
16b-3(c)(2)(ii) (or any successive provision) under the Securities Exchange Act
of 1934, as then in effect.
Executive Compensation
The following table summarizes the compensation paid to or earned by
the Company's Chief Executive Officer and the four most highly compensated
executive officers whose total salary and bonus exceeded $100,000 (collectively,
the "Named Executive Officers") during the fiscal years ended December 31, 1998
and December 31, 1997. During the fiscal year ended December 31, 1996, none of
the Company's officers received any cash compensation, bonuses, stock
appreciation rights, long-term compensation, stock awards or long-term incentive
rights from the Company.
<TABLE>
<CAPTION>
Annual Compensation
Other Annual
Name and Principal Position Year Salary Bonus Compensation(1)
<S> <C> <C> <C> <C>
- ------------------------------------- ---- ---------- --------- ---------------
Lance D'Ambrosio 1998 $165,000 $12,500 $13,800(3)
Chief Executive Officer 1997 $165,000(2) $6,875 $13,800(3)
and Board Chairman
Brian Reynolds 1998 $135,000(4) $15,000 $6,000
President and Chief Operating 1997 $-0- $-0- $6,000
Officer
Jerry Slovinski 1998 $130,000(5) $-0- $6,000
Senior Vice President and Chief 1997 $-0- $-0- $6,000
Financial Officer
William Levan 1998 $120,000(6) $10,000 $6,000
Senior Vice President 1997 $-0- $-0- $-0-
Engineering and Technology
Troy D'Ambrosio 1998 $105,000(7) $5,000 $6,000
Senior Vice President Legal & 1997 $-0- $-0- $-0-
Administration
_______________________
(1) Represents full year premiums on group term life insurance and medical and dental insurance.
(2) Reflects full year base salary. Mr. D'Ambrosio became a salaried employee of the Company on August 1, 1997.
(3) Includes an automobile allowance of $7,800.
(4) Reflects full year base salary. Mr. Reynolds became a salaried employee of the Company on July 1, 1998.
(5) Reflects full year base salary. Mr. Slovinski became a salaried employee of the Company on November 1, 1998.
(6) Reflect full year base salary. Mr. Levan became a salaried employee of the Company on March 31, 1998.
(7) Reflect full year base salary. Mr. D'Ambrosio became a salaried employee of the Company on October 1, 1998.
</TABLE>
<TABLE>
<CAPTION>
Stock Option Grants
The following table provides information relating to stock options awarded to each of the Named Executive Officers during
the fiscal year ended December 31, 1998.
<CAPTION>
Common Shares
Option Grants in Last Fiscal Year
Individual Grants
--------------------------------------------
Potential Realizable
Value at Assumed
Percent of Annual Rate of Stock
Number of Total Options Appreciationfor
Underlying Granted to Exercise Option Term(3)
Options Employees in Price Per Expiration
Name Granted(#) Fiscal Year(1) Share(2) Date 5%($) 10%($)
- ---------------------- ---------- ------------- --------- ---------- ----------------------
<S> <C> <C> <C> <C> <C>
Brian Reynolds 100,000 100% $1.00 12/31/2001 $813,500 $857,000
_______________________
(1) Based on options for an aggregate of 100,000 Common Shares granted during the fiscal year ended December 31, 1998.
(2) On the date of the grant of the options for the Common Shares, the Board of Directors of the Company estimated that the fair
market value of that stock was $4.61.
(3) Potential realizable value is based on the assumption that the Common Shares of the Company appreciates at the annual rate
shown (compounded annually) from the date of grant until the expiration of the option term. These numbers are calculated based
on the requirements promulgated by the Securities and Exchange Commission and do not reflect the Company's estimate of future
stock price growth.
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year-End Option Value
The following table provides information regarding the number and value of options to acquire Common Shares held by the
Named Executive Officers on December 31, 1998.
<S> <C> <C> <C> <C>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
Fiscal Year-End (#) Fiscal Year-End(1)
--------------------------------- --------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------- ----------- ------------- ----------- -------------
Brian Reynolds 100,000 -0- $770,000 $-0-
______________________
For purposes of determining the values of the options held by the Named
Executive Officers, the Company assumed that the Common Shares underlying the
option had a value of $8.70 per share on December 31, 1998, which is the
estimated fair market value the Board of Directors attributed to that stock on
December 23, 1998 in connection with the Company's sale of the Notes to
Internexus and FondElec and the corresponding conversion price for the Notes.
The option value is based on the difference between the fair market value of
such shares on December 31, 1998, and the option exercise price per share,
multiplied by the number of shares subject to the options.
</TABLE>
Employment Agreements
The Company has adopted a policy of entering into employment agreements
with each of its senior management and key personnel, and has either entered
into an employment agreement with each of those persons or has approved the
terms of their agreements. The employment agreements generally have initial
terms of between one and three years. Under the agreements, the employee is
entitled to a base salary ($165,000 for Lance D'Ambrosio, $135,000 for Mr.
Reynolds, $130,000 for Mr. Slovinski, $120,000 for Mr. Levan and $105,000 for
Troy D'Ambrosio), plus incentive bonuses (as determined by the Board of
Directors), standard benefits such as health and life insurance and
reimbursement of reasonable expenses. The agreements also provide for moving
allowances in some instances. The employment agreements for a number of the
Company's senior management also provide for the grant of options. See
"Management - Executive Compensation" and "Management - Stock Option Grants,"
above. In limited circumstances (primarily in the case of senior management
personnel who have significant management responsibility for and over the
operation of one of the Company's general market regions) the employment
agreements provide for the grant to the employee in question of an equity
interest in the joint ventures and/or Company subsidiaries operating in those
regions. These grants typically provide that the equity interest received by the
employee is non-dilutable to the extent of the investment by the Company or
other parties in the joint ventures and/or Company subsidiaries of up to a set
amount.
The employment contracts may be terminated by the Company for cause
(which is defined in the agreements) or without cause. In addition, the employee
can terminate the contract on notice to the Company ranging from 90 to 180 days.
If the contract is terminated without cause or as a result of a "change of
control," as defined in the agreements, the employee is entitled to receive
severance pay of up to 12 months salary, depending on the particular agreement.
The agreements also contain non-competition, non-solicitation and assignment of
inventions provisions which the Company believes are consistent with industry
practice.
Limitations of Liability and Indemnification
The Company's Amended and Restated Certificate of Incorporation limits
the personal liability of directors and officers for monetary damages to the
maximum extent permitted by Nevada law. Under Nevada law, such limitations
include monetary damages for any action taken or failed to be taken as an
officer or director except for (i) an act or omission that involves intentional
misconduct or a knowing violation of the law, or (ii) payment of improper
distributions. Nevada law also permits a corporation to indemnify any current or
former director, officer, employee or agent if the person acted in good faith
and in a manner in which he reasonably believed to be in or not opposed to the
best interest of the corporation. In the case of a criminal proceeding, the
indemnified person must also have had no reasonable cause to believe that his
conduct was unlawful.
The Company's Bylaws provide that, to the full extent permitted by the
Company's Amended and Restated Certificate of Incorporation and the Nevada
Business Corporation Act, the Company will indemnify (and advance expenses to)
the Company's officers, directors and employees in connection with any action,
suit or proceeding (civil or criminal) to which those persons are made party by
reason of their being a director, officer or employee. Any such indemnification
is in addition to the advancement of expenses.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification by the
Company would be required or permitted. The Company is not aware of any
threatened litigation or proceeding which would result in a claim for such
indemnification.
Employee Benefit Plans
In June, 1998, the Board adopted the 1998 Stock Incentive Plan (the
"Incentive Plan"). The Incentive Plan was approved by the Company's shareholders
in August 1998. See "Submission of Matters to the Vote of Security Holders." The
Board believes that the availability of stock options and other incentives that
are permitted to be awarded under the Incentive Plan are an important factor in
the Company's ability to attract and retain qualified employees and to provide
incentives for them to exert their best efforts on behalf of the Company.
All employees, consultants, advisors, officers and directors of the
Company and its subsidiaries are eligible to participate in the Incentive Plan.
The Incentive Plan is administered by the Board, which may designate the price
and other terms and conditions of any such award. The Board may also delegate
authority for administration of the Incentive Plan to a committee of the Board.
Subject to the provisions of the Incentive Plan, the Board, or a committee, if
any, may adopt and amend rules and regulations relating to the administration of
the Incentive Plan. Only the Board may amend, modify or terminate the Incentive
Plan.
A total of 1,250,000 Common Shares were originally reserved for
issuance under the Incentive Plan. The Board of Directors increased the number
of Common Shares reserved for issuance under the Incentive Plan to 1,820,229
Common Shares in December 1998. A total of 1,757,000 options have been approved
for grant by the Board of Directors (subject to the grant of such options
pursuant to an option agreement in form approved by the Board of Directors), of
which no options have been granted as of March 1, 1999. The Incentive Plan
permits the grant of incentive stock options, nonstatutory stock options, stock
awards, stock appreciation rights, cash bonus rights, dividend equivalent
rights, performance-based awards and foreign qualified grants. Common Shares
awarded under the Incentive Plan may be authorized and unissued Common Shares or
Common Shares acquired in the market. If any award granted under the Incentive
Plan expires, terminates or is cancelled, or if Common Shares sold or awarded
under the Incentive Plan are forfeited to the Company or repurchased by the
Company, the Common Shares again become available for issuance under the
Incentive Plan.
The Board determines the persons to whom options are granted, the
option price, the number of Common Shares to be covered by each option, the
period of each option, the times at which options may be exercised and whether
the option is an incentive stock option ("ISO"), as defined in Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), or a non-statutory
stock option ("NSO").
All options granted under the Incentive Plan are exercisable in
accordance with the terms of an option agreement entered into at the time of,
and as a condition to, the grant. If the option is an ISO, the terms must be
consistent with the requirements of the Code and applicable regulations,
including (if applicable) the requirements that the option price not be less
than the fair market value of the Common Shares on the date of the grant. If the
option is an NSO, the option price is as determined by the Board, and may be
less than the fair market value of the Common Shares on the date of the grant.
The Board may award Common Shares under the Incentive Plan as stock
bonuses, restricted stock awards, or otherwise. The Board determines the persons
to receive those awards, the number of Common Shares to be awarded, the time of
the award and the terms, conditions and restrictions of the stock awards. The
aggregate number of Common Shares that may be awarded to any one person pursuant
to stock awards under the Incentive Plan is determined by the Board of
Directors. No stock awards have yet been granted under the Incentive Plan.
Stock appreciation rights ("SARs") may be granted under the Incentive
Plan. SARs may, but need not, be granted in connection with an option grant or
an outstanding option previously granted under the Incentive Plan. An SAR is
exercisable only at the time or times established by the Board. If an SAR is
granted in connection with an option, it is exercisable only to the extent and
on the same conditions as the related option is exercisable. The Board may
withdraw any SAR granted under the Incentive Plan at any time and may impose any
condition upon the exercise of a SAR or adopt rules and regulations from time to
time affecting the rights of holders of SARs. No SARs have yet been granted
under the Incentive Plan.
The Board may also grant cash bonus rights under the Incentive Plan in
connection with (i) options granted or previously granted, (ii) SARs granted or
previously granted, (iii) stock awarded or previously awarded and (iv) shares
sold or previously sold under the Incentive Plan. Bonus rights may be used to
provide cash to employees for the payment of taxes in connection with awards
under the Incentive Plan. No cash bonus rights have yet been granted under the
Incentive Plan.
The Board may also grant awards intended to qualify as
performance-based compensation under Section 162(m) of the Code and the
regulations thereunder ("Performance-based Awards"). Performance-based Awards
may be denominated either in Common Shares or in dollar amounts. All or part of
the awards will be earned if performance goals established by the Board for the
period covered by the awards are met and the employee satisfies any other
restrictions established by the Board. The performance goals are expressed as
one or more targeted levels of performance with respect to the Company or any
subsidiary, division or other unit of the Company, including performance levels
relating to earnings, earnings per share, stock price increase, total
stockholder return (stock price increase plus dividends), return on equity,
return on assets, return on capital, economic value added, revenues, operating
income, cash flows or any of the foregoing. No Performance-based Awards have
been granted under the Incentive Plan.
Awards under the Incentive Plan may be granted to eligible persons
residing in foreign jurisdictions. The Board may adopt supplements to the
Incentive Plan necessary to comply with the applicable laws of foreign
jurisdictions and to afford participants favorable treatment under those laws,
but no award may be granted under any supplement with terms that are more
beneficial to the participants than the terms permitted by the Incentive Plan.
No foreign qualified grants have been awarded under the Incentive Plan.
The Incentive Plan will continue in effect for ten years from the date
it was adopted by the Board, subject to earlier termination by the Board. The
Board may suspend or terminate the Incentive Plan at any time.
MATTERS SUBMITTED TO THE VOTE OF THE SECURITY HOLDERS
On August 17, 1998, the Company held its 1998 annual meeting of
stockholders. At the meeting, the Company's stockholders approved the Company's
Amended and Restated Certificate of Incorporation, which was previously adopted
by the Company's Board of Directors. The Amended and Restated Certificate of
Incorporation amended the Company's Certificate of Incorporation by (i) changing
the Company's name to "Convergence Communications, Inc.," and (ii) increasing
the Company's authorized stock to 100 million shares of Common Stock, par value
$.001 per share, and 15 million shares of Preferred Stock, par value $.001 per
share. The Amended and Restate Certificate of Incorporation was filed on August
24, 1998 with the Nevada Secretary of State. At the meeting on August 17, 1998,
the shareholders also approved a 1 for 3.5 reverse split of the Company's
outstanding capital stock and an agreement under which the Company's outstanding
Series A Preferred Shares were exchanged for Common Shares, on a Preferred Share
to Common Share ratio of 1 to 10. Unless otherwise noted in this report, all
share amounts and share descriptions contained in this report reflect the
exchange of the Series A Preferred Shares for Common Shares and the 1 for 3.5
reverse split of the Company's outstanding capital stock on a retroactive or
current basis, as appropriate.
At the annual meeting, and as part of the amendment and restatement of
the Company's Certificate of Incorporation, the shareholders of the Company also
approved a classified board and elected eight persons to the Company's Board of
Directors. Those members consisted of Lance D'Ambrosio, Donald Williams, E.
Andrew Lowe, Troy D'Ambrosio, George Sorenson, Gaston Acosta-Rua, Jorge
Fucaraccio and Peter Schiller.
The shareholders also approved, at the annual meeting, the Company's
1998 Stock Incentive Plan and the 1998 Directors Stock Plan.
For a more detailed description of the matters addressed by the
shareholders at the annual meeting, see the Company's definitive proxy statement
on Form 14A, dated July 24, 1998. See also, the Company's current report on Form
8-KA, dated October 23, 1998. See also "Management - Board of Directors
Committees," "Management - Director Compensation," and "Management - Employee
Benefit Plans."
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's outstanding securities as of March 1, 1999
by (i) all those persons or entities known by the Company to be beneficial
owners of 5% or more of each class of its outstanding securities ("5%
Shareholders"), (ii) each director and each of the Company's Chief Executive
Officer and the next four highest paid officers ("Named Executive Officers"),
and (iii) all directors and the Company's executive officers (including the
Named Executive Officers) as a group. The data presented are based on
information provided to the Company by the Named Executive Officers, the
Company's directors and its 5% Shareholders.
<TABLE>
<CAPTION>
Common Share
Number and Class of Ownership Equivalent
Beneficial Owner Shares(1) Percentage(1) Ownership(2)
- ----------------------- ------------------ ------------- ------------
<S> <C> <C> <C>
5% Shareholders
George D'Ambrosio(3) 3,492,852 29.0% 28.8%
Common Common
FondElec Group, Inc.(4) 2,486,963 20.2% 20.4%
Common Common
Internexus, S.A.(5) 2,226,675 18.4% 18.3%
Common Common
Donald Williams 96,988 * *
Common
19,761 19.5
B Preferred
Caribbean Communications 206,126 1.7% 2.0%
Group, S.A. Common
46,378 45.7%
B Preferred
Amsterdam Pacific, L.L.C. 34,920 * *
Common
9,918 9.8%
B Preferred
Group Radio Centro 51,682 * *
Common
11,628 11.5%
B Preferred
Officers & Directors
Lance D'Ambrosio (6) 1,110,700 9.2% 9.1%
Common Common
Brian Reynolds (7) 100,000 * *
Common
Jerry Slovinski - * *
Dennis Gundy - * *
William Levan - * *
George Sorenson(8) 5,333 * *
Common(14)
Troy D'Ambrosio(9) 580,336 4.8% 4.7%
Common Common
Gaston Acosta-Rua(10) 5,333 * *
Common(14)
Jorge Fucaraccio(11) - * *
Peter Schiller(12) - * *
All Directors and 2,092,208 17.4% 17.2%
Officers as a Class Common Common
(16 Persons) (13)
- --------------------------
*Represents beneficial ownership of less than 1% of the security in question.
1 Based on 12,025,633 outstanding Common Shares and 101,379 outstanding Series B Preferred Shares. The number of outstanding
Common Shares assumes the closing of the Metro Transaction and the issuance by the Company of 287,356 Common Shares in
connection therewith. The inclusion herein of any shares as beneficially owned does not constitute an admission of beneficial
ownership of those shares. Unless otherwise indicated, each person listed has sole investment and voting power with respect to
the shares listed. In accordance with the rules of the Securities and Exchange Commission, each person is deemed to
beneficially own any shares issuable upon exercise of share options or warrants held by such person that are currently
exercisable or that become exercisable within 60 days after March 1, 1999.
2 Assumes the matters set forth in footnote 1. Also assumes, based on the stated rights and preferences of the Series B Preferred
Shares, that each Series B Preferred Share has the voting rights of one Common Share.
3 Includes shares held in the name of Mr. D'Ambrosio and held in the name of entities over which Mr. D'Ambrosio (either
individually or with family members) has voting and/or beneficial control and for which he does not disclaim beneficial
ownership. Also includes shares held by Mr. D'Ambrosio as nominee for a general partnership whose other partner is Mr.
D'Ambrosio's son, Lance D'Ambrosio.
4 Reflects shares held by FondElec and its affiliates. Includes options to acquire 45,000 Common Shares and warrants to acquire
221,372 Common Shares. The number of Common Shares subject to the option and warrants is subject to adjustment if the Company
engages in certain fundamental corporate transactions.
5 Includes shares held in the name of Internexus and its affiliates, including (i) options to acquire 10,667 Common Shares issued
to Messrs. Fucaraccio and Schiller under the Company's Director Stock Plan which they are required, under the terms of their
contractual agreements with Internexus, to assign to Internexus, and (ii) warrants to acquire 45,418 Common Shares.
6 Includes shares held in the name of Mr. D'Ambrosio and shares held in the name of entities over which Mr. D'Ambrosio has voting
and/or beneficial control and for which he does not disclaim beneficial ownership. Does not include shares held by Mr.
D'Ambrosio's father as nominee for a partnership in which Mr. D'Ambrosio is a 50% partner.
7 Includes options to acquire 100,000 Common Shares.
8 Includes options to acquire 5,333 Common Shares. Mr. Sorenson is a principal of FondElec. Mr. Sorenson disclaims beneficial
interest in the shares held by FondElec.
9 Includes shares held in the name of Mr. D'Ambrosio and held in the name of an entity over which Mr. D'Ambrosio (either
individually or with family members) has voting and/or beneficial control and for which he does not disclaim beneficial
ownership.
10 Includes options to acquire 5,333 Common Shares. Mr. Acosta-Rua is a principal of FondElec. Mr. Acosta-Rua disclaims beneficial
interest in the shares held by FondElec.
11 Mr. Fucaraccio provides consulting services to Internexus. Mr. Fucaraccio disclaims beneficial interest in the shares held by
Internexus, including options to acquire 5,333 Common Shares awarded to him (but assigned to Internexus) under the Company's
Director Stock Plan.
12 Mr. Schiller is an officer of Internexus. Mr. Schiller disclaims beneficial interest in the shares held by Internexus,
including options to acquire 5,333 Common Shares awarded to him (but assigned to Internexus) under the Company's Director Stock
Plan.
13 Based on the matters described in footnotes 4 through 13; includes options and warrants to acquire 260,667 Common Shares.
14 Represents options to acquire Common Shares issued under the Company's Director Stock Plan.
</TABLE>
PART 2.
MARKET FOR EQUITY AND RELATED SHAREHOLDER MATTERS
There has been no established public market for the Common Shares,
Series A Preferred Shares, or Series B Preferred Shares of the Company. The
Company cannot predict the effect, if any, that future sales of shares of Common
Shares, or Series B Preferred Shares, or the availability of such shares for
sale, will have at any market price prevailing from time to time on the
Company's equity securities. Future sales of substantial amounts of stock
(whether common or preferred) could adversely affect any prevailing market
prices of the Company's outstanding equity securities.
All of the currently issued and outstanding shares of the Company's
Common Shares and Series B Preferred Shares were issued by the Company in
transactions which the Company believes did not involve unregistered public
offerings. The 1,000,000 Common Shares issued in connection with the Separation
and the Series A Preferred Stock issued in connection with the formation of the
Company are "restricted securities" but are eligible for sale in the public
market subject to the volume, affiliate, timing and manner of sale limitations
of Rule 144 promulgated under the Securities Act of 1933, as amended. The Series
B Preferred Shares outstanding are currently "restricted securities," as that
term is defined in the federal securities laws, and may not be resold unless
registered under the Securities Act of 1933, as amended, or sold in connection
with an exemption therefrom, including Rule 144. All or a portion of the
restricted shares may in the future become eligible for sale in the public
market place in reliance on Rule 144, subject to volume, affiliate, timing and
manner of sale or other restrictions contained therein.
The Company has previously issued warrants, which were not registered
under the federal or state securities laws in reliance upon exemptions from
registration contained in those laws. The warrants constitute "restricted
securities" and may not be resold unless registered under the Securities Act of
1933, as amended, or disposed of in connection with an exemption therefrom.
As of the date hereof, there are approximately 440 holders of the
outstanding Common Shares and 9 holders of the outstanding Series B Preferred
Shares. The Company has not declared or paid any cash dividends on any class of
its equity securities. The Company does not anticipate paying dividends on its
equity securities in the near future.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CERTAIN RELEVANT FACTORS
The following information should be read in conjunction with "Selected
Consolidated Financial Data" and the Company's Consolidated Financial Statements
and notes thereto provided elsewhere in this report. This Management's
Discussion and Analysis of Financial Condition and Results of Operations and
other parts of this report may contain forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in such forward-looking statements. Factors that
might cause such differences include, but are not limited to, the Company's
history of unprofitability and the continuing uncertainty of its profitability,
the Company's ability to develop and introduce new services, the consummation of
certain asset and subscriber acquisition agreements to which the Company is a
party, the uncertainty of market acceptance of the Company's new and existing
services, the Company's reliance on collaborative partners, the Company's
limited sales and marketing experience, risks associated with obtaining
governmental approvals for the Company's services, the highly competitive
industry in which the Company operates and the rapid pace of technological
change within that industry, changes in or failure to comply with governmental
regulations, the Company's dependence on key employees and general economic and
business conditions, some or all of which may be beyond the control of the
Company.
Overview
The Company was formed to provide high quality, low-cost integrated
communications services using its own metropolitan area networks. The Company
intends to operate primarily in recently deregulated and high-growth markets,
principally in Central America, the Andean region and Mexico. The Company
currently offers customers high-bandwidth, high-speed data connections,
high-speed and dial-up Internet access, voice and video services in a number of
its markets using an Internet protocol-based technology platform and networks
that employ fiber-optic and hybrid fiber coaxial cable, plus "last mile"
high-band width fixed wireless systems.
From the Company's inception in 1995 until 1998, its main activities
consisted of acquiring licenses and authorizations in its various market
countries, acquiring building access rights, hiring management and other key
personnel, developing operating systems and activities directly associated with
the acquisition and deployment of the Company's various networks. During fiscal
1998, the Company first acquired the ability to provide, or introduced,
significant bundled telecommunications services in its markets.
Since its inception, the Company has sustained net losses and negative
cash flow, both of which have been significant. The Company expects the losses
and negative cash flow to continue until it develops a customer base that will
generate sufficient revenues to fund its operating expenses. The Company expects
that its 1999 operating and net losses and negative operating cash flow will be
greater than in 1998 as it begins its first full year of providing commercial
services in its various markets. The Company also anticipates that the execution
of its business plan will result in a rapid expansion of its operations, which
may place a significant strain on the Company's management, financial and other
resources. The Company's ability to effectively manage the problems associated
with this expansion will depend upon, among other things, its ability to monitor
operations, control costs, maintain effective quality control, secure necessary
interconnect and regulatory approvals, expand internal management, technical,
information and accounting systems and attract, assimilate and retain qualified
management and professional personnel. The Company's inability or failure to
effectively manage these issues could result in significant subscriber turnover,
stagnant or decreasing subscriber growth, managerial inefficiencies, missed
corporate opportunities and continuing or increased losses.
The difficulties in managing these various business issues will be
compounded by a number of the unique attributes of the Company's business
operations and strategy for becoming a premier facilities-based
telecommunications provider in its various markets. For example, the Company
utilizes, as part of its operating network, wireless technology. This technology
has been used by other telecommunications providers for a significant period of
time, but the Company's point to multi-point technology has only been
commercially used on a limited basis. Although the Company selected that
technology because it believes it complements the wireline technologies it
otherwise employs in its networks, if that technology does not perform as
expected or provide the advantages that the Company expects, the Company's
business, financial condition and the results of its operations may be
materially and adversely affected. Further, the Company employs an IP-based
technology platform that utilizes packet switching to transmit voice, video and
data elements over the same network. The Company believes that IP-based
packet-switched networks have less overhead and greater capacity than
traditionally used technology platforms but, in the past, there have been issues
regarding the quality of service provided by those platforms. The Company
believes that the quality of services provided by other transport systems has
been incorporated into the newer generations of IP switches and bandwidth
managers, but if the Company's technology platform does not perform as expected
or provide the advantages the Company expects, its business, financial condition
and the results of its operations could also be materially and adversely
affected.
Accounting Treatment
The Company's assets consist primarily of two groups--those assets the
Company acquired as a result of its formation, and those it acquired in its
transaction with TIC. See "Business Properties-Legal Formation and
Development-Company Formation." As a result of the TIC transaction, the former
shareholders of TIC obtained a significant portion of the voting power of the
combined companies on a common share equivalent basis. Accordingly, in
conformance with generally accepted accounting principles (GAAP), the merger has
been accounted for as a "reverse acquisition." Consistent with reverse
acquisition accounting treatment, the financial statements presented for the
fiscal year ended December 31, 1996 are the financial statements of TIC and
differ from the consolidated financial statements of Convergence Communications,
Inc. and its subsidiaries as previously reported. The consolidated financial
statements presented include the operations of TIC for the fiscal year ended
December 31, 1996 and the period January 1, 1997 through February 3, 1997 and of
Convergence Communications, Inc. and its subsidiaries for the period February 4,
1997 (the effective date of the TIC acquisition) to December 31, 1998.
Results of Operations
Year ended December 31, 1998 compared to the year ended December 31, 1997
The Company was in the development stage at December 31, 1997. During
the year ended December 31, 1998, the Company completed its development
activities and commenced its planned principal operations.
For the year ended December 31, 1998, the Company had revenues of
$3,113,482 as compared to $40,186 for the same period in 1997, for an increase
of $3,073,296. In accordance with GAAP, the revenues include the results from
the El Salvador Entities beginning July 17, 1998, the results from Inter@net
beginning August 17, 1998, and the results from CVV beginning August 15, 1997
(with each starting date representing the acquisition date).
The cost of service increased $1,711,085, from $165,048 for the year
ended December 31, 1997 to $1,876,133 in 1998. The increase is primarily related
to the additional revenues earned in 1998. The Company's gross margin was
$1,237,349 for the year ended December 31, 1998, compared to ($124,862) for the
same period in 1997.
Operating expenses for the year ended December 31, 1998 were
$11,859,251 compared to $3,791,607 for 1997, for an increase of $8,067,644. This
increase was primarily due to an increase in general and administrative and
professional fees related to the Company's acquisitions and addition of new
employees, the additional depreciation and amortization from the Company's
acquired operations and the write-off of a portion of the Company's New Zealand
assets associated with a change in the Company's business plan. The Company's
operating loss was $10,621,902 for the year ended December 31, 1998, compared to
$3,916,469 for the year ended December 31, 1997.
Interest income for the year ended December 31, 1998 was $268,996,
compared to $116,367 in 1997. Interest expense decreased $130,015 from $807,203
for the year ended December 31, 1997 to $677,188 for the year ended December 31,
1998. The decrease was due primarily to recording of interest expense for
warrants issued below fair market value in 1997, and was offset by an increase
in interest expense incurred by the Company under the Acquisition Debt.
Minority interest in loss of subsidiaries was $799,298 for the year
ended December 31, 1998, compared to $13,011 for the year ended December 31,
1997. The increase was due to the recording of the minority interest for the El
Salvador Transaction and the additional issuance of shares of Chispa in December
1998.
As a result of the foregoing, the Company's net loss for the year ended
December 31, 1998 was $10,230,796, compared to $4,594,294 for 1997, for an
increase of $5,636,502.
Year ended December 31, 1997 compared to the year ended December 31, 1996
For the year ended December 31, 1997, the Company had revenues of
$40,186 from the multi-channel video services provided in Caracas, Venezuela by
CVV, which manages the Venezuelan network. In accordance with GAAP, the revenues
and expenses for CVV are reported for the period August 15, 1997 (the date the
Company acquired its initial 68.14% interest in CVV) to December 31, 1997. Prior
to 1997, the Company did not have revenues. The cost of service for CVV's
revenues was $165,048 for the year ended December 31, 1997.
Operating expenses for the year ended December 31, 1997 were $3,791,607
compared to $399,620 for 1996, for an increase of $3,391,987. This increase was
primarily due to stock option compensation expense and incurred by the Company
in 1997 for options granted below fair value and professional fee expense, an
increase in general and administrative and professional fees related to the
acquisition of the Company's Venezuelan network rights and the Petrolera
Transaction and FondElec Transaction, and the depreciation, amortization and
lease expense from the Company's New Zealand assets and the Venezuelan assets.
The Company's operating loss was $3,916,469 for the year ended December 31,
1997, compared to $399,620 for the year ended December 31, 1996.
Interest income for the year ended December 31, 1997 was $116,367. The
Company had no interest income during 1996. Interest expense increased $784,255,
from $22,948 for the year ended December 31, 1996 to $807,203 for the year ended
December 31, 1997. The increase was due primarily to additional interest expense
incurred by the Company under the promissory notes the Company issued in
mid-1997, which were repaid in November 1997, and the warrants issued in
connection with those notes, which were issued at a price below fair value.
Minority interest in loss of subsidiaries was $13,011 for the year
ended December 31, 1997 . This loss related to the Company's New Zealand
subsidiary, AITS. There was no minority interest prior to 1997.
As a result of the foregoing, the Company's net loss for the year ended
December 31, 1997 was $4,594,294, compared to $422,568 for 1996, for an increase
of $4,171,726.
Liquidity and Capital Resources
Since inception, the Company has funded its cash requirements at the
parent company level through debt and equity transactions. The proceeds from
these transactions were primarily used to fund the Company's investments in, and
acquisition of, start-up network operations, to provide working capital, and for
general corporate purposes, including the expenses incurred in seeking and
evaluating new business opportunities. The Company's foreign subsidiary
interests have been financed by the Company through a combination of equity
investments and shareholder loans.
As of December 31, 1998, the Company had current assets of $10,126,717,
compared to $6,455,282 as of December 31, 1997, for an increase of $3,671,435.
The increase in current assets was primarily due to an increase in cash as a
result of the Notes, and the acquisition of the operations of Inter@net and
Chispa.
The Company had current liabilities of $14,096,138 as of December 31,
1998, compared to $1,961,413 as of December 31, 1997, for an increase of
$12,134,725. The increase in current liabilities was due to the assumption by
the Company of the current liabilities of Inter@net and Chispa, the current
portion of debt related to the issuance of notes in the Inter@net Transaction
and the El Salvador Transaction ("Acquisition Debt"), an increase in accounts
payable for purchases an increase in related party accrued consulting fees and
an increase in due to affiliates. Long term debt increased $14,216,203, from
$1,130,660 at December 31, 1997 to $15,346,863 at December 31, 1998. The
increase was due primarily to the Acquisition Debt, foreign severance accruals
and the issuance of the Notes.
The Company's principal sources of funds are its available resources of
cash and cash equivalents. At December 31, 1998, the Company had cash and cash
equivalents of $4.3 million. In early January, 1999, the Company received an
additional $5 million in conjunction with the Notes.
The cash flow generated by the Company's operations and projected
network launches will not be sufficient to cover the Company's projected
operating expenses, general and administrative expenses and start-up costs.
The ability of the Company to provide the services contemplated by its
business plan will be dependent upon the Company obtaining substantial
additional sources of funds to finance its business plan. While the Company
believes that it may be able to obtain financing through additional equity or
debt financing or otherwise, no assurances can be given that any such financing
will be available, or that the Company will be able to obtain any such financing
on favorable terms.
The Company currently estimates that it will require between $25 and
$30 million to build out and launch its operations in accordance with its
business plans during 1999. The Company has the ability to moderate its capital
spending and losses by varying the number and extent of its market build out
activities and the services it offers in its various markets. If the Company
elects to slow the speed (or narrows the focus) of its business plan, the
Company will be able to reduce its capital requirements and losses. The actual
costs of building out and launching the Company's markets would depend on a
number of factors, however, including the Company's ability to negotiate
favorable prices for purchases of network equipment, the number of customers and
the services for which they subscribe, the nature and success of the services
that the Company may offer, regulatory changes and changes in technology. In
addition, actual costs and revenues could vary from the amounts the Company
expects or budgets, possibly materially, and such variations are likely to
affect how much additional financing the Company will need for its operations.
Accordingly, there can be no assurance that the Company's actual financial needs
will not exceed the anticipated amounts available to it (including from new,
third parties) described above.
To the extent that the Company acquires the amounts necessary to fund
its business plan through the issuance of equity securities, the then-current
shareholders of the Company may experience dilution in the value per share of
their equity securities. The acquisition of funding through the issuance of debt
could result in a substantial portion of the Company's cash flow from operations
being dedicated to the payment of principal and interest on that indebtedness,
and could render the Company more vulnerable to competitive and economic
downturns. Financing could also be obtained by the Company's subsidiaries or
affiliates from third parties, although there can be no assurance the Company's
subsidiaries or affiliates will be able to obtain the financing required to make
planned capital expenditures, provide working capital or meet other cash needs
on terms which are economically acceptable to the Company.
The Company has taken several actions which it believes will improve its
short-term and ongoing liquidity and cash flow:
- The Company recently completed a debt financing pursuant to the terms
of the Notes. The Notes, represented by subordinated exchangeable
promissory notes of the Company in the original aggregate principal
amount of $10 million, were acquired by FondElec and Internexus
pursuant to the terms of a note purchase agreement dated December 23,
1998. Internexus funded its portion of its purchase of the notes ($5
million) in early January 1999. The notes bear interest at 10% per
annum, are due on December 23, 2001, and include warrants for shares of
the Company's common stock while the notes are outstanding. The Notes
are exchangeable, at the election of the Company, for shares of a
to-be-designated series of preferred stock acceptable in content and
form to Internexus and FondElec if third parties purchase at least an
additional $10 million of that preferred stock. See "Certain
Transactions."
- The Company is currently in negotiations to obtain third party equity
and debt financing for its activities and management believes that this
funding can be obtained under satisfactory terms. While there can be no
assurance that the Company will secure such financing, management
believes that this is achievable prior to June 30, 1999.
- Management is undertaking actions designed to conserve cash and control
costs as it pursues additional financing and capital resources.
- Management has negotiated an agreement with a significant stockholder
to support its working capital needs by refinancing approximately
$5,000,000 of the Company's notes payable due on February 17, 1999 on a
longer term basis. Additionally, to the extent that the Company's
working capital is insufficient to meet its remaining $3,467,654 note
repayment due in May 1999, the stockholder has committed to advance
additional capital to fund the required payment.
The Year 2000 Issue
The Company has completed a review of its computer systems and
operations to determine the extent to which its systems will be vulnerable to
potential errors and failures as a result of the "year 2000" problem. The year
2000 problem results from the use of computer programs which were written
employing only two digits (rather than four digits) to define applicable years.
On January 1, 2000, any clock or date recording mechanism, including
date-sensitive software which uses only two digits to represent the year, could
recognize a date using "00" as the year "1900", rather the year "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, provide services or engage in similar activities.
These failures, miscalculations, and disruptions could have a material adverse
effect on the Company's business, operations and financial condition.
The Company has concluded, based on its review of its operations and
computer systems, that its significant computer programs and operations will not
be materially affected by the year 2000 problem and that the programs that will
be affected can be properly modified or replaced by the end of 1999 at an
estimated cost of approximately $100,000. Under a resonably likely worst case
scenario, the Company's computer systems and operations could be materially
affected by the year 2000 problem. In addition to its own operations and
computer systems, the Company relies on operations and computer systems of
third-party customers, financial institutions, vendors and other parties with
and through which it conducts business (such as national telephone systems under
the Company's interconnect agreements, and the owners of communications
backbones utilized by the Company).
The Company intends to prioritize its year 2000 efforts to protect, to
the extent possible, its business and operations. The Company's first priority
will be to protect its mission-critical operations--such as those systems and
applications that are vital to the provision by the Company of voice, video and
data switching, processing and transport services to customers--from incurring
material service interruptions that could occur as the result of the year 2000
transition. To this end, the Company has attempted to identify any element
within its business operations (including elements relating to third party
relationships) that could be impacted by the year 2000 date change, and has
attempted to determine the risks to its continuing business operations as a
result of an adverse effect resulting from that date change.
The Company generally requires that its key vendors and suppliers
warrant in writing that they are year 2000 ready. The Company has purchased or
acquired most of its mission-critical systems from such third-party vendors.
Unfortunately, like other telecommunications providers (and, in particular,
telecommunications providers operating outside of the United States), the
Company's products and services are dependent upon third parties which may not
be fully year 2000 compliant. The Company has attempted to identify the vendors
and third-parties with which it has contractual relationships that may not be
year 2000 compliant by the end of 1999, and has adopted contingency plans which
it believes will mitigate any adverse impact to its business operations
resulting from those vendors' or third-parties' inability to perform in
accordance with their contractual obligations. These contingency plans include
the preparation and use of backup copies of financial records, installing
portable electrical generators, determining the availability and reliability of
alternate networks, and scheduling additional phone center, NOC, and repair
personnel.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Paragraph 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's executive officers and directors, and persons who
own 10% or more of a registered class of the Company's equity securities
(collectively, "Reporting Persons"), to file reports of ownership and changes in
ownership with the Securities and Exchange Commission if the Company and its
equity securities meet certain requirements. The Company has not received or
reviewed any filings under Section 16(a) for any Reporting Person, including any
filing on Forms 3, 4 or 5. The persons constituting the Reporting Persons are
described in the section entitled "Principle Stockholders."
REPORTS ON FORM 8-K
The registrant has filed the following reports on Form 8-K during the
period covered by this report:
Report on Form 8-K dated September 1, 1998, relating to the acquisition
of the Company's interest in Intra@net (amended October 5, 1998 to reflect the
filing of financial statements)
Report on Form 8-K dated October 23, 1998, relating to the resignation
of certain directors (amended October 23, 1998)
PART F/S
The following financial information is provided in accordance with the
requirements of Item 310 of Regulation S-B.
INDEX TO FINANCIAL STATEMENTS
Item Page
Independent Auditors' Report 68
Consolidated Balance Sheets 69
Consolidated Statements of Operations 70
Consolidated Statements of Stockholders' Equity 71
Consolidated Statements of Cash Flows 72
Notes to Consolidated Financial Statements 73
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Convergence Communications, Inc.
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheets of Convergence
Communications, Inc. and subsidiaries, formerly Wireless Cable & Communications,
Inc., (the "Company") as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1998, 1997 and 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years ended December 31, 1998, 1997 and 1996, in conformity with
generally accepted accounting principles.
The Company was in the development stage at December 31, 1997. During the year
ended December 31, 1998, the Company completed its development activities and
commenced its planned principal operations.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
April 14, 1999
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------------------------------------------------
December 31, December 31,
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,315,281 $ 6,171,515
Accounts receivable - net 432,868 9,754
Note proceeds due from affiliate (Note 9) 5,000,000 -
Due from affiliates - 36,950
Inventory (Note 2) 205,408 32,074
Prepaid license fees (Note 2) 57,359 186,982
Other current assets 115,801 18,007
--------------- ---------------
Total current assets 10,126,717 6,455,282
INVESTMENT IN CENTURION (Note 2) 845,955 845,955
PROPERTY AND EQUIPMENT - net (Notes 2 and 4) 8,524,521 421,944
INTANGIBLE ASSETS - net (Note 5) 22,650,040 9,723,754
OTHER ASSETS 325,811 42,171
--------------- ---------------
TOTAL ASSETS $ 42,473,044 $ 17,489,106
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 9) $ 8,676,722 $ 350,000
Accounts payable and accrued liabilities (Note 6) 3,976,651 801,855
Foreign bank lines of credit outstanding (Note 9) 27,281 -
Accrued consulting fees (payable to related parties) (Note 7) 340,629 100,000
Due to affiliates (Note 7) 1,074,855 709,558
--------------- ---------------
Total current liabilities 14,096,138 1,961,413
LONG-TERM LIABILITIES:
Long-term debt (payable to related parties) (Note 7) 1,224,504 1,130,660
Subordinated exchangeable promissory notes (payable to related parties) (Note 9) 10,000,000 -
Notes payable (Note 9) 3,987,268 -
Accrued foreign severance 135,091 -
--------------- ---------------
Total long-term liabilities 15,346,863 1,130,660
MINORITY INTEREST IN SUBSIDIARIES 2,345,517 18,067
--------------- ---------------
Total liabilities 31,788,518 3,110,140
COMMITMENTS AND CONTINGENCIES (Note 14)
STOCKHOLDERS' EQUITY * (Notes 1 and 10):
Series "A" Preferred stock; $0.001 par value; 0 shares authorized, issued
and outstanding in 1998; 4,250,000 authorized: 839,526 shares issued
and outstanding in 1997 (10-1 liquidation preference over common). - 839
Series "B" Preferred stock; $0.001 par value; 750,000 shares authorized:
101,374 shares issued and outstanding in 1998 and 1997. 101 101
Common stock; $0.001 par value; 100,000,000 shares authorized:
11,738,277 and 1,744,999 shares issued and outstanding in
1998 and 1997, respectively. 11,738 1,745
Additional paid-in capital 26,179,739 19,632,022
Accumulated deficit (15,486,537) (5,255,741)
Accumulated other comprehensive loss (20,515) -
--------------- ---------------
Total stockholders' equity 10,684,526 14,378,966
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 42,473,044 $ 17,489,106
=============== ===============
* Retroactively restated for the 1 to 3.5 reverse stock split approved by the Company's shareholders on August 17, 1998.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ----------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
NET REVENUES $ 3,113,482 $ 40,186 $ -
COST OF SERVICE 1,876,133 165,048 -
--------------- -------------- ---------------
GROSS MARGIN 1,237,349 (124,862) -
OPERATING EXPENSES:
Professional fees (Note 11) 2,270,588 1,200,102 176,488
Depreciation and amortization (Notes 2, 4 and 5) 2,864,789 619,182 -
Leased license expense (Note 13) 708,912 116,161 -
General and administrative 5,261,916 893,424 223,132
Stock option compensation expense (Note 11) 753,046 962,738 -
--------------- -------------- ---------------
Total 11,859,251 3,791,607 399,620
--------------- -------------- ---------------
OPERATING LOSS (10,621,902) (3,916,469) (399,620)
OTHER INCOME AND (EXPENSES):
Interest income 268,996 116,367 -
Interest expense (Notes 7 and 9) (677,188) (807,203) (22,948)
--------------- -------------- ---------------
Total (408,192) (690,836) (22,948)
--------------- -------------- ---------------
NET LOSS BEFORE MINORITY INTEREST (11,030,094) (4,607,305) (422,568)
MINORITY INTEREST IN LOSS OF SUBSIDIARIES (Note 1) 799,298 13,011 -
--------------- -------------- ---------------
NET LOSS $ (10,230,796) $ (4,594,294) $ (422,568)
=============== ============== ===============
Net loss per basic common share* (see Note 2) $ (0.87) $ (0.57) $ (0.99)
=============== ============== ===============
Net loss per diluted common share* (see Note 2) $ (0.87) $ (0.57) $ (0.99)
=============== ============== ===============
Weighted-average common shares*
Basic 11,736,927 8,044,827 428,571
=============== ============== ===============
Diluted 12,482,241 8,584,532 428,659
=============== ============== ===============
* Retroactively restated for the 1 to 3.5 reverse stock split approved by the Company's shareholders
on August 17, 1998 and the adoption of Statements of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share," effective December 31, 1997.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- --------------------------------------------------------------------------------------------------------------------------
Series "A" Preferred Stock Series "B" Preferred Stock
-------------------------- --------------------------
Total Shares * Amount Shares * Amount
------------ ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ (238,450)
Net loss for the year ended December 31, 1996 (422,568)
------------ ---------- --------- ---------- ---------
BALANCE, DECEMBER 31, 1996 (661,018)
Reverse acquisition of TIC:
Exchange of TIC common shares for CCI
Series "A" Preferred shares 14,571 685,063 $ 685
Addition of CCI common stock 86,990
Exchange of CVV common stock for CCI common
shares and Series "B" Preferred shares 7,096,500 101,374 $ 101
Issuance of CCI common stock and Series
"A" Preferred shares for cash 10,000,000 150,380 150
Issuance of warrants below fair value 657,143
Issuance of CCI common stock and Series
"A" Preferred shares for cash 300,000 4,083 4
Issuance of options for common shares and
Series "A" Preferred shares below fair value 1,479,074
Net loss for the year ended December 31, 1997 (4,594,294)
------------ ---------- --------- ---------- ---------
BALANCE, DECEMBER 31, 1997 14,378,966 839,526 839 101,374 101
Comprehevsive loss:
Net loss for the year ended December 31, 1998 (10,230,796)
Other comprehensive loss consisting of
foreign currency translation adjustment (20,515)
------------ ---------- --------- ---------- ---------
Total comprehensive loss (10,251,311) - - - -
Issuance of CCI common stock and Series
"A" Preferred shares for cash 4,956,626 91,180 91
Conversion of Series "A" Preferred shares into
common shares - (930,706) (930)
Exchange of Telecom common stock for CCI
common shares 600,000
Issuance of options for common shares
below fair value 1,000,245
------------ ---------- --------- ---------- ---------
BALANCE, DECEMBER 31, 1998 $ 10,684,526 - $ - 101,374 $ 101
============ ========== ========= ========== =========
* Retroactively restated for the 1 to 3.5 reverse stock split approved by the Company's shareholders on August 17, 1998.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- -------------------------------------------------------------------------------------------------------------------------
Common Stock Additional Accumulated
--------------------- Paid-in Accumulated Other Compre-
Shares * Amount Capital Deficit hensive Loss
---------- -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 428,571 $ 429 (238,879)
Net loss for the year ended December 31, 1996 (422,568)
---------- -------- ------------- ------------ ------------
BALANCE, DECEMBER 31, 1996 428,571 429 (661,447)
Reverse acquisition of TIC:
Exchange of TIC common shares for CCI
Series "A" Preferred shares (428,571) (429) $ 14,315
Addition of CCI common stock 1,041,494 1,041 85,949
Exchange of CVV common stock for CCI common
shares and Series "B" Preferred shares 450,563 451 7,095,948
Issuance of CCI common stock and Series
"A" Preferred shares for cash 228,658 229 9,999,621
Issuance of warrants below fair value 657,143
Issuance of CCI common stock and Series
"A" Preferred shares for cash 24,284 24 299,972
Issuance of options for common shares and
Series "A" Preferred shares below fair value 1,479,074
Net loss for the year ended December 31, 1997 (4,594,294)
---------- -------- ------------- ------------ ------------
BALANCE, DECEMBER 31, 1997 1,744,999 1,745 19,632,022 (5,255,741)
Comprehevsive loss:
Net loss for the year ended December 31, 1998 (10,230,796)
Other comprehensive loss consisting of
foreign currency translation adjustment $ (20,515)
---------- -------- ------------- ------------ ------------
Total comprehensive loss - - - (10,230,796) (20,515)
Issuance of CCI common stock and Series
"A" Preferred shares for cash 600,504 600 4,955,935
Conversion of Series "A" Preferred shares into
common shares 9,307,060 9,307 (8,377)
Exchange of Telecom common stock for CCI
common shares 85,714 86 599,914
Issuance of options for common shares
below fair value 1,000,245
---------- -------- ------------- ------------ -------------
BALANCE, DECEMBER 31, 1998 11,738,277 $ 11,738 $ 26,179,739 $ (15,486,537) $ (20,515)
========== ======== ============= ============ ============
* Retroactively restated for the 1 to 3.5 reverse stock split approved by the Company's shareholders on August 17, 1998.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
-------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,230,796) $ (4,594,294) $ (422,568)
Adjustments to reconcile net loss to net cash used in
development activities:
Depreciation and amortization 2,864,789 619,182 -
Minority interest in loss of subsidiaries (799,298) (13,011) -
Provision for impairment of long-lived assets 545,055 - -
Issuance of options for common shares below fair value 1,000,245 1,479,074 -
Amortization of discount on notes payable 554,731 - -
Issuance of warrants below fair value - 657,143 -
Change in assets and liabilities, net of effects
of acquisitions of Telecom and interest in Chispa:
Accounts receivable - net 301,927 959 -
Due from affiliates 42,919 - -
Inventory (56,887) 33,225 -
Prepaid license fees (9,500) (11,769) (13,778)
Other current assets (247,942) 272,767 -
Other assets (489,798) 1,258 -
Accounts payable and accrued liabilities 1,536,134 (473,491) 195,206
Accrued consulting fees 240,629 - -
Due to affiliates 348,689 - -
Accrued foreign severance 115,425 - -
-------------- ------------- --------------
Net cash used in operating activities (4,283,678) (2,028,957) (241,140)
-------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Centurion - (805,955) -
Reverse acquisition of WCCI - 56,582 -
Acquisition of Chispa (net of cash acquired) (2,248,641) - -
Acquisition of Telecom (net of cash acquired) (961,412) - -
Acquisition of CVV (net of cash acquired) - (387,318) -
Purchase of minority interest in CVV - (800,000) -
Purchases of equipment (4,546,900) (128,779) -
-------------- ------------- --------------
Net cash used in investing activities (7,756,953) (2,065,470) -
-------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 3,161,661 1,967,945 -
Proceeds from issuance of Series A preferred stock 1,794,965 8,332,055 -
Increase in minority interest from issuance of subsidiary common stock 500,000 - -
Proceeds from related party note 5,000,000
Proceeds from related party borrowings 98,286 919,333 235,033
Payments on related parties borrowings - (962,293) -
Proceeds from promissory notes - 2,300,000 -
Payments on promissory notes (350,000) (2,300,000) -
-------------- ------------- --------------
Net cash provided by financing activities 10,204,912 10,257,040 235,033
-------------- ------------- --------------
EFFECT OF EXCHANGE RATES ON CASH (20,515) - -
-------------- ------------- --------------
NET INCREASE (DECREASE) IN CASH (1,856,234) 6,162,613 (6,107)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,171,515 8,902 15,009
-------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,315,281 $ 6,171,515 $ 8,902
============== ============= ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 12,143 $ 30,996 $ -
============== ============= ==============
See Notes 1, 3 and 14 to the consolidated financial statements for other non-cash financing and investing activities.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
CONVERGENCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS COMBINATION
Business Description - Convergence Communications, Inc. (the
"Company"), formerly Wireless Cable & Communications, Inc. ("WCCI"), is
a facilities-based provider of high-quality, low-cost integrated
communications services through its own metropolitan area networks. The
Company operates in recently deregulated and high growth markets,
principally in Central American and the Andean region. The Company owns
(i) a 44.03% interest in Chispa Dos, Inc. ("Chispa") which is a holding
company for two subsidiaries that provide multi-channel television
services to over 26,000 subscribers in El Salvador and another
subsidiary that recently began providing Internet services (under the
terms of the Company's acquisition of its interest in Chispa Dos, it
also acquired operating and management control of the entity); (ii) a
100% interest in Interamerican Telecom, Inc., ("Telecom") the parent
company of Interamerican Net de Venezuela, S.A. ("Inter@net") which is
providing Internet services to approximately 3,400 subscribers in
Venezuela; and (iii) a 78.14% interest in Caracas Viva Vision TV, S.A.
("CVV"), a local multi-point distribution service ("LMDS") wireless
communications system in Venezuela that currently provides service to
approximately 695 subscribers.
In addition, the Company has interests in seven other entities that
either hold the right to operate wireless telecommunications systems or
have the right to manage and commercialize wireless telecommunications
rights held by other parties: (i) an 8.46% interest in Centurion
Comunicaciones, S.A. ("Centurion"), the entity that holds the LMDS
rights in Venezuela; (ii) a 94.9% interest in Auckland Independent
Television Services, Ltd. ("AITS"), which holds license and lease
rights in four multi-channel, multi-point distribution service ("MMDS")
channels in three New Zealand cities; (iii) a 100% interest in Wireless
Communications Holding - Guatemala, S.A. ("WCH - Guatemala"), a
corporation which has been formed to acquire and operate LMDS rights in
Guatemala; (iv) a 100% interest in Sociedad Television Interactiva,
S.A. ("TISA"), a corporation that has the right to manage and operate
an LMDS system in Costa Rica; (v) a 90% interest in Wireless
Communications Panama, S.A. ("WC - Panama"), which will act as the
operating company for an LMDS system in Panama; (vi) an 80% interest in
WCI de Argentina ("WCIA"), which holds a value added license to provide
telecommunications services in Argentina; and (vii) a 100% interest in
Transworld Wireless Television, Inc. ("TWTV"), a corporation that holds
four MMDS channels and a leased transmitter in Park City, Utah.
The Company has also signed a Memorandum of Understanding with a
Bahamas corporation for the purchase of 80% of three companies in
Guatemala providing telecommunications services, including Internet
services, to approximately 12,000 subscribers (see update in Note 16).
Organization - On January 31, 1997, the Company entered into a
transaction with Telecom Investment Corporation ("TIC"), pursuant to
which TIC merged with a newly formed wholly-owned subsidiary of the
Company, NewWCCI, Inc. (the "Merged Companies"). The merger was
effective February 4, 1997. Under the terms of the merger, the former
shareholders of TIC received 685,063 shares of the Company's newly
designated Series "A" Preferred Shares and for state law purposes TIC
became a wholly-owned subsidiary of the Company. As a result of the
merger, the former shareholders of TIC obtained approximately 87.7% of
the voting power of the Merged Companies on a common share equivalent
basis (as of February 4, 1997). Generally accepted accounting
principles typically require that the company whose shareholders retain
the majority voting interest in the combined business be treated as the
acquirer for accounting purposes. Accordingly, the merger has been
accounted for as a "reverse acquisition" whereby TIC is considered to
have acquired (as of February 4, 1997) an 87.7% interest on a common
share equivalent basis in the Company using the purchase method.
However, the Company remains the legal entity and the Registrant for
Securities and Exchange Commission reporting purposes.
Consistent with the reverse acquisition accounting treatment, the
financial statements presented through December 31, 1997 are the
financial statements of TIC and differ from the consolidated financial
statements of the Company and its subsidiaries as previously reported.
The consolidated financial statements presented include the operations
of TIC through February 3, 1997 and of the Company and its subsidiaries
from February 4, 1997 (effective date of the acquisition) and
afterward.
Generally accepted accounting principles require that the assets and
liabilities of the Company (the legal acquirer) be recorded at fair
value at the date of the merger. Based on management's estimates, the
fair value of the Company was not significantly different than its book
carrying value. Therefore, the assets and liabilities of the Company
have been recorded at their carryover book value as of February 4, 1997
(the effective date of the merger) to reflect the reverse acquisition
of the Company as follows:
Current assets (including cash of $56,582) $ 217,017
License rights 913,500
Equipment (net) 217
Other long term assets 577,347
Current liabilities (463,191)
Long-term debt (1,126,823)
Minority interest (31,077)
-----------------
Stockholders' equity (net) $ 86,990
=================
Pro forma consolidated results of operations of TIC, including the
Company and subsidiaries from the date of merger, as though the reverse
acquisition had occurred at the beginning of the periods presented, are
$4,645,113 and $1,005,584 of net loss for the years ended December 31,
1997 and 1996, respectively.
Development Stage Entity - The Company was in the development stage at
December 31, 1997. During the year ended December 31, 1998, the Company
completed its development activities and commenced its planned
principal operations.
Basis of Presentation - The Company's consolidated financial statements
have been prepared on a going concern basis, which contemplates the
realization of assets and satisfaction of liabilities in the normal
course of business.
Since its inception, the Company has sustained net losses and negative
cash flow, due primarily to start-up costs, legal and professional
expenses, interest expense on debt and charges for depreciation and
amortization and other costs relating to its acquisition and
development of its business. The Company expects to continue to
experience negative cash flow through at least 2000, and may continue
to do so thereafter while it develops and expands its business, even if
individual systems of the Company become profitable.
The Company has taken several actions which it believes will improve
its short-term and ongoing liquidity and cash flow:
- The Company is currently in negotiations to obtain third party
equity and debt financing for its activities and management
believes that this funding can be obtained under satisfactory
terms. While there can be no assurance that the Company will
secure such financing, management believes that this is achievable
prior to June 30, 1999.
- Management is undertaking actions designed to conserve cash and
control costs as they pursue additional financing and capital
resources.
- Management has negotiated an agreement with a significant
stockholder to support its working capital needs by refinancing
approximately $5,000,000 of the Company's notes payable due on
February 17, 1999 on a longer term basis. Additionally, to the
extent that the Company's working capital is insufficient to meet
its remaining $3,467,654 note repayment due in May 1999, the
stockholder has committed to advance additional capital to fund
the required payment.
The Company's continuation as a going concern is dependent upon its
ability to generate a cash flow contribution and secure adequate
financing or additional equity, and ultimately to achieve cash flow
positive operations in order to satisfactorily meet its debt
obligations. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company, its majority-owned subsidiaries,
and Chispa, a minority owned subsidiary of which the Company has
operating control and a majority of the Board of Directors seats. All
significant intercompany accounts and transactions have been eliminated
in consolidation.
Foreign Currency Translation - All of the Company's subsidiaries,
except for CVV and Inter@net, operate using the local currency as the
functional currency. Accordingly, all assets and liabilities of these
subsidiaries, except for CVV and Inter@net, are translated at current
exchange rates at the end of the period and revenues and costs at
average exchange rates in effect during the period. The resulting
cumulative translation adjustments have been recorded as an accumulated
other comprehensive loss, a separate component of stockholders' equity.
Because the Venezuelan bolivar is considered a highly inflationary
currency, CVV and Inter@net use the U.S. dollar as the functional
currency. Accordingly, assets and liabilities are translated at
period-end exchange rates,except for inventories and property, plant
and equipment, which are translated at historical rates. Revenues and
expenses are translated at average exchange rates in effect during the
period, except for costs related to balance sheet items, which are held
and translated at historical rates. Foreign currency translation gains
and losses from CVV and Inter@net are included in expenses as they are
incurred and were not material for the years ended December 31, 1998
and 1997.
Use of Estimates in Preparing Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recognition of Revenues, Costs and Expenses - Revenues for
telecommunications and multi-channel television services are recognized
in the period during which the services are provided. Costs and
expenses are recorded on the accrual basis.
Inventories - Inventories of subscriber installation materials and
subscriber converter boxes are stated at the lower of average cost or
market.
Prepaid License Lease Fees - Prepaid license lease fees are prepayments
of annual license or lease fees relating to the Company's license
rights and are expensed over the annual license or lease period.
Investment in Centurion - The Company uses the cost method of
accounting for its investment in Centurion as it holds less than 20% of
the voting shares of the entity and the Company does not exercise
significant influence. As of December 31, 1998 and 1997, the Company
had invested a total of $845,955 for an 8.46% interest in Centurion.
Property and Equipment - Equipment is stated at cost. Depreciation is
computed using the straight-line method over the expected useful life
of the assets as follows:
Life in years
---------------
Buildings and improvements 20 years
Telecommunications equipment 5 - 10 years
Subscriber equipment 2 - 5 years
Machinery and equipment 2 - 5 years
Furniture and equipment 2 - 10 years
Vehicles and tools 5 - 10 years
Net Loss Per Common Share and Common Share Equivalents- Net loss per
common share and common share equivalents is computed by both the basic
method, which uses the weighted average number of common shares and the
common stock equivalents on a voting basis for the Series "B" preferred
stock outstanding, and the diluted method, which includes the dilutive
common shares from stock options and warrants, as calculated using the
treasury stock method.
Income Taxes - The Company uses the asset and liability method to
account for income taxes. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their existing tax bases.
Long-Lived Assets - The carrying amount of all long-lived assets is
evaluated periodically to determine if adjustment to the depreciation
and amortization period or to the unamortized asset balance is
warranted. The Company's policy is to measure long lived asset
impairment by considering a number of factors as of each balance sheet
date including (i) current operating results of the applicable
business; (ii) projected future operating results of the applicable
business; (iii) the occurrence of any significant regulatory changes
which may have an impact on the continuity of the business; and (iv)
any other material factors that affect the continuity of the applicable
business.
After completing a review of the Company's business plan, including the
plans for the New Zealand prepaid and intangible assets, the Company
determined that it should maintain its current focus on the acquisition
and development of Latin American assets and businesses. Based on its
revised business plan, the Company further determined that it would be
in its best interest to search for a joint venture partner in New
Zealand to develop the Company's New Zealand license rights or seek a
purchase of the New Zealand prepaid and intangible assets. Due to the
uncertainty of the full recoverability of the New Zealand assets,
management recorded an impairment of $545,055 to leased license expense
for the year ended December 31, 1998.
Fair Value of Financial Instruments - The Company's financial
instruments, when valued using market interest rates, are not
materially different from the amounts presented in the consolidated
financial statements.
Comprehensive Loss - Effective January 1, 1998, the Company adopted
Statements of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income", and reclassified comprehensive loss
for 1998 to conform with SFAS No. 130. This statement requires the
Company to display an amount representing total comprehensive loss for
each applicable period. Accumulated other comprehensive loss consists
entirely of foreign currency translation adjustments. The Company had
no components of other comprehensive loss during 1997 or 1996 and is,
therefore, not required to report comprehensive loss for those periods.
Segment Reporting - Effective January 1, 1998, the Company adopted SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related
Information". The Company reviewed its operations in accordance with
SFAS No. 131 and determined that there were no reportable operating
segments for the year ending December 31, 1998.
Reclassifications - Certain reclassifications of previously reported
1997 and 1996 amounts have been made to conform to the 1998
classifications.
3. ACQUISITIONS
Inter@net Transaction - On August 17, 1998 the Company acquired all of
the outstanding stock of Telecom for a total purchase price of
approximately $2.4 million, including certain shareholder liabilities
assumed in connection with the transaction ("Inter@net Transaction").
The purchase price consisted of approximately $450,000 in cash,
$800,000 in promissory notes (one promissory note for $200,000 due on
August 17, 1999, and a second promissory note for $600,000 due on
August 17, 2000) and 85,714 of the Company's common shares. The parties
to the Inter@net Transaction valued the Company's common shares at
$600,000. The Company also paid approximately $550,000 in connection
with the acquisition for the purpose of paying off debt owed by Telecom
to its former shareholders. Approximately $600,000 of the purchase
price will be held in escrow for two years to insure the accuracy of
Telecom's and the selling shareholders' representations regarding the
business of Inter@net, Telecom's wholly-owned subsidiary.
Inter@net is an Internet service provider in Venezuela. Inter@net holds
two concessions from the Venezuelan government. The first concession
permits Inter@net to provide value-added services throughout Venezuela
and the second concession allows it to provide private data services
networks throughout Venezuela. Inter@net provides its Internet and data
services through a system owned by the state-owned telephone service
provider.
The following table shows the non-cash investing activities associated
with the Inter@net Transaction:
<TABLE>
<CAPTION>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITES:
Acquisition of Telecom (August 17, 1998)
<S> <C>
Fair value of assets acquired, including intangible assets
and equipment (net of cash acquired) $ 2,836,402
Fair value of liabilities assumed (520,083)
Common stock issued (600,000)
Notes payable (754,907)
----------------
Cash paid (net of cash acquired) $ 961,412
================
</TABLE>
El Salvador Transaction - Effective July 17, 1998 the Company (49.5%
ownership) and FondElec Essential Services Growth Fund, L.P. (50.5%
ownership) (together with its affiliates, ("FondElec") acquired,
through Chispa (a newly-formed joint venture corporation), all the
outstanding stock of two El Salvadorian corporations, Cablevisa, S.A.
("Cablevisa") and Multicable, S.A. ("Multicable") (collectively, the
"El Salvador Companies") from Star Industries, S.A., a Panamanian
corporation ("Star") (the "El Salvador Transaction"). The El Salvador
Companies own and operate multi-channel subscription television systems
in the Republic of El Salvador. The El Salvador Companies had
approximately 24,000 subscribers on the date of the acquisition. The
two companies provide their multi-channel subscription television
services through their own networks of fiber-optic and copper-based
cable. The El Salvador Companies have also been granted the right to
use 200 MHz of El Salvador's 2.5 GHz wireless communications frequency
band.
Under the terms of the parties' agreements regarding Chispa, the
Company has 56.8% voting control of Chispa, holds a majority of the
Board of Directors seats for Chispa, and has the right to acquire
FondElec's interest in Chispa under certain conditions. The Company
paid approximately $2.5 million for its interest in Chispa, and is
required to make additional capital contributions to Chispa (either in
the form of debt or equity) to fund its pro rata portion of Chispa's
operating costs and deferred purchase price payments for the stock of
Cablevisa and Multicable, as described below. If the Company fails to
make those payments, its interest in Chispa is subject to dilution.
The purchase price for the El Salvador Companies was $16.91 million.
Approximately $4.77 million of the purchase price was paid in cash at
closing, and the balance of the purchase price (approximately $12.14
million) was paid through Chispa's delivery of three promissory notes.
The first promissory note, in the original principal amount of
approximately $5.2 million, was due and payable on February 17, 1999.
This note was paid in February 1999 (see Note 16). The second
promissory note, in the original principal amount of approximately
$3.47 million, is due and payable on May 17, 1999. The final promissory
note, in the original principal amount approximately $3.47 million, is
due on July 17, 2000. The amounts due under the first and second
promissory notes are non-interest bearing (except in the event of
default by Chispa, in which case the notes will bear interest at the
rate of 7% per annum from the date of default), but the amounts due
under the third promissory note bear interest at the rate of 7% per
annum. If Chispa defaults on the payment of any amounts due under any
of the notes, Star may accelerate all remaining amounts due under all
of the notes. In connection with the closing, Chispa also paid $428,339
of outstanding debt of the El Salvador Companies to third party banks.
The amortization of the discount on notes payable resulted in interest
expense of $542,565 for the year ended December 31, 1998. (See Note 9).
The payment obligations under the first and second promissory notes are
secured by a pledge of a portion of the shares acquired by Chispa in
the El Salvador Companies and a mortgage over the El Salvador
Companies' real property. The amounts due under the third promissory
note are unsecured, but in connection with the transaction FondElec
delivered a letter to Star evidencing its agreement to provide
sufficient capital (either in the form of debt or equity) to Chispa to
pay the amounts due under the second and third promissory notes. The
security interest encumbering the pledged shares and the mortgaged
property will be released as Chispa makes payment of portions of the
purchase price. Under the terms of the promissory notes, Chispa is not
required to make any payments if it has a claim for indemnification for
any breach by Star or its principals of any representation, warranty or
covenant relating to the transaction, unless an arbitration panel has
ruled that the claim for indemnification is without merit or Star or
its principals have fully indemnified Chispa for the breach.
The following table shows the non-cash investing activities associated
with the El Salvador Transaction:
<TABLE>
<CAPTION>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITES:
Acquisition of El Salvador Companies (July 17, 1998)
<S> <C>
Fair value of assets acquired, including intangible assets
and equipment (net of cash acquired) $ 17,508,080
Fair value of liabilities assumed (1,266,173)
Notes payable (11,366,518)
Minority interest (2,626,748)
-----------------
Cash paid (net of cash acquired) $ 2,248,641
=================
</TABLE>
The Company originally owned 49.5% of the outstanding stock of Chispa.
In December 1998, Chispa sold an additional 12.4113 shares of its
capital stock to a third party for $700,000 (comprised of $500,000 in
cash and a $200,000 promissory note due February 17, 1999). This
transaction decreased the Company's ownership in Chispa to 44.03%. In
conjunction with this transaction, the Company, FondElec and the third
party signed a shareholders' agreement which, among other things,
provides the Company with operating control of Chispa.
CVV Acquisition - On November 8, 1996, the Company, acting as an agent
for TIC, entered into an agreement under which the Company executed an
option to acquire all of the stock of CVV (the "Option Agreement"). CVV
is a Venezuelan corporation which has entered into agreements with
Centurion to market and commercialize certain LMDS frequencies within
the country of Venezuela.
On July 24, 1997 and August 13, 1997, the Company executed amendments
to the Option Agreement whereby CVV, as contemplated by the Option
Agreement, amended the terms of the contract between the Company and
two of the principal shareholders (who collectively held approximately
68.14% of the total outstanding shares of CVV). Under the terms of the
amendment, the Company agreed to purchase the 68.14% interest held by
those parties for $200,000 in cash, 450,565 shares of the Company's
common stock, 101,374 shares of the Company's newly designated Series
"B" Preferred Shares and a promissory note in the amount of $200,000.
The promissory note accrued interest at the rate of 6.75% per annum. On
August 15, 1997, the Company completed the purchase of the 68.14% of
CVV. On December 2, 1997, the Company paid in full the $200,000
promissory note, along with $4,403 of accrued interest.
The Company and the shareholders of CVV also executed an escrow
agreement under which the shareholders of CVV deposited 50,792 shares
of the Company's common stock and 11,428 shares of the Company's Series
"B" Preferred Stock, representing a portion of the consideration for
the transaction, with an escrow agent in order to provide the Company
with security for the performance of the obligations and the accuracy
of the representations contained in the Option Agreement.
On August 1, 1997, the Company and the remaining shareholder of CVV
entered into another additional amendment to the Option Agreement
whereby the Company agreed to purchase an additional 10% of the total
outstanding shares of CVV for $800,000 in cash. On November 21, 1997,
the Company and the remaining shareholder of CVV completed the purchase
of that 10% interest and entered into an additional three-year option
agreement pursuant to which the Company acquired the right to purchase
the remaining shares of CVV not held by the Company for $2,000,000. The
Company paid and expensed $50,000 for the first twelve months of the
option and had the right to pay an additional $50,000 annually to
extend the option through November 2000.
As discussed in Note 14, the Company has filed an arbitration
proceeding relating to claims for indemnification and breach of the
representations and warranties made under the Option Agreement.
The following table shows the non-cash investing activities associated
with the CVV Transaction:
<TABLE>
<CAPTION>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITES:
Acquisition of CVV (August 15, 1997)
<S> <C>
Fair value of assets acquired, including intangible assets
and equipment (net of cash acquired) $ 8,485,740
Fair value of liabilities assumed (1,001,922)
Common stock issued (3,548,250)
Series B Preferred stock issued (3,548,250)
-----------------
Cash paid (net of cash acquired) $ 387,318
=================
</TABLE>
Pro Forma Effect of Acquisitions - The following pro forma information
reflects the results of the Company's operations as if the Inter@net
and El Salvador transactions and the CVV acquisition had occurred at
the beginning of the periods presented, adjusted for the effect of the
amortization of intangible assets interest expense on acquisition debt
and an increase of depreciation expense due to the increase to fair
value of fixed assets.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
<S> <C> <C> <C>
1998 1997 1996
Pro forma results --------------- -------------- ---------------
Revenue $ 6,810,194 $ 4,295,821 $ 4,476,733
Net loss $ (12,485,785) $ (8,395,738) $ (4,036,702)
Net loss per common share
and common share equivalent
(basic and diluted method) $ (1.06) $ (1.04) $ (9.42)
</TABLE>
These pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of what operating results
would have been had the acquisition actually taken place at the
beginning of the periods presented, nor do they purport to represent
results of future operations of the combined companies.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Land $ 586,400 $ -
Buildings and improvements 156,414 -
Telecommunications equipment 5,907,229 4,117
Subscriber equipment 381,204 266,602
Machinery and equipment 151,565 183,717
Furniture and equipment 425,403 37,702
Vehicles and tools 106,950 15,026
------------- ------------
7,715,165 507,164
Less - accumulated depreciation (534,737) (85,220)
------------ ------------
7,180,428 421,944
Network construction in progress 1,344,093 -
------------- --------------
$ 8,524,521 $ 421,944
============= ==============
</TABLE>
5. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
Intangible assets and their respective amortization lives are as follows as of December 31:
1998 1997 Years
----------------- --------------- --------
<S> <C> <C> <C>
License Rights $ 658,252 $ 1,164,833 10
Contract Rights 9,343,999 9,343,999 7 - 10
Subscriber Lists 8,924,317 - 5
Franchise Rights 4,111,528 - 20
Goodwill 2,815,598 - 20
----------------- ---------------
25,853,694 10,508,832
Accumulated amortization (3,203,654) (785,078)
----------------- ---------------
$ 22,650,040 $ 9,723,754
================= ===============
</TABLE>
<TABLE>
<CAPTION>
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following as of December 31:
1998 1997
------------ -------------
<S> <C> <C>
Accounts payable $ 3,488,492 $ 534,290
Accrued license lease fees 41,945 121,621
Accrued payroll, taxes and benefits 93,740 98,044
VAT and other taxes payable 67,736 -
Other accrued liabilities 81,301 47,900
Deferred income 203,437 -
------------- --------------
$ 3,976,651 $ 801,855
============= ==============
</TABLE>
7. RELATED PARTY TRANSACTIONS
In connection with the August 1997 Internexus Transaction described in
Note 12, the Company and Internexus formed WCI de Argentina for the
purpose of pursuing telecommunications opportunities in Argentina. As
of December 31, 1998, Internexus had loaned WCI de Argentina $98,286
which has been recorded in due to affiliates.
In connection with the CVV Transaction, the Company assumed accounts
payable and accrued liabilities totaling $520,609 due to a former
member of the Company's board of directors, to entities controlled by
this same former director, and to Centurion (whose shareholders include
this same director, an entity controlled by this former director and
the Company).
In connection with the merger with TIC, the Company assumed a note in
the amount of $180,281 due to an entity controlled by the father of the
Chief Executive Officer of the Company. The note agreement is dated
January 1, 1997, is due on demand and bears interest at the rate of
12%. As of December 31, 1998, $138,129 plus accrued interest of $74,783
was outstanding on the loan. The Company also assumed a services
agreement dated January 1, 1997 under which an entity owned by the
father of the Chief Executive Officer of the Company will provide
consulting services to TIC in exchange for fees equal to the greater of
$250,000 per year (except the first year minimum payment is $150,000)
or 2% of the first $50,000,000 of TIC's annual revenues and 1% of TIC's
gross revenues in excess of $50,000,000. The agreement expires December
31, 2001 and is renewable by mutual consent of both parties to the
agreement for successive one-year periods. The first year minimum
payment of $150,000 was made in October 1997. The Company also has a
current liability to an entity owned by the father of the Chief
Executive Officer of the Company in the amount of $90,629 as of
December 31, 1998, for a finder's fee related to the New Zealand
channel frequencies. The Company and the entity controlled by the
father of the Chief Executive Officer have agreed upon terms to settle
all amounts owed to this entity which is subject to approval by the
Company's board of directors.
In connection with the reverse acquisition described in Note 1, the
Company assumed a note payable due to Transworld Telecommunications,
Inc. ("TTI"). Certain of the Company's officers and directors are
shareholders in TTI. Interest on any outstanding balance accrues at 8%
per annum with the principal and interest becoming due and payable in
full on August 1, 2001. As of December 31, 1998, $996,707 (plus accrued
interest of $227,797) was outstanding on the loan.
8. INCOME TAXES
The following table presents the principal reasons for the difference
between the effective tax rate and the United State federal statutory
income tax rate:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Federal income tax benefit at statutory rate of 34% (3,478,471) (1,562,060)
State and local income taxes (511,540) (229,717)
Foreign rate differential 365,686 63,939
Increase (decrease) in taxes resulting from:
Effect of true-up of prior year items (893,146) (571,232)
Change in Valuation Allowance:
Federal 2,538,755 457,627
State 372,539 57,825
Foreign 990,572 636,364
Permanent Differences
Federal 31,117 4,173
State 4,576 617
Foreign 579,912 None
--------------- --------------
Total NONE NONE
=============== ==============
</TABLE>
The following table presents the U.S. and foreign components of the
provision (benefit) for income taxes:
<TABLE>
<CAPTION>
1998 1997
------------- -----------
<S> <C> <C>
Current:
Federal None None
State None None
Foreign None None
------------- ------------
None None
Deferred:
Federal (2,538,755) (457,627)
State (372,539) (57,825)
Foreign (990,572) (636,364)
Valuation Allowance 3,901,866 1,151,816
-------------- ------------
Total Provision (Benefit) NONE NONE
============== ============
</TABLE>
As of December 31, 1998, the Company has federal and state net
operating loss carryforwards of approximately $4,421,000 and
contribution carryforwards of approximately $12,000. The net operating
loss carryforwards will begin to expire in 2010. The Company also has
foreign net operating loss carryforwards of approximately $3,226,000.
We have recorded a valuation allowance to reflect the estimated amount
of deferred tax assets which, more likely than not, will not be
realized.
The long-term net deferred tax assets at December 31, 1998 and December
31, 1997 are fully reserved with a valuation allowance due to the
uncertainty of realization and are comprised of the following:
<TABLE>
<CAPTION>
1998 1997
Deferred Tax Assets: ---------------- ----------------
<S> <C> <C>
Net operating loss carryforwards
Federal $ 1,503,146 $ 459,797
State 221,583 67,617
Foreign 1,056,286 427,837
Basis in fixed assets None 799
Basis in intangibles 959,585 594,376
Related Party Accruals 223,627 None
Stock Options Deferred 1,223,220 None
Impairment of License Rights (Foreign) 185,319 None
Inventory Reserve (Foreign) 32,051 None
Provision for Bad Debts (Foreign) 43,783 None
Accrued Severance Pay (Foreign) 30,765 None
Other 4,159 None
---------------- ----------------
Total deferred tax asset 5,483,524 1,550,426
Deferred Tax Liabilities:
Basis in fixed assets (31,232) None
Valuation allowance (5,452,292) (1,550,426)
---------------- ----------------
Total net deferred tax asset NONE NONE
================ ================
</TABLE>
9. NOTES PAYABLE
Notes Payable - In conjunction with the Inter@net Transaction and the
El Salvador Transaction, the Company issued the following promissory
notes in 1998 (see Note 3):
<TABLE>
<S> <C>
1998
-------------
Borrowings under the Inter@net Transaction in the amount of $200,000 with a
stated interest rate of 5.72%. The payment of $200,000, plus accrued
interest is due on August 17, 1999. Using an imputed rate of interest of
10% the present value of this note was estimated at $191,671 as of August
17, 1998. The amortization of the discount on this note was $3,090 as of
December 31, 1998. $ 194,761
Borrowings under the Inter@net Transaction in the amount of $600,000 with a
stated interest rate of 5.72%. The payment of $600,000, plus accrued
interest is due on August 17, 2000. Using an imputed rate of interest of
10% the present value of this note was estimated at $551,070 as of August
17, 1998. The amortization of the discount on this note was $9,076 as of
December 31, 1998. 560,146
Borrowings under the El Salvador Transaction payable to Star on February 17,
1999 with a face value of $5,201,481 and no stated interest rate. Using
an imputed rate of interest of 10% the present value of this note was
estimated at $4,907,928 as of July 17, 1998. The amortization of the
discount on this note was $230,649 as of December 31, 1998. 5,138,577
Borrowings under the El Salvador Transaction payable to Star on May 17, 1999
with a face value of $3,467,654 and no stated interest rate. Using an
imputed rate of interest of 10% the present value of this note was
estimated at $3,191,498 as of July 17, 1998. The amortization of the
discount on this note was $151,886 as of December 31, 1998. 3,343,384
Borrowings under the El Salvador Transaction payable to Star on July 17, 2000
with a face value of $3,467,654 and a stated interest rate of 7%. Using
an imputed rate of interest of 10% the present value of this note was
estimated at $3,267,092 as of July 17, 1998. The amortization of the
discount on this note was $160,030 as of December 31, 1998. 3,427,122
-------------
Total notes payable 12,663,990
Less current portion (8,676,722)
-------------
Long-term portion $ 3,987,268
=============
</TABLE>
The Company also had borrowings under a line of credit arrangement,
payable to a Venezuelan bank at a market rate of interest, payable
under varying installments through May 1999 totaling $27,281.
The maturities of the notes payable are as follows as of December 31,
1998:
Year ending December 31:
1999 $ 8,676,722
2000 3,987,268
-------------
Total $ 12,663,990
=============
During 1997, the Company issued a $350,000 promissory note in
conjunction with the Company's purchase of a 7.5% interest in TISA.
This promissory note was paid in November 1998.
Subordinated Exchangeable Promissory Notes - On December 23, 1998, the
Company sold $10 million of subordinated exchangeable promissory notes
to FondElec and Internexus, S.A. ("Internexus") (the "Notes"). Both
FondElec and Internexus are related parties. The Notes are
exchangeable, at the election of the Company, for shares of a
to-be-designated series of Preferred Stock having certain rights and
preferences upon the purchase by third parties of at least $10 million
of the such Preferred Stock. The Notes bear interest at 10%, and are
due December 23, 2001. The Notes also include warrants to acquire
Common Shares having a value of 3.5% per month of the principal balance
of the Notes while the Notes are outstanding at an initial price of
$8.70 per share (subject to adjustment for future issuances of
securities and other fundamental corporate transactions). The
additional interest expense between the interest rate at which the debt
was issued and the estimated interest rate for which the debt would
have been issued in the absence of the warrants was not significant in
1998. The Company received the $5,000,000 of proceeds due from
Internexus under the Notes in early January 1999. This amount was
recorded as a note proceeds due from affiliate as of December 31, 1998.
In conjunction with the sale of the Notes, certain of the Company's
shareholders entered into an agreement with FondElec and Internexus
regarding the designation of, and voting for, directors which replaced
the terms of the FondElec Transaction and Internexus Transaction
described in Note 12. Under the agreement, the shareholder group,
FondElec and Internexus are each entitled to designate two persons to
be nominated as members of the Company's board of directors and the
other parties to the agreement are obligated to vote their shares in
the Company for the election of those designees. The voting agreement
also contains certain restrictions on the corporate actions the Company
may undertake. The Company is not a party to the voting agreement.
Secured Promissory Notes - During 1997, the Company borrowed $850,000
through secured promissory notes which were subsequently paid in full
in 1997. The former holders of the promissory notes also have the right
until January 31, 2002, subject to certain conditions and restrictions,
to exercise warrants to purchase up to 331,717 shares of the Company's
common stock at $2.63 per share. The Company recognized interest
expense in 1997 of $657,143, which represented the difference between
the interest rate at which the debt was issued and the estimated
interest rate for which the debt would have been issued in the absence
of the warrants. Two principals of the entity that holds option to
acquire 175,954 shares of the Company's common stock were also
directors of the Company (see Note 12).
10. PREFERRED STOCK
At December 31, 1998, the authorized number of shares of the Company's
preferred stock was 15,000,000, $0.001 par value, with 750,000 shares
designated as Series "B" Preferred shares. In 1998, the Company's
shareholders approved the Company's Amended and Restated Articles of
Incorporation, which were previously adopted by the Company's board of
directors. The Amended and Restated Articles of Incorporation, among
other things,: (i) increased the number of authorized shares of the
Company's preferred stock from 5,000,000 to 15,000,000; (ii) changed
the par value of each Preferred share from $0.01 to $0.001; (iii)
removed the designation for Series "A" Preferred Shares (which were
exchanged for common shares on a 10 for 1 basis pursuant to a separate
agreement); and (iv) approved a 1 for 3.5 reverse split of the
Company's outstanding capital stock (the "Reverse Split").
Prior to August 17, 1998 and at December 31, 1997, the Company had
designated 4,250,000 shares of its preferred stock as Series "A"
Preferred Shares. The rights and privileges of the Series "A" Preferred
Shares were as follows: (1) they carried voting rights that entitled
the holder to 10 votes per share and the holders voted together with
the common shares as one class on all matters; (2) if dividends were
distributed, the Series "A" Preferred Shares received an amount per
share equal to ten times the dividend per share paid to the common
shareholders; and (3) in the case of a liquidation, dissolution,
consolidation, merger or other similar type of transaction, the Series
"A" Preferred Shares would have received an amount per share equal to
ten times the aggregate consideration paid per common shares.
At December 31, 1998 and 1997, the Company had designated 750,000
shares of its preferred stock as Series "B" Preferred Shares. The
rights and privileges of the Series "B" Preferred Shares are as
follows: (1) they carry a liquidation preference of $35 per share ($10
per share in 1997, prior to the Reverse Split) and the Series "B"
receives liquidation proceeds prior to any liquidation distributions to
the common shareholders; (2) they carry voting rights that entitle the
holder to one vote per share and the holders vote together with the
common shareholders as one class on all matters; (3) they are
non-redeemable; (4) they pay noncumulative dividends in the annual
amount of 6.75% per share payable semiannually on January 1 and July 1
of each year (payable in cash or additional Series "B" Preferred
Shares, at Company's option); and (5) they are convertible only into
common shares of the Company on the earlier of the third anniversary of
their initial issuance, the date preceding the closing of an
underwritten public offering resulting in net proceeds to the Company
of $15 million and a market capitalization of $50 million (including
all amounts received by the Company in conjunction with the
underwritten public offering) or the sale of all or substantially all
of the Company's business or assets or a similar transaction. The
Series "B" Preferred Shares are convertible into common shares of the
Company as follows (i) in the event of the occurrence of the third
anniversary or the sale of all or substantially all of the Company's
business or assets, each share of Series "B" Preferred Share is
convertible into the number of common shares obtained by dividing $35
(after the Reverse Split) by the price per common share as determined
in good faith by the board of directors of the Company, and (ii) in the
case of an underwritten public offering, each Series "B" Preferred
Share is convertible into such number of common shares as is determined
by dividing $35 (after the Reverse Split) by the public offering price.
11. STOCK PLANS, COMMON STOCK AND PREFERRED STOCK OPTIONS
Stock Option Plan for Non-Employee Directors - The Company has reserved
100,000 common shares in a non-employee director stock option plan.
Options for these shares are awarded at 85% of the estimated fair
market value of the stock on the date of award. Compensation expense is
then recognized ratably over the one year vesting period. As of
December 31, 1998, the Company has not granted any non-employee
director stock options and options to acquire 100,000 non-employee
director plan shares are available for grant.
Stock Incentive Plan - In June 1998 the Company's board of directors
adopted the 1998 Stock Incentive Plan (the "Incentive Plan"). The
Incentive Plan was approved by the Company's shareholders in August
1998. The Incentive Plan originally reserved a total of 1,250,000
common shares for issuance under the plan. This number was subsequently
increased by the Company's board of directors in December 1998 to allow
for a maximum of 1,820,229 shares to be awarded. The Company's Board of
Directors administers the plan and determines the amount of awards and
other terms and conditions of the awards. Stock appreciation rights may
be granted under the Incentive Plan. There were no options granted
under these plans in 1998.
Stock Option Awards - The Company has also awarded other stock options
which are summarized in the table below:
<TABLE>
<CAPTION>
Common Stock Options:
<S> <C> <C> <C>
Number Range of Exercise
1998: of Shares Price Per Share
Outstanding at beginning of year 14,999 $0.35 - $3.50
Exchanged Series A Preferred options 395,000 $0.88
Granted 164,177 $0.88 - $1.00
Canceled 0 -
---------------
Outstanding at end of year 574,176 $0.35 - $3.50
Weighted average exercise price of options
granted during year $0.96
Number Range of Exercise
1997: of Shares Price Per Share
Outstanding at beginning of year 35,714 $0.35
Granted 14,999 $0.35 - $3.50
Canceled 35,714 $0.35
---------------
Outstanding at end of year 14,999 $0.35 - $3.50
Weighted average exercise price of options
granted during year $3.36
Number Range of Exercise
of Shares Price Per Share
1996:
Outstanding at beginning of year 0
Granted 35,714 $0.35
Canceled 0
---------------
Outstanding at end of year 35,714 $0.35
Weighted average exercise price of options
granted during year $0.35
</TABLE>
The amounts reported in this table have been restated for the
Reverse Split.
Preferred Stock Options:
On December 22, 1997, the Board of Directors authorized stock
options for 199,811 shares of Series "A" Preferred Stock (which
were subsequently exchanged for 570,891 authorized common stock
options after the exchange of the Series "A" Preferred Stock for
common shares and the application of the Reverse Split. In 1997,
39,500 Series "A" Preferred options (restated for the Reverse
Split) were granted with a $7.88 exercise price; such options
were exchanged into 395,000 common stock options in 1998.
There were no preferred stock options outstanding during 1996.
The common and preferred options are all fully vested and expire
between 1999 and 2001.
The Company accounts for stock options granted using the Accounting
Principles Board ("APB") Opinion No. 25. Accordingly, compensation cost
has been recognized for all stock option grants which were issued with
an exercise price below the estimated fair value at the date of grant.
The total stock option expense recognized in 1998 and 1997 were
$1,000,245 and $1,479,074, respectively, of which $753,046 and $962,738
related to compensation expense and $247,199 and $516,336 related to
professional fees expense, respectively. Had compensation cost for the
Company's stock options been determined based on the estimated fair
value at the grant dates for awards consistent with SFAS No. 123, the
Company's net loss and net loss per common share and common share
equivalent would have changed to the pro forma amounts indicated below:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
Net loss: ------------------ --------------- --------------
As reported $ (10,230,796) $ (4,594,294) $ (422,568)
Pro forma $ (10,278,111) $ (4,632,242) $ (422,568)
Net loss per weighted average
common share (basic and
diluted method):
As reported $ (0.88) $ (0.58) $ (0.99)
Pro forma $ (0.88) $ (0.58) $ (0.99)
</TABLE>
The amounts listed in the table have been restated for the Reverse
Split and the adoption of Statements of Financial Accounting Standards
No. 128, "Earnings Per Share," effective December 31, 1997.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998, 1997 and 1996:
dividend yield of 0%, expected volatility of 0%, risk-free interest
rates ranging from 4% to 7%, and expected lives ranging from 2 to 4
years.
12. STOCK PURCHASE AGREEMENTS
November 1997 - Effective November 1, 1997, the Company executed a
Stock Purchase Agreement with FondElec which owned (at that time) 8.6%
of the Company's equity structure on a common share equivalent basis
pursuant to which the Company agreed to sell equity securities of the
Company which were sufficient to bring FondElec's ownership of the
Company up to 18% of the Company's total equity structure on a common
share equivalent basis for $5,248,795 in cash (the "FondElec
Transaction"). On November 21, 1997, FondElec closed a $300,000
investment in the Company under the terms of the FondElec Transaction.
On February 25, 1998, FondElec closed the remaining $4,948,795
investment under the FondElec Transaction.
The FondElec Transaction gave FondElec certain minority rights
provisions which were terminated on December 23, 1998 in connection
with the sale of the Notes and replaced by the provisions described in
Note 9.
August 1997 - Effective August 1, 1997, the Company executed a Stock
Purchase Agreement with Petrolera Argentina San Jorge, S.A.
("Petrolera") to sell equity securities of the Company equivalent to
18% of the Company's total equity structure on a common share
equivalent basis for $10,000,000 in cash (the "Internexus
Transaction"). Under the terms of the agreement, the 18% ownership
interest was non-dilutive until the earlier of September 30, 1997
(including transactions that close before November 1, 1997, which were
the subject of serious negotiations on September 30, 1997), or when the
Company had closed an additional $10,000,000 of equity financing from
certain other third parties. The Internexus Transaction was completed
on August 30, 1997. Petrolera subsequently transferred its interest in
the Company to Internexus, a company owned by the shareholders of
Petrolera.
As a result of the Company's acquisition of its interest in CVV as
described in Note 3, Internexus acquired additional shares of the
Company's common stock and Series "A" preferred stock in order to
maintain its 18% effective voting control percentage in the Company.
The Internexus Transaction gave Internexus certain minority rights
provisions which were terminated on December 23, 1998 in connection
with the sale of the Notes and replaced by the provisions described in
Note 9.
In conjunction with the Internexus Transaction, the Company borrowed
$2,100,000 on August 4, 1997. The loan bore interest at 10%, was
unsecured, and was repaid with accrued interest at the closing of the
Internexus Transaction when the outstanding principal and accrued
interest were applied towards the purchase price payment in the
Internexus Transaction.
13. OPERATING LEASES
The Company leases corporate office space and equipment in the United
States and at foreign locations under operating leases with terms that
range between 3 and 5 years. The Company also is obligated to make
annual future minimum lease payments relating to four channels in New
Zealand which have been converted to U.S. dollars using the December
31, 1998 exchange rate of $0.53. Future minimum annual lease payments
under the Company's operating leases are as follows:
Year ending December 31:
1999 $ 620,058
2000 597,171
2001 602,934
2002 611,263
2003 202,788
2004 and thereafter 17,100
---------------
Total future lease payments $2,371,064
===============
Total rent expense under the operating leases in 1998 and 1997 was
$363,618 and $9,209, respectively. In 1996, the Company shared office
space with TTI and paid a nominal fee. Total leased license expense was
$708,912 (including the recorded impairment loss of $545,055 discussed
in Note 2), $116,161 for 1998 and 1997, respectively, There was no
leased license expense in 1996.
14. COMMITMENTS AND CONTINGENCIES
Litigation - In September 1998, the Company filed two arbitration
proceedings against Donald Williams, a former director and officer of
the Company. The first proceeding relates to a claim for
indemnification and breach of the representations and warranties made
by Mr. Williams and other parties pursuant to the Company's acquisition
of an interest in certain Venezuelan corporations that hold and have
the right to operate 1 GHz frequency in the 28 GHz range in Venezuela.
The other arbitration proceeding requests a declaratory judgment that
the Company's termination of Mr. Williams as an employee in August 1998
was for "cause." Both arbitrations have been stayed pending the outcome
of settlement negotiations between the parties. On April 9, 1999, the
Company was named as a defendant in an action by a group of United
States investors who believe they have claims against Mr. Williams with
respect to an investment made in those Venezuelan entities (or certain
entities that previously held or had the right to operate those same
network rights). The plaintiffs have asserted that they have claims
against the Company as a result of the Company's investment in the
Venezuelan. The Company believes the claims of the plaintiffs regarding
the Company are without merit. In addition, the sellers from whom the
Company acquired its interests in the Venezuelan entities agreed to
indemnify the Company for breaches of any representations they made
regarding the status of those entities, their liabilities and assets.
The sellers did not note the potential claim of the United States
investors on the disclosure schedules for investment.
The Company is also involved in, and pursues, routine legal actions
relating to its business operations, including customer collection
activities.
On October 15, 1996, TIC entered into a definitive agreement under
which TIC and a third party group agreed to form a corporation in
Panama to provide an LMDS wireless service in Panama. The Company
agreed to provide all funding to the corporation in return for 90%
ownership in the Panamanian corporation. The other 10% is owned by the
license holder and shall not be diluted or reduced by any issuance of
additional securities. The Panamanian corporation will pay the license
holder a one-time fee of $5,000 upon the initiation of service and a
rental fee of $6,000 per year for the first five years of the contract.
Effective August 20, 1998, the Company and FondElec entered into a
non-exclusive agreement under which FondElec agreed to provide advisory
services to the Company relating to the acquisition of controlling
interests in companies engaged in telecommunication services in Latin
America, with particular emphasis on investments in Mexico, Guatemala,
El Salvador, Argentina and Brazil. The agreement requires FondElec to
provide standard investment advisory services, but neither FondElec nor
any of its principals is required to take part in any solicitation of
investors or otherwise participate in the marketing of any of the
Company's securities. The term of the agreement is one year. The fee
under the agreement is the lesser of 3% of any equity raised after
August 20, 1998 (up to a maximum of $750,000), however, there is no fee
due if the Company does not raise any additional equity by August 20,
1999.
None of the above agreements is with a foreign government nor foreign
government employees. The agreements are with foreign corporations or
individuals.
15. GEOGRAPHICAL REPORTING
As of December 31, 1998, the Company conducted active business
operations outside the United States in El Salvador and Venezuela. The
following is a summary extract of the Company's foreign operations in
El Salvador and Venezuela and identifiable assets in New Zealand, and
Costa Rica for fiscal year 1998:
<TABLE>
<CAPTION>
Sales to
Unaffiliated Identifiable
Customers Net Loss Assets
---------------- ----------------- -----------------
<S> <C> <C> <C>
United States $ - $ (5,669,828) $ 13,327,377
El Salvador 2,606,199 (769,077) 19,395,740
Venezuela 507,283 (2,369,186) 10,608,892
Guatemala - (356,314) 1,010,868
New Zealand - (835,061) 241,944
Costa Rica - (231,330) 692,854
Eliminations - - (2,804,631)
-------------- ---------------- ---------------
Total $ 3,113,482 $ (10,230,796) $ 42,473,044
============== ================ ===============
</TABLE>
As of December 31, 1997, the Company conducted active business
operations outside the United States in Venezuela. The following is a
summary extract of the Company's foreign operations in Venezuela and
identifiable assets in New Zealand and Costa Rica for fiscal year 1997:
<TABLE>
<CAPTION>
Sales to
Unaffiliated Identifiable
Customers Net Loss Assets
------------- --------------- --------------
<S> <C> <C> <C>
United States $ - $ (3,675,494) $ 6,403,903
Venezuela 40,186 (645,507) 9,585,670
New Zealand - (273,293) 994,149
Costa Rica - - 750,000
Eliminations - - (244,616)
-------------- ---------------- ---------------
Total $ 40,186 $ (4,594,294) $ 17,489,106
============== ================ ===============
</TABLE>
16. SUBSEQUENT EVENTS
Guatemala Transaction - In February 1999, the Company entered into an
agreement to acquire 60% of a Guatemalan holding company that owns
companies which provide Internet and multi-channel television services
to over 12,400 subscribers in Guatemala and initiated local and long
distance telephony services in February 1999. The agreement is subject
to the seller's meeting certain conditions prior to closing the
transaction.
The purchase price for the Company's 60% interest of the Guatemalan
holding company will be $7.5 million, consisting of $2.0 million in
cash and promissory notes due through the second anniversary of the
closing, common shares of the Company having a value (based on a per
common share price of $8.70) of $2.5 million, and $3.0 million in
"capital notes" due through the fifth anniversary of the closing.
Payments by the Company under the capital notes will be used by the
sellers to fund their continuing 40% share of any additional equity
capital required by the Guatamalan holding company to meet its working
capital, expansion and operating requirements. The purchase price is
subject to adjustment under certain conditions.
El Salvador Note Payable Payment - In February 1999, the first note
payable payment of approximately $5.2 million was due to Star. Chispa
is in the process of refinancing this payment and the May 17, 1999
payment with a third party bank. In order to allow Chispa to make the
February 17, 1999 payment and continue to pursue the refinancing
opportunity, FondElec loaned Chispa the funds required to make the
February 17, 1999 payment. The loan was in the form of a 90-day
promissory note bearing interest at 12.0% (see Note 1).
GBM Agreement - In March 1999, the Company had reached an arrangement
with GBM Corporation, an IBM alliance company, who is the exclusive
provider of IBM computer hardware and software in El Salvador ("GBM"),
to provide data transmission services to GBM's 120 business customers,
which cumulatively have over 20,000 separate connections. Under the
terms of the arrangement, GBM will act as a reseller of the Company's
services and will be entitled to a fixed percentage of the revenues
generated by each of its customers. Also, GBM will have exclusivity to
market the Company's services to a pre-agreed number of potential
business clients for a period of six months.
PART 3.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No.
Exhibit Page
<S> <C> <C>
3.1 Articles of Incorporation *
3.2 Bylaws *
3.3 Amended and Restated Articles of Incorporation 98-107
4.1 Statement of Rights and Preferences for the Series A Preferred Stock *
4.2 Statement of Rights and Preferences for the Series B Preferred Stock *
10.1 Agreement and Plan of Reorganization *
10.2 Escrow Agreement between Fidelity Transfer Company, TTI and the Company *
10.3 Commitment Agreement between the Company and TTI *
10.4 Letter of Understanding with Decathlon *
10.5 Merger Agreement between the Company and Telecom Investment Corporation *
10.6 Services Agreement between Bridgeport Financial, Inc. and the Company *
10.7 Option and Stock Purchase Agreement between the Company, Caracas Viva Vision, S.A. and its *
Shareholders
10.8 July 24, 1997 Amendment to Option and Stock Purchase Agreement *
10.9 August 13, 1997 Amendment to Option and Stock Purchase Agreement *
10.10 Shareholders Agreement between Petrolera Argentina San Jorge, S.A. and the Company *
10.11 Stock Purchase Agreement between FondElec Essential Services Growth Fund, L.P., Pegasus *
Fund, L.P. and the Company
10.12 Securities Purchase Agreement dated December 23, 1998 among the Company, Internexus, S.A. 108-143
and FondElec Essential Services Growth Fund, L.P.
10.13 Form of Promissory Note issued in connection with the Securities Purchase Agreement dated 144-162
December 23, 1998
12.1 Computation of Earnings Per Share 163-165
21.1 Subsidiaries of the Registrant 166
27.1 Financial Data Schedule 167
* This document was previously filed with the Commission and is incorporated in this report by reference.
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CONVERGENCE COMMUNICATIONS, INC.
April 14, 1999 /S/ Lance D'Ambrosio
- ---------------------- -------------------------------------------------
Date Lance D'Ambrosio
Chairman and Chief Executive Officer
(Principal Executive Officer)
CONVERGENCE COMMUNICATIONS, INC.
April 14, 1999 /S/ Jerry Slovinski
- ---------------------- -------------------------------------------------
Date Jerry Slovinski
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
DIRECTORS
April 14, 1999 /S/ Lance D'Ambrosio
- ---------------------- -------------------------------------------------
Date Lance D'Ambrosio
April 14, 1999 /S/ Troy D'Ambrosio
- ---------------------- -------------------------------------------------
Date Troy D'Ambrosio
April 14, 1999 /S/ Jorge Fucaraccio
- ---------------------- -------------------------------------------------
Date Jorge Fucaraccio
April 14, 1999 /S/ Peter Schiller
- ---------------------- -------------------------------------------------
Date Peter Schiller
April 14, 1999 /S/ Gorge Sorenson
- ---------------------- -------------------------------------------------
Date George Sorenson
April 14, 1999 /S/ Gaston Acosta-Rua
- ---------------------- -------------------------------------------------
Date Gaston Acosta-Rua
EXHIBIT INDEX
Exhibit
No. Exhibit Page
3.3 Amended and Restated Articles of Incorporation ______
10.12 Securities Purchase Agreement dated December 23, 1998 ______
among the Company, Internexus, S.A and FondElec
Essential Services Growth Fund, L.P.
10.13 Form of Promissory Note issued in connection with the ______
Securities Purchase Agreement dated December
23,1998
12.1 Computation of Earnings Per Share _____
21.1 Subsidiaries of the Registrant _____
27.1 Financial Data Schedule _____
EXHIBIT 3.3
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
CONVERGENCE COMMUNICATIONS, INC.
These Amended and Restated Articles of Incorporation were adopted by
the board of directors of this Corporation and approved by the majority vote of
this Corporation's stockholders at a meeting held on August 17, 1998, in
accordance with the provisions of Sections 78.390 and 78.403 of the Nevada
Revised Statutes.
ARTICLE I
The name of the corporation is Convergence Communications, Inc. (the
"Corporation")
ARTICLE II
The purposes for which the Corporation is organized are to engage in
any and all lawful acts that, presently or in the future, may legally be
performed by a corporation organized under the laws of the State of Nevada.
ARTICLE III
A. Authorized Shares. The corporation is authorized to issue two
classes of stock to be designated, respectively, "Common Stock," and "Preferred
Stock." The total number of shares of stock the Corporation is authorized to
issue is 115,000,000, divided into 100,000,000 shares of Common Stock, par value
$.001 per share, and 15,000,000 shares of Preferred Stock, par value $.001 per
share. The preferences, limitations and relative rights of the shares of each
class of stock, and the express grant of authority to the board of directors to
amend these articles of incorporation to divide the shares of Preferred Stock
into series, to establish and modify the preferences, limitations and relative
rights of each share of Preferred Stock, and to otherwise impact the
capitalization of the corporation, are set forth below.
B. Common Stock.
1. Voting Rights. Except as otherwise expressly provided by law or
in this Article III, each outstanding share of Common Stock shall be entitled to
one vote on each matter to be voted on by the shareholders of the Corporation;
2. Liquidation Rights. Subject to any prior or superior rights of
liquidation as may be conferred upon any shares of Preferred Stock, and after
payment or provision for payment of the debts and other liabilities of the
Corporation, upon any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation, the holders of shares of Common
Stock then outstanding shall be entitled to receive all of the assets and funds
of the Corporation remaining and available for distribution. Such assets and
funds shall be divided among and paid to the holders of the shares of Common
Stock, on a pro rata basis, according to the number of shares of held by each of
them;
3. Dividends. Dividends may be paid on the outstanding shares of
Common Stock as and when declared by the board of directors, out of funds
legally available therefor; provided, however, no dividends shall be made with
respect to the shares of Common Stock until all preferential dividends required
to be paid or set apart for any shares of Preferred Stock have been paid or set
apart; and
4. Residual Rights. All rights accruing to the outstanding shares of
the capital stock of the corporation not expressly provided for to the contrary
herein or in the corporation's bylaws or in any amendment hereto or thereto
shall be vested in the shares of Common Stock.
C. Shares of Preferred Stock. Other than as set forth in Section D of
this Article III, the board of directors, without shareholder action, may amend
the corporation's articles of incorporation, pursuant to the authority granted
to the board of directors under Section 78.1955 of the Nevada Revised Statutes
(the "Statutes"), to do any of the following:
1. Preferences. Designate and determine, in whole or in part, the
preferences, limitations and relative rights of the shares of Preferred Stock,
within the limits set forth in the Statutes;
2. Series. Create one or more series of shares of Preferred Stock,
fix the number of shares of each such series, and designate and determine, in
whole or part, the preferences, limitations and relative rights of each series
of shares of Preferred Stock, within the limits set forth in the Statutes;
3. Changes in Rights. Alter or revoke the preferences, limitations
and relative rights granted to or imposed upon the shares of Preferred Stock
(before the issuance of any shares of Preferred Stock) or upon any wholly
unissued series of Preferred Stock; and
4. Increase in Series. Increase or decrease the number of shares
constituting any series of Preferred Stock, the number of shares of which was
originally fixed by the board of directors, either before or after the issuance
of shares of the series, provided that the number may not be decreased below the
number of shares of such series then outstanding, or increased above the total
number of authorized shares of Preferred Stock available for designation as a
part of such series.
D. Series B Preferred Stock. Notwithstanding the preceding, the Board
of Directors of the Corporation has fixed and determined the voting rights,
designations, preferences, qualifications, privileges, limitations,
restrictions, options and other special or relative rights of a series of the
Corporation's Preferred Stock, hereinafter designated as the "Series B Preferred
Stock," consisting of 750,000 shares of the Corporation's 15,000,000 shares of
authorized Preferred Stock, of which (prior to the filing of this Certificate)
14,250,000 shares of such 15,000,000 shares are undesignated.
1. Dividends.
(a) No dividend shall be declared or paid on the Common Stock of
the Corporation during any fiscal year of the Corporation until dividends in the
annual amount of $2.3625 per share (as adjusted for any stock dividends,
combinations, or stock splits with respect to such stock as set forth below),
noncumulative, on the shares of Series B Preferred Stock shall have been
declared and paid during such fiscal year. The preferential dividend on the
shares of Series B Preferred Stock shall be payable semiannually on January 1
and July 1 of each year.
(b) The preferential dividend described in Section D(1)(a) of
Article III hereof shall be payable by the Corporation, in its sole discretion,
in (a) cash, or (b) by the delivery to each holder of the shares of the Series B
Preferred Stock of the number of shares of Series B Preferred Stock equal to the
product of (i) .0675 (annually, or .03375 semi-annually, as the case may be),
multiplied by (ii) the number of shares of issued and outstanding Series B
Preferred Stock held by such shareholder.
2. Liquidation. In the event of a voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, the holder of each
share of Series B Preferred Stock shall be entitled to receive (subject to any
other class of the Corporation's stock that is senior to the Service B Preferred
Stock), prior and in preference to any distribution of any of the assets of the
Corporation to the holders of the shares of Common Stock, an amount equal to
$35.00 per share of Series B Preferred Stock. If, upon any such liquidation,
dissolution or winding up of the Corporation, the assets distributable among the
holders of the Series B Preferred Stock shall be insufficient to permit the
payment in full to such holders of the amount hereinabove provided, then the
entire assets of the Corporation shall be applied ratably to the payment of such
amount to the holders of shares of the Series B Preferred Stock then
outstanding.
3. Redemptions. Shares of Series B Preferred Stock shall not be
redeemable.
4. Conversion. Shares of Series B Preferred Stock shall not be
convertible, except as provided in the further paragraphs of this Section D(4)
of Article III.
(a) All issued and outstanding shares of Series B Preferred Stock
shall be automatically converted into fully paid and nonassessable shares of
Common Stock of the Corporation at the applicable Conversion Rate on the date
preceding the earliest to occur of (i) three years from the date of the initial
issuance of the Series B Preferred Stock, or (ii) the date of the consummation
of the Corporation's sale of shares of its Common Stock in an underwritten
public offering pursuant to a registration statement (other than a registration
statement filed on Form S-4 or S-8, or other form not applicable for the general
issuance of shares) filed with and declared effective by the U.S. Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended, which
results in aggregate gross cash proceeds to the Corporation of at least
$15,000,000 and which results in a market capitalization for the Corporation of
at least $50,000,000 (post money) (an "Offering"), or (iii) if the Corporation
shall merge with or consolidate into another corporation and shall not be the
surviving entity in such merger or consolidation, or shall sell, transfer or
otherwise dispose of all or substantially all of its property, assets or
business.
(b) As used herein, the term "Conversion Rate" shall mean, with
respect to the occurrence of any event described in clause (i) or clause (iii)
of Section D(4)(a) of Article III, a fraction, the numerator of which shall be
$35.00 and the denominator of which shall be the then value, per share, of the
Corporation's Common Stock, as determined in good faith by the Board of
Directors, and, with respect to the occurrence of the event described in clause
(ii) of Section D(4)(a) of Article III, a fraction, the numerator of which shall
be $35.00 and the denominator of which shall be the greater of the actual per
share price paid by investors in the Corporation's Common Stock pursuant to the
Offering.
(c) Upon a conversion of shares of Series B Preferred Stock into
shares of Common Stock pursuant to the provisions of Section D(4)(a) of Article
III, the holder thereof shall surrender, during regular business hours, the
certificate or certificates representing the shares of the Series B Preferred
Stock, duly endorsed to the Corporation or in blank, at the principal office of
the Corporation or at such other place as the Corporation shall designate. The
Corporation shall, promptly following its receipt of such certificates,
determine the number of shares of Common Stock into which the shares of Series B
Preferred Stock shall convert by multiplying the number of shares of Series B
Preferred Stock so tendered to the Corporation by the applicable Conversion
Rate, and deliver to such holder of the shares of Series B Preferred Stock, or
to such holder's nominee or nominees as shall be designated by such holder, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled, together with cash to which such holder shall be
entitled in lieu of fractional shares. The shares of Series B Preferred Stock to
be converted shall be deemed to have been converted and canceled as of the day
immediately preceding the earliest to occur of the events described in Section
D(4)(a) of Article III, and the person or persons entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock on such date.
(d) At least 10 days prior to the anticipated occurrence of the
earliest to occur of any event specified in Section D(4)(a) of Article III, the
Corporation shall give a written notice to each holder of record of the shares
of Series B Preferred Stock, by certified mail enclosed in a postage paid
envelope addressed to such holder at such holder's address as the same shall
appear on the books of the Corporation. Delivery shall be deemed to have
occurred on the second day after deposit of such notice in the mail. Such notice
shall (i) state that the shares will be automatically converted on the date
preceding the consummation of the anticipated event, (ii) state the expected
date of conversion, and (iii) call upon such holder to exchange on or after said
date at the principal place of business of the Corporation a certificate or
certificates representing the shares of Series B Preferred Stock to be converted
in accordance with such notice as provided above. Upon any conversion hereunder,
the Corporation shall not be obligated to issue certificates for the shares of
Common Stock unless and until certificates evidencing the converted shares of
Series B Preferred Stock are delivered to the Corporation.
(e) The issuance of certificates for shares of Common Stock upon
the conversion of shares of Series B Preferred Stock shall be made without
charge to the converting holder of shares of Series B Preferred Stock for any
original issue or transfer tax in respect of the issuance of such certificates.
(f) The Corporation shall at all times reserve and keep available
out of its authorized but unissued shares of Common Stock, solely for the
purpose of effecting the conversion of shares of Series B Preferred Stock, the
full number of shares of Common Stock then deliverable upon the conversion or
exchange of all the shares of Series B Preferred Stock at the time outstanding.
The Corporation shall take at all times such corporate action as shall be
necessary in order that the Corporation may validly and legally issue fully paid
and nonassessable shares of Common Stock upon the conversion of shares of Series
B Preferred Stock in accordance with the provisions hereof.
(g) No fractional shares of Common Stock or scrip representing
fractional shares of Common Stock shall be issued upon any conversion of shares
of Series B Preferred Stock.
5. Equitable Adjustment. If a state of facts shall occur which,
without being specifically controlled by the provisions of these resolutions
(including, without limitation, any subdivision of the outstanding shares of the
Common Stock into a greater number of shares of Common Stock, any combination of
the outstanding shares of Common Stock into a lesser number of shares, the
issuance of rights to all of the holders of its shares of Common Stock entitling
them to subscribe for or purchase shares of Common Stock at a price per share
less than the then fair market value of the shares of Common Stock, the
declaration of a dividend or other distribution payable in shares of Common
Stock, or the reorganization of the Corporation), would not fairly protect the
conversion, dividend or voting rights of the holders of the shares of Series B
Preferred Stock or the rights of the Corporation in accordance with the
essential intent and principles of these resolutions, then the Board of
Directors of the Corporation shall make an adjustment in the application of the
provisions hereof, in accordance with such essential intent and principles, so
as to protect such rights. Anything herein to the contrary notwithstanding, no
adjustment in the Conversion Rate shall be required unless such adjustment,
either by itself or with other adjustments not previously made, would require a
change of at least 5% in the Conversion Rate, provided, however, that any
adjustment which by reason of this subparagraph is not required to be made shall
be carried forward and taken into account in any subsequent adjustment. All
calculations under this Section shall be made to the nearest one-thousandth of a
share.
6. Voting Rights. Except as provided by statute, each share of
Series B Preferred Stock shall entitle the holder thereof the right to cast one
vote on every matter duly brought before the holders of shares of Common Stock
of the Corporation. The holders of the shares of Series B Preferred Stock and of
the Common Stock shall vote together as one class on all matters submitted to a
vote of the shareholders of the Corporation.
7. Rank. All shares of Preferred Stock shall be identical and of
equal rank except as to terms which may be specified by the Board of Directors
pursuant to the resolution or resolutions providing for the issuance or
amendment of the terms applicable to the shares of Series B Preferred Stock
adopted from time to time by the Board of Directors.
ARTICLE IV
A. Voting Generally. Unless otherwise provided in these Articles of
Incorporation, or in the Statutes, every shareholder entitled to vote shall have
the right to vote his shares for the election of the directors of the
Corporation, but no shareholder shall have the right to accumulate its votes for
the election of the directors.
B. Directors.
1. Number. The number of directors of the Corporation shall be set
by the Bylaws, but shall not be less than three or more than nine. The board of
directors to be elected in 1998 shall be comprised of eight directors.
2. Classes. The board of directors shall be divided into three
groups, designated, respectively, Class I, Class II, and Class III. No one class
shall have more than one director more than any other class. If a fraction is
contained in the quotient arrived at by dividing the designated number of
directors by three, then, if such fraction is one-third, the additional director
shall be a member of Class I and if such fraction is two-thirds, one of the
additional directors shall be a member of Class I and one of the additional
directors shall be a member of Class II, unless otherwise provided from time to
time by resolution adopted by the board of directors.
3. Terms. Each director shall serve for three years, until the third
annual meeting following the annual meeting at which such director was elected;
provided, that each initial director in Class I shall serve for a term ending on
the date of the annual meeting in 2001; each initial director in Class II shall
serve for a term ending on the date of the annual meeting in 2000; and each
initial director in Class III shall serve for a term ending on the date of the
annual meeting in 1999. The term of each director shall be always subject to the
election and qualification of his successor and to his earlier death,
resignation or removal.
4. Removal. Directors of the Corporation may be removed only for
cause as determined by the affirmative vote or written consent of (i) all of the
other directors then in office, or (ii) the holders of at least two-thirds of
the shares of the Corporation entitled to vote thereon.
5. Vacancies. Any vacancy in the board of directors including a
vacancy from an enlargement of the board, shall be filled by a vote of a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director. A director elected to fill a vacancy shall be elected
to hold office until the next election of the class for which such director
shall have been chosen, subject to the election and qualification of his
successor and to his earlier death, resignation or removal.
6. Allocations of Directors Among Classes. In the event of any
increase or decrease in the authorized number of directors, (i) each director
then serving as such shall nevertheless continue as a director of the class of
which he is a member, and (ii) the newly created or eliminated directorship
resulting from such increase or decrease shall be apportioned by the board of
directors among the three classes of directors so as to ensure that no one class
has more than one director more than any other class. To the extent possible,
newly created directorships shall be added to those classes whose terms of
office are to expire at the latest dates following such allocation, and
eliminated directorships shall be subtracted from those classes whose terms of
offices are to expire at the earliest dates following such allocation, unless
otherwise provided from time to time by resolution adopted by the board of
directors.
7. Quorum; Action at Meeting. A majority of the directors at any
time in office shall constitute a quorum for the transaction of business. If at
any meeting of the directors there shall be less than such a quorum, a majority
of those present may adjourn the meeting. Every decision made by a majority of
the directors present at a meeting duly held at which a quorum is present shall
be regarded as the act of the board of directors unless a greater number is
required by law, by the Bylaws of the Corporation or by these Articles of
Incorporation.
8. Amendments to this Article. The affirmative vote or written
consent of the holders of at least two-thirds of the shares of the Corporation
issued and outstanding and entitled to vote shall be required to amend or
repeal, or to adopt any provision inconsistent with, this Article IV.
ARTICLE V
A. Indemnification. The Corporation shall, to the fullest extent
permitted by the Statutes, as the same may be amended and supplemented,
indemnify all directors, officers, employees and agents of the Corporation whom
it shall have the power to indemnify thereunder from and against any and all of
the expenses, liabilities, or other matters referred to therein or covered
thereby. The Corporation shall advance expenses to its directors, officers,
employees and agents to the full extent permitted by the Statutes, as the same
may be amended or supplemented. Such rights to indemnification or advancement of
expenses shall continue as to a person who has ceased to be a director, officer,
employee or agent of the Corporation, and shall inure to the benefit of the
heirs, executives and administrators of such persons. The indemnification and
advancement of expenses provided for herein shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement may be
entitled under any bylaw, agreement, vote of shareholders or of disinterested
directors or otherwise. The Corporation shall have the right to purchase and
maintain insurance on behalf of its directors, officers, employees or agents to
the full extent permitted by the Statutes, as the same may be amended or
supplemented.
B. Limitation of Directors Liability. To the fullest extent permitted
by section 841 of the Statutes or as it may hereafter be amended, or any other
applicable law as now in effect, no director of the corporation shall be
personally liable to the corporation or its shareholders for monetary damages
for any action taken or any failure to take any action as a director. No
amendment or repeal of this Article V, nor the adoption of any provision in
these articles of incorporation inconsistent with this Article, shall eliminate
or reduce the effect of this Article, in respect of any matter occurring, or any
cause of action, suit or claim that, but for this Article, would accrue or
arise, prior to such amendment, repeal or adoption of an inconsistent provision.
In witness whereof, the undersigned have executed these Amended and
Restated Articles of Incorporation this 24th day of August, 1998.
Convergence Communications, Inc.
/S/ Brian Reynolds
_________________________________________
Brian Reynolds
President
STATE OF Utah )
: ss.
COUNTY OF Salt Lake )
On August 24, 1998, personally appeared before me, a Notary Public,
Brian Reynolds, who acknowledged that he executed the above instrument in his
capacity as president of Convergence Communications, Inc.
/S/ Janeen Batt
_________________________________________
NOTARY PUBLIC
My Commission Expires: Residing at: Salt Lake City
______________________
/S/ Anthony Sansone
_________________________________________
Anthony Sansone
Secretary
STATE OF UTAH )
: ss.
COUNTY OF SALT LAKE )
On August 24, 1998, personally appeared before me, a Notary Public,
Anthony Sansone, who acknowledged that he executed the above instrument in his
capacity as secretary of Convergence Communications, Inc.
/S/ Janeen Batt
_________________________________________
NOTARY PUBLIC
My Commission Expires: Residing at: Salt Lake City
______________________
EXHIBIT 10.12
SECURITIES PURCHASE AGREEMENT DATED DECEMBER 23, 1998
AMONG THE COMPANY, INTERNEXUS, S.A. AND FONDELEC ESSENTIAL
SERVICES GROWTH FUND, L.P.
______________________________
SECURITIES PURCHASE AGREEMENT
______________________________
SUBORDINATED EXCHANGEABLE PROMISSORY NOTES
OF
CONVERGENCE COMMUNICATIONS, INC.
Dated as of December 23, 1998
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Section Page
<S> <C> <C>
1. Definitions..............................................................................................1
2. Issuance, Purchase and Sale of Securities................................................................6
2.1 Issuance of the Securities.............................................................6
2.2 Sale and Purchase of the Securities.............................................................6
3. Closing of Sale of Securities............................................................................7
4. Covenants of the Company.................................................................................7
4.1 Deliveries by the Company to the Purchasers on the Closing Date.................................7
(a) Securities.............................................................................7
(b) Opinion of Counsel.....................................................................7
(c) Stockholders' Agreement................................................................7
(d) Registration Rights Agreement..........................................................7
(e) Officer's Certificate..................................................................7
(f) Payment of Closing Fees................................................................7
4.2 Deliveries by the Purchasers to the Company on the Closing Date.................................8
(a) Purchase Price.........................................................................8
(b) Stockholders' Agreement................................................................8
(c) Registration Rights Agreement..........................................................8
5. Representations and Warranties, Etc......................................................................8
5.1 Organization and Qualification; Authority.......................................................8
5.2 Corporate Authorization.........................................................................8
5.3 No Conflict; Requisite Consents.................................................................9
5.4 Capitalization..................................................................................9
5.5 Litigation; Defaults...........................................................................10
5.6 No Material Adverse Change.....................................................................10
5.7 Employee Programs..............................................................................10
5.8 Private Offerings..............................................................................12
5.9 Company SEC Documents..........................................................................12
5.10 Financial Statements; No Undisclosed Liabilities...............................................12
5.11 Environmental Regulation, Etc..................................................................13
5.12 Properties and Assets..........................................................................13
5.13 Insurance......................................................................................13
5.14 Employment Practices...........................................................................14
5.15 Intellectual Property..........................................................................14
5.16 Material Contracts.............................................................................14
5.17 Taxes..........................................................................................14
5.18 Licenses.......................................................................................15
5.19 Transactions with Affiliates...................................................................15
5.20 Federal Reserve Regulations....................................................................15
5.21 Investment Company Act.........................................................................15
5.22 Broker's or Finder's Commissions...............................................................15
5.23 Books and Records..............................................................................15
5.24 Disclosure.....................................................................................15
6. Representations and Warranties of the Purchasers........................................................16
7. Covenants of the Company................................................................................17
7.1 Use of Proceeds................................................................................17
7.2 Charter Documents..............................................................................17
7.3 Ordinary Course................................................................................17
7.4 Issuance of Securities.........................................................................17
7.5 Dividends; Changes in Capital Stock............................................................17
7.6 Change in Condition............................................................................18
7.7 No Action......................................................................................18
7.8 Replacement of Certificates....................................................................18
8. Rights and Obligations of the Purchasers................................................................18
8.1 Exchange Right.................................................................................18
8.2 Reservation of Securities......................................................................18
8.3 Anti-Dilution Provisions - Adjustment of Number of Shares of Capital Stock.....................19
(a) Combinations and Subdivisions of Capital Stock........................................19
(b) Distributions in Respect of Capital Stock.............................................19
(c) Recapitalization, Reclassification and Succession.....................................19
(d) Fractional Shares.....................................................................19
(e) Issuance of Additional Shares of Capital Stock........................................20
(f) Company to Prevent Dilution...........................................................20
8.4 Notice to the Holder...........................................................................20
8.5 Exchange Listing by the Company................................................................21
9. Conditions to Closing...................................................................................22
9.1 Conditions to the Company's Obligations........................................................22
9.2 Conditions to the Purchasers' Obligations......................................................22
10. Restrictions on Transfer................................................................................23
10.1 Restrictive Legends............................................................................23
10.2 Notice of the Proposed Transfer; Opinion of Counsel............................................23
11. Miscellaneous...........................................................................................24
11.1 Indemnification; Expenses, Etc.................................................................24
11.2 Survival of Representations and Warranties.....................................................25
11.3 Amendment and Waiver...........................................................................25
11.4 Notices, Etc...................................................................................25
11.5 Entire Agreement...............................................................................25
11.6 Successors and Assigns.........................................................................26
11.7 Agreement and Action of the Purchasers.........................................................26
11.8 Expenses.......................................................................................26
11.9 Descriptive Headings...........................................................................26
11.10 Governing Law..................................................................................26
11.11 Counterparts...................................................................................26
</TABLE>
SCHEDULES
SCHEDULE 5.1 -- Qualified Jurisdictions and Subsidiaries
SCHEDULE 5.2 -- Authorization
SCHEDULE 5.3 -- Consents
SCHEDULE 5.4 -- Capitalization
SCHEDULE 5.5 -- Litigation; Defaults
SCHEDULE 5.6 -- Material Developments
SCHEDULE 5.7 -- ERISA
SCHEDULE 5.10 -- Undisclosed Liabilities
SCHEDULE 5.11 -- Environmental
SCHEDULE 5.12 -- Properties and Assets
SCHEDULE 5.13 -- Insurance
SCHEDULE 5.14 -- Employment Practices
SCHEDULE 5.15 -- Intellectual Property
SCHEDULE 5.16 -- Material Contracts
SCHEDULE 5.17 -- Taxes
SCHEDULE 5.18 -- Licenses
SCHEDULE 5.19 -- Transactions with Affiliates
EXHIBITS
EXHIBIT A -- Certificate of Designations of Series C Preferred
Stock
EXHIBIT B -- Form of Note
EXHIBIT C -- Form of Registration Rights Agreement
EXHIBIT D -- Stockholders' Agreement
EXHIBIT E -- Form of Warrant
EXHIBIT F -- Form of Opinion of Parsons Behle & Latimer
EXHIBIT G -- List of DAC Aid Recipients
EXHIBIT H -- Form of Exchange Notice
SECURITIES PURCHASE AGREEMENT
This SECURITIES PURCHASE AGREEMENT ("Agreement"), dated as of December
__, 1998, by and among Convergence Communications, Inc., a Nevada corporation
(the "Company"), FondElec Essential Services Growth Fund, L.P., a Cayman Islands
limited partnership ("FESGF") and Internexus, S.A., an Argentinian corporation
("Internexus"). FESGF and Internexus are also each referred to herein as a
"Purchaser," and collectively, the "Purchasers."
W I T N E S S E T H:
WHEREAS, the Company is in the process of raising capital through the
sale by the Company of debt or equity securities resulting in gross proceeds of
up to $35 million (the "Financing"); and
WHEREAS, the Company desires to issue and sell to the Purchasers, and
the Purchasers desire to purchase from the Company, the Notes (as defined below)
in the aggregate amount of $10,000,000 and the Warrants (as defined below), on
the terms, and subject to the conditions, set forth herein.
NOW, THEREFORE, in consideration of these premises, the mutual
covenants and agreements set forth herein and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. Definitions. For purposes hereof unless the context otherwise
requires, the following terms shall have the meanings indicated. All accounting
terms not otherwise defined herein, shall have the respective meanings accorded
to them under GAAP (as defined below). Unless the context otherwise requires,
(i) references to a "Schedule" or an "Exhibit" are to a Schedule or an Exhibit
attached to this Agreement, (ii) references to a "section" are to a section of
this Agreement and (iii) any of the following terms may be used in the singular
or the plural, depending on the reference.
"Affiliate" means any Person (i) which directly or indirectly
through one or more intermediaries controls, or is controlled by, or is under
common control with, the Company, (ii) which beneficially owns or holds 10% or
more of any class of the outstanding Voting Stock of the Company or (iii) which
is a relative or spouse of such person, or any relative of such spouse, who has
the same home as such person. The term "control" means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of a Person, whether through ownership of Voting Stock, by Contract
or otherwise.
"Agreement" means this Agreement, as amended, modified or
supplemented from time to time, in accordance with the terms hereof, together
with any exhibits, schedules or other attachments thereto.
"Benefit Plans" has the meaning ascribed thereto in Section
5.7 hereof.
"Business Day" means any day that is not a Saturday, a Sunday
or a day on which banking institutions in New York, New York are authorized or
obligated by Law, executive order or government decree to be closed.
"Capital Stock" means, with respect to any Person, any and all
shares, interests, participations, rights in or other equivalents (however
designated and whether voting or non-voting) of such Person's capital stock,
whether outstanding on the Closing Date or issued after the Closing Date and any
and all rights, warrants or options exercisable or exchangeable for or
convertible into such capital stock.
"Certificate of Designations" means the Certificate of
Designations of the Series C Preferred Stock, substantially in the form of
Exhibit A hereto.
"Charter Documents" has the meaning ascribed thereto in
Section 5.1 hereof.
"Closing" has the meaning ascribed thereto in Section 3
hereof.
"Closing Date" has the meaning ascribed thereto in Section 3
hereof.
"Code" means the Internal Revenue Code of 1986, and the rules
and regulations promulgated thereunder, as amended from time to time.
"Commission" means the United States Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act.
"Common Stock" means the common stock, par value $.001 per
share, of the Company.
"Company" has the meaning ascribed thereto in the introduction
hereof.
"Company Financial Statements" has the meaning ascribed
thereto in Section 5.10 hereof.
"Company SEC Documents" has the meaning ascribed thereto in
Section 5.9 hereof.
"Contracts" has the meaning ascribed thereto in Section 5.16
hereof.
"ERISA" means the Employee Retirement Income Security Act of
1974, and the rules and regulations promulgated thereunder, as amended.
"ERISA Affiliate" means any trade or business (whether
incorporated or unincorporated) which is a member of a group described in
Section 414(b), (c), (m) or (o) of the Code, of which the Company also is a
member.
"ERISA Affiliate Title IV Plan" has the meaning ascribed
thereto in Section 5.7 hereof.
"Exchangeable Securities" has the meaning ascribed thereto in
Section 8.4(b) hereof.
"Exchange Act" means the Securities Exchange Act of 1934, and
the rules and regulations of the Commission promulgated thereunder, as amended.
"Exchange Price" has the meaning ascribed thereto in Section
8.1 hereof.
"Fair Market Value" means, with respect to the shares of
Common Stock issuable upon exchange of the Notes, the lower of (a) the Market
Price on the date of exchange of the Notes for Common Stock or (b) the average
closing sales price per share of Common Stock for the ten (10) trading days
immediately preceding the date of exchange of the Notes for Common Stock.
"Financing" has the meaning ascribed thereto in the
introduction hereof.
"GAAP" means generally accepted accounting principles and
practices set forth in the opinions and pronouncements of the Accounting
Principles Board and the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as may be approved by a significant
segment of the accounting profession that are applicable to the circumstances as
of the date of determination.
"Governmental Authority" means any governmental or
quasi-governmental authority including, without limitation, any federal, state,
territorial, county, municipal or other governmental or quasi-governmental
agency, board, branch, bureau, commission, court, arbitration panel, department,
authority, body or other instrumentality or political unit or subdivision or
official thereof, whether domestic or foreign.
"Holder" means any Person who now holds or shall hereafter
acquire and hold the Notes.
"Indemnified Party" or "Indemnified Parties" has the meaning
ascribed thereto in Section 11.1(a) hereof.
"Intellectual Property" shall mean all registered patents,
trademarks, product designations, service marks, copyrights, and applications
for any of the foregoing, used, licensed, leased or owned, by a Person which is
material to the operations of such Person.
"Law" means any statute, ordinance, code, rule, regulation or
order enacted, adopted, promulgated, applied or followed by any Governmental
Authority.
"License" or "Licenses" has the meaning ascribed thereto in
Section 5.18 hereof.
"Lien" means any security agreement, financing statement
(whether or not filed) mortgage, lien (statutory or otherwise), charge, pledge,
hypothecation, conditional sales agreement, adverse claim, title retention
agreement or other security interest, encumbrance, lien, charge, restrictive
agreement, mortgage, deed of trust, indenture, pledge, option, limitation,
exception to or other title defect in or on any interest or title of any vendor,
lessor, lender or other secured party to or of such Person under any conditional
sale, lease, consignment, or bailment given for security purposes, trust receipt
or other title retention agreement with respect to any Property or asset of such
Person, whether direct, indirect, accrued or contingent.
"Losses" has the meaning ascribed thereto in Section 11.1(a)
hereof.
"Market Price" means, with respect to the shares of Common
Stock issuable upon exchange of the Notes, (a) if the shares are listed or
admitted for trading on any national securities exchange or included in The
Nasdaq National Market or Nasdaq SmallCap Market, the last reported sales price
as reported on such exchange or market; (b) if the shares are not listed or
admitted for trading on any national securities exchange or included in The
Nasdaq National Market or Nasdaq SmallCap Market, the average of the last
reported closing bid and asked quotation for the shares as reported on NASDAQ or
a similar service if NASDAQ is not reporting such information; (c) if the shares
are not listed or admitted for trading on any national securities exchange or
included in The Nasdaq National Market or Nasdaq SmallCap Market or quoted by
NASDAQ or a similar service, the average of the last reported bid and asked
quotation for the shares as quoted by a market maker in the shares (or if there
is more than one market maker, the bid and asked quotation shall be obtained
from two market makers and the average of the lowest bid and highest asked
quotation). In the absence of any available public quotations for the Common
Stock, the Board of Directors of the Company shall determine in good faith the
fair value of the Common Stock, which determination shall be set forth in a
certificate by the Secretary of the Company.
"Material Adverse Effect" has the meaning ascribed thereto in
Section 5.1 hereof.
"NASDAQ" means the National Association of Securities Dealers
Automated Quotation System.
"Notes" means the Subordinated Exchangeable Promissory Notes
of the Company, substantially in the form of Exhibit B hereto.
"Person" means any individual, entity or group, including,
without limitation, individual, corporation, limited liability company, limited
or general partnership, joint venture, association, joint stock company, trust,
unincorporated organization, or government or any agency or political
subdivision thereof.
"Preferred Stock" means the preferred stock, par value $.001
per share, of the Company.
"Property" means any interest in any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.
"Purchasers" has the meaning ascribed thereto in the
introduction hereof.
"Registration Rights Agreement" means the Registration Rights
Agreement dated as of the date hereof, by and among the Company and the
Purchasers, substantially in the form of Exhibit C hereto, as amended, modified
or supplemented from time to time in accordance with the terms thereof, together
with any exhibits, schedules or other attachments thereto.
"Regulation D" means Regulation D under the Securities Act.
"Restricted Security" has the meaning ascribed thereto in
Section 10.2 hereof.
"Rule 144" means Rule 144 as promulgated by the Commission
under the Securities Act, and any successor rule or regulation thereto.
"Rule 144A" means Rule 144A as promulgated by the Commission
under the Securities Act, and any successor rule or regulation thereto.
"Securities" means the Notes and the Warrants.
"Securities Act" means the Securities Act of 1933, and the
rules and regulations of the Commission promulgated thereunder, as amended.
"Series A Preferred Stock" means the Series A Preferred Stock,
par value $.001 per share, of the Company.
"Series B Preferred Stock" means the Series B Preferred Stock,
par value $.001 per share, of the Company.
"Series C Preferred Stock" shall mean a class of stock or
series of preferred stock to be issued by the Company in connection with the
Financing (and upon exchange of the Notes as provided in Section 8.1), which
class of stock or series of preferred stock: (i) shall have the relative voting
rights, designations, preferences, qualifications, privileges, limitations,
restrictions and other special or relative rights described in the Certificate
of Designations, and (ii) shall be senior to the Series B Preferred stock in its
rights to receive liquidating distributions.
"Stockholders' Agreement" means the Stockholders' Agreement
dated as of the date hereof by and among the Company and the Purchasers,
substantially in the form of Exhibit D hereto, as amended, modified or
supplemented from time to time in accordance with the terms thereof, together
with any exhibits, schedules or other attachments thereto.
"Significant Subsidiaries" means the following entities:
Cablevisa, S.A., Chispa Dos, Inc., InterAmerican Net De Venezuela, S.A.,
Interamerican Telecom, Inc., Multicable, S.A., WCI Cayman, Inc. and WCI de
Venezuela, C.V.
"Subsidiary" means with respect to any Person, any
corporation, association or other business entity of which securities
representing more than 50% of the combined voting power of the total Voting
Stock (or in the case of an association or other business entity which is not a
corporation, more than 50% of the equity interest) is at the time owned or
controlled, directly or indirectly, by that Person or one or more Subsidiaries
of that Person or a combination thereof. When used herein without reference to
any Person, "Subsidiary" means a Subsidiary of the Company.
"Taxes" has the meaning ascribed thereto in Section 5.17
hereof.
"Transaction Documents" means, collectively, this Agreement,
the Notes, the Registration Rights Agreement, the Stockholders' Agreement, the
Warrants and any and all agreements, exhibits, schedules, certificates,
instruments and other documents delivered pursuant hereto and thereto.
"Voting Stock" means any class or classes of Capital Stock
pursuant to which the holders thereof have the general voting power under
ordinary circumstances to vote for the election of directors, managers or
trustees of any Persons (irrespective of whether or not at the time, Capital
Stock of any class or classes will have, or might have, voting power by the
reason of the happening of any contingency).
"Warrants" means the warrants, in substantially the form of
Exhibit E attached hereto, to acquire shares of Common Stock which shall be
automatically exercisable without any action on the part of the Company on the
first day of each month commencing on February 1, 1999 in an amount equal to
3.5% of the principal amount of the Notes then outstanding divided by the then
exercise price of the Warrant and pro rated for any period less than one month.
2. Issuance, Purchase and Sale of Securities
2.1 Issuance of the Securities. The Company has authorized the
issuance and sale of the Securities in the aggregate principal amount of
$10,000,000 to be acquired by the Purchasers in accordance with the terms of
this Agreement. Each Note will be issued in substantially the form of the Note
attached hereto as Exhibit B. Each Warrant will be issued in substantially the
form of the Warrant attached hereto as Exhibit C.
2.2 Sale and Purchase of the Securities. Subject to the terms and
conditions of this Agreement, on the Closing Date (as defined), the Company will
issue, sell and deliver to each Purchaser and each Purchaser will purchase from
the Company, such principal amount of Notes and Warrants, as is specified
opposite such Purchaser's name on the signature pages hereto. At the Closing (as
defined), the principal amount of the Notes and the Warrants shall be payable by
the Purchasers to the Company in cash by wire transfer of immediately available
funds.
3. Closing of Sale of Securities. The purchase and delivery of the
Securities to be purchased by the Purchasers hereunder shall take place at the
offices of Swidler Berlin Shereff Friedman, LLP, 919 Third Avenue, New York, New
York 10022, at a closing (the "Closing") on or before December 23, 1998 or at
such other place or on such other date as the Purchasers and the Company may
agree upon (such date on which the Closing shall have actually occurred, the
"Closing Date"). At the Closing, the Company will deliver or cause to be
delivered to each Purchaser the Securities to be purchased by such Purchaser
pursuant hereto against payment of the purchase price therefor. The Securities
to be purchased by each Purchaser hereunder shall be, with respect to such
Purchaser, in the form of a single Note (or such greater number of Notes as each
Purchaser may request no less than 48 hours prior to the Closing) and Warrant,
dated the date of the Closing and registered in the Purchaser's name or that of
its nominee (provided to the Company no less than 48 hours prior to the
Closing).
4. Deliveries at the Closing.
4.1 Deliveries by the Company to the Purchasers on the Closing
Date. At the Closing, the Company will deliver or cause to be delivered to each
Purchaser, against payment of the purchase price as provided herein:
(a) Securities. The Notes and Warrants, as provided in
Section 3 hereof.
(b) Opinion of Counsea. A favorable opinion from Parsons
Behle & Latimer, counsel for the Company, substantially in the form set forth in
Exhibit F, addressed to the Purchasers, dated the Closing Date and otherwise
satisfactory in substance and form to the Purchasers, and their respective
counsel.
(c) Stockholders' Agreement. The Stockholders' Agreement,
duly executed by the Company.
(d) Registration Rights Agreement. The Registration Rights
Agreement, duly executed by the Company.
(e) Officer's Certificate. A certificate, dated the Closing
Date, of an officer of the Company, (i) certifying as true, complete and correct
its Charter Documents and resolutions relating to the transactions contemplated
by this Agreement and the other Transaction Documents, (ii) as to the absence of
proceedings or other action for dissolution, liquidation or reorganization of
the Company and (iii) as to the incumbency and specimen signatures of officers
who shall have executed instruments, agreements and other documents in
connection with the transactions contemplated hereby.
(f) Payment of Closing Fees. The fees, expenses and
disbursements of counsel for the Purchasers reflected in statements of such
counsel rendered prior to or on the Closing Date and the out-of-pocket expenses
of the Purchasers, which fees, expenses and disbursements shall not exceed
$50,000 in the aggregate.
4.2 Deliveries by the Purchasers to the Company at the Closing
Date. At the Closing, each Purchaser will deliver or cause to be delivered to
the Company the following:
(a) Purchase Price. Such Purchaser's payment of the purchase
price, as provided herein.
(b) Stockholders' Agreement. The Stockholders' Agreement,
duly executed by the Purchasers.
(c) Registration Rights Agreement. The Registration Rights
Agreement, duly executed by the Purchasers.
5. Representations and Warranties, Etc. In order to induce the
Purchasers to purchase the Securities, the Company represents and warrants to
the Purchasers that, except as set forth on the disclosure schedule hereto:
5.1 Organization and Qualification; Authority. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Nevada. Schedule 5.1 attached hereto contains a list of the
name and jurisdiction of organization of each of the Company's Subsidiaries and
the Company's ownership interest with respect thereto. Each Significant
Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation. The Company and
each of its Significant Subsidiaries has full corporate power and authority and
all necessary government approvals to own and lease its properties and carry on
its business as presently conducted, is duly qualified, registered or licensed
as a foreign corporation to do business and is in good standing in each
jurisdiction in which the ownership or leasing of its properties or the
character of its present operations makes such qualification, registration or
licensing necessary, except where the failure to so qualify or be in good
standing would not have a material adverse effect on the condition (financial or
otherwise), assets, business or results of operations of the Company and its
Significant Subsidiaries, taken as a whole (a "Material Adverse Effect"). The
Company has heretofore delivered to the Purchasers' counsel complete and correct
copies of (i) the certificate of incorporation and (ii) the by-laws of the
Company and its Significant Subsidiaries, each as amended to date and as
presently in effect (collectively, the "Charter Documents").
5.2 Corporate Authorization. The execution, delivery and
performance by the Company of this Agreement and the other Transaction Documents
are within the Company's corporate power and authority. The execution and
delivery of this Agreement and the other Transaction Documents by the Company
and the performance by the Company of its obligations hereunder and thereunder,
have been duly authorized by all requisite corporate action and no other
corporate proceedings on the part of the Company other than those listed on
Schedule 5.2 are necessary to authorize this Agreement and the other Transaction
Documents. This Agreement and the other Transaction Documents have been duly
executed and delivered by duly authorized officers of the Company and, assuming
the due authorization, execution and delivery thereof by all parties thereto
other than the Company, constitutes a legal, valid and binding obligation of the
Company, enforceable against it in accordance with its terms, except as may be
limited by bankruptcy, reorganization, moratorium, fraudulent conveyance and
insolvency laws and by other laws affecting the rights of creditors generally
and except as may be limited by the availability of equitable remedies.
5.3 No Conflict; Requisite Consents. The execution, delivery and
performance by the Company of this Agreement and the other Transaction Documents
does not and will not (i) contravene or conflict with the Charter Documents,
(ii) constitute a default under or give rise to a right of termination,
cancellation or acceleration of any right or obligation of the Company or any of
the Company's Subsidiaries under any provision of any written agreement or other
instrument binding upon the Company or any of the Company's Subsidiaries or
require the consent of any third party under any Law applicable to the Company
or any License held by the Company or any of the Company Subsidiaries, or (iii)
result in the creation or imposition of any Lien on any asset of the Company or
any of the Company's Subsidiaries, except, with respect to each of the
occurrences or results referred to in clauses (ii) and (iii) of this sentence,
(a) the third party consents set forth in Schedule 5.3 and (b) such items which
would not have a Material Adverse Effect.
5.4 Capitalization
(a) As of December 23, 1998, the authorized Capital Stock of
the Company consists of 100,000,000 shares of Common Stock and 15,000,000 shares
of Preferred Stock consisting of 750,000 shares of Series B Preferred Stock, of
which 11,738,277 shares of Common Stock and 101,379 shares of Series B Preferred
Stock are issued and outstanding. Prior to August 17, 1998, the Company also had
authorized 4,250,000 shares of Series A Preferred Stock, of which 3,257,490 were
outstanding. All of the previously issued shares of Series A Preferred Stock
have been converted into shares of Common Stock, and there are no shares of
Series A Preferred Stock issued and outstanding. All issued and outstanding
shares of the Company's Capital Stock are validly issued, fully paid and
nonassessable. Except as set forth on Schedule 5.4, there are no (i) outstanding
subscriptions, options, warrants or rights (including registration rights,
conversion rights and preemptive rights), agreements, calls, convertible
securities, arrangements or commitments of any character to which the Company is
a party relating to the issued or unissued Capital Stock or other securities of
the Company or obligating the Company to grant, issue or sell any such options,
warrants or rights or (ii) shares of Common Stock reserved for issuance upon the
exercise of any warrants, options granted or to be granted under any stock
option plan or any options previously granted outside of any stock option plan.
(b) All the outstanding shares of Common Stock of the
Company's Subsidiaries are validly issued, fully paid and nonassessable and are
owned by the Company or by a Subsidiary of the Company free and clear of all
Liens, except as set forth on Schedule 5.4 and except for Liens which in the
aggregate are not material to the Company and its Subsidiaries. As of the date
of this Agreement, there are no outstanding options, warrants, preemptive or
other rights, Contracts, commitments, undertakings or arrangements by which any
of the Company's Subsidiaries is or may become obligated to issue any additional
shares of their Capital Stock or securities convertible into any such shares
except as set forth on Schedule 5.4. The Company does not directly or indirectly
own any interest in any other corporation, partnership, joint venture or other
business association or entity, which interest is material to the Company and
its Subsidiaries, taken as a whole, except as set forth on Schedule 5.4.
Schedule 5.4 contains a list of all options, warrants or other securities
convertible into shares of Common Stock granted or approved to be granted by the
Company's Board of Directors (or a committee thereof) prior to the date hereof.
5.5 Litigation; Defaults. There is no action, suit, proceeding or
investigation pending or, to the knowledge of the Company, threatened against or
affecting the Company, any of its Subsidiaries, or any properties of any of the
foregoing, before or by any Governmental Authority or any other Person, which
would (i) have a Material Adverse Effect, or (ii) impair the ability of the
Company to perform any material obligation which the Company has under any
Transaction Document except as set forth on Schedule 5.5 or Schedule 5.11.
Neither the Company nor any of its Subsidiaries is in violation of, or in
default under (and there does not exist any event or condition which, after
notice or lapse of time or both, would constitute such a default under), any
term of its Charter Documents, or of any term of any agreement, Contract,
instrument, judgment, decree, writ, determination, arbitration award, or Law
applicable to the Company or any of its Subsidiaries or to which the Company or
any of its Subsidiaries is bound, or to any Properties of the Company or any of
its Subsidiaries, except in each case to the extent that such violations or
defaults would not (a) affect the validity or enforceability of any Transaction
Document, (b) have a Material Adverse Effect or (c) impair the ability of the
Company to perform any material obligation which the Company has under any
Transaction Document except as set forth on Schedule 5.5 or Schedule 5.11.
5.6 No Material Adverse Change. Since September 30, 1998, there
has been (i) no material adverse change in the condition (financial or
otherwise), assets, business, projects or results of operations of the Company
or any of its Subsidiaries, (ii) no material obligation or liability (contingent
or otherwise) incurred by the Company or any of its Subsidiaries, other than
obligations and liabilities incurred in the ordinary course of business and no
material Lien placed on any of the Properties of the Company or any of its
Subsidiaries that remains in existence on the date hereof, other than
liabilities and Liens described on Schedule 5.12 hereto, and (iii) no
acquisition or disposition of any material assets by the Company or any of its
Subsidiaries (or any Contract or arrangement therefor), or any other material
transaction, otherwise than for fair value in the ordinary course of business,
except as set forth on Schedule 5.6 or in the Company SEC Documents.
5.7 Employee Programs
(a) Neither the Company nor its Subsidiaries provide, nor
has an obligation to provide, or make contributions to provide compensation or
benefits of any kind or description whatsoever (whether current or deferred and
whether paid in cash or in kind) to, or on behalf of, one, or more than one,
current or former employees or directors of the Company, its Subsidiaries or any
of its current or former Affiliates or any of their dependents, other than any
plans, programs or other arrangements which only provide for the payment of cash
compensation currently from the general assets of the Company or its
Subsidiaries on a payday by payday basis as base salary or hourly wages for
current services and other than policies for vacation and sick days and except
as disclosed on Schedule 5.7 (individually, a "Benefit Plan," and collectively,
the "Benefit Plans"). Each of the Benefit Plans is listed on Schedule 5.7.
(b) Except as disclosed on Schedule 5.7:
(i) No ERISA Affiliate (other than the Company or its
Subsidiaries) provides, or has an obligation to provide,
contributions, compensation or benefits of or under any plan,
program or arrangement which is subject to Title IV of ERISA
("ERISA Affiliate Title IV Plan").
(ii) The Company has furnished or made available to the
Purchasers a true, complete and current copy of each written
Benefit Plan and any amendments thereto, a summary of each other
Benefit Plan, and all Internal Revenue Service, Department of Labor
or Pension Benefit Guaranty Corporation rulings or determinations,
annual reports, summary plan descriptions, actuarial and other
financial reports and such other documentation with respect to any
Benefit Plan as was reasonably requested by the Purchasers.
(iii) No assets have been set aside in a trust or other
separate account to pay directly or indirectly any benefits under
any Benefit Plan or to the extent assets have been set aside, all
assets are shown on the books and records of such trust or separate
account at their fair market value as of the date of any report
last provided with respect to such trust.
(iv) Each Benefit Plan and each ERISA Affiliate Title
IV Plan has been established, maintained and administered in
compliance in all material respects with all applicable Laws. The
Company has no duty or obligation to indemnify or hold any other
person or entity harmless for any liability attributable to any
acts or omissions by such person or entity with respect to any
Benefit Plan or ERISA Affiliate Title IV Plan, other than
indemnification obligations to Benefit Plan fiduciaries under the
terms of the Benefit Plan documents and corporate charters, by-laws
and state corporate Law.
(v) Neither the Company nor its Subsidiaries has
incurred any material liability for any tax or penalty with respect
to any Benefit Plan, ERISA Affiliate Title IV Plan or any group
health plan (as described in Section 5000 of the Code) of an ERISA
Affiliate including, without limitation, any tax or penalty under
ERISA or under the Code.
(vi) Neither the Company nor its Subsidiaries has
terminated or withdrawn from, or sought a funding waiver with
respect to, any Benefit Plan which is subject to Title IV of ERISA.
(vii) To the knowledge of the Company, there is no
proposed or actual audit or investigation by any Governmental
Authority with respect to any Benefit Plan or ERISA Affiliate Title
IV Plan.
(viii)Neither the Company nor its Subsidiaries has any
obligation to make, or reimburse another employer, directly or
indirectly, for making, contributions to a multi employer plan as
described in Title IV of ERISA.
5.8 Private Offerings. Assuming the truth of the Purchasers'
representations and acknowledgments contained in Section 6 hereof, neither the
Company nor any Person acting on its behalf (other than the Purchasers, as to
whom the Company makes no representations) has offered or sold the Securities by
means of any general solicitation or general advertising within the meaning of
Rule 502(c) under the Securities Act. The Company has not sold the Securities to
anyone other than the Purchasers designated in this Agreement. No securities of
the same class or series as the Notes have been issued and sold by the Company
prior to the date hereof. The Securities shall bear substantially the same
legend set forth in Section 10.1 hereof for at least so long as required by the
Securities Act. Assuming the truth of the Purchasers' representations and
acknowledgments contained in Section 6 hereof and any required filings pursuant
to the Securities Act or any state securities laws, or such other post-closing
filings as may be required, the offer and sale of the Securities are and will be
exempt from the registration and prospectus delivery requirements of the
Securities Act, and have been registered or qualified (or are exempt from
registration and qualification) under the registration, permit or qualification
requirements of all applicable state securities laws.
5.9 Company SEC Documents. The Company has filed with the
Commission, and has heretofore made available to the Purchasers, true and
complete copies of, each report, schedule, registration statement and definitive
proxy statement required to be filed by it under the Exchange Act or the
Securities Act (as such documents have been amended since the time of their
filing, collectively, the "Company SEC Documents"). As of their respective
dates, the Company SEC Documents do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
5.10 Financial Statements; No Undisclosed Liabilities. The
financial statements of the Company included or incorporated by reference in the
Company SEC Documents (the "Company Financial Statements") have been prepared in
accordance with GAAP applied on a consistent basis (except as may be indicated
therein or in the notes thereto) and fairly present in all material respects the
consolidated financial position of the Company and the consolidated Subsidiaries
of the Company as at the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case of
any unaudited interim financial statements, to normal year-end adjustments and
any other adjustments described therein). Since September 30, 1998, neither the
Company nor any of the Company's Subsidiaries has incurred any liabilities or
obligations of any nature, whether or not accrued, absolute, contingent or
otherwise, that would have a Material Adverse Effect, other than liabilities (i)
disclosed on Schedule 5.10, or the Company SEC Documents filed prior to the date
of this Agreement (all of which have been furnished to the Purchasers), (ii)
adequately provided for in the Company Financial Statements or disclosed in any
related notes thereto (all of which have been furnished to the Purchasers),
(iii) not required under GAAP to be reflected in the Company Financial
Statements, or disclosed in any related notes thereto, (iv) incurred in
connection with this Agreement or the other Transaction Documents, or (v)
incurred in the ordinary course of business.
5.11 Environmental Regulation, Etc. To the knowledge of the
Company, (i) the operations of the Company and its Subsidiaries comply in all
material respects with all applicable federal, state or local environmental,
health and safety statutes and regulations; (ii) none of the operations of the
Company or its Subsidiaries is the subject of any judicial or administrative
proceeding alleging the violation of any federal, state or local environmental,
health or safety statute or regulation; (iii) none of the operations of the
Company or its Subsidiaries is the subject of a federal or state investigation
evaluating whether any remedial action is needed to respond to a release of any
hazardous or toxic waste, substance or constituent, or other substance into the
environment; (iv) neither the Company nor its Subsidiaries has filed any notice
under any federal or state Law indicating past or present treatment, storage or
disposal of a hazardous waste or reporting a spill or release of a hazardous or
toxic waste, substance or constituent, or other substance into the environment;
and (v) neither the Company nor its Subsidiaries has contingent liability in
connection with any release of any hazardous or toxic waste, substance or
constituent, or other substance into the environment except as set forth on
Schedule 5.11.
5.12 Properties and Assets. The Company and its Subsidiaries have
good record and marketable fee title to all real Property and all other Property
and assets, whether tangible or intangible, owned by them and reasonably
necessary in the conduct of business of the Company or its Significant
Subsidiaries, except defects in title which would not have a Material Adverse
Effect or disclosed on Schedule 5.12. The Company and its Subsidiaries have
complied with all commitments and obligations on their part to be performed or
observed under each of the leases listed on Schedule 5.12, except for such
noncompliance which would not have a Material Adverse Effect. All buildings,
machinery and equipment of the Company and its Subsidiaries are in good repair
and working order, except for ordinary wear and tear, and except as would not
have a Material Adverse Effect.
5.13 Insurance. A list of all insurance policies covering the
assets, business, equipment and Properties under which the Company or any of its
Subsidiaries may derive any material benefit is set forth on Schedule 5.13
hereof. Except as set forth on Schedule 5.13, such policies of insurance and
bonds (or other policies and bonds providing substantially similar insurance
coverage) are and have been in full force and effect for at least the last year
and remain in full force and effect. Such policies of insurance and bonds are of
the type and in amounts customarily carried by Persons conducting business
similar to that presently conducted by the Company and its Subsidiaries. The
Company knows of no threatened termination of any such policies or bonds.
5.14 Employment Practices. Neither the Company nor its
Subsidiaries is a party to, or bound by, any collective bargaining agreement,
Contract or other agreement or understanding with a labor union organization
except as set forth on Schedule 5.14. Except as set forth on Schedule 5.14,
there (i) is no unfair labor practice or material labor arbitration proceeding
pending or, to the Company's knowledge, threatened against the Company or its
Subsidiaries, (ii) are no organizational efforts with respect to the formation
of a collective bargaining unit presently being made or, to the Company's
knowledge, threatened involving employees of the Company or its Subsidiaries,
and (iii) is no material labor controversy in existence with respect to the
Company's or the Subsidiaries' business and operations.
5.15 Intellectual Property. Schedule 5.15 annexed hereto sets
forth an accurate and complete list of all Intellectual Property owned or
licensed by the Company and its Subsidiaries. Except as set forth on Schedule
5.15, (i) the Company and its Subsidiaries own, are licensed or otherwise have
the right to use, all Intellectual Property used in the business of the Company
and its Subsidiaries, as presently conducted or as proposed by the Company or
its Subsidiaries to be conducted, (ii) to the knowledge of the Company, the use
of the Intellectual Property by the Company or its Subsidiaries does not
infringe upon or otherwise violate the rights of any third party in or to such
Intellectual Property, and no claim has been asserted with respect thereto which
violation or assertion would have a Material Adverse Effect, and (iii) no
employee of the Company or its Subsidiaries has a right to receive a royalty or
similar payment, or has any other monetary rights, in respect of any item of
Intellectual Property of the Company or its Subsidiaries.
5.16 Material Contracts. Schedule 5.16 sets forth a true, complete
and correct list of all contracts, agreements, commitments, obligations and
licenses to which the Company or its Subsidiaries is a party that are material
("Contracts"); provided, however, purchase agreements involving payments in the
aggregate of $100,000 per annum or less shall not be deemed to be material
unless such purchase agreement is by and between the Company and any Affiliate.
All of the Contracts are valid and binding and are in full force and effect;
and, except as set forth on Schedule 5.16 hereto, there are no existing material
defaults (or events which, with notice or lapse of time or both, would
constitute a material default) by the Company or its Subsidiaries, or, to the
Company's knowledge, any other party thereunder.
5.17 Taxes. The Company and its Subsidiaries have in all material
respects filed or obtained extensions of all federal, state, local and foreign
income, excise, franchise, real estate, sales and use and other tax returns
heretofore required by Law to be filed by it. All material federal, state,
county, local, foreign or other income taxes which have become due or payable by
the Company or any of its Subsidiaries (collectively, "Taxes"), have been paid
in full or are adequately provided for in accordance with GAAP on the financial
statements of the applicable Person. No Liens arising from or in connection with
Taxes have been filed and are currently in effect against the Company or any of
its Subsidiaries, except for Liens for Taxes which are not yet due or which
would not have a Material Adverse Effect. Except as set forth on Schedule 5.17,
no audits or investigations are pending or, to the knowledge of the Company,
threatened with respect to any tax returns or Taxes of the Company or any of its
Subsidiaries.
5.18 Licenses. The Company and its Subsidiaries hold all material
licenses, franchises, permits, consents, registrations, certificates and other
approvals (individually, a "License" and collectively, "Licenses") required for
the conduct of their business as now being conducted, and are operating in
substantial compliance therewith, except where the failure to hold any such
License or to operate in compliance therewith would not have a Material Adverse
Effect. Except as set forth on Schedule 5.18, the Company and its Subsidiaries
are in substantial compliance with all Laws applicable to it, except in each
case where the failure so to comply would not have a Material Adverse Effect or
a material adverse effect on the ability of the Company to perform any
obligation that it has under any Transaction Document to which it is a party.
5.19 Transactions with Affiliates. There are no material
transactions, agreements or understandings, existing or presently contemplated,
between or among the Company or any of its Subsidiaries, and any of their
officers or directors or stockholders or any of their Affiliates or associates
except as set forth on Schedule 5.19.
5.20 Federal Reserve Regulations. None of the transactions
contemplated by this Agreement (including without limitation the use of the
proceeds from the sale of the Securities) will violate or result in a violation
of Section 7 of the Exchange Act, or any regulation promulgated thereunder,
including without limitation, Regulations G, T, U and X of the Board of
Governors of the Federal Reserve System.
5.21 Investment Company Act. Neither the Company nor any of its
Subsidiaries is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
5.22 Broker's or Finder's Commissions. The Company has not
employed any agent, broker, investment banker, finder or financial advisor or
incurred any liability for any broker's or finder's fee or any other commission
or similar fee in connection with the transaction contemplated by this Agreement
and the other Transaction Documents.
5.23 Books and Records. The books of account, minute books, stock
record books and other records of the Company and the Company's Subsidiaries,
all of which have been made available to the Purchasers, are complete and
correct in all material respects.
5.24 Disclosure. This Agreement and the other Transaction
Documents do not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
6. Representations and Warranties of the Purchasers
(a) Each Purchaser represents for itself to the Company that (i)
it is an accredited investor as defined in Regulation D under the Securities
Act, and (ii) by reason of its business and financial experience, and the
business and financial experience of those persons, if any, retained by it to
advise it with respect to its investment in the Securities, such Purchaser
together with such advisers have such knowledge, sophistication and experience
in business and financial matters as to be capable of evaluating the merits and
risk of the prospective investment, and that it is purchasing the Securities for
its own account or for one or more separate accounts maintained by it or for the
account of one or more institutional investors on whose behalf such Purchaser
has authority to make this representation for investment and not with a view to
the distribution thereof or with any present intention of distributing or
selling any of the Securities except in compliance with the Securities Act and
except to one or more such institutional investors, provided that the
disposition of such Purchaser's or such investor's property shall at all times
be within its control. Each Purchaser understands and agrees that the Company's
offer and sale of the Securities have not been registered under the Securities
Act and the Securities may be resold only if registered pursuant to the
provisions thereunder or if an exemption from registration is available.
(b) Each Purchaser which is an insurance company represents, to
the knowledge of such Purchaser, that no part of the funds to be used by it to
purchase the Securities to be purchased by such Purchaser constitutes assets
allocated to any separate account maintained by such Purchaser that contains the
assets of any Benefit Plan listed on Schedule 5.7 (or its related trust). Each
Purchaser which is not an insurance company or an "investment company" (as
defined in the Investment Company Act of 1940, as amended) also represents, to
the knowledge of such Purchaser, that no part of the funds to be used to
purchase the Securities to be purchased by such Purchaser constitutes assets
allocated to any trust or other entity which contains the assets of any Benefit
Plan listed on Schedule 5.7. The representations made in the preceding sentences
are made solely in reliance upon, and subject to, the accuracy of the Company's
representations contained in Section 5.7 of this Agreement and the list of
Benefit Plans shown on Schedule 5.7. As used in this section, the term "separate
account" shall have the meaning assigned to it in Section 3(17) of ERISA.
(c) Each Purchaser represents for itself to the Company that it
has full power and authority and has taken all action necessary to authorize it
to enter into and perform its obligations under this Agreement and the other
Transaction Documents. This Agreement is the legal, valid and binding obligation
of each Purchaser, and is enforceable against each Purchaser in accordance with
its terms, except as may be limited by bankruptcy, reorganization, moratorium,
fraudulent conveyance and insolvency laws and by other laws affecting the rights
of creditors generally and except as may be limited by the availability of
equitable remedies.
(d) Each Purchaser has received all the information it has
requested from the Company and has had the opportunity to ask questions of the
Company and, relying on the completeness and accuracy of such information, such
Purchaser believes such information is sufficient to make an informed decision
with respect to its purchase of the Securities.
(e) Each Purchaser acknowledges for itself that the address set
forth on such Purchaser's signature page hereto is such Purchaser's principal
place of business.
7. Covenants of the Company. The Company covenants and agrees that
from the date hereof until the earlier of (i) the consummation of the sale of
the Series C Preferred Stock to the holders of the Notes as contemplated below
or (ii) the repayment of the Notes in full, unless Holders of at least a
majority of the aggregate principal amount of the Notes then outstanding shall
otherwise consent in writing, it will do or cause the following:
7.1 Use of Proceeds. Use the net proceeds from the sale of the
Notes to provide for working capital requirements and general corporate
purposes; provided, however, that with respect to net proceeds received from the
sale of Notes to FESGF, the Company shall use at least 90% of such proceeds to
invest directly or indirectly in entities in countries which are included on the
DEC Deutsche Investitions - und Entwicklingsgesellscheft mbH's list of DAC aid
recipients on Exhibit G hereto, as amended from time to time by FESGF.
7.2 Charter Documents. The Charter Documents shall not have been
modified or amended since the date delivered by the Company, except for the
Company's Certificate of Incorporation which may be amended to increase the
number of authorized shares of Capital Stock and to perform such other acts as
are necessary to establish the terms of the Series C Preferred Stock.
7.3 Ordinary Course. The Company's business and the businesses of
its Subsidiaries shall be conducted only in the ordinary course of business and
in a manner consistent with past practice and the business plan(s) approved by
the Company's Board of Directors. The Company shall use commercially reasonable
efforts to preserve substantially intact the business organization of itself and
its Subsidiaries, to keep available the services of its present officers and
employees and to preserve its present relationships with customers, suppliers
and other persons with which it has a significant business relationship.
7.4 Issuance of Securities. The Company shall not, nor shall it
permit any of its Subsidiaries to, issue, deliver, sell, redeem, acquire,
authorize or propose to issue, deliver, sell, redeem, acquire or authorize, any
shares of its Capital Stock of any class or any securities convertible into, or
any rights, warrants or options to acquire, any such shares or convertible
securities or other ownership interest, provided that the Company shall be
permitted to (i) issue Common Stock, warrants or Series C Preferred Stock
resulting from the Financing, (ii) issue up to 500,000 shares of Common Stock at
a price of not less than $8.70 per share in connection with the Company's
contemplated purchase of Metrotelecom, S.A. and related companies and (iii)
grant options (which shall include outstanding options to officers, directors,
employees and agents) to purchase up to an aggregate of 10% of the shares of
Common Stock outstanding, as determined on a fully-diluted basis.
7.5 Dividends; Changes in Capital Stock. The Company shall not,
nor shall it propose to: (i) declare, set aside, make or pay any dividend or
other distribution, payable in cash, stock, property or otherwise, with respect
to any of its Capital Stock, except with respect to the Series B Preferred
Stock, which dividends shall not exceed the annual amount of 6.75% per share or
(ii) reclassify, combine, split, subdivide or redeem, purchase or otherwise
acquire, directly or indirectly, any of its Capital Stock.
7.6 Change in Condition. The Company shall promptly advise the
Purchasers in writing of any change in the condition (financial or otherwise),
operations or properties or businesses of the Company or any of its Subsidiaries
which would have a Material Adverse Effect.
7.7 No Action. The Company shall not, and shall not permit any of
its Subsidiaries to, take or agree or commit to take any action, (i) that is
likely to make any of its representations or warranties hereunder inaccurate; or
(ii) that is prohibited pursuant to the provisions of this Section 7.
7.8 Replacing of Certificates. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction, or
mutilation of any certificate representing any of the Securities, and in the
case of loss, theft or destruction, upon receipt of indemnity in reasonable form
and scope, the Company will issue a new certificate representing such Securities
in lieu of such lost, stolen, destroyed, or mutilated certificate.
8. Rights and Obligations of the Purchasers
8.1 Exchange of Right. In the event the Company has not issued
$10,000,000 face amount of Series C Preferred Stock to Persons other than the
Purchasers as of July 1, 1999, any Holder may, upon five Business Days notice
furnished to the Company, exchange, in whole or in part, the Notes beneficially
owned by such Holder into (i) a number of shares of Series C Preferred Stock
having a liquidation preference equal to the principal amount outstanding of the
Notes held by such Holder and, at the option of the Holder, the accrued but
unpaid interest on those Notes or (ii) a number of shares of Common Stock,
Preferred Stock or any other equity security offered for sale by the Company
after the date hereof having a liquidation preference or Fair Market Value as of
such date, as the case may be, equal to the principal amount outstanding of the
Notes held by such Holder. The Company shall pay all accrued but unpaid interest
on the Notes through the date of such exchange, except for the accrued but
unpaid interest on the Notes which has been converted into shares of Series C
Preferred Stock pursuant to subsection (i) of this Section 8.1. The notice
furnished by a Holder to the Company pursuant to this Section 8.1 shall be in
substantially the form attached hereto as Exhibit H. The "Exchange Price" means
$8.70 per share of Series C Preferred Stock subject to adjustment if the
liquidation preference of the Series C Preferred Stock is reduced or if the
Series C Preferred Stock or Common Stock is issued at less than $8.70 per share.
8.2 Reservation of Securities. The Company shall reserve and set
apart and have at all times, free from preemptive rights, the number of
authorized but unissued shares of Series C Preferred Stock or Common Stock, to
conform to the Company's obligations set forth in Section 8 and under the
Warrants.
8.3 Anti-Dilution Provisions - Adjustment of Number of Shares of
Capital Stock. The number of shares of Common Stock or Preferred Stock into
which the Notes are exchangeable shall be subject to adjustment with respect to
the shares of Common Stock or Preferred Stock of the Company as follows:
(a) Combinations and Subdivisions of Capital Stock. If at
any time the outstanding shares of Common Stock or Preferred Stock of the
Company shall be subdivided into a greater or combined into a lesser number of
shares (whether with the same or a different par value or without par value),
the number of shares of such Common Stock or Preferred Stock transferable upon
the exchange of the Notes shall be proportionately increased or decreased.
(b) Distributions in Respect of Capital Stock. If the
Company shall distribute by way of dividend or otherwise upon its shares of
Common Stock or Preferred Stock any cash, securities or property (excluding cash
dividends paid out of earnings or surplus and dividends or distributions payable
in rights, warrants or options to subscribe for or purchase such Common Stock or
Preferred Stock, or to subscribe for or purchase securities convertible into or
exchangeable for such Common Stock or Preferred Stock, with or without payment
of additional consideration, such convertible or exchangeable securities being
herein called "Exchangeable Securities," or payable in Exchangeable Securities),
then thereafter each Holder will be entitled to receive the number of shares of
the Common Stock or Preferred Stock of the Company then deliverable pursuant to
the terms hereof, and, in addition, the cash, securities or property which such
Holder would have received by way of such dividends or other distributions if,
continuously since the date of delivery hereof, such Holder had been the record
holder of the number of shares of such Common Stock or Preferred Stock, which
would have been deliverable upon the exercise of such Holder's exchange right if
such exchange had been effected immediately prior to the record date for such
distribution of cash, securities or property.
(c) Recapitalization, Reclassification and Succession. If
any recapitalization of the Company or reclassification of shares of Common
Stock or Preferred Stock of the Company or any merger or consolidation of the
Company into or with a corporation or other business entity, or the sale or
transfer of all or substantially all of either of the Company's assets or of any
successor corporation's assets to any other corporation or business entity (any
such corporation or business entity being included within the meaning of the
term "successor corporation") shall be effected, then, each Holder shall
thereafter have the right to receive upon the basis and upon the terms and
conditions specified herein and in lieu of the shares of common stock or
preferred stock of such corporation immediately theretofore issuable upon the
exercise of such Holder's exchange rights, such shares of capital stock,
securities or other property as may be issued or payable with respect to or in
exchange for a number of outstanding shares of such common stock or preferred
stock equal to the number of shares of Common Stock or Preferred Stock of the
Company immediately theretofore deliverable upon the exercise of such Holder's
exchange rights had such recapitalization, reclassification, merger,
consolidation, sale or transfer not taken place.
(d) Fractional Shares. In the event that the application of
the provisions of this Section 8 would result in the issuance of a fraction of a
share of Common Stock or Preferred Stock of the Company, or a number of full
shares plus a fraction of a share of such Common Stock or Preferred Stock, then
such fractional share shall be disregarded if less than one-half a share, or, if
more than one-half of a share, the number of shares issuable upon such exchange
shall be rounded out to the next full share.
(e) Issuance of Additional Shares of Capital Stock. If the
Company shall issue any additional shares of Common Stock, Preferred Stock or
Common Stock or Preferred Stock equivalents (other than as provided in the
foregoing subsections (a) through (d)) for no consideration or for a
consideration per share less than the Exchange Price in effect on the date of
and immediately prior to such issue, then and in such event, such Exchange Price
shall be reduced concurrently with such issue, to a price equal to the lower of
$8.70 or the price at which the Company offers such securities in a future
offering of securities; provided, however, that this provision shall not apply
to (i) the issue of up to 500,000 shares of Common Stock at a price of not less
than $8.70 per share in connection with the Company's contemplated purchase of
Metrotelecom, S.A. and related companies and (ii) the grant of options
(including outstanding options to officers, directors, employees and agents) to
purchase up to an aggregate of 10% of the shares of Common Stock outstanding, as
determined on a fully-diluted basis as authorized by the Company's Board of
Directors.
(f) Company to Prevent Dilution. If any event or condition
occurs as to which other provisions of this Section 8 are not strictly
applicable or if strictly applied would not fairly protect the exercise of
exchange rights hereunder in accordance with the essential intent and principles
of such provisions, or which might materially and adversely affect the exercise
of exchange rights of the Holders under any provisions hereof, then the Company
shall make an adjustment in the application and interpretation of such
provisions, in accordance with such essential intent and principles, so as to
protect such rights as aforesaid, and any adjustment necessary with respect to
the Exchange Price per share and the number of shares subject to the exchange
right hereunder so as to preserve without dilution the rights of the Holders;
provided, however, that in no event shall any such adjustment (other than a
reverse stock split or the like) have the effect of increasing the Exchange
Price per share as otherwise determined pursuant to this Agreement.
8.4 Notice to the Holder
(a) If the character of securities or assets deliverable
upon exchange of the Notes shall be changed as a result of the provisions
hereof, then in each such case the Company shall forthwith and within fifteen
(15) days prior to such proposed change cause a written certificate of the chief
executive officer or the chief financial officer of the Company and by its
treasurer to be sent first-class, certified mail, return receipt requested,
postage prepaid, to each Holder specifying the character of the securities or
assets and the amount thereof so deliverable and the details of the computations
thereof.
(b) In case at any time:
(i) the Company shall pay any dividend upon its
outstanding Common Stock or Preferred Stock payable in shares
of Common Stock or Preferred Stock or make any distribution
(other than cash dividends out of earned surplus) to the
holders of its shares of Common Stock or Preferred Stock; or
(ii) the Company shall offer for subscription pro rata
to the holders of its Common Stock or Preferred Stock any
additional shares of Common Stock or Preferred Stock or other
rights; or
(iii)there shall be effected any recapitalization of the
Company or reclassification of the shares of Common Stock or
Preferred Stock of the Company, or any merger or
consolidation of the Company into or with any other
corporation or business entity and as a result of which the
Company is not the surviving corporation, or the sale or
transfer of all or substantially all of the assets of the
Company to any other corporation or business entity; or
(iv) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall give written notice to
each Holder of the date which is the record date for such dividend, distribution
or subscription rights, or on which such recapitalization, reclassification,
merger, consolidation, sale, transfer, dissolution, liquidation or winding up
shall take place, as the case may be. Such notice shall also specify the date as
of which the holders of record of the Company's Common Stock or Preferred Stock
shall participate in such dividend, distribution or subscription rights, or
shall be entitled to exchange its Common Stock or Preferred Stock for securities
or other property deliverable upon such recapitalization, reclassification,
merger, consolidation, sale, transfer, dissolution, liquidation or winding up,
as the case may be. Such written notice shall be given at least ten (10) days
prior to the action in question and not less than ten (10) days prior to the
record date.
8.5 Exchange Listing by the Company. If any shares of Common
Stock or Preferred Stock required to be reserved for purposes of exchange of the
Notes requires listing on any national securities exchange before such shares
may be issued upon exchange, the Company will, at its expense, as expeditiously
as possible, cause such shares to be duly listed on the appropriate national
securities exchange.
9. Conditions to Closing
9.1 Conditions to the Company's Obligations
The obligations of the Company to effect the sale and issuance of the
Securities shall be subject to the satisfaction of the conditions set forth
below, at or before the Closing (which conditions may be waived by the Company
in writing).
(a) The representations and warranties of the Purchasers set
forth in Section 6 of this Agreement shall be true and correct in all material
respects as of the date hereof and as of the date of the Closing, and the
Company shall have received a certificate signed by an officer of each of the
Purchasers dated as of the date of each Closing certifying that such
representations and warranties are true and correct.
(b) The Purchasers shall have performed, satisfied and
complied in all material respects with all covenants, agreements and conditions
required by this Agreement, and the Company shall have received a certificate
signed by an officer of each of the Purchasers dated as of the date of the
Closing certifying the performance, satisfaction and compliance therewith in all
material respects.
(c) The Purchasers shall have delivered to the Company at the
Closing the items set forth in Section 4.2.
9.2 Conditions to the Purchasers' Obligations
The obligations of the Purchasers to effect the purchase of the
Securities shall be subject to the satisfaction of the conditions set forth
below, at or before the Closing (which conditions may be waived by the
Purchasers in writing).
(a) The representations and warranties of the Company set
forth in Section 5 of this Agreement shall be true and correct in all material
respects as of the date hereof and as of the date of the Closing, and the
Purchasers shall have received a certificate signed by the Chief Executive
Officer of the Company dated as of the date of the Closing certifying that such
representations and warranties are true and correct.
(b) The Company shall have performed, satisfied and complied
in all material respects with all covenants, agreements and conditions required
by this Agreement and the Purchasers shall have received a certificate signed by
the Chief Executive Officer of the Company dated as of the date of the Closing
certifying the performance, satisfaction and compliance therewith in all
material respects.
(c) The Company shall deliver to the Purchasers at the Closing
the items set forth in Section 4.1.
(d) The Company shall not have suffered a Material Adverse
Effect.
10. Restrictions on Transfer
10.1 Restrictive Legends. Except as otherwise permitted by this
Section 10, each Note issued pursuant to this Agreement and any security issued
upon exchange thereof shall be stamped or otherwise imprinted with a legend in
substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
PURSUANT TO THE SECURITIES OR "BLUE SKY" LAWS OF ANY STATE. SUCH
SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED OR OTHERWISE ASSIGNED, EXCEPT PURSUANT TO (i) A
REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS
EFFECTIVE UNDER SUCH ACT, (ii) RULE 144 OR RULE 144A UNDER SUCH
ACT, OR (iii) ANY OTHER EXEMPTION FROM REGISTRATION UNDER SUCH
ACT, PROVIDED THAT, IF REQUESTED BY THE COMPANY, AN OPINION OF
COUNSEL REASONABLY SATISFACTORY IN FORM AND SUBSTANCE IS FURNISHED
TO THE COMPANY THAT AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF SUCH ACT IS AVAILABLE.
The Company shall maintain a copy of this Agreement and any amendments
thereto on file in its principal office, and will make such copy available
during normal business hours for inspection to any party thereto or will provide
such copy to any Purchaser upon its request.
10.2 Notice of the Proposed Transfer; Opinion of Counsel. Each
Purchaser of each Note bearing the restrictive legend set forth in Section 10.1
above ("Restricted Security") agrees that prior to any transfer or attempted
transfer of such Restricted Security to give to the Company (a) written notice
describing the manner or circumstances of such transfer or proposed transfer,
and (b) an opinion of counsel, which is knowledgeable in securities law matters,
in form and substance reasonably satisfactory to the Company, to the effect that
the proposed transfer of such Restricted Security may be effected without
registration of such Restricted Security under the Securities Act. If the holder
of the Restricted Security delivers to the Company an opinion of counsel in form
and substance reasonably satisfactory to the Company that subsequent transfers
of such Restricted Security will not require registration under the Securities
Act, the Company will after such contemplated transfer deliver new Securities
for such Restricted Security which do not bear the Securities Act legend set
forth in Section 10.1 above. The restrictions imposed by this Section 10 upon
the transferability of any particular Restricted Security shall cease and
terminate (i) when such Restricted Security has been sold pursuant to an
effective registration statement under the Securities Act, (ii) when such
Restricted Security has been transferred pursuant to Rule 144 or Rule 144A
promulgated under the Securities Act, or (iii) upon the date which is two (2)
years after the later of (A) the original issue date of the Restricted Security
and (B) the last date on which the Company or any Affiliate of the Company was
the owner of the Restricted Security (or any predecessor Restricted Security).
As used in this Section 10.2, the term "transfer" encompasses any sale, transfer
or other disposition of any Securities referred to herein.
11. Miscellaneous
11.1 Indemnification; Expenses, Etc
(a) The Company agrees to indemnify and hold harmless each
Purchaser, its Affiliates and each of its and their respective directors,
officers, partners, principals, shareholders and attorneys (individually, an
"Indemnified Party" and, collectively, the "Indemnified Parties") from and
against any and all losses, claims, damages, liabilities, costs (including
reasonable attorneys' fees) and expenses (collectively, "Losses") to which any
Indemnified Party may become subject, insofar as such Losses arise out of, in
any way relate to, or result from (i) any breach of any representation or
warranty made by the Company, or the failure of the Company to fulfill any
agreement or covenant contained in this Agreement or any other Transaction
Document, or (ii) any proceeding against the Company or any Indemnified Party
brought by any third party arising out of or in connection with this Agreement
or the other Transaction Documents; provided, however, that the Company shall
not have any obligation under this indemnity provision to indemnify any
Indemnified Party with respect to Losses until the aggregate combined total of
all such Losses incurred by any Indemnified Party exceeds $5,000, whereupon the
Indemnified Party shall be entitled to indemnity with respect to the full amount
of Losses, and the Company shall reimburse the Indemnified Party for all such
Losses as they are incurred or suffered by such Indemnified Party. The Company
shall not have any obligation under this indemnity provision for claims which
are first made after the expiration of all applicable statutes of limitations,
or for liabilities resulting from the gross negligence or willful misconduct of
any Indemnified Party.
(b) If any Indemnified Party is entitled to indemnification
hereunder, such Indemnified Party shall give notice to the Company of any claim
or of the commencement of any proceeding against the Company or any Indemnified
Party brought by any third party with respect to which such Indemnified Party
seeks indemnification pursuant hereto; provided, however, that the delay to so
notify the Company shall not relieve the Company from any obligation or
liability except to the extent the Company is prejudiced by such delay. The
Company shall have the right, exercisable by giving written notice to an
Indemnified Party within 30 days after the receipt of written notice from such
Indemnified Party of such claim or proceeding, to assume, at the expense of the
Company, the defense of any such claim or proceeding with counsel reasonably
satisfactory to such Indemnified Party. After notice from the Company to the
Indemnified Party of its election to assume the defense of such claim or
proceeding, the Company shall not be liable to the Indemnified Party for any
legal or other expenses subsequently incurred by the Indemnified Party in
connection with the defense thereof other than reasonable costs of
investigation; provided that the Indemnified Party shall have the right to
employ separate counsel to represent the Indemnified Party who may be subject to
liability arising out of any claim in respect of which indemnity may be sought
by the Indemnified Party against the Company, but the fees and expenses of such
counsel shall be for the account of such Indemnified Party unless (i) the
Company and the Indemnified Party shall have mutually agreed to the retention of
such counsel or (ii) in the opinion of counsel to such Indemnified Party,
representation of both parties by the same counsel would be inappropriate due to
actual or potential conflicts of interest between them, it being understood,
however, that the Company shall not, in connection with any one such claim or
proceeding or separate but substantially similar or related claims or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (together with appropriate local counsel) at any time for all
Indemnified Parties. The Company shall not consent to entry of any judgment or
enter into any settlement that does not include as an unconditional term thereof
the giving by claimant or plaintiff to such Indemnified Party or Parties of a
release, in form and substance satisfactory to the Indemnified Party or Parties,
from all liability in respect of such claim, litigation or proceeding.
11.2 Survival of Representations and Warranties. All
representations and warranties contained in this Agreement or in the other
Transaction Documents shall survive, for a period of three (3) years from the
date hereof, the execution and delivery of this Agreement, any investigation at
any time made by any Purchaser or on such Purchaser's behalf, the purchase of
the Securities by the Purchasers under this Agreement and any disposition of or
payment on the Securities.
11.3 Amendment and Waiver. This Agreement may be amended, modified
or supplemented, and waivers or consents to departures from the provisions
hereof may be given, provided that the same are in writing and signed by the
Purchasers and/or the other holders of the Notes, holding a majority of the
aggregate principal amount of the Notes, and the Company.
11.4 Notices, Etc. Except as otherwise provided in this Agreement,
notices and other communications under this Agreement shall be in writing and
shall be delivered personally, sent by telecopier (with written confirmation of
receipt), mailed by registered or certified mail, return receipt requested, or
by a nationally recognized overnight courier, postage prepaid, addressed, (a) if
to Internexus, at such address or telecopier number as is set forth next to
Internexus' name on the signature page hereto, or as Internexus shall have
furnished to the Company in writing, with a copy to Greenberg, Peden, Siegmeyer
& Oshman, P.C., 12 Greenway Plaza, 10th Floor, Houston, Texas 77046, telecopier
no.: (713) 627-7057, to the attention of H.B. Naylor, III, Esq., or (b) if to
FESGF, at such address or telecopier number as is set forth next to FESGF's name
on the signature page hereto, or as FESGF shall have furnished to the Company in
writing, with a copy to Swidler Berlin Shereff Friedman, LLP, 919 Third Avenue,
New York, New York 10022, telecopier no.: (212) 758-9526, to the attention of
Morris Orens, Esq., or (c) if to the Company, at 102 West 500 South, Suite 320,
Salt Lake City, Utah 84101, telecopier no.: (801) 532-6060, to the attention of
Chief Executive Officer, or at such other address or telecopier number, or to
the attention of such other officer, as the Company shall have furnished to the
Purchasers in writing, with a copy to Parsons Behle & Latimer, telecopier no.:
(801) 532-1234, to the attention of Scott Carpenter, Esq.
11.5 Entire Agreement. This Agreement and the other Transaction
Documents embody the entire agreement and understanding between the Purchasers
and the Company and supersede all prior agreements and understandings relating
to the subject matter hereof.
11.6 Successors and Assigns. Whenever in this Agreement any of the
parties hereto are referred to, such reference shall be deemed to include the
successors and assigns of such party; and all covenants, promises and agreements
by or on behalf of the respective parties which are contained in this Agreement
shall bind and inure to the benefit of the successors and assigns of all other
parties. The terms and provisions of this Agreement and the other Transaction
Documents shall inure to the benefit of and shall be binding upon any assignee
or transferee of any Purchaser, and in the event of such transfer or assignment,
the rights and privileges herein conferred upon any such Purchaser shall
automatically extend to and be vested in, and become an obligation of, such
transferee or assignee, all subject to the terms and conditions hereof. In
connection therewith, such transferee or assignee may disclose all documents and
information which such transferee or assignee now or hereafter may have relating
to the Notes, this Agreement, the other Transaction Documents, the Company, any
other Persons referred to herein or any of the business of any of the foregoing
entities, subject to such transferee or assignee executing a confidentiality
agreement reasonably satisfactory to the Company.
11.7 Agreement and Action of the Purchasers. Upon any occasion
requiring, permitting or referencing an act or an approval, consent, waiver,
election or other action on the part of the Purchasers, any such action shall
(i) be taken upon the affirmative vote of the Purchasers and/or the other
holders of the Notes, holding a majority or agreeing to purchase a majority
under this Agreement of the aggregate principal amount of the Notes, or (ii) be
deemed to have been taken by the Purchasers upon such action being taken by the
Purchasers and/or the other holders of the Notes, holding a majority of the
aggregate principal amount of the Notes.
11.8 Expenses. Subject to the limitation set forth in Sections
4.1(f), the Company agrees to pay all costs and expenses of the Purchasers in
connection with the preparation, execution, delivery and administration of this
Agreement or any amendments or modifications hereto and other instruments and
documents to be executed contemporaneously herewith, including reasonable
attorney's fees and out-of-pocket expenses of counsel for the Purchasers.
11.9 Descriptive Headings. The headings in this Agreement are for
purposes of reference only and shall not limit or otherwise affect the meaning
hereof.
11.10 Governing Law. This Agreement shall be construed and enforced
in accordance with, and the rights of the parties shall be governed by, the
internal laws of the State of New York, without regard to any choice-of-law
principles thereof.
11.11 Counterparts. This Agreement may be executed simultaneously
in two or more counterparts, each of which shall be deemed an original.
If this Agreement is satisfactory, please so indicate by signing the
applicable attached signature page of this Agreement and delivering such
counterpart to the Company, whereupon this Agreement will become binding among
the parties hereto in accordance with its terms.
CONVERGENCE COMMUNICATIONS, INC.
By: /S/ Troy D'Ambrosio
__________________________________
Name: Troy D'Ambrosio
Title: Senior Vice President
<TABLE>
<CAPTION>
SECURITIES PURCHASE AGREEMENT FOR
SUBORDINATED EXCHANGEABLE PROMISSORY NOTES
PURCHASER SIGNATURE PAGE
<S> <C>
Accepted and agreed as of the Aggregate Principal Amount and
date first written above: Purchase Price of Notes to be Purchased
by Internexus, S.A.: $5,000,000
By: /S/ Edwardo Priu
________________________
Name:
Title:
Address: Peron 925, 5th Floor
Buenos Aires 1038, Argentina
Telephone: 011-541-327-1702
Telecopy: 011-541-325-8705
with a copy to:
Address: Tax I.D. Number:
Greenberg, Peden, Siegmeyer
& Oshman, P.C.
12 Greenway Plaza, 10th Floor (if acquired in the name of a
Houston, Texas 77046 nominee, the taxpayer I.D.
Attention: H.B. Naylor, III, Esq. number of such nominee)
Telephone: (713) 627-2720
Telecopy: (713) 627-7057
Designated Bank:
Nominee (name in which the
Notes are to be registered, _____________________________________
if different than name of Name
Purchaser):
_____________________________________
ABA #
_____________________________________
______________________________________ Street Address
(Nominee's Name)
_____________________________________
City State Zip Code
_____________________________________
Account Number Attention
</TABLE>
<TABLE>
<CAPTION>
SECURITIES PURCHASE AGREEMENT FOR
SUBORDINATED EXCHANGEABLE PROMISSORY NOTES
PURCHASER SIGNATURE PAGE
<S> <C>
Accepted and agreed as of the Aggregate Principal Amount
date first written above: and Purchase Price of Notes to be
Purchased by FondElec Essential
Services Growth Fund, L.P.: $5,000,000
By: /S/ Thomas Cauchois
________________________
Name: Thomas Cauchois
Title: Director of FondElec ESGP Corp.,
the General Partner of FESGF
Address: 333 Ludlow Street
Stamford, Connecticut 06902
Telephone: (203) 326-4570
Telecopy: (203) 326-4578
with a copy to:
Address: Tax I.D. Number: 98 0177158
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue (if acquired in the name of a
New York, New York 10022-9998 nominee, the taxpayer I.D.
Attention: Morris Orens, Esq. number of such nominee)
Telephone: (212) 891-9450
Telecopy: (212) 758-9526
Designated Bank:
Nominee (name in which the Barclays Bank plc____________________
Notes are to be registered, Name
if different than name of
Purchaser): 026 002 574__________________________
ABA #
75 Wall Street_______________________
___________________________________ Street Address
(Nominee's Name)
New York, New York___________________
City State Zip Code
215 954 099__________________________
Account Number Attention
</TABLE>
EXHIBIT 10.13
FORM OF PROMISSORY NOTE
ISSUED IN CONNECTI0N WITH THE SECURITIES PURCHASE AGREEMENT
DATED DECEMBER 23, 1998
THE SECURITIES REPRESENTED BY THIS NOTE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR PURSUANT TO THE SECURITIES
OR "BLUE SKY" LAWS OF ANY STATE. SUCH SECURITIES MAY NOT BE OFFERED,
SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE ASSIGNED, SOLD,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE ASSIGNED, EXCEPT
PURSUANT TO (i) A REGISTRATION STATEMENT WITH RESPECT TO SUCH
SECURITIES WHICH IS EFFECTIVE UNDER SUCH ACT, (ii) RULE 144 OR RULE
144A UNDER SUCH ACT, OR (iii) ANY OTHER EXEMPTION FROM REGISTRATION
UNDER SUCH ACT, PROVIDED THAT, IF REQUESTED BY THE COMPANY, AN OPINION
OF COUNSEL REASONABLY SATISFACTORY IN FORM AND SUBSTANCE IS FURNISHED
TO THE COMPANY THAT AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
SUCH ACT IS AVAILABLE.
CONVERGENCE COMMUNICATIONS, INC.
Subordinated Exchangeable Promissory Note
December 23, 2001 $5,000,000
Convergence Communications, Inc., a Nevada corporation (herein called
the "Company"), hereby promises to pay to the order of FondElec Essential
Services Growth Fund, L.P., a Cayman Islands limited partnership, or its
successors or assigns (the "Holder"), in accordance with the terms and
conditions herein, the principal sum of Five Million Dollars ($5,000,000), and
accrued and unpaid interest thereon. The principal amount hereof, and the
interest thereon, shall be payable in lawful currency of the United States of
America to the Holder at the registered address of the Holder on the Maturity
Date (as defined in Article 1).
This Subordinated Exchangeable Promissory Note (this "Note") is one of
a duly authorized issue of notes due December 23, 2001 (the "Notes") limited to
an aggregate principal amount of $10,000,000, issued by the Company pursuant to
or in connection with a Securities Purchase Agreement (the "Purchase
Agreement"), dated as of the date hereof by and among the Company and the
Purchasers parties thereto.
The following is a statement of the rights of the Holder and the
conditions to which this Note is subject, and to which the Holder, by the
acceptance hereof, agrees:
1. Maturity Date. The principal amount hereof, and the
interest therefor, shall be payable on the date which is the earlier of (i)
December 23, 2001 or (ii) the date of exchange of this Note pursuant to Article
4 hereof (the "Maturity Date").
2. Interest. Interest on the unpaid principal amount hereof
shall accrue at the rate of ten percent (10%) per annum computed on the basis of
a 365-day year from the date of this Note until paid in full. During the period
in which an Event of Default (as defined in Article 7 hereof) shall have
occurred and is continuing, interest on the outstanding principal amount of this
Note shall accrue at the rate of fifteen (15%) per annum.
3. Prepayment.
3.1 Optional Prepayment. The Company may prepay all, but not
less than all, of the principal amount of this Note at any time upon fifteen
(15) days' written notice to the Holder at a price equal to the principal amount
of this Note, plus all accrued and unpaid interest to the date of prepayment;
provided, however, that in the event the Company gives notice to the Holder of
its intent to prepay this Note in full, the Holder shall have five (5) business
days after its receipt of such notice within which to exercise its exchange
right as provided in Article 4 hereof. All payments received shall first be
applied to accrued interest and then to principal.
3.2 Mandatory Prepayment. While this Note is outstanding, if
the Company undertakes any of the following transactions and any of Holder's
designees on the Board of Directors shall have voted against such transaction,
then the Holder may declare the entire principal amount of this Note plus all
accrued interest to be due and payable upon ten (10) days written notice to the
Company:
(a) The merger, consolidation or amalgamation of the Company
with any other person, unless the Company is the surviving corporation in any
such merger, consolidation or amalgamation, or the engagement in any other
business combination;
(b) The transfer or other disposition of all or substantially
all of the assets of the Company or the acquisition, by asset or stock purchase,
merger or otherwise, of the assets or stock of any other corporation or
partnership;
(c) Any action that would amend, modify or restate the
Articles of Incorporation or By-Laws of the Company; and
(d) The Company's engaging in any material business operations
other than those relating to the telecommunications industry.
4. Right of Exchange.
4.1 Right of Exchange. The Holder of this Note is entitled to
the exchange rights and other benefits provided under Article 8 of the Purchase
Agreement, including, without limitation, the right of the Holder to provide
notice to the Company in the form of Attachment No. 1 hereto in the event the
Holder elects to exchange the Note for securities of the Company.
4.2 Purchase Obligation. If the Company has (i) issued at
least $10,000,000 face amount of Series C Preferred Stock (as defined in the
Purchase Agreement) of the Company to persons other than the Purchasers (as
defined in the Purchase Agreement) prior to July 1, 1999 and (ii) delivered to
the Holder an opinion of counsel reasonably satisfactory to the Holder and its
counsel that the Series C Preferred Stock shall have a preference in liquidation
to receive its full liquidation preference prior to any payments to holders of
the Series B Preferred Stock of the Company, the Company may require the Holder
to exchange all, but not less than all, of this Note into a number of shares of
Series C Preferred Stock having a liquidation preference equal to the principal
amount outstanding of the Note plus the accrued but unpaid interest on the Note
through the date of exchange.
5. Subordination.
5.1 Subordination to Senior Indebtedness. The payment of the
principal of and interest on this Note is expressly subordinated to the payment
of all Senior Indebtedness, as hereinafter defined, to the extent set forth in
this Article 5. The term "Senior Indebtedness" shall mean all indebtedness and
other amounts which the Company may be obligated to pay under the terms of those
certain transactions identified on Schedule A attached hereto, together with any
increases, renewals, modifications, assumptions or refundings thereof.
Notwithstanding the foregoing, no Senior Indebtedness shall impair the rights of
the Holder to exchange this Note in accordance with the terms of Article 4
hereof.
5.2 Priority of Senior Indebtedness on Default. No payment
with respect to this Note shall be made by the Company or received by the Holder
if there is outstanding at the time such payment is to be made any Senior
Indebtedness and there exists at such time, or immediately after giving effect
to such payment there would exist, any default in the payment of principal of or
any premium or interest on any Senior Indebtedness or any other event of default
under the terms of any Senior Indebtedness then outstanding, which default has
not been waived or cured prior thereto.
5.3 Priority of Senior Indebtedness on Liquidation. Upon any
payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities, to creditors upon any dissolution or
winding up or total or partial liquidation or reorganization of the Company,
whether voluntary or involuntary, or in bankruptcy, insolvency, receivership or
other proceedings, all amounts due or to become due in respect of any and all
Senior Indebtedness shall first be paid in full and payment or distribution of
assets of the Company of any kind or character, whether in cash, property or
securities, to which the Holder would be entitled shall be paid to the holders
of Senior Indebtedness (pro rata to each such holder on the basis of the
respective amounts of Senior Indebtedness held by such holders of Senior
Indebtedness or on such other basis as the holders of Senior Indebtedness or a
court of competent jurisdiction shall direct) to the extent necessary to pay all
Senior Indebtedness in full after giving effect to any concurrent payment or
distribution to or from the holders of Senior Indebtedness, before any payment
or distribution is made to the Holder.
5.4 Duties of Holder to Holders of Senior Indebtedness. In the
event that any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities, shall be received by the
Holder, in violation of Section 5.2 or Section 5.3, or provision made for such
payment, in accordance with its terms, such payment or distribution shall be
(and shall be deemed to be) held in trust for the benefit of, and shall be paid
over or delivered to, the holders of such Senior Indebtedness for application to
the payment of all Senior Indebtedness remaining unpaid (pro rata to each holder
on the basis of the amount of Senior Indebtedness held by such holder or on such
other basis as the holders of Senior Indebtedness or a court of competent
jurisdiction shall direct) to the extent necessary to pay all such Senior
Indebtedness in full in accordance with its terms, after giving effect to any
concurrent payment or distribution to or for the holders of such Senior
Indebtedness.
5.5 Enforcement by Holders of Senior Indebtedness. The
provisions of Sections 5.2, 5.3 and 5.4 shall be for the benefit of the holders
of the Senior Indebtedness and may be enforced directly by such holders against
the Holder without the necessity of joining the Company as a party.
5.6 Subrogation. Subject to the prior payment in full of all
Senior Indebtedness, to the extent of any payment or distribution to the holders
of Senior Indebtedness which would, except for the provisions of this Article,
have been made to the Holder, the Holder shall be subrogated to the rights of
the holders of Senior Indebtedness to receive payments or distributions of
assets of the Company applicable to the Senior Indebtedness until the principal
of and accrued and unpaid interest on this Note shall be paid in full, and no
such payment or distribution to the holders of Senior Indebtedness shall, as
among the Company, its creditors (other that the holders of Senior Indebtedness)
and the Holder, be deemed to be a payment by the Company to or on account of
this Note. The Holder shall be subrogated to such rights of the holders of
Senior Indebtedness in the same proportion as the principal amount of this Note
then outstanding bears to the aggregate principal amount then outstanding under
all indebtedness of the Company (including this Note) ranking pari passu with
this Note and containing subrogation provisions to the same effect as those set
forth herein.
5.7 Obligations of the Company Unimpaired. It is understood
that the provisions of this Article 5 are intended solely for the purpose of
defining the relative rights of the Holder on the one hand and the rights of
holders of Senior Indebtedness on the other, and nothing contained herein is
intended to or shall impair, as among the Company, its creditors (other than the
holders of Senior Indebtedness) and the Holder, the obligation of the Company,
which is unconditional and absolute, to pay to the Holder the principal of and
interest on this Note as and when the same shall become due and payable in
accordance with its terms and without giving effect to this Article 5, or to
affect the relative rights of the Holder and the other creditors of the Company
other than the holders of Senior Indebtedness, nor shall anything herein prevent
the Holder from exercising all remedies otherwise permitted by applicable law
upon default of this Note, subject to the rights, if any, under this Article 5
of the holders of Senior Indebtedness in respect of cash, property or securities
of the Company receivable or received upon the exercise of any such remedy.
6. Covenants.
6.1 Affirmative Covenants. From and after the date hereof
until the earlier of the Maturity Date or the date of payment of the principal
of and accrued interest on this Note, the Company shall comply with and perform
each of the following covenants and agreements:
6.1.1 Financial Reporting. The Company will furnish to the Holder
copies of the following financial statements, reports and
information:
(a) a copy of the Company's consolidated annual
report (including audited balance sheets, statements of
operations, statements of stockholders' equity and statements
of cash flow) for the Company and its Subsidiaries (as defined
in the Purchase Agreement) of the Company for such fiscal
year, prepared in accordance with generally accepted
accounting principles ("GAAP") consistent with the preceding
year, certified by Deloitte & Touche LLP or such other
independent public accountants as shall be approved by the
Holder, which approval shall not be unreasonably withheld.
During such period as the Company is subject to the periodic
reporting requirements of either Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, such report and
financial statements shall be delivered to the Holder at such
time as the Company files with the Securities and Exchange
Commission its annual report on Form 10-K or 10-KSB (but in no
event later than 105 days after the end of each fiscal year of
the Company). During such period as the Company is not subject
to the periodic reporting requirements of either Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended, such
report and financial statements shall be delivered to the
Holder as soon as available and in any event within 90 days
after the end of each fiscal year of the Company;
(b) a consolidated balance sheet, statement of
operations and statement of cash flow for the Company and its
Subsidiaries, as of the end of, and for, each such quarter,
prepared in accordance with GAAP consistently applied (subject
to the absence of notes and to customary and reasonable
year-end adjustments), certified by the Company's chief
financial officer as fairly and accurately representing the
financial condition of the Company and its Subsidiaries as of
the end of, and for, the period covered thereby. During such
period as the Company is subject to the periodic reporting
requirements of either Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, such report and financial
statements shall be delivered to the Holder at such time as
the Company files with the Securities and Exchange Commission
its quarterly report on Form 10-Q or 10-QSB (but in no event
later than 60 days after the end of each fiscal quarter of the
Company). During such period as the Company is not subject to
the periodic reporting requirements of either Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended, such
report and financial statements shall be delivered to the
Holder as soon as available and in any event within 45 days
after the end of each fiscal quarter of the Company; and
(c) such other information with respect to the
financial condition and operations of the Company and its
Subsidiaries as the Holder may reasonably request.
6.1.2 Payment of Taxes and Claims. The Company will duly pay and
discharge, as the same become due and payable, all taxes,
assessments and governmental and other charges, levies or claims
levied or imposed, which are, or which if unpaid might become, a
lien or charge upon the properties, assets, earnings or business
of the Company or any of its Subsidiaries; provided, however, that
nothing contained in this Section 6.1.2 shall require the Company
to pay and discharge, or cause to be paid and discharged, any such
tax, assessment, charge, levy or claim so long as the Company in
good faith shall contest the validity thereof and shall set aside
on its books adequate reserves with respect thereto. In the event
the Company fails to satisfy its obligations under this Section
6.1.2, the Holder may, but is not obligated to, satisfy such
obligations in whole or in part and any payments made and expenses
incurred in doing so shall constitute additional indebtedness to
the Holder and shall be paid or reimbursed by the Company as
additional principal amount hereunder.
6.1.3 Selection of Accountants. As long as this Note is
outstanding, the Holder shall have the right to approve the
accounting firm retained or to be retained by the Company to
render accounting advice thereto (such approval not to be
unreasonably withheld). The Holder acknowledges that Deloitte &
Touche LLP is a satisfactory accounting firm.
6.1.4 Maintenance of Corporate Existence and Properties.
(a) The Company will, and will cause each Subsidiary
to, at all times do or cause to be done all things necessary
to maintain, preserve and renew its corporate charter and its
rights, and comply in all material respects with all related
laws applicable to the Company and such Subsidiary; provided,
however, that nothing contained in this paragraph shall (i)
require the Company or such Subsidiary to maintain, preserve
or renew any right not material in the conduct of the business
of the Company or such Subsidiary, (ii) prevent the
termination of the corporate existence of any Subsidiary of
the Company if, in the reasonable opinion of the Board of
Directors of the Company, such termination is not
disadvantageous to the Holder or (iii) require the Company or
such Subsidiary to comply with any law so long as the validity
or applicability thereof shall be contested in good faith by
appropriate proceedings.
(b) The Company will as soon as practicable give
written notice to the Holder of any litigation, arbitration or
governmental investigation or proceeding, which has been
instituted or, to the knowledge of the Company, is threatened
against the Company or any of its Subsidiaries, or any of
their respective properties, which (i) involves or is likely
to involve a claim or claims for damages, penalties or awards
in excess of $100,000 in the case of claims for which the
Company is not adequately insured or in excess of $300,000 in
the case of claims for which the Company is adequately
insured; (ii) if determined adversely to the Company or such
Subsidiary would have a material adverse effect thereon; or
(iii) relates to the Purchase Agreement or any documents
executed pursuant thereto.
(c) The Company will provide or cause to be provided
for itself and its Subsidiaries insurance against loss or
damage of the kinds customarily insured against by
corporations similarly situated, with reputable insurers, in
such amounts, with such deductibles and by such methods as
shall be adequate, and in no event involving material
differences from the insurance currently generally maintained.
(d) The Company will keep true books of records and
accounts in which full and correct entries in all material
respects will be made of all its business transactions and the
business transactions of its Subsidiaries, and will reflect in
its financial statements adequate accruals and appropriations
to reserves, all in accordance with GAAP (subject to customary
and reasonable year-end adjustments).
(e) The Company will, and will cause each of its
Subsidiaries to, comply with all applicable statutes, rules,
regulations, orders and restrictions relating to federal,
state and local laws and of any governmental department,
commission, board, regulatory authority, bureau, agency and
instrumentality with respect thereto, and of any court,
arbitrator or other body with jurisdiction and authority, in
respect of the conduct of the respective businesses thereof
and the ownership of their respective properties, except
those, the violations of which would not have a material
adverse effect thereon and except such as are being contested
in good faith.
6.1.5 Notice of Event of Default. In addition to any other
reporting requirements set forth herein, the Company shall have an
immediate obligation to report to the Holder the occurrence of any
Event of Default (as defined herein) or any event which with the
giving of notice or the passage of time, or both, would constitute
any such Event of Default.
6.2 Negative Covenants. From and after the date hereof until
the Maturity Date or until such later time as the Notes are either exchanged or
paid in full, the Company shall not, and will cause each of its Subsidiaries to
not, without the prior written consent of (i) at least a majority of the
aggregate principal amount of the Notes then outstanding or, for so long as
there are only seven (7) members on the Board of Directors of the Company and
the holders of the Notes each have two (2) designees on the Board of Directors,
(ii) by the affirmative vote of two-thirds (2/3) of the Company's Board of
Directors nominated by the three Groups (as defined in the Stockholders'
Agreement, dated as of December 23, 1998, by and among George D'Ambrosio, Lance
D'Ambrosio, Troy D'Ambrosio, Pegasus Fund, L.P., FondElec Essential Services
Growth Fund, L.P. and Internexus, S.A.):
6.2.1 Restrictions on Sale of Assets, Consolidations, Mergers and
Acquisitions.
(a) Sell, lease, transfer or otherwise dispose of in excess of 20%
of its assets.
(b) Consolidate with or merge into any other person or entity or
permit any other person or entity to consolidate with or merge
into it unless the Company is the surviving corporation in any
such consolidation or merger; provided, however, that a Subsidiary
of the Company may consolidate with or merge into the Company or a
wholly-owned Subsidiary of the Company.
(c) Subject to Section 6.2.2, acquire, by asset or stock purchase,
merger or otherwise, the assets or stock of any other corporation,
partnership or any other entity.
6.2.2 Additional Indebtedness. Create, incur, assume or suffer to
exist any indebtedness for borrowed money ("Borrowed Money") after
the date hereof except for (i) Borrowed Money evidenced by the
Notes, (ii) Senior Indebtedness, (iii) other Borrowed Money that
is consolidated funded indebtedness (including capitalized lease
obligations) of the Company or its Subsidiaries and which does not
exceed in the aggregate $20,000,000, (iv) other Borrowed Money
that is indebtedness of the Company or its Subsidiaries which does
not exceed in the aggregate $10,000,000 and which is related to
the acquisition of a third person on a consolidated basis, (v)
other Borrowed Money that is indebtedness of Subsidiaries of the
Company which does not exceed in the aggregate $20,000,000 and
which is related to the purchase of equipment or other capital
expenditures, (vi) other Borrowed Money, incurred with the consent
of at least a majority in aggregate principal amount of the Notes
at the time outstanding, the proceeds of which are used in the
ordinary course of business of the Company or such Subsidiary, as
the case may be and (vii) other Borrowed Money that is by its
terms subordinated in right of payment to the payment of the
obligations of the Company under the Notes and no principal
payments of which are due prior to the Maturity Date and the
holders of such subordinated indebtedness enter into a
subordination agreement satisfactory to the holders of a majority
in aggregate principal amount of the Notes.
6.2.3 Liens and encumbrances. Cause or permit any of its assets or
properties, whether owned or hereafter acquired, to be subject to
any liens or encumbrances except in the ordinary course of
business of the Company or such Subsidiary, as the case may be.
6.2.4 Guarantees. Become liable as a guarantor, or otherwise,
except for guarantees provided as obligations of a wholly-owned
Subsidiary of the Company.
6.2.5 Restrictions on Dividends, Distributions and Investments.
(a) Declare or pay any dividend or make any other
distributions on any shares of the Company's capital stock,
except with respect to the Series B Preferred Stock, $.001 par
value per share, of the Company, which dividends shall not
exceed the annual amount of 6.75% per share; or
(b) Issue, deliver, sell, redeem, purchase or
otherwise acquire any shares of the Company's capital stock or
any warrants, rights or other options to purchase such capital
stock; provided, however, that the Company shall be permitted
to (i) issue common stock, warrants or Series C Preferred
Stock resulting from the Company's Financing (as defined in
the Purchase Agreement) and (ii) grant options to purchase up
to an aggregate of 10% of the shares of the Company's common
stock outstanding, as determined on a fully-diluted basis.
6.2.6 Additional Prohibited Transactions.
(a) Amend its certificate of incorporation or bylaws;
(b) Make capital expenditures (including such expenditures made by
the Company and all such Subsidiaries) exceeding, in the
aggregate, $30,000,000 during any calendar year;
(c) Make any material change in the scope or nature of the
business of the Company as it is currently being conducted;
(d) File for receivership, dissolution, liquidation or bankruptcy;
(e) Acquire equity securities (other than pursuant to a buyback or
repurchase of equity securities issued by the Company) or assets
of any other person or entity involving payments aggregating in
excess of $10,000,000 during any calendar year; or
(f) Enter into, assume or become bound by any agreement to do any
of the foregoing or otherwise attempt to do any of the foregoing.
7. Default.
7.1 Events of Default. An "Event of Default" shall exist if any of
the following occurs and is continuing as to the Company:
(a) Default shall be made by the Company on a payment
of the principal amount or interest on the Notes, when and as
such principal amount and interest, as the case may be, shall
become due and payable by acceleration or otherwise; or
(b) Default shall be made in the performance or
observance of any covenant, condition, undertaking or
agreement contained in the Notes, which default shall not have
been cured after fifteen (15) days notice of such default; or
(c) Any warranty, representation or other statement
made by or on behalf of the Company contained in the Notes or
in the Purchase Agreement shall be false or misleading in any
material respect at the time such warranty, representation or
other statement, as the case may be, was made; or
(d) The Company or any of its Subsidiaries (other
than Caracas Viva Vision TV, S.A., Communicaciones Centurion,
S.A. or Communicaciones Spectrum, S.A. (collectively, the
"Venezuelan Subsidiaries")) shall (i) file a petition seeking
relief for itself under the United States Bankruptcy Code, as
now constituted or hereafter amended from time to time, or
file an answer consenting to, admitting the material
allegations of or otherwise not controverting, or fail timely
to controvert, a petition filed against the Company seeking
relief under the United States Bankruptcy Code, as now
constituted or hereafter amended from time to time or (ii)
file a petition or answer with respect to relief under the
provisions of any other now-existing or future applicable
bankruptcy, insolvency or other similar law of the United
States or any state thereof or of any other country or
province thereof or jurisdiction providing for the
reorganization, winding-up or liquidation of corporations or
an arrangement, composition, extension or adjustment with
creditors; or
(e) (i) An order for relief shall be entered against
the Company or any of its Subsidiaries (other than the
Venezuelan Subsidiaries) under the United States Bankruptcy
Code, as now constituted or hereafter amended from time to
time, which order is not stayed and remains unstayed for a
period of 45 days, (ii) the entry of an order, judgment or
decree by operation of law or by a court having jurisdiction
in the premises which is not stayed and remains unstayed for a
period of 45 days (A) adjudging the Company bankrupt or
insolvent under, or ordering relief against the Company under,
or approving a properly-filed petition seeking relief against
the Company under the provisions of any other now-existing or
future applicable bankruptcy, insolvency or other similar law
of the United States or any state thereof or of any other
country or province thereof or jurisdiction providing for the
reorganization, winding-up or liquidation of corporations or
any arrangement, composition, extension or adjustment with
creditors, (B) appointing a receiver, supervisor, liquidator,
assignee, sequestrator, trustee or custodian of the Company or
any of its Subsidiaries or of any substantial portion of the
property of the Company or any such Subsidiaries, or (C)
ordering the reorganization, winding-up or liquidation of the
affairs of the Company or any of its Subsidiaries, or (iii)
the expiration of 60 days after the filing of any involuntary
petition against the Company or any of its Subsidiaries
seeking any of the relief specified in paragraph (d) of this
Section 7.1 or paragraph (e) of this Section 7.1 without
dismissal of such petition; or
(f) The Company or any of its Subsidiaries shall (i)
make a general assignment for the benefit of creditors, (ii)
consent to the appointment of, or taking possession of all or
a substantial part of the property of the Company or any such
Subsidiary by, a receiver, supervisor, liquidator, assignee,
sequestrator, trustee or custodian of the Company or any such
Subsidiary, (iii) admit its insolvency or inability to pay its
debts generally as such debts become due, (iv) fail generally
to pay its debts as such debts become due or (v) take any
action (including such actions taken by the Company's
directors or a majority of the Company's shareholders)
regarding the dissolution or liquidation of the Company or any
such Subsidiary (other than the Venezuelan Subsidiaries).
7.2 Remedies. In case any one or more of the Events of Default
specified in Section 7.1 hereof shall have occurred and be continuing, the
Holder shall have the right to accelerate payment of the entire principal
amount, and all interest accrued thereon, and, upon such acceleration, such
principal amount and interest shall thereupon become immediately due and
payable, without any presentment, demand, protest or other notice of any kind
(which presentment demand, protest or other notice of any kind are hereby
expressly waived), and the Company shall forthwith pay to the Holder the entire
then outstanding principal amount, and interest accrued thereon, due pursuant to
this Note.
8. Preemptive Rights.
8.1 Subsequent Offerings. The Holder shall have a right to
purchase its pro rata share on a fully-diluted basis of all Equity Securities
(as defined below) that the Company may, from time to time, propose to sell and
issue after the date of issuance of the Note, other than the Equity Securities
excluded by Section 8.6 hereof. The Holder's "pro rata share on a fully-diluted
basis" for purposes of this Section shall be defined as the ratio of (A) the
number of outstanding shares of common stock (including all shares of common
stock issued or issuable upon conversion of all outstanding shares of preferred
stock into shares of common stock or upon the exercise of any outstanding
options and warrants) of which the Holder is deemed to be a holder immediately
prior to the issuance of such Equity Securities to (B) the total number of
outstanding shares of common stock (including all shares of common stock issued
or issuable upon conversion of outstanding shares of preferred stock into shares
of common stock or upon the exercise of any outstanding options and warrants)
immediately prior to the issuance of the Equity Securities. For purposes of this
Note, "Equity Securities" shall mean any equity security of the Company,
including, but not limited to (i) any shares of common stock or shares of
preferred stock, (ii) any security convertible, with or without consideration,
into shares of common stock, shares of preferred stock or other equity
securities of the Company (including any option to purchase such a convertible
security), (iii) any security carrying any right to subscribe to or purchase
shares of common stock, shares of preferred stock or any other equity security
of the Company or (iv) any such right.
8.2 Exercise of Rights. If the Company proposes to issue any
Equity Securities (the "Offered Securities"), it shall give the Holder written
notice of its intention, describing the Equity Securities, the price thereof and
the terms and conditions upon which the Company proposes to issue the same. The
Holder shall have the right, for a period of fifteen (15) business days from the
receipt of such notice, to deliver notice to the Company agreeing to purchase
its pro rata share on a fully-diluted basis of the Equity Securities for the
price and upon the terms and conditions specified in the notice by giving
written notice to the Company and stating therein the quantity of Offered
Securities to be purchased. Notwithstanding the foregoing, the Company shall not
be required to offer or sell such Equity Securities to the Holder if such offer
or sale would cause the Company to be in violation of applicable securities
laws.
8.3 Issuance of Equity Securities to Other Persons. Following
the fifteen (15) day notice period set forth in Section 8.2 hereof, the Company
shall have ninety (90) days thereafter to sell the Equity Securities in respect
of which the Holder's rights were not exercised, at a price and upon general
terms and conditions materially no more favorable to the purchasers thereof than
specified in the Company's notice to the Holder pursuant to Section 8.2 hereof.
If the Company has not sold such Equity Securities within such 90-day period set
forth in this Section 8.3, the Company shall not thereafter issue or sell any
Equity Securities without first offering such securities to the Holder in the
manner provided above.
8.4 Termination of Preemptive Rights. The preemptive rights
established by this Article 8 shall not apply to, and shall terminate
immediately prior to the effective date of the registration statement pertaining
to, a registered public offering of Equity Securities of the Company pursuant to
which the Company receives net proceeds of at least $15,000,000 with a market
capitalization of at least $50,000,000.
8.5 Transfer of Preemptive Rights. The preemptive rights of
the Holder under this Article 8 may not be sold or transferred in any manner.
8.6 Excluded Securities. The preemptive rights established by
this Article 8 shall have no application to any of the following Equity
Securities:
(a) shares of common stock (and/or options or other shares of
common stock purchase rights issued pursuant to such options or other rights)
issued or to be issued to employees, officers or directors of, or consultants or
advisors to, the Company or any subsidiary, pursuant to stock purchase or stock
option plans or other arrangements that are approved by the Board of Directors;
(b) any Equity Securities issued in connection with the
Company effectuating or entering into: (i) a merger, consolidation,
amalgamation, acquisition or similar business combination approved by the Board
of Directors; and (ii) a joint venture, commercial transaction (including,
without limitation, equipment lessors or other persons guaranteeing the
obligations of the Company to equipment lessors) or other commercial
relationship approved by the Board of Directors and by the board members
appointed by the holders of the Notes;
(c) shares of common stock issued in connection with any stock
split, stock dividend or recapitalization by the Company; or
(d) any Equity Securities issued upon exchange of the Notes.
9. Registration Rights. The Company has agreed to provide
certain registration rights in respect of the shares of Series C Preferred
Stock, common stock, preferred stock or any other equity security of the Company
to which this Note is exchangeable, the terms and conditions of which are set
forth in the Registration Rights Agreement dated as of the date hereof, between
the Company and the Holder.
10. Warrants. The Company has agreed to issue to the Holder
warrants to purchase shares of common stock, the terms and conditions of which
are set forth in the Purchase Agreement.
11. Miscellaneous.
11.1 Law. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
11.2 Binding Effect. All terms and agreements in this Note by
the Holder (by virtue of its acceptance) and the Company shall bind its
successors and assigns.
11.3 Maximum Lawful Rate. It is the intent of the Company and
the Holder to conform to and contract in strict compliance with applicable usury
law from time to time in effect. In no way, nor in any event or contingency
(including but not limited to prepayment, default, demand for payment, or
acceleration of the maturity of any obligation), shall the rate of interest
taken, reserved, contracted for, charged or received under this Note exceed the
highest lawful interest rate permitted under applicable law. If the Holder shall
ever receive anything of value which is characterized as interest under
applicable law and which would apart from this provision be in excess of the
highest lawful interest rate permitted under applicable law, an amount equal to
the amount which would have been excessive interest shall, without penalty, be
applied to the reduction of the principal amount owing on this Note in the
inverse order of its maturity and not to the payment of interest, or refunded to
Company or the other payor thereof if and to the extent such amount which would
have been excessive exceeds such unpaid principal. All interest paid or agreed
to be paid to the Holder shall, to the extent permitted by applicable law, be
amortized, prorated, allocated and spread throughout the full stated term
(including any renewal or extension) of this Note so that the amount of interest
on account of such obligation does not exceed the maximum permitted by
applicable law. As used in this Section, the term "applicable law" shall mean
the laws of the State of New York or the federal laws of the United States,
whichever laws allow the greater interest, as such laws now exist or may be
changed or amended or come into effect in the future.
11.4 Severability. In case any provision of this Note shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
11.5 Payments on Business Days. In any case where the date for
payment of any principal of or interest on this Note shall not be a Business Day
(as defined below), then (notwithstanding any other provision of this Note)
payment of interest or principal (and premium, if any) need not be made on such
date, but may be made instead on the next succeeding Business Day with the same
force and effect as if made on the date otherwise established hereunder for
payment of such principal or interest, and no interest shall accrue for the
period from and after the date otherwise established hereunder for payment of
such principal or interest. As used herein, the term "Business Day" shall mean
each weekday which is not a day on which banking institutions in New York are
authorized or obligated by law or executive order to close.
11.6 Waivers. Any term, covenant, agreement or condition of
this Note may, with the written consent of the Company and the holders of at
least a majority in aggregate principal amount of the Notes at the time
outstanding, be amended or compliance therewith may be waived (either generally
or in a particular instance and either retroactively or prospectively) altered,
modified or amended; provided, however, that no such instrument shall, without
the consent of the holders of all of the Notes then outstanding (a) reduce or
extend the fixed maturity of any Note, increase or reduce the rate of payment of
interest thereon, change the currency for payment of principal and/or interest
under any Note, or relieve the Company of its obligation to pay principal and
interest then due or (b) reduce the aforesaid percentage of Notes, the holders
of which are required to consent to any such instrument.
11.7 Notices. Any notice or other communication required or
permitted hereunder shall be in accordance with Section 11.4 of the Purchase
Agreement.
IN WITNESS WHEREOF, the Company has caused this Note to be executed by
its officer thereunto duly authorized this 23rd day of December, 1998.
CONVERGENCE COMMUNICATIONS, INC.
By: /S/ Troy D'Ambrosio
____________________________________
Name: Troy D'Ambrosio
Title: Senior Vice President
ATTACHMENT 1
EXCHANGE NOTICE
TO: CONVERGENCE COMMUNICATIONS, INC.
The undersigned Holder of the within Note hereby irrevocably exercises
the right and option of such Holder to exchange the within Note into shares of
_________ stock of Convergence Communications, Inc. in accordance with the terms
of the within Note and the Purchase Agreement therein described, and directs
that the shares issuable upon such exchange be issued in the name of and
delivered to the undersigned unless a different name has been indicated below.
If the shares are to be issued in the name of a person other than the
undersigned, the undersigned will pay all transfer taxes, if any, payable with
respect thereto.
__________________________________
(Holder)
Please print name and address (including zip code number) and provide taxpayer
identification number of person to whom shares are to be delivered:
- -----------------------------------
- -----------------------------------
- -----------------------------------
EXHIBIT 12.1
COMPUTATION OF EARNINGS PER COMMON SHARE AND
COMMON SHARE EQUIVALENTS
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
Cumulative Weighted Average Share Calculation
Basic:
Number Days Weighted
Description Date of CSE Outstanding Calculation
- ----------------------------------------------------- ------------ --------------- ------------- -----------------
<S> <C> <C> <C> <C>
Beginning common stock 12/31/97 10,424,710 365 3,805,019,150
Issuance of common stock for equity 2/25/98 1,512,304 309 467,301,936
Issuance of common stock for IAN 8/17/98 85,714 136 11,657,104
-----------------
4,283,978,190
/ 365
--------------- -----------------
Weighted average common shares outstanding for the
year ended December 31, 1998 12/31/98 12,022,728 11,736,927
=============== =================
Diluted:
Number Days Weighted
Description Date of CSE Outstanding Calculation
- ----------------------------------------------------- ------------ --------------- ------------- -----------------
Beginning common stock equivalents 12/31/97 11,166,426 365 4,075,745,490
Issuance of common stock for equity 2/25/98 1,512,304 309 467,301,936
Issuance of common stock for IAN 8/17/98 85,714 136 11,657,104
Issuance of options 12/23/98 164,177 8 1,313,416
-----------------
Subtotal 4,556,017,946
Less FAS No. 128 Treasury Method Adjustment 233,712
-----------------
4,555,784,234
/ 365
--------------- -----------------
Weighted average common shares outstanding for the
year ended December 31, 1998 12/31/98 12,928,621 12,482,241
=============== =================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
Cumulative Weighted Average Share Calculation
Basic:
Number Days Weighted
Description Date of CSE Outstanding Calculation
- ---------------------------------------------------- --------- ----------- --------- ----------------
<S> <C> <C> <C> <C>
Beginning common stock 12/31/96 428,571 365 156,428,415
Reverse acquisition of assets
Common shares canceled 2/4/97 (428,571) 330 (141,428,430)
Common shares issued 2/4/97 1,041,494 330 343,693,020
Series "A" preferred shares issued 2/4/97 6,850,630 330 2,260,707,900
Common & Series B preferred shares issued for CVV 8/17/97 735,014 136 99,961,904
Common and Series A preferred shares issued for equity 8/30/97 1,732,458 123 213,092,334
Common and Series A preferred shares issued for equity 11/1/97 65,114 60 3,906,840
----------------
2,936,361,983
/ 365
----------- ----------------
Weighted average common stock outstanding for the
year ended December 31, 1997 12/31/97 10,424,710 8,044,827
=========== ================
Diluted:
Number Days Weighted
Description Date of CSE Outstanding Calculation
- ---------------------------------------------------- --------- ----------- --------- ----------------
Beginning common stock 12/31/96 464,285 365 169,464,129
Reverse acquisition of assets
Common shares canceled 2/4/97 (428,571) 330 (141,428,430)
Common shares issued 2/4/97 1,041,494 330 343,693,020
Series "A" preferred shares issued 2/4/97 6,850,630 330 2,260,707,900
Common options canceled 2/4/97 (35,714) 330 (11,785,714)
Series "A" preferred options granted 2/4/97 395,000 330 130,350,000
Issuance of options 3/31/97 14,285 275 3,928,375
Issuance of options 3/31/97 714 275 196,350
Issuance of warrants 6/30/97 331,717 184 61,035,928
Common & Series B preferred shares issued for CVV 8/17/97 735,014 136 99,961,904
Common and Series A preferred shares issued for equity 8/30/97 1,732,458 123 213,092,334
Common and Series A preferred shares issued for equity 11/1/97 65,114 60 3,906,840
----------------
Subtotal 3,133,122,636
Less FAS No. 128 Treasury Method Adjustment 231,606
----------------
3,133,354,242
/ 365
----------- ----------------
Weighted average common stock outstanding for the
year ended December 31, 1997 12/31/97 11,166,426 8,584,532
=========== ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
Cumulative Weighted Average Share Calculation
Basic:
Number Days Weighted
Description Date of CSE Outstanding Calculation
- ---------------------------------------------------- --------- ----------- --------- ----------------
<S> <C> <C> <C> <C>
Beginning common stock 12/31/95 428,571 366 156,856,986
----------------
156,856,986
/ 366
----------- ----------------
Weighted average common stock outstanding for the
year ended December 31, 1996 12/31/96 428,571 428,571
=========== ================
Diluted:
Number Days Weighted
Description Date of CSE Outstanding Calculation
- ---------------------------------------------------- --------- ----------- --------- ----------------
Beginning common stock 12/31/95 428,571 366 156,856,986
Issuance of options 12/31/96 35,714 0 -
----------------
Subtotal 156,856,986
Less FAS No. 128 Treasury Method Adjustment 32,142
----------------
156,889,128
/ 366
----------- ----------------
Weighted average common stock outstanding for the
year ended December 31, 1996 12/31/96 35,714 428,659
=========== ================
</TABLE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Subsidiaries of the Registrant:
Transworld Wireless Television, Inc.
Auckland Independent Television Services, Ltd.
Telecom Investment Corporation
Caracas Viva Vision TV, S.A.
Wireless Communications Holding - Guatemala, S.A.
Sociedad Television Interactiva, S.A.
Wireless Communications Panama, S.A.
WCI de Argentina, S.A.
WCI de Cayman, Inc.
TelLatin, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001020424
<NAME> Convergence Communications, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-1-1998
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1.0
<CASH> 4,315,281
<SECURITIES> 0
<RECEIVABLES> 432,868
<ALLOWANCES> 0
<INVENTORY> 205,408
<CURRENT-ASSETS> 10,126,717
<PP&E> 9,059,258
<DEPRECIATION> (534,737)
<TOTAL-ASSETS> 42,473,044
<CURRENT-LIABILITIES> 14,096,138
<BONDS> 0
0
101
<COMMON> 11,738
<OTHER-SE> 10,672,687
<TOTAL-LIABILITY-AND-EQUITY> 42,473,044
<SALES> 3,113,482
<TOTAL-REVENUES> 3,113,482
<CGS> 1,876,133
<TOTAL-COSTS> 13,735,384
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 677,188
<INCOME-PRETAX> (10,230,796)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,230,796)
<EPS-PRIMARY> (.87)
<EPS-DILUTED> (.87)
</TABLE>
