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, 1999.
[ ] 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
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(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
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(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: Name of each exchange
Title of each class on which registered
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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: $9,099,054.
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 $15,465,958.
As of March 1, 2000, 11,585,489 shares of registrant's common stock, par value
$.001 per share, 101,374 shares of the registrant's series B preferred stock,
par value $.001 per share, and 9,728,909 shares of the registrants series C
preferred stock, par value $.001 per share, were outstanding.
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CONVERGENCE COMMUNICATIONS, INC.
March 31, 2000
Form 10-KSB
PART 1.
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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
OUR BUSINESS AND PROPERTIES
Overview of Our Operations
We are a leading facilities-based provider of integrated broadband
communications and Internet services to the business customer through our
metropolitan area networks. We operate in recently deregulated and high growth
markets, principally Mexico, Central America and the Andean region of South
America. We offer businesses, governmental agencies and residential customers
broadband, high-speed data connections, high-speed and dial-up Internet access,
voice and video services. Our networks use technology based on the Internet
Protocol, or IP, and we employ networks with over 270 route kilometers of
fiber-optic and hybrid fiber coaxial cable, plus "last mile" broadband fixed
wireless connectivity.
We have operations in nine countries -- Mexico, Venezuela, El Salvador,
Guatemala, Panama, Costa Rica, Honduras, Nicaragua, and the Dominican Republic.
We provide services to over 34,500 customers in 17 major metropolitan areas in
these countries. By December 2000, we expect to have operations in 46 cities and
serve over 59,000 customers.
During the last year, we reached the following business milestones:
o In October 1999, we closed a $109.5 million equity and debt facility
with six strategic investors.
o In March 2000, we signed a conditional agreement with Alcatel, a world
recognized telecommunications integrater and equipment manufacturer,
to construct a turnkey pan-regional network for us and to provide us
with up to $175 million in financing over the next three years for
network build-out and systems integration services.
o We closed three significant acquisitions. These acquisitions added
over 3,500 customers to our existing subscriber base and gave us an
interest in an existing fiber-optic network in Mexico City. One of
those acquisitions was the purchase of the data services operations of
an IBM affiliate that does business in seven Latin American countries,
and another acquisition was the purchase of the second largest data
services provider in Mexico. We have also entered into a letter of
intent to acquire a system in Guatemala which will add over 12,835
customers to our subscriber base.
o We increased our consolidated revenues from $3.1 million in 1998 to
$9.1 million in 1999, and increased our consolidated assets from $42.5
million to $97.2 million during the same period. Our plant, property
and equipment grew from $8.5 million in 1998 to $28.4 million in 1999.
o We formed a joint venture with a major developer of fiber optic
systems in Mexico to build networks in seven of the largest cities in
Mexico.
o We completed the construction of our networks in El Salvador, Panama
and Costa Rica.
o We started the year without any fiber in our leased or owned networks,
and by the end of this year we expect to have over 630 route
kilometers of fiber.
We believe that, by being the first provider of integrated
telecommunications services in our market areas, we will be able to secure
access to a broad base of business and government customers. We also believe
that, if we develop our business operations on the schedule described in this
report, we will create significant barriers for our competitors to overcome, and
that our "lowest operating cost" strategy and highly differentiated service
offerings will give us a competitive advantage over other telecommunications
providers in our markets.
We are designing our network around an IP-based technology platform
that uses packet switching to transmit voice, video and data elements over the
same system. We intend to use the IP platform with a flexible delivery network
that uses fiber-optic, coaxial cable and wireless distribution systems. We
believe this approach allows the most efficient delivery of high-speed "last
mile" connectivity with our IP-based service offerings, and provides an
economical method for delivering high quality bundled communications services.
Our telecommunications solutions typically consist of combinations of the
following services:
o Network Services. We offer our business customers a broad range of
end-to-end network services for their point-to-point and point-to-multi-point
telecommunications needs. These services range from simple connections to
customized private telecommunications network solutions, including high-speed
data transmission and virtual private networks. As of March 1, 2000, we had over
500 network service customers which, in some cases, includes high-speed Internet
access (representing over 2,300 connections).
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o Internet Access. We offer Internet access services primarily to corporate
and governmental users. We also offer residential Internet access service. Our
services include both high-speed and dial-up Internet access using high-speed
systems. As of March 1, 2000, we had over 4,300 Internet access customers in our
systems and, assuming we close the Metrotelecom transaction, we will acquire an
additional 4,200 customers.
o Telephone Services. We offer limited national and international telephone
services in El Salvador and, once we complete the Metrotelecom transaction, in
Guatemala. We currently process nearly 1.0 million telephony minutes per month.
Once we complete the Metrotelecom transaction, that number will increase to
approximately 9.5 million minutes per month. We expect to be able to provide
telephony services in Mexico in 2000 and Venezuela in 2001.
o Web Hosting and Other Value Added Services. We offer web hosting services
that facilitate our customers' electronic commerce and electronic business
initiatives. Those services include a number of information technology services
such as web page design and the design, installation and integration of
intranets, extranets, and virtual private data networks.
o Video Services. We offer cable television, or CATV, services in El
Salvador (where we own the largest CATV system) and Guatemala, where we have
contracted to buy the second largest CATV system. Those systems have over 37,000
subscribers.
We were incorporated in Nevada in 1995 as "Wireless Cable &
Communications, Inc." In August 1998, we changed our name to "Convergence
Communications, Inc." When we discuss our operations in this report, you should
assume we are describing our own and our controlled subsidiaries' operations.
Our principal executive offices are located at 102 West 500 South, Suite 320,
Salt Lake City, Utah 84101, and our telephone number there is (801) 328-5618.
Our principal operating offices are located at 9050 Pembroke Pines Blvd.,
Pembroke Pines, Florida 33024, and our telephone number there is (954) 430-9393.
Our world wide web site is located at www.convergence-comm.net. The information
on that site is not part of this report. Our logo and certain titles and logos
for our services are our property. Each trademark, tradename or service mark of
any other company appearing in this report belongs to its holder.
We previously reported some of the transactions and operations
information set forth in this report in greater detail in other reports we have
filed with the Securities and Exchange Commission, including in the reports
described below in the section entitled "Reports on Form 8-K" and our quarterly
reports on Form 10-QSB for the periods covered by this report. You should read
the information in this report in connection with those other reports and
filings. In addition, some of the matters described in this report (including,
specifically, our proposed purchase of Metrotelecom) occurred or are scheduled
to occur after December 31, 1999, the close of the period covered by this
report. We have included descriptions of those matters in this report to provide
a more balanced description of our operations.
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Our Market Opportunity
The combined telecommunications market worldwide is believed to be in
excess of $700 billion and is expected to grow to $1.0 trillion by the year
2002. Growth in the industry is driven by a number of factors, including
increased demand for applications such as electronic commerce, video-on-demand,
and video conferencing. Internet access and data services are arguably one of
the fastest growing segments of the telecommunications market, with an estimated
116 million Internet users worldwide.
The Latin American telecommunications industry is, in particular,
undergoing dramatic change, including widespread privatization of existing
networks. The countries in Latin America that have or are beginning to
deregulate have done so as their governments have recognized the need to
introduce market competition. Along with many other countries, Mexico,
Venezuela, El Salvador, Guatemala and the Dominican Republic have agreed under
the World Trade Organization Agreement on Basic Telecommunications Services to
promote competition in their countries' telecommunications industries.
In many instances, however, the operators of these privatized
telecommunications systems have had difficulty responding to market demands for
efficient service, new fixed lines and the bandwidth necessary for data
transmission and high-speed Internet access. The increased demand for
telecommunications services 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 2002, up from $33.2
billion in 1996. Growth in overall telecommunication revenues is expected to be
approximately 12% per year, while growth from data services is expected to
achieve a compounded annual growth rate of approximately 41% through 2002
(assuming relative economic stability), compared to a compounded growth rate of
approximately 13% in the United States. This growth will be due to a number of
factors, including:
o Increased Competition. As competitors enter the Latin America
telecommunications market, the range of telecommunications services available to
consumers should expand. Incumbent providers in deregulating markets have
existing customer bases but, we believe, have not focused on providing quality
services at competitive prices. Demand for services should increase once
competitors are able to offer better and cheaper service.
o The Entry of Globalized Businesses into Latin America. As corporations
from more developed markets expand their operations into Latin America and Latin
American corporations develop more global operations, the need for private data
networks and broadband capacity should grow.
o Changes in Technology. Latin American markets have historically been
dependent on legacy telecommunications systems and the infrastructure of the
incumbent operators. These systems have generally been based on technology and
equipment having limited bandwidth capabilities and relatively poor transmission
quality. We believe the demand for high bandwidth and broadband services will
increase as telecommunications infrastructure improves and the use of data
intensive applications becomes feasible in Latin America. One of the most
notable trends arising from the growth of the Internet is the adoption of the IP
as the standard for wide-area corporate communications. IP allows computers with
different architectures and operating systems to communicate with one another.
We believe telecommunication companies will increasingly shift from traditional
circuit-switched networks to packet-switched networks by incorporating IP into
their systems. According to Ovum, an independent analyst group, the worldwide
market for IP will reach over $60 billion by 2005.
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o Increases in the Use of the Internet. The Latin American Internet market
is generally thought to be several years behind the Internet market in the
United States in terms of overall market penetration of both use and Internet
related services. Actual use varies by country, but was estimated to be, on
average, less than 1% (compared to 18% in the United States) in 1997, and is
projected to increase to 4% by 2002 (compared to over 40% in the United States).
Our Business Solution
We believe emerging technologies have significantly enhanced the value
and capacity of networks that combine different types of delivery systems, in
part because of the convergence of traditional voice, data and video switching
technologies. Our IP-based technology platform allows us to transmit voice,
video and data elements over the same network using a combination of
fiber-optic, coaxial cable networks and wireless communication systems. This
approach allows us to provide "last mile" connectivity with IP-based service
offerings, providing an economical method of delivering high-quality, high-speed
bundled communications services.
We offer a wide variety of telecommunications services, including
broadband, high-speed data transmission, high-speed and dial-up Internet access,
voice, video and value-added services in many of our markets. We allow
subscribers to combine those services into individually designed packages,
rather than offering only telecommunications service packages designed for a
"typical" customer. We believe this flexible sales strategy reduces 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.
Our Business Strategies
Our business objective is to be the premier facilities-based provider
of integrated broadband telecommunication solutions to business and governmental
customers in Mexico, Central America and the Andean region. Our strategies to
achieve that objective include the following:
o We focus on underserved markets in Latin America. We provide and intend
to expand our integrated communication solutions in under-served markets in the
Mexican, Central American and Andean regions of Latin America. These areas have
a combined population of more than 162 million people, and we believe there is a
large and growing demand for telecommunications services in these markets. As a
first provider of competitively priced bundled telecommunications services in
many of these rapidly deregulating markets, we believe we will be able to secure
a significant subscriber base and market share with minimal turnover.
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o We pursue strategic acquisitions of subscriber bases and ancillary
services. In addition to developing our own subscriber base through the
promotion of our telecommunications services, we engage in selective
acquisitions of existing telecommunications subscriber bases by acquiring other
existing telecommunications providers. We benefit from the revenue generated by
these acquisitions and from the vertical integration of key service providers.
During the past year, we acquired existing telecommunications subscriber bases
in Mexico, El Salvador, Guatemala, Panama, Costa Rica, the Dominican Republic,
Honduras, and Nicaragua, and we have entered into an agreement to acquire
additional subscribers in Guatemala.
o We focus on providing Internet and network services to the business
customer. We are focusing our initial network development and acquisition
activities on adding to our high-speed and dial-up Internet access, network
services and value-added services. We believe the subscriber base for these
services is, in general, more affluent and stable. By first emphasizing those
services, we believe we will be able to achieve positive cash flow more quickly.
o We use our own broadband communications networks. We provide a
significant portion of our telecommunications services through our own
next-generation transmission networks. We intend to acquire our own transmission
networks in markets where we currently lease network rights from other parties.
The flexibility of our network architecture allows us to minimize the deployment
of network equipment not associated with revenues, since a significant portion
of our planned capital expenditures will be for the purchase of subscriber
premises equipment, which is generally deployed only when we acquire
subscribers. In addition, our systems do not need to cover an entire market
before we 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.
o We use multiple delivery systems. We use a combination of fiber-optic
cable, coaxial cable and broadband fixed wireless transmission networks to
deliver our services. We believe this approach allows the most flexible and
efficient delivery of high-speed "last mile" connectivity and provides a lower
overall network cost for delivering our bundled telecommunications services.
o We focus on end users. We offer our services directly to end users,
rather than positioning ourselves as a wholesale network service provider. By
deriving our revenues from providing telecommunications services directly to end
user customers, we believe we will quickly establish a sustainable and broad
customer base. We also believe that, by offering state-of-the-art last-mile
connectivity, we will create significant barriers for our competitors to
overcome. This strategy should minimize the risk of generating substantial
revenues from only a limited number of sources, and should maximize our revenues
and profitability by allowing us to access the higher priced retail market.
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o We maximize subscriber penetration and focus on the business customer. We
initially offer our services in portions of our markets where we believe we have
the most potential to generate significant subscriber growth. These areas
include the major metropolitan areas of Mexico, Venezuela, Guatemala, El
Salvador, Costa Rica, and Panama, the primary business centers for each country,
which have a potentially greater demand for telecommunications services. Once we
establish an operating platform in a market area, we focus on maximizing
subscriber growth through careful segmentation of the business customer base,
customizing the services we offer to each identified segment, and competitively
pricing our services.
o We use and support local management. We rely on local managers in our
markets. Our local managers play an active role in securing network rights and
obtaining necessary regulatory approvals, assist us in arranging, identifying
and evaluating opportunities for our business, and provide local advocacy for
our operations. Our local managers typically have operating experience in the
telecommunications industry, and are supported by our corporate operations staff
in the United States. We believe our use of local managers allows us to respond
rapidly and effectively to operational matters, develop and maintain effective
working relationships with local partners and capitalize on telecommunications
opportunities. We have recently acquired several companies and have been able to
retain their local experienced management.
o We enter into strategic alliances. We have entered into strategic
alliances with a number of companies already active in the Latin American
telecommunications markets. We believe these partners are both influential and
respected within their countries or regions, and they typically work closely
with our senior management.
Our Network Technology
We employ an IP-based technology platform that uses packet switching to
transmit voice, video and data elements over the same network in the majority of
our markets. We combine this technology with a delivery system that uses
fiber-optic networks, coaxial cable networks and wireless telecommunication
networks. We believe this architecture allows the most efficient delivery of
high-speed "last mile" connectivity with IP-based service offerings, such as
Internet, intranet, extranet and voice services. We also believe an IP-based
platform provides an economical method for delivering high quality bundled
communications services. We ultimately plan to provide voice, data, Internet and
video services over the same network architecture in each of our markets. In the
market areas where we have acquired companies that use non-IP-based platform
(such as ATF/frame relay systems), we intend to convert those networks to
IP-based platforms.
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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. We
believe 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 a
network's capacity.
Circuit-switched networks use a single circuit for each conversation,
and route each data transmission separately. Each conversation occupies an
entire circuit or portion of the network for the duration of the call or data
transmission, even if there are times when no data is being transmitted. In a
packet-switched network, however, 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. 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.
Packet-switched networks have less overhead than traditional
circuit-switched networks, which also 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 (which is the
equivalent of the contents of eight encyclopedia volumes) from New York to
London over a traditional public circuit-switched telephone network would cost
the provider approximately $27.00. The cost to move the same amount of
information over an IP network would be only about $2.00.
We also believe our IP-based architecture facilitates a significantly
more sophisticated bandwidth management capability. Most of our competitors
offer only limited bandwidth guarantees, such as high-level voice, video and
data management, but we can actively manage bandwidth at a services layer. This
means we can allocate bandwidth on demand to a particular data stream, voice
conversation or video stream, as needed. We believe this capability will be a
significant service differentiator in the market place.
We combine 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 been
shown to be a reliable, high-capacity, scalable telecommunications transport
network method, and standardized point-to-point and point-to-multipoint
equipment is now available from numerous vendors.
In late 1999, we began the process of selecting a technology partner to
assist us in the design, construction and financing of our integrated networks.
We received responses to our request for proposals from several of the world's
largest telecommunications systems builders and integrators. In early 2000, we
narrowed the partner selection process to three potential vendors and, in March
2000, we entered into an umbrella agreement with Alcatel. Alcatel has operations
in over 130 countries and annual revenues of over $22 billion, and is a world
recognized builder of next-generation telecommunications networks.
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The umbrella agreement is contingent on our negotiating with Alcatel
the terms of separate turnkey contracts for the various segments of our network.
Alcatel has agreed to provide us with up to $175 million in vendor financing as
part of the relationship. Under the terms of the agreement, we will work with
Alcatel to expand our networks in 17 cities across Mexico, Guatemala, El
Salvador, Costa Rica, Panama and Venezuela.
Alcatel has agreed to construct a state of the art, "pure" IP network
for us that will function for both voice and data applications. Although the
contract represents Alcatel's first next-generation IP network to be deployed in
Latin America on a pan-regional basis, Alcatel has significant network design,
construction and systems integration experience. Further, our relationship with
Alcatel is not exclusive, so we will be able to use the services of other
network and systems integraters if, for any reason, Alcatel has difficulty in
meeting the operational specifications contained in the umbrella agreement.
Our Markets
We have grown rapidly since we began our operations in 1995. Our
customer base has increased from 900 cable television customers in one country
in 1997, the year we acquired our first operating system, to 659 high-speed data
customers 4,379 dial-up Internet customers, and 29,000 cable television
customers in nine countries. Those numbers will increase to 1,159, 8,579 and
37,000 respectively, when we acquire Metrotelecom. Our customers include large
corporations and businesses, government agencies and residential customers. Our
focus going forward will be to grow our market share among business customers.
The table below provides summary information regarding our operations and
markets. Our operations are described in more detail in the individual market
discussions on the following pages:
<TABLE>
<CAPTION>
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Customers(2)
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Country/Market Operations(1) 1999 2000 GDP(3) Population(4)
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<S> <C> <C> <C> <C> <C>
Mexico NS, ISP, WH 0 535 $410.0 bn 96,000,000
Central America (5)
El Salvador NS, ISP, CATV, Tel, WH 26,000(6) 30,350(7) $11.8 bn 6,200,000
Guatemala NS, ISP, CATV, Tel 0 12,825(8) $18.6 bn 11,500,000
Panama NS, ISP 0 267(9) $8.7 bn 2,700,000
Costa Rica NS 0 3(10) $9.7 bn 3,700,000
Dominican Republic NS 0 10(11) $14.6 bn 8,100,000
Nicaragua ISP 0 81(12) $2.0 bn 4,600,000
Honduras ISP 0 542(13) 4.5 bn 6,200,000
Venezuela NS, ISP 1,771(14) 2,660(15) $86.6 bn 22,800,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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(1) "NS" means network services; "ISP" means high-speed or dial-up Internet
services; "CATV" means cable television; "Tel" means telephone services;
and "WH" means web hosting services.
(2) As of March 31 for the year shown, with the exception of the figures for
Guatemala, which assume our acquisition of the Metrotelecom system. That
acquisition is expected to occur in early April 2000. Without the
Metrotelecom subscribers, the customer count in Guatemala would be 125.
(3) Gross domestic product, as estimated for 1998.
(4) As of 1999.
(5) At December 31, 1998, this market region included our operations in El
Salvador, Costa Rica and Panama. At December 31, 1999, this market region
included our operations in those countries plus Guatemala, Nicaragua,
Honduras and the Dominican Republic. The customers attributable to our
operations in Guatemala include the customers we will acquire in connection
with our purchase of the Metrotelecom operations. The Metrotelecom
operations are described below.
(6) Represents 26,000 CATV subscribers.
(7) Represents 29,000 CATV subscribers, 550 network services and high speed
Internet access subscribers (with over 875 connections) and 800 dial-up
Internet customers.
(8) Represents 506 high speed data, 4,319 dial-up Internet and 8,000 CATV
customers. Includes those customers and services associated with the
Metrotelecom transaction.
(9) Represents 54 high speed Internet access and network services customers and
213 dial-up Internet customers.
(10) Represents network services customers.
(11) Represents network services customers.
(12) Represents dial-up Internet customers.
(13) Represents dial-up Internet customers.
(14) Represents dial-up Internet customers.
(15) Represents 12 high speed Internet access and network services customers and
2,648 dial-up Internet customers.
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Mexico
General. We entered the Mexican market in 1999. In June 1999, we
acquired an approximately 17% of the capacity of a fiber optic network in Mexico
City that is owned by Metronet, S.A. de C.V., or Metronet, and entered into an
option to purchase up to 33% of the capacity of that network. At closing, the
network consisted of approximately 117 route kilometers (containing
approximately 1,153 kilometers of fiber strands), and is configured in three
existing rings. In connection with that transaction, we also entered into an
agreement with Metronet to jointly pursue the development of new fiber networks
in seven other major Mexican cities.
In December, we acquired International Van, S.A. de C.V., or Intervan,
a corporation that provides data networking and network access services to over
500 corporate customers (representing over 2200 operating connections) in Mexico
through a nationwide ATM/frame relay network. Intervan currently provides the
majority of its services through a leased network owned by Telmex, the national
phone company. We intend, however, to migrate Intervan's customers to our fiber
optic capacity in Mexico to the extent possible.
Our Market Opportunity. We believe the Mexican market presents an
excellent opportunity for the expansion of our business. Mexico has a population
of approximately 96 million, with a moderate-to-high per capita income. Mexico's
gross domestic product (which was approximately $380.9 billion in 1998) is
expected to grow by 5% in 2000, after an increase of 3.7% in 1999. Additionally,
since the signing of the NAFTA Treaty, the Mexican economy has been more closely
tied to the United States economy, and it weathered the recent international
currency turmoil better than other Latin American countries.
Although the Mexican telecommunications market is one of the largest in
the world, Mexico had a teledensity of less than 10% in 1998 (compared with over
60% in the United States). 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,
when teledensity is expected to reach 11%. The Mexican data traffic and Internet
access market is estimated to have a compounded annual growth rate of 38% over
the next five years.
Regulatory Environment. The 1995 Ley Federal de Telecomunicaciones, the
1940 Ley de Vias Generales de Comunicacion, the 1990 Reglamento de
Telecomunicaciones and the rules promulgated by Cofetel (such as rules for local
and long-distance interconnection), define the regulatory structure applicable
to telecommunications services in Mexico. The objectives of the 1995
Telecommunications Law are to promote the efficient development of the
telecommunications industry, to encourage fair competition in the provision of
quality, low-priced services and to assure satisfactory coverage of the
population based on socio-economic factors.
Telecommunication services in Mexico and service providers are
regulated and supervised by the Secretaria de Comunicaciones y Transportes, or
SCT, and the Cofetel. The SCT is the governmental agency principally responsible
for regulating telecommunications services in Mexico. Cofetel was established by
a Presidential Decree as an independent authority within the SCT and is
responsible for
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o issuing secondary regulations applicable to the telecommunications
industry
o recommending to the SCT the grant, amendment, extension, assignment
and revocation of concessions and permits and
o supervising concessionaires engaged in interconnection negotiations
and, if necessary, resolving any differences arising from these
negotiations.
Cofetel also regulates the auction of radio spectrum frequencies. The SCT
retains, however, the authority to grant all concessions and permits and to
resolve major issues in which Cofetel can only make recommendations, such as
spectrum allocation and the imposition of penalties.
Under the Ley Federal de Telecomunicaciones, or FTL and the Ley de
Inversion Extranjera, or FIL, no more than 49% of the capital stock of a Mexican
corporation holding a concession to provide local telephone, or domestic and
international long distance services, may be held by non-Mexican investors,
except in the case of concessions for cellular communications services, in which
the participation of non-Mexican investors may exceed 49% if the corporation
obtains the prior approval of the National Commission of Foreign Investment.
Corporations holding those licenses may not have foreign owners which,
individually or collectively, have a direct participation in 49% of the
corporation's voting shares or effective control of the corporation.
To provide public telecommunications services in Mexico through a
public network, a service provider must obtain a concession from the SCT. Under
the FTL, concessions for public networks may not have a term of more than 30
years, and concessions for radioelectric spectrum may not exceed 20 years.
Concessions may be extended for a term equivalent to the term for which the
concession was originally granted. In addition to concessions, the SCT may grant
permits for
o establishing, operating or exploiting private telecommunications
services not constituting a public network
o installing operating or exploiting transmission ground stations and
o providing telecommunications services as a reseller.
There is no specified maximum term for permits. Under the FTL, only registration
with the SCT is required to provide value-added telecommunications services
The telecommunications regulations and the concession of Telemex
contain various provisions designed to introduce competition. In general, the
SCT is authorized to grant concessions to other parties to provide any of the
services which Telmex has provided under its concession. In 1996, the SCT opened
the Mexican market to competition for fixed-link domestic and international
long-distance telephone services. Prior to that time, as long as Telmex was in
compliance with its concession, no competing long-distance provider could
operate.
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Starting in 1997, Telmex was required to permit any other
concessionaire to connect to its network. The SCT issued the technical rules for
the interconnection of competing long-distance carriers with the Telmex network
in July 1994, specifying that there would be an unlimited number of
long-distance concessions and that Telmex must provide over 200 interconnection
points by the year 2000. The Telmex concession provides that other terms of
interconnecting, including fees, are generally to be negotiated between Telmex
and each other long-distance carrier.
In 1996, the SCT released rules governing long-distance services,
together with basic technical plans for numbering and for signaling. The new
long-distance rules establish the general framework for competitive
long-distance services, including rules regarding customer selection of
carriers, allocation of service-related liabilities, subscription, billing and
collection. They also provide for certain consultation and information-sharing
mechanisms among service providers and with the SCT.
Network Architecture. We currently own 17.46% of the capacity of the
Metronet network. As of March 2000, the network had approximately 204 kilometers
of fiber in Mexico City. The network consists of three interconnected rings and
contains, in the aggregate, 3,929 kilometers of fiber optic strands. Under the
terms of our purchase of our capacity rights, we have the right to purchase up
to a total of 33.33% of the fiber optic capacity of the network. Additionally,
we have 2,266 fiber optic strands in Guadalajara and 2,039 kilometers of fiber
optic strands in Monterrey. Intervan currently uses both leased lines from
Telmex and the Metronet network to provide services to customers. We intend to
migrate our customers to the Metronet network to the extent possible.
The Metronet network currently consists of over 204 kilometers of
fiber-optic pathways. We expect the network to be increased to over 370
kilometers by the end of 2000. We are also scheduling the construction of
networks in other cities in Mexico, as follows:
o We will construct a network in Monterrey, and expect to have Phase I
of the 43 kilometer network completed by the end of the first quarter
of this year.
o We have scheduled the construction of a network in Guadalajara, which
we believe should be completed in the third quarter of this year.
o We have scheduled the construction of a 47 kilometer network in Ciudad
Juarez, which we believe should be completed in the fourth quarter of
this year.
o We have scheduled the construction of a network in Puebla and Leon,
which we believe will be completed in 2001.
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o We intend to enter into alliances with third parties that currently
own networks in Chihuahua and Tijuana.
We use an IP-based network architecture in all of our markets except
Mexico, which, due to current customer requirements, uses primarily an ATM/frame
relay system. We intend, as the market allows, to migrate all of our current
customers in Mexico to our IP-based system and intend to use our IP-based system
for new customers.
Our Customers. Our customer base in Mexico consists of businesses which
subscribe to our Network Services, high-speed Internet and web hosting services.
The customers include multinational corporations, governmental agencies and
other businesses in different industries, including banking, insurance,
manufacturing, tourism, and retail operations. We intend to expand our marketing
efforts in Mexico to a broader customer base, including residential users and,
as regulatory changes take place, intend to apply for the authority to provide
telephony services.
As of March 1, 2000, our top customers in Mexico were as follows:
o MCI Worldcom
o Grupo Seguridad Integral, S.A. de C.V. (Cometra)
o Qualitas Compania de Seguros, S.A. de C.V.
o Internacional de Ceramsca, S.A. de C.V. (Interceramic)
o Intermedia Communications Inc.
o Liberty Mexico Seguros, S.A.
o Independencia, S.A. (Financiera Independencia)
o Ernst & Young Mexico
o Generali Mexico Compania de Seguros, S.A.
o Compania Sherwin Williams, S.A. de C.V.
o CBI Grupo Financiero
o Samsung Electronics, S.A. de C.V.
Competition. The telecommunications market in Mexico is more
competitive than most other markets in which we currently operate. Intervan was
the first company offering data transmission services in Mexico and is the
largest company in the industry independent of carriers. We believe no other
provider of bundled high-bandwidth services in the market focuses on "last mile"
solutions as we do. As a result, we believe we can successfully increase our
penetration in the Mexican market by adapting operating strategies similar to
those we have used in our other markets.
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There are few companies offering comparable comprehensive datacom
services in Mexico, and almost all are carrier-related. Our primary competitors
in Mexico today are Telmex, Avantel and Alestra. Additional data service
companies that are indirect competitors because of a different product offering
(namely analog-based services) include Optel and InfoAccess. A summary of key
operating data is listed below. Neither Avantel nor Telmex provide services
beyond connectivity.
InterVan Avantel Alestra Telmex
-------- ------- ------- ------
FR Ports 2,200 560 980 4,500
ATM Backbone YES YES YES YES
Customers 520 100 150 980
Value Added Services YES NO NO NO
Outsourcing YES NO NO NO
Market Share 18% 5% 6% 70%
Telmex is the largest provider of packet-switched data communications
in Mexico through its subsidiary Red Uno. Telmex has successfully capitalized on
its advantage as practically the sole owner of local loops, public switches and
last-mile connections in many parts of the country. Telmex acquired Red Uno, a
data services company in 1996, which allowed it to position itself as a
facilities based VAS provider. Telmex also offers nationwide Internet services
under its wholly owned subsidiary UniNet, which it merged with Red Uno. Avantel
(which is a joint venture of MCI and Banamex Accival) operates an extensive
long-haul fiber optic backbone in Mexico and focuses primarily on providing
capacity for long-distance and Internet traffic. Because of Telmex's high
interconnection prices and backbone unreliability, Avantel has been able to
position itself as the main provider of Internet access to ISPs in Mexico.
However, Avantel has not been able to acquire a critical mass of customers that
require wide area connectivity, virtual private networks, or other services that
use frame relay and ATM transmission technology. Alestra, which is a joint
venture of AT&T, Grupo Alfa and Bancomer, has chosen to focus its energies on
increasing its long distance business instead of providing datacom services.
Central America
General. Our Central American market region operations are conducted in
seven countries--El Salvador, Guatemala, Panama, Costa Rica, Nicaragua, Honduras
and the Dominican Republic. We have over 32,000 customers in those market areas,
including 750 high-speed data customers (representing over 2,000 connections),
and 1,900 dial-up and high-speed Internet customers. When we complete the
Metrotelecom transaction (as described below), we will add 12,700 additional
customers to that subscriber base, including 510 high-speed data customers,
4,200 dial-up and high-speed Internet customers and 8,000 CATV customers.
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We began our operations in the region in 1998, when we acquired an
interest in an operating cable television system in El Salvador. That system is
the largest CATV system in El Salvador. We also provide network services, high
speed and dial-up Internet access, web hosting and telephony services.
In December 1999, we added to our operations in the region by acquiring
all of the operations of GBNet Corporation, or GBNet, which provides data
networking and internet access services through seven subsidiaries to over 400
high-speed data customers (representing over 1,200 connections) and over 1000
dial-up Internet customers in Guatemala, Honduras, El Salvador, Nicaragua, Costa
Rica, Panama and the Dominican Republic. The seller of GBNet was General
Business Machines Corporation, or GBM, the exclusive general distributor of IBM
products and services in several Latin American countries, including the
countries in which GBNet operates. In connection with that transaction, we also
entered into a number of other agreements with GBM, including a
commercialization agreement under which GBNet and GBM agreed to recommend one
another as a preferred provider of services and products, an equipment purchase
agreement under which GBM agreed to provide GBNet with preferred purchasing
terms on any IBM equipment it acquires from GBM for its operations, and a
network management agreement, under which GBNet will provide GBM with managed
data network services connections.
Finally, in December 1999, we entered into a letter of intent to
purchase the stock of Grupo Metrotelecom, S.A., a Guatemala holding company that
conducts high-speed data, dial-up and high-speed Internet and telephony services
in Guatemala, and the assets of an affiliate of Metrotelecom, S.A. that provides
CATV services using its own fiber and coaxial cable network. Grupo Metrotelecom,
S.A. and the CATV affiliate are referred to in this report collectively as
"Metrotelecom". Metrotelecom currently has over 8000 CATV customers, 510
high-speed data customers (representing 1,500 connections), 4200 Internet
customers and processes over 6 million telephony minutes per month. Unless
otherwise noted in this report, the information regarding our markets,
operations, subscribers and networks assumes the consummation of the
Metrotelecom acquisition. As described in more detail below, the December 1999
letter of intent expired in January 2000, but we and the sellers are still
negotiating the terms of the final documents for the transaction in good faith,
and we expect to close the transaction in early April, when we receive the last
of the governmental approvals for the transaction. We cannot give any
assurances, however, that the acquisition will take place, or that it will take
place on the terms described below.
The following information summarizes our Central American market
operations:
El Salvador.
General. We currently have over 30,000 customers in El Salvador. Those
customers include approximately 29,000 CATV subscribers, 550 network services
and high speed Internet access customers (representing over 875 connections) and
800 dial-up Internet customers. Those customers include approximately 45
high-speed data customers we acquired as part of the GBNet acquisition in
December 1999. The balance of our El Salvadoran customers are serviced through
Chispa Dos, Inc., or Chispa, a holding company in which we hold an approximate
33% interest that conducts operations exclusively in El Salvador. Chispa has
four operating subsidiaries, two of which provide cable television services, one
of which provides data transmission and Internet access services, and the last
of which will provide telephone services. Under the terms of our acquisition of
our interest in Chispa, we also acquired operating and management control of
that entity.
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The cable television operating subsidiaries are, together, the largest
cable television providers in El Salvador, with over 75,000 homes passed and
over 29,000 subscribers. Those subscribers represent approximately 47% of the
CATV market in El Salvador. The data services and Internet access operating
subsidiary launched its services in early 1999 and signed up approximately 333
subscribers in its first two weeks of operations. That system provides Internet
access over the public switched system to over 800 subscribers and high-speed
data services to over 550 subscribers (representing over 875 connections). In
addition, we recently executed an interconnect agreement with the incumbent
telephone provider in El Salvador, which allows us to provide telephony services
in that country. As of March 15, 2000, we were processing over 900,000 minutes
of telephony per month.
Our Market Opportunity. We believe El Salvador presents significant
opportunities for providers of bundled telecommunication services. In addition,
we believe El Salvador presents favorable market conditions and has demonstrated
its intent to promote telecommunications investments by adopting a fairly open
regulatory regimen.
Despite increased investment in the telecommunications sector since the
end of the El Salvadoran 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 approximately 8.7%, and the average
waiting time for a new line was over five years. The unmet demand for telephone
lines is estimated to be between 500,000 and 800,000 lines. This need will
contribute to strong demand for new telephone services and, in addition, the
market for international-long distance services benefits from the approximately
1 million Salvadorans living in the United States. Approximately 80% of the
international long distance revenues from calls to El Salvador are generated by
traffic from the United States.
El Salvador has Central America's second largest economy. In 1998, it
had an annual growth in real gross domestic products of approximately 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. The El Salvador inflation rate is also relatively low, and was
approximately 4.1% per annum in 1998 and 3.5% in 1999. El Salvador's exchange
rate has also been historically stable.
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El Salvador's population is approximately 6.2, million with
approximately 1,625,000 of those persons living in the capital city of San
Salvador. San Salvador is the financial, commercial and political center of El
Salvador and has one of Central America's highest population densities. The
total number of urban households in El Salvador is approximately 725,000, and
the average buying power per urban household is approximately $9,620. The top
three out of five urban socioeconomic segments present approximately 42% of the
total households in the country.
Regulatory Environment. El Salvador's telecommunication law 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 break up 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, resolves
conflicts over interconnection and access issues, awards concessions and also
allocates frequencies. Concessions or licenses are required to provide local,
long distance services and wireless services, although there are typically no
build-out requirements. The 49% limitation on foreign ownership is only
applicable to radio broadcasting and television licenses. While rates for
telecommunication services are generally capped, operators are free to set their
actual rates anywhere below the cap. Data service providers, including ISPs, are
not required to obtain a concession or license to offer their services.
Under the Telecommunications Framework Law, private companies can
currently provide the following telecommunications services in El Salvador:
o Wireline Voice (local and long distance)
o Data Services
o Internet access
o Value added services
o Wireless services
o Cable television
Network Architecture. As part of our strategy to provide bundled
high-speed internet access and data connectivity to our customers, we completed
the construction of our El Salvador network in early 1999, which consists of a
fully redundant 100 kilometer fiber-optic ring interconnected with 70 kilometers
of 750 MHz two-way coaxial cable. The all-aerial network uses coaxial cable for
"last mile" connectivity to our subscriber locations. The network covers
approximately 85% of the business community of San Salvador. In areas of new
development, we initially intend to use wireless communications to provide
services using wireless rights we acquired in 1998, and then deploy cable
through areas of higher density. We also completed the construction of a central
network operations center, or NOC, which monitors our El Salvadoran network 24
hours a day, seven days a week, and provides real-time alarm, status and
performance information and a network point of presence, which provides an
efficient method for detecting potential system faults before they occur and
minimizes our response time. During 2000, we intend to complete the upgrading of
approximately 35% of our network to a 750MHz system.
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Our Customers. We believe we have achieved significant penetration
levels among our targeted CATV customers, and we are now expanding our marketing
efforts in El Salvador for our CATV services to a broader residential customer
base, including to subscribers in the cities of San Miguel and Santa Ana. For
high-speed internet and data transmission services, we target multinationals,
government agencies, and other businesses in different industries, including
banking, manufacturing, tourism and retail operations. We recently signed an
interconnect agreement with the incumbent telephone company, which allows us to
provide telephony services in El Salvador. We intend to market these services to
large multinational corporations, governmental agencies and other business in
different industries, and thereafter, to a broader range of residential and
commercial operations.
As of March 1, 2000, our largest customers in El Salvador were as follows:
o Hotels - Camino Real Intercontinental, Alameda, Princess, Marriot,
Holiday Inn, Siesta, Mediterraneo Plaza, Novo, Puerto Bus
o Hospitals - Centro Ginecologico, Hospital de Emergencias, Centro
Pediatrico, Hospital de la Mujer
o High Speed Internet - Liceo Frances, Del Sur S.A. de C.V., Compania
Comercial Curacao, Adan Romero, Newcom El Salvador, S.A. de C.V.,
D'Casa S.A. de C.V., Ministerio de Educaion de El Salvadaor, Edmundo
Rodriguez, Corpoweb.com S.A. de C.V., Fonseca Computadoras S.A. de
C.V.
Competition. Until its privatization, the national telephone company
supplied all public telecommunication services in El Salvador. Beginning in July
1998, various entities acquired control of portions of El Salvador's
telecommunication service industry and, as a result, we currently have a number
of competitors in El Salvador for each of our service offerings. We believe,
however, that we are currently the only integrated service provider that is
capable of delivering bundled broadband, high-speed internet access, data
transmission, voice and video services to a broad range of customers.
Based on available data, we believe our market shares for our services
are approximately 47% for cable television, and 50% for Internet access.
Information for data transmission is not generally available. Our primary
competitors in El Salvador, the markets in which they compete and their relative
market shares, are as follows:
o Cable Television--Cable Color (34%),
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o Internet Access--Salnet (21%), CTE (12%), Vignet (12%), Cytec (7%)
o Data transmission--CTE (N/A), Tortsatelsa (N/A)
Guatemala.
General. We recently entered into a letter of intent for the purchase
of Metrotelecom, a holding company and its affiliate in Guatemala that provide
Internet access, network services, CATV and local and long distance telephony
services. Metrotelecom provides services to approximately 8,000 cable
subscribers (with over 50,000 homes passed), 4,200 Internet subscribers and 500
high-speed data customers. Metrotelecom is the largest ISP in Guatemala and the
second largest provider of CATV services. In addition, Metrotelecom is
processing approximately 8.5 million minutes of telephony per month, which makes
it the largest aggregator of local minutes after the incumbent telephone
operator and the nationalized cellular phone company. We believe that, by
acquiring Metrotelecom, we will establish ourselves as a premier provider of
broadband, high-speed internet access and data transmission services, voice and
video services to businesses and residential customers in Guatemala.
We originally agreed to acquire Metrotelecom in February 1999. Under
the terms of that original agreement, we agreed to purchase 60% of the holding
company for the ISP, high-speed data and telephony services, but not the
affiliate that owns the fiber optic network those companies use to provide their
services, or the CATV subscribers. In December 1999, we restructured the
transaction and agreed to acquire 100% of the holding company (rather than 60%),
plus the assets of the affiliate that owns the fiber optic network and CATV
subscribers. The letter of intent called for a closing of the transaction no
later than January 2000 (at which time the letter of intent technically
expired), but the parties have agreed to extend their negotiations regarding our
acquisition of the operations and assets, and we expect to complete the
acquisition in April 2000. In addition to the subscribers we expect to acquire
in the Metrotelecom transaction, we acquired 6 high-speed data (representing
over 20 connections) and 119 dial-up Internet customers in Guatemala in
connection our acquisition of GBNet in December 1999.
Our Market Opportunity. We believe Guatemala offers significant
opportunities for bundled telecommunication services. Guatemala has rapid
economic and population growth, low penetration of telephone and data
transmission services and a relatively open regulatory regime. At present,
Guatemala's teledensity is 5.3%, the lowest in Central America after Honduras
(4%) and Nicaragua (3%). However, we believe Guatemala's relatively large
population, combined with recently favorable economic conditions, provides a
significant potential for telecommunications services growth. According to
industry experts, Guatemala's telecommunication sector will experience
significant growth following the successful privatization of Telecommunicaciones
de Guatemala, or Telgua, in October 1998 and the entry of new service providers
into the market. Telgua estimates current demand for its phone lines totals
approximately one million lines, and the official waiting list is for 400,000
lines. The teledensity in Guatemala is expected to double by the end of 2001.
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Guatemala has the largest economy in Central America, with a gross
domestic product of approximately $18.6 billion. It has shown relatively strong,
sustained growth, averaging 4.1%, over the past four years. We believe 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 addition, in 1996, Guatemala's government passed legislation
to liberalize and privatize the telecommunications and electricity sectors.
The population of Guatemala is approximately 12 million. Guatemala
City, the capital of Guatemala, has a population of approximately 2.1 million
and is the industrial and political center of the country. The total number of
urban households in Guatemala is approximately 720,000, and the average buying
power per urban household is approximately $14,138. The top three of out five
urban socioeconomic segments in Guatemala represent approximately 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 providing and
regulating telecommunications services in Guatemala. As of May 1997, operators
of telecommunications 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 telephony
providers, including a subsidiary of Metrotelecom. These agreements obligated
Telgua to provide interconnection services. Telgua initiated performance under
these agreements in February of 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. Currently, privately held companies can provide wireline voice
services (local and long distance), data services, dial-up Internet services,
dedicated data services, private network services and value added services.
Network Architecture. We will provide our services in Guatemala
primarily through Metrotelecom's network in Guatemala City, which consists of 90
kilometers of fiber optic infrastructure with six nodes interconnected with 200
kilometers of coaxial cable. The network, which is all underground, uses coaxial
cable for "last mile" connectivity to subscriber locations. We have also secured
two blocks of frequency in Guatemala's wireless telecommunications spectrum to
provide our services through broadband multi-point wireless transmissions. In
1999 we leased a 256 MHz microwave connection, which we intend to increase to
512 MHz between our network in Guatemala and our network in El Salvador, which
provides us with a long distance interconnection for our services. We also built
a central NOC in Guatemala City, which will monitor the Guatemalan network 24
hours a day, seven days a week, and provide real-time alarm, status and
performance information. Metrotelecom's network in Guatemala covers
approximately 70% of the business community of Guatemala City.
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Our Customers. As of March 1, 2000, Metrotelecom's top business
customers in Guatemala were as follows:
o United States Embassy o Cemaco
o Industria Nacional De Alimentos (INA) o Alamacenes Paiz
o Vecesa o Aprofam
o Xerox o Mislion Diamarca
o Minugua o Mision Tecnica Alemana (GTZ)
o Bolsa de Valores Nacional o Ministerio de Energia y Minas
Competition. Internet services were first 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. We
view the market for internet access services to individuals as competitive and
somewhat fragmented, but we believe 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 telecommunication services in Guatemala. At the
end of 1997, Telgua had 430,000 lines in service out of a total of 630,000
installed lines. In addition to Telgua's core business of providing local,
long-distance and international telecommunication services, it provides leased
lines, data network services, and telegraph services. Telgua has executed a
number of access agreements with other operators that are planning to provide,
or have already begun providing, domestic or international voice services. We
expect our competition in this area to increase, but believe we will have an
advantage over our competitors because our services are more reliable and cost
effective.
In the cable television market, there is one other main provider of
CATV services in Guatemala City, and hundreds of smaller providers operating in
rural areas throughout the country. We believe Metrotelecom's CATV operations
are the second largest cable television operations in the country.
Based on available data, we believe we will have approximately 32% of
the Guatemalan market for Internet access, 5% of the Guatemalan market for data
transmission and 16% of the Guatemalan market for CATV once we complete the
Metrotelecom acquisition. Upon the completion of that transaction, our primary
competitors in Guatemala, the markets in which they compete and their relative
market shares will be as follows:
o Internet access--Infovia (23%), Quicknet (13%)
o Data transmission--Telgua (73%), Totalcom (7%), Cablenet (7%)
o CATV--Maya Cable (77%)
o Telephony--Telegua (above 70%)
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Panama
General. In 1999, we completed the construction of phase one of our
network in Panama and began offering a full range of network services and high
speed Internet access. As of the date of this report, we have approximately 267
customers in Panama (54 high-speed Internet access and network services
customers and 213 dial-up Internet customers) which includes the operations we
acquired in the GBNet acquisition. In 2000, we intend to build transmission
nodes in Colon and Los Pueblos, extending our services to those areas.
Our Market Opportunity. We believe the Panamanian market provides
significant opportunities for bundled telecommunications services. We believe
there is significant unmet demand in Panama for basic telephone services,
reliable data transmission and Internet services, but that the country enjoys
favorable economic conditions and an open regulatory regime for Internet access,
data transmission and value-added services.
Cable & Wireless Panama, or CWP, currently dominates the market for
basic local, national and international voice services through its exclusive
license, which will expire on January 1, 2003. CWP has announced an aggressive
network buildout over the next few years, as it attempts to gain market share
prior to losing its exclusive market position. Panama's teledensity of 15.4%,
however, shows that there is still a high, unmet demand and growth opportunities
for telephone services. In addition, we believe that the deregulated market for
Internet access, data transmission and value-added services provides
opportunities for companies like ours to become a significant provider of
bundled high-band width, high-speed Internet access and data transmission
services in Panama.
Panama's economy is based on a well-developed services sector that
accounts for approximately 70% of the country's gross domestic product. These
services include the services relating to the operation of the Panama Canal,
banking, insurance, governmental operations, the Transisthmian Oil Pipeline, and
the Colon Free Zone, or CFZ. Panama's economy grew by approximately 1.5% in 1998
and is expected to have grown by approximately 3.1% in 1999, resulting in a
gross domestic product for Panama of approximately $8.7 billion. Panama has a
population of approximately 2.7 million, and the top three urban socioeconomic
segments represent 43% of total households. There are approximately 365,000
urban households, and the average buying power per urban household totals
approximately $8,865.
Regulatory Environment. The new Telecommunications Law of 1996, and the
subsequent sale of a controlling stake of Panama's national telecommunications
monopoly, have significantly affected the telecommunications industry in Panama.
We believe these two events mark the start of a liberalization of the
telecommunications sector, which is expected to continue on January 1, 2003,
when CWP's exclusive right to provide local and international telephony
services, dedicated voice circuits and public and semipublic terminal services
will end. At that point, a number of telecommunications services in Panama will
become completely deregulated and opened to competition.
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In July 1999, Panama passed a new law regulating television, cable
television and broadcasting services. The law, Law No. 24, provides that both
television and broadcasting services are now considered public services subject
to the supervision of Panama's regulatory entity, Ente Regulador de los
Servicios Publicos, or ERSP. As in the case of other telecommunications
services, concessions for the provision of television and broadcasting services
are granted by ERSPS. Procedures for obtaining concessions of those services or
similar to those established for other telecommunication services. As of the
date of this report, the markets for data services, Internet value-added
services, trunking, satellite services, VSAT, and interactive multi-casting to
private user groups is open to competition in Panama. Basic vocal services, as
well as basic local and international services, dedicated voice circuits and
personal telecommunications services are closed. As of January 2003, all markets
currently closed are scheduled to be opened, but the law is unclear with regard
to the provision of data services using cable installed plant and IP telephony.
Network Architecture. In 1999 we completed construction of three
wireless hubs in Panama City to deliver Internet access and data transmission
services using a portion of the Panamanian radio frequency. In addition, we
completed the construction of a NOC in Panama City and deployed a fiber-optic
connection between our wireless hubs using pole rights we obtained from a local
power utility. Our network currently covers approximately 60% of the central
business district of Panama City.
Customers. We intend to provide our high-speed Internet access and data
transmission services to the large business community located in Panama City.
The Panamanian economy is dominated by a well-developed services sector that
includes the Panama Canal, banking, insurance, government and the CFZ. In
addition, we intend to market our dial-up Internet access services as an
additional service for our high-speed Internet and point-to-point customers. We
also intend to aggressively market our regional dial-up services, which we
believe will be available in the second quarter of 2000.
Competition. Internet services first became available in Panama
following the launch of a microwave link with Costa Rica in June 1994. There are
five major ISPs conducting business in the Internet services market that have a
combined customer base of approximately 35,000 subscribers. Two of these
competitors (CWP and Cable Onda) currently provide a combination of Internet
access and data transmission.
We started offering services in Panama at the beginning of 2000. Our
primary competitors in Panama, and the market shares which they hold, are as
follows:
o Internet Access--PSINET (51%), Orbinet (35%), CWP (40%), Bell South
(3%)
o Data Transmission--Telpan (15%), CWP (75%), others (10%)
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Costa Rica.
General. In 1999 we completed the installation of our NOC and one hub
as part of our metropolitan area network in San Jose, Costa Rica and, under the
terms of the GBNet acquisition, acquired 3 high-speed data customers, including
GBM, in the country. Those customers represent over 8 connections. We provide
the high-speed data services through an agreement with RACSA (using its
network), and we provide international connectivity to those customers using
GBNet's frame relay network. We also currently provide one-way video, data and
audio connection to 10 customers in Costa Rica, and are conducting technical
tests for remote surveillance video services.
Market Opportunity. We believe the Costa Rican telecommunications
market presents strong opportunities for providers of bundled telecommunication
services, based on the anticipated deregulation of the market, favorable
economic conditions, and absence of a single company offering combined
telecommunications services.
We also believe the telecommunication sector in Costa Rica is more
developed than most of the 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
telecommunications market and the expected increase demand for telecommunication
services.
Costa Rica experienced a 46% growth in CATV subscribers in 1997,
equating to a 9.3% penetration of the estimated 600,000 TV households. That
penetration rate is below the Latin American average of 13.9%, indicating a
potential for continued subscriber growth. Over the next five years, the CATV
market is forecast to grow at an average rate of approximately 28%. As of 1999,
there were 40,000 commercial Internet dial-up subscribers in Costa Rica, up from
20,000 subscribers in 1997, reflecting an annual growth rate of 100%.
Costa Rica has a population of 3.7 million, and has been recovering
steadily from its 1996 economic contraction.
Gross domestic product increased 3.2% in 1997, approximately 5% in 1998
and is expected to have increased approximately 1.7% in 1999, resulting in a
total gross domestic product of approximately $9.7 billion. There are
approximately 410,000 urban households in Costa Rica, and the average buying
power per urban household is approximately $8,928. The top three out of five
socioeconomic segments represent approximately 50% of all households.
Regulatory Environment. In March 2000, Costa Rica's government passed
legislation that will significantly restructure the country's telecommunications
sector. The underlying approach to the legislation is a gradual liberalization
of several key markets during the two or three years following its adoption. The
privatization of Instituto Costarricense de Electridad, or ICE, the national
telephone company, is currently not under consideration. Prior to the adoption
of the new law, cable television was open to competition, but private data
networks could be established only for a company's private use. Also, it was not
legal to provide data networking service to anyone other than the actual owner
of a network. We believe the new legislation for the restructuring of the
country's telecommunication sector will open local voice, international long
distance, data services, Internet access, and wireless voice services to
competition.
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Network Architecture. In 1999, we completed two wireless
telecommunications hubs (including one located at our NOC) which will, subject
to our receiving appropriate approvals, enable us to deliver Internet access,
data transmission and video services using a portion of the Costa Rican LMDS
wireless telecommunications spectrum. In addition, we have installed over 2.8
kilometers of fiber-optic cable hubs, as the first step toward building a
fiber-optic ring that will allow us to interconnect our wireless hubs and our
NOC/hub. The fiber-optic cable run is in the downtown area in one of the central
business districts of San Jose. Our NOC, which we completed in 1999, will
monitor our network operations in Costa Rica 24 hours a day, 7 days a week, and
provide real-time alarm, status and performance information.
The complete technical plan for our network deployment in Costa Rica,
once deregulation occurs, will include the installation of a total of 4 hubs
connected using our wireless spectrum rights and an approximately 56 kilometer
fiber-optic ring. The network, once completed, will cover approximately 80% of
the business sectors of the San Jose metropolitan area.
Our Customers. Subject to our receiving appropriate governmental
authorization, we intend to provide our bundled services initially to business
customers in San Jose, which has a population of approximately 1.3 million. We
intend to offer our high-speed data transmission services to corporations, banks
and financial institutions, chain stores and supermarkets, and our high-speed
Internet access to the top level of socioeconomic segment residential customers,
multi-nationals, universities and import/export corporations. In addition, we
intend to market our dial-up Internet access services to residential customers
in the second socioeconomic segment as an added value to business high-speed
clients, and to small and medium sized companies. We are currently providing one
one-way audio video and data connection to customers.
Competition. There is currently only one Internet service provider
operating in Costa Rica, which is known as RACSA. RACSA has approximately 20
authorized resellers. These companies act as resellers for both Internet access
and data transmission services. We believe the deregulation of the Costa Rican
telecommunications laws will allow us to compete in the market for Internet
services and other value-added services.
ICE, through RACSA, is the sole provider of bandwidth within Costa
Rica, so there is presently no developed market for companies to offer dedicated
data transmission services to corporate customers. ICE'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 as a result of the ratification of the proposed
telecommunications law, we believe that, with our infrastructure in place and
operational, we will be well positioned to provide dedicated data transmission
services to customers. We believe we can differentiate ourselves from other
potential competitors in the Costa Rican market by offering speed and network
reliability, integrated services and solutions for our customers'
telecommunications needs, 24-hour technical and customer support and quick
installation.
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The most aggressive competitors in the market place are two television
companies, Amzak (Cable Color) and Cable Tica, which use existing fiber optic
rings to provide their services and already are providing Internet services via
cable modem.
Nicaragua, Honduras and the Dominican Republic.
General. We acquired our Nicaraguan, Honduran and Dominican Republic
operations when we acquired GBNet. We currently have over 633 customers in those
market countries, consisting of 34 high-speed services customers (representing
over 100 connections), and 599 dial-up Internet customers. We service those
customers through the infrastructure arrangements we acquired in the GBNet
acquisition.
Our Market Opportunity. We believe the Nicaraguan, Honduran and
Dominican Republic markets offer growth opportunities for bundled
next-generation telecommunications systems, given the significant unmet demand
for telephone communication services and the growing demand for other
telecommunication services in those markets. The teledensity in Nicaragua,
Honduras and the Dominican Republic are, respectively 3%, 4% and 9.5%, which in
each case is below the average of approximately 12% for Latin America. Based on
data for 1993, Nicaragua had only 67,000 telephones, Honduras had only 105,000
telephones and the Dominican Republic had only 190,000 telephones.
Over the past eight years, Nicaragua has witnessed a significant
increase in its economic prospects. Notwithstanding this progress, it still
remains among the poorest countries in the western hemisphere, with a 1998 per
capita gross national product of $410. Hurricane Mitch also significantly
affected the country's economy. Gross domestic product growth was projected to
be approximately 6% for each of 1998 and 1999, but (primarily because of
Hurricane Mitch) actual gross domestic product growth was only 4% in 1998 and is
expected to be 6% in 1999.
Honduras also ranks amongst the lowest-income countries in the western
hemisphere. Prior to Hurricane Mitch in the fall of 1998, Honduras was pursuing
a modern economic reform program and had posted strong annual growth numbers.
Hurricane Mitch, however, dramatically changed economic forecasts for Honduras.
Honduras sustained approximately $3 billion in damages as a result of the
hurricane and will probably see gross domestic product shrink by approximately
2% in 1999. Significant aid to the country has helped stabilize the economy and,
in addition, the Paris Club and bilateral creditors have offered substantial
debt relief to the country. The two largest cities in Honduras are Tegucigalpa,
which has a population of approximately 2 million people, and San Pedro Sula,
which has a population of approximately 1 million.
The Dominican Republic is also one of the poorer Latin American
countries. In December 1996, incoming President Fernandez presented a reform
package for the Dominican Republic that included a devaluation of the peso,
income tax cuts, a 50% increase in sales taxes, reduced import tariffs and
increased gasoline prices, all in an attempt to create a market-oriented economy
that could compete internationally. Most of these reforms were stalled in the
legislature, but the economy grew vigorously in 1997 and 1998, with tourism and
telecommunications leading the advance. The government is working to increase
electric generating capacity, which it considers a key to continued economic
growth, but the privatization of the state electricity company was met with
several delays. In late September 1998, Hurricane Georges caused approximately
$1.3 billion in damages to the country's agriculture and infrastructure.
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Regulatory Environment. The regulatory structure for telecommunications
services in Nicaragua, Honduras and the Dominican Republic differs
substantially:
o Nicaragua. Beginning in August 1994, Nicaragua's telecommunication sector
underwent a series of major transformations. At that time, the Instituto
Nicaraguense de Telecomunicaciones y Correos was divided into two legal
entities--Telcor and Eintel. TELCOr became Nicaragua's regulatory agency, and
EINTEL took over the functions of the country's nationalized telephone company.
The objective was to begin the process of incorporating new investors in EINTEL
through major changes in the Nicaraguan telecommunications laws. The August 1994
actions were followed by the approval, in August 1995, of the General Law of
Telecommunications and Other Postal Services (Law No. 200), and the promulgation
of telecommunications regulations under Decree No. 19-96. In March 1996, the
Nicaraguan assembly enacted the Telecommunications Framework Law (Law No. 210),
which established a new regulatory environment and paved the way for the break
up and privatization of the government-owned monopolies on telecommunication
services. That law also provided for the sale of 40% of the shares of EINTEL to
the public.
TELCOR, the regulatory entity in charge of regulation and
oversight of the telecommunication sector, is charged with establishing prices,
resolving conflicts over interconnection and access issues, and also awards
concessions and allocates frequencies. In December 1999, Law No. 326 modified
Article 29 of Law No. 200 by deleting the limitations on foreign ownership.
Those limitations formerly required majority ownership of telecommunications
companies to be held by Nicaraguan citizens. The 49% limitation on foreign
ownership now only applies to mass media, which Nicaragua designates as radio
broadcasting and television.
The telecommunications law governs five sectors:
o Public services, which are designated as essential, of utility and of
general importance to the habitants of Nicaragua
o Services of general interest, such as other public services, not
including essential public services, which are offered to the public
under the guidance of TELCOR
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o Services of special interest, which are offered by an operator with a
limited number of clients
o Services of particular interest, which are services established by a
national or legal entity to satisfy its own needs, and
o Non-regulated services, which are services generally designated as
being those services that may be operated without substantial
limitations or governance from TELCOR
o Dominican Republic. In the Dominican Republic, the legal framework for
telecommunications is based on General Telecommunications Law 153-98, which was
enacted in 1998, the resolutions promulgated under that law and the concession
agreements that have been entered into by the Dominican Republic with individual
service providers. Law 153-98 is the result of a joint government and industry
project conducted with the assistance of the ITU. As part of this process, the
ITU drafted a proposed telecommunications law and various regulations, including
interconnection and tariff regulations, in consultation with Dominican
telecommunications carriers.
The Constitution of the Dominican Republic also affects the
telecommunications sector. Among other individual and social rights, the
Constitution guarantees Dominican citizens the freedom of trade. The
Constitution specifically provides that monopolies may be established only for
the benefit of the Dominican government and must be created by law.
Law 153-98 established a basic framework to regulate the installation,
maintenance and operation of telecommunications networks and the provision of
telecommunications services and equipment. The law adopted the "universal
service principal," by guaranteeing access by telecommunications services at
affordable prices in low income rural and urban areas. The law creates a fund
for the development of the telecommunications sector that is supported by a 2%
tax on industry participants' billings for all telecommunications services. The
law eliminated the former 10% tax charged on billings of international and
domestic long distance traffic to customers.
Law 153-98 created an independent regulator with strong regulatory
powers, the Instituto Dominicano de las Telecomunicaciones, or INDOTEL, and
established the regulator's responsibilities, authorities and procedures.
INDOTEL is charged with implementing telecommunications development projects to
satisfy the requirements of the universal service principal. Law 153-98 grants
INDOTEL control over all frequency bands and channels of radio transmission and
communications within the Dominican Republic and over its jurisdictional waters.
Law 153-98 encourages competition in all telecommunications services by
enforcing the right to interconnect with existing participants and ensuring
against monopolistic practices, but it also recognizes the legality of certain
concessions that are currently operational. The law establishes mechanisms to
set cost-based interconnection charges and to resolve interconnection disputes
by requiring existing operators to amend their interconnection agreements
consistent with the new requirements. The law also eliminates cross subsidiaries
and provides for progressive rates, and re-balancing of the tariffs that
traditionally have been subsidized, in order to reflect costs more accurately.
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We believe the increase in tariffs stipulated in the telecommunications
law will have a direct positive impact on our revenues, since approximately 70%
of our local access lines are primary residential lines and a greater percentage
of our network will consist of primary or first lines as we expand our local
network. In addition, interconnection costs have been reduced to reflect costs
more closely, which should result in higher margins for our operations. We also
expect the increase in demand for long distance services stemming from reduced
long distance fees to encourage continued long distance traffic growth.
o Honduras. In October 1995, the Honduran National Congress enacted
Ordinance 185-95. The Ordinance modified the Organic Laws of the Honduran
Telecommunications Company, which was enacted in May 1976, and which created the
National Commission of Telecommunications. The goal of the Ordinance is to
promote the modernization and privatization of the various telecommunications
sectors.
In September 1998, the National Congress adopted Ordinance 244-98,
which provided for the creation of a publicly and privately funded entity to
oversee the operation and regulation of the Honduran telecommunications industry
and the grant of concessions and licenses. That entity is currently evaluating
various proposals for the private funding.
Network Architecture. We provide our services in Nicaragua, Honduras
and the Dominican Republic primarily through the networks owned by the incumbent
telecommunications companies. In Honduras, the government owned entity HONDUTEL
provides us access to the Internet. In the Dominican Republic, we use a
frame-relay network and leased lines to provide our services. In Nicaragua,
HONDUTEL also provides us with access to the Internet.
Our Customers. Our customer base in Nicaragua, Honduras and the
Dominican Republic consists primarily of the customers we acquired in our
December 1999 purchase of GBNet and its operating companies. Those customers
subscribe to our dial-up Internet high-speed services, and include
multi-national corporations, residential customers and other businesses in
different industries. We intend to expand our marketing efforts in these markets
to a broader customer base.
As of March 1, 2000, the number of our customers and the top customers
in each of these markets were as follows:
o Nicaragua--81 dial-up customers. Our largest customers include Casa
Pellas, Challenge Air Cargo and the Venezuelan Embassy.
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o Honduras--542, of which 24 are high-speed Internet access and network
services customers and 518 Internet dial-up customers. Our largest
customers include Bancansa, Banco Ficohsa and La Curacad.
o Dominican Republic--10 high-speed corporate customers. Our largest
customers include Allegro, E Leon Jimenez and Ray-o-Vac.
Competition. The telecommunications markets in Nicaragua, Honduras and
the Dominican Republic are not as competitive as other markets in which we
currently operate, such as Mexico and Venezuela. We believe, however, that there
is currently no other provider of bundled high-band services in those market
areas that focus on "last mile" solutions.
Based on available data, we believe our market shares for services in
these areas are approximately 5%, 10% and 0% for Internet access and 0%, 20% and
8% for data transmission services in, respectively, Nicaragua, Honduras and the
Dominican Republic. Our primary competitors in these countries are as follows:
o Nicaragua - Telematic, IBW Internet, Alfanumeric, Cablenet and Netport
o Honduras - Netsys, Hondulata, and Hundutel
o Dominican Republic - CODETEL, GTE and TRICOM
Venezuela
General. We launched our Venezuelan Internet access, network services,
and value-added services in August 1998 through the acquisition of Interamerican
Net de Venezuela, S.A., or Inter@net. Inter@net is a Venezuela ISP and
high-speed data provider that provides services primarily over leased lines to
over 2,660 billed customers and 850 prepaid customers (12 of which are
high-speed data customers) in the cities of Maracaibo, Puerto la Cruz, Ciudad
Ojeda and Caracas.
In October 1999, we agreed to lease an existing 65 kilometer
fiber-optic network in Caracas which we will use to provide our services in that
city. The lease is one of a number of agreements that we entered into in
connection with our acquisition of $26 million credit facility from the owner of
the network. The other agreements relating to the credit facility include a
buildout agreement, pursuant to which we can ask the owner of the network to
expand the network to locations we specify, and a commercial services agreement,
pursuant to which an affiliate of the network owner will provide us with billing
and other administrative services.
Our Market Opportunity. We believe the Venezuelan telecommunications
market offers growth opportunities for bundled next-generation
telecommunications services, given the significant unmet demand for telephone
communications services and the growing demand for other telecommunications
services in the market. Telecommunications is one of the fastest growing sectors
in Venezuela, and experienced a 117% increase between 1991 and 1996. The growth
of the market was prompted, in part, by the privatization of the state-owned
monopoly telephone services provider, Compania Anonima Telefonos de Venezuela,
or CANTV, and the liberalization of enhanced telecommunications services in
1991. The sector has benefited during the past few 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 4.0 million subscribers
in 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 in the year 2000, up from 16,000 users in 1996.
Cellular mobile telephone penetration is expected to grow to 6% in the year
2000, up from 4.1% in 1997.
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Venezuela experienced an economic slow-down in 1998 and 1999 due to a
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. Although Venezuela's gross domestic product growth was 5.1% in 1997, it
decreased by .1% in 1998, to $86.6 billion. As a result of the recent election
of President Chavez and the economic and political uncertainty accompanying
those elections, Venezuela is expected to continue experiencing reduced economic
performance in the near term.
Venezuela has a population of 22.8 million, of which 4.9 million reside
in Caracas. In Venezuela, the top three out of five urban socioeconomic segments
represents 25% of the households, and the average buying power per household is
approximately $10,590. The relatively high average buying power per household in
the two top socioeconomic segments 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 access 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 service to competitors in the Venezuelan market. By 2001, we believe
operators will be competing for subscribers in all service areas. We also
believe 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. As of the date of this report, the
markets for data services, dedicated network services, dial-up Internet
services, value-added services, mobile satellite services, trunking and rural
telephony have been privatized, but the markets for basic local telephone
services, domestic long distance and international voice services are currently
closed.
Network Architecture. Inter@net provides its Internet access and
network services through a system owned by the state-owned telephone service
provider. In Caracas, we expect to migrate a portion of our customer base to the
fiber-optic network that we agreed to lease in late 1999. That fiber-optic ring
consists of approximately 65 kilometers of fiber cable, configured in rings and
containing an aggregate of 55 kilometers of fiber cable. The network covers
approximately 90% of the central business district of Caracas. We intend to
construct a similar 60 kilometer fiber network in Maracaibo this year. That
network, when completed, will cover approximately 95% of the Maracaibo central
business district. We intend to migrate our customers from the leased
state-owned system to our networks as soon as possible.
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Customers. We target the higher socioeconomic segments in Caracas,
Maracaibo and Valencia for our Internet access services. For high-speed Internet
and data transmission services, we target multi-national corporations,
governmental agencies and other businesses in different industries, including
banking, manufacturing, tourism and retail operations. These customers are
mainly located in the central business districts of Caracas and the business
districts of Maracaibo and Valencia. As of March 1, 2000, our top business
customers included:
o ABB (Asea Brown Boveri) o Video Phaser
o Nera Telecommunications o Ciber Office
o Noble Drilling o Cyber Cafe
o Khronos Capital o Carl Hansen
o Universidad Santiago Marino o Ven Max
o Richard Meyer o Intellisoftware
Competition. CANTV has provided full service telecommunications in
Venezuela since 1894. Its monopoly for basic telephone services is scheduled to
end in late 2000, by which time it plans to have approximately 3.2 million lines
in service. There are currently two providers of cellular voice services and two
providers of mobile operations services in Venezuela.
Internet service was first introduced in Venezuela in the mid-1990s by
a group of small and medium sized ISPs. By March 1998 there were approximately
38 ISPs in operation. As of year end 1998, the total number of Venezuelan
Internet subscribers was estimated to be 130,000, of which we service
approximately 3%. We believe the data transmissions services market in Venezuela
is fragmented, with at least seven major competitors offering dedicated
value-added and private network data services to corporate customers. The
following information shows the composition of the Venezuelan telecommunications
market in each segment and the approximate market shares of the principal
competitors for those services:
o Internet Access--T-Net (35%), CANTV (23%), Netpoint (6%), Compuserve
(3%)
o Data Transmission--CANTV (N/A), Bantel (N/A), C-Com (N/A)
Our Other Network Rights
Argentina. In August 1997 we formed WCI de Argentina, or WCIA, with one
of our major shareholders. In 1998, WCIA was granted a "value added" license to
provide data services and video conferencing services in Argentina. WCIA is
owned 80% by us and 20% by our shareholder. We do not have any active operations
in Argentina.
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Venezuela. We own approximately 78% of the stock of Caracas Viva Vision
TV, S.A., or Viva Vision, a Venezuelan corporation that acts as the operating
company for a multi-channel television system in Caracas, Venezuela. The license
for the operation is held by Comunicaciones Centurion, S.A., or Centurion. We
also own approximately 8.5% of Centurion. We are currently pursuing an
arbitration proceeding against Donald Williams, one of the persons from whom we
acquired our Viva Vision stock, relating to the breach of the representations he
and the other sellers of the Viva Vision stock made to us when we bought the
stock. As noted in more detail below in our financial statements, in accordance
with generally accepted accounting principles we have characterized our
investment in Viva Vision and Centurion as being impaired.
Utah (U.S.). We own an interest in wireless network rights and a leased
transmitter facility in Park City, Utah. We acquired the Park City rights in
August 1995, and they are held by our wholly-owned subsidiary, Transworld
Wireless Television, Inc. The Park City rights consist of four 2.5 GHz channels.
In accordance with Federal Communications Commission requirements, we broadcast
a carrier signal over the transmitter, but we do not use the Park City rights in
any active operations. We intend to either enter into a joint venture with a
local operating company in Utah to use these rights or sell them to a third
party.
Our Business Operations
We have adopted a number of procedures and policies that we believe
allow us to operate more efficiently and provide better services to our
customers. These policies and procedures include the following:
We Offer Bundled Service Packages. We provide a number of
telecommunications services, and anticipate that we will increase the number and
types of the services we offer as we build out, acquire or launch our
telecommunications systems. Our services include standard telecommunications
services such as high-speed and dial-up Internet access and network services,
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, we allow our
subscribers to bundle our various services into customer-specific packages. We
believe our flexible sales strategy reduces switching barriers for subscribers
who may initially be reluctant to switch all of their telecommunications
services and vendors at one time or who are subject to existing contracts.
Our Pre-Launch Activities. Prior to initiating the buildout of a new
market, we conduct pre-launch studies to evaluate the business market and other
factors relating to market potential. We have already conducted several such
studies in our markets, and have created a development plan that identifies the
subscriber potential of various areas within our markets based on such factors
as television, telephone and data penetration rates, income levels, existing
competition and whether or not we have access to existing fiber-optic or coaxial
cable networks. Based on the results of those studies, we have defined the
probable areas where fiber-optic, coaxial cable or wireless networks may be
required and where there is the greatest potential for subscriber growth. After
we initiate construction of a market's network, and as the construction of the
network nears completion, we generally initiate a marketing program. Our
marketing programs typically include the following:
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o door-to-door sales in commercial buildings
o direct mailings
o television and print advertisements
o advertising on installation vehicles
o Internet web pages
o telemarketing
o participation in professional forums
o marketing tied to regional events such as high interest sporting
events
o free or promotional services to key or high profile users
o where appropriate, the use of resellers, agents and direct marketing
agencies
Our Customer Service. We believe that by providing high levels of
customer service, we will be able to maintain high levels of customer
satisfaction and minimize subscriber turnover. With this objective in mind, we
have adopted operating policies under which:
o we complete installations promptly
o provide prompt customer service 24 hours a day, seven days a week
(using a call center or customer hotline)
o provide timely repair service
o make new subscriber follow-up calls after installation to ensure
customer satisfaction. We also impart a "customer service" mentality
in our employees through ongoing in-house training sessions. We have
also adopted various employee incentive programs linked to achieving
high levels of customer satisfaction.
Our Network Operations Centers. We deploy central node transmission and
switching equipment in NOCs in each of our principal market areas. Our 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 our
network and, with respect to our voice services, to interconnect with local
exchange networks and long distance networks. To ensure that our networks are
working as efficiently as possible, we construct and maintain NOCs which monitor
our various microwave, fiber-optic and coaxial cable networks on a 24 hour a day
basis and which provide our operating personnel with alarm, status and
performance information. The NOCs include equipment which allow us to conduct
preventive maintenance activities of that we can avoid network outages or to
respond promptly to any network disruption that might occur.
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Our Management Information Systems and Billing. In the majority of our
operating markets, we use commercial management information systems which are
tailored to meet the requirements of the telecommunications industry. We intend
to standardize these systems, and anticipate that the integrated system will
allow us to monitor customer service and customer payment patterns, monitor
subscriber equipment and installations, and manage each operating network
efficiently. We also have adopted credit procedures and collection policies
which we believe will minimize subscriber turnover and uncollectable accounts.
In certain instances, such as our operations in Venezuela, we may enter into
services agreements with third parties under which they will provide billing and
collection services for us.
Our Acquisition Strategy
We intend to pursue our expansion strategy in the future by acquiring
broadband telecommunication networks and ISPs that meet our market selection
criteria. We have developed a series of complex criteria to analyze these
prospective acquisitions. These criteria include the following:
o the number of potential business subscribers in the market
o the types of telecommunications services in which the subscribers
would most likely be interested
o license rights and concession
o the existence of established groupings or blocks of network rights
o the nature, quality and extent of service provided by existing and
traditional communications networks in the market
o demographics
o the existence of a strong local strategic partner
o political and economic risk
o governmental regulation
o existing microwave, fiber-optic and/or coaxial cable transmission
facilities
o the potential to add business to our subscriber base by acquiring the
acquisition target's existing operations.
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We also evaluate the potential acquisition's ability to facilitate our use of
economies of scale and to increase our operating efficiencies, particularly
where a market acquisition can add subscribers or add to our existing regional
market operations.
Our Business and Operating Issues.
To operate successfully, we will need to deal with a number of
governmental and operational issues. These issues include the following:
Governmental Regulation. Our services are 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 our ability to own and operate our
networks and provide our 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 our business as a
whole.
Risks of Foreign Investment. We have invested and intend 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 our competitors or companies
upon which the operating companies and network right holders in which we have 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 we intend to or have invested, and otherwise may have
a material adverse effect on our business operations, financial condition and
operations. Our interests in some or all of our market countries could be
adversely affected by expropriation, confiscatory taxation, nationalization,
political, economic or social instability, changes in laws or other developments
over which we have little or no control.
Network Issues. We 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 these governmental agencies will
not seek to limit, revoke or otherwise adversely modify the terms of those
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 the network rights being revoked or modified.
International Currency Risks. A number of the countries in which we
operate, 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 our
operations and business. We have adopted limited foreign currency exchange risk
procedures and intend to adopt a country specific protocol in the future for
dealing with these risks. There can be no assurance, however, that our risk
procedures will be adequate or successful. The value of the our interests in
these countries will depend, in part, on currency restrictions and controls that
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these countries may impose.
International Tax Risks. We have operations in several Latin American
countries and maintain our 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 we do business, there is no universal method or rate of
taxation among our various market countries. In addition, distributions or other
payments we receive from our 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 we own 10% or more of the voting stock, but our ability to claim any such
foreign tax credits and to use net foreign losses may be subject to limitations
and restrictions. We have adopted limited tax planning procedures to mitigate
the international tax risks to which we are subject, but intend to adopt a more
comprehensive set of planning and operational procedures in the future. There
can be no assurance our tax planning will be adequate or successful.
Our Properties and Facilities
Our Equipment. Under our letter of intent with Alcatel, we will not be
obligated to use them as the exclusive provider of our network components. As a
result, we 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 use 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. We believe that, by
employing standardized equipment, we will be able to make appropriate decisions
based on the price of the equipment, with less emphasis on the manufacturer.
Our Office Space. As of March 1, 2000, we lease 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. We believe our office space in Salt Lake City, Utah and San Jose,
California is adequate for our current needs, but we recently began negotiations
for a lease for new office space for our Florida operations. We believe we all
of our leases are on commercially reasonable terms. We also maintain, through
our various subsidiaries and affiliates, office space in a number of the
countries in which we operate.
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Our Network and Other Rights. We hold license rights, either directly
or derivatively, for fiber-optic and coaxial cable networks and microwave
point-to-multipoint telecommunications networks in our markets. We generally
have acquired those rights pursuant to the following:
o the acquisition of direct ownership rights or rights of use
o long-term contracts with third parties
o arrangements where we are the majority or sole owner of the entity
that owns those assets
o contractual arrangements which we believe provide us 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-multipoint microwave communications
networks in most markets that meet our market selection criteria have already
been granted to, or been applied for by, third parties. Therefore, to build and
operate any wireless portions of our networks in new markets where we do not
already control network rights, we 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.
Content of Our Telecommunications Services
Our Internet Access and Network Services. We intend to operate ISPs in
each of our markets and provide Internet access and network services to our
subscribers in those countries. We will offer the services as part of a bundled
offering under our brand name, through a contractual arrangement such as a
partnership, management agreement, services arrangements, joint venture or
otherwise, or on a transport basis where our 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.
We also provide 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.
Our Voice Services. We intend, subject to local regulation, to provide
a complete range of local exchange and long distance services as part of our
services. We anticipate 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.
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Our Television Programming. We have entered into a number of contracts
with commercial television programming suppliers and packagers for our video
programming services. These contracts include both master agreements, under
which we use specific programming in most or all of our markets, and regional
specific contracts, pursuant to which we use programming in regional or country
specific markets.
Our Legal Formation and Development
Our Company's Formation. Our company was formed in August 1995 for the
purpose of continuing the development of certain business assets formerly held
by Transworld Telecommunications, Inc., or TTI, a publicly held United States
corporation. Through its joint venture entity, Wireless Holdings, Inc., or WHI,
TTI owned 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. In October 1999, Sprint Corporation
acquired TTI and WHI.
In July 1995, TTI decided to separate its business assets into two
groups. Under the terms of the business separation, TTI formed a new corporation
(our company) to hold TTI's New Zealand and Park City, Utah network rights, and
the stock of the new corporation was then to be distributed to TTI's
shareholders. In order to complete the transaction, TTI formed our 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 network
rights. TTI immediately transferred the shares of our company to an escrow
agent, to be held for the benefit of TTI's shareholders of record on that date.
In December 1996, we became a reporting company under the Securities Exchange
Act of 1934, as amended, pursuant to a registration statement on Form 10-SB. We
have not yet distributed the shares from the escrow.
In connection with our formation, TTI agreed to loan us up to $1.0
million to finance our operations. TTI loaned us those amounts, which are due in
August 2001, during 1997. We currently owe approximately $996,000 (plus accrued
interest of approximately $330,000) under that loan.
Subsequent Financings and Other Transactions. Since our formation, we
have engaged in the following significant financings and other transactions:
o TIC Transaction. Prior to January 31, 1997, our primary business assets
consisted of our New Zealand network rights and a small equity interest in a
company that holds wireless network rights in Venezuela. In February 1997, we
merged a newly formed wholly-owned subsidiary with Telecom Investment
Corporation, or 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 TIC shareholders received 685,062 shares of our newly
designated series A preferred shares and TIC became our wholly-owned subsidiary.
TIC's principal shareholder was George D'Ambrosio, the late father of our Chief
Executive Officer. The series A preferred shares were converted into 6,850,620
common shares effective August 1998. As a result of our transaction with TIC,
the former TIC shareholders and option holders acquired approximately 87% of our
voting control (on a fully diluted common share equivalent basis). As a result
of our subsequent transactions with other investors in our stock, the voting
control of the former shareholders and option holders of TIC has been reduced to
approximately 32%. Our transaction with TIC was accounted for as a reverse
acquisition for accounting purposes.
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o FondElec Note and Warrant Offerings. In 1997, we 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 our common shares having a value equal to the original principal
amount of the notes. Currently, the warrants entitle their holders to purchase
approximately 331,717 of our common shares at a current exercise price of
approximately $2.626 per share. FondElec Essential Services Growth Fund, L.P.,
or FondElec, and certain of its affiliates were the principal investors in the
notes and warrants.
o Internexus Stock Purchase. Effective August 1997, we sold Petrolera
Argentina San Jorge S.A. 228,658 of our common shares and 150,380 of our series
A preferred shares for $10 million. The series A preferred shares were converted
into 1,503,800 of our common shares effective August 1998. Petrolera also
acquired the right to purchase, for a nominal purchase price, an amount of our
common shares and/or series A preferred shares sufficient to maintain its
percentage interest in the voting control of our company if we entered into
transactions for the sale of our securities with certain specified parties on or
before November 1, 1997. We entered into transactions with two of those
specified parties and, as a result, Petrolera acquired an additional 199,912 of
our common shares and 23,822 of our series A preferred shares for a total
purchase price of $7,831. Petrolera subsequently transferred its common shares
and preferred shares to Internexus, S.A. which is owned by the same shareholders
as Petrolera. The 23,822 series A preferred shares were converted into 238,220
of our common shares effective August 1998.
o FondElec Stock Purchase. Effective November 1997, we sold FondElec an
aggregate of 424,876 of our common shares and 71,442 series A preferred shares
for a total purchase price of $5,248,795. The series A preferred shares were
converted into 714,432 of our common shares in August 1998.
o Viva Vision Transaction. In August 1997, we acquired 78% of an entity
that operated a cable television operation in Caracas, Venezuela. The entity,
Viva Vision, operated the system using a wireless telecommunications concession
held by Comunicaciones Centurion, S.A. We are also an approximately 8.5%
shareholder of Centurion. We purchased our interest in Viva Vision for a total
of $1.2 million in cash and delivered 450,571 shares of our common stock and
101,378 shares of our series B preferred stock for the interest.
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o Acquisition of our El Salvador Operations. In July 1998, we and FondElec
formed Chispa as a holding company for the acquisition of two subscription cable
television companies in El Salvador. The seller of the cable television
operations was Star Industries, S.A., a Panamanian corporation. Under the terms
of the agreements for the transactions, we acquired a 49.5% interest in Chispa,
while FondElec acquired a 50.5% interest. The agreements, provided, however,
that we would have operating control of Chispa, that we would hold a majority of
the board of directors' seats, and that we would have the right to acquire
FondElec's interest in Chispa under certain conditions. We paid approximately
$2.7 million for our interest in Chispa and we are required to make additional
capital contributions to it (either in the form of debt or equity) to fund our
prorata portion of its operating costs and deferred purchase price payments (as
described below) for the two cable television operating subsidiaries.
The total purchase price for the two operating subsidiaries was $16.91
million, approximately $4.77 million of which we and FondElec paid at closing,
and the balance (approximately $12.14 million, representing the deferred portion
of the purchase price) was paid through Chispa's delivery of three promissory
notes. The first promissory note was in the amount of $5.2 million, and was due
on February 17, 1999. The second promissory note, in the approximate principal
amount of $3.47 million, was due on May 17, 1999, and the final promissory note,
in the original principal amount of $3.47 million, is due on July 17, 2000. The
amounts due under the first and second promissory notes were non-interest
bearing, but the amounts under the third promissory note bear interest. In
connection with the closing, Chispa also paid approximately $430,000 of
outstanding debt of the cable television operating systems to third party banks.
Chispa has paid the first and second promissory notes.
In December, 1998, Chispa sold a portion of its equity to a third party
investor and, as a result of that transaction, our interest in Chispa was
reduced to 44.03%. Under our agreements with FondElec and that third party
shareholder, we still maintained management control over Chispa so that we could
consolidate the results of its operations in our financial statements.
In October 1999, in connection with an equity and debt financing that
we completed with six accredited investors, one of those investors acquired a
direct interest in Chispa for $5.25 million in cash. In connection with that
purchase, we acquired additional shares in Chispa by capitalizing approximately
$900,000 on the amounts owed us. As a result of that transaction, we currently
hold approximately 32.64% of Chispa. Under the management and shareholder
agreements for Chispa, however, we maintain day-to-day control over its
operations and are entitled to elect 50% of its directors.
o December 1998 Financings. In December 1998, we sold $10 million of our
subordinated and exchangeable promissory notes to FondElec and Internexus. The
notes were exchangeable, at our election, for preferred stock having certain
rights and preferences upon the purchase by third parties of at least $10
million of such preferred stock. The notes bore interest at 10% per annum, were
due December 23, 2001, and included warrants for common shares while the notes
were outstanding. At the request of FondElec, two of our officers and directors
also agreed to grant a FondElec affiliate an option to acquire a portion of
their common shares. We paid these notes in full in connection with our October
1999 financing transactions. We issued warrants to acquire a total of 454,622
common shares under the notes. FondElec holds 227,311 of those warrants and
Internexus holds the balance of 227,311 warrants. The warrants have an exercise
price of $7.50 per common share.
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o Metronet Acquisition. In June 1999, we acquired approximately 17% of the
capacity of a fiber-optic network in Mexico City. The owner of the network was
Metronet, S.A. de C.V., or Metronet.
We paid $3,928,616 (plus $589,292 in value added taxes and $200,000 in
related transaction costs) for the capacity. At the closing, we also paid
$149,565 (plus $22,435 in value added taxes) for a two year option to purchase
additional capacity which, with the capacity we acquired, will result in our
owning a total of approximately 33% of the network's capacity. If we exercise
our option for the additional capacity in full, the purchase price for that
additional capacity would be $4,464,230 (plus value added taxes applicable to
the acquisition). We may acquire the additional capacity in one or more
portions, so long as the exercise price for any portion we acquire is at least
$500,000. If we acquire any portion of the additional capacity after December
15, 1999, the purchase price for that portion is increased by 3% for each month
after December 15, 1999 and through the closing for that portion.
In connection with our purchase of the capacity, we entered into a
maintenance agreement that governs the terms of our use of the acquired capacity
(and the additional capacity if we purchase it) and the network's maintenance.
The maintenance agreement remains in effect as long as we hold any interest in
the network, subject to our right to terminate the agreement on any fifth
anniversary of the agreement.
We also agreed with Metronet to jointly pursue the development of new
fiber networks in the Mexican cities of Monterrey, Guadalajara, Puebla, Cancun,
Ciudad Juarez, Leon and Tijuana, and such other locations in Mexico as we agree
from time to time. We will be responsible jointly for determining the nature,
structure, magnitude and geographic coverage of any development projects in
those markets, as well as the manner in which the rights in each of those
projects will be owned by us and Metronet.
We financed our capacity purchase through a $2,615,925 loan from
FondElec and a $2,550,000 loan from Internexus. The loans were evidenced by
senior promissory notes which bore interest at 10% per annum and were due
(together with unpaid interest) on the earlier of January 3, 2000 or our receipt
of proceeds from any equity or debt financing. FondElec and Internexus also
received warrants to acquire shares of our common stock while the notes were
outstanding and a premium based on the actual repayment date of the notes, and
the performance of our obligations under the promissory notes was secured by a
proxy to vote common shares held by certain of our officers and directors. The
premium amount varied depending on the repayment date of the notes, but
represented an annual interest rate of 55% on the unpaid amounts. The promissory
notes were paid in full in October 1999, when (as described below) we closed an
equity and debt financing with six accredited investors, including FondElec and
Internexus. A total number of 96,870 shares are issuable under the warrants at
an exercise price of $7.50 per share. FondElec holds warrants for 49,053 of
those common shares and Internexus holds warrants for 47,817 shares.
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o Bridge Loans. In August, September and October 1999 we borrowed a total
of $2.5 million from FondElec and Internexus for our business purposes. FondElec
loaned us a total of $1.0 million of those amounts, and Internexus loaned us the
balance. The loans were due in November and December of 1999. All unpaid amounts
under the loans bore interest at 13% per annum. Both FondElec and Internexus
received warrants to acquire common shares in connection with the transaction.
The number of shares subject to the warrants was based on the period of time
that the amounts under the loan were outstanding. The loan from FondElec was
guaranteed by certain of our officers and directors, who pledged their interest
in a company that holds approximately 900,000 of our common shares. An affiliate
of FondElec has an option to acquire their interest in that company under
certain circumstances. The loans from FondElec and Internexus were repaid in
October 1999 by part of the proceeds from the financing transaction we completed
with six accredited investors. FondElec and Internexus can acquire a total of
18,204 common shares (at an exercise price of $7.50 per share) under the
warrants they received in the loan transactions. FondElec holds warrants for
10,688 of those shares, and Internexus holds warrants for 7,516 common shares.
o October 1999 Financing. In October 1999 we closed the first portion of a
$109.5 million private equity and credit facility financing package with six
accredited investors. At the closing, we received $33 million in cash from the
sale of 4.4 million shares of our series C convertible preferred stock to three
of the six accredited investors' and exchanged approximately $15 million of debt
we previously issued to two of the accredited investors (FondElec and
Internexus) into 1,995,577 shares of series C stock. Those five parties also
acquired options to purchase 2,558,230 additional shares of our series C stock
and warrants to purchase 1,598,894 shares of our common stock, and two existing
shareholders (Internexus and FondElec) acquired additional warrants to purchase
520,000 shares of our common stock.
The parties to the stock purchase agreement included:
o Telematica EDC, C.A., or Telematica
o TCW/CCI Holding LLC, or TCW
o the International Finance Corporation, or IFC
o Glacier Latin America, LTD, or Glacier
o FondElec
o Internexus.
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The IFC was named as a party to the agreement, but pursuant to a waiver
by the other parties, did not join in the execution of the agreement at the
first closing. The IFC had until November 19, 1999 to join in the agreement and
to fund its purchase obligations under it.
Under the agreement, Telematica and TCW were obligated to purchase, for
cash, an additional 2,666,666 shares of series C stock, options for 1,066,666
shares of series C stock and warrants for 666,666 shares of our common stock for
$20 million at a second closing that was to be held after the parties received
clearance under the Hart-Scott-Rodino Anti-trust Improvements Act of 1976. The
IFC was also obligated to purchase 666,666 shares of series "C" stock and to
acquire an option for 266,666 shares of our series C stock and on warrant for
166,666 shares of our common stock for $5 million if it joined in the execution
of the financing agreement. In early November 1999 we received clearance under
the anti-trust laws and, on November 16, 1999, we closed the second portion of
the financing. At the closing, we received $25 million in cash from TCW,
Telematica and the IFC in exchange for the securities described in the preceding
sentences. In connection with the closing, we paid our financial advisor a
placement fee (and associated amounts for expenses) of $2.6 million and issued
it a four-year warrant to acquire 303,333 of our common shares at $7.50 per
share. We also paid FondElec an advisory fee of $1,081,500 for their services
relating to the transaction.
Under the terms of the financing agreement, Telematica also invested,
at the second closing, $5.25 million in Chispa, our El Salvador holding company.
Telematica also agreed to negotiate with us, in good faith, the terms of a joint
venture agreement, pursuant to which Telematica and we will each invest $5
million to conduct telecommunications operations in Columbia. Finally,
Telematica also agreed to enter into a long-term $26 million credit facility
with our wholly-owned Venezuelan subsidiary, Inter@net and, in connection with
that transaction, agreed to enter into a fiber-optic lease, pursuant to which
Inter@net will lease a portion of Telematica's existing fiber-optic network in
Caracas, Venezuela, and a commercial services agreement, under which
Telematica's affiliate will provide billing, collection and other commercial
services to Inter@net.
A portion of the $26 million credit facility, $7 million, will be paid
to Inter@net in cash, and the $19 million balance will be advanced to Inter@net,
as required, for the purpose of paying its obligations under the fiber lease
agreement and the commercial services agreement. The outstanding amounts under
the credit facility bear interest at 3% per year. Interest will be capitalized
during the first four years of the facility and, thereafter, are payable in
cash. The outstanding principal and unpaid interest amounts under the facility
are convertible to shares of Inter@net at Telematica's election at any time
after the third anniversary of the facility, but Telematica can convert the
amounts due under the facility prior to the third anniversary if Inter@net
defaults under the facility. Assuming the draw down of the entire facility and
no payment by Inter@net of any of the advanced amounts, the principal and
interest advanced under the facility would be convertible into shares
representing 50% of Inter@net's equity ownership. The credit facility also
provides for a corresponding subscription right in Telematica's favor, pursuant
to which it is allowed to purchase 50% of the outstanding stock of Inter@net for
$26 million. As Inter@net draws on the credit facility, the subscription
obligation is proportionately reduced. Any election by Telematica to convert the
amounts due under the facility into shares of Inter@net must be exercised with
the subscription right.
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In connection with the closing of the debt and equity facility, we, the
six accredited investors and certain other parties (including Lance D'Ambrosio
and Troy D'Ambrosio, who are our officers and directors) executed a shareholders
agreement which provides, among other things, that the shareholder parties to it
may not transfer their securities in our company (other than to their
affiliates) except under limited circumstances. The agreement also provides that
each of the shareholders will vote for the election, at any election of the
board of directors, for designees of certain other parties to the agreement. Our
directors will make all decisions with respect to ordinary matters regarding our
business and operations by a simple majority vote of the directors present at a
meeting duly called and convened, but certain actions will require the vote of a
designated director of any three of five director groups, certain other actions
will require the vote of a designated director of any four of the five director
groups, and other actions will require the vote of a designated director from
all five director groups. The five director groups are the groups of directors
designated by:
o Lance and Troy D'Ambrosio and the estate of their father, George
D'Ambrosio.
o TCW.
o Telematica.
o FondElec.
o Internexus.
We believe the issuance of our securities to the accredited investors
was exempt from the registration requirements of the federal securities laws.
The investors were all sophisticated investors, they conducted extensive due
diligence of our operations in connection with their investments, and they
represented that they were acquiring our securities for investment purposes.
o GBNet Acquisition. On December 15, 1999, we acquired all of the
outstanding stock of GBNet. The seller of GBNet was GBM, which is the exclusive
general distributor of IBM products and services in several Latin American
countries, including the countries in which GBNet operates.
The total purchase price for GBNet was $13 million, of which we paid $4
million in cash at closing. We paid the balance of the purchase price by
delivering four promissory notes which are due on the first through fourth
anniversaries of the closing. The notes, which bear no interest, are in
principal amounts sufficient to provide GBM with an imputed interest rate of
10.75% per annum through their anticipated payment dates. Our obligation to pay
the deferred portions of the purchase price is secured by a pledge of the shares
of GBNet, as well as its operating subsidiaries. A portion of the pledged shares
will be released to us as we pay down the promissory notes. GBM will be
entitled, however, to retain at least 51% of the pledged shares until we pay all
of the amounts under the promissory notes.
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o Intervan Acquisition. On December 24, 1999, we acquired all of the
outstanding stock of International Van S.A. de C.V., or Intervan. Intervan
provides data networking and network access services to customers in Mexico
through a nationwide ATM network. The seller of Intervan was Controladora
S.O.E., S.A. de C.V.
The total purchase price for Intervan was $21 million, of which we paid
$15 million in cash at the closing. We paid the balance of the purchase price by
delivering two promissory notes which are due on the first and second
anniversaries of the closing. The promissory note due in December 2000 is for
$4,500,000 and is non-interest bearing. The promissory note due in December 2001
is for $1,500,000 and bears interest during the second year at the rate of 8%
per annum. The amounts represented by the promissory notes are subject to
downward adjustment if Intervan suffers recurring revenue losses after the
closing.
o Metrotelecom Acquisition. In December 1999, we entered into a letter of
intent to acquire 100% of Metrotelecom. Metrotelecom provides Internet access
services, high speed data transmission services, cable television services and
telephony services in Guatemala through an operating fiber optic network located
in Guatemala City. The letter of intent required the closing of the transaction
to be completed by the end of January 2000, but the parties have continued to
work toward the closing, which is now scheduled for April 2000.
The purchase price for Metrotelecom will be $13.5 million, of which we
will pay $3.75 million in cash at closing. We will also deliver 121,212 of our
common shares at closing, which the parties agree has a value of $1 million. We
will pay the balance of the purchase price, $8.75 million, by delivering four
promissory notes at closing. The notes are due on the first through fourth
anniversary of the closing, and bear interest at a rate of 7% per annum. The
note due on the first anniversary is in the original principal amount of $4.75
million, and each of the three other notes is in the amount of $1.333 million.
The amount of the first note is subject to adjustment, depending on the cash
balance and intercompany debt of the parties as of the closing date. To secure
our performance under the letter of intent, we deposited $375,000 in cash with
an escrow agent in late December 1999. At the closing of the transaction, the
amounts held in the escrow will be paid to the sellers and credited against the
cash portions of the purchase price.
As part of the transaction, we will enter into a series of side
agreements relating to our use of certain intellectual property that was
developed by some of Metrotelecom's principals. The intellectual property
includes an operating and business reporting computer program and related
software, as well as certain operating technology and software relating to
Metrotelecom's IP-based technology platform. Under the terms of the technology
agreement, we will receive a worldwide non-exclusive license to use the
technology.
o Alcatel Vendor Financing. In March 2000, we signed a $175 million vendor
financing package preliminary umbrella agreement with Alcatel. Under the terms
of the agreement, Alcatel will assist us in the construction of our networks and
provide systems integration services over the next three years. Alcatel will
finance up to $175 million for the purpose of covering up to 100% of the
equipment and related services it supplies to us, as well as our purchase of OEM
and other equipment or services through Alcatel. The agreement is contingent on
the negotiation of a number of individual turnkey contracts, as well as
ancillary contracts relating to the securitization of our obligations to repay
Alcatel the amounts we borrow.
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The financing will be structured as three separate loans (covering our
three basic marketing areas). We will be required to repay the principal amounts
we draw under the financing agreement in quarterly installments, commencing 30
months from the closing date. The actual number of quarterly installments will
be negotiated by the parties based on a to-be-agreed upon business plan, but the
final maturity date for the financing is currently scheduled to be in January
2007. The financing will generally be available through June 30, 2002. We will
pay interest on the borrowed amounts at a rate which we believe to be
competitive.
We will be required to make mandatory prepayments on the drawn amounts
from any refinancings we obtain, from a portion of our excess cash flow, from
insurance payments (above thresholds that we will agree upon) and from the sale
of any of our assets.
The loan will be secured by a comprehensive security package which will
include:
o A pledge of their stock in our company by each of our major
shareholder groups.
o Pledges of our stock and other equity interests in our subsidiaries.
o A first and perfected security interest, to the extent permitted by
law, in our licenses and permits for the operation of our networks or
systems.
o A security interest in our equipment, supplies, inventory and other
personal property.
o An assignment, for security purposes, of our material contracts.
o A security interest in our accounts receivable.
In connection with the transaction, we will be required to pay Alcatel
a commitment fee and an arrangement fee, and to issue them warrants in amounts
which we believe are consistent with fees and equity interests payable to large
vendors for similar transactions.
We are currently negotiating the definitive documents for the
transaction, and expect to execute those documents in the second quarter of
2000. Even though the parties have spent considerable time and resources
negotiating the terms of the letter of intent, we can give no assurance that we
will execute definitive documents for the transaction with Alcatel or that, if
we do, the definitive documents will not contain terms and conditions materially
different from those described above.
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EMPLOYEES
- ---------
As of March 1, 2000, we had approximately 475 full-time employees and,
once we close the Metrotelecom transaction, we will have approximately 725
full-time employees. Approximately 30 of our employees work in our United States
offices, and the balance work in our subsidiary operation offices in our
markets. Our employees are not represented by any unions or collective
bargaining entities.
LITIGATION
- ----------
In September 1998, we filed two arbitration proceedings against Donald
Williams, one of our former directors and officers. The first proceeding relates
to a claim for indemnification for breach of the representations and warranties
made by Mr. Williams in 1997 when we purchased of our interest in Viva Vision.
The other arbitration proceeding requests a declaratory judgment that we
terminated Mr. Williams in August 1998 for "cause." The employment action was
dismissed in early March 2000.
In early April 1999, we were 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 for an investment they allegedly made in Viva Vision (or
certain entities that previously held or had the right to operate the same
network rights as Viva Vision does) before we purchased our interest in that
company. In September 1999, the New Jersey court granted our motion to move the
action to Federal District Court in Utah. In February 2000 the plaintiffs
dismissed the suit without prejudice.
In August 1999, we settled a lawsuit that had been filed against us in
Nevada. Under the terms of the settlement, we purchased the plaintiff's common
shares for approximately $965,000. We believe the settlement was in our best
long-term interest.
Certain of our officers and directors have acted as officers and
directors of TTI. In December 1997, TTI 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 TTI's
interest in certain United States network rights. In October 1999, TTI
successfully emerged from bankruptcy when Sprint Corporation bought TTI and
those United States network rights.
In March 2000, we were named as defendant in an action brought in
federal court in California. The suit claims we defrauded the plaintiffs in 1997
when we diluted their position by engaging in our merger with TIC, that we
breached contractual obligations to offer them a portion of the securities we
sold other parties, and that the promissory note we executed in favor of TTI is
due now, rather than in August 2001. The plaintiff, which is the assignee of the
promissory note we executed in favor of TTI in 1997, is in litigation with TTI,
and both TTI and the plaintiff are claiming rights in the note. We intend to
vigorously defend the action.
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DIVIDENDS DISTRIBUTIONS AND REDEMPTIONS
We have not declared or paid any dividends to the holders of our common
shares or preferred shares.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information summarizes certain transactions that we
either engaged in during the past two years, or which we propose to engage in,
involving our executive officers, directors, 5% stockholders and immediate
family members of those persons:
October 1999 Transactions. In October 1999, we entered into a series of
agreements relating to our sale to six accredited investors of shares of our
newly designated series C stock. Two of the accredited investors, FondElec and
Internexus, acquired their shares through the conversion of debt we had issued
them, and the four other investors acquired their shares for cash. In connection
with that transaction, we, the accredited investors and certain of our existing
shareholders, entered into an agreement under which TCW, Telematica, FondElec
and its affiliates, Internexus and the group represented by Lance D'Ambrosio,
Troy D'Ambrosio and the Estate of George S. D'Ambrosio, each agreed to vote
their shares in favor of one designee to our Board of Directors by each of those
shareholder groups (while our Board of Directors consisted of five members), or
two designees to our Board of Directors (while it consists of ten members).
Messrs. Baeza and Bahamonde are the designees of TCW, Messrs. Corredor and Magan
are the designees of Telematica, Mr. Schiller and Mr. Fucaraccio are the
designees of Internexus, Mr. Sorenson and Mr. Acosta-Rua are the designees of
FondElec, and Troy D'Ambrosio and Lance D'Ambrosio are the designees of the
D'Ambrosio group, under that agreement. Those shareholder parties hold all of
our outstanding series C shares and approximately 82.3% of our outstanding
common shares.
Internexus Transactions. We have entered into the following contracts,
agreements and arrangements with Internexus:
o In August 1997, we sold Internexus $10 million of our capital stock
and Internexus and we formed a subsidiary for the purpose of
developing network rights in Argentina. The subsidiary is held 80% by
us and 20% by Internexus.
o In December 1998, June 1999, September 1999 and October 1999, we
borrowed a total of $9.05 million from Internexus. In connection with
those loans, we issued Internexus warrants to acquire shares of our
common stock. Internexus converted the principal and interest amounts
due under all those notes into shares of our series C stock in
connection with the October 1999 financing transactions described
above.
FondElec Transactions. We have entered into the following contracts,
agreements, and arrangements with FondElec and its affiliates:
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o In 1997, we sold secured promissory notes, together with warrants to
acquire common shares, to five accredited investors, including a
warrant for 175,954 common shares to an affiliate of FondElec. We
subsequently repaid those notes. In 1997, we also issued FondElec
warrants to acquire an additional 50,000 common shares (at $0.875 per
share) for services it provided to TIC before the TIC transaction
o In November 1997, we sold FondElec $5 million of our capital stock.
o Our subsidiaries have entered into a number of agreements with
FondElec and its affiliates with respect to our business operations in
El Salvador. Those agreements include the purchase agreements whereby
we acquired our interest in Chispa and its operating subsidiaries in
that country, the sale by Chispa of its capital stock to a third
party, and the documents relating to the refinancing of the payment
obligations for the operating companies with a commercial lender. Our
El Salvador subsidiary has also agreed to grant FondElec and our
company warrants to acquire shares of its capital stock in connection
with any loan by us or FondElec to the El Salvador subsidiary. When
Telematica purchased its interest in Chispa in October 1999, Chispa
used a portion of the proceeds from that sale ($3.8 million) to pay
FondElec amounts Chispa owed it.
o In December 1998, June 1999 and August 1999, we borrowed a total of
approximately $8.7 million from FondElec. In connection with those
transactions, we also issued FondElec warrants to acquire shares of
our common stock. FondElec converted the principal amounts under the
December 1998 note ($5 million) into shares of our series C stock in
connection with our October 1999 financing transactions and we repaid
the balance of the amounts due FondElec.
o In August 1999, we entered into an advisory services agreement with
FondElec relating to our payment of certain fees to FondElec,
including fees (totaling $1,654,000) relating to the sale of our
series C stock in our October 1999 financing transactions. We paid
FondElec the fees due it under the October financing when we closed
the financing. FondElec also receives $50,000 per quarter for the
advisory services it provides us under the agreement.
Telematica Transactions. We have entered into the following contracts,
agreements and arrangements with Telematica and its affiliates:
o As part of our October 1999 financing transactions, we agreed with
Telematica to negotiate in good faith a joint venture for the purpose
of acquiring and developing network rights in Colombia.
o In connection with our October 1999 financing transactions, Telematica
acquired approximately 32.6% of Chispa for $5.25 million. In
connection with Telematica's acquisition of that interest, we
capitalized approximately $900,000 of the amounts that Chispa owed us,
and Chispa used a portion of the proceeds from Telematica's investment
(approximately $3.8 million) to pay a portion of the amounts that the
subsidiary owed FondElec.
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o In October 1999, our Venezuelan subsidiary, Inter@net, entered into a
$26 million financing arrangement with Telematica. A portion of that
financing commitment, $7 million, will be paid by Telematica in cash,
and the remaining amounts will be drawn down by Inter@net, from time
to time, to cover its obligations under the terms of a fiber optic
capacity lease and a commercial services agreement that Inter@net will
enter into with Telematica or its affiliates. The amounts under the
debt facility are convertible under certain circumstances into shares
of Inter@net. Assuming the full funding of the facility, the
conversion of the debt amounts into equity would result in Telematica
or its affiliates acquiring 50% of the stock of Inter@net.
Stock Purchase. In 1999, we purchased and subsequently retired 35,174
of our common shares from a shareholder for $250,000. The shareholder also
forgave $235,175 we owed it. The shareholder is an affiliate of two of our
officers and directors.
Employment Agreements. We have entered into employment agreements with
certain of our senior management. Some of those employees also act as our
directors. Those employment agreements contain "change of control" provisions
that provide those employees with severance benefits under certain conditions.
OUR MANAGEMENT
Our directors, executive officers and key employees, and their
respective ages and the positions they hold with us, 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 our directors or executive officers. Our Board of Directors is currently
comprised of ten members. Executive officers are chosen by, and serve at the
discretion of, the Board of Directors:
Name Age Position
- ---- --- --------
Lance D'Ambrosio............ 42 Chief Executive Officer and Chairman of the
Board of Directors
Brian Reynolds.............. 43 President and Chief Operating Officer
Jerry Slovinski............. 43 Senior Vice President and Chief Financial
Officer
Troy D'Ambrosio............. 39 Senior Vice President, Legal &
Administration, Director
William Levan............... 45 Senior Vice President, Engineering &
Technology
Jose Miguel Padron.......... 45 Vice President, Chief Executive Officer,
CCI Central America
Luis de la Fuente........... 53 Vice President of Strategic Alliances
Sam Nash.................... 55 Acting Chief Executive Officer, CCI
Venezuela
Mario Vasquez............... 43 Chief Executive Officer, CCI Mexico
Anthony Sansone............. 35 Vice President, Treasurer and Corporate
Secretary
Gary Barlow................. 34 Vice President of Accounting and Taxation
Mario L. Baeza.............. 48 Director
Norberto Corredor........... 36 Director
Gaston Acosta-Rua........... 35 Director
Jorge Fucaraccio............ 56 Director
Peter Schiller.............. 64 Director
George Sorenson............. 44 Director
Salomon Magan............... 48 Director
Alfonso Bahamonde........... 57 Director
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Our Senior Management Team
Lance D'Ambrosio, Chief Executive Officer and Chairman of the Board of
Directors. Mr. D'Ambrosio has been involved in the telecommunications business
for over nine years and has over 20 years of entrepreneurial business and sales
experience. Mr. D'Ambrosio is responsible for our acquisitions, strategic
planning and mergers, and is responsible for all of our financing plans. Mr.
D'Ambrosio was one of our founders and has been our Chief Executive Officer
since inception. Between 1992 and 1995, Mr. D'Ambrosio served as the President,
Chief Executive Officer and a Director of TTI, a wireless cable television
company in the United States that had operations in six markets. TTI was
recently sold to Sprint Corporation. 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.
Brian Reynolds, President and Chief Operating Officer. Mr. Reynolds
joined us in July 1998 as our 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 us, Mr. Reynolds acted as a
telecommunications consultant to a number of entities, including our company.
Between 1994 and 1997, Mr. Reynolds served as Chief Operating Officer of
Wireless Holdings, Inc., or WHI, where he was responsible for start-up and
growth of its high-speed data and wireless cable operations. During 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. Before 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.
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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 Andersen, 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.
Before he joined us, 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 has 18 years of business and government experience,
including four years of telecommunications experience prior to joining us as an
officer in October 1998. Before joining us, 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. TTI and WHI were recently sold to
Sprint Corporation. Between September 1996 and October 1998, Mr. D'Ambrosio
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 Vice President of
Corporate Communications and Government Relations.
William Levan, Senior Vice President Engineering & Technology. Mr.
Levan joined us in March 1998 as our Senior Vice President of Engineering. Mr.
Levan is a 23-year veteran of the telecommunications industry and holds seven
patents. Between 1994 and 1998, he held senior management positions with Hybrid
Networks in Cupertino, California, most recently as its Director or
Applications, where he was responsible for pre-sales support of its Hybrid
Series 2000 broadband modem system. 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.
Jose Miguel Padron, Vice President and Chief Executive Officer CCI
Central America. Mr. Padron is Vice President & Chief Executive Officer of our
Central America Region operations. Mr. Padron originally joined us 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 us in February 1999. Mr.
Padron is the founder of Inter@net, the Venezuelan ISP we 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.
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Luis de la Fuente, Vice President of Strategic Alliances. Mr. De la
Fuente is our Vice President of Strategic Alliances and also acts as Chairman of
our Mexican 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.
Samuel Nash, Vice President and Chief Executive Officer CCI Venezuela.
Mr. Nash has over 30 years of telecommunications industry experience. He joined
us in February 1999 as our Chief Operating Officer for CCI Mexico. From January
1998 to 1999, Mr. Nash was responsible for Amaritel/Maxcom, Mexico's first CLEC
startup, where he served as General Manager, Network Services and Long Distance
Strategic Business Units. Prior to joining Amaritel, Mr. Nash was Vice
President, International Marketing & Business Development, for Sattel
Communications, an affiliate of Hughes Communications, in Calabasas, California.
From 1988 to 1997, Mr. Nash was President of Target Planning Consulting, which
served the telecommunications and computer industries in the United States and
Canada. Between 1974 and 1988, Mr. Nash held several positions at Northern
Telecom Ltd., including Corporate Assistant Vice President Product Line
Management and Director of Marketing & Sales, International Operations. Mr. Nash
holds an Engineering Master of Science Degree and Ph.D Degree in Digital
Telecommunications from Eindhoven University of Technology, The Netherlands, and
a Master of Business Administration from Harvard University.
Mario Vasquez, Chief Executive Officer CCI Mexico. Mr. Vasquez joined
us in 1999 when we acquired Intervan, the second largest carrier in Mexico,
where he was the President and Chief Executive Officer. Mr. Vasquez has a master
of science in telecommunications (University of Essex, Great Britain) and an
engineering degree in electronics and communications (Universidad Ibero
Americana, Mexico) and brings 26 years of experience in the telecommunication's
field. Mr. Vasquez began his telecommunications career as design engineer of
radio systems for Ingenieria de Radio (IRASA) in 1975. Between 1979 and 1987, he
was responsible for technology planning and evaluation at Telefonos de Mexico
(Telmex), the incumbent carrier in Mexico. Between 1993 and 1998, he was
Director and General Manager for Mexico and Central America for Newbridge
Networks, and between 1990 and 1993 he was Director of Cable Systems for AT&T.
Between 1988 and 1990, he was Vice President of Network Design and Engineering
for Sersa-Geocomm.
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Anthony Sansone, Vice President, Treasurer and Corporate Secretary. Mr.
Sansone has been with our company since its inception and, until 1998, acted as
our controller in addition to his duties as our Corporate Secretary and
Treasurer. Mr. Sansone has eleven 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 in 1991.
Gary Barlow, Vice President of Accounting and Taxation. Mr. Barlow has
twelve years of accounting and financial experience, including eight years of
big-five public accounting experience and a combined four years with a Fortune
100 company and another public accounting firm. Between 1992 and 1996, he was a
senior auditor with Price Waterhouse in Northern California, serving SEC
registrant clients in the high technology industry. Between 1997 and 1999, he
was an audit manager with Deloitte & Touche in Salt Lake City, Utah, where he
served various clients, including SEC registrants. Mr. Barlow received a
Bachelor of Science degree in Accounting from the University of Utah in 1992 and
is a Certified Public Accountant.
Mario Baeza, Director. Mr. Baeza is the Chairman and Chief Executive
officer of TCW/Latin America Partners, L.L.C., which is the managing general
partner of TCW/Latin America Private Equity Partners, L.P., a $230 million
partnership organized by Baeza & Company and jointly owned by Baeza & Company
and Trust Company of the West. The fund makes privately-negotiated equity and
equity-related investments in companies in Latin America. Trust Company of the
West is a global asset management firm with over $60 billion of assets under
management. Between 1994 and 1996, Mr. Baeza was President of Wasserstein
Perella International Limited and Chief Executive Officer of Grupo Wasserstein
Perella, the Latin America division of the firm. From 1974 to 1994 he was an
associate and then, at the age of 29, became a partner, at the law firm of
Debevoise & Plimpton, where he specialized in international mergers and
acquisitions, international finance and leveraged buyout transactions. Mr. Baeza
has been a Herman Phleger Visiting Professor of Law at Stanford Law School and a
Lecturer in Law at Harvard Law School. Mr. Baeza is a member of the board of
directors of Air Products and Chemical Company, an industrial company listed on
the New York Stock Exchange, the Ariel Mutual Funds Complex, Tendtudo Holdings,
L.L.C., Brazil's leading national do-it-yourself home improvement retail chain,
Dekor Internacional S.A. de C.V., one of Mexico's largest home finishings
chains, GDC Alimentos, S.A., Brazil's leading canned seafood company, Camil
Alimentos, S.A., one of Brazil's leading branded rice and beans processors and
distributors, Dermet de Mexico, Mexico's leading specialty chemical distributor,
and Marta Harff, a leading Argentine brand and retailer of feminine personal
care products.
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Norberto Corredor, Director. Mr. Corredor is the Manager of
Telecommunications and Automation Services for C.A. La Electricidad de Caracas,
SACA, a Venezuelan utility company that is an affiliate of Telematica EDC, one
of our shareholders. In that capacity, he is responsible for acquisition,
planning, operation and maintenance of the company's telecommunications network
and automation systems. He has held different management positions during his 15
years with the company, including as a manager assigned to work in Montreal,
Canada, where he lead a development team for the electric network control
system. Mr. Corredor has also been involved in the development of the
telecommunications networks and automation systems of several utilities in El
Salvador and Colombia.
Gaston Acosta-Rua, Director. 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.
Jorge Fucaraccio, Director. Since 1994, Mr. Fucaraccio has been an
advisor to Petrolera Argentina San Jorge S.A. and Bolland S.A., Argentinean
corporations, or their affiliates 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, where he was responsible for managing all of
its technical departments and research centers, 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.
Peter Schiller, Director. Since 1993, Mr. Schiller has been employed by
Bolland S.A and its affiliates, including 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.
George Sorenson, Director. 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.
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Salomon Magan, Director. Mr. Magan is Executive Vice President of
Strategic Planning at Grupo EDC (and affiliate of Telematica EDC), where he is
responsible for overseeing the company's strategy and evaluating its portfolio
of investments. He has held several different management positions during his 18
years with the group, and most recently served as Executive Manager, Generation
and Transmission, where he was also responsible for the group's
telecommunications operations, and as Coordinator of the Organizational Change
Committee. Mr. Magan is a member of the board of directors of several companies
that operate in the utility, communications and electrical services industries,
including Energia del Pacifico, EPSA, and electric utility in Colombia,
Genevapca CA, Venezuela's leading independent power producer, Telecommunications
de Caracas, CA, which has an agreement with Orbcomm International Partners, LP,
to offer data communications, in Central America, and the Caribbean through Low
Earth Orbit Satellite Constellation.
Alfonso Bahamonde Director. Mr. Bahamonde is Managing Director and
Principal in General Partner of TCW/Latin America Partners, LLC (an affiliate of
TCW/CCI Holding) where he is responsible for managing its business operations,
including sourcing, analyzing and monitoring its private equity investments.
Prior to joining TCW/Latin America Partners in September 1996, Mr. Bahamonde was
the Senior Managing Director and Chief Investment Officer of Latin America
Private Equity Partners, LLC and, immediately prior to that, was Senior Advisor
for Wasserstein Perella & Co., Inc. Mr. Bahamonde has also held senior
management and officer positions with Continental Bank, N.A., and Chase
Manhattan Bank, N.A., primarily in their South American operations.
Our Advisory Board
We have formed an advisory board for the purpose of assisting us in
identifying market and product development opportunities, reviewing with our
management the progress of our specific projects, recruiting our top management
and evaluating our operational systems and, in general, assisting us in our
regulatory and strategic planning. Members of the advisory board are leaders in
the fields of business and telecommunications and generally meet with our
management on an informal basis. Our advisory board has received options to
acquire a total of 150,000 of our common shares (at our average exercise price
of $6.42 per share) as compensation for their services.
Noe Kenig, Chairman, CCI Advisory Board. Mr. Kenig is chairman of our
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.
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<PAGE>
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.
Our Board of Directors and Other Information.
Our 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
Messrs. Schiller, Magan and Bahamonde serve until 2002. The Class 2 directors,
consisting of Messrs. Troy D'Ambrosio , Baeza and Corredor, serve until 2003.
The Class 1 directors, consisting of Messrs. Lance D'Ambrosio, Acosta-Rua and
Fucaraccio, serve until 2001. At each annual meeting of our shareholders, the
successors to the class of directors whose term expires at that 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. Our 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.
Our Board of Directors Committees
During 1999, our Board of Directors held 9 meetings, and each director
attended at least 75% of those meetings. During 1999, the Board of Directors had
four standing committees, the Audit Committee, the Compensation Committee, the
Executive Committee and the Special Committee. However, the Board met as a full
board, rather than as committees, during all of 1999. In December 1999, the
Board of Directors discontinued the Special Committee, which was formed
primarily for the purpose of overseeing any public offerings we made of our
securities.
Our Audit Committee is charged with the review of the professional
services we receive from our independent auditors, determining the independence
of those auditors, determining the accuracy of our annual financial statements,
determining the appropriateness, efficiency and accuracy of our system of
internal accounting controls and financial reporting practices, and reviewing
such other matters regarding our financial procedures as may be brought to its
attention or as may be specifically delegated to it from time to time by our
Board. Upon the Audit Committee's review of any of those matters, it is charged
with preparing and submitting periodic reports, summaries and proposals to our
Board of Directors regarding those matters, which may then be acted upon by our
full Board. During 1999, the Audit Committee consisted of Messrs. Fucaraccio,
Sorenson and Troy D'Ambrosio. As the result of the resignation of Messrs.
Sorenson and D'Ambrosio as directors in order to facilitate the appointment of
Messrs. Baeza and Corredor to the Board of Directors in October 1999 in
connection with our closing of our October 1999 financing, between October and
December, the Audit Committee consisted solely of Mr. Fucaraccio. Between
December 1999 and February 2000, Messrs. Lance D'Ambrosio, Baeza, Corredor,
Fucarracio and Acosta-Rua comprised the committee. In February 2000, the Board
appointed Messrs. Bahamonde, Sorenson, Troy D'Ambrosio, Schiller and Corredor to
serve on the committee and, in March 2000, Mr. Corredor was appointed chairman
of the committee.
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<PAGE>
Our Compensation Committee is charged with the review of the levels,
form, policies and procedures for the compensation of our executives and agents,
the review of our pension and other benefit programs, and such other
compensation matters as may be brought to its attention or as may be delegated
to it by our Board. Upon the Compensation Committee's review of any of those
matters, it is charged with preparing and submitting periodic reports, summaries
of proposals to our Board of Directors regarding those matters for action by the
entire Board. During 1999, the Compensation Committee consisted of Messrs. Troy
D'Ambrosio, Acosta-Rua and Fucaraccio. As the result of the resignation of Mr.
D'Ambrosio as a director in order to facilitate the appointment of Messrs. Baeza
and Corredor to the Board of Directors in October 1999 in connection with our
closing of our October 1999 financing, between October and December, the Audit
Committee consisted of Messrs. Acosta-Rua and Fucaraccio. Between December 1999
and February 2000, Messrs. Lance D'Ambrosio, Baeza, Corredor, Fucarracio and
Acosta-Rua comprised the committee. In February 2000, the Board appointed
Messrs. Baeza, Lance D'Ambrosio, Fucaraccio, Acosta-Rua and Magan to serve on
the committee, with Messrs. Lance D'Ambrosio and Baeza acting as co-chairman.
Our Executive Committee is charged with the performance of the duties
of our Board of Directors between regularly scheduled meetings of the Board and,
in that capacity, is charged with the functions, and has the authority of, the
full Board of Directors with regard to matters addressed by it. During 1999, the
Executive Committee consisted of Messrs. Lance D'Ambrosio, Acosta-Rua and Troy
D'Ambrosio. As the result of the resignation of Troy D'Ambrosio as a director in
order to facilitate the appointment of Messrs. Baeza and Corredor to the Board
of Directors in October 1999 in connection with our closing of our October 1999
financing, between October and December, the Executive Committee consisted of
two members, Lance D'Ambrosio and Gaston Acosta-Rua. Between December 1999 and
February 2000, Messrs. Lance D'Ambrosio, Baeza, Corredor, Fucarracio and
Acosta-Rua comprised the committee. In February 2000, the Board appointed
Messrs. Baeza, Acosta-Rua, Fucaraccio, Lance D'Ambrosio and Magan to serve on
the committee.
The Board does not have a nominating committee. The entire Board
performs those duties.
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<PAGE>
Our Director Compensation.
Our directors do not receive cash compensation for serving on our Board
(or any committee of the Board), or for any other services they provide to us in
their capacity as directors. Our directors, however, are reimbursed for expenses
they incur in connection with attending Board or committee meetings. In
addition, any directors who are not employees are awarded options under the
terms of our 1998 Director Stock Plan.
The Board of Directors adopted the director stock plan in June 1998,
and our shareholders approved it at our annual meeting in August 1998. A total
of 100,000 common shares are reserved for issuance under the director stock
plan. The director stock plan provides each non-employee director with an
aggregate annual compensation retainer of options to acquire 8,000 common
shares. Each option is granted on the first day after the last day of each
calendar year for services performed during the preceding year. The first
options were granted under the director stock plan in January 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 is a non-employee
director. If a non-employee director no longer serves as a director for any
reason, he or she is entitled to all ungranted portions of his or her option
(which will accrue on a daily basis through the date of termination as a
director).
Each option vests on the first anniversary of the date of its grant,
and the options expire, if unexercised, five years from the date of grant. The
exercise price of each option is 85% of the fair market value of the common
shares on the date of grant. The number of common shares issuable in connection
with the option and the aggregate number of common shares remaining available
for issuance under the director stock plan are proportionately adjusted to
reflect any subdivision or combination of the outstanding common shares.
The director stock plan will continue until May 30, 2008, unless it is
terminated prior to that time by the Board of Directors. The Board of Directors
may amend, modify or suspend the director stock 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 stock plan
will be effective prior to its approval by the shareholders to the extent that
approval is then required by applicable legal requirements, and (ii) the
director stock plan can not be amended more than once every six months to the
extent the amendment is limited by Rule 16b-3(c)(2)(ii) (or any successor
provision) under the Securities Exchange Act of 1934, as then in effect.
Our Executive Compensation
The following information summarizes the compensation we paid to our
Chief Executive Officer and our four other most highly compensated executive
officers whose total salary and bonus exceeded $100,000 during the fiscal years
ended December 31, 1999, December 31, 1998 and December 31, 1997. We did not
award any of those executive officers any options or stock awards during 1999.
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<PAGE>
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------------------
Other Annual
Name and Principal Position Year Salary Bonus Compensation
------------------------------------ ---------- -------------- --------------- -------------------
<S> <C> <C> <C> <C>
Lance D'Ambrosio 1999 $165,000 $41,250 $13,800(3)
Chief Executive Officer 1998 $165,000 $12,500 $13,800(3)
And Board Chairman 1997 $165,000(2) $6,875 $13,800(1), (3)
Brian Reynolds 1999 $135,000 $33,750 $6,000
President and Chief Operating 1998 $135,000(4) $15,000 $6,000(1)
Officer 1997 $-0- $-0- $-0-
Jerry Slovinski 1999 $133,333 $32,500 $26,000(1), (6)
Senior Vice President and 1998 $130,000(5) $-0- $6,000(1)
Chief Financial Officer 1997 $-0- $-0- $-0-
William Levan 1999 $120,000 $30,000 $6,000
Senior Vice President 1998 $120,000(7) $10,000 $6,000(1)
Engineering and Technology 1997 $-0- $-0- $-0-
Troy D'Ambrosio 1999 $105,000 $26,250 $6,000
Senior Vice President Legal & 1998 $105,000(8) $5,000 $6,000(1)
Legal & Administration 1997 $-0- $-0- $-0-
_______________________
</TABLE>
(1) Person named was our employee during only a part of the year in question.
The amount shown assumes 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
on August 1, 1997.
(3) Includes an automobile allowance of $7,800.
(4) Reflects full year base salary. Mr. Reynolds became a salaried employee on
July 1, 1998.
(5) Reflects full year base salary. Mr. Slovinski became a salaried employee on
November 1, 1998.
(6) Includes a $20,000 loan that was forgiven on November 1, 1999.
(7) Reflects full year base salary. Mr. Levan became a salaried employee on
March 31, 1998.
(8) Reflects full year base salary. Mr. D'Ambrosio became a salaried employee
on October 1, 1998.
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<PAGE>
FISCAL YEAR-END OPTION VALUE
The following information summarizes the number and value of options to
acquire common shares held by the executive officers described above.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Fiscal Year-End (#) Options at Fiscal Year-End
------------------------------------ -----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Brian Reynolds 183,333 166,667 $1,191,645 $1,083,335
Jerry Slovinski 100,000 150,000 $300,000 $262,500
William Levan 50,000 100,000 $144,500 $289,000
</TABLE>
For purposes of determining the values of the options held by the named
executive officers, we assumed that the common shares underlying the option
granted had a value of $7.50 per share, which is the estimated fair market value
our Board of Directors attributed to that stock on October 15, 1999 in
connection with the sale of our series C stock. The option value is based on the
difference between the fair market value of those shares, and the option
exercise price per share, multiplied by the number of shares subject to the
options.
Our Employment Agreements
We typically enter into an employment agreement with each of our senior
management and key personnel. The employment agreements generally have initial
terms of between one and three years. Under the agreements, the employee is
entitled to a base salary plus incentive bonuses, as determined by the Board of
Directors, standard benefits such as health and life insurance and reimbursement
of reasonable expenses. The base annual salaries for our senior management and
key personnel during 1999 were as follows:
o $165,000 for Lance D'Ambrosio
o $135,000 for Mr. Reynolds
o $133,333 for Mr. Slovinski
o $120,000 for Mr. Levan
o $105,000 for Troy D'Ambrosio
The agreements also provide for moving allowances in some instances. The
employment agreements for a number of our senior management also provide for the
grant of options. The option grants are generally subject to vesting schedules
and require the employee to forfeit portions of the here vested options if he or
she terminates the relationship. In two instances (in the case of senior
management personnel who have significant management responsibility for and over
the operation of one of our general market regions), we have agreed to grant to
the employee a 5% equity interest in our joint ventures and/or our 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 us or other parties in our joint ventures and/or our subsidiaries
of up to a set amount.
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<PAGE>
We can terminate the employment contracts for cause, which is defined
in the agreements, or without cause. In addition, the employee can terminate the
contract on notice to us 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 we believe are consistent with industry practice.
Limitations of Liability and Indemnification
Our 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 an act or omission that involves intentional misconduct or a
knowing violation of the law, or 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.
Our Bylaws provide that, to the full extent permitted by our Amended
and Restated Certificate of Incorporation and the Nevada Business Corporation
Act, we will indemnify, and advance expenses to, the our 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. That indemnification is in addition to the advancement of
expenses.
At present, we are not involved in any litigation or proceeding
involving any of our directors, officers, employees or agents where
indemnification by us would be required or permitted.
Our Employee Benefit Plans
In June 1998, our Board adopted the 1998 Stock Incentive Plan. The
Incentive Plan was approved by our shareholders in August 1998. The Board
believes the availability of stock options and the other incentive compensation
that us permitted to be awarded under the Incentive Plan is an important factor
in our ability to attract and retain qualified employees and to provide
incentives for them to exert their best efforts on behalf of us.
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<PAGE>
All employees, consultants, advisors, officers and directors of our
subsidiaries and our company 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. Our Board increased the number of common
shares reserved under the Incentive Plan to 1,820,229 common shares in December
1998. A total of 1,202,000 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
exercised as of March 1, 2000.
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 or repurchased by us, the common shares again become available for
issuance under the Incentive Plan.
Our 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, which we refer to as an ISO, as defined
in Section 422 of the Internal Revenue Code of 1986, as amended, or a
non-statutory stock option, or 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 tax 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 our Board, and may be
less than the fair market value of the common shares on the date of the grant.
Our Board may award common shares under the Incentive Plan as stock
bonuses, restricted stock awards, or otherwise. Our 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 using
stock awards under the Incentive Plan is determined by our Board. No stock
awards have yet been granted under the Incentive Plan.
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<PAGE>
We may also grant stock appreciation rights under the Incentive Plan.
Stock appreciation rights may, but need not, be granted in connection with an
option grant or an outstanding option previously granted under the Incentive
Plan. A stock appreciation right is exercisable only at the time or times
established by our Board. If a stock appreciation right 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. Our Board may withdraw any stock
appreciation rights granted under the Incentive Plan at any time and may impose
any condition upon the exercise of a stock appreciation right or adopt rules and
regulations from time to time affecting the rights of holders of stock
appreciation rights. No stock appreciation rights have yet been granted under
the Incentive Plan.
Our Board may also grant cash bonus rights under the Incentive Plan in
connection with options granted or previously granted, stock appreciation rights
granted or previously granted, stock awarded or previously awarded and 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.
Our 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 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 our Board for the period covered by the awards
are met and the employee satisfies any other restrictions established by our
Board. The performance goals are expressed as one or more targeted levels of
performance for our company or any of our subsidiaries, divisions or other
units, including performance levels relating to earnings, earnings per share,
stock price increase, total stockholder return, which is measured by the 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
During 1999 we did not hold an annual meeting of stockholders. On
January 14, 2000, however, we held our annual meeting for the year 2000. At the
meeting, the stockholders:
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<PAGE>
o Approved an amendment to our Amended and Restated Articles of
Incorporation which increased the maximum number of our board members
from nine to ten.
o Ratified and approved the appointment of Deloitte & Touche, LLP as our
independent public accountants for the fiscal year ending December 31,
1999.
o Elected Mario L. Baeza, Norberto Corredor and Troy D'Ambrosio as Class
2 directors, and Peter Schiller, George Sorenson, Salomon Magan and
Alfonso Bahamonde as Class 3 directors.
We filed the amendment to our Amended and Restated Articles of
Incorporation to increase the number of directors to ten with the Secretary of
State's office for the State of Nevada on January 20, 2000
OUR PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of our outstanding securities as of March 1, 2000 by the
following parties:
o all those persons or entities known by us to be beneficial owners of
5% or more of each class of our outstanding securities, or "5%
Shareholders"
o each director and each of our Chief Executive Officer and the next
four highest paid officers, or "Named Executive Officers"
o all directors and our executive officers as a group.
The data presented are based on information provided to us by the parties
specified above.
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<PAGE>
<TABLE>
<CAPTION>
Name of Number of Percentage of
Beneficial Owner Class Shares Class(1)
---------------- ----- ------ ------
<S> <C> <C> <C>
TCW/CCI Holding LLC(2) Common -0- (*)
(5% Shareholder) Series C Preferred 4,666,666 42.2%
Telematica EDC, C.A.(3) Common -0- (*)
(5% Shareholder) Series C Preferred 4,666,666 42.2%
FondElec Essential Service(4) Common 2,733,597 22.6%
Growth Fund, L.P. Series C Preferred 933,332 9.3%
(5% Shareholder)
Internexus, S.A.(5) Common 2,461,234 20.7%
(5% Shareholder) Series C Preferred 1,860,475 18.1%
Estate of George S. Common 1,003,286 8.7%
D'Ambrosio(6) Series C Preferred -0- (*)
(5% Shareholder)
International Finance Common -0- (*)
Corporation(7) Series C Preferred 933,332 9.3%
(5% Shareholder)
Glacier Latin-America Common -0- (*)
LTD(8) Series C Preferred 560,000 5.7%
(5% Shareholder)
Lance D'Ambrosio(9) Common 3,564,552 30.8%
(CEO, Director) Series C Preferred -0- (*)
Brian Reynolds(10) Common 183,333 1.6%
(Pres. and COO) Series C Preferred -0- (*)
Jerry Slovinski(11) Common 100,000 (*)
(Sr. VP and CFO) Series C Preferred -0- (*)
Troy D'Ambrosio Common 580,336 5.0%
(Sr. VP/Director) Series C Preferred -0- (*)
William Levan(12) Common 50,000 (*)
(Sr. VP) Series C Preferred -0- (*)
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<PAGE>
Jose Miguel Padron(13) Common 33,333 (*)
(VP/CEO of Series C Preferred -0- (*)
Central America
Operations)
Luis de la Fuente(14) Common 34,000 (*)
(VP/CEO of Mexico Series C Preferred -0- (*)
Operations)
Anthony Sansone(15) Common 165,555 1.4%
(Vice President Series C Preferred -0- (*)
Treasurer/Secretary)
Gaston Acosta-Rua(16) Common 4,000 (*)
(Director) Series C Preferred -0- (*)
Jorge Fucaraccio(17) Common -0- (*)
(Director) Series C Preferred -0- (*)
Mario Baeza(18) Common -0- (*)
(Director) Series C Preferred 10,000 (*)
Norberto Corredor(19) Common -0- (*)
(Director) Series C Preferred -0- (*)
George Sorenson(20) Common -0- (*)
(Director) Series C Preferred -0- (*)
Peter Schiller(21) Common -0- (*)
(Director) Series C Preferred -0- (*)
Salomon Magan (22) Common -0- (*)
(Director) Series C Preferred -0- (*)
Alfonso Bahamonde(23) Common -0- (*)
(Director) Series C Preferred -0- (*)
All directors and officers as a group Common 4,719,455 39.3%
(16 persons)(24) Series C Preferred 10,000 (*)
- ----------------------
*Less than 1%
</TABLE>
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<PAGE>
(1) Based on 11,585,489 outstanding shares of common stock and 9,728,909
outstanding shares of series C preferred stock. We also have 101,374 shares
of series B preferred stock outstanding, but have not included those shares
in this chart. The series B shares are held by approximately nine holders,
and two of those holders (Donald Williams and his affiliates, Caribbean
Communications, S.A., own approximately 65% of all the series B shares).
The inclusion of any shares as "beneficially owned" does not constitute an
admission of beneficial ownership (which has a broad definition under the
securities laws) of those shares. Unless otherwise indicated, each person
listed has sole investment and voting power with respect to the shares
listed. Also, each person is deemed to beneficially own any shares issuable
on exercise of stock options or warrants held by that person that are
currently exercisable or that become exercisable within 60 days after March
1, 2000.
(2) Includes an option to acquire 1,333,333 shares of series C Stock. Does not
include 833,333 shares of common stock that may be acquired under the terms
of a warrant issued to the stockholder in October 1999, but which may not
be exercised until the occurrence of certain specified corporate events.
(3) Includes an option to acquire 1,333,333 shares of series C Stock. Does not
include 833,333 shares of common stock that may be acquired under the terms
of a warrant issued to the stockholder in October 1999, but which may not
be exercised until the occurrence of certain specified corporate events.
(4) Includes an option to acquire 266,666 shares of series C Stock. Includes
513,006 common shares under warrants granted to the stockholder prior to
October 1999. Does not include 426,666 shares of common stock that may be
acquired under the terms of warrants issued to the stockholder in October
1999, but which may not be exercised until the occurrence of certain
specified corporate events.
(5) Includes an option to acquire 531,564 shares of series C Stock. Includes
282,644 common shares under warrants granted to the stockholder prior to
October 1999. Also includes options to acquire 8000 common shares which
were granted to Internexus' designees to our Board of Directors under our
Director Stock Plan, but which were assigned to Internexus under the terms
of the designees' arrangements with Internexus. Does not include 592,228
shares of common stock that may be acquired under the terms of warrants
issued to the stockholder in October 1999, but which may not be exercised
until the occurrence of certain specified corporate events.
(6) George D'Ambrosio was the father of Lance D'Ambrosio and Troy D'Ambrosio.
Lance D'Ambrosio has been appointed the personal representative of the
Estate of George S. D'Ambrosio. Lance D'Ambrosio disclaims beneficial
ownership of the shares held by the Estate.
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<PAGE>
(7) Includes an option to acquire 266,666 shares of series C Stock. Does not
include 166,666 shares of common stock that may be acquired under the terms
of warrants issued to the stockholder in October 1999, but which may not be
exercised until the occurrence of certain specified corporate events.
(8) Includes an option to acquire 160,000 shares of series C Stock. Does not
include 100,000 shares of common stock that may be acquired under the terms
of warrants issued to the stockholder in October 1999, but which may not be
exercised until the occurrence of certain specified corporate events.
(9) Includes shares held in the name of Mr. D'Ambrosio and 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
1,003,286 common shares held by the Estate of George S. D'Ambrosio, for
which Lance D'Ambrosio acts as personal representative and for which he
disclaims beneficial ownership.
(10) Includes options to acquire 183,333 common shares.
(11) Includes options to acquire 100,000 common shares.
(12) Includes options to acquire 50,000 common shares.
(13) Includes options to acquire 33,333 common shares.
(14) Includes options to acquire 34,000 common shares.
(15) Shares shown are held by a limited liability company for which Mr. Sansone
acts as the managing member. Mr. Sansone does not disclaim beneficial
ownership of such shares. Also includes options to acquire 50,000 common
shares.
(16) Mr. Acosta-Rua is a principal of FondElec and certain of its affiliates.
Mr. Acosta-Rua disclaims beneficial interest in the shares held by FondElec
and its affiliates. Also includes options to acquire 4,000 common shares.
(17) Mr. Fucaraccio is an officer of an affiliate of Internexus. Mr. Fucaraccio
disclaims beneficial interest in the shares held by Internexus, or its
affiliates.
(18) Mr. Baeza is a principal of TCW/CCI Holding or its affiliates, and is an
officer and sole member of a company that is a member of an entity that
controls TCW/CCI Holding. The shares of series C Stock shown for Mr. Baeza
reflect his indirect interest in TCW/CCI Holding's shares. Mr. Baeza
disclaims beneficial interest in the shares held by TCW/CCI Holding except
to the extent of that indirect interest.
(19) Mr. Corredor is an officer of Telematica or its affiliates. Mr. Corredor
disclaims beneficial interest in the shares held by Telematica except to
the extent shown.
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(20) Mr. Sorenson is a principal of FondElec. Mr. Sorenson disclaims beneficial
interest in the shares held by FondElec. Also includes options to acquire
4,000 common shares.
(21) Mr. Schiller is an officer of one or more affiliates of Internexus. Mr.
Schiller disclaims beneficial interest in the shares held by Internexus and
its affiliates.
(22) Mr. Magan is an officer of an affiliate of Telematica. Mr. Magan disclaims
beneficial interest in the shares held by Telematica.
(23) Mr. Bahamonde is a principal of an affiliate of TCW/CCI Holding. Mr.
Bahamonde disclaims beneficial interest in the shares held by TCW/CCI
Holding.
(24) Assumes the matters set forth in notes 1 through 23. Includes options to
acquire 466,666 common shares.
PART 2.
- -------
MARKET FOR EQUITY AND RELATED SHAREHOLDER MATTERS
There is no established public market for our common shares or
preferred shares. We cannot predict the effect, if any, that future sales of
common shares or preferred shares, or the availability of such shares for sale,
will have on any market price prevailing from time to time on our equity
securities. Future sales of substantial amounts of our stock, whether common or
preferred, could adversely affect any prevailing market prices of our
outstanding equity securities.
In 1995 we issued 1 million of our common shares to the former
shareholders of TTI in connection with our business separation from TTI. In
connection with that transaction, we placed all of those shares in escrow (where
they remain today) and filed a registration statement on Form 10-SB under the
Securities Exchange Act of 1934, as amended. We issued all of our currently
issued and outstanding common shares and preferred shares since the initial
issuance of the 1 million common shares that are held in escrow in transactions
which we believe did not involve unregistered public offerings. The common
shares and preferred shares we issued in those transactions are "restricted
securities." All or a portion of the restricted shares may in the future become
(or, in some instance, may be now) 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.
We have previously issued warrants and options, which were not
registered under the federal or state securities laws in reliance upon
exemptions from registration contained in those laws. The warrants and options
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.
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As of the date of this report, there are approximately 440 holders of
our outstanding common shares, nine holders of our outstanding series B
preferred shares and six holders of our outstanding series C preferred shares.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CERTAIN RELEVANT FACTORS
The following information should be read in conjunction with "Selected
Consolidated Financial Data" and our Consolidated Financial Statements and notes
thereto provided elsewhere in this report. The following discussion and other
parts of this report may contain forward-looking statements that involve risks
and uncertainties. Our 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, our history of unprofitability and
the continuing uncertainty of our profitability, our ability to develop and
introduce new services, the consummation of certain asset and subscriber
acquisition agreements to which we are a party, the uncertainty of market
acceptance of our new and existing services, our reliance on collaborative
partners, our limited sales and marketing experience, risks associated with
obtaining governmental approvals for our services, the highly competitive
industry in which we operate and the rapid pace of technological change within
that industry, changes in or failure to comply with governmental regulations,
our dependence on key employees and general economic and business conditions,
some or all of which may be beyond our control.
Overview
We are in the business of providing high quality, low-cost integrated
communications services using our own metropolitan area networks. We intend to
operate primarily in recently deregulated and high-growth markets, principally
in Mexico, Central America and the Andean region of Latin America. We offer
customers broadband, high-speed data connections, high-speed and dial-up
Internet access, voice and video services in a number of our 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 our inception in 1995 until 1998, our main activities consisted of
acquiring licenses and authorizations in our 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 our various networks. During fiscal 1998, we first acquired the
ability to provide, or introduced, significant bundled telecommunications
services in our markets.
Since our inception, we have sustained net losses and negative cash
flow, both of which have been significant. We expect the losses and negative
cash flow to continue until we develop a customer base that will generate
sufficient revenues to fund our operating expenses. We expect that our 2000
operating and net losses and negative operating cash flow will be greater than
in 1999. We also anticipate that the execution of our business plan will result
in a rapid expansion of our operations, which may place a significant strain on
our management, financial and other resources. Our ability to manage the
problems associated with this expansion will depend, among other things on, our
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. Our
inability or failure to effectively manage these issues effectively could result
in significant subscriber turnover, stagnant or decreasing subscriber growth,
managerial inefficiencies, missed corporate opportunities and continuing or
increased losses.
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The difficulties in managing these various business issues will be
compounded by a number of the unique attributes of our business operations and
strategy for becoming a premier facilities-based telecommunications provider in
our various markets. For example, we utilize, as part of our operating network,
wireless technology. This technology has been used by other telecommunications
providers for a significant period of time, but our point-to-multipoint
technology has only been commercially used on a limited basis. Although we
selected that technology because we believe it complements the wireline
technologies we otherwise employ in our networks, if that technology does not
perform as expected or provide the advantages that we expect, our business,
financial condition and the results of our operations may be materially and
adversely affected. Further, we employ an IP-based technology platform that uses
packet switching to transmit voice, video and data elements over the same
network. We believe 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. We believe 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 our technology platform does not perform as expected
or provide the advantages we expect, our business, financial condition and the
results of our operations could also be materially and adversely affected. Also,
as part of our operations in some of our markets, we rely on network capacity
that we lease from third parties, some of which may be our competitors in the
market.. Those parties may not have the same incentive as other,
non-competitive, network owners to maintain those existing relationships with us
on terms which promote our competitive advantage
Accounting Treatment
Our assets consist primarily of those assets we acquired as a result of
our formation, and those we acquired in the transaction with TIC. 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, or 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.
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Results of Our Operations
1999 compared to 1998
Revenues. Our Revenues for 1999 totaled $9.1 million, compared to $3.1
million for 1998, representing a $6.0 million increase from revenues for 1999.
The following table shows our revenues by operating subsidiary for 1999 and
1998:
TOTAL REVENUES
(in thousands) 1999 1998
------------------------- ------ ------
Intervan (1) $ 172 -
GBnet (2) 197 -
Inter@net (3) 1,156 $ 399
Chispa (3) 7,562 2,537
Parent Company and others 13 177
------- -------
Consolidated total $ 9,100 $ 3,113
======= =======
- -------------------
(1) 1999 revenue includes only eight days of ownership.
(2) 1999 revenue includes only sixteen days of ownership.
(3) 1998 revenue represents less than six months of ownership.
The increase in our 1999 revenues was primarily attributable to
ownership of the Inter@net and Chispa entities for all twelve months of 1999.
Chispa's customer base grew from 25,176 customers in 1998 to 29,276 customers in
1999, an increase of 4,100 customers, or 16%. In addition to the growth of the
customer base, Chispa began offering dial up internet services and high speed
data services to residential and corporate customers during the latter half of
1999.
Our Inter@net customer base consists of both contract and pre-paid
customers. Inter@net's contract customer base grew from 1,771 customers in 1998
to 2,667 customers in 1999, an increase of 51%. The pre-paid customer base grew
from an average of 356 customers in 1998 to an average of 462 customers in 1999,
an increase of 106 customers (or 30%). Despite increases in the customer base,
however, net revenues for Inter@net reflect the downward pressure on prices due
to competition and economic difficulties in Venezuela.
During December 1999, we commenced both our operations in Mexico and in
the GBnet affiliated countries of Central America (Guatemala, El Salvador,
Honduras, Nicaragua, Costa Rica, Panama and the Dominican Republic).
Variable Cost of Services. Variable cost of services consists primarily
of bandwidth and cable programming charges. The cost of these services totaled
$3.2 million in 1999, an increase of $1.3 million (or 68%) from 1998. Of total
variable cost of services for 1999, $2.2 million related to our Chispa's
operations in El Salvador and $0.6 million related to Inter@net's operations in
Venezuela.
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Salaries, Wages and Benefits. Our salaries, wages and benefits totaled
$5.8 million, an increase of $3 million (or 107%), from 1998. We maintained a
total of 490 employees at December 31, 1999, compared to 242 employees at
December 31, 1998. The increase in headcount reflects both the normal increases
associated with our maturing operation and the employees we acquired during the
month of December 1999 in our purchases of Intervan and GBnet, which had 126 and
29 employees, respectively, at December 31, 1999. We increased the salaries,
wages and benefits of our personnel to match market rates and increases in cost
of living.
Selling, General and Administrative Expenses. We incurred SG&A expenses
of $7.0 million in 1999, an increase of $2.3 million (or 46%) compared to 1998.
The increase in SG&A expenses reflects growth in our operations, including
completing significant acquisitions in 1999 and 1998, as well as the increased
development of our networks. The increase in SG&A reflects:
o consulting, legal and tax advisor fees, which totaled $2.7 million,
compared with $2.3 million for 1998
o a 45% increase in travel and promotion costs, to $1 million in 1999,
compared to $0.7 million in 1998. These expenses relate primarily to
the expansion of our operations into Central America and Mexico, the
significant private equity and credit facility we completed in October
1999 and the proposed vendor and equipment financing agreement with
Alcatel.
o on a company-wide basis, we recorded a provision for doubtful accounts
of $0.4 million, compared to $0.04 in 1998 as a result of payment
arrears and increased operations.
Stock Compensation Expense. We incurred non-cash stock compensation
expense in 1999 of $1.3 million.
Depreciation and Amortization. Our depreciation and amortization
expense totaled $5.3 million in 1999, representing an increase of $2.4 million
over 1998. The increase relates primarily to amortization of intangible assets
relating to our acquisitions.
Asset Impairment. Since 1997, we have owned approximately 78% of the
stock of Viva Vision, which acts as the operating company for the local
multi-point distribution service license held by Centurion. The total purchase
price for our interest in Viva Vision was approximately $8,300,000, of which the
majority of the purchase price was allocated to an intangible asset. In
connection with the Viva Vision transaction, we also acquired an 8.46% interest
in Centurion for approximately $845,000. During the fourth quarter of fiscal
1999, we determined that our related Viva Vision recorded assets and intangible
assets and our investment in Centurion, totaling approximately $5.7 million as
of December 31, 1999 may be impaired. As a result, a recoverability and fair
value assessment of the related assets in accordance with generally accepted
accounting principles was completed by management, which concluded that the
assets would not be recovered. Accordingly, we recorded an impairment of $5.7
million for the year ended December 31, 1999.
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Interest Expense, Net. Our net interest expense totaled $3.3 million in
1999, consisting of interest expense of $3.7 million and interest income of $0.4
million. Net interest expense for 1999 increased $2.9 million from 1998. The
increase in net interest expense was primarily attributable to our increased
indebtedness from acquisition and financing activities. The average interest
rate recorded on our indebtedness outstanding as of 1999 was approximately
10.75%, compared to approximately 10% for 1998.
Provision for Income Taxes. We recorded a provision for income taxes of
$0.05 million in 1999, compared to none for 1998. Chispa, which operates in El
Salvador, recognized the majority of this income tax expense.
Net Loss. We incurred a net loss of $20.3 million in 1999, an increase
of $10.1 million, compared to 1998. The principal reasons for the increase were:
o the increase in our amortization expense on intangible assets as a
result of acquisitions
o increased interest expense attributable to our increased indebtedness
as a result of acquisitions
o the impairment of our Viva Vision and Centurion intangible assets, and
o the increase in SG&A expenses due to the growth in our operations.
1998 compared to 1997
During the year ended December 31, 1998, we completed our development
activities and commenced planned principal operations. We were in the
development stage at December 31, 1997.
Revenues. Our revenues for 1998 totaled $3.1 million, compared to
$0.004 million for 1998, representing a $3.1 million increase. The following
table shows our revenues by operating subsidiary for 1998 and 1997:
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TOTAL REVENUES
(in thousands) 1998 1997
------------------------- ----- -----
Inter@net(1) $ 399 -
Chispa (1) 2,537 -
Parent Company and others 177 $ 40
------- -----
Consolidated total $ 3,113 $ 40
======= =====
- ----------------
(1) 1998 revenues represent less than six months of ownership.
The increase in revenues in 1998 was primarily attributable to the
acquisition of our ownership interests in Inter@net and Chispa for five and six
months of 1998, respectively.
Variable Cost of Services. Our variable cost of services totaled $1.9
million in 1998, an increase of $1.7 million from 1997. Of total variable cost
of services for 1998, $1.4 million related to Chispa's operations in El Salvador
and $0.2 million related to Inter@net's operations in Venezuela.
Salaries, Wages and Benefits. Our salaries, wages and benefits totaled
$2.8 million in 1998, an increase of $2.5 million from 1997. We maintained a
total of 242 employees at December 31, 1998, compared to fewer than 20 employees
at December 31, 1997. The increase in headcount reflects normal increases in our
employee count as our operations matured and the employees we acquired through
our acquisitions during the months of July and August of 1998 of Chispa and
Inter@net, which had 180 and 42 employees, respectively, at December 31, 1998.
Selling, General and Administrative Expenses. We incurred SG&A expenses
of $4.8 million in 1998, an increase of $3.0 million (or 167%) compared to 1997.
The increase in SG&A expenses reflects growth in our operations, including
completing significant acquisitions in 1998 and increased development of our
networks. The increase in SG&A reflects:
o consulting, legal and tax advisor fees, which totaled $2.3 million in 1998,
compared with $1.2 million for 1997
o a 196% increase in travel and promotion costs to $0.7 million compared to
$0.2 million in 1997
o the increase related primarily to the expansion of our operations into El
Salvador and Venezuela and researching potential business offerings in New
Zealand and Central America
Leased License Expense. During 1998, after completing a review of our
business plan, we determined to focus our business activities on the acquisition
and development of Latin America assets and businesses. Accordingly, leased
license expense in 1998 primarily represents an acceleration of the intangible
asset amortization related to the New Zealand license rights we had owned since
our inception.
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Stock Compensation Expense. We incurred non-cash stock compensation
expense in 1998 totaling $0.8 million.
Depreciation and Amortization. Our depreciation and amortization
expense totaled $2.9 million in 1998, representing an increase of $2.3 million
compared to 1997. The significant increase relates primarily to the amortization
of intangible assets relating to acquisitions.
Interest Expense, Net. Our net interest expense totaled $0.4 million,
consisting of interest expense of $0.7 million and interest income of $0.3
million. Net interest expense for 1998 decreased $0.3 million from 1997. The
decrease in interest expense was due primarily to recording of interest expense
for warrants we issued below fair value with debt in 1997.
Net Loss. We incurred a net loss of $10.2 million in 1998, an increase
of $5.6 million, compared to 1997. The principal reasons for the increase were
o the increase in our amortization expense on intangible assets as a
result of acquisitions
o the amortization of our New Zealand assets
o and the increase in SG&A expenses due to the growth in our operations
Liquidity and Capital Resources
Since inception, we have funded our cash requirements at the parent
company level through debt and equity transactions. The proceeds from these
transactions were primarily used to fund our investments in, and acquisition of,
start-up network operations, to provide working capital, and for general
corporate purposes, including the expenses we incurred in seeking and evaluating
new business opportunities. Our foreign subsidiary interests have been financed
by a combination of equity investments and shareholder loans.
We will continue to make significant capital expenditures in the next
several years in connection with building our networks, the further development
of our operations in Mexico, Venezuela and Central America, and new customer
accounts (for which we install our equipment on customer premises). We intend to
meet our capital requirements during 2000 from a combination of the following:
o unused proceeds from our October 1999 Financing
o borrowings under any definitive vendor financing agreement we execute
with Alcatel
o additional private equity transactions relating to the exercise of
outstanding options and warrants, particularly the options we issued
the six accredited investors in connection with our October 1999
financing transactions.
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We anticipate that we will require approximately $46.5 million during
2000 for capital expenditures related to the expansion of our existing
telecommunications business, and that we will require significant amounts
thereafter.
During 1999, our operating activities used $4.8 million, compared with
$4.3 million during 1998. Our investing activities used $31.6 million in 1999,
compared with $7.8 million during 1998. These changes are primarily attributable
to our GBnet and Intervan acquisitions, for which we paid a combined total of
$18.0 million in net cash on the closing dates. Our capital expenditures of
$13.1 million also contributed to the significant increase in investing
activities during 1999. Financing activities, principally our October 1999
financing, provided $58.4 million in net cash flow during 1999, compared to
$10.2 million in 1998.
As of December 31, 1999, we had current assets of $31.0 million,
compared to $10.1 million as of December 31, 1998, for an increase of $20.9
million. The increase in current assets was primarily due to an increase in cash
as a result of the October 1999 financing.
We have the ability to moderate our capital spending and losses by
varying the number and extent of our market build out activities and the
services we offer in our various markets. If we elect to slow the speed, or
narrow the focus, of our business plan, we will be able to reduce our capital
requirements and losses. The actual costs of building out and launching our
markets would depend on a number of factors, however, including our 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 we may offer, regulatory changes and changes in technology. In
addition, actual costs and revenues could vary from the amounts we expect or
budget, possibly materially, and such variations are likely to affect how much
additional financing we will need for our operations. Accordingly, there can be
no assurance that our actual financial needs will not exceed the anticipated
amounts available to us, including from new, third parties, described above.
To the extent we acquire the amounts necessary to fund our business
plan through the issuance of equity securities, our shareholders 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
our cash flow from operations being dedicated to the payment of principal and
interest on that indebtedness, and could render us more vulnerable to
competitive and economic downturns. Our subsidiaries or affiliates could also
obtain financing from third parties, but there can be no assurance our
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 us.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Paragraph 16(a) of the Securities Exchange Act of 1934, or the "Exchange
Act", requires our executive officers and directors, and persons who own 10% or
more of a registered class of our equity securities, which we refer to
collectively as "Reporting Persons", to file reports of ownership and changes in
ownership with the Securities and Exchange Commission if we and our equity
securities meet certain requirements. We have received copies of filings on
Forms 3 or 4 for the year ended December 31, 1999 for Mario Baeza, Norberto
Corredor, TCW and Telematica (and certain of TCW's and Telematica's affiliates).
Based solely on our review of these Forms, we believe they were timely filed. We
have not received Forms 3, 4 or 5 from any other of our Reporting Persons for
that period.
REPORTS ON FORM 8-K
The registrant has filed the following reports on Form 8-K during the
period covered by this report:
o Report on Form 8-K for the event date June 15, 1999, relating to our
acquisition of fiber-optic capacity in Mexico City from Metronet.
o Report on Form 8-K for the event date August 6, 1999, relating to
FondElec's loan to us of $1 million and the dismissal of a lawsuit
against us that was brought in the federal district court in the State
of Nevada.
o Report on Form 8-K for the event date September 3, 1999, relating to
Internexus' loan to us of $1 million in September of 1999 and an
additional loan of $500,000 in October 1999. The report also describes
the status of an upgrade to our private network concession that had
been granted to us by the licensing authority in Venezuela, and the
grant by the U.S. District Court for the District of New Jersey of our
motion to move certain litigation that was filed against us in that
court in early 1999 to the United States District Court for the
District of Utah.
o Report on Form 8-K for the event date October 18, 1999, relating to
our closing of the first portion of our $109.5 million private equity
and credit facility financing package with six accredited investors,
and the transactions related to those investments.
o Report on Form 8-K for the event date November 16, 1999, relating to
our closing of the final portion of our $109.5 million private equity
and credit facility financing package.
o Report on Form 8-K for the event date December 15, 1999, relating to
our acquisition of GBNet.
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o Report on Form 8-K for the event date December 24, 1999, relating to
our acquisition of Intervan.
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 85
Consolidated Balance Sheets 86
Consolidated Statements of Operations 88
Consolidated Statements of Cash Flows 89
Consolidated Statements of Stockholders' Equity 91
Notes to Consolidated Financial Statements 93
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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, (the "Company") as of December 31, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. Our audits also included the financial statement schedule listed in
the Index at Exhibit 99. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that the Company 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, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material aspects, the information set forth therein.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
March 28, 2000
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<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- ----------------------------------------------------------------------------------------------------------------
December 31, December 31,
1999 1998
-------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 26,303,296 $ 4,315,281
Accounts receivable - net (Note 2) 3,180,748 432,868
Due from affiliate (Notes 7 and 12) - 5,000,000
Inventory - net (Note 2) 262,177 205,408
Other current assets 1,225,490 173,160
-------------- -------------
Total current assets 30,971,711 10,126,717
INVESTMENT IN CENTURION (Note 2) - 845,955
PROPERTY AND EQUIPMENT - net (Notes 2 and 4) 28,446,776 8,524,521
INTANGIBLE ASSETS - net (Note 5) 36,660,025 22,650,040
OTHER ASSETS 1,126,011 325,811
-------------- -------------
TOTAL ASSETS $ 97,204,523 $ 42,473,044
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - current portion (Note 9) $ 11,190,987 $ 8,676,722
Accounts payable and accrued liabilities (Note 6) 6,851,249 4,344,561
Due to affiliates (Note 7) 122,356 1,074,855
-------------- -------------
Total current liabilities 18,164,592 14,096,138
LONG-TERM LIABILITIES:
Subordinated exchangeable promissory notes (payable
to related parties) (Notes 10 and 12) - 10,000,000
Notes payable - long-term portion (Note 9)
11,389,937 3,987,268
Long-term debt (payable to related parties) (Note 7)
2,595,634 1,224,504
Other long-term liabilities
185,686 135,091
-------------- -------------
Total long-term liabilities
14,171,257 15,346,863
MINORITY INTEREST IN SUBSIDIARIES
5,493,394 2,345,517
-------------- --------------
Total liabilities
37,829,243 31,788,518
COMMITMENTS AND CONTINGENCIES (Note 14)
STOCKHOLDERS' EQUITY (Note 10):
Series "B" Preferred stock; $0.001 par value; 750,000 shares authorized:
101,374 shares issued and outstanding in 1999 and 1998.
101 101
Series "C" Preferred stock; $0.001 par value; 14,250,000 shares authorized:
9,728,909 shares issued and outstanding in 1999 and 1998.
9,729 -
Common stock; $0.001 par value; 100,000,000 shares authorized:
11,585,489 and 11,738,277 outstanding in 1999 and 1998, respectively
11,585 11,738
Additional paid-in capital
95,147,893 26,179,739
Accumulated deficit
(35,764,016) (15,486,537)
Accumulated other comprehensive loss
(30,012) (20,515)
-------------- -------------
Total stockholders' equity
59,375,280 10,684,526
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 97,204,523 $ 42,473,044
============== =============
</TABLE>
See notes to consolidated financial statements.
85
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- -----------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 1998 1997
------------------ ------------------ -----------------
<S> <C> <C> <C>
NET REVENUES FROM SERVICES $ 9,099,054 $ 3,113,482 $ 40,186
------------------ ------------------ -----------------
COSTS AND EXPENSES:
Variable cost of services 3,202,017 1,876,133 165,048
Salaries, wages and benefits 5,768,580 2,756,212 343,072
Selling, general and administrative 7,041,690 4,776,292 1,750,454
Depreciation and amortization (Notes 2, 4 and 5) 5,308,489 2,864,789 619,182
Asset impairment (Note 2) 5,680,101 - -
Leased license expense 72,421 708,912 116,161
Stock option compensation expense (Note 11) 1,251,349 753,046 962,738
------------------ ------------------ -----------------
Total costs and expenses 28,324,647 13,735,384 3,956,655
------------------ ------------------ -----------------
OPERATING LOSS (19,225,593) (10,621,902) (3,916,469)
OTHER INCOME AND (EXPENSES):
Interest expense, net (Notes 7 and 9) (3,274,814) (401,695) (690,836)
Net gain (loss) on foreign exchange 27,488 (6,497) -
------------------ ------------------ -----------------
Total other expense (3,247,326) (408,192) (690,836)
------------------ ------------------ -----------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (22,472,919) (11,030,094) (4,607,305)
PROVISION FOR INCOME TAXES (50,183) - -
------------------ ------------------ -----------------
LOSS BEFORE MINORITY INTEREST (22,523,102) (11,030,094) (4,607,305)
MINORITY INTEREST IN LOSS OF SUBSIDIARIES 2,245,623 799,298 13,011
------------------ ------------------ -----------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (20,277,479) $ (10,230,796) $ (4,594,294)
================== ================== =================
Net loss per basic and diluted common share (see Note 2) $ (1.48) $ (0.87) $ (0.57)
================== ================== =================
Weighted-average number of common shares:
Basic and diluted 13,660,881 11,736,927 8,044,827
================== ================== =================
See notes to consolidated financial statements.
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 1998 1997
--------------- ---------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(20,277,479) $(10,230,796) $ (4,594,294)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 5,308,489 2,864,789 619,182
Provision for bad debts 363,005 - -
Minority interest in loss of subsidiaries (2,245,623) (799,298) (13,011)
Asset impairment (Note 2) 5,680,101 545,055 -
Issuance of options for common shares below fair
value 1,251,349 1,000,245 1,479,074
Amortization of discount on notes payable 682,440 554,731 -
Issuance of warrants below fair value 162,191 - 657,143
Change in assets and liabilities, net of effects
of acquisitions:
Accounts receivable (573,033) 301,927 959
Due from affiliate 5,000,000 42,919 -
Inventory (81,376) (56,887) 33,225
Other current assets (687,897) (257,442) 260,998
Other assets (561,485) (489,798) 1,258
Accounts payable and accrued liabilities 1,602,914 1,776,763 (473,491)
Due to affiliates (491,541) 348,689 -
Other long-term liabilities 50,595 115,425 -
--------------- ---------------- -----------------
Net cash used in operating activities (4,817,350) (4,283,678) (2,028,957)
--------------- ---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Centurion - - (805,955)
Reverse acquisition of CCI - - 56,582
Purchase of wireless licenses (512,944) - -
Cash paid in GBnet acquisition, net (4,000,000) - -
Cash paid in Intervan acquisition, net (13,979,747) - -
Cash paid in Chispa Dos acquisition, net - (2,248,641) -
Cash paid in Inter@net acquisition, net - (961,412) -
Cash paid in Viva Vision acquisition, net - - (387,318)
Purchase of minority interest in Viva Vision - - (800,000)
Purchases of property and equipment (13,087,570) (4,546,900) (128,779)
--------------- ---------------- -----------------
Net cash used in investing activities (31,580,261) (7,756,953) (2,065,470)
--------------- ---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock - 3,161,661 1,967,945
Net proceeds from issuance of Series "C" Preferred
Stock (Note 12) 53,578,039 - -
Net proceeds from issuance of Series "A" Preferred Stock - 1,794,965 8,332,055
Repurchases of treasury stock prior to retirement (1,215,860) - -
Increase in minority interest from issuance of
subsidiary common stock 5,725,000 500,000 -
Proceeds from related party note - 5,000,000
Proceeds from related party borrowings 11,935,422 98,286 919,333
Payments on related party borrowings and outstanding
debt (15,581,076) - (962,293)
Proceeds from promissory notes 4,335,000 - 2,300,000
Payments on promissory notes (383,334) (350,000) (2,300,000)
--------------- ---------------- -----------------
Net cash provided by financing activities 58,393,191 10,204,912 10,257,040
--------------- ---------------- -----------------
EFFECT OF EXCHANGE RATES ON CASH (7,565) (20,515) -
--------------- ---------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 21,988,015 (1,856,234) 6,162,613
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,315,281 6,171,515 8,902
--------------- ---------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,303,296 $ 4,315,281 $ 6,171,515
=============== ================ =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 1,621,896 $ 12,143 $ 30,996
=============== ================ =================
Cash paid during the year for income taxes (including
prepaid) $ 113,418 $ 38,055 $ -
=============== ================ =================
See Note 16 to the consolidated financial statements for other non-cash
financing and investing activities.
See notes to consolidated financial statements.
</TABLE>
87
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock
-------------------------------------------------------------------
Series "A" Series "B" Series "C"
------------------------------------------------------------------------
Total Shares Amount Shares Amount Shares Amount
------------- ------------------------------------------------------------------------
<S> <S> <C> <C> <C> <C> <C> <C>
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 -- --
Comprehensive 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 -- --
Comprehensive loss:
Net loss for the year
ended December 31, 1999 (20,277,479) -- -- -- -- -- --
Other comprehensive loss consisting of
foreign currency translation adjustment (9,497) -- -- -- -- -- --
------------ ---------- ---------- ---------- --------- ---------- ---------
Total comprehensive loss (20,286,976) -- -- -- -- -- --
Issuance of Series "C"
Preferred Stock, net 67,794,198 -- -- -- -- 9,728,909 $ 9,729
Issuance of Warrants 750,677 -- -- -- -- -- --
Repurchases and retirements
of common stock (1,215,860) -- -- -- -- -- --
Forgiveness of related party liability 235,175 -- -- -- -- -- --
Issuance of warrants on debt 162,191 -- -- -- -- -- --
Issuance of options for common shares
below fair value 1,251,349 -- -- -- -- -- --
------------ ---------- ---------- ---------- --------- ---------- ---------
BALANCE, DECEMBER 31, 1999 $ 59,375,280 -- $ -- 101,374 $ 101 9,728,909 $ 9,729
============ ========== ========== ========== ========= ========== =========
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- --CONTINUED--
Common Stock Additional Accumulated
------------------------------ Paid-in Accumulated Other Compre-
Shares Amount Capital Deficit hensive Loss
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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) --
Comprehensive 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)
Comprehensive loss:
Net loss for the year
ended December 31, 1999 -- -- -- (20,277,479) --
Other comprehensive loss consisting of
foreign currency translation adjustment -- -- -- -- $ (9,497)
------------ ------------ ------------ ------------ ------------
Total comprehensive loss -- -- -- (20,277,479) (30,012)
Issuance of Series "C"
Preferred Stock, net -- -- 67,784,469 -- --
Issuance of warrants -- -- 750,677 -- --
Repurchases and retirements
of common stock (152,788) (153) (1,215,707) -- --
Forgiveness of related party liability -- -- 235,175 -- --
Issuance of warrants on debt -- -- 162,191 -- --
Issuance of options for common shares
below fair value -- -- 1,251,349 -- --
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 11,585,489 $ 11,585 $ 95,147,893 (35,764,016) $ (30,012)
============ ============ ============ ============ ============
</TABLE>
88 (a)
<PAGE>
See notes to consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Business Description - Convergence Communications, Inc. and subsidiaries
(the "Company"), is a provider of integrated broadband communications and
Internet services through its own metropolitan area networks. The Company
operates in recently deregulated and high growth markets, principally
Mexico, Central America and the Andean region of South America. The Company
offers business entities, governmental agencies and residential customers
high-broadband, high-speed data connections, high-speed and dial-up
Internet access, voice and video services. The Company's networks use
technology based on the Internet Protocol, or "IP", and asynchronous
transfer mode, or "ATM", technology.
From its inception, the Company has focused on providing telecommunications
services using high speed transmission networks within and across national
borders. The Company intends to capitalize on the rapidly growing demand
for telecommunications services in countries emerging from developing and
state-controlled economies and where there is growing liberalization of
regulations governing the provision of telecommunications services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 amortization of intangible assets relating to
acquisitions, interest expense on debt relating to acquisitions, start-up
costs, legal and professional expenses, and charges for depreciation and
other costs relating to its acquisition and development of its business.
The Company expects to continue to experience net losses and negative cash
flow through at least 2001, 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 intends to meet its operational and
capital expenditure requirements during 2000 from a combination of unused
proceeds from its recent equity financing, additional private equity
transactions and an equipment financing facility with a vendor equipment
provider.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company, all wholly and majority-owned subsidiaries,
and its 32.6% interest in Chispa Dos, Inc. ("Chispa"), the holding entity
of Cablevisa, S.A., Multicable S.A. and Cybernet de El Salvador S.A. The
Company has operating control and 50% of the Board of Directors seats of
Chispa. All significant intercompany accounts and transactions have been
eliminated in consolidation.
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.
89
<PAGE>
Cash and Cash Equivalents - Cash and cash equivalents are highly liquid
investments, including short-term investments and time deposits with
original maturities of three months or less at the time of purchase. Cash
equivalents and short-term investments are stated at cost, which
approximates market value.
Accounts Receivable - No single customer accounted for greater than 10% of
accounts receivable at December 31, 1999 and 1998. The allowance for
doubtful accounts was $366,448 and $328,283 at December 31, 1999 and 1998,
respectively.
Inventories - Inventories of subscriber installation materials and
subscriber converter boxes are stated at the lower of average cost or
market. The inventory balance reflects an inventory reserve of $259,579 for
excess and obsolescence at December 31, 1999 and 1998.
Property and Equipment - Property and equipment are recorded at cost and
depreciated using the straight-line method over the following expected
useful lives:
Life in years
-------------
Buildings and improvements 10 - 20 years
Operating communications equipment 2 - 10 years
Furniture, fixtures and equipment 2 - 10 years
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.
Since 1997, the Company has owned 78.14% of the stock of Caracas Viva
Vision TV, S.A., a Venezuelan Corporation ("Viva Vision") which acts as the
operating company for the local multi-point distribution service ("LMDS")
license held by Comunicaciones Centurion S.A. ("Centurion"). The total
purchase price for the 78.14% interest in Viva Vision was approximately
$8,300,000, of which the majority of the purchase price was allocated to an
intangible asset. In connection with the Viva Vision transaction, the
Company also acquired an 8.46% interest in Centurion for approximately
$845,000. During the fourth quarter of fiscal 1999, the Company determined
that the Visa Vision recorded assets and intangible assets and the
investment in Centurion totaling $5,680,000 as of December 31, 1999 may be
impaired. As a result, a recoverability and fair value assessment of the
related assets in accordance with generally accepted accounting principles
was completed by management, which concluded that the assets would not be
recovered. Accordingly, management recorded an impairment of $5,680,000 for
the year ended December 31, 1999.
90
<PAGE>
Revenue Recognition - The Company provides telecommunication services to
its customers pursuant to contracts, which range from six months to five
years but generally are for three years. The customer generally pays an
installation charge and a monthly fee based on the quantity and type of
equipment installed. Services are billed on a monthly, predetermined basis,
which coincides with when the services are rendered. Revenues for
multi-channel television services are recognized in the period during which
the services are provided. All revenues and expenses are recorded on the
accrual basis. No single customer accounted for greater than 10% of total
revenue from services for the years ended December 31, 1999, 1998 and 1997.
Stock Based Compensation - The Company accounts for stock option grants to
employees and directors in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25").
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. Provision is made for taxes on undistributed
earnings of foreign subsidiaries to the extent that such earnings are not
considered to be permanently invested.
Foreign Currency Translation - All of the Company's subsidiaries, except
for GBnet and Inter@net, operate using the local currency as the functional
currency. Accordingly, all assets and liabilities of these subsidiaries,
except for GBnet 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) income, a
separate component of stockholders' equity.
GBnet and Inter@net use the U.S. dollar as the functional currency.
Net Loss Per Basic and Diluted Common Shares - 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 and Series C 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. At December 31, 1999, 1998 and 1997, all options and warrants
were antidilutive due to the losses of the Company.
Fair Value of Financial Instruments - The Company's financial instruments
include cash and cash equivalents, receivables, payables and short and
long-term debt. The fair value of such financial instruments has been
determined using available market information and interest rates as of
December 31, 1999 and 1998. The recorded value of each financial instrument
approximates its fair value.
Comprehensive Loss - The Company reports comprehensive loss in accordance
with Statements of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income". 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.
91
<PAGE>
Segment Reporting - Effective January 1, 1998, the Company adopted SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information".
SFAS No. 131 changes the way public companies report information about
segments of their business in their annual financial statements and
requires them to report selected segment information in their quarterly
reports issued to shareholders. SFAS No. 131 also requires entity-wide
disclosures about the products and services an entity provides, the foreign
countries in which it holds assets and reports revenues, and its major
customers.
Recently Issued Financial Accounting Standards - In June 1998, SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" was
issued. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an entity
recognize all derivative assets or liabilities in the balance sheet and
measure those instruments at fair value. SFAS No. 133 is effective for the
Company's financial statements for the year beginning January 1, 2001. The
Company is currently evaluating the effects of SFAS No. 133 on its
financial statements.
Reclassifications - Certain reclassifications of previously reported 1998
and 1997 amounts have been made to conform to the 1999 classifications.
3. ACQUISITIONS
Intervan Acquisition - On December 24, 1999, Convergence Communications,
S.A. de C.V. ("CCI Mexico"), a wholly owned subsidiary of the Company,
acquired all of the outstanding stock of Intervan from Controladora S.O.E.,
S.A. de C.V., a Mexican corporation ("SOE"). Intervan provides data
networking and network access services to over 420 customers in Mexico
through a nationwide ATM network. The total purchase price for Intervan was
approximately $21,000,000 ($20,338,705 effective purchase price including
the discount on the notes of $661,295), of which CCI Mexico paid
$15,000,000 in cash at the closing. The balance of the purchase price was
paid through CCI Mexico's delivery of two promissory notes, which are due
on the first and second anniversaries of the closing. The promissory note
due on December 24, 2000 is in the face amount of $4,500,000 and is
non-interest bearing. The promissory note due on December 24, 2001 is in
the face amount of $1,500,000 and bears interest during the second year at
the rate of 8% per annum. The notes were recorded at the present value of
approximately $5,300,000, which reflects the estimated market rate of
interest of 10.75%. The amounts represented by the promissory notes are
subject to downward adjustment if Intervan suffers recurring revenue losses
after the closing. The allocation below represents a preliminary allocation
of the purchase price.
92
<PAGE>
The preliminary purchase price was allocated as follows:
Current assets $ 3,749,864
Property and equipment 5,136,584
Other assets 851,128
Intangible assets (primarily subscriber rights) 13,344,581
Liabilities assumed (2,743,452)
------------
$ 20,338,705
============
GBnet Acquisition - On December 15, 1999, the Company completed the
acquisition of all of the outstanding capital stock of GBnet from General
Business Machines ("GBM") for a total purchase price of $13,000,000, of
which the Company paid $4,000,000 in cash at the closing. The balance of
the purchase price, or $9,000,000 (after discount of promissory notes), was
paid through the delivery of four promissory notes, which are due on the
first through fourth anniversaries of the closing. The allocation below
represents a preliminary allocation of the purchase price. The promissory
notes, which are non-interest bearing, are in face amounts sufficient to
provide GBM with an imputed interest rate of 10.75% per annum through their
anticipated payment dates. The Company's obligations to pay the deferred
portions of the purchase price are secured by a pledge of the shares of
GBnet, as well as its operating subsidiaries. A portion of those pledged
shares will be released to the Company as it pays down the promissory
notes. GBM will be entitled to retain at least 51% of the pledged shares
until the Company pays all amounts due under the promissory notes.
In connection with the acquisition, GBM and GBnet entered into a number of
ancillary documents, including (1) a commercialization agreement, pursuant
to which each of GBnet and GBM agreed to recommend one another as preferred
providers of services and products, (2) an equipment purchase agreement,
pursuant to which GBM agreed to provide GBnet with preferred purchasing
terms for any IBM equipment it acquires from GBM for its operations, and
(3) a network management agreement pursuant to which GBnet will provide GBM
with managed data network services frame relay-based connections.
The preliminary purchase price was allocated as follows:
Fair value of assets acquired:
Current assets $ 268,161
Property and equipment 2,872,908
Intangible assets (primarily subscriber rights) 9,858,931
Liabilities assumed None
-----------
$13,000,000
===========
Inter@net Acquisition - On August 17, 1998, the Company acquired all of the
outstanding stock of Telecom, a Panamanian corporation, which own 100% of
the stock of Inter@net, for a total purchase price of approximately
$2,400,000, including certain shareholder liabilities assumed in connection
with the acquisition. The purchase price consisted of $450,000 in cash,
$800,000 in promissory notes (one promissory note for $200,000 was paid on
August 17, 1999, and a second promissory note for $600,000 is due on August
17, 2000) and 85,714 of the Company's common shares. The parties to the
Inter@net acquisition 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 until August 2000 to insure the accuracy of Telecom's and the
selling shareholders' representations regarding the business of Inter@net.
93
<PAGE>
The purchase price was allocated as follows:
Fair value of net assets acquired: $ 6,130
Intangible assets (subscriber rights and goodwill) 2,393,870
----------
$2,400,000
==========
El Salvador Acquisition - In July 1998, the Company and FondElec formed
Chispa as a holding company for the acquisition of two subscription cable
television companies in El Salvador from Star Industries, S.A., ("Star") a
Panamanian corporation. Under the terms of the agreements for the
transactions, the Company acquired a 49.5% interest in Chispa, while
FondElec acquired a 50.5% interest. The agreements provided that the
Company would have operating control of Chispa, would hold a majority of
the board of directors' seats, and would have the right to acquire
FondElec's interest in Chispa under certain conditions. The Company paid
approximately $2,500,000 for its interest in Chispa and is required to make
additional capital contributions to it (either in the form of debt or
equity) to fund its pro rata portion of the operating costs and deferred
purchase price payments (as described below) for the two cable television
operating subsidiaries.
The total purchase price for the two operating subsidiaries was about
$16,909,000, approximately $4,800,000 of which the Company and FondElec
paid at closing, and the balance was paid through Chispa's delivery of
three promissory notes. The first promissory note was in the amount of
$5,201,000, and was due on February 17, 1999. The second promissory note,
in the approximate principal amount of $3,467,000, was due on May 17, 1999,
and the final promissory note, in the original principal amount of
$3,467,000, is due on July 17, 2000. The amounts due under the first and
second promissory notes were non-interest bearing, but the amounts under
the third promissory note bears interest at 7%. In connection with the
closing, Chispa also paid approximately $430,000 of outstanding debt of the
cable television operating systems to third party banks.
The purchase price was allocated as follows:
Fair value of net assets acquired: $ 3,588,254
Intangible assets (subscriber and franchise
rights and goodwill) 13,320,746
-----------
$16,909,000
===========
In December 1998, Chispa sold a portion of its equity to a third party
investor for $700,000 (comprised of $500,000 in cash and a $200,000
promissory note) and, as a result of that transaction, the Company's
interest in Chispa was reduced to 44.03%.
In October 1999, in connection with the equity and debt financing that the
Company completed with six accredited investors, one of those investors
acquired a direct interest in Chispa for $5,525,000. In connection with
that purchase, the Company acquired additional shares in Chispa by
capitalizing approximately $900,000 on the amounts owed back to the
Company. As a result of that transaction, the Company currently holds
approximately 32.6% of Chispa. Under the management and shareholder
agreements for Chispa, the Company maintains day-to-day control over Chispa
operations and is entitled to elect 50% of its directors.
94
<PAGE>
Pro Forma Effect of Acquisitions - The following pro forma information
reflects the results of the Company's operations as if the Intervan, GBnet,
Inter@net and Chispa acquisitions had occurred as of January 1, 1997,
adjusted for the effect of the amortization of intangible assets, interest
expense on acquisition debt, the change in minority interest, and any
increases of depreciation expense due to the increase to fair value of
fixed assets.
Years Ended December 31,
------------------------
1999 1998 1997
Pro forma results ----------- ----------- ------------
Revenue $ 29,369,852 $ 22,442,575 $ 14,143,768
Net loss $(23,623,326) $(18,517,316) $ (16,643,543)
Net loss per common share
and common share equivalent
(basic and diluted) $ (1.73) $ (1.58) $ (2.07)
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 acquisitions 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:
1999 1998
-------------- ------------
Land $ 586,400 $ 586,400
Buildings and improvements 325,754 156,414
Operating communications equipment 28,590,650 6,439,998
Furniture, fixtures and other equipment 1,637,135 532,353
-------------- ------------
Total 31,139,939 7,715,165
Less - accumulated depreciation (6,379,544) (534,737)
-------------- ------------
Total 24,760,395 7,180,428
Network construction in progress 3,686,381 1,344,093
-------------- ------------
Property and equipment, net $ 28,446,776 $ 8,524,521
============== ============
5. INTANGIBLE ASSETS
Intangible assets and respective amortization lives consisted of the
following as of December 31:
95
<PAGE>
1999 1998 Years
-------------- ------------- ---------
License rights $ 512,944 $ 658,252 5 - 15
Contract rights - 9,343,999 7 - 10
Subscriber rights 32,524,143 8,924,317 5 - 7
Franchise rights 4,111,528 4,111,528 20
Goodwill 2,815,598 2,815,598 20
--------------- -------------
39,964,213 25,853,694
Accumulated amortization (3,304,188) (3,203,654)
-------------- -------------
$ 36,660,025 $ 22,650,040
============== =============
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following as of
December 31:
--------------- --------------
1999 1998
Accounts payable $ 1,865,119 $ 3,488,492
Accrued liabilities 4,238,208 652,632
Deferred revenue 747,922 203,437
--------------- --------------
Total $ 6,851,249 $ 4,344,561
=============== ==============
7. RELATED PARTY TRANSACTIONS
In August 1999, the Company entered into an advisory services agreement
with FondElec relating to payment of certain fees to FondElec. The Company
paid $1,654,000 to FondElec relating to certain consulting services
provided to the Company, including services related to the sale of Series
"C" Preferred Stock in the October 1999 financing transactions. The Company
recorded $1,281,500 as equity transaction costs and the balance as
administration expenses. FondElec is also entitled to receive $50,000 per
quarter for the services it provides the Company under the advisory
agreement. A subsidiary of Chispa also has outstanding debt owed to
FondElec of $1,269,497, plus accrued interest of $81,725 using a rate of
12%. This debt is subordinated to another third-party bank notes payable
with a final maturity date of 2004.
During 1999, the Company borrowed $1,000,000 from FondElec and $1,500,000
from Internexus for business purposes. FondElec and Internexus received a
total of 18,204 warrants to acquire common stock at $7.50 per share. These
loans were repaid in October 1999.
In 1998, the Company granted FondElec an option to purchase 50,000 common
shares at $0.875 per share for advisory services. In 1997, the Company sold
a series of secured promissory notes and warrants in private placement
transactions. The Company issued a total of 331,717 warrants in this
transaction. The warrants have a five-year exercise period and allow the
holder to purchase common shares of the Company at $2.626 per share. An
affiliate of FondElec, who was an investor in the notes, received 175,954
of the warrants. The remaining warrants were issued to non-affiliated
investors.
In connection with a reverse acquisition that occurred in 1997, the Company
assumed a note payable to Transworld Telecommunications, Inc. ("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, 1999, $996,707 (plus accrued interest of $329,430) was
outstanding on the loan.
96
<PAGE>
During 1999, the Company also purchased and subsequently retired 35,714
shares of its common stock from a shareholder for $250,000. The shareholder
also forgave $235,175 of a note payable and accrued interest of the
Company. As the amounts were due from a related party, the amounts of debt
forgiveness were recorded as contributed capital.
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:
1999 1998
Federal income tax benefit at statutory rate ---- -----
of 34% $(6,877,280) $(3,478,471)
State and local income taxes
Foreign rate differential (1,011,365) (511,540)
Increase (decrease) in taxes resulting from: 769,464 365,686
Effect of true-up of prior year items
Change in valuation allowance: 194,574 (893,146)
Federal
State 3,128,188 2,538,755
Foreign 460,027 372,539
Permanent Differences 1,055,861 990,572
Federal
State 15,500 31,117
Foreign 2,279 4,576
2,312,935 579,912
------------ ------------
Total $ 50,183 $ -0-
============ ============
The following table presents the U.S. and foreign components of the
provision (benefit) for income taxes:
1999 1998
Current:
Federal $ -- $ --
State -- --
Foreign 50,183 --
-------------- ---------------
50,183 --
Deferred:
Federal (3,128,188) (2,538,755)
State (460,027) (372,539)
Foreign (1,055,861) (990,572)
Valuation Allowance 4,644,076 3,901,866
--------------- ---------------
Total Provision $ 50,183 $ -0-
=============== ===============
As of December 31, 1999, the Company has net operating loss carryforwards
of approximately $12,000,000. The net operating loss carryforwards will
begin to expire in 2010. The Company also has foreign net operating loss
carryforwards of approximately $5,800,000. The Company has recorded a
valuation allowance to reflect the estimated amount of deferred tax assets
which, more likely than not, will not be realized.
97
<PAGE>
The long-term net deferred tax assets at December 31, 1999 and 1998 are
fully reserved with a valuation allowance due to the uncertainty of
realization and are comprised of the following:
1999 1998
-------------- ------------
Deferred Tax Assets:
Net operating loss carryforwards
Federal $ 4,072,489 $ 1,503,146
State 600,105 221,583
Foreign 2,069,156 1,056,286
Basis in intangibles 1,180,804 959,585
Related party accruals 161,323 223,627
Stock options deferred 1,711,246 1,223,220
Impairment of license rights 185,319 185,319
Inventory reserve 43,616 32,051
Provision for bad debts 96,246 43,783
Accrued severance pay 47,980 30,765
Other 8,768 4,159
-------------- ------------
Total deferred tax asset 10,177,052 5,483,524
Deferred Tax Liabilities:
Basis in fixed assets (80,684) (31,232)
Valuation allowance (10,096,368) (5,452,292)
-------------- ------------
Total net deferred tax asset $ -- $ --
============== ============
9. NOTES PAYABLE
The Company has the following notes outstanding of December 31 (see Note
3):
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
<S> <C> <C>
Notes Payable for the Intervan acquisition represented by two promissory
notes with a combined face value of $6,000,000. The first
promissory note of $4,500,000 is non-interest bearing maturing
December 24, 2000. The second note of $1,500,000 bears interest at
8% in the second year only maturing December 24, 2001. Both
promissory notes were discounted at 10.75%, which reflects the
estimated market rate of interest The amortization of the discount
on these notes was $9,930 as of December 31, 1999. $ 5,267,035
Notes Payable for the GBnet acquisition represented by four non-interest
bearing promissory notes with a combined face value of $11,795,000.
These four promissory notes were discounted at 10.75%, which reflects
the estimated market rate of interest. The four notes mature annually
on December 14, 2000 through 2003. The amortization of the discount
on these notes was $51,038 as of December 31, 1999. 9,051,038
98
<PAGE>
Notes Payable from a third-party bank. This note bears interest at LIBOR
plus 4.75%, which reflects the estimated market rate of interest. The
note has mandatory quarterly payments maturing in 2004. 3,951,669
Notes Payable for the Inter@net acquisition represented by two promissory
notes with a combined face value of $800,000 at a stated rate of
5.72%. Both promissory notes were discounted at 10%, which reflects
the estimated market rate of interest. The first promissory note, in
the face amount of $200,000, plus accrued interest, was paid on
August 17, 1999. A payment of approximately $35,000 on the second
note, including interest, was also paid on August 17, 1999. 524,036 $ 754,907
Notes Payable for the Chispa acquisition payable to Star on February 17,
1999 with a face value of $5,201,481 and no stated interest rate was
paid in 1999. 5,138,577
Notes Payable for the Chispa acquisition payable to Star on May 17, 1999,
with a face value of $3,467,654 and no stated interest rate was
refinanced with a third-party bank. 3,343,384
Notes Payable for the Chispa acquisition 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 the acquisition date. The
amortization of the discount on this note was $520,054 as of December
31, 1999. 3,787,146 3,427,122
----------------- ----------------
Total notes payable 22,580,924 12,663,990
Less current portion (11,190,987) (8,676,722)
----------------- ----------------
Long-term portion $ 11,389,937 $ 3,987,268
================= ================
</TABLE>
The scheduled maturities of notes payable and long-term debt at December
31, 1999 are as follows:
Year ending December 31:
2000 $ 11,190,987
2001 3,103,048
2002 2,328,589
2003 2,592,050
2004 3,366,250
----------------
Total $ 22,580,924
================
The collateral on the Chispa acquisition related notes and refinancings
include the tangible assets of Chispa's subsidiaries.
10. PREFERRED STOCK
In conjunction with the equity financing on October 12, 1999, the Board of
Directors designated the Series C Preferred Stock as a new series of
preferred stock. The non-redeemable convertible Series C Preferred Stock
consists of 14,250,000 shares of preferred stock, par value $0.001 per
share, and has the following general rights and preferences: (1) they vote
with the outstanding shares of the Company's common stock and Series B
Preferred Stock (unless otherwise required by law), and have one vote per
share; (2) they are convertible into shares of the Company's common stock,
initially on a one-for-one basis. The conversion ratio is subject to
adjustment for fundamental corporate transactions. Conversion is generally
optional, but is mandatory upon the occurrence of a disposition event (sale
of Company or initial public offering); (3) they have a liquidation
preference of $7.50 which is superior to the Company's common stock, but
subordinate to the Company's Series B Preferred Stock.
99
<PAGE>
At December 31, 1999, the authorized number of shares of the Company's
preferred stock was 15,000,000, $0.001 par value, with 14,250,000 shares
and 750,000 shares designated as Series C Preferred Stock and Series B
Preferred Stock, respectively. None of the Company's preferred stock is
redeemable.
At December 31, 1999 and 1998, the Company had designated 750,000 shares of
its preferred stock as Series B Preferred Stock. The rights and privileges
of the Series B Preferred Stock are as follows: (1) they carry a
liquidation preference of $35 per share 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
non-cumulative 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 Stock, 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 Stock 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 Stock is convertible into the number of common shares obtained
by dividing $35 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 Stock is convertible
into such number of common shares as is determined by dividing $35 by the
public offering price.
Prior to August 17, 1998, the Company had designated 4,250,000 shares of
its preferred stock as Series A Preferred Stock. All Series A Preferred
Stock was converted to common stock in 1998.
On December 23, 1998, the Company issued $10,000,000 of subordinated
exchangeable promissory notes to FondElec and Internexus, S.A. which have
been subsequently converted into Series C Preferred Stock related to the
October 1999 financing. (See Note 12) These notes also included 454,622 in
common stock warrants at an exercise price of $7.50, which remain
outstanding as of December 31, 1999. The warrants are only exercisable
should the value of the Company's common stock rise to 150% or greater of
the warrant price. During 1999, additional interest expense of $162,191 was
recognized on this debt for 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.
100
<PAGE>
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, 1999, the
Company has granted 28,774 non-employee director stock options. As of
December 31, 1998, the Company had not granted any non-employee director
stock options.
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. The Company's board of directors subsequently
increased this number 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.
As of December 31, 1999, the Company has granted 1,202,000 options under
the Incentive Plan. As of December 31, 1998, the Company had not granted
any options under the Incentive Plan.
During 1999, 11,714 common shares were awarded from the original Telecom
option authorized pool.
Stock Option Awards - The total stock options granted by the Company are
summarized in the table below:
<TABLE>
<CAPTION>
Options Price Range Weighted
1999: Average
Exercise Price
------------------ ---------------- -----------------
<S> <C> <C> <C>
Outstanding at beginning of year 1,492,842 $0.35 - 7.50 $3.31
Granted 295,048 $0.88- 7.50 $5.40
Canceled 0
------------------
Outstanding at end of year 1,787,890 $0.35 - 7.50 $3.66
==================
Number Price Range Weighted
1998: of Options Average
Exercise Price
------------------ ---------------- -----------------
Outstanding at beginning of year 14,999 $0.35 - 3.50 $3.36
Exchanged Series A Preferred options 395,000 $0.88 $0.88
Granted
Canceled 1,082,843 $0.88 - 7.50 $4.20
0
------------------
Outstanding at end of year 1,492,842 $0.35 - 7.50 $3.31
==================
101
<PAGE>
Number Price Range Weighted
1997: of Options Average
Exercise Price
------------------ ---------------- -----------------
Outstanding at beginning of year 35,714 $0.35 $0.35
Granted 14,999 $0.35 - 3.50 $3.36
Canceled 35,714 $0.35 $0.35
------------------
Outstanding at end of year 14,999 $0.35 - 3.50 $3.36
==================
Options Weighted Weighted
1999: Granted Average Average Fair
Exercise Price Value of Options
Grants with exercise price equal to FMV
200,000 7.50 1.10
Grants with exercise price less than FMV
95,048 0.98 4.16
------------------
295,048 5.40 2.08
==================
</TABLE>
Options Outstanding and Exercisable
Options Outstanding Options Exercisable
- --------------------------------------------- --------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Options Contractual Exercise Options Exercise
Outstanding Life Price Exercisable Price
846,605 2.65 0.92 654,938 0.99
404,285 3.93 4.52 124,285 4.34
537,000 4.01 7.31 35,000 7.14
- ---------------- -------------
1,787,890 814,223
================ =============
The Company accounts for stock options granted to employees using APB 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
1999, 1998 and 1997 was $1,251,349, $1,000,245 and $1,479,074,
respectively, of which $1,251,349, $753,046 and $962,738 related to
compensation expense and the remaining amounts 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 (based on the Black-Scholes
option valuation model), the Company's net loss and net loss per basic and
diluted common share would have changed to the pro forma amounts indicated
below:
102
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------
1999 1998 1997
--------------- -------------- -------------
<S> <C> <C> <C>
Net loss:
As reported $ (20,277,479) $ (10,230,796) $ (4,594,294)
Pro forma $ (20,532,818) $ (10,278,111) $ (4,632,242)
Net loss per the weighted
average common share (basic
and diluted):
As reported $ (1.48) $ (0.87) $ (0.57)
Pro forma $ (1.50) $ (0.87) $ (0.57)
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The fair value of each option grant is estimated on the date of grant using
the Black Scholes valuation model method prescribed by SFAS No. 123 for
nonpublic entities with the following assumptions: no volatility; no
dividend yield, risk-free interest rates ranging from 4% to 6%, and
expected lives ranging from 1 to 3 years.
12. STOCK PURCHASE AGREEMENTS
October 1999 Financing. In October and November 1999, the Company closed
certain components of a total $109,500,000 private equity and credit
facility financing package with six accredited investors. By the final
closing, the Company had received $58,000,000 in cash from the sale of
7,733,332 shares of Series C Preferred Stock to four of the six accredited
investors' and exchanged approximately $15,000,000 of debt the Company
previously issued to two of the accredited investors (FondElec and
Internexus) into 1,995,577 shares of Series C Preferred Stock. The
investors also acquired options to purchase 3,891,562 additional shares of
Series C Preferred Stock and warrants to purchase 2,432,226 shares of
common stock, and two existing shareholders (Internexus and FondElec)
acquired additional warrants to purchase 520,000 shares of common stock.
The preferred stock options have an exercise price of $7.50 per share and
expire in July 2000. The warrants have exercise prices that are based on
certain contractual yields contingent upon certain events, as agreed in the
warrant agreement. The warrants have an estimated value of $0.26 each. In
connection with this financing, the Company also granted its financial
advisor in the transaction a 4-year warrant to acquire 303,333 common
shares at $7.50 per share.
The parties to the stock purchase agreement included: Telematica EDC, C.A.,
or Telematica; TCW/CCI Holding LLC, or TCW; the International Finance
Corporation, or IFC; Glacier Latin America, LTD, or Glacier; FondElec; and
Internexus.
Under the terms of the financing agreement, Telematica invested $5,525,000
in Chispa. Telematica also agreed to negotiate with the Company the terms
of a joint venture agreement pursuant to which Telematica and the Company
will each invest $5,000,000 to conduct telecommunications operations in
Columbia. Additionally, Telematica agreed to enter into a long-term
$26,000,000 credit facility with Inter@net and, in connection with that
transaction, agreed to enter into a fiber-optic lease, pursuant to which
Inter@net will lease a portion of Telematica's existing fiber-optic network
in Caracas, Venezuela, and a commercial services agreement, under which
Telematica's affiliate will provide billing, collection and other
commercial services to Inter@net.
103
<PAGE>
A portion of the $26,000,000 credit facility, or $7,000,000, will be paid
to Inter@net in cash, and the $19,000,000 balance will be advanced to
Inter@net, as required, for the purpose of paying its obligations under the
fiber lease agreement and the commercial services agreement. The
outstanding amounts under the credit facility bear interest at 3% per year.
Interest will be capitalized during the first four years of the facility
and, thereafter, are payable in cash. The outstanding principal and unpaid
interest amounts under the facility are convertible to shares of Inter@net
at Telematica's election at any time after the third anniversary of the
facility, but Telematica can convert the amounts due under the facility
prior to the third anniversary if Inter@net defaults under the facility.
Assuming the draw-down of the entire facility and no payment by Inter@net
of any of the advanced amounts, the principal and interest advanced under
the facility would be convertible into shares representing 50% of
Inter@net's equity ownership. The Company would retain operating control of
Inter@net. The credit facility also provides for a corresponding
subscription right in Telematica's favor, pursuant to which it is allowed
to purchase 50% of the outstanding stock of Inter@net for $26 million. As
Inter@net draws on the credit facility, the subscription obligation is
proportionately reduced. Any election by Telematica to convert the amounts
due under the facility into shares of Inter@net must be exercised with the
subscription right.
13. LEASES
Metronet Capital Lease. In June 1999, the Company acquired approximately
17% of the capacity of a fiber-optic network in Mexico City. The owner of
the network was Metronet, S.A. de C.V., or ("Metronet"). The Company paid
$4,717,908 for the capacity. This transaction was recorded as a prepaid
capital lease, therefore, there are no future obligations. At the closing,
the Company also paid $172,000 for a two year option to purchase additional
capacity which when combined with the capacity already acquired, will
result in the Company owning a total of approximately 33% of the network's
capacity.
The Company financed the capacity purchase through a $2,615,925 loan from
FondElec and a $2,550,000 loan from Internexus. The loans were evidenced by
senior promissory notes, which bore interest at 10% per annum and were due
(together with unpaid interest) on the earlier of January 3, 2000 or
receipt of proceeds from any equity or debt financing. FondElec and
Internexus also received warrants to acquire shares of common stock while
the notes were outstanding and a premium based on the actual repayment date
of the notes. A total number of 96,870 shares are issuable under the
warrants at an exercise price of $7.50 per share. The premium amount varied
depending on the repayment date of the notes, but represented an annual
interest rate of 55% on the unpaid amounts. The FondElec promissory note
and accrued interest was paid in full subsequent to the October 1999
Financing. The Internexus promissory note and accrued interest was
converted into Series C Preferred Stock during the October 1999 Financing.
The Company leases corporate office space and equipment under operating
leases with terms that range between three and five years. Future minimum
annual lease payments under the Company's operating leases are as follows:
104
<PAGE>
Year ending December 31:
2000 $ 950,079
2001 791,394
2002 746,471
2003 472,303
2004 and thereafter 1,181,077
-----------
Total future lease payments $4,141,324
===========
Total rent expense under the operating leases in 1999, 1998 and 1997 was
$908,538, $363,618, and $9,209, respectively.
14. COMMITMENTS AND CONTINGENCIES
Litigation - In September 1998, the Company filed two arbitration
proceedings against Donald Williams, a former director and officer. The
first proceeding relates to a claim for indemnification for breach of the
representations and warranties made by Mr. Williams in 1997 when the
investment in Viva Vision occurred. The other arbitration proceeding
requests a declaratory judgment of the Company's termination of Mr.
Williams in August 1998 for "cause." The employment arbitration was
dismissed in March 2000.
Dismissal of Suit - On August 9, 1999, the Company settled a shareholder
suit by agreeing to purchase the plaintiffs' common shares in the Company
for $965,860.
The Company is also involved in, and pursues, routine legal actions
relating to its business operations, including customer collection
activities. Liability, in the event of final adverse determination in any
of these matters should not, in the aggregate, have a material adverse
effect on the consolidated financial position or results of operations of
the Company .
15. OPERATING SEGMENT INFORMATION
The Company makes key financial decisions based on certain operating
results of its subsidiaries and revenue types. The Company's operating
segment information, is as follows for the years ended December 31, 1999,
1998 and 1997:
NET REVENUES FROM SERVICES BY SUBSIDIARY:
<TABLE>
<CAPTION>
DIAL UP INTERNET ACCESS 1999 1998 1997
------------------ ---------------- --------------
<S> <C> <C> <C>
Intervan (in Mexico) $ - $ - $ -
GBnet (in Central America) 31,359 - -
Inter@net (in Venezuela) 1,086,932 399,399 -
Chispa Dos (in El Salvador) 159,530 - -
Parent Company and others - - -
------------------ ---------------- --------------
Consolidated total $ 1,277,821 $ 399,399 $ -
================== ================ ==============
105
<PAGE>
HIGH SPEED DATA 1999 1998 1997
INTERNET ACCESS
------------------ ---------------- --------------
Intervan (in Mexico) $ 172,355 $ - $ -
GBnet (in Central America) 165,274 - -
Inter@net (in Venezuela) 33,191 - -
Chispa Dos (in El Salvador) 66,468 - -
Parent Company and others 9,754 - -
------------------ ---------------- --------------
Consolidated total $ 447,042 $ - $ -
================== ================ ==============
CABLE TELEVISION 1999 1998 1997
------------------ ---------------- --------------
Intervan (in Mexico) $ - $ - $ -
GBnet (in Central America) - - -
Inter@net (in Venezuela) - - -
Chispa Dos (in El Salvador) 6,412,776 2,181,850 -
Parent Company and others - 177,049 40,186
------------------ ---------------- --------------
Consolidated total $ 6,412,776 $ 2,358,899 $ 40,186
================== ================ ==============
OTHER 1999 1998 1997
------------------ ---------------- --------------
Intervan (in Mexico) $ - $ - $ -
GBnet (in Central America) - - -
Inter@net (in Venezuela) 35,537 - -
Chispa Dos (in El Salvador) 922,433 355,184 -
Parent Company and others 3,445 - -
------------------ ---------------- --------------
Consolidated total $ 961,415 $ 355,184 $ -
================== ================ ==============
TOTAL REVENUES 1999 1998 1997
------------------ ---------------- --------------
Intervan (in Mexico) $ 172,335 $ - $ -
GBnet (in Central America) 196,633 - -
Inter@net (in Venezuela) 1,155,660 399,399 -
Chispa Dos (in El Salvador) 7,561,207 2,537,034 -
Parent Company and others 13,219 177,049 40,186
------------------ ---------------- --------------
Consolidated total $ 9,099,054 $ 3,113,482 $ 40,186
================== ================ ==============
OPERATING 1999 1998 1997
INCOME (LOSS)
------------------ ---------------- --------------
Intervan (in Mexico) $ (76,576) $ - $ -
GBnet (in Central America) 14,699 - -
Inter@net (in Venezuela) (880,496) (206,617) -
Chispa Dos (in El Salvador) (1,986,749) (1,551,907) -
Parent Company and other (16,296,473) (8,863,378) (3,916,469)
------------------ ---------------- --------------
Consolidated total $ (19,225,593) $ (10,621,902) $ (3,916,469)
================== ================ ==============
106
<PAGE>
CAPITAL EXPENDITURES 1999 1998 1997
DEPRECIATION EXPENSE
AMORTIZATION EXPENSE
------------------ ---------------- --------------
Intervan (in Mexico)
Capital expenditures -
Depreciation expense $ 18,856
Amortization expense 29,983
GBnet (in Central America)
Capital expenditures -
Depreciation expense 48,162
Amortization expense 68,465
Inter@net (in Venezuela)
Capital expenditures 357,697 $ 209,637
Depreciation expense 136,313 9,028
Amortization expense 225,006 25,310
Chispa Dos (in El Salvador)
Capital expenditures 4,201,237 1,272,303
Depreciation expense 1,326,678 245,881
Amortization expense 1,902,195 879,410
Parent Company and other
Capital expenditures 8,528,636 3,064,960 $ 128,779
Depreciation expense 159,237 194,608 85,220
Amortization expense 1,393,594 1,510,552 533,962
------------------ ---------------- --------------
Consolidated totals:
Capital expenditures $ 13,087,570 $ 4,546,900 $ 128,779
Depreciation expense 1,689,246 449,517 85,220
Amortization expense 3,619,243 2,415,272 533,962
TOTAL ASSETS 1999 1998 1997
------------------ ---------------- --------------
Intervan (in Mexico) $ 22,998,357 $ - $ -
GBnet (in Central America) 13,205,355 - -
Inter@net (in Venezuela) 3,293,363 3,050,928 -
Chispa Dos (in El Salvador) 22,588,457 19,395,740 -
Parent Company and others 35,118,991 20,026,376 17,489,106
------------------ ---------------- --------------
Consolidated total $ 97,204,523 $ 42,473,044 $ 17,489,106
================== ================ ==============
LONG-LIVED ASSETS 1999 1998 1997
------------------ ---------------- --------------
Intervan (in Mexico) $ 19,068,279 $ - $ -
GBnet (in Central America) 12,731,839 - -
Inter@net (in Venezuela) 3,040,167 3,043,789 -
Chispa Dos (in El Salvador) 17,916,020 17,382,219 -
Parent Company and others 12,350,496 10,748,553 10,145,698
------------------ ---------------- --------------
Consolidated total $ 65,106,801 $ 31,174,561 $ 10,145,698
================== ================ ==============
</TABLE>
107
<PAGE>
16. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<S> <C>
Acquisition of Intervan (December 24, 1999):
Estimated fair value of assets acquired, including intangible
assets and equipment (net of cash acquired) $ 21,980,304
Fair value of liabilities assumed (2,743,452)
Notes payable (5,257,105)
-----------------
Cash paid (net of cash acquired) $ 13,979,747
=================
Acquisition of GBnet (December 15, 1999):
Estimated fair value of assets acquired, including intangible
assets and equipment (no cash was acquired) $ 13,000,000
Fair value of liabilities assumed None
Notes payable (9,000,000)
----------------
Cash paid $ 4,000,000
================
Acquisition of Inter@net (August 17, 1998):
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
================
Acquisition of Chispa (July 17, 1998):
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
=================
Acquisition of Viva Vision (August 15, 1997):
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>
Internexus converted $9,966,836 in notes to 1,328,911 shares of Series "C"
Preferred Stock. FondElec converted $5,000,000 in notes to 666,666 shares
of Series "C" Preferred Stock (See Note 12).
The Company converted a liability of approximately $900,000 into additional
interest owned in Chispa. This conversion brought the Company's ownership
percentage to 32.6%.
108
<PAGE>
During 1999, a related party liability of approximately $250,000 was
forgiven and contributed to equity as part of an overall treasury stock
repurchase and retirement transaction.
17. SUBSEQUENT EVENTS
Metrotelecom Acquisition. In December 1999, the Company entered into a
letter of intent to acquire 100% of Metrotelecom. Metrotelecom is a holding
company for three Guatemalan subsidiaries that provide internet access
services, high speed data transmission services, cable television services
and telephony services in Guatemala. As part of the transaction, the
Company will also acquire an operating fiber optic network and cable
television operation located in Guatemala City. The letter of intent
required that the transaction be closed by the end of January 2000, but the
parties have continued their negotiations since then and contemplate a
closing in early April 2000.
The purchase price for Metrotelecom will be $13,500,000, of which the
Company will pay $3,750,000 in cash at closing. The Company will also
deliver 121,212 of common shares at closing, in which the parties agree has
a value of $1,000,000. The Company will pay the balance of the purchase
price, $8,750,000 by delivering four promissory notes at closing. The
notes, are due on the first through fourth anniversary of the closing, and
bear interest at a rate of 7% per annum. The promissory note due on the
first anniversary is in the original principal amount of $4,750,000, and
each of the three other notes is in the amount of $1,333,000. The amount of
the first note is subject to adjustment, depending on the cash balance and
intercompany debt of the parties as of the closing date.
Alcatel Vendor Financing. In March 2000, the Company signed a $175,000,000
vendor financing letter of intent with Alcatel. Under the terms of the
letter of intent, Alcatel will assist the Company in the construction of
networks and provide systems integration services over the next three
years. Alcatel will finance up to $175,000,000 for the purpose of covering
up to 100% of the equipment and related services supplied to the Company,
as well as the Company's purchase of OEM and other equipment or services
through Alcatel.
The Company is currently negotiating the definitive documents for the
transaction, and it expects to execute those documents in the second
quarter of 2000. Even though the parties have spent considerable time and
resources negotiating the terms of the letter of intent, the Company cannot
give assurance that the Company will execute definitive documents for the
transaction with Alcatel.
Litigation . In March 2000, the Company was named as defendant in an action
brought in federal court in California. The suit claims the Company
defrauded the plaintiffs in 1997 when the Company diluted the plaintiff's
position by engaging in the merger with Telecom Investment Corporation and
that the promissory note the Company executed in favor of TTI is due. The
plaintiff, which is the assignee of a promissory note the Company executed
in favor of TTI in 1997, is in litigation with TTI.
109
<PAGE>
PART 3.
- -------
INDEX TO EXHIBITS
Exhibit
No. Exhibit Page
- -------- ------- -----
3.1 Articles of Incorporation *
3.2 Bylaws *
3.3 Amended and Restated Articles of Incorporation *
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 *
4.3 Statement of Right and Preferences for the Series C
Preferred Stock Ex. 4.3
4.4 Amendment to Series C Certificate Ex. 4.4
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 December23, 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 *
10.14 Participation Agreement, dated October 15, 1999, among
TelemAtica EDC, C.A., TCW/CCI Holding LLC, Glacier
Latin-America Ltd., the International Finance
Corporation, FondElec Essential Services Growth Fund,
L.P., Internexus S.A. (collectively, the "Investors"),
the Company and other parties *
10.15 Option Agreement, dated October 18, 1999, among the
Company and the Investors *
10.16 Form of Series C Warrant, dated October 18, 1999, as
issued in favor of each Investor *
10.17 CCI Shareholder's Agreement, dated October 18, 1999,
among the Company, the Investors, and other parties *
10.18 Amended and Restated Registration Rights Agreement, dated
October 19, 1999 among the investors and other parties *
10.19 Stock Purchase Agreement between General Business
Machines Corporation and the Company, dated December 15,
1999 Ex.10.19
10.20 Stock Purchase Agreement for the purchase of
International Van, S.A. de C.V., dated December 24, 1999 Ex.10.20
21.1 Subsidiaries of the Registrant Ex. 21.1
27.1 Financial Data Schedule Ex. 27.1
99 Valuation and Qualifying Accounts Ex. 99
* This document was previously filed with the Commission and is incorporated
in this report by reference.
110
<PAGE>
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.
3-29-2000 /s/ Lance D'Ambrosio
- ---------------------- -------------------------------------------------
Date Lance D'Ambrosio
Chairman and Chief Executive Officer
(Principal Executive Officer)
CONVERGENCE COMMUNICATIONS, INC.
3/29/2000 /s/ Jerry Slovinski
- ---------------------- -------------------------------------------------
Date Jerry Slovinski
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
DIRECTORS
- ----------
3-29-2000 /s/ Lance D'Ambrosio
- ---------------------- -------------------------------------------------
Date Lance D'Ambrosio
3-29-2000 /s/ Troy D'Ambrosio
- ---------------------- -------------------------------------------------
Date Troy D'Ambrosio
3-29-2000 /s/ Mario Baeza
- ---------------------- -------------------------------------------------
Date Mario Baeza
3-29-2000 /s/ Alfonso Bahamonde
- ---------------------- -------------------------------------------------
Date Alfonso Bahamonde
3-29-2000 /s/ Norberto Corredor
- ---------------------- -------------------------------------------------
Date Norberto Corredor
3-29-2000 /s/ Salomon Magan
- ---------------------- -------------------------------------------------
Date Salomon Magan
3-29-2000 /s/ Peter Schiller
- ---------------------- -------------------------------------------------
Date Peter Schiller
3-29-2000 /s/ Jorge Fucaraccio
- ---------------------- -------------------------------------------------
Date Jorge Fucaraccio
3-29-2000 /s/ George Sorenson
- ---------------------- -------------------------------------------------
Date George Sorenson
3-29-2000 /s/ Gaston Acosta-Rua
- ---------------------- -------------------------------------------------
Date Gaston Acosta-Rua
CERTIFICATE ESTABLISHING AND DESIGNATING
THE RIGHTS, PREFERENCE AND RESTRICTIONS OF SHARES OF
SERIES C CONVERTIBLE PREFERRED STOCK OF
CONVERGENCE COMMUNICATIONS, INC.
We, TROY D'AMBROSIO, Vice President, and ANTHONY SANSONE, Secretary, of
Convergence Communications, Inc. (the "Corporation"), a corporation organized
and existing under the General Corporation Laws of the State of Nevada, in
accordance with the provisions of ss. 78.195 of the Nevada Revised Statutes, DO
HEREBY CERTIFY:
That, in accordance with the authority expressly vested in the Board of
Directors of the Corporation, the Board of Directors, at a meeting duly held and
convened on October 12, 1999, adopted, 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 ("Preferred Stock"), hereinafter designated as the
"Series C Convertible Preferred Stock," consisting of 14,250,000 shares of the
Corporation's 15,000,000 shares of authorized Preferred Stock, by adopting the
following resolution:
RESOLVED, that pursuant to the authority expressly vested in the Board
of Directors of the Corporation and pursuant to the provisions of the
General Corporation Law, the Board of Directors hereby fixes and
determines the relative voting rights, designations, preferences,
qualifications, privileges, limitations, restrictions and other
special or relative rights of the Series C Convertible Preferred
Stock, which shall consist of 14,250,000 shares of the Corporation's
preferred stock (the "Series C Preferred Stock"), as follows:
1. Voting Rights. Each share of Series C 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, $.001 par value, of the
Corporation ("Common Stock"). Except as otherwise provided by law, the
holders of Series C Preferred Stock, the holders of Series B Preferred
Stock and the holders of Common Stock shall vote together as one class on
all matters submitted to a vote of shareholders of the Corporation.
2. Retired Shares. Any Series C Preferred Stock purchased or otherwise
acquired by the Corporation in any manner whatsoever (including by reason
of the conversion of such Series C Preferred Stock into shares of Common
Stock) shall be retired and canceled promptly after the acquisition
thereof. All such shares shall, upon their cancellation, become authorized
but unissued preferred stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors.
3. Liquidation, Dissolution or Winding Up.
(a) Upon a Liquidation Event (as hereinafter defined), the holders of the
shares of Series C Preferred Stock shall be entitled, before any
distribution or payment is made upon any Common Stock or any other
class or series of stock ranking junior to the Series C Preferred
Stock as to distribution of assets upon liquidation, to be paid an
amount equal to the greater of (A) the sum of (i) $7.50 per share (as
adjusted for Reclassification Events (as hereinafter defined)) and
(ii) all accrued and unpaid dividends to such date and (B) the amount
which would be received if all shares of Series C Preferred Stock had
been converted to Common Stock prior to such Liquidation Event
(collectively, the "Liquidation Payments"). A "Liquidation Event"
means the liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary. If upon any Liquidation Event the
remaining assets of the Corporation available for distribution to its
stockholders shall be insufficient to pay the holders of shares of
Series C Preferred Stock the full amount to which they shall be
entitled, the holders of shares of Series C Preferred Stock and any
class or series of stock ranking upon a Liquidation Event on a parity
with the Series C Preferred Stock shall share ratably in the
distribution of the entire remaining assets and funds of the
Corporation legally available for distribution in proportion to the
respective amounts which would otherwise be payable in respect of such
shares held by them upon such distribution if all amounts payable on
or with respect to such shares were paid in full.
(b) Upon any Liquidation Event, after the holders of Series C Preferred
Stock shall have been paid in full the Liquidation Payments, the
remaining assets of the Corporation may be distributed ratably per
share in order of preference to the holders of Common Stock and any
other class or series of stock ranking junior to the Series C
Preferred Stock as to distribution of assets upon liquidation.
(c) Written notice of a Liquidation Event, stating a payment date, the
amount of the Liquidation Payments and the place where said
Liquidation Payments shall be payable, shall be given by mail, postage
prepaid, not less than thirty (30) days prior to the payment date
stated therein, to each holder of record of Series C Preferred Stock
at his post office address as shown by the records of the Corporation.
4. Redemption. The Series C Preferred Stock shall not be redeemable.
5. Conversion. The holders of the Series C Preferred Stock shall have the
following conversion rights:
(a) Mandatory Conversion. Each share of Series C Preferred Stock shall be
converted automatically into fully paid and nonassessable shares of
Common Stock at the "conversion rate" (as defined in paragraph (c)
below) in effect immediately preceding the occurrence of either of the
following events:
(i) all of the holders of the outstanding Series C Preferred Stock,
acting together, transfer their equity securities (including
their Series C Preferred Stock and any options, warrants or other
rights they may hold to acquire the Corporation's equity
securities) for cash consideration or for securities of another
entity that are registered and are freely tradable pursuant to a
registration statement filed with and declared effective by the
Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Act"), and where the class of securities
so registered are listed or admitted for trading on the New York
Stock Exchange, the American Stock Exchange or the National
Association of Securities Dealers Automated Quotation System
National Market (each a "Recognized Exchange"); or
(ii) the effective date of a registration statement for an
underwritten registered public offering of the Corporation's
securities under the Act, pursuant to which the class of the
shares so registered is approved for listing on a Recognized
Exchange, the Corporation receives net proceeds from the offering
of not less than $75 million, and the offering is managed by a
lead underwriter of international standing (a "Qualified Public
Offering").
(b) Optional Conversion. Each share of Series C Preferred Stock shall be
convertible at any time, at the option of the holder of record
thereof, into fully paid and nonassessable shares of Common Stock at
the conversion rate then in effect upon notice of conversion and
surrender to the Corporation or its transfer agent of the certificate
or certificates representing the Series C Preferred Stock to be
converted, as provided below, or if the holder notifies the
Corporation or its transfer agent that such certificate or
certificates have been lost, stolen or destroyed, upon the execution
and delivery of an agreement satisfactory to the Corporation to
indemnify the Corporation from any losses incurred by it in connection
therewith.
(c) Basis For Conversion; Converted Shares. The basis for any conversion
under this Section 5 shall be the "conversion rate" in effect at the
time of conversion (for mandatory conversions under the provisions of
(a) above), or at the time of notice and surrender (for optional
conversions under the provisions of (b) above), which for the purposes
hereof shall mean the number of shares of Common Stock issuable for
each share of Series C Preferred Stock surrendered for conversion
under this Section 5 based on the conversion price then in effect. The
conversion price shall be $7.50 per share of Common Stock, as adjusted
pursuant hereto, and the conversion rate shall be $7.50 divided by the
conversion price then in effect. If any fractional interest in a share
of Common Stock would be deliverable upon conversion of Series C
Preferred Stock, the Corporation shall pay in lieu of such fractional
share an amount in cash equal to the conversion price in effect at the
close of business on the date of conversion multiplied by such
fractional share (computed to the nearest one hundredth of a share).
Any shares of Series C Preferred Stock which have been converted shall
be canceled and any dividends on converted shares shall cease to
accrue, and the certificates representing shares of Series C Preferred
Stock so converted shall represent only the right to receive (i) such
number of shares of Common Stock into which such shares of Series C
Preferred Stock are convertible, plus (ii) cash payable for any
fractional share plus (iii) any accrued but unpaid dividends relating
to such shares through the immediately preceding dividend payment
date. Upon the conversion of shares of Series C Preferred Stock as
provided in this Section 5, the Corporation shall promptly pay all
then accrued but unpaid dividends to the holder of the Series C
Preferred Stock being converted. The Board of Directors of the
Corporation shall at all times reserve a sufficient number of
authorized but unissued shares of Common Stock to be issued in
satisfaction of the conversion rights and privileges aforesaid.
(d) Mechanics of Conversion. In the case of any mandatory conversion, the
Series C Preferred Stock shall automatically, and without further
action by the holder thereof, convert into shares of Common Stock and,
upon surrender of the certificate or certificates therefor at the
office of the Corporation or its transfer agent for the Series C
Preferred Stock, the Corporation shall, as soon as practicable
thereafter, issue and deliver to such holder, or to the nominees or
nominee of such holder, a certificate or certificates for the number
of shares of Common Stock to which such holder shall be entitled as
aforesaid. In the case of an optional conversion, before any holder of
Series C Preferred Stock shall be entitled to convert the same into
shares of Common Stock, it shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation
or its transfer agent for the Series C Preferred Stock, shall give
written notice to the Corporation of the election to convert the same
and shall state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued and, upon the
Corporation's receipt of such certificates, election to convert and
information regarding the names in which the shares of Common Stock
are to be issued, such shares of Series C Preferred Stock shall be
deemed converted. The Corporation shall, as soon as practicable
thereafter, issue and deliver to such holder of Series C Preferred
Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to which such
holder shall be entitled as aforesaid. A certificate or certificates
will be issued for the remaining shares of Series C Preferred Stock in
any case in which fewer than all of the shares of Series C Preferred
Stock represented by a certificate are converted. Upon any conversion
of Series C Preferred Stock into Common Stock, all declared but unpaid
cash dividends on the converted Series C Preferred Stock shall be paid
in cash.
(e) Issue Taxes. The Corporation shall pay all issue taxes, if any,
incurred in respect of the issue of shares of Common Stock on
conversion. If a holder of shares surrendered for conversion specifies
that the shares of Common Stock to be issued on conversion are to be
issued in a name or names other than the name or names in which such
surrendered shares stand, the Corporation shall not be required to pay
any transfer or other taxes incurred by reason of the issuance of such
shares of Common Stock to the name of another, and if the appropriate
transfer taxes shall not have been paid to the Corporation or the
transfer agent for the Series C Preferred Stock at the time of
surrender of the shares involved, the shares of Common Stock issued
upon conversion thereof may be registered in the name or names in
which the surrendered shares were registered, despite the instructions
to the contrary.
6. Adjustment of Conversion Price and Conversion Rate. The conversion price
and the conversion rate shall be subject to adjustment from time to time in
accordance with the following provisions:
(a) Certain Definitions. For purposes of this Certificate:
(i) The term "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued, or deemed to be issued by the
Corporation pursuant to paragraph (g) of this Section 6, after
the Original Issue Date, as defined below, except:
(A) shares of Common Stock issuable upon conversion of, or
distributions with respect to, the Series B Preferred Stock
or Series C Preferred Stock now or hereafter issued by the
Corporation, or pursuant to the terms of any options or
warrants to acquire Common Stock or Series C Preferred Stock
to be delivered in connection with the Corporation's
anticipated sale of shares of its Series C Preferred Stock,
an option to acquire additional shares of Series C Preferred
Stock and warrants to purchase shares of Common Stock under
the terms of that certain proposed Participation Agreement
among the Corporation and certain accredited investors (the
"Participation Agreement"); and
(B) shares of Common Stock issuable upon the exercise of any
options or warrants outstanding or approved by the Board of
Directors prior to the Original Issue Date; and
(C) the grant of options either prior to or after the Original
Issue Date to officers, directors, employees and agents to
purchase up to an aggregate of 10% of the shares of Common
Stock outstanding, as determined on the basis of the assumed
exercise of all outstanding warrants and options and the
conversion of all Preferred Stock of the Corporation into
Common Stock.
(ii) The term "Convertible Securities" shall mean any
evidence of indebtedness, shares (other than Series C
Preferred Stock) or other securities convertible into
or exchangeable for Common Stock.
(iii)The term "Fair Market Price" shall mean with respect
to a share of Common Stock, (a) if the shares are
listed or admitted for trading on any Recognized
Exchange, 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 Recognized
Exchange, 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 Corporation 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 Corporation, and such fair value
shall be deemed the Fair Market Price.
(iv) The term "Options" shall mean rights, options or
warrants to subscribe for, purchase or otherwise
acquire Common Stock or Convertible Securities.
(v) The term "Original Issue Date" shall mean the
Subsequent Closing Date, as that term is defined in the
Participation Agreement or, if the Participation
Agreement is not executed by the parties thereto or is
executed by the parties thereto but no Subsequent
Closing (as defined in the Participation Agreement)
takes place, the date of the initial issuance of any
Series C Preferred Stock.
(b) Reorganization, Reclassification. In the event of a reorganization,
share exchange or reclassification (other than a change in par value,
or from par value to no par value, or from no par value to par value,
or a transaction described in subsection (c) or (d) below), each share
of Series C Preferred Stock shall, after such reorganization, share
exchange or reclassification (a "Reclassification Event"), be
convertible at the option of the holder into the kind and number of
shares of stock or other securities or other property of the
Corporation which the holder of Series C Preferred Stock would have
been entitled to receive if the holder had held the Common Stock
issuable upon conversion of such share of Series C Preferred Stock
immediately prior to such reorganization, share exchange or
reclassification.
(c) Consolidation, Merger. In the event of a merger or consolidation to
which the Corporation is a party and pursuant to which the rights of
preferences of the holders of the Series C Preferred Stock are reduced
or such parties' ownership interests in the Corporation relative to
one another are changed, each share of Series C Preferred Stock shall,
after such merger or consolidation, be converted into the kind and
number of shares of stock and/or other securities, cash or other
property which the holder of such share of Series C Preferred Stock
would have been entitled to receive if the holder had held the Common
Stock issuable upon conversion of such share of Series C Preferred
Stock immediately prior to such consolidation or merger.
(d) Subdivision or Combination of Shares. In case outstanding shares of
Common Stock shall be subdivided, the conversion price shall be
proportionately reduced as of the effective date of such subdivision,
or as of the date a record is taken of the holders of Common Stock for
the purpose of so subdividing, whichever is earlier. In case
outstanding shares of Common Stock shall be combined, the conversion
price shall be proportionately increased as of the effective date of
such combination, or as of the date a record is taken of the holders
of Common Stock for the purpose of so combining, whichever is earlier.
(e) Stock Dividends. In case shares of Common Stock are issued as a
dividend or other distribution on the Common Stock (or such dividend
is declared), then the conversion price shall be adjusted, as of the
date a record is taken of the holders of Common Stock for the purpose
of receiving such dividend or other distribution (or if no such record
is taken, as of the earliest of the date of such declaration, payment
or other distribution), to that price determined by multiplying the
conversion price in effect immediately prior to such declaration,
payment or other distribution by a fraction (i) the numerator of which
shall be the number of shares of Common Stock outstanding immediately
prior to the declaration or payment of such dividend or other
distribution, and (ii) the denominator of which shall be the total
number of shares of Common Stock outstanding immediately after the
declaration or payment of such dividend or other distribution. In the
event that the Corporation shall declare or pay any dividend on the
Common Stock payable in any right to acquire Common Stock for no
consideration, then the Corporation shall be deemed to have made a
dividend payable in Common Stock in an amount of shares equal to the
maximum number of shares issuable upon exercise of such rights to
acquire Common Stock.
(f) Issuance of Additional Shares of Common Stock. If the Corporation
shall issue any Additional Shares of Common Stock (including
Additional Shares of Common Stock to be issued pursuant to paragraph
(g) below) after the Original Issue Date (other than as provided in
the foregoing subsections (b) through (e)), for no consideration or
for a consideration per share less than the greater of (i) the Fair
Market Price in effect on the date of and immediately prior to such
issue or (ii) the conversion price in effect on the date of and
immediately prior to such issue (such applicable consideration per
share being the "Applicable Price"), then in such event, the
conversion price shall be reduced, concurrently with such issue, to a
price equal to the prior conversion price multiplied by the quotient
obtained by dividing (A) an amount equal to (x) the total number of
shares of Common Stock outstanding immediately prior to such issuance
or sale multiplied by the conversion price in effect immediately prior
to such issuance or sale, plus (y) the number of Additional Shares of
Common Stock deemed issued for the aggregate consideration received or
deemed to be received by the Corporation upon such issuance or sale
based on the Applicable Price, by (B) the total number of shares of
Common Stock outstanding immediately after such issuance or sale.
For purposes of the formulas expressed in paragraph 6(e) and 6(f), all
shares of Common Stock issuable upon the exercise of outstanding Options or
issuable upon the conversion of the Series C Preferred Stock or outstanding
Convertible Securities (including Convertible Securities issued upon the
exercise of outstanding Options), shall be deemed outstanding shares of Common
Stock both immediately before and after such issuance or sale.
(g) Deemed Issue of Additional Shares of Common Stock. In the event the
Corporation at any time or from time to time after the Original Issue
Date shall issue any Options or Convertible Securities or shall fix a
record date for the determination of holders of any class of
securities then entitled to receive any such Options or Convertible
Securities, then the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provisions contained
therein designed to protect against dilution) of Common Stock issuable
upon the exercise of such Options, or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such
Convertible Securities, shall be deemed to be Additional Shares of
Common Stock issued as of the time of such issue of Options or
Convertible Securities or, in case such a record date shall have been
fixed, as of the close of business on such record date for the
consideration determined pursuant to paragraph 6(h)(ii), provided that
in any such case in which Additional Shares of Common Stock are deemed
to be issued:
(i) no further adjustments in the conversion price shall be made upon
the subsequent issue of Convertible Securities or shares of
Common Stock upon the exercise of such Options or the issue of
Common Stock upon the conversion or exchange of such Convertible
Securities;
(ii) if such Options or Convertible Securities by their terms provide,
with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the Corporation, or
increase or decrease in the number of shares of Common Stock
issuable, upon the exercise, conversion or exchange thereof, the
conversion price computed upon the original issuance of such
Options or Convertible Securities (or upon the occurrence of a
record date with respect thereto), and any subsequent adjustments
based thereon, upon any such increase or decrease becoming
effective, shall be recomputed to reflect such increase or
decrease insofar as it affects such Options or the rights of
conversion or exchange under such Convertible Securities
(provided, however, that no such adjustment of the conversion
price shall affect Common Stock previously issued upon conversion
of the Series C Preferred Stock);
(iii)upon the expiration of any such Options or any rights of
conversion or exchange under such Convertible Securities which
shall not have been exercised, the conversion price computed upon
the original issue of such Options or Convertible Securities (or
upon the occurrence of a record date with respect thereto), and
any subsequent adjustments based thereon, shall, upon such
expiration, be recomputed as if:
(A) in the case of Options or Convertible Securities, the only
Additional Shares of Common Stock issued were the shares of
Common Stock, if any, actually issued upon the exercise of
such Options or the conversion or exchange of such
Convertible Securities and the consideration received
therefor was the consideration actually received by the
Corporation (x) for the issue of all such Options, whether
or not exercised, plus the consideration actually received
by the Corporation upon exercise of the Options or (y) for
the issue of all such Convertible Securities which were
actually converted or exchanged plus the additional
consideration, if any, actually received by the Corporation
upon the conversion or exchange of the Convertible
Securities; and
(B) in the case of Options for Convertible Securities, only the
Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such
Options, and the consideration received by the Corporation
for the Additional Shares of Common Stock deemed to have
been then issued was the consideration actually received by
the Corporation for the issue of all such Options, whether
or not exercised, plus the consideration deemed to have been
received by the Corporation upon the issue of the
Convertible Securities with respect to which such Options
were actually exercised.
(iv) No readjustment pursuant to clause (ii) or (iii) above shall have
the effect of increasing the conversion price to an amount which
exceeds the lower of (x) the conversion price on the original
adjustment date or (y) the conversion price that resulted from
any issuance or deemed issuance of Additional Shares of Common
Stock between the original adjustment date and such readjustment
date.
(v) In the case of any Options which expire by their terms not more
than 30 days after the date of issue thereof, no adjustment of
the conversion price shall be made until the expiration or
exercise of all such Options, whereupon such adjustment shall be
made in the same manner provided in clause (iii) above.
(h) Determination of Consideration. For purposes of this Section 6, the
consideration received by the Corporation for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(i) Cash and Property. Such consideration shall:
(A) insofar as it consists of cash, be the aggregate amount of
cash received by the Corporation; and
(B) insofar as it consists of property other than cash, be
computed at the fair value thereof at the time of the issue,
as determined by the vote of 66-2/3% of the Corporation's
Board of Directors or if the Board of Directors cannot reach
such agreement, by a qualified independent public accounting
firm, other than the accounting firm then engaged as the
Corporation's independent auditors, agreed upon by the
Corporation on the one hand and the holders of 66-2/3% of
the outstanding shares of Series C Preferred Stock on the
other hand.
(ii) Options and Convertible Securities. The consideration per share
received by the Corporation for Additional Shares of Common Stock
deemed to have been issued pursuant to paragraph (g) above,
relating to Options and Convertible Securities shall be
determined by dividing:
(A) the total amount, if any, received or receivable by the
Corporation as consideration for the issue of such Options
or Convertible Securities, plus the minimum aggregate amount
of additional consideration (as set forth in the instruments
relating thereto, without regard to any provision contained
therein designed to protect against dilution) payable to the
Corporation upon the exercise of such Options or the
conversion or exchange of such Convertible Securities, or in
the case of Options for Convertible Securities, the exercise
of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities by
(B) the maximum number of shares of Common Stock (as set forth
in the instruments relating thereto, without regard to any
provision contained therein designed to protect against
dilution) issuable upon the exercise of such Options or
conversion or exchange of such Convertible Securities.
(i) Other Provisions Applicable to Adjustment Under this Section. The
following provisions will be applicable to the adjustments in
conversion price and conversion rate as provided in this Section 6:
(i) Treasury Shares. The number of shares of Common Stock at any
time outstanding shall not include any shares thereof then
directly or indirectly owned or held by or for the account
of the Corporation or any shares or securities subject to
purchase or acquisition by the Corporation pursuant to any
executory contract of purchase.
(ii) Other Action Affecting Common Stock. In case the Corporation
shall take any action affecting the outstanding number of
shares of Common Stock other than an action described in any
of the foregoing subsections 6(b) to 6(g) hereof, inclusive,
which would have an inequitable effect on the holders of
Series C Preferred Stock, the conversion price shall be
adjusted in such manner and at such time as the Board of
Directors of the Corporation on the advice of the
Corporation's independent public accountants may in good
faith determine to be equitable in the circumstances.
(iii)Minimum Adjustment. No adjustment of the conversion price
shall be made if the amount of any such adjustment would be
an amount less than one percent (1%) of the conversion price
then in effect, but any such amount shall be carried forward
and an adjustment with respect thereof shall be made at the
time of and together with any subsequent adjustment which,
together with such amount and any other amount or amounts so
carried forward, shall aggregate an increase or decrease of
one percent (1%) or more.
(iv) Certain Adjustments. The conversion price shall not be
adjusted upward except in the case of a combination of the
outstanding shares of Common Stock into a smaller number of
shares of Common Stock, or in the event of a readjustment of
the conversion price pursuant to Section 6(g)(ii) or (iii).
(j) Notices of Adjustments. Whenever the conversion rate and conversion
price is adjusted as herein provided, an officer of the Corporation
shall compute the adjusted conversion rate and conversion price in
accordance with the foregoing provisions and shall prepare a written
certificate setting forth such adjusted conversion rate and conversion
price and showing in detail the facts upon which such adjustment is
based, and such written instrument shall promptly be delivered to the
record holders of the Series C Preferred Stock.
7. Ranking. The Series C Preferred Stock shall rank prior to the Common Stock
and all other classes or series of the Preferred Stock other than the
Series B Preferred Stock authorized by the Corporation's Board of Directors
and established pursuant to a filing with the Nevada Secretary of State's
office on August 18, 1997.
8. Fractional Shares. Series C Preferred Stock may be issued in fractions of a
share which shall entitle the holder, in proportion of such holder's
fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
the holders of Series C Preferred Stock.
9. Dividends and Distributions. The holders of Series C Preferred Stock shall
be entitled to receive cash dividends and other distributions of cash or
property when, as and if declared by the Board of Directors out of funds
legally available for such purposes. If at any time the Corporation
declares any such dividend or other distribution on its Common Stock and
there are shares of its Series C Preferred Stock issued and outstanding,
then a dividend or other distribution shall also be declared on the Series
C Preferred Stock, payable at the same time and on the same terms and
conditions, entitling each holder of Series C Preferred Stock to receive
the dividend or distribution such holder would have received had such
holder converted the Series C Preferred Stock as of the record date for
determining stockholders entitled to receive such dividend or distribution.
10. Information Rights. From and after the date hereof until such time as the
Series C Preferred Stock has been converted into shares of Common Stock,
the Corporation will furnish to holders of Series C Preferred Stock copies
of the following financial statements, reports and information:
(a) a copy of the Corporation's consolidated annual report (including
audited balance sheets, statements of operations, statements of
stockholders' equity and statements of cash flow) for the Corporation
and each subsidiary of the Corporation for such fiscal year, prepared
in accordance with generally accepted accounting principles ("GAAP")
consistent with the preceding year, certified by the Corporation's
independent public accountants. During such period as the Corporation
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 holders of
Series C Preferred Stock at such time as the Corporation 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 Corporation). During such period as the Corporation
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 holders of Series C Preferred Stock as soon as available and in
any event within 90 days after the end of each fiscal year of the
Corporation.
(b) a consolidated balance sheet, statement of operations and
statement of cash flow for the Corporation 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 Corporation's chief financial officer as fairly
and accurately representing the financial condition of the
Corporation and its subsidiaries as of the end of, and for, the
period covered thereby. During such period as the Corporation 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
holders of Series C Preferred Stock at such time as the
Corporation 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
Corporation. During such period as the Corporation 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 holders
of Series C Preferred Stock as soon as available and in any event
within 45 days after the end of each fiscal quarter of the
Corporation; and
(c) such other information with respect to the financial condition
and operations of the Corporation and its subsidiaries and
affiliates as the holders of Series C Preferred Stock may
reasonably request or as the Corporation may be required to
provide the holders of the Common Stock under the Nevada General
Corporation Laws.
11. Preemptive Rights.
(a) Subsequent Offerings. Each of the holders of Series C Preferred Stock
shall have a right to purchase its pro rata share on a fully-diluted
basis of all Equity Securities that the Corporation may, from time to
time, propose to sell and issue after the Original Issue Date, other
than the Equity Securities excluded by Section 11(f) hereof. Each such
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 (based on the shares of Common
Stock issued or issuable upon conversion of all outstanding shares of
Series C Preferred Stock into shares of Common Stock or upon the
exercise of any outstanding options and warrants for the purchase or
acquisition of Series C Preferred Stock) of which such holder of
Series C Preferred Stock 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 to acquire Common Stock
immediately prior to the issuance of the Equity Securities. As used
herein, "Equity Security" shall mean any equity security of the
Corporation, 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 Corporation
(including any option to purchase such a convertible security), (iii)
any right to subscribe to or purchase shares of Common Stock, shares
of Preferred Stock or other equity security of the Corporation or (iv)
any security carrying such right.
(b) Exercise of Rights. If the Corporation proposes to issue any Equity
Securities (the "Offered Securities"), it shall give the holders of
Series C Preferred Stock written notice of its intention, describing
the Equity Securities, the price thereof and the terms and conditions
upon which the Corporation proposes to issue the same. Each such
holder of Series C Preferred Stock shall have the right, for a period
of fifteen (15) business days from the receipt of such notice, to
deliver a notice to the Corporation 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 Corporation's
notice, stating therein the quantity of Offered Securities to be
purchased and its agreement to close the purchase of such Equity
Securities concurrently with the Corporation's sale of the Equity
Securities to other parties. Notwithstanding the foregoing, the
Corporation shall not be required to offer or sell such Equity
Securities to any such holder of Series C Preferred Stock who would
cause the Corporation to be in violation of applicable securities laws
by virtue of such offer or sale.
(c) Issuance of Equity Securities to Other Person. Following the fifteen
(15) day notice period set forth in Section 11(b) hereof, the
Corporation shall have one hundred twenty (120) days thereafter to
issue the Equity Securities in respect of which the holders of Series
C Preferred Stock 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 Corporation's notice to the
holders of Series C Preferred Stock pursuant to Section 11(b) hereof.
If the Corporation has not sold such Equity Securities within such
120-day period set forth in this Section 11(c), the Corporation shall
not thereafter issue or sell any Equity Securities without first
offering such securities to the holders of Series C Preferred Stock in
the manner provided above.
(d) Termination of Preemptive Rights. The preemptive rights established by
this Article 11 shall not apply to, and shall terminate immediately
prior to the effective date of the registration statement pertaining
to, a Qualified Public Offering.
(e) Transfer of Preemptive Rights. The preemptive rights of the holders of
Series C Preferred Stock under this Article 11 may not be transferred.
(f) Excluded Securities. The preemptive rights established by this Article
11 shall have no application to any of the following Equity
Securities:
(i) 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 Corporation or
any subsidiary, pursuant to stock purchase or stock option or
other plans or other arrangements that are approved by the Board
of Directors;
(ii) any Equity Securities issued in connection with the Corporation
effectuating or entering into: (1) a merger, consolidation,
amalgamation, acquisition or similar business combination
approved by the Board of Directors; or (2) a joint venture,
commercial transaction (including, without limitation, equipment
lessors or other persons guaranteeing the obligations of the
Corporation to equipment lessors) or other commercial
relationship approved by the Board of Directors; or
(iii)any Equity Securities described in Section 6(a)(i)(A) or Section
6(a)(i)(B); or
(iv) shares of Common Stock issued in connection with any stock split,
stock dividend or recapitalization by the Corporation.
12. Amendment. The rights, designations, preferences, qualifications,
privileges, limitations and restrictions set forth herein may be modified
or amended by a writing executed by the Corporation and the holders of 66
2/3% of the outstanding Series C Preferred Stock.
* * * *
IN WITNESS WHEREOF, the undersigned hereby certify that the foregoing
resolution was duly and unanimously adopted by the Board of Directors of the
Corporation on October 12, 1999, and have caused this Certificate to be executed
this 13th day of October, 1999.
/s/
--------------------------------------
Troy D'Ambrosio, Vice President
/s/
--------------------------------------
Anthony Sansone, Secretary
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
The foregoing instrument was acknowledged before me this 13th day of
October, 1999, by Troy D'Ambrosio and Anthony Sansone, the Vice President and
Secretary, respectively, of Convergence Communications, Inc.
-------------------------------------
Notary Public
My Commission Expires: Residing at:
-------------------------
- ----------------------
AMENDMENT TO THE CERTIFICATE ESTABLISHING AND DESIGNATING THE
RIGHTS, PREFERENCE AND RESTRICTIONS OF SHARES OF SERIES C
CONVERTIBLE PREFERRED STOCK OFCONVERGENCE COMMUNICATIONS, INC.
We, TROY D'AMBROSIO, Vice President, and ANTHONY SANSONE, Secretary, of
Convergence Communications, Inc. (the "Corporation"), a corporation organized
and existing under the General Corporation Laws of the State of Nevada, DO
HEREBY CERTIFY:
That, pursuant to the provisions of Section 78.1955 of the Nevada
Revised Statutes and in accordance with the authority expressly vested in the
Corporation's Officers and Board of Directors pursuant to resolutions adopted at
a duly called and convened meeting of the Board of Directors held on October 12,
1999, and in accordance with the approvals granted by stockholders holding at
least sixty-six and two-thirds percent (66 2/3 %) of the outstanding Series C
Convertible Preferred shares in the Corporation, the undersigned hereby amend
the Certificate Establishing and Designating the Rights, Preference and
Restrictions of shares of Series C Convertible Preferred Stock, as approved by
the Nevada Office of the Secretary of State on October 13, 1999 (the
"Certificate"), as follows:
1. Consolidation, Merger. The Certificate is hereby amended by deleting
in its entirety the provisions of Section 6(c) thereof, and by inserting in its
stead the following provision, which shall have the same force and effect as
though, and be deemed to have been, originally stated and included therein:
(c) Consolidation, Merger. In the event of a merger or consolidation
to which the Corporation is a party, each share of Series C
Preferred Stock shall, after such merger or consolidation, be
convertible at the option of the holder into the kind and number
of shares of stock and/or other securities, cash or other
property which the holder of such share of Series C Preferred
Stock would have been entitled to receive if the holder had held
the Common Stock issuable upon conversion of such share of Series
C Preferred Stock immediately prior to such merger or
consolidation
2. Issuance of Additional Shares of Common Stock. The Certificate is
hereby amended by deleting from Section 6(f), clause (x), the phrase "multiplied
by the conversion price in effect immediately prior to such issuance or sale,"
which deletion shall have the same force and effect as though, and be deemed to
have been, originally stated and included therein.
IN WITNESS WHEREOF, the undersigned has executed these amendments to
the Certificate as of this _____ day of November, 1999.
/S/
-----------------------------------
TROY D'AMBROSIO, Vice President
/S/
-----------------------------------
ANTHONY SANSONE, Secretary
================================================================================
STOCK PURCHASE AGREEMENT
Between
GENERAL BUSINESS MACHINES CORPORATION ("GBM")
("Seller")
And
CONVERGENCE COMMUNICATIONS, INC. ("CCI")
("Purchaser")
Dated As Of The 15th Of December, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
RECITALS 2
TERMS AND CONDITIONS...........................................................3
ARTICLE I DEFINITIONS.........................................................3
1.1 Certain Definitions..........................................3
1.2 Terms Generally.............................................11
ARTICLE II THE TRANSACTIONS..................................................11
2.1 Closing.....................................................11
2.2 Sale And Purchase Of Shares.................................12
2.3 Purchase Price..............................................12
2.4 Payment of the Purchase Price...............................12
2.5 Closing Obligations.........................................14
2.6 Conditions to Closing Obligations...........................18
2.7 Effects of Non-Closing......................................20
ARTICLE III REPRESENTATIONS AND WARRANTIES OF GBM............................21
3.1 Organization and Good Standing..............................21
3.2 Authority; No Breach or Default.............................21
3.3 Capital Stock...............................................23
3.4 Equity Interests............................................25
3.5 No Undisclosed Liabilities..................................25
3.6 Books and Records...........................................25
3.7 GBnet Financial Statements..................................26
3.8 No Material Adverse Effect..................................26
3.9 Taxes.......................................................27
3.10 Title to Properties; Encumbrances...........................27
3.11 Permits.....................................................27
3.12 Compliance with Applicable Laws.............................28
3.13 No Litigation...............................................28
3.14 Material Contracts..........................................29
3.15 Business as Usual...........................................30
3.16 Intellectual Property.......................................30
3.17 Employees...................................................31
3.18 Disclosures.................................................31
3.19 Brokers or Finders..........................................32
3.20 Year 2000 Compliance........................................32
3.21 Related Party Transactions or Claims........................32
3.22 Environmental Laws and Regulations..........................32
3.23 Bankruptcy..................................................33
3.24 Insurance...................................................33
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CCI.............................33
4.1 Organization and Good Standing..............................33
4.2 Authority...................................................33
4.3 Investment Representation...................................35
4.4 Certain Proceedings.........................................35
4.5 Brokers or Finders..........................................36
4.6 CCI Financial Statements....................................36
4.7 Litigation; Decrees.........................................36
4.8 Undisclosed Liabilities.....................................36
4.9 Absence of Changes or Events................................37
4.10 Compliance with Applicable Laws.............................37
4.11 Permits, Licenses and Authorizations........................37
4.12 Disclosure..................................................38
ARTICLE V AFFIRMATIVE COVENANTS..............................................38
5.1 CCI's Affirmative Covenants.................................38
5.2 GBM's Affirmative Covenants.................................40
5.3 Further Assurances..........................................42
ARTICLE VI NEGATIVE COVENANTS................................................42
ARTICLE VII INDEMNIFICATION..................................................44
7.1 Indemnification and Payment of Damages by GBM...............44
7.2 Indemnification and Payment of Damages by CCI...............45
7.3 Time Limitations............................................45
7.4 Limitations on Amount.......................................46
7.5 Procedure For Indemnification: Third Party Claims...........47
7.6 Procedure for Indemnification: Other Claims.................49
7.7 Payment of Indemnification..................................49
ARTICLE VIII TERMINATION.....................................................49
8.1 Termination Events..........................................49
8.2 Effect of Termination.......................................50
8.3 Survival of Certain Provisions..............................50
ARTICLE IX GENERAL PROVISIONS................................................50
9.1 Notices.....................................................50
9.2 Entire Agreement............................................52
9.3 Covenants Against Unfair Competition........................53
9.4 Survival of Representations, Warranties, and Covenants......55
9.5 Assignment..................................................55
9.6 No Third-Party Beneficiaries................................56
9.7 Expenses....................................................56
9.8 Applicable Law..............................................56
9.9 Waivers; Amendments.........................................57
9.10 Waiver of Jury Trial........................................57
9.11 Severability................................................58
9.12 Counterparts................................................58
9.13 Headings....................................................58
9.14 Conciliation of Disputes....................................58
9.15 Jurisdiction; Consent to Service of Process.................59
9.16 Confidentiality; Publicity..................................61
9.17 Consequential Damages.......................................61
9.18 Time Of Essence.............................................61
<PAGE>
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement") is made as of the 15th
day of December, 1999, by and between the following parties:
GENERAL BUSINESS MACHINES CORPORATION,
an international business company organized and existing under the laws of
the British Virgin Islands ("GBM"),
with business address at
GBM Building, Paseo Colon, San Jose, Costa Rica
(hereinafter referred to as "GBM" or the "SELLER");
And
CONVERGENCE COMMUNICATIONS, INC.
a corporation organized under the laws of
the State of Nevada, United States of America ("CCI"),
having its principal place of business at
102 West 500 South, Suite 320, Salt Lake City, UT
84101, U.S.A.
and Florida offices at 9050 Pines Blvd., Suite 480,
Pembroke Pines, FL 33204, U.S.A.
(hereinafter referred to as "CCI" or "PURCHASER");
GBM AND CCI may, collectively, be referred to hereinafter, as the "Parties",
and, individually, as a "Party".
RECITALS
WHEREAS, CCI is a provider of communications services in several
Central and South American countries and is the holder, through its subsidiaries
and affiliates in this region, of country-wide concessions for subscriber cable
television, domestic and international public telephony, data transmission
services, value added telecommunications services, and a variety of services for
access and uses of the Internet; and
WHEREAS, CCI has expertise in telecommunications and transmission of
data, and it is committed to developing new, and enhancing its presently owned,
wireless and fiber optic networks with the leading technology available in the
market; and
WHEREAS, GBM is the exclusive general distributor of IBM products and
services in the countries of Belize, Guatemala, Honduras, El Salvador,
Nicaragua, Costa Rica and Panama, as well as in the Dominican Republic and Haiti
(the "Region"); and
WHEREAS, GBM, as a complementary line of business, is also engaged in
providing data networking services through its wholly owned subsidiary, GBnet
Corporation, an international business company organized and existing under the
laws of the British Virgin Islands ("GBnet"), to a wide base of customers in the
countries of Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica, Panama,
and the Dominican Republic (the "GBnet Region"); and
WHEREAS, CCI desires to purchase from GBM and GBM desires to sell to
CCI all of the outstanding shares of capital stock of GBnet, subject to the
terms and conditions of this Agreement and the "Ancillary Agreements" referred
to herein; and
WHEREAS, each of the Parties wishes to engage with the other Party in a
mutually beneficial business relationship through the marketing to its own
customers of the other Party's products and services; and, to that end, each of
the Parties is willing to negotiate in good faith the terms and conditions of
certain Supplementary Agreements, as such term is defined hereinafter.
NOW, THEREFORE, in consideration of the above-mentioned premises and
mutual promises herein made, and in consideration of the representation and
covenants herein contained, the Parties agree as follows:
Terms and conditions
ARTICLE I. DEFINITIONS
1.01 Certain Definitions.
In this Agreement, the following terms shall have the meanings specified below:
(1) "Agreement" shall mean this Stock Purchase Agreement, its exhibits and
schedules.
(2) "Affiliate" shall mean, when used with respect to a specified Person,
another Person that directly, or indirectly through one or more
intermediaries, controls or is controlled by or is under common control
with the Person specified.
(3) "Ancillary Agreements" shall mean the Promissory Notes and the Pledge
Agreement, in the form attached hereto as Exhibits A and B, respectively.
(4) "Beneficial Owner", a Person shall be deemed the "beneficial owner" of, and
shall be deemed to "beneficially own", any securities which such Person or
any of its Affiliates (a) beneficially owns, directly or indirectly, (b)
has the right to acquire (whether such right is exercisable immediately or
only after the passage of time) pursuant to any agreement, arrangement or
understanding or upon the exercise of any right of conversion or exchange,
warrant, option or otherwise or, (c) which are beneficially owned, directly
or indirectly, by any other Person with which such Person or any of such
Person's Affiliates has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any such securities.
(5) "CCI's Financial Statements" shall have the meaning set forth in Section
4.06 hereof.
(6) "Closing" shall mean the consummation of the Contemplated Transactions by
the Parties.
(7) "Closing Date" shall mean December 15, 1999.
(8) "Commercialization Agreement" means that certain agreement between the
Parties, dated as of the Closing Date, in the form attached as Exhibit C
hereto.
(9) "Confidential Information" shall have the same meaning as in the Non
Disclosure and Confidentiality Agreement referred to in Section 9.16,
hereof, copy of which is attached hereto as Exhibit 1.
(10) "Consolidated Annualized Cash Flow" shall mean the seasonably adjusted, by
a mutually acceptable procedure, Consolidated Operating Cash flow of any
Person for the most recently ended fiscal quarter multiplied by four (4).
(11) "Consolidated Cash Flow" shall mean the consolidated earnings of any Person
before interest, taxes, depreciations and amortizations.
(12) "Consolidated Net Income" shall mean, for any period for which the amount
thereof is to be determined, the Consolidated Net Income after income taxes
of any Person for such period determined in accordance with GAAP but, in
any event, not including in net income any of the following: (a) any
extraordinary items, including, without limitation, any gain or loss
attributable to the sale, conversation or other disposition of capital
assets other than in the ordinary course of business (b) any gains
resulting from the write-up of assets, (c) any proceeds of any life
insurance policy, (d) a reversal of any reserve, except to the extend that
provision for such reserve is made during such period, and (e) any other
extraordinary or nonrecurring items of earnings of any such Person for such
period.
(13) "Contemplated Transactions" shall mean all of the transactions contemplated
by this Agreement, including:
(a) the sale by GBM to CCI and the purchase by CCI from GBM of all of the
GBnet Shares, on the terms and subject to the conditions of this
Agreement; and
(b) entering into the Supplementary Agreements by CCI and GBM.
(14) "Control" (including, with its correlative meanings, "controlled by" and
"under common control with") shall mean possession, directly or indirectly,
of power to direct or cause the direction of management or policies of a
Person (whether through ownership of securities or partnership or other
ownership interests, by contract or otherwise).
(15) "Deferred Portion" of the Purchase Price shall have the meaning set forth
in Section 2.04(b) hereof.
(16) "Dollars" or "" or "USD" shall mean the lawful currency of the United
States of America.
(17) "Employees to be Retained" shall have the meaning set forth in Section 3.17
hereof.
(18) "Equipment Purchase Agreement" shall mean that certain agreement between
the Parties,hereto, dated as of the Closing Date, in the form attached
hereto as Exhibit D (19) "Financial Statements" shall have the meaning set
forth in Section 3.07 hereto.
(20) "First Note" shall have the meaning set forth in Section 2.04(b) hereof.
(21) "Fourth Note" shall have the meaning set forth in Section 2.04(b), hereof.
(22) "GAAP" shall mean United States generally accepted accounting principles,
as published from time to time by the Financial Accounting Standards Board
(as such principles are applied in the United States as of the date of the
financial statement or other document with respect to which the term is
used), consistently applied.
(23) "GBM Business" shall mean the distribution, sale and lease of computer
products (hardware and software), and related products and services for
which GBM has distribution or other rights in any and all of the countries
within the Region.
(24) "GBnet" shall mean GBnet Corporation, an international business company
organized and existing under the laws of the British Virgin Islands
("GBnet"), which is a wholly owned subsidiary of GBM.
(25) "GBnet Customers" shall have the meaning set forth in Schedule 3.14(b).
(26) "GBnet Region" shall have the meaning set forth in the fourth Recital
hereof.
(27) "GBnet Shares" shall mean all of the shares of common stock of GBnet
outstanding as of the date hereof.
(28) "GBnet Subsidiaries" shall mean the wholly owned subsidiaries of GBnet, as
they exist as of the date hereof in the countries within the GBnet Region,
whether fully incorporated or in the process of being incorporated, as set
forth in Schedule 3.04 hereto.
(29) "Governmental Authority" shall mean any court, administrative agency or
commission or other governmental body or instrumentality, domestic or
foreign, of competent jurisdiction.
(30) "Governmental Authorization" shall mean any approval, consent, license,
permit, waiver, or other authorization issued, granted, given, or otherwise
made available by or under the authority of any Governmental Authority.
(31) "Indebtedness" of any Person shall mean, without duplication, (a) all
obligations of such Person for borrowed money or with respect to deposits
or advances of any kind, (b) all obligations of such Person evidenced by
bonds, debentures, notes or similar instruments, (c) all obligations of
such Person upon which interest charges are customarily paid, (d) all
obligations of such Person under conditional sale or other title retention
agreements relating to property or assets purchased by such Person, (e) all
obligations of such Person issued or assumed as the deferred purchase price
of property or services, (f) all Indebtedness of others secured by (or
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien on property owned or acquired by such
Person, whether or not the obligations secured thereby have been assumed,
(g) all guarantees by such Person of Indebtedness of others, (h) all
capital lease obligations of such Person, (i) all obligations of such
Person in respect of interest rate protection agreements, foreign currency
exchange agreements or other interest or exchange rate hedging arrangements
and (j) all obligations of such Person as an account party in respect of
letters of credit and bankers' acceptances. The Indebtedness of any Person
shall include the Indebtedness of any partnership in which such Person is a
general partner.
(32) "Intellectual property" shall have the meaning set forth in Section 3.16
hereof.
(33) "Interim Statements" shall have the meaning set forth in Section 3.07
hereof.
(34) "Lien" shall mean, with respect to any asset, (a) mortgage, deed of trust,
lien, pledge, charge, security interest, easement, covenant, right of way,
restriction, equity or encumbrance of any nature whatsoever in or on such
asset, (b) the interest of a vendor or a lessor under any conditional sale
agreement, capital lease or title retention agreement relating to such
asset and (c) in the case of securities, any purchase option, call or
similar right of a third party with respect to such securities.
(35) "Mark" shall have the meaning set forth in Section 3.16.
(36) "Material Adverse Effect" shall mean (a) any change or effect that is
materially adverse to the business, properties, assets, condition
(financial or otherwise) or results of operations of CCI or GBnet, or (b) a
material impairment to the ability of CCI or GBnet, to perform its
respective obligations under this Agreement or any Ancillary Agreement, in
each case as amended from time to time.
(37) "Material Contracts" shall have the meaning set forth in Section 3.14
hereof.
(38) "Materiality" of any event, change or effect with respect to CCI or GBnet
means that any such event, change or effect is material to the business,
properties, assets, condition (financial or otherwise), or results of
operations of CCI or the Network.
(39) "Network" shall mean GBnet together with the GBnet Subsidiaries.
(40) "Network Management Agreement" shall mean that certain operating agreement
between the Parties, dated as of the Closing Date, in the form attached
hereto as Exhibit E.
(41) "Permits" shall have the meaning set forth in Section 3.11 hereof.
(42) "Person" shall mean any individual, firm, corporation, limited liability
company, partnership, trust, joint venture, Governmental Authority or other
entity, and shall include any successor (by merger or otherwise) of such
entity.
(43) "Pledge Agreement" shall mean that Pledge Agreement dated as of the Closing
Date, between CCI, GBnet and GBM, in the form attached hereto as Exhibit B.
(44) "Pledged Shares" shall have the meaning set forth in Section 2.04(b)
hereto.
(45) "Pro-Forma Consolidated Debt Service" shall mean, at any time of
determination, the sum (calculated without duplication on a consolidated
basis) of (a) all payments of principal of Indebtedness (including any
Indebtedness proposed to be incurred and excluding any Indebtedness
proposed to be paid at such time) of any Person scheduled to be made during
the period of twelve (12) calendar months beginning with such date of
determination, plus (b) the amount of interest to be paid (assuming for
such purpose that adjustable and floating interest rates remain at the rate
in effect on such date) on Indebtedness (including any Indebtedness
proposed to be incurred and excluding any Indebtedness proposed to be paid
at such time) of any Person during such twelve (12) calendar month period.
(46) "Promissory Notes" shall mean four (4) Promissory Notes in the form
attached hereto as Exhibit A, to be executed and delivered by CCI to GBIVI
at the Closing dated as of the Closing Date, payable to GBM on the dates
and for the amounts set forth in Section 2.04(b) hereof.
(47) "Region" shall have the meaning set forth in the third Recital hereof.
(48) "Second Note" shall have the meaning set forth in Section 2.04(b) hereof.
(49) "Shares" shall mean the GBnet Shares.
(50) "Subsidiaries' Stock" shall mean all of the outstanding shares of common
stock of each and all of the GBnet Subsidiaries.
(51) "Subsidiary" shall mean, with respect to any Person, any other Person (a)
more than 50% of whose outstanding shares or securities (representing the
right to vote for the election of directors or other managing authority)
are, or (b) which does not have outstanding shares or securities (as may be
the case in a partnership, limited liability company, joint venture or
unincorporated association), but more than 50% of whose ownership interest
representing the right to make decisions for such other Person is, now or
hereafter, owned or controlled, directly or indirectly, by such Person, but
such other Person shall be deemed to be a Subsidiary only so long as such
ownership or control exists.
(52) "Supplementary Agreements" shall mean, collectively, the Commercialization
Agreement, the Equipment Purchase Agreement and the Network Management
Agreement, the terms and conditions of which have been negotiated by the
Parties to their respective full satisfaction.
(53) "Tax" or "Taxes" shall mean all local and foreign taxes, assessments and
other governmental charges, and levies including, without limitation, (a)
taxes based upon or measured by gross receipts, income, profits, sales, use
or occupation, and (b) value added, ad valorem, transfer, franchise,
withholding, payroll, employment, excise, or property taxes, together with
(c) all interest, penalties and additions imposed with respect to such
amounts and (d) any obligations under any agreements or arrangements with
any other Person with respect to such amounts.
(54) "Terminated Employees" shall have the meaning set forth in Section 3.17
hereof.
(55) "Third Note" shall have the meaning set forth in Section 2.04(b) hereof.
(56) "Total Indebtedness" shall mean the sum of all Indebtedness of any Person,
determined on a consolidated basis, but excluding all intercompany
Indebtedness.
(57) "Transaction Documents" shall mean this Agreement, the Ancillary
Agreements, the Supplementary Agreements, and any other agreements,
instruments and documents required to be delivered hereunder in connection
with the Contemplated Transactions.
(58) "U.S.A." or "U.S." shall mean the United States of America.
1.02. Terms Generally.
The definitions in Section 1.01, above, shall apply equally to both the singular
and plural forms of the terms defined. Whenever the context may require, any
pronoun shall include the corresponding masculine, feminine and neuter forms.
The words "include", "includes" and "including" shall be deemed to be followed
by the phrase "without limitation". All references herein to Sections,
Paragraphs, Exhibits and Schedules shall be deemed references to Sections and
Paragraphs of, and Exhibits and Schedules to, this Agreement, unless the context
shall otherwise require. Except as otherwise expressly provided herein, all
terms of an accounting or financial nature shall be construed in accordance with
GAAP, as in effect from time to time.
ARTICLE II. THE TRANSACTIONS
2.01. Closing.
The, Parties will conduct a closing of the Contemplated Transactions (the
"Closing"), on and subject to the terms and conditions of this Agreement. The
Closing will take place at 848 Brickell Avenue, Penthouse Suite, Miami, Florida
33131, U.S.A., at 5:00 P.M. on December 15, 1999 (the "Closing Date" or at such
later time and date as may be mutually agreed upon in writing by the Parties.
2.02. Sale And Purchase Of Shares.
Out of a total of fifty thousand (50,000) authorized shares of common stock of
GBnet, and one thousand (1,000) outstanding Shares, GBM is the sole owner of all
of the one thousand (1,000) GBnet Shares which represent the totality of the
outstanding capital stock of GBnet, and GBM, through its sole ownership of
GBnet, is also, indirectly, the sole owner of any and all of the Subsidiaries'
Stock.
Subject to the terms and conditions of this Agreement, at the Closing, SELLER
will sell and transfer the GBnet Shares to PURCHASER, and PURCHASER will
purchase the GBnet Shares from SELLER, whereby PURCHASER shall acquire all of
the outstanding capital stock of GBnet, and indirectly all of the Subsidiaries'
Stock.
2.03. Purchase Price.
The total purchase price ("Purchase Price")
for all of the GBnet Shares shall be the amount of THIRTEEN MILLION DOLLARS
(USD13,000,000), and shall be paid by CCI to GBM in lawful currency of the U.S.
as provided in Section 2.04, hereinbelow.
2.4. Payment of the Purchase Price.
The Purchase Price shall be paid by CCI to GBM as follows:
(a) Up Front Payment. At the Closing, CCI shall pay to GBM the amount of FOUR
MILLION U.S. DOLLARS (USD4,000.000) by wire transfer of immediately
available funds to GBM's account with BAC FLORIDA BANK, Miami, Florida,
U.S.A., as provided in Section 2.05(a)(i), hereinbelow.
(b) Deferred Payment. CCI shall pay the NINE MILLION U.S. DOLLARS
(USD9,000,000) remaining balance of the Purchase Price (the "Deferred
Portion") in FOUR (4) annual installments, with accrued interest on the
outstanding balance of the Deferred Portion from the Closing Date to the
date of actual payment computed at a rate equal to 10.75% per annum. Such
annual installments shall be evidenced by four (4) Promissory Notes, all
dated as of the Closing Date and payable to GBM on the dates and for the
amounts of principal and accrued interest on the outstanding balance set
forth in the following payment Schedule, which Promissory Notes shall be
duly executed by CCI and delivered to GBM at the Closing as set forth in
Section 2.05(a)(ii):
<TABLE>
<CAPTION>
Promissory Notes Date of Payment Amount of Payment
(Includes principal amount plus accrued interest on
outstanding balance of Deferred Portion)
<S> <C> <C>
- ----------------------- ---------------------------- ------------------------------------------------------------
First Note December 14th, 2000 on or TWO MILLION FOUR HUNDRED SIXTY EIGHT THOUSAND U.S. DOLLARS
before 12 Noon. (USD 2,468,000).
Second Note December 14th, 2001 on or TWO MILLION THREE HUNDRED SIX THOUSAND U.S. DOLLARS
before 12 Noon. (USD2,306,000).
- ----------------------- ---------------------------- ------------------------------------------------------------
Third Note December 14th, 2002 on or THREE MILLION ONE HUNDRED FORTY FIVE THOUSAND U.S. DOLLARS
before 12 Noon. (USD3,145,000).
Fourth Note December 14th, 2003 on or THREE MILLION EIGHT HUNDRED SEVENTY SIX THOUSAND U.S.
before 12 Noon. DOLLARS (USD3,876,000).
</TABLE>
Pursuant to this Section 2.04 (b), as collateral for and to secure the full and
timely payment of the Deferred Portion of the Purchase Price and the performance
of CCI's obligations under the Ancillary Agreements, (1) the PURCHASER shall
pledge to GBM all of the GBnet Shares PURCHASER will acquire at the Closing,
which will be held by GBM pursuant to the Pledge Agreement in the form attached
hereto as Exhibit B; and (2) the PURCHASER shall further cause GBnet to pledge
to GBM all of the stock of each of the GBnet Subsidiaries, which shall also be
held by GBIVI pursuant to the Pledge Agreement. The GBnet Shares and the
Subsidiaries' Stock are hereby defined, collectively, as the "Pledged Shares".
Upon timely payment by CCI to GBM of the full amount of each Promissory Note, as
set forth above, and provided CCI is not otherwise in default of its obligations
under the Ancillary Agreements, GBM shall release to CCI such number of Pledged
Shares as is directly proportional to the ratio of the amount paid to the
Deferred Portion of the Purchase Price. GBM shall promptly deliver such released
Pledged Shares to CCI; provided, however, that GBM shall be entitled to retain
at all times no less than fifty one percent (51 %) of the originally Pledged
Shares until payment in full by the PURCHASER to GBM of the totality of the
Purchase Price.
(c) Prepayment. In the event that CCI elects to prepay the full amount of any
Promissory Note prior to its maturity date, GBM shall reimburse CCI
simultaneously with such prepayment the portion of the stated principal
amount of such Promissory Note that corresponds to unearned interest based
on the implicit original principal amount and interest rate as set out in
Section 2.04(b) hereof.
2.05. Closing Obligations.
At the Closing, the Parties shall deliver the following, subject to the
satisfaction or waiver by the appropriate Party of the conditions to Closing set
out in Section 2.06 below:
(a) CCI shall deliver to GBM:
-------------------------
(i) The amount of FOUR MILLION U.S. DOLLARS (USD4,000,000), as the Upfront
Payment pursuant to Section 2.04(a), by wire transfer of immediately
available funds to BAC FLORIDA BANK, Miami, Florida, ABA Number
067009044. with immediate advice to Mr. Luis E. Laguna, EVP and
Comptroller, before 5:OO PM, Eastern Standard Time, on December 19,
1999, for the benefit of GBM, account number 37013777.
(ii) Four (4) Promissory Notes, duly executed by PURCHASER, as set forth in
Section 2.04(b), above, which Promissory Notes shall be delivered to
GBM in New York City, New York, at such place and to such Person or
Persons as GBM shall indicate in writing to CCI.
(iii)The Pledge Agreement, duly executed by CCI and GBnet, covering all of
the Pledged Shares, pursuant to Section 2.04(b).
(iv) Stock certificates representing the Pledged Shares, issued in CCI's
and GBnet's names, as applicable, representing the totality of the
Pledged Shares, duly endorsed to GBM by CCI and GBnet.
(v) Certificate of GBnet's corporate secretary, duly executed, certifying
that the pledge of all of the Pledged Shares to GBM has been duly
authorized and will be properly annotated in the share records of
GBnet and each of the GBnet Subsidiaries.
(vi) The Commercialization Agreement duly executed by CCI. (vii) The
Network Services Agreement, duly executed by CCI. (viii) The Equipment
Purchase Agreement, duly executed by CCI. (ix) A certificate of good
standing for CCI. (x) A certificate executed by CCI representing and
warranting to GBM that the representations and warranties of the
PURCHASER in this Agreement were accurate in all respects as of the
date of this Agreement and are accurate in all material respects as of
the Closing Date as if made on the Closing Date.
(xi) A corporate resolution of CCI evidencing its corporate power,
authority and right to enter into the Contemplated Transactions and to
execute the Transaction Documents, and that all necessary actions to
duly execute and deliver this Agreement, such other agreements and
Transaction Documents have been duly taken.
(xii)A Legal Opinion from Parsons, Behle & Latimer, Nevada Counsel to CCI,
as to corporate existence, organization and good standing of CCI.
(xiii) A Legal opinion from Akerman, Senterfitt & Eidson, P.A., Florida
Counsel to CCI, as to due execution, validity and enforceability of
the Agreement and each of the Ancillary Agreements by CCI.
(xiv)Such other instruments or documents as may be reasonably necessary or
appropriate to carry out the Contemplated Transactions.
(b) GBM shall deliver to CCI:
-------------------------
(i) Certificates representing the GBnet Shares, duly endorsed to the
PURCHASER, and the certificates of the Subsidiaries' Stock either
issued to GBnet or endorsed to it, free and clear of all liens and
encumbrances, other than those Liens that will be arising from the
Transaction Documents.
(ii) GBnet Secretary Certificate, dated as of the Closing Date, evidencing
that the GBnet Shares are the only outstanding shares of GBnet as of
the Closing Date, and that the share records of GBnet have been
properly annotated so as to evidence the transfer of ownership of the
GBnet Shares from GBM to CCI.
(iii)Secretary Certificate of each of the GBnet Subsidiaries, dated as of
the Closing Date, evidencing that the shares of stock of the
respective GBnet Subsidiary forming part of the Subsidiaries' Stock
are the only outstanding shares of such GBnet Subsidiary as of the
Closing Date.
(iv) The Pledge Agreement duly executed by GBM.
(v) The Commercialization Agreement duly executed by GBM.
(vi) The Network Services Agreement, duly executed by GBM.
(vii) The Equipment Purchase Agreement, duly executed by GBM.
(viii) A certificate of good standing for GBM.
(ix) A certificate of good standing for GBnet.
(x) A certificate executed by GBM representing and warranting to PURCHASER
that the representations and warranties of GBM in this Agreement were
accurate in all respects as of the date of this Agreement and are
accurate in all material respects as of the Closing Date as if made on
the Closing Date.
(xi) A corporate resolution of GBM evidencing its corporate power,
authority and right to enter into the Contemplated Transactions and to
execute the Transaction Documents, and that all necessary actions to
duly execute and deliver this Agreement, such other agreements and
Transaction Documents have been duly taken.
(xii)The resignations of each of the Persons who, immediately prior to
Closing, are directors and officers of GBnet, and directors of the
GBnet Subsidiaries, which resignations shall become effective upon
Closing.
(xiii) A Legal Opinion from McW Todman & Co., BVI Counsel to GBM, as to
corporate existence, organization and good standing of GBM and GBnet.
(xiv)A Legal Opinion from Steel Hector & Davis LLP, Florida Counsel to GBM
as to due execution, validity and enforceability of this Agreement and
the Pledge Agreement by GBM.
(xv) Such other instruments or documents as may be reasonably necessary or
appropriate to carry out the Contemplated Transactions.
2.6. Conditions to Closing Obligations.
---------------------------------
(a) Conditions to Obligations of CCI at Closing:
-------------------------------------------
The obligation of CCI to purchase the GBnet Shares from GBM, and to
consummate or cause to be consummated the other Contemplated Transactions,
and to take the other actions required to be taken by PURCHASER at Closing
as set forth in Section 2.05(a) hereinabove, is subject to the
satisfaction, at or prior to Closing, of each of the following conditions,
any of which may be waived by CCI:
(i) GBM shall, subject to PURCHASER's full compliance with Section
2.05(a), consummate or cause to be consummated the transactions
contemplated in Section 2.05(b) to be performed at the Closing;
(ii) The representations and warranties of GBM set forth in ARTICLE III
hereof shall have been true and correct as of the date of this
Agreement and shall be true and correct in all material respects at
and as of the Closing Date as if made on the Closing Date; and
(iii)No court or Governmental Authority shall have enacted, issued,
promulgated, enforced or entered any law, statute, ordinance, rule,
regulation, judgment, decree, injunction or other order (whether
temporary, preliminary or permanent) that continues in effect and
restrains, enjoins or otherwise prohibits consummation of the
transactions to be performed at the Closing.
(b) Conditions to Obligations of GBM at Closing:
-------------------------------------------
The obligation of GBM to sell the GBnet Shares to CCI, and to consummate or
cause to be consummated the other Contemplated Transactions, and to take
the other actions required to be taken by GBM at Closing as set forth in
Section 2.05(b) hereinabove, is subject to the satisfaction, at or prior to
Closing, of each of the following conditions, any of which may be waived by
GBM:
(i) CCI shall consummate or cause to be consummated, subject to GBM's full
compliance with Section 2.05(b) above, the transactions contemplated
in Section 2.05(a) hereof to be performed at the Closing;
(ii) The representations and warrantees of CCI set forth in ARTICLE IV
hereof shall have been true and correct as of the date of this
Agreement and shall be true and correct in all material respects at
and as of the Closing Date as if made on the Closing Date; and
(iii)No court or Governmental Authority shall have enacted, issued,
promulgated, enforced or entered any law, statute, ordinance, rule,
regulation, judgment, decree, injunction or other order (whether
temporary, preliminary or permanent) that continues in effect and
restrains, enjoins or otherwise prohibits consummation of the
transactions to be performed at the Closing.
2.07. Effects of Non-Closing.
Subject to the provisions of ARTICLE VIII, herein, failure to consummate the
purchase and sale provided for in this Agreement on the date and time and at the
place determined pursuant to Section 2.01, or at such later time and date as may
be mutually agreed upon in writing by the Parties, will result in the
termination of this Agreement and will relieve CCI and GBM of their respective
obligations under this Agreement (other than responsibility for any breach prior
to or in connection with such termination).
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF GBM
GBM represents and warrants to PURCHASER, as of the date hereof and as of the
Closing Date as follows:
3.01. Organization and Good Standing.
GBM is a corporation duly organized, validly existing and in good standing under
the laws of the British Virgin Islands and has all requisite corporate power and
authority to own and operate its properties and to carry on its business as
conducted as of the date hereof. GBnet is a corporation duly organized, validly
existing and in good standing under the laws of the British Virgin Islands and
has all requisite corporate power and authority to own and operate its
properties and to carry on its business as conducted as of the date hereof. Each
GBnet Subsidiary in the GBnet Region has been duly organized in accordance with
the laws of the country in which such GBnet Subsidiary operates, and has the
requisite power and authority to conduct its business as presently conducted,
and is in good standing under the laws of its jurisdiction where such
qualification is required.
3.2. Authority; No Breach or Default.
GBM has all requisite, corporate power and authority to enter into this
Agreement, the Ancillary Agreements and the Supplementary Agreements and to
consummate the transactions contemplated herein and therein, as applicable. The
execution and delivery by GBM of this Agreement, the Ancillary Agreements and
the Supplementary Agreements and the consummation of the transactions
contemplated herein and therein, as applicable, have been duly authorized by all
necessary corporate action on the part of GBM. This Agreement, the Ancillary
Agreements and the Supplementary Agreements, as applicable, will, upon
execution, constitute the legal, valid and binding obligations of GBM,
enforceable against GBM in accordance with their terms, except as such terms may
be limited by bankruptcy, insolvency, moratorium, reorganization and other laws
of general application affecting the enforcement of creditors' rights generally
and by the availability of equitable remedies.
Neither the execution and delivery of this Agreement or any other Transaction
Documents to which GBM is a party, nor the performance of its obligations
hereunder or thereunder, will
(i) violate any applicable law to which GBnet or any of the GBnet Subsidiaries
is subject or by
(ii) which it or its properties or assets are bound or affected, or any
provision of the charter or organizational document of GBnet or any of the
GBnet Subsidiaries, or
(iii)require of any material consent, approval or authorization of, or
declaration or filing with, or notice to any Governmental Authority in the
Region or to any Person; or
(iv) conflict with, result in a breach of, constitute a default under, result in
the acceleration of, create in any party the right to accelerate,
terminate, modify, or cancel, or require any notice under any Material
Contract to which GBnet or any of the GBnet Subsidiaries is a party or by
which GBnet or any of the GBnet Subsidiaries or their property may be
bound, except as otherwise disclosed in Schedule 3.02, hereto, or
(v) give any Person the right to prevent, delay, or otherwise interfere with
any of the Contemplated Transactions pursuant to:
(1) any provision of GBnet's or any of the GBnet Subsidiaries'
organizational documents;
(2) any resolution adopted by the board of directors or the stockholders
of GBnet or any of the GBnet Subsidiaries;
(3) any legal requirement or order to which GBnet or any of the GBnet
Subsidiaries may be subject; or
(vi) with respect to the approval by the directors of GBM of the transactions
contemplated by the Transaction Documents to which GBM is a party,
constitute a violation by any director of GBM of any fiduciary duty that
such director owes to GBM or to a third party, as a consequence of which
GBnet or any of the GBnet Subsidiaries is obligated to indemnify such
director, or
(vii)to the extent of GBM's knowledge, give rise to any claims, against GBnet
or any of the GBnet Subsidiaries, or
(viii) result in the creation of any Lien (other than as created by the
Transaction Documents) on any assets of GBnet or any of the GBnet
Subsidiaries.
3.03 Capital Stock.
-------------
(a) Shareholding.
GBM is the sole owner of all of the GBnet Shares, and they represent the
totality of the outstanding capital stock of GBnet. All of the GBnet Shares have
been duly authorized, validly issued, fully paid and non-assessable, free from
Liens and were not issued in violation of any preemptive rights. GBM is both the
lawful beneficial owner and holder of record of the GBnet Shares and has the
full right, power and authority to sell, convey, transfer and/or deliver the
GBnet Shares to CCI GBnet is the sole owner of all of the Subsidiaries' Stock,
which Subsidiaries' Stock represents the totality of the outstanding capital
stock of the GBnet Subsidiaries. The Subsidiaries' Stock is as of the Closing
Date, duly authorized, validly issued, fully paid and non-assessable, free from
Liens and was not issued in violation of any preemptive rights. GBnet is both
the lawful beneficial owner and holder of record of the Subsidiaries Stock. GBM
and GBnet have complied with all laws and regulations in connection with the
issuance of the GBnet Shares and the Subsidiaries' Stock.
Neither GBnet nor any of the GBnet Subsidiaries is a party or subject to any
agreement or understanding, and there is no agreement or understanding between
any Person, that affects or relates to the voting or giving of written consents
with respect to any security or the voting by a director of GBnet or any of the
GBnet Subsidiaries. (b) Outstanding Securities and Commitment: There are no
outstanding warrants, options, rights, securities, agreements, subscriptions or
other commitments pursuant to which GBnet and/or any of the GBnet Subsidiaries
may become obligated to issue, deliver or sell any additional capital shares of
GBnet and/or of any GBnet Subsidiaries, or to issue, grant, extend or enter into
any such warrants, options, rights, securities, agreements, subscriptions or
other commitments. There are no outstanding options, rights, securities,
agreements or other commitments pursuant to which GBnet and/or the GBnet
Subsidiaries are or may become obligated to redeem, repurchase or otherwise
acquire or retire any of the GBnet Shares or the Subsidiaries Stock
3.4 Equity Interests.
GBnet has no subsidiaries, other than the GBnet Subsidiaries listed in Schedule
3.04 hereto. The GBnet Subsidiaries have no subsidiaries.
3.5 No Undisclosed Liabilities.
GBnet does not and the GBnet Subsidiaries do not have any material liabilities
or obligations which may have a Material Adverse Effect on its business not
reflected in its Financial Statements, or in the notes thereto, or not otherwise
disclosed in this Agreement, except for liabilities and obligations incurred in
the ordinary course of business consistent with past practice since the date of
such Financial Statements up to the date of this Agreement.
3.6 Books and Records.
Except as otherwise set forth in any Exhibit or Schedule to this Agreement, the
books of account, articles of incorporation and By-laws (or other organizational
documents) as amended to date, stock ledgers and minute books of GBnet and each
of the GBnet Subsidiaries, all of which have been provided to CCI, are complete
and correct in all material respects and have been maintained in accordance with
sound business practices. The minute books of GBnet in all material respects
contain accurate and complete records of all meetings held and corporate action
taken by the stockholders and the Boards of Directors of GBnet. The minute books
of the GBnet Subsidiaries in all material respects contain accurate and complete
records of all meetings hold and corporate action taken, if any, by the
stockholders and the Boards of Directors of the GBnet Subsidiaries.
3.7 GBnet Financial Statements.
GBM has delivered to CCI (a) Consolidated financial statements of GBnet and its
Subsidiaries compiled by GBM's independent accountants from GBM's audited
consolidated financial statements as of December 31, 1998, and (b) unaudited
balance sheets and income and expense statements of GBnet and its Subsidiaries
as of November 30, 1999, certified by GBnet's chief financial officer (the
"Interim Statements") (the financial statements in (a) and Interim Statements in
(b) are referred to hereinafter, collectively, as the "Financial Statements").
Except as set forth or reflected in such Financial Statements, such Financial
Statements fairly present the financial condition and the results of operations
of GBnet and the GBnet Subsidiaries as of the respective dates of and for the
periods referred to in such Financial Statements, all in accordance with GAAP
consistently applied. The Financial Statements are attached hereto as Exhibit F.
Except as otherwise provided therein, the Financial Statements are based on and
consistent with the books and records of GBnet and the GBnet Subsidiaries,
fairly represent the financial conditions, assets, liabilities and equity of
such companies and their results of operations, are correct and complete in all
material respects and have been prepared in accordance with GAAP, applied on a
consistent basis.
3.8 No Material Adverse Effect.
Since the date of the Financial Statements, there has been no Material Adverse
Effect in the financial conditions or the operations of GBnet or the GBnet
Subsidiaries, which may interfere with their ability to perform their respective
obligations under the Transaction Documents, except as reflected therein. Since
the date of the Financial Statements, GBnet and the GBnet Subsidiaries have not
declared or paid or made, or agreed to declare or pay or make, to their
respective shareholders any dividends or other distributions in cash or
property, except within the normal range of annual dividends paid or
distributions made by comparable firms in the ordinary course of business.
3.9 Taxes.
GBnet and all the GBnet Subsidiaries have (i) duly filed all tax reports and
returns required to be filed by any of them in accordance with applicable law
and all such reports and returns are true, complete and accurate in all material
respects; (ii) duly paid all taxes and other charges due by it to the
appropriate taxing authorities, including, without limitation, those due in
respect of properties, income, sales, or payrolls of any of them; (iii) the
reserves for taxes reflected in the Financial Statements are adequate in
conformity with GAAP; (iv) there are no tax Liens upon any property or rights of
GBnet or the GBnet Subsidiaries; (v) there are no material liabilities (other
than as such are set forth in the Financial Statements) for taxes; and (vi)
there are no extensions or claims or audits or investigations pending with
regard to GBnet or the GBnet Subsidiaries tax liabilities. Neither GBnet nor any
of the GBnet Subsidiaries are currently subject to any tax audit or has been
notified by any Governmental Authority that it will be subject to any tax audit.
3.10 Title to Properties; Encumbrances.
GBnet and/or the GBnet Subsidiaries have good title to all of the assets
(personal, tangible or intangible) that GBnet and/or the GBnet Subsidiaries
purport to own, as reflected in the books and records of GBnet, and/or the GBnet
Subsidiaries, including the Financial Statements. Except as otherwise disclosed
in the Financial Statements, the GBnet Assets are free and clear of all Liens.
3.11 Permits.
GBnet and/or the GBnet Subsidiaries possess all the permits and other
authorizations, governmental or otherwise (collectively, the "Permits") required
under applicable law to operate the GBnet Network and business as presently
conducted, and to exercise the rights granted thereby, as set forth in Schedule
3.11 hereto. All such Permits are valid and in full force and effect as of the
date of this Agreement. To GBM's knowledge, no proceeding is pending or
threatened to revoke or amend any such Permits as of the date hereof.
3.12 Compliance with Applicable Laws.
GBnet and the GBnet Subsidiaries have operated and, as of the date hereof are
operating, their business in compliance in all material respects with all
applicable laws. Neither GBnet nor any GBnet Subsidiary is in violation of, or
in default under, any term of its organizational documents or of any judgment,
decree, writ, statute, governmental rule or regulation applicable to GBnet or
any GBnet Subsidiary or to which they or any of them is bound, except to the
extent that such violations or defaults would not (i) affect the validity or
enforceability of any Transaction Document, or (ii) have any material adverse
effect in the assets, liabilities, business, financial condition, result of
operations or prospects of GBnet, or any of the GBnet Subsidiaries as these
exist as of the date of this Agreement.
3.13 No Litigation.
Except as disclosed in Schedule 3.13 hereto or in the Financial Statements or
notes thereto, there is no suit, claim, action, proceeding or investigation
pending, outstanding or threatened which, either in any case or in the
aggregate, might result in a Material Adverse Effect, or in any impairment of
the right or ability of GBnet or any GBnet Subsidiary to carry on its respective
businesses as now conducted, or in any liability on the part of GBnet or any
GBnet Subsidiary, either individually or taken as a whole and none which
questions the validity of this Agreement or any Transaction Document or any
action taken or to be taken in connection herewith. None of GBnet or any GBnet
Subsidiary is a party or subject to the provisions of any order, injunction,
judgement or decree of any court or government agency or instrumentality which
might adversely affect their respective businesses; and there is no action suit,
proceeding or investigation by GBnet or any GBnet Subsidiary currently pending
or which GBnet or any GBnet Subsidiary intends to initiate which may reasonably
be expected to materially adversely affect their respective businesses.
3.14 Material Contracts.
Reference is made to (i) the GBnet Communications Transport Contracts set forth
in Schedule 3.14(a) hereto; and (ii) GBnet Customers Contracts, set forth in
Schedule 3.14.(b) hereto. The copies of such contracts (collectively, the
"Material Contracts") heretofore provided by GBM to CCI are incorrect and
complete copies of such Material Contracts. Neither GBnet nor any of the GBnet
Subsidiaries is a party to any contract (i) lending to or guaranteeing any
obligation for borrowed money of any insider or any affiliate, or (ii)
prohibiting or substantially restricting GBnet or any GBnet Subsidiary from
freely engaging in business as being conducted as of the Closing Date. To GBM's
knowledge, no event has occurred or circumstance exists as of the date hereof
that may contravene, conflict with, or result in a violation or breach of, or
give GBnet or other Person the right to declare a default or exercise any remedy
under, or to accelerate the maturity or performance of, or to cancel, terminate,
or modify, any Material Contract. The Material Contracts are, as of the date
hereof, adequate for GBnet and each GBnet Subsidiary to carry out such part of
its business which is the subject matter of the Material Contracts as being
conducted as of the date of this Agreement. There are no Material Contracts or
contracts any one of which may generate annual revenues or expenses in excess of
USD1100,000, other than those disclosed in Schedules 3.14(a) and 3.14(b).
3.15 Business as Usual.
From the date of the Financial Statements to the date hereof, GBnet and the
GBnet Subsidiaries have conducted their business in the usual manner and GBnet
and the GBnet Subsidiaries have not taken any action out of the ordinary course
of business which may have a Material Adverse Effect.
3.16 Intellectual Property.
GBnet holds, directly or indirectly through the GBnet Subsidiaries, all rights
to the use of the service mark GBnet (the "Mark") throughout the GBnet Region,
and has taken steps toward the registration of said service Mark pursuant to the
laws of the countries comprised in the GBnet Region. The status of the
registration of the Mark in the Region as of the Closing Date is set out in
Schedule 3.16(a). GBnet also has legal rights to certain know-how, trade
secrets, proprietary computer software, databases and compilations and valid
lease interests in licenses (including licenses for use of computer software
programs) and other non-owned intellectual property used in the conduct of its
business (the "Intellectual Property"). Schedule 3.16(b) lists all licensing
agreements held by GBnet and the GBnet Subsidiaries other than such purchased
for less than THIRTY THOUSAND U.S. DOLLARS (US 30,000) business of GBnet and the
GBnet Subsidiaries, as presently conducted, and the conduct, use and
exploitation of the Intellectual Property does not infringe on or misappropriate
any rights held or asserted by any Person, and no Person is infringing on the
Intellectual Property; provided, that, the foregoing representations are given
to the best of GBM's knowledge as to all owned and non-owned Intellectual
Property. The Intellectual Property is adequate to conduct the business of GBnet
and of the GBnet Subsidiaries, as presently conducted. None of the Intellectual
Property has ever been declared by a court of competent jurisdiction, invalid or
unenforceable, or is the subject of any pending or, to GBM's knowledge,
threatened action for opposition, cancellation, declaration, infringement, or
invalidity, unenforceability or misappropriation or like claim, action or
proceeding.
3.17 Employees.
Except for the employees to be retained by GBnet or the GBnet Subsidiaries
pursuant to CCI's request which are listed in Schedule 3.17 hereto (the
"Employees to be Retained"), GBM, will have terminated, effective on or before
the Closing Date, the employment of all its employees (the "Terminated
Employees"), with appropriate settlements with and releases from them, and to
the extent applicable cancelled the benefit plans of all of them at GBM's own
expense. GBM will have also settled in full, as of the Closing Date, all
salaries, wages, fees, commissions, bonuses, vacations, leaves, insurance,
pension fund contributions, workmen's compensation or any other form of
employment compensation and fringe benefits due to the Employees to be Retained
and to the- Terminated Employees, as well as any claims and liabilities by
reason of their employment, including social security taxes or government levies
or assessments payable thereon by GBM as of the Closing Date. There are no
employment, collective bargaining agreements, or management agreements entered
into by GBnet or the GBnet Subsidiaries the effects of which shall extend beyond
the Closing Date.
3.18 Disclosures.
GBM has not knowingly failed to disclose to CCI any facts or documents material
to the condition (financial or otherwise), properties, assets, liabilities,
earnings, operations, or business of GBnet or the GBnet Subsidiaries. No
representation or warranty of GBM contained in this Agreement and no statement
contained in any document or certificate furnished by or on behalf of GBM to CCI
or any of its representatives contains any untrue statement of a material fact
or omits to state any material facts, except where such statement or omission
would not have a Material Adverse Effect.
3.19 Brokers or Finders.
GBM and its officers and agents have incurred no obligation or liability,
contingent or otherwise, for brokerage or finders fees or agents' commissions or
other similar payment in connection with this Agreement and will indemnity and
hold W harmless from any such payment alleged to be due by or through CCI as a
result of the actions of GBM or its officers, employees or agents.
3.20 Year 2000 Compliance.
The network of hardware, software and microcode used by GBnet to conduct its
business as being conducted as of the date of this Agreement, is capable, as a
whole, of functioning before, on, or after December 31, 1999 without significant
loss of functionality or performance.
3.21 Related Party Transactions or Claims.
Except as disclosed in a confidential letter by GBIVI to W, no officer,
director, or stockholder of GBM, GBnet or the GBnet Subsidiaries or any
Affiliate thereof is directly or indirectly interested in any contract,
agreement, arrangement or transaction with GBnet or the GBnet Subsidiaries or
has any claim against GBnet or the GBnet Subsidiaries.
3.22 Environmental Laws and Regulations.
Except as disclosed in Schedule 3.22 hereto, (i) the business of GBnet and of
the GBnet Subsidiaries has been conducted in all material respects in compliance
with the environmental laws of the countries of the GBnet Region (ii) neither
GBnet nor the GBnet Subsidiaries have received any written notice under any such
environmental laws from any Governmental Authority revoking, canceling,
materially modifying or refusing to renew any permit, license or authorization
or providing written notice of violations of any such environmental laws.
3.23 Bankruptcy.
Neither GBnet nor any GBnet Subsidiary has filed any
voluntary petitions admitting its bankruptcy or requesting a reorganization, nor
have any petitions alleging insolvency been filed against GBnet or any GBnet
Subsidiary, nor have any of them been judicially declared to be bankrupt or
insolvent, nor are any of them insolvent or in the state of being liquidated or
dissolved.
3.24 Insurance.
GBnet's and the GBnet Subsidiaries! insurance coverage under GBM's global
policies are in full force and effect. Neither GBnet nor any GBnet Subsidiary is
in default thereunder and all claims thereunder have been correctly filed in a
due and timely manner.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF CCI
CCI hereby represents and warrants to GBM as of the date hereof and as of the
Closing Date as follows:
4.01 Organization and Good Standing.
CCI is a corporation duly organized, validly existing and in good standing under
the laws of the State of Nevada, United States of America. The execution and
delivery by CCI of this Agreement, the Ancillary Agreements and the
Supplementary Agreements and the consummation of the transactions contemplated
herein and therein have been duly authorized by all necessary corporate action
on the part of CCI.
4.02 Authority.
CCI has all requisite, corporate power and authority to
execute and deliver this Agreement, the Ancillary Agreements and the
Supplementary Agreements and other Transaction Documents, to consummate the
transactions contemplated herein and therein, and to perform its obligations
hereunder and thereunder. Upon the execution and delivery by CCI of this
Agreement, the Ancillary Agreements, the Supplementary Agreements or any other
agreements or documents hereunder, this Agreement, the Ancillary Agreements, the
Supplementary Agreements and any such other agreements and documents will
constitute the legal, valid, and binding obligations of CCI, enforceable against
CCI in accordance with their respective terms, except as such terms may be
limited by bankruptcy, insolvency, moratorium, reorganization and other laws of
general application affecting the enforcement of creditors' rights generally and
by the availability of equitable remedies. Neither the execution and delivery of
this Agreement, the Ancillary Agreements, the Supplementary Agreements or any
other agreements or documents required hereunder or thereunder to which CCI is a
party, nor the performance of its obligations hereunder or thereunder, will
(a) violate any applicable law to which CCI is subject or by which it or its
properties or assets are bound or affected or any provision of the charter
or other organizational documents of CCI, or
(b) give any Person the right to prevent, delay, or otherwise interfere with
any of the Contemplated Transactions pursuant to:
(i) any provision of CCI's organizational documents;
(ii) any resolution adopted by the board of directors or the stockholders
of CCI; or
(iii) any legal requirement or order to which CCI may be subject.
(c) result in the creation of any Lien (other than as created by the
Transaction Documents) on any of the assets of GBnet or the GBnet
Subsidiaries.
CCI is not and will not be required to obtain any material consent from any
Persons in connection with the execution and delivery of this Agreement, the
Ancillary Agreements, the Supplementary Agreements or any other agreements or
documents referred to herein, or the consummation or performance of any of the
Contemplated Transactions.
4.03 Investment Representation.
The PURCHASER acknowledges and agrees that the GBnet Shares are not registered
under the U.S. Securities Act of 1933, as amended (the "Act"). The PURCHASER is
acquiring the GBnet Shares, solely for its own account, for investment purposes,
and not with a view to, or for resale in connection with, any distribution
thereof, and the PURCHASER acknowledges and agrees that the certificates
representing the GBnet Shares shall bear a legend substantially to this effect.
The PURCHASER has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of its acquisition
of the GBnet Shares.
The PURCHASER shall not sell, transfer, or otherwise dispose of any GBnet Shares
for as long as PURCHASER has not paid in full to GBM the Deferred Portion of the
Purchase Price. The foregoing notwithstanding, CCI may pledge or encumber any
Pledged Shares released by GBM pursuant to Section 2,04(b) hereof, in fine.
4.04 Certain Proceedings.
There is no pending proceeding that has been commenced against CCI and that
challenges, or may have the effect of preventing, delaying, making illegal, or
otherwise interfering with, any of the Contemplated Transactions. To CCI's
knowledge, no such proceeding has been threatened.
4.5 Brokers or Finders.
CCI and its officers and agents have incurred no obligation or liability,
contingent or otherwise, for brokerage or finders' fees or agents' commissions
or other similar payment in connection with this Agreement and will indemnify
and hold GBM harmless from any such payment alleged to be due by or through GBM
as a result of the actions of CCI or its officers, employees or agents.
4.6 CCI Financial Statements.
CCI has delivered to GBM its audited financial statements as of December 31,
1998 and its unaudited financial statements as of September 30, 1999 ("CCI's
Financial Statements"), attached hereto as Exhibit G, certified by CCI's Chief
Financial Officer as correct and complete, and in accordance with the books and
records of CCI, prepared in conformity with GAAP consistently applied and
representing fairly the financial condition of CCI as of the date thereof,
subject to normal year end adjustments.
4.7 Litigation; Decrees.
Except as provided in Schedule 4.07, there are no lawsuits, claims, arbitrations
or other proceedings or investigations pending or, to the best knowledge of CCI,
threatened by or against or affecting CCI or any of its properties or assets. To
the best knowledge of CCI, there is no basis for and, such lawsuit, claim,
arbitration or other proceeding or investigation. There is no outstanding
judgment, order or decree of any Governmental Authority or arbitrator applicable
to any of CCI or its properties, assets or business having, or which, insofar as
can be reasonably foreseen, in the future may have, a Material Adverse Effect on
CCI or on its business as conducted or as proposed to be conducted.
4.8 Undisclosed Liabilities.
CCI does not have any material liabilities or obligations of any nature which
may have a Material Adverse Effect on its business not reflected on CCI's
Financial Statements or in the notes thereto or not otherwise disclosed in this
Agreement, except for liabilities and obligations incurred in the ordinary
course of business consistent with past practice since the date of the CCI's
Financial Statements up to the date of this Agreement.
4.9 Absence of Changes or Events.
Since the date of the CCI's Financial Statements, there has been no Material
Adverse Effect in the financial condition or the operations of CCI, or which
interfere with its ability to perform its obligations under the Transaction
Documents, except as reflected therein. Since the date of the CCI's Financial
Statements, CCI has not declared or paid or made, or agreed to declare or pay or
make, to its shareholders any dividends or other distributions in cash or
property, except within the normal range of annual dividends paid or
distributions made by comparable firms in the ordinary course of business.
4.10 Compliance with Applicable Laws.
CCI, its properties, assets, operations and business are in compliance in all
material respects with all applicable statutes, laws, ordinances, rules and
regulations of any Governmental Authority and any filing requirements relating
thereto.
4.11 Permits, Licenses and Authorizations.
CCI has obtained or will promptly obtain after execution of this Agreement, and
prior to Closing, all permits, licenses and other authorizations which may be
required under applicable law with respect to the ownership of the GBnet Shares
and the Subsidiaries' Stock. CCI will fully comply in all material respects with
all terms and conditions of such permits, licenses and authorizations.
4.12 Disclosure.
CCI has not knowingly failed to disclose to GBM any facts material to the
condition (financial or otherwise), properties, assets, liabilities, earnings,
operations, or business of CCI. No representation or warranty of CCI contained
in this Agreement, and no statement contained in any document or certificate
furnished by or on behalf of CCI to GBM or any of its representatives pursuant
to the Ancillary Agreements, contains any untrue statement of a material fact or
omits to state any material fact.
ARTICLE V. AFFIRMATIVE COVENANTS
5.1 CCI's Affirmative Covenants.
CCI hereby covenants to GBM that from the Closing Date and consummation of the
Contemplated Transactions, and for as long as CCI has not paid to GBM any
portion of the Purchase Price, CCI shall .comply, and shall cause GBnet and each
of the GBnet Subsidiaries to comply, with the following covenants:
(a) Minimum Operational Standards. As long as any portion of the Purchase Price
remains outstanding, GBnet shall operate its business in accordance with,
at least, the Minimum Operational Standards set forth in Exhibit H, hereto,
which include, among others, availability, performance and reliability.
Material breach by CCI, GBnet or any of the GBnet Subsidiaries of any such
minimum operational standards shall constitute a material breach of this
Agreement.
(b) Conduct of the Network Business. As long as any portion of the Purchase
Price remains outstanding, CCI shall, and shall cause GBnet and each of the
GBnet Subsidiaries (i) to conduct the Network's business and operations
464a in a commercially reasonable manner; (ii) to preserve the goodwill of
the business; (iii) to maintain all of the GBnet assets and the GBnet
Subsidiaries' assets and other properties in customary repair, order and
condition; and (iv) to maintain insurance coverage thereon as is consistent
with sound industry practice. (c) Employees to Be Retained. Immediately
upon Closing, CCI will cause GBnet and each of the GBnet Subsidiaries to
offer new employment to all the Employees to be Retained, at salaries and
benefits comparable to those existing immediately prior to the Closing.
Furthermore, CCI will cause each of the GBnet Subsidiaries to maintain
employment of all these employees for a transition period of three hundred
sixty five days (365) beginning on the Closing Date, except in the event of
termination for reasonable cause or non-performance. Upon Closing, CCI,
GBnet and the GBnet Subsidiaries shall be solely responsible parties for
all employment relationships and obligations with respect to the Employees
to be Retained. CCI, GBnet and the GBnet Subsidiaries shall cause all
Employees to be Retained, as a condition of employment, to enter into
agreements, in form and substance satisfactory to GBM, relating to
noncompetition, nondisclosure of confidential information and non
assignment of trademarks and copyrights to CCI and/or GBnet.
(d) Performance of Obligations. GBnet and the GBnet Subsidiaries shall pay
their Indebtedness and other obligations to third parties promptly and in
accordance with their terms before they shall become delinquent or in
default or give rise to a Lien upon their income or profits or in respect
of their property or any part thereof which may impair their ability to
successfully conduct their business.
(e) Service Mark and Domain Name. CCI hereby acknowledges (i) that the "GBM"
service mark and the "gbm.net" registered domain name are both the sole and
exclusive property of GBM and over which GBM reserves all rights in
perpetuity; (ii) that GBM, as an act of forbearance, has agreed to allow
GBnet to use after the Closing the corporate name "GBM.NET, S.A." to
designate the GBnet Subsidiary in the Dominican Republic for a transitional
period ending December 31, 2000; and (iii) that GBM has also agreed to
allow GBnet to use after the Closing the domain name gbm.net" as GBnet's
electronic address in the Internet for a period ending June 3091, 2000. CCI
hereby covenants that neither CCI nor GBnet or any of the GBnet
Subsidiaries, or any Person `which is an affiliate or subsidiary of any of
them, shall under any circumstances claim any rights to such property of
GBM. CCI further covenants to GBM that it shall cause GBnet and the GBnet
Subsidiaries to vacate the aforesaid service mark and domain name and cease
all use thereof within the terms set forth above.
5.2 GBM's Affirmative Covenants.
(a) Transition of Business. Following the Closing and the consummation of the
acquisition of GBnet by CCI, GBM will cause its own country Subsidiaries in
the GBnet Region (and its officers and employees):
(i) to provide reasonable assistance to CCI in making a smooth transition
of the GBnet business to CCI;
(ii) to provide assistance to GBnet in its efforts to obtain the renewal of
the service contract with the ALLEGRO organization in the Dominican
Republic; and
(iii)to abstain from any action intended to or that has the effect of
discouraging any lessor, licensor, GBnet customer, supplier or other
business associate of GBM or any of its subsidiaries from maintaining
or extending to GBnet and the GBnet Subsidiaries the same business
relationships extended to such companies before the Closing Date.
(b) Use of GBM Subsidiaries' Facilities. In order to facilitate relocation of
the Network equipment, which through the date hereof, has been located at
the GBIVI local Subsidiary's offices in the countries of the GBnet Region,
GBM will, for a period of one (1) year beginning on the Closing Date, allow
GBnet and the GBnet Subsidiaries to continue using for such purposes, at no
cost, the same space currently used for said purposes, subject to such
reasonable conditions as GBM deems necessary for the security and
confidentiality of the GBM Business. GBM will also provide administrative
support services (the "Administrative Support Services") to GBnet and the
GBnet Subsidiaries for a 6-month period, beginning on the Closing Date.
Such Administrative Support Services, will include services such as
invoicing and billings, secretarial services, telephone, electric power,
and similar, and will be billed to GBnet at GBM's cost on a monthly basis,
within the first ten (10) days of the month immediately subsequent to the
month in which the services were paid by GBM.
5.3 Further Assurances.
The Parties hereby agree to execute such other documents or comply with such
formalities after Closing as may be reasonably necessary to complete transfer of
the Subsidiaries' Stock to GBnet, including the issuance of the final
certificates therefor, replace the present directors and corporate officers and
to properly annotate the pledge of the Subsidiaries' Stock to GBM in the books
and records of the GBnet Subsidiaries.
ARTICLE VI. NEGATIVE COVENANTS
CCI covenants to and agrees with GBM that, from the Closing Date and so long as
any portion of the Purchase Price remains outstanding, unless GBM otherwise
consents, in advance, in writing:
6.1 CCI shall neither cause nor permit GBnet or any of the GBnet Subsidiaries
to:
(a) sell or transfer any GBnet Shares, or any of the GBnet Subsidiaries'
Stock, as applicable; or
(b) issue any new shares of stock of GBnet, in addition to the 1,000 GBnet
Shares outstanding as of the Closing Date, or issue any new shares of
stock in addition to the respective number of shares outstanding as of
the Closing Date and forming part of the Subsidiaries' Stock.
6.2 CCI shall neither cause nor permit GBnet to declare and pay any dividends
or make any other distributions, including redemptions and repurchase of
securities, until the totality of the outstanding balance of the Purchase
Price is paid in full to GBM.
6.3 Neither CCI, nor GBnet or any of the GBnet Subsidiaries shall (i) take any
action out of the ordinary course of business which may have a Material
Adverse Effect on the assets or liabilities of GBnet: or any of the GBnet
Subsidiaries, as existing as of the Closing Date, or the continuation of
services of the Network, as conducted as of the Closing Date; (ii) sell or
transfer in any way any of the Network's assets other than in the ordinary
course of business, unless GBnet or the GBnet Subsidiary involved receives
full value for it; or (iii) amend, or cause to amend, as applicable, the
charter or Bylaws, or other organizational documents, of GBnet or any of
the GBnet Subsidiaries.
6.4 CCI shall neither cause nor permit GBnet or any of the GBnet Subsidiaries
to incur, create, assume, guarantee or otherwise become liable for any
Indebtedness, unless, GBnet or the GBnet Subsidiary involved receives full
value therefor and immediately thereafter and after giving effect thereto,
the following conditions are satisfied:
(a) After the second anniversary of the Closing Date, the rate of
consolidated Total Indebtedness of GBnet to consolidated not worth
determined in accordance with GAAP of GBnet does not exceed 2.5: 1.
(b) The ratio of Consolidated Annualized Cash Flow to Pro-Forma
Consolidated Debt Service of GBnet is at least: (i) 0.5 : 1 for the
year 2001; and (ii) 0.8: 1 for the year 2002 and afterwards;
provided, that the conditions set forth in (b) above, shall be considered
satisfied if the Promissory Notes due and payable for the previous years
have been fully and timely paid, as provided in Section 2.04(b) hereof.
6.5 CCI shall neither cause nor permit GBnet or any of the GBnet Subsidiaries
to grant, create or assume any Lien on the property of GBnet or the
property of any of the GBnet Subsidiaries, unless:
(a) Such Lien relates to obligations incurred for a proper business
purpose of GBnet or of the GBnet Subsidiary; and
(b) GBnet or the involved GBnet Subsidiary thereby receives equivalent
value therefor; and
(c) Conditions 6.04(a) and (b) hereof are also satisfied.
ARTICLE VII. INDEMNIFICATION
7.1 Indemnification and Payment of Damages by GBM.
Subject to the provisions of Section 9.04, and to limitations set forth in
Sections 7.03 and 7.04 herein, GBM will indemnify and hold harmless CCI and its
Subsidiaries, Affiliates, directors, principals, agents, employees and
controlling persons (collectively, the "CCI Indemnities") for the amount of, any
loss, liability, claim, damage, expense (including costs of investigation and
defense and reasonable attorneys' fees) (collectively, "CCI Damages"), arising,
directly or indirectly, from or in connection with:
(a) any material breach of any representation or warranty made by GBM in
this Agreement or in any other certificate or document delivered by
GBM pursuant to this Agreement; and
(b) any material breach by GBM of any covenant or obligation of GBM under
this Agreement; and
(c) any liability of GBnet or any of the GBnet Subsidiaries not shown in
GBnet's Financial Statements, or in any Schedule hereto, other than
liabilities incurred since the date of such Financial Statements in
the ordinary course of business or arising in connection with or from
or after the Closing, except as may result from a breach or violation
thereof prior to the Closing; and
(d) any liability arising from third party claims against GBnet or the
GBnet Subsidiaries for breach of a Material Contract or any other
cause of action occurring or accruing prior to the Closing, except to
the extent that it may have been reserved in the Financial Statements
or disclosed in any Schedule; and
(e) any liability arising out of any claims by any GBM's shareholders on
account for or in connection with the sale of the GBnet Shares to CCI.
7.2 Indemnification and Payment of Damages by CCI.
CCI will indemnify and hold harmless GBM, its Subsidiaries, Affiliates,
directors, principals, agents, employees and controlling persons (collectively,
the "GBM Indemnities") for the amount of, any loss, liability, claim, damage,
expense (including costs of investigation and defense and reasonable attorneys'
fees) (collectively, "GBM Damages"), arising, directly or indirectly, from or in
connection with:
(a) any material breach of any representation or warranty made by CCI in
this Agreement or in any other certificate or document delivered by
CCI pursuant to this Agreement; and
(b) any material breach by CCI of any covenant or obligation of CCI in
this Agreement.
7.3 Time Limitations.
(a) If the Closing occurs, GBM will have no liability for indemnification,
or otherwise, with respect to any representation or warranty, other
than those in Sections 3.01, 3.02(first paragraph), 3.03, 3.05, 3.09,
3.10, 3.12 and 3.13, unless CCI notifies GBM of a claim specifying the
factual basis of that claim in reasonable detail to the extent then
known by CCI within four (4) years of the Closing Date.
(b) If the Closing occurs, CCI will have no liability for indemnification,
or otherwise, with respect to any representation or warranty, other
than those made by CCI in the Ancillary Agreements, unless GBM
notifies CCI of a claim specifying the factual basis of that claim in
reasonable detail to the extent then known by GBM within four (4)
years of the Closing Date.
7.4 Limitations on Amount.
(a) GBM and CCI will have no liability, for indemnification or otherwise,
with respect to the matters described in Section 7.01 and 7.02 until
the total of all Damages with respect to such matters exceeds THIRTY
THOUSAND UNITED STATES DOLLARS (USD30,000) (the "Threshold"); provided
that the foregoing limitation shall not apply to any amounts owed by
CCI to GBM under any of the Ancillary Agreements. CCI will use
reasonable efforts to provide notice to GBM of claims for CCI Damages,
and vice versa; provided, however, that failure to provide such notice
will not prejudice the claimant's rights hereunder. GBM shall not be
prejudiced by any failure to promptly dispute any claim for or notice
of CCI Damages, and vice versa.
(b) The aggregate liability of CCI and GBM (for indemnification or
otherwise) with respect to the matters described in Section 7.01 and
7.02 shall not exceed ONE MILLION THREE HUNDRED THOUSAND UNITED STATES
DOLLARS (USD1,300,000) (the "ceiling"), for any reason whatsoever;
provided, however, that the foregoing limitation shall not apply to
any amounts owed by CCI to GBM under the Pledge Agreement and/or the
Promissory Notes.
(c) The amount limitations in Section 7.04(b) will not apply to CCI claims
for breach of representations and warranties in Sections 3.01,
3.02(first paragraph), 3.03, 3.05, 3.08, 3.09, 3.10, 3.12, 3.13, and
3.18.
(d) The amount limitations in Section 7.04(b) will not apply to GBM claims
for breach of representations and warranties in Sections 4.01, 4.02
(first paragraph), 4.03, 4.05, 4.06, 4.07, 4.08, 4.09 and 4.10, and
4.12.
7.5 Procedure For Indemnification: Third Party Claims.
(a) Promptly after receipt by an Indemnitee under Section 7.01 and 7.03,
of notice of the commencement of any proceeding against it by a third
party, such Indemnitee will, if a claim is to be made or
indemnification under any such Section, give notice to the
indemnifying party (the "Indemnitor") of the commencement of such
claim, but the failure to notify the Indemnitor will not relieve the
Indemnitor of any liability that it may have to any Indemnitee, except
to the extent that the Indemnitor demonstrates that the defense of
such action has been prejudiced by the Indemnitee's failure to give
such notice.
(b) If any proceeding referred to in this Section 7.05 is brought against
an Indemnitee and it gives notice to the Indemnitor of the
commencement of such proceeding, the Indemnitor will be entitled to
participate in such proceeding and, to the extent that it wishes to
assume the defense of such proceeding with counsel reasonably
satisfactory to the Indemnitee and, after notice from the Indemnitor
to the Indemnitee of its election to assume the defense of such
proceeding, the Indemnitor will not, as long as it diligently conducts
such defense, be liable to the Indemnitee under Section 7.05 for any
fees of other counsel or any other expenses with respect to the
defense of such proceeding, in each case subsequently incurred by the
Indemnitee in connection with the defense of such proceeding, other
than reasonable costs of investigation.
(c) If the Indemnitor assumes the defense of a proceeding,
(i) no compromise or settlement of such claims may be effected by the
Indemnitor without the Indemnitee's consent which shall not be
unreasonably withheld or untimely delayed, unless (a) there is no
finding or admission of any violation of legal requirements or
any violation of the rights of any Person and no effect on any
other claims that may be made against the Indemnitee, and (b) the
sole relief provided is monetary damages or other consideration
to be paid or satisfied in full by the Indemnitor; and
(ii) the Indemnitee will have no liability with respect to any
compromise or settlement of such claims effected without its
consent which shall not be unreasonably withheld or untimely
delayed.
(d) If notice is given to an Indemnitor of the commencement of any
proceeding and the Indemnitor does not, within ten (10) days after the
Indemnitee's notice is given, give notice to the Indemnitee of its
election to assume the defense of such proceeding, the Indemnitor will
be bound by any determination made in such proceeding or any
compromise or settlement effected by the Indemnitee.
7.6 Procedure for Indemnification: Other Claims.
A claim for indemnification for any matter not involving a third-party claim may
be asserted by written notice to the party from whom indemnification is sought
describing in reasonable detail the basis for such claim and presenting all
available documentation with respect thereto.
7.7 Payment of Indemnification.
Claims for indemnification under this ARTICLE VII shall be paid or otherwise
satisfied by the indemnitor within thirty (30) days after notice thereof is
given by the Indemnitee.
ARTICLE VIII. TERMINATION
8.1 Termination Events.
This Agreement may be terminated and the transactions contemplated hereby
may be abandoned, but not later than the Closing Date:
(a) by mutual written consent of CCI and GBM;
(b) by CCI, in its sole discretion, if any of the representations or
warranties of GBM contained herein are not in all material respects
true, accurate and complete as of the applicable date, or if GBM
breaches any covenant or agreement contained herein;
(c) by GBM, in its sole discretion, if any of the representations or
warranties of CCI contained herein are not in all material respects
true, accurate and complete as of the applicable date, or if CCI
breaches any covenant or agreement contained herein;
(d) by either Party, if the Closing has not taken place on or before
December 15, 1999, unless: (a) the Parties mutually agree to extend
the deadline for Closing; or (b) the failure to consummate the Closing
on or prior to such date is solely due to such Party's fault.
8.2 Effect of Termination.
In the event of a termination of this Agreement pursuant to Section 8.01, above,
written notice thereof shall promptly be given to the other Party hereto and
this Agreement shall terminate and the transactions contemplated hereby shall be
abandoned without further action by the other Party hereto. Notwithstanding such
termination, each Party shall have the right to seek damages in the event of a
breach by the other party of its obligations under this Agreement.
8.3 Survival of Certain Provisions.
Notwithstanding anything to the contrary contained herein, the respective
obligations of the Parties pursuant to Sections 3.19, 4.04, 9.07 and 9.16,
hereof, shall survive the termination of this Agreement.
ARTICLE IX. GENERAL PROVISIONS
9.1 Notices.
Notices and other communications provided for herein shall be in writing and
shall be delivered by hand or overnight international courier service,
air-mailed or sent by graphic scanning or other telegraphic communication
equipment available to both, the sending Party and the receiving Party, as
follows:
If to GBM:
GENERAL BUSINESS MACHINES CORPORATION ("GBM")
GBM Building, Paseo Colon
San Jose Costa Rica
Attention: Mr. Alfredo Darquea Sevilla, C.F.O.
Tel: (506) 256-2200
Fax: (506) 223-9532
With a copy to:
Dr. Ernesto Cruz, General Counsel
848 Brickell Avenue, Suite 800
Miami, Florida 33131, U.S.A.
Tel: (305) 789-7019
Fax: (305) 374-7553
If to PURCHASER:
CONVERGENCE COMMUNICATIONS INCORPORATED ("CCI")
102 West 500 South, Suite 320
Salt Lake City, State of Utah 84101, U.S.A.
Attention: Mr. Troy D'Ambrosio, Senior Vice-President
Tel: (801) 328-5618
Fax: (801) 532-6060
With a copy to:
Mr. Gaston Acosta-Rua
THE FONDELEC GROUP INC.
333 Ludlow Street
Stamford, Connecticut 06902, U.S.A.
Tel: (203) 326-4750
Fax: (203) 326-4578
And to:
Mr. Luis Alonso Medina
JAIME, MEDINA, MINERO & ASOCIADOS
Calle y Colonia Roma, No. 23
San Salvador, El Salvador
Tel: (503) 298-1671; 298-1701
Fax: (503) 224-3679
All notices and other communications given to either Party hereto in accordance
with the provisions of this Agreement shall be deemed to have been given on the
date of receipt if delivered by hand or overnight courier service or sent by
telex, graphic scanning or other telegraphic communications equipment available
to both the sender and the receiver, or on the date five (5) Business Days after
dispatch by certified or registered mail if mailed, in each case delivered, sent
or mailed (properly addressed) to such Party as provided in this Section 9.01,
or in accordance with the latest unrevised direction from such Party given in
accordance with this Section.
9.2 Entire Agreement.
This Agreement, including its Exhibits and Schedules, and Ancillary Agreements
constitute the entire agreement between the Parties relative to the acquisition
of GBnet and supersedes any written or verbal, previous or contemporaneous
agreements between the Parties with respect to the acquisition of GBnet or the
transactions contemplated herein, which are hereby superseded by this Agreement,
its Exhibits and Schedules and Ancillary Agreements, including without
limitation that certain Heads of Agreement dated August 24, 1999, by and among
CCI, GBM and FondElec Group Inc.
Each of the Parties hereto hereby acknowledges and agrees that each of them has
been advised by counsel during the course of negotiations and had significant
input in the development of this Agreement and this Agreement shall not,
therefore, be construed more strictly against any party responsible for its
drafting, nor shall this Agreement be interpreted as favoring any party with
regard to any preemption or rule requiring construction against the party
causing this Agreement to be drafted.
9.3 Covenants Against Unfair Competition.
(a) GBM Covenants to CCI. GBM agrees that for a continuous period of four
(4) years, beginning on the date hereof:
(i) will not, directly or indirectly, engage in any of the countries
of the GBnet Region in any business activity that directly
competes with the business of GBnet or the GBnet Subsidiaries as
it exists on the Closing Date, that is, the provision to third
parties of data transmission, telephone internet access, direct
broadcast satellite systems, point to point, or point to
multipoint, multichannel distribution systems, master antenna
television systems, community antenna, vareline or other type of
franchise hardwire or wireless cable television system which
provides voice, video or data services.
(ii) GBM shall not, directly or indirectly, for itself or on behalf of
or in conjunction with any Person: (a) Divert or attempt to
divert business or customers of GBnet or the GBnet Subsidiaries
by soliciting, negotiating or transacting any business which is
the same as or similar to the GBnet business with any customer of
GBnet or of the GBnet Subsidiaries; (b) Engage in any other acts
which directly or indirectly affect, circumvent, compromise or
undermine GBnet's relationship with any GBnet customer; (c)
Disclose to any competitor of GBnet the identity of any GBnet
customers.
(b) CCI's Covenants to GBM. CCI hereby agrees that for a continuous period
of four (4) years, beginning on the Closing Date, neither CCI, GBnet,
any of the GBnet Subsidiaries, or any Affiliates thereof:
(i) Shall, directly or indirectly, for itself or on behalf of or in
conjunction with any Person, engage in any of the countries of
the Region in any business activity that directly or indirectly
(a) competes with the GBM Business, as conducted by GBM, directly
or indirectly through the GBM Subsidiaries, as of the Closing
Date; divert or attempt to divert business or customers of GBM or
its Subsidiaries, by soliciting, negotiating or transacting any
business which is similar to the GBM business; (c) engage in any
other acts which directly or indirectly affect, circumvent,
compromise or undermine GBM's or its Subsidiaries' relationship
with any of its customers; (d) disclose to any competitor of GBM
the identity of any GBM customers.
(ii) Shall employ or offer employment to any person who, on the date
hereof or within the three (3) years immediately preceding the
date of execution of this Agreement, is or has been an employee,
officer or director of GBM, its Subsidiaries or Affiliates,
unless GBM express consents in writing to such employment, except
for the Employees to be Retained.
The Parties agree and acknowledge that the restrictions contained in this
Section are reasonable in scope and duration and are necessary to protect each
Party's rights. Each of the Parties agree and acknowledge that upon breach of
any provision of this Section by the other Party, the non-breaching Party shall
be entitled to injunctive relief, specific performance or other equitable
relief; provided, however, that, this shall in no way limit any other remedies
which the non-breaching Party may have in law or in contract, including, without
limitation, the right to seek monetary damages.
9.4 Survival of Representations, Warranties, and Covenants.
All covenants, agreements, representations and warranties made by CCI and GBM in
this Agreement, or in certificates or other documents, prepared or delivered in
connection with this Agreement, shall be considered to have been relied upon by
each of the Parties and shall survive the execution and delivery of this
Agreement or such certificate or other document for a period of four (4) years
from the date hereof, except as provided in Section 7.03 hereof.
9.5 Assignment.
This Agreement and the rights hereunder or under the Ancillary Agreements shall
not be assignable or transferable by either Party without the prior written
consent of the other Party hereto; provided that CCI's consent, written or
otherwise, will not be required for the transfer, assignment or endorsement of
the Promissory Notes or the Pledge Agreement by GBM.
9.6 No Third-Party Beneficiaries.
This Agreement is for the sole benefit of the Parties hereto and their permitted
assignees and nothing herein expressed or implied shall give or be construed to
give to any Person, other than the Parties hereto and such assignees, any legal
or equitable rights hereunder.
9.7 Expenses.
All costs and expenses incurred in connection with this Agreement, the Ancillary
Agreements and the Supplementary Agreements and the transactions contemplated
hereby and thereby, shall be paid by the Party incurring such costs or expenses.
All stamp and other transfer taxes which may be payable in respect of the
execution and delivery of this Agreement, the Ancillary Agreements or the
transfer of the GBnet Shares to CCI shall be borne by CCI, except for income
taxes or capital gain taxes which legally may be applicable to GBM. CCI further
agrees to indemnify GBM from and hold it harmless against any documentary taxes,
assessments or charges made by any Governmental Authority by reason of the
execution or delivery of this Agreement, the Ancillary Agreements or the
transfer of the GBnet Shares to CCI
The provisions of this Section 9.07 shall remain operative and in full force and
effect regardless of the consummation of the transactions contemplated herein or
in any Ancillary Agreement, or the invalidity or unenforceability of any term or
provision of this Agreement, any Ancillary Agreement or any other agreements
related hereto or thereto. All amounts due under this under this Section shall
be payable on written demand therefor.
9.8 Applicable Law. This Agreement, the Ancillary Agreements and any
other agreements and documents delivered by the Parties and related hereto or
thereto, shall be governed by and construed in accordance with the internal laws
of the State of Florida applicable to agreements made and to be performed
entirely within Florida, without regard to the conflicts of law principles of
such State.
9.9 Waivers; Amendments.
(a) No failure or delay by the Parties in exercising any power or right
hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any
other or further exercise thereof or the exercise of any other right
or power.
(b) Neither this Agreement nor any provision hereof may be waived, amended
or modified except pursuant to an agreement or agreements in writing
entered into by CCI and GBM.
9.10 Waiver of Jury Trial.
EACH PARTY HERETO HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER
OR IN CONNECTION WITH THIS AGREEMENT, ANY OF THE ANCILLARY AGREEMENTS, OR ANY
AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION HEREWITH. EACH PARTY HERETO
(1), CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER PARTY HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE OTHER PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (2), ACKNOWLEDGES
THAT IT AND THE OTHER PARTY HERETO HAVE BEEN INDUCED TO ENTER INTO THIS
AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS
SECTION.
9.11 Severability.
In the event any one or more of the provisions contained in this Agreement
should be held invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein shall
not in any way be affected or impaired thereby. The Parties shall endeavor in
good-faith negotiations to replace the invalid, illegal or unenforceable
provisions with valid provisions the economic effect of which comes as close as
possible to that of the invalid, illegal or unenforceable provisions.
9.12 Counterparts.
This Agreement may be executed in any number of counterparts, each of which
shall constitute an original but all of which when taken together shall
constitute but one contract, and shall become effective when one or more such
counterparts have been signed by each of the Parties and delivered to the other
Party.
9.13 Headings.
Section headings used herein are for convenience of reference only, are not part
of this Agreement, and are not to affect the construction of, or to be taken
into consideration in interpreting, this Agreement.
9.14 Conciliation of Disputes.
In the event there is a dispute under any of the Transaction Documents, other
than any of the Ancillary Agreements, the Parties will meet with one another and
diligently attempt to resolve their disagreements. If they are unable to do so,
then upon request of any Party to the dispute, they will conciliate the dispute,
utilizing a single conciliator pursuant to the ICC Rules of Optional
Conciliation in a proceeding to take place in Miami, Florida, and carried out in
the English language. If, after thirty (30) calendar days, the mediation is not
successful, then the Parties would be free to bring any action in law or in
equity they deemed appropriate to protect their interests. The provisions of
this Section shall not apply to any actions or proceedings for non-payment of
sums due, or otherwise, under the Ancillary Agreements.
9.15 Jurisdiction; Consent to Service of Process.
(a) Both of the Parties hereto, CCI and GBM, hereby irrevocably and
unconditionally submit, for themselves and their property, to the
jurisdiction of any court of the State of Florida sifting in
Miami-Dade County, Florida, or any Federal court of the United States
of America sifting in the Southern District of the State of Florida,
and any appellate court from any such court, in any suit, action or
proceeding arising out of or relating to this Agreement or any
Ancillary Agreement, or for recognition or enforcement of any
judgment, and each of the Parties hereto hereby irrevocably and
unconditionally agrees that all claims in respect of any such suit,
action or proceeding may be heard and determined in such State of
Florida court. or Federal court. It shall be a condition precedent to
each Party's right to bring any such suit, action or proceeding that
such suit, action or proceeding, in the first instance, be brought in
such State of Florida court or, to the extent permitted by law, in
such Federal court (unless such suit, action or proceeding is brought
solely to obtain discovery or to enforce a judgment), and if each of
such State of Florida court and such Federal court refuses to accept
jurisdiction with respect thereto, such suit, action or proceeding may
be brought in any other court of competent jurisdiction. No Party to
this Agreement may move to (1) transfer any such suit, action or
proceeding from such State of Florida court or any Federal court of
the United States of America sifting in the State of Florida, to
another jurisdiction, (2) consolidate any such suit, action or
proceeding brought in such State of Florida court or Federal court
with a suit, action or proceeding in another jurisdiction or (3)
dismiss any such suit or proceeding brought in such State of Florida
court or any Federal court of the United States of America sifting in
the State of Florida, for the purpose of bringing the same in another
jurisdiction. Each Party agrees that a final judgment in any such
suit, action or proceeding shall be conclusive and may be enforced in
any other jurisdiction by suit on the judgment or in any other manner
provided by law.
(b) CCI and GBM each hereby irrevocably and unconditionally waives, to the
fullest extent it may legally and effectively do so, any objection
which it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to the Ancillary
Agreements in any State of Florida court sifting in Miami-Dade County,
Florida, or any Federal court sifting in the State of Florida. CCI and
GBIVI hereby irrevocably waives, to the fullest extent permitted by
law, the defense of an inconvenient forum to the maintenance of such
suit, action or proceeding in such court and further waives the right
to object, with respect to such suit, action or proceeding, that such
court does not have jurisdiction over such Party. (c) Each of the
Parties, CCI and GBM, hereby irrevocably consents to service of
process in the manner provided for notices in Section 9.01 hereof;
nothing in this Agreement will affect the right of either Party to
this Agreement to serve process in any other manner permitted by law.
9.16 Confidentiality; Publicity.
Each of the Parties agrees that their undertakings to preserve the
confidentiality of information, and to use such information only for the
specific purposes of this Agreement, as set out in that certain Non Disclosure
and Confidentiality Agreement between CCI and GBM, dated the 28th of January,
1999, attached hereto as Exhibit 1, shall continue in full force and effect and
apply to any and all information exchanged in furtherance of the acquisition of
GBnet and otherwise pursuant to this Agreement or any other agreements referred
to herein.
CCI and GBM agree that no public release, announcement or other form of
publicity concerning the transactions contemplated hereby, and under the
Ancillary Agreements or any other agreements referred to herein, shall be issued
by either Party, without the prior written consent of the other Party, except as
such release or announcement may be required by applicable local or foreign law,
rules or regulations of any Government Authority.
9.17 Consequential Damages.
Neither GBM nor CCI shall be liable to any Person for any consequential,
incidental, special or punitive damages arising out of or in connection with
this Agreement, the Ancillary Agreements or any other agreements referred to
herein.
9.18 Time Of Essence.
With regard to all dates and time periods set forth or referred to in this
Agreement, time is of the essence.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
PURCHASER:
CONVERGENCE COMMUNICATIONS, INC. ("CCI")
A State of Nevada Corporation
By: /s/
Name: Troy D'Ambrosio
Title: Sr. Vice President
Place: Miami, Florida, United States of America
GBM:
GENERAL BUSINESS MACHINES CORPORATION ("GBM")
A British Virgin Islands international business company.
By: /s/
Name: Armando Gonzalez
Title: President and C.E.O.
Place: Miami, Florida, United States of America
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT (the "Agreement") dated as of December 24, 1999,
executed by and between Controladora S.O.E., S.A. de C.V., a Mexican company
duly represented in this act by Mr. Ariel Ramos Marcin, (hereinafter the
"Seller"), and Convergence Communications, S.A. de C.V., a Mexican company duly
represented in this act by Mr. Luis Manuel De la Fuente Baca (hereinafter the
"Purchaser").
WITNESSETH:
WHEREAS, Seller owns 28,468,536,125 common ordinary shares (individually a
"Share" and collectively the "Shares") and Mr. Alexandre Penna owns one (1)
share representing the 100% (one hundred percent) of the issued and outstanding
shares of the capital stock of International Van, S.A. de C.V. (the "Company").
WHEREAS, on December 23, 1999, an extraordinary shareholders meeting of the
Seller was held authorizing the execution of this Agreement.
WHEREAS, as of the date hereof a stock purchase agreement was executed by
and between Mr. Alexandre Penna, as seller, and Convergence Communications,
Inc., as purchaser, for the transfer of the one (1) share property of Mr.
Alexandre Penna to Convergence Communications, Inc.
WHEREAS, in regard to the telecommunications permit No. 3-STD-94 4861
issued by the Secretaria de Comunicaciones y Transporte ("SCT") in favor of
Intersys de Mexico, S.A. de C.V. as of September 30, 1994, was transferred to
the Company as evidenced by the authorization No. 112.207-2703 issued on
December 16, 1999 by the SCT ("Intervan Permit") copy of which are attached
hereto as Exhibit "A."
WHEREAS, Seller wishes to sell to Purchaser, and Purchaser wishes to
purchase, the Shares for a total price of US$21,000,000.00 (twenty one million
Dollars 00/100 legal currency of the United States of America) (the "Purchase
Price") as provided herein below.
NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS:
ARTICLE I. PURCHASE AND SALE OF THE SHARES
1.1 Definitions. Capitalized terms used herein but not otherwise defined
shall have the meanings ascribed to them in Exhibit "B" attached hereto.
1.2 Purchase and Sale. At the Closing Date and subject to the compliance of
Conditions Precedent provided in Section 1.3 below, the Seller shall sell and
deliver duly endorsed to Purchaser, and Purchaser agrees to purchase the Shares.
1.3 Conditions Precedent for Closing. The effectiveness of this Agreement
shall be subject to the satisfaction of the following Precedent Conditions:
(a) The delivery by Seller to Purchaser of a certified copy by the
Secretary of the Company of the shareholders resolutions authorizing
the amendment to Clause X of the Company's by-laws.
(b) The delivery by Seller to Purchaser of a certified copy by the
Secretary of the Company of the shareholders resolutions accepting of
the resignation of the current members of the Board of Directors,
officers, examiners, agents and representatives, ratifying any action
or agreement performed or executed by those and waiving any action
from the Company against those, and of the delivery.
(c) The delivery by Seller to Purchaser of satisfactory evidence of the
cancellation of the pledge over the Company shares in favor of TV
Azteca, S.A. de C.V.
(d) The execution of the employment and management letter of intents
between the Company and the following employees: Mario Enrique
Vazquez, Gustavo De law Serna Cardenas, Carlos Alberto Zurita, Roberto
Aldaba Flores, Fernando Castillo and Felipe de Jesus Hernandez
(collectively, the "Management Team").
(e) The issuance of a legal opinion by White & Case, S.C. as counsel to
Seller.
(f) The delivery by Seller to Purchaser of the acknowledgment of payment
and waiver by the Management Team of any right or action of any kind
against the Company in regard to any stock option plan of the Company.
1.4 Purchase Price. In consideration for the purchase and sale of the
Shares, and in exchange for the duly endorsed certificates in favor of the
Purchaser evidencing the Shares, Purchaser shall pay to Seller the Purchase
Price for a total amount of US$21,000,000.00 (twenty one million Dollars 00/100
legal currency of the United States of America).
1.5 Payment: (a) The Purchaser shall pay the Purchase Price as follows:
(i) The amount of US$15,000,000.00 (fifteen million Dollars 00/100 legal
currency of the United States of America) shall be paid within 3
(three) business days from the date hereof through the wire transfers
to the following bank accounts: (a) US$627,500.00 (six hundred twenty
seven thousand five hundred Dollars 00/100 legal currency of the
United States of America) to the bank account No. 200000761972 at the
First Union Bank of Florida, Jacksonville, Florida and ABA No.
063000021 at the name of Communications Equity Associates, LLC, and
US$14,372,500.00 (fourteen million seventy two thousand five hundred
Dollars 00/100 legal currency of the United States of America) to the
bank account No. 400659549 at the Chase Manhattan Bank, New York, New
York, ABA No. 021000021 at the name of Controladora S.O.E., S.A. de
C.V. to the attention of Mr. Daniel Bacardi at (212) 789-4944.
(ii) The amount of US$4,500,000.00 (four million five hundred thousand
Dollars 00/100 legal currency of the United States of America) shall
be paid one (1) year from the Closing Date by means of a wire transfer
to the bank account referred to above, unless otherwise instructed in
writing by Seller. The obligation of Purchaser pursuant to this
paragraph shall be evidenced by means on a non-interest bearing one
year promissory note (hereinafter the "One year Promissory Note") to
be issued by Purchaser in favor of Seller as of date hereof based on
the formal attached hereto as Exhibit "C."
(iii)The amount of US$1,500,000.00 (one million five hundred thousand
Dollars 00/100 legal currency of the United States of America) shall
be paid two (2) years from the closing Date by means of a wire
transfer to the bank account referred to in paragraph (a) above,
unless otherwise instructed in writing by Seller. The obligation of
Purchaser pursuant to this paragraph shall be evidenced by means of an
interest bearing two year promissory note (hereinafter the "Two year
Promissory Note") to be issued by Purchaser as of date hereof in favor
of Seller based on the format attached hereto as Exhibit "D."
(b) Unless otherwise herein provided, in the event the One year Promissory
Note is not timely paid in full, such circumstance shall be considered to be an
acceleration event of the Two year Promissory Note and, as a result, all the
amounts payable under the Two year Promissory Note shall be payable at the
maturity date of the One year Promissory Note.
(c) Purchaser further agrees to pay on demand all costs and expenses of
collection and reasonable legal fees paid or incurred by Seller in enforcing any
obligations in charge of Purchaser hereunder.
1.6 Purchase Price Adjustment. The Purchase Price shall be adjusted only
and exclusively in the events and circumstances and under the terms and
conditions provided in Articles V and VI below.
1.7 Receipt of the Company by Purchaser. The parties hereto acknowledge and
agree that the material delivery of the Company and of its accounting,
financial, operational and legal books, documentation and information from
Seller to Purchaser shall be performed as of the Closing Date, and that
Purchaser shall assume material possession of the Company and of its accounting,
financial, operational and legal books, documentation and information as of such
Closing Date.
ARTICLE II. REPRESENTATION AND WARRANTIES OF SELLER
2. Representations of Seller. As of the date hereof, subject to the terms
and conditions provided in the indemnification mechanism under Article IV below,
Seller makes the following representations and warranties, and agrees to
Purchase as follows:
2.1 Existence, Power and Authority. Each of Seller and the Company is a
"sociedad anonima de capital variable" duly organized, validly existing under
the laws of the United Mexican States. Each of Seller and the Company have the
corporate authority to enter into this Agreement and perform their obligations
hereunder. This Agreement has been duly authorized and approved by all required
corporate action of Seller and the Company and is a valid and binding obligation
of Seller and Company enforceable against them in accordance with its terms
pursuant to the general extraordinary shareholders meeting of the Seller and the
Company executed as of the date hereof, copies of which are attached hereto as
Exhibit "E." The Company has all requisite power and authority to own its assets
and to conduct its activities in the ordinary course of business.
2.2 Capital Stock. As of the date hereof, the Company has, in the
aggregate, 28,468,536,125 common ordinary shares with no per value (no shares
are held in treasury) issued and outstanding all of which have been validly
issued, are fully paid and nonassessable and were not issued in violation of any
preemptive rights. Exhibit "F" hereof sets forth the ownership of all common
stock that is issued and outstanding on the date hereof and will be issued and
outstanding immediately prior to the Closing Date. There are no options,
warrants, calls, subscriptions, conversion or other rights, agreements or
commitments obligating the Company to issue any additional shares of capital
stock of the Company or any other securities convertible into, exchangeable for
or evidencing the right to subscribe for any shares of capital stock of the
Company.
2.3 Capacity. Seller is not subject to any charter, by-law, mortgage, lien,
lease, agreement, instrument, order, law, rule, regulation, judgment or decree,
or any other restriction of any nature, which would prevent the consummation of
the transactions contemplated by this Agreement by Seller. Seller has full legal
right power and authority to enter into this Agreement, to perform its
obligations hereunder, and to sell, assign, transfer and convey the Shares
pursuant to this Agreement and deliver to Purchaser the Shares pursuant to the
provisions of this Agreement. This Agreement has been duly signed and delivered
by Seller and constitutes and shall constitute the legal, valid and binding
obligation of Seller enforceable against Seller in accordance with its terms.
2.4 Ownership of Shares. Seller is the lawful owner of the Shares, free and
clear of all liens, encumbrances, restrictions, claims, restrictions or
interests of third parties of every kind and they are not subject to any option,
warrant, call or commitment of any nature as evidenced in the copy of the shares
registry book of the Company, attached herein as Exhibit "G."
2.5 Financial Condition. Seller has delivered to Purchaser the audited
consolidated balance sheets, financial and related income statements of the
Company for the fiscal year ended on December 31, 1998 and the non-audited
balance sheets, financial and related income statements as of November 30, 1999
(hereinafter, the "Financial Statements"), copy of which is attached hereto as
Schedule 2.5. Unless otherwise provided herein and to the best of the Seller's
knowledge, the Financial Statements fairly present the financial condition,
assets, liabilities, equity and results of operations of the Company as of their
respective dates and periods and as of November 30, 1999 and are correct and
complete in all material respects, and have been prepared tin accordance with
the generally-accepted accounting principles in Mexico (Mexican GAAP) applied on
a consistent basis throughout the periods involved. Unless otherwise provided
herein, Seller does not know and has no reasonable grounds to know of any basis
for the assertion against the Company of any claim or liability not fully
reserved against in the aforesaid Financial Statements.
2.6 Accounts Receivable and Payable. Except as described in Schedule 2.6,
the accounts receivable and payable of the Company arising from the business as
set forth on the Financial Statements are valid and genuine, have arisen solely
out of bona fide sales and deliveries of goods, performance of services and
other business transactions in the ordinary course of business consistent with
past practice, are not subject to valid defenses, set-offs or counterclaims, and
are collectible within one hundred and eighty (180) days at the full recorded
amount thereof less, in the case of accounts receivable appearing on the
Financial Statements, the recorded allowance for collection losses on the
Financial Statements. The allowance for collection losses on the Financial
Statements has been determined in accordance with the Mexican GAAP consistent
with past practice.
2.7 Inventory. Except as described in Schedule 2.7, all inventory of the
Company used in the conduct of its business, including without limitation raw
materials, work-in process and finished goods, reflected on the Financial
Statements or acquired since the date thereof was acquired and has been
maintained in the ordinary course of its business; is of good and merchantable
quality; consists substantially of a quality, quantity and condition usable,
leasable or salable in the ordinary course of its business; is owned free and
clear of any lien. The Company is not under any liability or obligation with
respect to the return of inventory in the possession of wholesalers, retailers
or other customers.
2.8 Indebtedness. Except as described in Schedule 2.8, the Company has not
incurred any additional Indebtedness other than those related to its ordinary
course of business. For purposes of this Agreement, "Indebtedness" shall mean,
as applied to the Company and without duplication: (i) all indebtedness for
borrowed money, (ii) all obligations evidenced by a note, bond, debenture,
letter of credit, draft or similar instruments, (iii) capital and pure leases,
(iv) any transaction recognized as an indebtedness under Mexican GAAP and (iv)
all indebtedness and obligations of the type described in Sections (i) through
(iii) above, to the extent that such person has guaranteed or for which such
person is responsible or liable, directly or indirectly. Notwithstanding the
above, from the date hereof until the Closing Date, the Company shall be
authorized to incur individually Indebtedness up to an amount of US$25,000.00
(Twenty-Five Thousand Dollars 00/100 currency of the United States of America).
2.9 Absence of Undisclosed Liabilities. Unless otherwise provided herein,
the Company has no material liabilities or obligations known or unknown, direct
or indirect, absolute, contingent, accrued or otherwise, (whether absolute,
accrued, contingent or otherwise) except (a) as specifically and fully reserved
against or reflected on the Financial Statements and those arising in the
ordinary course of business since the date thereof, and (b) the liabilities and
obligations set forth on Schedule 2.9 or in any other schedule attached hereto.
2.10 Tax Matters. Unless otherwise provided in Schedule 2.10 attached
hereto, the Company has filed with the appropriate governmental agencies all
required tax returns for all years through and including 1998 as provided in the
Financial Statements for such period and the Company has filed with the
appropriate agencies all required tax returns as of the date hereof and it is
not in default with respect to any such filing, is not delinquent in payment of
any taxes claimed to be due by any authority and has paid or made adequate
provision on the Financial Statements for all taxes relating to its activities
(including but not limited to all income, withholding, and value added taxes,
real and personal property taxes, occupational taxes, social security
contributions, and any interest and/or penalties related thereto). No statutory
period of limitation governing the time of assessment or collection of any tax
has been extended with respect to the Company. The Company has not received any
claim nor notification by any authority of any kind in regard to any deficiency
in tax payment for any of the Company's taxable years. There are no tax audits
or investigations currently pending with respect to the Company. There are no
basis for assessment of any deficiency in income taxes or any other taxes or
governmental charges against the Company.
2.11 Customs Matters. The Company is not in default with respect to any
customs filings and returns with the appropriate governmental agencies and is
not delinquent in the payment of any import taxes claimed to be due by any
customs authority. No deficiency in payment has been claimed by any customs
authority for any of the Company's taxable years. There are no customs audits or
investigations currently pending with respect to the Company. There are no basis
for assessment of any deficiency in import taxes or duties or any other customs
or governmental charges against the Company.
2.12 Absence of Certain Changes. Except as disclosed on the Financial
Statements or on Schedule 2.12 or in other schedules to this Agreement, and
since January 1, 1999 through the date hereof there has no been in respect to
the Company, any material adverse change in the financial condition of the
Company in excess of US$100,000.00 (One Hundred Thousand Dollars 00/100 legal
currently of the United States of America) (the "Material Adverse Change") of
the total amount of the net worth of the Company's capital (capital contable)
regarding its assets, liabilities, equity, operations, business or prospects.
2.13 Tangible Personal Property. Except as provided in the Financial
Statements or as disclosed on Schedule 2.13, the Company has good and marketable
title to all of the tangible personal property that it owns, as reflected on the
Financial Statements (except as sold or otherwise disposed of or acquired in the
ordinary course of business of the Company or otherwise consistent with this
Agreement, free and clear of all liens, encumbrances, pledges and mortgages. The
Company has valid and enforceable leases of all tangible personal property, all
of which leased property is identified on Schedule 2.9. The machinery,
equipment, furniture and fixtures, computer hardware and software used by the
Company are in good operating conditions and repair, and are suitable and fit
for the purposes for which they are currently being used.
2.14 Leased Real Property. (a) Schedule 2.14 contains a complete and
accurate list and legal description of each real property lease (the "Real
Property Leases") to which the Company is a party by listing the name of the
landlord or sublandlord, a description of the leased premises ("Leased Real
Property"), the commencement and expiration dates of the current term, the
security deposited by the Company with the landlord or sublandlord, if any, the
monthly rental (including base and all additional rents), and whether consent is
required pursuant to such Real Property Lease for the consummation of the
transactions contemplated hereby.
(b) Except as described in Schedule 2.14, all Real Property Leases are
valid binding and enforceable in accordance with their terms, neither the
Company nor, to the best knowledge of Seller, any other party to any such lease
is in default thereunder, and no event of default or other event that, with the
giving of notice and/or the passage of time, would constitute an event of
default has occurred thereunder with respect to the Company or, to the knowledge
of the Seller, any other party thereto.
2.15 Intellectual Property. Schedule 2.15 lists the patents, trademarks,
trade names, copyrights and unpatented proprietary information, know-how and
technology ("Intellectual Property") used by the Company in their business,
specifying in each case whether such Intellectual Property is owned or used
under license or is in process of registration as therein provided. Except as
set forth in Schedule 2.10, the Company has all the necessary licenses to
operate the software used by it in the manner presently used, and such use is
consistent with the respective licenses, none of the Intellectual Property has
been held or found to be invalid and the validity of none of the Intellectual
Property has been questioned in any proceeding currently pending nor threatened.
The Company owns or possesses all Intellectual Property necessary to provide its
services. Except as set forth on Schedule 2.15, there is, to the best knowledge
of Seller, no reasonable basis upon which any claim may be asserted against the
Company for infringement or misappropriation of any domestic or foreign letters
patent, patents, patent applications, patent licenses, software licenses, and
know-how licenses, trade names, trademark registrations and applications,
trademarks, service marks, copyrights, copyright registrations or applications,
trade secrets, technical knowledge, know-how or other confidential proprietary
information. All letters patent, registrations and certificates issued by any
governmental entity relating to any of the Intellectual Property and all
licenses and other agreements pursuant to which the Company uses any of the
Intellectual Property, are valid and subsisting, have been properly maintained,
and neither the Company nor, to the best knowledge of Seller, any other person
is in default or violation thereunder.
2.16 Contracts. Schedule 2.16 describes the contracts executed by the
Company, exceeding the amount of US$50,000.00 (Fifty Thousand Dollars 00/100
legal currency of the United States of America) other than those contracts with
customers which are listed in Schedule 2.28 below. The Company is not a party to
any other contracts or agreements exceeding such amount or its equivalent in
Mexican Pesos. Each of the agreements, contracts, commitments, leases, plans and
other instruments, documents and undertakings required to be listed on Schedule
2.16 or not required to be listed thereon because of the amount thereof, is
valid and enforceable in accordance with its terms; the Company is, and to the
best knowledge of Seller, all other parties thereto are, in full compliance with
the provisions thereof; the Company is not, and to the best knowledge of the
Seller, no other party thereto is in material default in the performance,
observance or fulfillment of any obligation, covenant or condition contained
therein; and no event has occurred with which or without the giving of notice or
lapse of time, or both, would constitute a default thereunder. Except as listed
on Schedule 2.16, no written or oral agreement, contract or commitment described
or required to be described on Schedule 2.16 requires the consent of any party
in connection with the transactions contemplated hereby.
2.17 Permits. Unless otherwise provided herein, the Company holds all
material governmental licenses, approvals, registrations and permits, including
the Intervan Permit ("Permits") required by applicable Law for it to own and/or
possess its assets and to operate its business and operate, among other things,
as provider of value added telecommunication services in Mexico and perform its
ordinary business activities as of the date hereof. Except as specified in
Schedule 2.17, all Permits and the Intervan Permit are and after the execution
of this Agreement, will remain in full force and effect and are renewable in the
ordinary course of business, as the case may be.
2.18 Compliance with Applicable Law and Permits. Except as disclosed on
Schedule 2.18 or in any other schedule attached hereto, the Company is
conducting and has conducted its business in compliance with all applicable
Laws, regulations, Permits and the Intervan Permit and has received no notice
that it is in breach or violation of the applicable Laws, regulations, Permits
and the Intervan Permit which could cause a Material Adverse Change.
2.19 No Conflict. The execution, delivery and performance of this Agreement
by Seller will not (a) result in a violation of any law, rule, ordinance,
regulation, order, judgment or decree by which Seller is bound; (b) conflict
with, or result in a breach of or default under, any mortgage, lien, lease,
license, permit, agreement, contract or instrument to which Seller is a party or
by which it is bound, which conflict, breach or default would result in a
Material Adverse Change on the ability of Seller to perform its obligations
under this Agreement; (c) require for its execution and perfection of any filing
with, or permit, consent of approval, or the giving of any notice to, any
governmental or regulatory body, agency or authority, or any other Person, or
(d) result in a violation or breach of, conflict with, constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, cancellation, payment, or acceleration) under, or result
in the creation of any encumbrance upon any properties or assets of the Company
under any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, licenses, franchise, permit, agreement, lease or any other instrument
or obligation to which the Company or Seller is a party, or by which it or any
of its respective properties or assets may be bound. None of the Seller or the
Company is required to give prior notice to, or obtain any consent, approval or
authorization from, or make any declaration or filing with, any governmental
authority, creditor or other person in connection with the execution or delivery
of this Agreement or the consummation of the transactions contemplated hereby;
no contract shall be rendered void or shall result in giving any other party
thereto the right to terminate such contract or otherwise affect the rights and
obligations of the parties thereunder as a consequence of this Agreement.
2.20 No Defaults. Except as set forth in Section 2.21 below and to the
beset knowledge of Seller, the Company (and where necessary, Seller) has
performed, or has taken all actions reasonably necessary, to enable the Company
to perform when due all material obligations under any contracts or permits to
which it is a party or subject and there has not occurred any material default
or Material Adverse Change other than an event with which the lapse of time or
giving of notice or both may become a material default under any such contract
or permit. All contracts executed by the Company are valid and legal obligations
enforceable against all parties thereto.
2.21 Litigation and Arbitration. Except as set forth on Schedule 2.21, (a)
neither the Company nor Seller has been notified of any claims, actions, suits
or proceedings pending or threatened by or against the Company or Seller in any
court, arbitration, tribunal or arbitrator or before any governmental or
administrative authority, and (b) neither the Company nor Seller has been
notified of any decree, judgment, order, arbitration award or notice of any kind
that enjoins or restrains it from taking any action of any kind.
2.22 Employee and Labor Matters. Seller does not have any knowledge that
any of the Company's key employees plans to terminate his/her or their
employment with the Company. The Company is in compliance in all material
respects with all applicable laws respecting employment and employment
practices, terms and conditions of employment, and wages and hours. Unless
otherwise expressly provided in Schedule 2.22, the Company is not a party to or
subject to any collective bargaining or other agreement with any unions. No
consent of any union, works, council or other employee group is required for,
and no agreement restricts the execution of this Agreement and the consummation
of any of the transactions contemplated herein. The Company has not entered into
any contract or arrangement with any employee providing for any severance or
termination payment or other similar payment upon the termination of employment
beyond the minimum to which the employee is entitled by applicable law. The
consummation of the transactions contemplated hereby will not entitle any
employee or employee group to any severance or termination pay or other labor
indemnification. Except as set forth in Schedule 2.22, there has been no
increase in the compensation paid or payable or to become payable by nor any
general increase in the compensation paid or payable or to become payable by the
Company, nor any increase in benefits paid or to be paid or provided by the
Company. Seller has provided Purchaser with an accurate list of all employees of
the Company and the current rate of compensation for each such employee
(including information on bonuses and fringe benefits).
2.23 Employee Benefit Plans. The Company has no Employee Benefit Plans
other than those identified in Schedule 2.23. All obligations of the Company,
whether arising by operation of law, by contract for payments by it with respect
to benefits for its employees in respect of periods prior to [November 30, 1999]
have been paid by it or adequate provision therefor has been made in the
Financial Statement, except as disclosed in Schedule 2.23.
2.24 Related Party Transactions. No shareholder and no officer or director
of the Company has any direct or indirect interest in any of the assets used or
held by the Company in the conduct of its business or operations or is a party
to or haw any interest, direct or indirect, in any contract with the Company.
2.25 Banks; and Powers of Attorney. Schedule 2.25 is a true and complete
list showing the name of each bank in which the Company has an account or safety
deposit box and the names of all persons authorized to draw thereon or to have
access thereto.
2.26 Insurance. The Seller has delivered to Purchaser or Purchaser's agents
or advisors true and complete copies of all insurance policies or bonds to which
the Company is a party or under which the Company, or any director of them, is
covered. All such policies are valid, outstanding and enforceable according to
its terms. The bonds are sufficient for compliance with all contracts to which
the Company is party and will continue in full force under their respective
terms. All premiums due for such policies have been paid, and the Company has
otherwise performed all of its respective obligations under each policy to which
the Company is a party. Schedule 2.26 is a true and complete list of the
insurance policies of the Company which, as of this date, are in full force and
effect.
Neither the Seller nor the Company has received any refusal of coverage or
any notice that a defense will be afforded with reservation of rights or any
notice of cancellation or any other indication that any insurance policy is no
longer in full force and effect or will not be renewed or that the issuer of any
policy is not willing or able to perform its obligations thereunder.
2.27 Brokers. Seller and its agents have incurred no obligation or
liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other similar payment in connection with this Agreement, other
than with Communications Equity Associates.
2.28 Customers. The Customers of the Company as of the date hereof are
listed in Schedule 2.28 (the "Customers") including the corresponding total and
individual revenue corresponding as therein provided (the "Closing Customer
Recurring Revenue"). Except as provided in Schedule 2.28, Seller does not have
any knowledge that any of the Company's Customers intend in any way to terminate
their business relationship with the Company.
2.29 Disclosure. No representation or warranty by the Seller in this
Agreement, and no certificate or statement furnished or to be furnished to
Purchaser pursuant to this Agreement or in connection with the transactions
contemplated hereby, contains or shall contain any untrue statement of material
fact, or omits or shall omit to state a material fact necessary to make the
statements contained herein and therein misleading.
2.30 Year 2000 Compliance ("Y2K"). Schedule 2.30 describes the actions and
measures that the Company has taken or performed in order to enable the software
and hardware of the Company related to the main business activities of the
Company to comply with the Y2K requirements.
2.31 Bankruptcy Proceedings. Seller has not commenced a voluntary case
concerning itself under any bankruptcy law; there is no involuntary case under
any such statute commenced against Seller; no custodian (sindico) has been
appointed for, or has taken charge of, all or substantially all of the property
of Seller; Seller has not commenced any other proceeding under any adjustment of
debt, relief of debtors, dissolution, insolvency, liquidation or similar law of
any jurisdiction with regards to Seller or its assets; any such proceeding which
remains undismissed has been commenced against Seller which remains; Seller has
not been adjudicated insolvent (insolvente), in suspension of payments
(suspension de pagos) or bankrupt (quiebra); no order of relief or other order
approving any such case or proceeding has been entered; Seller has not suffered
any appointment of any custodian or the like for all or substantially all of its
property; Seller has not made a general assignment for the benefit of creditors;
any corporate action has been taken by Seller for the purpose of effecting any
of the foregoing.
2.32 Subsidiaries and Equity Investments. Seller has no participation,
interest, fiduciary right or holds shares or equity interests or any other type
of equity or control right of and in regard to any type of business association
or trust including, without limitation, partnerships, corporations, asociacion
en participacion and business trusts.
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF PURCHASER
3. Representations of the Purchaser. The Purchaser represents, warrants and
agrees as follows:
3.1 Existence, Power and Authority. Purchaser is a company duly organized,
validly existing under the laws of the United Mexican States. Purchaser has the
corporate power and authority to enter into this Agreement and to perform its
obligations hereunder. This Agreement has been duly authorized and approved by
all required corporate action of the Purchaser and is a valid and binding
obligation of Purchaser, enforceable against it in accordance with its terms.
3.2 Capacity. Purchaser is not subject to any charter, agreement,
instrument, order, law, rule, regulation, judgment or decree, or any other
restriction of any kind or character, which would prevent consummation of the
transactions contemplated by this Agreement by Purchaser.
3.3 No Conflicts. The execution, delivery and performance of this Agreement
by Purchaser will not (a) result in a violation of any law, rule, ordinance,
regulation, order, judgment or decree by which Purchaser is bound, (b) conflict
with, or result in a breach of, or default under, any mortgage, lien, lease,
license, permit, agreement, contract or instrument to which Purchaser is a
party, which conflict, breach or default, would have a Material Adverse Effect
on the ability of Purchaser to perform its obligations under this Agreement, or
(c) require any filing with, or permit, consent or approval of, or the giving of
any notice to any governmental or regulatory body, agency or authority, or any
other Person. Neither the entering into of this Agreement nor the completion of
the transactions contemplated hereby by Purchaser will result in a violation of
or default under any of the provisions of the Articles of Incorporation or
by-laws of Purchaser, any agreement or other instrument to which Purchase is a
party or by which Purchaser is bound. Purchaser is not required to give prior
notice to, or obtain any consent, approval or authorization of, any governmental
authority, creditor or other person in connection with the execution or delivery
of this Agreement or the consummation of the transactions contemplated hereby.
3.4 Change of Ownership. Purchaser is an entity controlled by Convergence
Communications, Inc. ("CCI") which, in turn, is controlled directly or
indirectly by Lance D'Ambrosio, Troy D'Ambrosio, estate of George D'Ambrosio,
TTW/CCI Holding LLC, Telematica ECC, Internexus, S.A. and Fondelec Essential
Services Growth Fund L.P. (collectively, the "Controlling Shareholders"). Seller
shall have the right to accelerate the Promissory Notes upon any event causing:
(i) Purchaser to cease being controlled by CCI, or (ii) the Controlling
Shareholders to fail to control CCI among them, unless such failure follows upon
a registered public offering of CCI's securities under United States Securities
Law, the heirs of a class of CCI's securities so registered being approved or
listed on the New York Stock Exchange or the NASDAQ and the offering being
managed by a lead underwriter of international standing.
ARTICLE IV. PRE-CLOSING COVENANTS
4.1 Access to Information. Prior to the Closing Date, upon reasonable
notice from Purchaser to the Company, the Company will afford to the officers,
attorneys, accountants or other authorized representatives of Purchaser
reasonable access during normal business hours to the employees, assets,
facilities and the books and records of the Company so as to afford Purchaser
full opportunity to make such review, examination and investigation of the
business as Purchaser may desire to make. Purchaser will be permitted to make
extracts from or to make copies of such books and records as may be reasonably
necessary in connection therewith. Prior to the Closing Date, the Company will
promptly furnish or cause to be furnished to Purchaser such financial and
operating data and other information as Purchaser may reasonably request.
4.2 Conduct of Business. Except as consented to by Purchaser in writing or
otherwise provided herein, during the period from the date of the Agreement and
continuing until the Closing Date, the Company will, in respect of its conduct
of the business, and Seller will cause the Company to:
(a) not incur any liabilities, other than in the ordinary course of
business consistent with past practice, or discharge or satisfy any lien or
encumbrance, or pay any liabilities, other than in the ordinary course of
business consistent with past practice, or fail to pay or discharge when
due any liabilities of which the failure to pay or discharge will cause any
Material Adverse Change or risk of material loss to it or any of its assets
or properties;
(b) not sell, encumber, assign or transfer any assets or properties,
except for the sale of inventory in the ordinary course of business
consistent with past practice, or the replacement or betterment of obsolete
or worn-out equipment in the ordinary course of business, consistent with
past practice;
(c) not make or suffer any amendment or termination of any contract,
or cancel, modify or waive any substantial debts or claim held by it or
waive any rights of substantial value, whether or not in the ordinary
course of business;
(d) not declare, set aside or pay any dividend or make or agree to
make any other distribution or payment in respect of its capital shares or
redeem, purchase or otherwise acquire or agree to redeem, purchase or
acquire any of its capital shares;
(e) not make commitment or agreements for capital expenditures or
capital additions or betterments;
(f) not acquire or agree to acquire any assets except in the ordinary
course of business, consistent with past practice;
(g) not increase the salaries or other compensation of, or make any
advance (excluding advances for ordinary and necessary business expense) or
loan to, any of its employees or make any increase in, or any addition to,
other benefits to which any of its employees may be entitled;
(h) not change any of the accounting principles followed by it or the
methods of applying such principles;
(i) not enter into any transaction other than in the ordinary course
of business consistent with past practice; or
(j) not amend its by-laws nor take any action with respect to any such
amendment;
(k) not authorize or issue any shares of the Company's capital stock
or other equity securities nor grant any option, warrant, or right calling
for the authorization or issuance of any such shares;
(l) not declare, set aside or pay any dividend or other distribution
in respect of its capital stock nor directly or indirectly redeem or
purchase any of its capital stock or any interest in or right to acquire
any such stock;
(m) (i) carry on the business in the usual, regular and ordinary
course as presently conducted and consistent with past practice (including
maintaining inventory at historical levels, and in no event less than that
which is adequate for use in the business), (ii) keep the business intact,
(iii) keep available the services of the present employees of the business,
(iv) use its reasonable efforts to collect outstanding accounts receivable,
and (v) use its reasonable efforts to maintain the goodwill associated with
the business, including but not limited to, preserving the relationships of
Customers (and shall pay amounts due Customers on a timely basis),
suppliers and others having business dealings with the business, consistent
with past practices;
(n) maintain the Company assets in at least as good condition as they
were being maintained as of the date hereof (subject only to normal wear
consistent with past experience) and not move any asset (other than in the
ordinary course of business and consistent with past practice) to any
location other than the Leased Real Property, maintain supplies and
inventories in quantities consistent with its customary business practice,
maintain all of its rights in and to its intellectual property, and
maintain in full force and effect all of its intangible property rights; or
(o) not take or omit to take any action as a result of which any
representation or warranty of Seller in Article III would be rendered
untrue or incorrect if such representation or warranty were made
immediately following the taking or failure to take such action.
4.3 Notification. (a) The Company and Seller shall notify Purchaser, and
Purchaser shall notify Seller, of any litigation, arbitration or administrative
proceeding pending or, to its knowledge, threatened against the Company, Seller
or Purchaser, as the case may be, which challenges the transactions contemplated
hereby.
(b) The Company and Seller will provide prompt written notice to
Purchaser of any change in any of the information contained in its
representations and warranties made in Article III hereof or any Exhibits
or Schedules referred to herein or attached hereto and shall promptly
furnish any information which Purchaser may reasonably request in relation
to such change; provided, however, that such notice shall not operate to
cure any breach of the representations and warranties made in Article III
hereof or any Exhibits or Schedules referred to herein or attached hereto.
4.4 Cooperation. The parties hereto shall cooperate fully with each other
in taking any actions, including actions to obtain the required consent of any
governmental entity or any third party, necessary or helpful to accomplish the
transactions contemplated by this Agreement; provided, however, that no party
shall be required to take any action which would have a Material Adverse Change
upon it or the Company.
4.5 No Inconsistent Action. No party hereto shall take any action which is
materially inconsistent
with its obligations under this Agreement.
4.6 Satisfaction of Conditions. Without limiting the generality or effect
of any provision of Section 1.3 above, prior to the Closing Date, each of the
parties will use reasonable efforts with due diligence and in good faith to
satisfy promptly all conditions required hereby to be satisfied by such party in
order to expedite the consummation of the transactions contemplated hereby.
4.7 Confidentiality. Purchaser and Seller shall, except to the extent
required by any governmental authority, keep confidential and shall use
commercial reasonable efforts to cause to be kept confidential by their
representatives and officials, all information disclosed prior to the date of
this Agreement or hereafter to any such persons in connection with this
Agreement and the consummation of the transactions contemplated hereby, and none
of such information shall be used in any manner other than in connection with
this Agreement and the other agreements contemplated hereby. This obligation
shall survive three (3) years following the Closing Date.
4.8 Publicity. No party hereto will issue or cause the publication of any
press release or other public announcement with respect to this Agreement or the
transactions contemplated hereby without the prior consent of the other party,
which consent will not be unreasonable withheld; provided, however, that nothing
herein will prohibit either party from issuing or causing publication of any
such press release or public announcement to the extent that such party
determines such action to be required by law or the rules of any national stock
exchange applicable to it or to its affiliates, in which event the party making
such determination will, if practicable under the circumstances, use reasonable
efforts to allow the other party reasonable time to comment on such release or
announcement in advance of its issuance.
4.9 Acquisition Proposals. From and after the date of this Agreement,
Seller shall not, nor shall they authorize or permit any officer, director or
employee of, or any investment banker, attorney, accountant or other
representative retained by the Company, or the Company to, solicit, initiate or
encourage submission of any proposal or offer (including by way of furnishing
information) from any person which constitutes, or may reasonably be expected to
lead to, any Acquisition Proposal. As used in this Agreement, "Acquisition
Proposal" shall mean any proposal for the acquisition of the one hundred percent
(100%) of the capital stock of the Company or any proposal or offer to acquire
in any manner a substantial equity interest in, or a substantial portion of, the
assets of the Company.
4.10 Representations, Warranties and Covenants.
(a) All representations and warranties of Seller provided herein or in
any Exhibit, Schedule or document delivered pursuant hereto, shall be true
and complete in all material respects s of the date hereof without regard
to any schedule updates furnished by Seller after the date hereof, as the
case may be, and on and as of the Closing Date as if made on and as of that
date.
(b) All of the terms, covenants and conditions to be complied with and
performed by Seller on or prior to the Closing Date shall have been
complied with or performed.
(c) Purchaser shall have received a certificate, dated as of the
Closing Date, executed by a duly authorized officer of Seller, certifying
in such detail as Purchaser may reasonably request that the conditions
specified in Section 1.3 above have been fulfilled.
ARTICLE V. INDEMNITY OBLIGATIONS BY SELLER
5.1 Indemnification for Losses. (a) Subject to the provisions of Article
VII below, Seller shall indemnify Purchaser for any and all liabilities, losses,
damages, claims, costs, deficiencies, obligations or expenses (including
penalties and interest and legal fees and costs, as well as any liability
imposed on any officers, employees, agents or representatives of the Purchaser
(the "Purchaser Officer") other than the Company's officers, officials, agents
and representatives as of the date hereof in regard to any individual liability
to those, which are imposed solely by virtue of their relationship with the
Purchaser) derived from any misrepresentation or breach of any representation,
warranty, covenant or obligation of the Seller under this Agreement; provided,
that no claim shall be made hereunder unless and until the aggregate of any
Losses that may have occurred exceed the amount of US$100,000.00 (One Hundred
Thousand Dollars 00/100 legal currency of the United States of America) except
for (x) any claim in regard to the Schedule 2.4 related to any lien over the
Shares in favor of TV Azteca, S.A. de C.V., and (y) any claim from Management
Team in regard to an benefit in their favor deriving from any stock option plan,
in which cases the above-mentioned exceptions shall be terminated at the time of
delivery by Seller to Purchaser of, as the case may be, (i) proper evidence in
regard to the payment of any and all debt to TV Azteca, S.A. de C.V., and/or
(ii) the waiver and acknowledgment of payment from the Management Team in regard
to such program.
(b) In the event of Losses suffered by Purchaser Officer, Seller shall
indemnify only Purchaser subject to: (a) the existence of a direct Loss by
Purchaser as a result of the damage suffered by the Purchaser Officer; (b) in no
way and under no circumstance Seller shall have an obligation of any kind in
favor of a Purchaser Officer; and (c) the obligation of Seller to indemnify
Purchaser in this event shall be subject to any and all of the terms and
conditions provided herein for Losses.
5.2 Indemnification Procedures for Losses. The obligation from Seller to
indemnify the Purchaser for Losses shall be subject to the following terms,
conditions and procedure:
(a) Notification. Purchaser shall promptly give notice to Seller of
any matter that Purchaser has determined has given or could give rise to a
right of indemnification under this Agreement written notice within ten
(10) business days, for claims in the United States of America, and three
(3) days, for claims in Mexico, from the date Purchaser acknowledged such
event. If Purchaser shall receive notice of any claim by a third party
which is or may be subject to indemnification (a "Third Party Claim"),
Purchaser shall give to Seller prompt written notice of such Third Party
Claim (x) within fifteen (15) business days if it is a claim presented in
the United States, or (y) within three (3) calendar days if it is a claim
presented in Mexico, and Seller shall cooperate with the Purchaser against
such Third Party Claim. In any event, Seller shall have the right to employ
Seller's own counsel and participate in the defense of the case at its own
expense. No such Third Party Claim may be settled without the written
consent of the other party, unless the settlement involves only the payment
of money by such party and such payment does not affect the goodwill of the
other party.
(b) Cure Period. Seller shall have a cure period of thirty (30)
calendar days after Purchaser's notification to remedy any breach under
this Agreement and to clarify or remedy any breach, as the case may be.
(c) Conduct of Defense. Purchaser shall promptly submit to Seller
copies of all pleadings, responsive pleadings, motions, and other similar
legal documents and papers received by it in connection with the action,
suit or proceeding as the case may be. Subject to an appropriate
confidentiality agreement, the parties shall make available to each other
and each other's counsel and accountants all of the books and records
relating to the action, suit, or proceeding, and Seller shall render to the
Purchaser any assistance as may be reasonably required in order to insure
the proper and adequate defense of the action, suit, or proceeding. Any
legal fees or expenses deriving from the above shall be paid by Seller.
ARTICLE VI. CLOSING REVENUE LOSS AND PRICE ADJUSTMENT
6.1 Closing Customer Recurring Revenue Loss. Subject to the provisions of
Article VII above, in the event that at the end of the 6 (six) months from the
Closing Date (the "Adjustment Date"), the Closing Customer Recurring Revenue has
suffered a loss in excess of five percent (5%) of such Closing Customer
Recurring Revenue, the Purchase Price shall be adjusted in the amount resulting
in excess of such five percent (5%) (the "Closing Customer Recurring Revenue
Loss"), unless such loss results from any increase in the tariffs of services
provided by the Company, decrease in the quality of such services or any other
decision of the Purchaser outside of the commercially accepted practices in
Mexico, in which case such loss shall not be considered to be a Closing Customer
Recurring Revenue Loss.
6.2 Adjustment of the Purchase Price Procedure for Closing Customer
Recurring Revenue Loss.
(a) Parties hereto agree that, as the case may be, the Closing
Customer Recurring Revenue Losses at the end of the 6 (six) months period
shall be calculated according to the following:
(i) For each percentage point in excess of 5%, the principle
amount combined Promissory Notes shall be reduced by 1/95 (one ninety
fifth).
(ii) For purpose of clarity of the above, the following procedure
shall apply based on InterVan's Recurrent Revenue for the month of May
2000:
If AdIRR > = CIRR x 0.95, then
PCAPN = US$6,000,000
If AdIRR < CIRR x 0.95, then
Adjustment = US$6,000,000.00 x [((AdIRR/CIRR) - 0.95) x - 1] PCAPN =
US$6,000,000 - Adjustment
Where:
AdIRR = Adjustment Date for InterVan Recurrent Revenue shall be May
31, 2000 and shall be measured against the Clients under schedule 2.28
category (b) and (b) exclusively
CIRR = Closing InterVan Recurrent Revenue shall mean the amount of
$6,169,592.00 (six million one hundred and sixty nine thousand five
hundred ninety two Pesos 00/100 legal currency of the United Mexican
States) as referred to in Schedule 2.28 attached hereto.
PCAPN = Principal Combined Amount of the Promissory Notes
InterVan Recurrent Revenue = Shall mean the Customer Current Revenue
for any and all purposes of this agreement.
Closing Customer Recurring Revenue = Shall mean the InterVan Recurrent
Revenue and shall not include the Local Loop Recurrent Revenue
referred to in Schedule 2.28.
(b) Purchase shall deliver a written notice to Seller within 10 (ten)
business days from the adjustment Date that there has been a Closing
Customer Recurring Revenue Loss.
(c) Seller shall clarify any circumstance in regard to the Closing
Customer Recurring Revenue Loss alleged by Purchaser; provided,
however, that (i) Purchaser shall be obliged to deliver to Seller any
documentation and information required in writing by Seller; (ii)
shall authorize the access to the Seller's agents or advisors to the
place of location of such documentation or information; and (iii)
Seller shall deliver its conclusions within 30 (thirty) days from the
date Purchaser authorized the access or delivered, as the case may be,
the corresponding information.
(d) In the event the parties do not agree in the existence or
non-existence of a Closing Customer Recurring Revenue Loss, such
circumstance shall be verified by a report of an independent auditor.
For purpose of the above, the parties hereto shall designate as
independent auditor (the "Independent Auditor") to be selected among 3
(three) of the most prestigious and renowned accounting firms in
Mexico. Parties hereto acknowledge and agree to that from those
accounting firms, it shall be automatically appointed for the purposes
provided above, the firm which commits to complete such audit in the
shortest time frame.
(e) The Independent Auditor shall clarify any circumstance in regard to
the Closing Customer Recurring Revenue Loss alleged by Purchaser;
provided, however, that (i) Purchaser shall deliver to the Independent
Auditor any documentation and information required in writing by the
Independent Auditor; (ii) shall authorize the access to the
Independent Auditor personnel to the place of location of such
documentation or information, and (iii) the Independent Auditor shall
deliver its conclusions within 30 (thirty) days from the date
Purchaser authorized it the access to, or delivered the, as the case
may be, corresponding information; provided, however, that such term
shall be extended if requested in writing by the Independent Auditor.
(f) The conclusions of the Independent auditor shall be final and binding
to the parties hereto. Any dispute in regard to the conclusions of the
Independent Auditor shall be resolved according to the dispute
resolution mechanism provided in Section 5.2 below.
ARTICLE VII. COMMON PROVISIONS TO LOSSES AND CLOSING
CUSTOMER RECURRING REVENUE LOSS
7.1 Limitation.
(a) Any amount resulting from Losses, Closing Customer Recurring Revenue
Loss or any other dispute related to any of the obligations of Seller
under this Agreement shall be offset against the amount of the One
year Promissory Note. In the event such amount exceeds the amount of
the One year Promissory Note, the corresponding amount shall be offset
against the amount of the Two year Promissory Note.
(b) In the event of a Closing Customer Recurring Revenue Loss, the
Purchase Price shall be considered to be reduced in the same
proportion as that of the corresponding offset.
(c) In the events provided above, the Promissory Notes, as the case may
be, shall remain in full force and effect for the remaining balance
after the offset referred to above.
(d) In the event the principal amount of the Promissory Note is offset in
full, the obligations of Seller to indemnify Purchaser or to adjust
the Purchase Price shall be terminated as of the date of such offset,
and under no circumstance or event Seller shall be liable to Purchaser
or any other third party.
7.2 Termination.
(a) The obligations of Seller pursuant to Articles V and VI above shall
terminate as follows:
(i) The Indemnification for Losses shall terminate on 2 (two) years
from the Closing Date, and
(ii) The Price Adjustment for Closing Customer Recurring Revenue Loss
shall terminate the latter of: (i) 30 (thirty) days from the
Adjustment Date in the event of no objection from Purchaser; or
(ii) receipt of Independent Auditor report described in Section
6.2(e) above.
(b) In the event a claim for indemnification is made prior to such
termination, such termination shall not affect or in any way impair
the rights of Purchaser to indemnification in respect of the
particular matter as to which the claim is made, whether or not the
amount of indemnification to which Purchaser is entitled in respect of
such matter shall have been determined prior to such termination.
7.3 Knowledge by Purchaser. Purchaser represents and warrant to Seller
that, to the extent of liabilities disclosed, none of the information expressly
set out in the written materials delivered by Seller to Purchaser prior to, or
simultaneously with, the Closing leads Purchaser to conclude that there has
occurred a Loss or a Customer Recurring Revenue Loss as of the Closing, and
Purchaser acknowledges that Seller is relying on the foregoing representation
and warranty in agreeing to make the indemnities set out in Section 5.1 and to
adjust the Purchase Price as set out in Section 6.1.
ARTICLE VIII. MISCELLANEOUS
8.1 Governing Law. This Agreement, including without limitation, the
interpretation, construction and validity hereof, shall be governed by the Laws
of the United Mexican States.
8.2 Arbitration. (a) In the event that any dispute, controversy or claim
arising regarding any Losses, Closing Customer Recurring Revenue Loss or any
other relating to or in connection with this Agreement, including any question
regarding its existence, validity or termination, or regarding a breach thereof
(hereafter, the "dispute") is not settled as provided in Clause IV above or
within 15 (fifteen) days after the notice is given to the other parties seeking
representative consideration of a dispute, for any dispute different from Losses
and Closing Customer Recurring Revenue Loss, then the dispute shall be finally
settled by international arbitration under and in accordance with the Rules of
Conciliation and Arbitration of the American Arbitration Association ("AAA"),
New York, New York, United States of America in effect on the date of this
Agreement (the "Rules"). A party wishing to submit a dispute to arbitration
shall give written notice to such effect to the other parties hereto and to the
AAA, (the "AAA Court"). The parties shall have [30 (thirty)] calendar days from
another party's notice of such a request for arbitration to designate the
arbitrators for the dispute.
(b) Seller and Purchaser shall designate one arbitrator each, and the two
designated arbitrators shall in turn choose a third arbitrator, who shall also
be the chairman of the panel. The AAA Court shall confirm the appointment of the
third arbitrator. If one party appoints an arbitrator but the other party fails
to nominate its arbitrator within the 30 day period specified above, then the
appointment of the second arbitrator shall be made by the AAA Court upon the
request of the other party; and if the appointed arbitrators shall fail to
appoint the third arbitrator within 30 (thirty) calendar days after the date of
appointment of the most recently appointed arbitrator, the third arbitrator
shall be appointed by the AAA Court upon the request of either party.
(c) (i) The arbitrators shall be legal practitioners having at least 15
years experience in commercial legal matters in the 20 years immediately
preceding commencement of the arbitration; (ii) the arbitration shall be
conducted under and in accordance with the Rules, which Rules are deemed to be
incorporated by reference to this clause; (iii) the site of the arbitration
shall be New York, New York, United State of America and the language to be used
in the arbitration proceedings shall be the English language; provided, however,
that any award shall produce effects in Mexico City as deemed to have been made
there; (iv) all direct testimony shall be submitted by sworn affidavit or
written question and answer; reasonable discovery shall be permitted but shall
be limited in all cases to requests for documentation; (v) the decision of the
arbitrators shall be rendered within 180 calendar days from the appointment of
the last arbitrator, and shall be final and binding upon all parties; (vi) any
award shall be in writing in the English language and state the reasons and
contain reference to the legal grounds upon which it is based. The award may be
made public only with the written consent of all parties to the arbitration;
provided, however, that any ruling or award, final or otherwise, may be cited in
any subsequent dispute; (vii) The arbitrators shall neither have nor exercise
any power to act as amicable compositeur or decide ex aequo et bono; or to award
special, exemplary, indirect, consequential or punitive damages. The costs of
the arbitration shall be fixed in accordance with the Rules.
8.3 Captions. The Article and Section captions used herein are for
reference purposes only, and shall not in any affect the meaning or
interpretation of this Agreement.
8.4 Parties in Interest. This Agreement may not be transferred, assigned or
pledged by any party hereto, other than by operation of law. This Agreement
shall be binding upon, and shall inure to the benefit of, the parties hereto and
their respective heirs, executors, administrators, successors and permitted
assignees.
8.5 No Soliciting and Competition. As of the date hereof, Seller hereby
agrees not to solicit of clients, customers, or employees of the Company or to
compete in the same line of business with the Company for a period of 3 (three)
years from the date hereof.
8.6 Notices. All notices given under this Agreement shall be in writing and
shall be delivered by hand or sent by facsimile (with a confirmation copy sent
by international courier service) or international courier service to the
addressee or to an officer of the intended recipient.
If to Purchaser, such notices shall be addressed to:
Covergence Communications, S.A. de C.V.
102 West 500 South, Suite 320
Salt Lake City, Utah 84101
Attn: Troy D'Ambrosio
Fax: (801) 532-6060
Tel: (801) 528-5618
with a copy (which is not required to constitute notice) to:
Parsons Behle & Latimer
One Utah Center
201 South Main Street, Suite 1800
Salt Lake City, Utah 84145-0898
Attn: Scott R. Carpenter
Fax: (801) 536-6111
Tel: (801) 328-5618
and
Baker & McKenzie, S.C.
Boulevard Manuel Avila Camacho No. 1, Piso 12
Colonia Lomas de Chapultepec
C.P. 11000, Mexico D.F., Mexico
Attn: Gaspar Gutierrez Centeno
Fax: (525) 230-2999
Tel: (525) 230-2900
or to any subsequent address of which Purchaser may notify the other parties in
writing.
If to the Seller, such notices shall be addressed to:
Chase Capital Partners
380 Madison Avenue, 12th Floor
New York, NY 10017-2591 U.S.A.
Attn: Robert Ruggiero and Susan Segal
Tel: (212) 622-3098
Fax: (212) 622-4535
with a copy (which is not required to constitute notice) to:
White & Case, S.C.
Paseo de las Palmas No. 405-50
Lomas de Chapultepec
C.P. 11000, Mexico D.F., Mexico
Attn: Alexis Rovzar, Rafael Romo Corzo and Ariel Ramos Marcin
Fax: (525) 540-9699
Tel: (525) 540-9600
or to any subsequent address of which the Seller may notify the other parties in
writing.
Notices under this Agreement shall be deemed given upon actual receipt by
the addressee. All notices must be given in the English language.
8.7 Counterparts. This Agreement may be executed in two or more
counterparts, all of which taken together shall constitute on the same
instrument.
8.8 Entire Agreement. This Agreement contains the entire understanding of
the parties hereto with respect to the subject matter contained herein and
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
8.9 Amendments. This Agreement may not be changed orally, but only by an
agreement in writing signed by the parties.
8.10 Severability. In case any provision in this Agreement shall be held
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions hereof will not in any way be affected or impaired
thereby.
8.11 Third Party Beneficiaries. Each party hereto intends that this
Agreement shall not benefit or create any right, or cause of action in, or on
behalf of, any person other than the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
Seller Purchaser
Controladora S.O.E., S.A. de C.V. Covergence Communications, S.A. de C.V.
/s/ /s/
- ------------------------------------ ---------------------------------------
By: Ariel Ramos Marcin By: Luis Manuel De la Fuenta Baca
SUBSIDIARIES OF THE REGISTRANT
Subsidiaries of the Registrant:
Transworld Wireless Television, Inc. - A Nevada Corporation
Auckland Independent Television Services, Ltd. - A New Zealand Corporation
Telecom Investment Corporation. - A Delaware Corporation
WCI de Argentina, S.A. - An Argentinean Corporation
WCI de Cayman, Inc. - A Cayman Islands Corporation
Chispa Dos, Inc. - A Cayman Islands Corporation
TeLatin, Inc. - A Cayman Islands Corporation
Television Interactiva, S.A. - A Costa Rican Corporation
Papeles de Curcuma, S.A. - A Costa Rican Corporation
Multicable, S.A. de C.V. - El Salvadoran Corporation
Cablevisa, S.A. de C.V. - El Salvadoran Corporation
Cybernet de El Salvador S.A. de C.V. - El Salvadoran Corporation
Metrotelecom, S.A. de C.V. - El Salvadoran Corporation
Wireless Communications Holdings-Guatemala, S.A. - A Guatemalan Corporation
Wireless Communications License-Holdings Guatemala, S.A. - A Guatemalan
Corporation
Wireless Communications Operations-Guatemala, S.A. - A Guatemalan Corporation
Convergence Communications, S.A. de C.V. - A Mexican Corporation
International Van, S.A. de C.V. - A Mexican Corporation
Wireless Communications Panama, S.A. - A Panamanian Joint Venture Corporation
Interamerican Telecom Inc. - A Panamanian Corporation
Caracas Viva Vision TV, S.A. - A Venezuelan Corporation
Communicaciones Centurion, S.A. - A Venezuelan Corporation
Communicationes Spectrum, S.A. - A Venezuelan Corporation
Interamerican Net de Venezuela, S.A. - A Venezuelan Corporation
WCI de Venezuela, C.A. - A Venezuelan Corporation
GBnet Corporation - A British Virgin Is. Corporation
GBnet, S.A. - A Guatemalan Corporation
GBnet, S.A. de C.V. - El Salvadoran Corporation
GBnet de Honduras, S. A. - A Honduran Corporation
GBnet, S.A. - A Nicaragua Corporation
GB.net, Inc. - a Panamanian Corporation
GBM Net, S.A. - A Dominican Republic Corporation
GBnet, S.A. - A Costa Rican Corporation
WCI de Colombia - a Delaware Corporation
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001020424
<NAME> CONVERGENCE COMMUNICATIONS, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1.000
<CASH> 26,303,296
<SECURITIES> 0
<RECEIVABLES> 3,547,196
<ALLOWANCES> 366,488
<INVENTORY> 262,177
<CURRENT-ASSETS> 30,971,711
<PP&E> 34,826,320
<DEPRECIATION> 6,379,544
<TOTAL-ASSETS> 97,204,523
<CURRENT-LIABILITIES> 18,164,592
<BONDS> 0
0
9,830
<COMMON> 11,585
<OTHER-SE> 59,353,865
<TOTAL-LIABILITY-AND-EQUITY> 97,204,523
<SALES> 9,099,054
<TOTAL-REVENUES> 9,099,054
<CGS> 0
<TOTAL-COSTS> 28,324,647
<OTHER-EXPENSES> 27,488
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,274,814
<INCOME-PRETAX> (22,472,919)
<INCOME-TAX> (50,183)
<INCOME-CONTINUING> (20,277,479)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,277,479)
<EPS-BASIC> (1.48)
<EPS-DILUTED> (1.48)
</TABLE>
CONVERGENCE COMMUNICATIONS, INC.
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
-------------------------
Balance-at- Charged- Charged- Deductions Balance-at-
Beginning-of-Year to-Cash- to-Other- End-of-
and- Accounts Year
Expenses
Description
<S> <C> <C> <C> <C> <C>
Year-ended-December-31,-1999:
Deducted-from-assets-accounts
Accounts-Receivable:
Allowance $ 328,283 $ 363,005 $ 324,840 $ 366,448
Inventory:
Reserve 259,579 259,579
Deferred-tax-assets:
Valuation-allowance 5,452,292 4,644,076 10,096,368
Year-ended-December-31,-1998:
Deducted-from-assets-accounts
Accounts-receivable:
Allowance ----------- 328,283 328,283
Inventory:
Reserve ----------- 259,579 259,579
Deferred-tax-assets:
Valuation-allowance 1,550,426 3,901,866 5,452,292
Year-ended-December-31,-1997:
Deducted-from-assets-accounts
Accounts-receivable:
Allowance -----------
Inventory:
Reserve -----------
Deferred-tax-assets:
Valuation-allowance 398,610 1,151,816 1,550,426
</TABLE>
