<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 1, 1998
REGISTRATION NO. 333-47723
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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
(Exact name of Registrant as specified in its charter)
ECUADORIAN TELECOMMUNICATIONS CONSORTIUM CORP. CONECEL
(Translation of Registrant's name into English)
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<S> <C> <C>
REPUBLIC OF ECUADOR 4812 N/A
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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AMAZONAS 6017 Y RIO COCA
QUITO, ECUADOR
(5932) 469-129
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
CT CORPORATION SYSTEM
1633 BROADWAY, 23RD FLOOR
NEW YORK, NEW YORK 10019
(212) 664-1666
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
FERNANDO C. ALONSO, ESQ. JAMES M. WADDINGTON, ESQ.
SPENCER G. FELDMAN, ESQ. PROSKAUER ROSE LLP
GREENBERG TRAURIG HOFFMAN 1585 BROADWAY
LIPOFF ROSEN & QUENTEL, P.A. NEW YORK, NEW YORK 10036
1221 BRICKELL AVENUE TEL: (212) 969-3000
MIAMI, FLORIDA 33131 FAX: (212) 969-2900
TEL: (305) 579-0500
FAX: (305) 579-0717
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED (1) REGISTERED (2) PER SHARE (3) PRICE (3) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class B Common Stock, par value 1,000
sucres per share................... 42,299,668 shares $3.875 $163,911,214 $48,354
===========================================================================================================================
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(1) American Depositary Receipts evidencing American Depositary Shares issuable
on deposit of the Class B Common Stock registered hereby will be registered
pursuant to a separate Registration Statement on Form F-6.
(2) Includes 5,517,348 shares of Class B Common Stock (represented by American
Depositary Shares) that may be purchased pursuant to the Underwriters'
over-allotment option.
(3) Estimated solely for purposes of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
PROSPECTUS
CONECEL LOGO
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
9,195,580 AMERICAN DEPOSITARY SHARES
EACH REPRESENTING FOUR SHARES OF CLASS B COMMON STOCK
Each American Depositary Share ("ADS") being offered hereby represents four
shares of Class B Common Stock (the "Class B Common Stock") of Consorcio
Ecuatoriano de Telecomunicaciones S.A. CONECEL, a corporation (sociedad anonima)
organized and existing under the laws of the Republic of Ecuador (the
"Company"). The ADSs are evidenced by American Depositary Receipts ("ADRs"). See
"Description of American Depositary Receipts."
Of the 9,195,580 ADSs being offered hereby (the "Offering"), 8,046,464 ADSs
are being sold by the Company and 1,149,116 ADSs are being sold by certain
shareholders of the Company (the "Selling Shareholders"). See "Principal and
Selling Shareholders." The Company will not receive any of the proceeds from the
sale of the ADSs by the Selling Shareholders. See "Underwriting."
Prior to the Offering, there has been no public market for the ADSs, Class
B Common Stock or any other equity securities of the Company in Ecuador, the
United States or elsewhere. It is currently estimated that the initial public
offering price of the ADSs in the Offering will be between $13.50 and $15.50 per
ADS. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price of the ADSs. The Company has two
classes of shares, the Class B Common Stock being offered and the Class A Common
Stock ("Class A Common Stock") of the Company. The rights of holders of the
Class B Common Stock and holders of Class A Common Stock are substantially the
same, except that holders of Class B Common Stock are not entitled to vote other
than in certain limited circumstances. See "Description of Capital Stock." The
ADSs have been approved for listing, upon official notice of issuance, on the
Nasdaq National Market ("Nasdaq") under the symbol "PRTA."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==========================================================================================================
Price to the Underwriting Discounts Proceeds to the
Public and Commissions(1) Company(2)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per ADS..................... $ $ $
- ----------------------------------------------------------------------------------------------------------
Total(3).................... $ $ $
==========================================================================================================
<CAPTION>
============================ ========================
Proceeds to the
Selling Shareholders
- ---------------------------- ------------------------
<S> <C>
Per ADS..................... $
- -------------------------------------------------------------------------------
Total(3).................... $
- --------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting offering expenses estimated at $919,000 payable by the
Company.
(3) The Company has granted to the Underwriters an option, exercisable within 30
days after the date hereof, to purchase up to an aggregate of 1,379,337
additional ADSs at the same price and on the same terms as set forth herein,
solely to cover over-allotments, if any. If the option granted to the
Underwriters is exercised in full, the total Price to the Public,
Underwriting Discounts and Commissions and Proceeds to the Company will be
$ , $ and $ , respectively. See "Underwriting."
---------------------------
JOINT GLOBAL COORDINATORS AND BOOKRUNNERS
UBS SECURITIES SBC WARBURG DILLON READ INC.
---------------------------
The ADSs offered hereby are being offered by the several Underwriters,
subject to prior sale, when, as and if delivered to and accepted by them and
subject to various prior conditions, including their right to reject orders in
whole or in part. It is expected that delivery of the ADRs evidencing the ADSs
will be made on or about , 1998 at the offices of UBS Securities
LLC, New York, New York or through the facilities of The Depository Trust
Company.
---------------------------
UBS SECURITIES
SBC WARBURG DILLON READ INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEHMAN BROTHERS
---------------------------
The date of this Prospectus is April 2, 1998
<PAGE> 3
[Inside Front Cover Page]
COLOR GRAPHICS SHOWING THE COMPANY'S PRODUCTS, PRODUCT NAMES AND TRADEMARKS.
<PAGE> 4
ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES
The Company is a corporation (sociedad anonima) organized and existing
under the laws of the Republic of Ecuador. All of the directors and officers of
the Company and certain of the experts named in this Prospectus reside outside
of the United States, and all or a substantial portion of the assets of such
persons and the Company are located outside the United States. As a result, it
may not be possible for investors to effect service of process within the United
States upon such persons, including with respect to matters arising under the
Securities Act, or to enforce against the Company or any of them judgments of
courts of the United States predicated upon the civil liability provisions of
the federal securities laws of the United States. The Company has been advised
by Estudio Juridico Pareja, Abogados, its legal counsel in Ecuador, that there
is doubt as to the enforceability, in original actions in Ecuadorian courts, of
liabilities predicated solely on the United States federal securities laws and
as to the enforceability in Ecuadorian courts of judgments of United States
courts obtained in actions predicated upon the civil liability provisions of the
United States federal securities laws.
The Company has appointed CT Corporation System as its authorized agent
upon which process may be served in any action arising out of or based upon the
ADSs or the Class B Common Stock which may be instituted in any federal or state
court having subject matter jurisdiction in the Borough of Manhattan, the City
of New York, New York. Such appointment may not be respected by an Ecuadorian
court. See "Risk Factors -- Factors Relating to Ecuador -- Enforceability of
Certain Civil Liabilities."
PRESENTATION OF FINANCIAL INFORMATION
In this Prospectus, references to "sucres" are to Ecuadorian sucres and
references to "$" and "Dollars" are to U.S. dollars. The Company maintains its
financial statements in sucres and remeasures them into U.S. dollars in
accordance with United States generally accepted accounting principles ("U.S.
GAAP") as follows: non-monetary assets, liabilities, revenues and expenses are
remeasured at the historical exchange rate. Monetary assets, liabilities,
revenues and expenses are remeasured at the exchange rate in effect at the date
a transaction occurs. Gains and losses related to the remeasurement of monetary
assets and liabilities are included in the Company's statement of operations.
The amounts remeasured to U.S. dollars reflect the foregoing currency
remeasurement and are not indicative of any changes in exchange rates in prior
or subsequent periods. See Note A of the Notes to Financial Statements. Such
remeasurement does not imply that sucres may be exchanged for U.S. dollars at
any such rate or at all. See "Annex A -- The Republic of Ecuador -- Economy" for
a more detailed discussion regarding exchange rates in Ecuador.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements." All statements other
than statements of historical information provided herein are forward-looking
and may contain information about financial results, economic conditions, trends
and known uncertainties. The Company cautions prospective investors that actual
results could differ materially from those expected by the Company, depending on
the outcome of certain factors, including, without limitation, (i) adverse
changes in the Ecuadorian economy with respect to rates of inflation, economic
growth, currency devaluation and other factors, (ii) the failure of the
Ecuadorian economy to perform as predicted in future periods, (iii) adverse
changes in the Ecuadorian political situation, including, without limitation,
the reversal of various market-oriented reforms and economic recovery measures,
or the failure of such reforms and measures to achieve their goals, (iv) adverse
changes in the markets for the Company's services and (v) other factors
discussed under "Risk Factors" herein. Prospective investors are cautioned not
to place undue reliance on these forward-looking statements which speak only as
to the date hereof. Any such forward-looking statements are not intended to give
any assurance as to future results. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
which may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events. These forward-looking statements
may be found under the captions "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
------------------------
NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY THE COMPANY, THE
SELLING SHAREHOLDERS OR ANY UNDERWRITER THAT WOULD PERMIT A PUBLIC OFFERING OF
THE ADSS OR CLASS B COMMON STOCK OR THE POSSESSION OR DISTRIBUTION OF THIS
PROSPECTUS IN ANY JURISDICTION WHERE ACTION FOR THOSE PURPOSES IS REQUIRED,
OTHER THAN IN THE UNITED STATES. PERSONS WHO COME INTO POSSESSION OF THIS
PROSPECTUS ARE REQUIRED BY THE COMPANY, THE SELLING SHAREHOLDERS AND THE
UNDERWRITERS TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO
THE OFFERING OF THE ADSS OR CLASS B COMMON STOCK AND THE DISTRIBUTION OF THIS
PROSPECTUS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE ADSS, INCLUDING
OVER-ALLOTMENT, STABILIZING AND SHORT COVERING TRANSACTIONS AND THE IMPOSITION
OF PENALTY BIDS.
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<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, included elsewhere in this Prospectus, including
information under "Risk Factors." For a description of the recent history of
Ecuador, see "Annex A -- The Republic of Ecuador" and for the definitions of
certain terms used herein, see "Annex B -- Glossary of Certain
Telecommunications Terms." In this Prospectus, unless otherwise noted, (a) all
information assumes that the Underwriters' over-allotment option is not
exercised and (b) the financial statements included herein are presented in
accordance with U.S. GAAP. As used in this Prospectus, (i) "Conecel" or the
"Company" refers to Consorcio Ecuatoriano de Telecomunicaciones S.A. CONECEL, an
Ecuadorian corporation, and (ii) "Conecel Holdings" refers to Conecel Holdings
Limited, a special purpose British Virgin Islands company which currently owns
85% of the capital stock of Conecel.
THE COMPANY
The Company is the leading provider of integrated wireless
telecommunications services in Ecuador, offering cellular, international and
national long distance, data transmission and cellular public telephone
services, and is the only company in Ecuador licensed to provide all of these
services. The Company is the largest cellular provider in Ecuador, having
104,061 cellular subscribers as of December 31, 1997 and a cellular network that
covers approximately 10.2 million people, representing in excess of 85% of the
country's population. The Company is also the largest cellular public telephone
operator in Ecuador with 1,440 cellular public telephones in operation as of
December 31, 1997. The Company's recently-commenced data transmission operations
are currently providing data, voice and image connectivity over its cellular
network to a number of major Ecuadorian companies, and beginning in the second
quarter of 1998, the Company anticipates offering Internet gateway services to
its customers. The Company's products and services are marketed through its
approximately 900 combined internal sales representatives and independent
distributors utilizing the Company's "Porta" trademarks, one of the best known
brand names in Ecuador.
The Company has experienced substantial growth, with total revenues and
operating income having grown to approximately $75.0 million and $13.8 million,
respectively, for the year ended December 31, 1997 from approximately $29.8
million and $1.4 million, respectively, for the year ended December 31, 1996. In
addition, average minutes of usage per reported subscriber has increased to 295
minutes per month in 1997 from 190 minutes per month in 1996, a 55.3% increase.
As a result, total minutes of usage per month of the Company's reported
subscribers has increased to 31.2 million minutes for December 1997 from 7.7
million minutes for December 1996.
THE ECUADORIAN TELECOMMUNICATIONS MARKET
The lack of a highly-developed wireline telecommunications system in
Ecuador has created a significant market opportunity for the Company. Ecuador
currently has one of the least developed traditional wireline systems in Latin
America with an average penetration rate, as of December 31, 1996, of only 6.4
telephone lines per 100 persons. Wireline penetration rates, by comparison, in
Uruguay, Argentina, Chile, Venezuela, Colombia, Mexico, Brazil and Peru as of
December 31, 1996, were 19.6%, 16.0%, 13.2%, 12.0%, 10.0%, 9.6%, 7.5% and 4.7%,
respectively. The state-owned wireline system in Ecuador has yet to reach many
of Ecuador's approximately 12 million people. Consequently, there are typically
long waiting periods for new telephone lines that vary significantly by city and
usually range from a few weeks or months in the best markets (including Quito
and Guayaquil) to two years or longer in other markets. The lack of
highly-developed wireline telecommunications systems in Ecuador has resulted in
some subscribers looking to wireless telecommunications systems as a substitute
(as well as a supplement) to wireline systems. In November 1997, the Government
of Ecuador formed two regional operating entities, Andinatel, S.A. and
Pacifictel, S.A. (together, the "Ecuadorian Wireline System"), in anticipation
of the expected privatization of the state-owned wireline system (formerly known
as Emetel, S.A.).
The Ecuadorian cellular telephone industry has experienced significant
growth since cellular services were first offered in March 1994, primarily as a
result of the unfilled demand for traditional wireline telephone services, as
well as the convenience, relatively short activation time and reliability of
cellular telephones, and
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more recently as a result of the introduction of the "calling party pays"
interconnection system in Ecuador, in which the originator of the call pays the
entire cellular charge of the call.
BUSINESS STRATEGY
The Company's current business strategy is to (i) take advantage of the
strong demand for telecommunications services in Ecuador by aggressively
marketing its cellular services to a broader potential subscriber base with an
emphasis on maximizing shareholder return through a full range of
competitively-priced service plans and by increasing the capacity of its
cellular network to support additional subscribers, (ii) exploit the competitive
advantages associated with its digital TDMA service (including a complete line
of value-added telecommunications services) and high-quality international and
national long distance services, (iii) leverage the local strengths associated
with the Company's extensive distribution channels and continue to expand such
channels by adding more independent distributors, (iv) differentiate its
services by providing high-quality, reliable customer service and (v) capitalize
on its strong brand name recognition throughout the country. The Company's
long-term strategy is to expand the range of telecommunications products and
services which it offers through its network to satisfy all of a customer's
telecommunications needs, from national and international cellular telephone
services to data transmission connectivity for Internet access,
videoconferencing, e-mail and fax, and to consistently be the first company to
introduce innovative telecommunications and multimedia technologies in Ecuador
under its "Porta" brand name as such technologies become available in other
parts of the world. As part of this strategy, beginning in the second quarter of
1998, the Company anticipates offering Internet gateway services to provide
network access to local Internet service providers, as well as to the Company's
existing customer base.
BUSINESS OPERATIONS
The Company's operations are currently focused in four principal areas: (i)
cellular operations, (ii) international and national long distance service,
(iii) data transmission services and (iv) public cellular telephones. For the
year ended December 31, 1997, approximately 95% of the Company's revenues were
attributable to cellular operations.
Cellular Operations. The Company was the first company to provide cellular
telephone services in Ecuador, commencing in March 1994, and is the current
market leader. The Company owns and operates 63 cell sites, 17 cell repeaters
and two switching centers connected through 57 microwave-based cellular
transmission facilities (the "Network") that currently operate in a geographic
area that covers approximately 85% of the country's population. The Network is
based on a system using digital TDMA technology and equipment predominately
supplied by Northern Telecom Limited ("Northern Telecom"). As of December 31,
1997, the geographic area covered by the Company's Network had an estimated
aggregate population of approximately 10.2 million people, including the main
metropolitan areas of Quito, the capital city with approximately 1.5 million
people, Guayaquil, the main commercial center with approximately 2 million
people, and Cuenca, with approximately 500,000 people. As of December 31, 1997,
the Company had 104,061 reported cellular subscribers, resulting in a market
penetration of approximately 0.88% and representing approximately 65% of the
total cellular subscribers in Ecuador, based on the Company's estimates. To
support the significant growth in its subscriber base, the Company has invested
approximately $80.0 million through December 31, 1997 to construct its Network
and, as of such date, had upgraded approximately 50% of the Network with digital
TDMA technology. The Company anticipates that 90% of the Network will be
digitalized by the end of 1998. The Company holds one of only two cellular
telephone concessions granted by the Government of Ecuador, and is the only
cellular operator providing digital wireless service in the country. The
Company's cellular telephone concession (the "Cellular Concession"), which was
awarded in August 1993, has a term of 15 years and is renewable at the option of
the Government of Ecuador for an additional 15-year term.
International and National Long Distance Service. The Company provides
international and national long distance service to its cellular customers under
the terms of its Cellular Concession. The Company began providing international
long distance service to the United States in August 1996 and worldwide in March
1997 and routed an average of approximately 150,000 minutes per month of
outbound international long distance traffic during 1997. The Company seeks to
capitalize on the low call completion rate, poor voice
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quality and inability to encrypt transmissions of existing Ecuadorian
long-distance telephone companies with analog-based systems, by providing high
quality long distance service through its Network in conjunction with TeleData
World Services, Inc. and SysNet Corp. The Company has established "roaming"
arrangements to enable its subscribers to utilize their cellular telephones
throughout most of Latin America, the United States and Canada. The Company has
also recently entered into a roaming agreement with Iridium SudAmerica
Corporation that is expected to enable the Company's subscribers to utilize
cellular telephones throughout the rest of the world once the Iridium network is
functioning, which is expected to be in September 1998.
Data Transmission Services. The Company recently began providing data
transmission services in Ecuador through the Network's existing teleport
facilities and microwave network under the terms of its data transmission
concession (the "Data Transmission Concession"). Data transmission service is
one of the fastest-growing sectors of the Ecuadorian telecommunications market,
primarily due to demand from companies in the financial, manufacturing, health
care and travel industries, requiring instantaneous access to information around
the world. Since March 1997, the Company has entered into ten data transmission
service agreements, including agreements with a number of major Ecuadorian
companies, and the Company is currently negotiating to enter into additional
data transmission service agreements, however no assurance can be given that any
agreements in negotiation will be concluded. The Data Transmission Concession,
which was awarded to the Company in December 1994, has a term of 15 years and is
renewable at the option of the Government of Ecuador for an additional 15-year
term. In addition, under the terms of a recently awarded ten-year Internet
service concession, the Company anticipates offering Internet gateway services
to provide network access to local Internet service providers, as well as to the
Company's existing customer base, beginning in the second quarter of 1998. Such
gateway services will provide World Wide Web graphical information, database
access and e-mail capabilities to these customers.
Public Cellular Telephones. The Company is required to install and operate
public telephones using cellular technology under the terms of its Cellular
Concession. The capital and largest commercial cities in Ecuador have relatively
few operational public telephones, and rural areas have significantly fewer. The
Company believes that providing public cellular telephones complements its core
cellular operations by (i) providing additional access to telephone service for
new and existing customers, including a segment of the population that would not
otherwise purchase telephone services, (ii) increasing utilization of the
Network, thereby adding significant incremental revenues and cash flow, and
(iii) expanding the Company's marketing of its branded products. As of December
31, 1997, the Company had 1,440 public cellular telephones in operation, which
generated average monthly revenues of approximately $110 per telephone and had
an average payback period of 18 months. The Company's public cellular telephones
operate using prepaid phone cards, thereby minimizing the risks of fraud,
vandalism and noncollection.
The Company is a corporation (sociedad anonima) formed in June 1993 under
the laws of the Republic of Ecuador. The Company's principal executive office is
located at Amazonas 6017 y Rio Coca, Quito, Ecuador, and its main telephone
number at this office is (5932) 469-129. In addition, the Company maintains an
Internet home page which is located on the World Wide Web at
http://www.porta.net.
3
<PAGE> 8
RECENT TRANSACTIONS
The Company is currently controlled by the Parra family, a leading
Ecuadorian family with interests in the country's banking, construction, real
estate and agricultural industries (the "Parra Family"), through its 100%
interest in Conecel Holdings, which currently owns approximately 85% of the
capital stock of the Company. The remaining 15% of the capital stock of the
Company is owned by Centro Empresarial, Cempresa C.A. ("Cempresa"), an
Ecuadorian corporation that is also controlled by the Parra Family. Conecel
Holdings acquired its shares in the Company in September 1997 from three former
minority shareholders, including Grupo Iusacell, S.A. de C.V., the Mexican
telecommunications affiliate of Bell Atlantic Corporation (which sold in the
aggregate 47.37% of the outstanding shares for a purchase price of $51.0
million), and from Cempresa (which sold 37.63% of the outstanding shares for a
purchase price of $27.5 million). Cempresa retained 15% of the outstanding
shares and entered into an agreement, described below, concerning the subsequent
distribution of such retained shares. In connection with such acquisition, on
September 30, 1997, Conecel Holdings sold in a private transaction to qualified
institutional buyers, $121.0 million aggregate principal amount of Conecel
Holdings' 14% Series A Secured Notes due 2000 (the "Conecel Holdings Notes") and
transferable warrants to purchase 1,633,500 shares of the Company's Class B
Common Stock from Conecel Holdings (the "Warrants").
Concurrently with the closing of the Offering, Conecel Holdings will
transfer its obligations under the Conecel Holdings Notes to the Company, which
will use a substantial portion of the net proceeds (though not less than 80% of
such net proceeds) of the Offering to redeem such Notes in part at a redemption
price equal to 107% of the outstanding principal amount thereof, plus unpaid
accrued interest to the redemption date. The Conecel Holdings Notes that are not
redeemed by the Company will remain obligations of Conecel Holdings. See "Use of
Proceeds." Following the Offering and the application of the proceeds thereof,
the Company will continue to have outstanding $125.0 million aggregate principal
amount of 14% Notes due 2002, the holders of which have waived compliance with
certain covenants to permit the prepayment of a portion of the Conecel Holdings
Notes (though not less than $80.0 million) from the net proceeds of the
Offering. See "The Conecel Indebtedness." In addition, the holders of the
Warrants that have agreed to sell shares hereunder are expected to exercise
their Warrants for shares of Class B Common Stock and sell such shares as part
of the Offering. Conecel Holdings will also be a selling shareholder in the
Offering. See "Principal and Selling Shareholders."
In September 1997, an entity wholly owned by the Parra Family preliminarily
agreed to purchase from MasTec Inc. ("MasTec"), a Miami-based telecommunications
engineering and construction company, the 40% interest in Cempresa which the
Parra Family did not own, in exchange for $20.0 million in cash and 7,500,000
shares of the Company's Class B Common Stock owned by Cempresa (which it will
convert from an equal number of shares of Class A Common Stock) (the "MasTec
Transaction"). Pursuant to a definitive stock purchase agreement, the cash
portion of the MasTec Transaction was paid in December 1997, with the share
transfer to occur concurrently with the consummation of the Offering. Of the
remaining shares of Class A Common Stock held by Cempresa, 3,000,000 shares will
be transferred to Conecel Holdings, thereby increasing its ownership interest in
the Company to approximately 89% of the outstanding capital stock (prior to the
Offering), and 750,000 shares will be converted into Class B Common Stock and
transferred to an unaffiliated entity for services rendered in connection with
the MasTec Transaction. As a result of the foregoing, following the consummation
of the Offering, the Parra Family will control 100% of the outstanding shares of
Class A Common Stock of the Company and effectively possess full operating and
Board control of the Company. See "Certain Relationships and Related
Transactions."
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THE OFFERING
ADSs Offered............... 9,195,580 ADSs. Each ADS represents four shares of
Class B Common Stock. The ADSs are evidenced by
ADRs. See "Description of American Depositary
Receipts."
ADSs offered by the
Company.................... 8,046,464 ADSs.
ADSs offered by the Selling
Shareholders............. 1,149,116 ADSs.
Over-Allotment Option...... The Company has granted the Underwriters an option
to purchase up to an aggregate of 1,379,337
additional ADSs solely for the purpose of covering
over-allotments, if any. See "Underwriting."
Shares Outstanding(1)(2)...
<TABLE>
<CAPTION>
AFTER GIVING
PRIOR TO EFFECT TO
THE OFFERING THE OFFERING(3)
--------------- ---------------
<S> <C> <C>
Class A Common Stock...................... 63,710,250 60,747,286
Class B Common Stock...................... 11,289,750 46,438,570
---------- -----------
Total............................ 75,000,000 107,185,856
========== ===========
</TABLE>
Initial Offering Price..... It is anticipated that the initial offering price
of the ADSs will be between $13.50 and $15.50 per
ADS.
Use of Proceeds............ The net proceeds to be received by the Company from
its sale of the ADSs are estimated to be
approximately $109.3 million (at an assumed initial
public offering price of $14.50 per ADS). The
Company will use at least 80% of the net proceeds
from the Offering to redeem a significant portion
of the Conecel Holdings Notes (though not less than
$80.0 million). The remaining net proceeds will be
used by the Company for capital expenditures. The
Company will not receive any of the proceeds from
the sale of the ADSs by the Selling Shareholders.
See "Use of Proceeds."
Selling Shareholders....... The Selling Shareholders are certain warrantholders
that have elected to exercise their Warrants and
sell their shares of Class B Common Stock as part
of the Offering and certain existing shareholders
listed under "Principal and Selling Shareholders."
See "Principal and Selling Shareholders."
- ---------------
(1) Effective January 23, 1998, the Company's authorized equity share capital of
150,000,000 shares was divided into two classes designated as Class A Common
Stock and Class B Common Stock. See "Description of Capital Stock."
(2) Gives effect to, before or concurrently with the consummation of the
Offering, (a) the conversion by Conecel Holdings of 1,633,500 shares of
Class A Common Stock into an equal number of shares of Class B Common Stock
and the exercise of the Warrants by the holders thereof for such shares of
Class B Common Stock, (b) the conversion by Conecel Holdings of 2,962,964
shares of Class A Common Stock into an equal number of shares of Class B
Common Stock to be sold in the Offering, (c) the conversion by Cempresa of
8,250,000 shares of Class A Common Stock into an equal number of shares of
Class B Common Stock to transfer to MasTec and an unaffiliated entity in
connection with the MasTec Transaction and (d) the conversion by Conecel
Holdings of 1,406,250 shares of Class A Common Stock owned by Conecel
Holdings into an equal number of shares of Class B Common Stock which are
subject to a warrant held by UBS Securities LLC (the "UBS Warrants") issued
in consideration for corporate finance advisory services rendered to the
Company, Conecel Holdings and its affiliates since May 1995. Does not
include an aggregate of 750,000 shares of Class B Common Stock reserved for
issuance to executive officers, key employees and independent contractors of
the Company under the Company's 1998 Stock Option Plan. See "-- Recent
Transactions," "Management -- Stock Option Plan," "Certain Relationships and
Related Transactions" and "Underwriting."
(3) Assuming the Underwriters do not exercise their over-allotment option.
5
<PAGE> 10
Limited Voting Rights...... The rights of holders of Class B Common Stock and
Class A Common Stock are substantially the same,
except that holders of Class B Common Stock are not
entitled to vote other than in certain limited
circumstances. Accordingly, holders of Class A
Common Stock will be able to control substantially
all matters submitted generally to a vote of
shareholders, including the election of directors.
Shares of Class A Common Stock are convertible into
Class B Common Stock at the option of the holders
thereof. See "Description of Capital Stock."
Dividends.................. Information relating to payment of dividends on the
Class B Common Stock is set forth in "Dividend
Policy" and "Description of Capital Stock."
Listing.................... The ADSs have been approved for listing, upon
official notice of issuance, on the Nasdaq National
Market under the symbol "PRTA." It is not currently
contemplated that the ADSs, the Class B Common
Stock or any other equity securities of the Company
will trade on any exchange or market other than in
the United States; however the Company may
reexamine such decision in the future.
Risk Factors............... Prospective investors should carefully consider all
information contained in this Prospectus, including
the detailed description of the risk factors
beginning on page 10, relating to investments in
Ecuadorian companies generally and to an investment
in the Company. Such risk factors include (i)
factors relating to Ecuador, such as recent
political and economic developments, border
conflicts with Peru, inflation, currency
fluctuations and devaluation (including the recent
devaluation of the currency), regulatory and
concession matters, risks due to Ecuador's share
registration system, effects of El Nino on
Ecuadorian economy, enforceability of certain civil
liabilities and effects of developments in other
markets; (ii) factors relating to the Company, such
as high leverage and ability to service debt, risks
related to payments from the Ecuadorian Wireline
System, terms of interconnection agreements,
limited operating history and net losses, risks
associated with new industry and growth, ability to
manage growth, dependence on key personnel,
competition, rapid technological change, churn rate
risks, dependence upon certain equipment suppliers,
equipment failure and natural disasters, future
capital needs, related party transactions and
potential conflicts of interest, and alleged health
risks associated with wireless telephones; and
(iii) factors relating to the ADSs and Class B
Common Stock, such as marketability and possible
price volatility, the availability of preemptive
rights, shares eligible for future sale, dilution,
control by Parra Family and corporate disclosure.
Taxation................... Dividends paid in cash or in any other form with
respect to the Class B Common Stock, whether held
directly or represented by an ADS, will be subject
to an Ecuadorian withholding tax imposed at the
rate of 25% on the gross amount of the dividend.
Gains of a Non-Ecuadorian Holder (as defined below)
from the sale or other disposition of ADSs and
exchanges of ADSs for Class B Common Stock will not
be subject to Ecuadorian income taxes or
withholding thereof. Gains of a Non-Ecuadorian
Holder from the sale or other disposition of Class
B Common Stock inside (but not outside) Ecuador
will be subject to Ecuadorian income tax at a
maximum rate of 25%. See "Taxation -- Ecuadorian
Taxation." For certain United States tax
considerations with respect to purchasing, holding
and disposing of the ADSs or the Class B Common
Stock, see "Taxation -- United States Taxation."
6
<PAGE> 11
SUMMARY FINANCIAL AND OPERATING DATA
(Dollars in thousands, except per share and operating data)
The Company commenced providing cellular telephone services in March 1994.
Accordingly, results for 1994 are not directly comparable with the other periods
presented below. The summary financial information for each of the fiscal years
in the four-year period ended December 31, 1997 are derived from financial
statements included elsewhere herein that have been prepared in accordance with
U.S. GAAP and audited by BDO Binder, independent auditors. BDO Binder is one of
the world's largest accounting and consulting organizations. This information
should be read in conjunction with, and is qualified in its entirety by
reference to, the financial statements and the related notes thereto presented
elsewhere in this Prospectus. Calculations of revenue per subscriber and airtime
usage per subscriber are made on the basis of "reported subscribers."
The unaudited pro forma data for the year ended December 31, 1997 gives
effect to (i) the issuance by Conecel Holdings of 1,406,250 warrants issued in
connection with certain corporate financial advisory services rendered to the
Company, Conecel Holdings and its affiliates and (ii) the issuance by Conecel
Holdings of 1,633,500 Warrants in connection with the issuance of the Conecel
Holdings Notes. The unaudited pro forma financial data is based on the
historical financial statements of the Company and the assumptions and
adjustments described in the accompanying notes. The Company believes that the
assumptions on which the unaudited pro forma data are based are reasonable. The
unaudited pro forma data is provided for informational purposes and does not
purport to represent what the Company's financial position or results of
operations actually will be for any period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996 1997(1)
------- -------- -------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service Revenues:
Activation revenues....................................... $ 4,059 $ 2,066 $ 1,069 $ 972
Recurring charges(2)...................................... 7,571 24,664 27,223 65,487
Sales of equipment........................................ 1,083 3,090 1,532 8,557
------- -------- -------- --------
Total............................................... 12,713 29,820 29,824 75,016
------- -------- -------- --------
Cost of Revenues:
Cost of services(3)....................................... (1,348) (6,155) (7,997) (12,262)
Cost of equipment sold.................................... (957) (4,150) (2,336) (14,763)
------- -------- -------- --------
Total............................................... (2,305) (10,305) (10,333) (27,025)
------- -------- -------- --------
Gross profit................................................ 10,408 19,515 19,491 47,991
------- -------- -------- --------
Operating Expenses:
Selling expenses.......................................... (2,070) (3,567) (2,180) (7,920)
Marketing expenses........................................ (2,229) (6,333) (4,353) (3,936)
General and administrative expenses....................... (3,266) (5,813) (7,388) (12,205)
Depreciation and amortization(1).......................... (2,205) (2,536) (4,189) (6,290)
Settlement related to calling party pays(4)............... -- -- -- (3,560)
Provision for bad debt.................................... (5) (1,946) -- (277)
------- -------- -------- --------
Total............................................... (9,775) (20,195) (18,110) (34,188)
------- -------- -------- --------
Operating income (loss)..................................... 633 (680) 1,381 13,803
------- -------- -------- --------
Other income:
Interest income........................................... 366 426 556 2,873
Other income.............................................. 75 266 1,602 888
------- -------- -------- --------
Total............................................... 441 692 2,158 3,761
------- -------- -------- --------
Other expenses:
Interest expense(1)....................................... $(2,654) $ (5,016) $ (3,034) $(20,985)
Remeasurement (loss) gain................................. (1,927) 899 (2,037) (6,293)
------- -------- -------- --------
Total............................................... (4,581) (4,117) (5,071) (27,278)
------- -------- -------- --------
Net income (loss)........................................... $(3,507) $ (4,105) $ (1,532) $ (9,714)
======= ======== ======== ========
Net income (loss) per share................................. $ (.31) $ (.11) $ (.02) $ (.13)
------- -------- -------- --------
Weighted average number of shares outstanding............... 11,484 38,288 75,000 75,000
======= ======== ======== ========
</TABLE>
7
<PAGE> 12
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
PRO FORMA DATA:
Pro forma net loss(5)....................................... $(14,714)(5)
========
Pro forma net loss per share(5)............................. $ (.20)
--------
Pro forma average number of shares outstanding.............. 75,000
========
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, DECEMBER 31, 1997
--------------------------- -----------------------
AS
1994 1995 1996 ACTUAL ADJUSTED(6)
------- ------- ------- -------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.............................................. $ 6,353 $21,909 $11,000 $ 66,453 $ 79,142
Property and equipment, net................................. 15,747 31,315 32,156 74,520 74,520
Licenses and systems........................................ 1,949 1,845 1,698 52,015 52,015
Total assets................................................ 24,106 55,951 44,931 271,606 283,803
Current liabilities......................................... 20,556 22,854 15,126 48,517 42,782
Long-term debt(7)........................................... 1,667 12,812 11,052 246,000 159,632
Stockholders' equity (deficit).............................. 1,883 20,285 18,753 (22,911)(1) 81,389
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1994 1995 1996 1997
------- -------- -------- ---------
<S> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(8)................................................... $ 2,838 $ 1,856 $ 5,570 $ 23,248
Net cash provided (used) by:
Operating activities...................................... (2,558) 5,188 3,925 (10,256)
Investing activities...................................... (5,356) (20,154) (4,883) (105,600)
Financing activities...................................... 8,079 26,283 (10,360) 119,722
Capital expenditures........................................ 5,387 17,928 4,830 47,931
OPERATING DATA:
Average airtime usage (minutes per month)(9)................ 207 165 190 295
Average number of reported subscribers...................... 7,199 23,429 28,382 65,251
Average monthly revenue per reported subscriber............. $134.63 $ 95.07 $ 83.07 $ 84.88(10)
Percent of Ecuadorian population covered(11)................ 30% 60% 80% 85%
Ending reported subscribers................................. 15,012 28,558 34,970 104,061
Ending market penetration................................... .13% .25% .29% .87%
Average of average monthly churn............................ .79% .86% 3.96%(12) 2.13%
</TABLE>
- ---------------
(1) Under accounting rules relating to "push-down" accounting, the Company is
required to reflect certain assets and liabilities of Conecel Holdings on
the Company's balance sheet. Due to "push-down" accounting, the Company had
a stockholders' deficit as of December 31, 1997. Without giving effect to
such accounting treatment, the Company's stockholders' equity would have
been $15.3 million. Upon repayment in full or in part of the Conecel
Holdings Notes, as a result of "push-down" accounting, the Company will
continue to carry approximately $66.8 million of goodwill on its balance
sheet which will be amortized over 30 years. The effect of such accounting
treatment will be to decrease net income or increase net loss, as
applicable, in the amount of approximately $2.2 million annually for future
periods. Results of operation for 1997 include approximately $0.6 million
of depreciation and amortization and approximately $6.2 million of interest
expense associated with "push-down" accounting.
(2) Includes monthly fees, airtime charges, roaming charges, national and
international long distance revenues and public phone service revenues.
(3) In May 1997, the Company prepaid the annual license fees that were payable
to the Government of Ecuador pursuant to its Cellular Concession.
Commencing June 1997, the Company was no longer required to make the annual
cost payment to the Government of Ecuador and the full amount of the
prepayment ($53.6 million) will be amortized as a pre-paid expense over the
remainder of the term of such license and will continue to be reflected in
cost of services.
(4) Represents settlement of amounts due from Andinatel, S.A. and Pacifictel,
S.A. (the successors to Emetel, S.A.) regarding calling party pays. See
Note B to Notes to Financial Statements.
(5) The pro forma adjustments for the year ended December 31, 1997 are as
follows:
<TABLE>
<S> <C>
Historical net loss......................................... $ (9,714)
Pro forma adjustments:
For warrants issued in connection with corporate finance
advisory services....................................... (2,039)
For warrants issued in connection with the Conecel
Holdings Notes.......................................... (2,961)
--------
Pro forma net loss.......................................... (14,714)
========
</TABLE>
The pro forma adjustments have been determined with an assumed public
offering price of $3.625 per share of Class B Common Stock, however, the
actual price may be higher or lower depending on the market conditions at
the time of the Offering. The pro forma net loss is presented to reflect an
estimate of the expenses the Company will record in 1998 when the value of
the Class B Common Stock is determined for 1,633,500 warrants issued in
connection with the issuance of the Conecel Holdings Notes and 1,406,250
warrants issued in connection with corporate finance advisory services. As
of December 31, 1997, "Long-term debt"
8
<PAGE> 13
included $125.0 million aggregate principal amount of the Conecel Notes
and, as a result of "push-down" accounting, $121.0 million aggregate
principal amount of the Conecel Holdings Notes issued on September 30,
1997. See "Use of Proceeds."
(6) Gives effect to the sale of the 8,046,464 ADSs offered by the Company
hereby (at an assumed initial public offering price of $14.50 per ADS) and
the application of the estimated net proceeds therefrom as set forth under
"Use of Proceeds."
(7) As of December 31, 1997, "Long-term debt" included $125.0 million aggregate
principal amount of the Conecel Notes and, as a result of "push-down"
accounting, $121.0 million aggregate principal amount of the Conecel
Holdings Notes issued on September 30, 1997.
(8) EBITDA represents earnings (net income (loss)) before interest, taxes,
depreciation and amortization, remeasurement gain (loss) and other income.
The Company has included information concerning EBITDA (which is not a
measure of financial performance under U.S. GAAP), because it understands
that it is used by certain investors as one measure of an issuer's ability
to meet obligations for interest, income tax and amortization of debt
before new capital expenditures for property and equipment. EBITDA should
not be construed as an alternative to net income (as determined in
accordance with U.S. GAAP) as an indicator of operating performance. EBITDA
is calculated using financial statement information included herein. The
Company's EBITDA may not be comparable to computations presented by other
companies since all companies and analysts do not calculate EBITDA in the
same fashion. In addition, EBITDA takes into account the annual license
payments that were made by the Company to the Government of Ecuador
pursuant to the Cellular Concession prior to the prepayment of the annual
license fees in May 1997. As the license has been prepaid, the annual
license cost, recorded at $400,000 in 1994, $1.6 million in 1995, $3.4
million in 1996 and $3.9 million in 1997, will be recorded as cost of
services in the future in order to maintain continuity with historical
data. The Company will amortize the prepayment amount over the remaining
term of the Cellular Concession resulting in annual amortization of
approximately $4.9 million. Excluding the minimum annual license cost, the
Company would have reported an EBITDA of $3.2 million in 1994, $3.5 million
in 1995 and $9.0 million in 1996. In 1997, EBITDA of $23.2 million was
reduced by the inclusion in cost of services of the amortization of the
Cellular Concession in the amount of $3.2 million.
(9) Average airtime usage figures include airtime usage related to the
Company's public cellular telephone operations and free minutes.
(10) Average monthly revenue per reported subscriber ("ARPU") for 1997 includes
recurring revenues received by the Company resulting from the sale of
telephone equipment (e.g., handsets) under the Comodato programs and public
cellular telephones. The Company does not believe that ARPU is
significantly affected as a result of this treatment.
(11) Based on publicly-available information compiled by the Central Bank of
Ecuador, the population of Ecuador was approximately 11,173,500,
11,460,000, 11,689,000 and 11,700,000 people at the end of 1994, 1995, 1996
and 1997, respectively.
(12) During 1996, the Company disconnected approximately 8,000 reported
subscribers with non-performing accounts in order to upgrade the credit
quality of its subscriber base. See "Business -- Subscriber
Management -- Management of Churn and Credit Policy."
9
<PAGE> 14
RISK FACTORS
An investment in the ADSs or shares of Class B Common Stock involves a high
degree of risk. Each prospective investor should carefully consider the
following risk factors inherent in and affecting the business of the Company and
this Offering before making an investment decision. For additional information
concerning Ecuador and certain matters discussed below, see "Annex A -- The
Republic of Ecuador." In general, investing in the securities of issuers in
emerging markets such as Ecuador involves a higher degree of risk than investing
in the securities of issuers in the United States and other more developed
countries.
FACTORS RELATING TO ECUADOR
Recent Political and Economic Developments
On February 6, 1997, the Congress of Ecuador voted to remove former
President Abdala Bucaram Ortiz from the Presidency of Ecuador on the grounds
that he was "mentally incompetent." President Bucaram initially refused to
recognize his removal and, immediately thereafter, a brief power struggle ensued
among President Bucaram, Vice President Rosalia Arteaga and Fabian Alarcon
Rivera, the President of the Ecuadorian Congress. Episodes of civil unrest,
disturbances and demonstrations followed throughout the country and a brief
two-day assumption of the Presidency by then Vice President Arteaga. In February
1997, Fabian Alarcon Rivera was appointed by the Congress of Ecuador as the
interim President for a term expiring in August 1998, and in May 1997, a
national referendum legitimized the appointment of Fabian Alarcon as President
of Ecuador. General elections have been set for May 1998 to elect the next
President and Vice President of the country, who will take office in August
1998.
The Company's operations are dependent upon the performance of the economy
of Ecuador. The economy of Ecuador is currently undergoing significant
development and structural reform. The possibility exists that rapid
fluctuations in consumer prices, gross domestic product and interest rates will
occur. Ecuador is the world's largest exporter of bananas and a major shrimp
producer. Nonetheless, Ecuador's economy is very susceptible to external factors
because there currently exist only three principal sources of export
revenues -- oil, bananas and shrimp. Oil accounts for approximately 31% of
export revenues. The Company's financial results may be affected by fluctuations
in the economy of Ecuador, the external demand for its primary exports, the
effect of economic fluctuations on the ability of customers to pay for the
Company's services and the ability of the market to support the growth of the
telecommunications sector.
The Government of Ecuador has historically exercised significant influence
over the Ecuadorian economy in general, and the market for telecommunications
services in particular. Government actions concerning the economy could continue
to have an important effect on Ecuadorian entities, including the Company, and
on market conditions, prices and returns on Ecuadorian securities. President
Alarcon has publicly announced certain of his proposed economic plans, which
include renegotiating Ecuador's foreign debt to free up funds for social
programs, minimizing corruption and mismanagement in government and suspending
the convertibility plan proposed by former President Bucaram that would peg the
sucre to the U.S. dollar. In addition, President Alarcon has taken certain
controversial measures during his presidency, such as increasing gasoline
prices, that have resulted in isolated demonstrations and threats of general
labor stoppages. Accordingly, there can be no assurance given with regard to the
impact that the implementation of President Alarcon's economic plans and
policies, or possible resulting civil disturbances, may have on the Company's
operations and/or prospects.
It is impossible to predict what effect these events and conditions, which
are entirely outside the control of the Company, will have on the country or the
Company. Prospective purchasers of the securities offered hereby should
recognize that these conditions and events create significant uncertainties and
risks, which could have a material adverse effect on the Company's operations
and/or prospects. The Company's performance could be affected by changes in
economic policies of the Ecuadorian government (which has exercised and
continues to exercise a substantial influence over many aspects of the economy)
and especially by a reversal of the market-oriented economic initiatives by the
administration. There can be no assurance that the current market-oriented
policies will be continued. See "Annex A -- The Republic of Ecuador."
10
<PAGE> 15
Border Conflicts with Peru
Ecuador and Peru have been parties to a long-standing border dispute over
48 miles of unmarked border located in the Amazon region. This territorial
dispute has from time to time resulted in hostilities. In January 1995, the
armed forces of Peru and Ecuador confronted each other within the disputed
region. In February 1995, Ecuador and Peru signed a cease-fire agreement.
Throughout 1997, negotiations between Peru and Ecuador to resolve the border
dispute occurred. In January 1998, Ecuador and Peru publicly pledged to make a
joint effort to reach a final settlement of their border dispute by June 1998,
according to a negotiation timetable the two countries agreed to and signed in
Brazil. In February 1998, the Presidents of Peru and Ecuador met at their border
to discuss negotiations aimed at ending the dispute. Despite Ecuador's and
Peru's intentions and steps to continue the peace process, there can be no
assurance that such conflict will not result in additional confrontations and
hostilities, which may materially and adversely affect the Company's operations.
Inflation
Throughout most of the 1980s and 1990s, Ecuador experienced high levels of
inflation. Ecuador has had an inflation rate of approximately 25.4% in 1994,
22.8% in 1995, 25.5% in 1996 and 30.7% in 1997. Tariffs and charges for the
Company's services, except charges for inbound calls originated by a wireline
subscriber (which are a significant portion of the Company's revenues), are
linked to the U.S. dollar and are billed in sucres at the sucre/U.S. dollar
exchange rate in effect on the billing date. The Company collects its revenues
in sucres, but its outstanding indebtedness (other than local trade payables)
and certain equipment costs are U.S. dollar-denominated. In periods of high
inflation, the Company may seek to raise the prices it charges for its services
in order to mitigate the effects of inflation. In the event of high inflationary
periods, the maximum permitted rates which the Company may charge (as allowed by
the National Council of Telecommunications (CONATEL)), and the ability of the
Company's customers to afford the Company's services, may not keep up with the
rate of inflation. There can be no assurance that the performance of the
Ecuadorian economy, the operating results of the Company or the value of the
ADSs or the shares of Class B Common Stock will not be adversely affected by
continuing or increased levels of inflation. See "Annex A -- The Republic of
Ecuador -- Economy," "-- Currency Fluctuations and Devaluation" and
"-- Regulatory and Concession Matters."
Currency Fluctuations and Devaluation
In recent years, the sucre has generally experienced a significant
depreciation relative to the U.S. dollar. For example, in December 1995, the
sucre/U.S. dollar exchange rate was 2,925 sucres per U.S. dollar and, in
December 1996, the exchange rate was 3,632 sucres per U.S. dollar. As of
December 31, 1997, the exchange rate was 4,430 sucres per U.S. dollar, all as
determined by the Ecuadorian Central Bank. The Ecuadorian sucre trades within a
"crawling corridor" which varies by month. On March 25, 1998, the Central Bank
of Ecuador and Ecuadorian Monetary Board adjusted the "crawling corridor" by
shifting the corridor approximately 7.5%, in effect devaluing the Ecuadorian
sucre. The government indicated that this adjustment was intended to address
high food prices brought on by the effects of El Nino. The ability of the
Ecuadorian government to maintain this band will depend on many political and
economic factors, including the Government's ability to control inflation, limit
or reduce fiscal deficits and the availability of foreign currency to support
the crawling corridor. Uncertainties exist as to the Republic of Ecuador's
ability to maintain this band. Any further change in the foreign exchange policy
of the Republic of Ecuador could have a material adverse effect on the Company.
As of December 31, 1997, substantially all of the Company's indebtedness
was denominated in U.S. dollars and the Company has incurred and expects to
continue to incur a significant portion of its borrowings in U.S. dollars.
Tariffs and charges for the Company's services, except charges for inbound calls
originated by a wireline subscriber (which are a significant portion of the
Company's revenues), are linked to the U.S. dollar and are billed in sucres at
the sucre/U.S. dollar exchange rate in effect on the billing date. Consequently,
the Company is exposed to currency exchange rate risks that could significantly
affect the Company's ability to meet its obligations and finance its Network
construction. The Company currently does not plan to enter into hedging
transactions with respect to these foreign currency risks and it is unlikely
that
11
<PAGE> 16
the Company would be able to obtain hedging arrangements on commercially
satisfactory terms with respect to all such risks. The exchange rate of the
sucre to the U.S. dollar has declined in recent years and on March 25, 1998 was
effectively devalued by a shift in the "crawling corridor". Any further decrease
in the value of the sucre relative to the U.S. dollar could have a material
adverse effect on the Company's financial condition and results of operations.
See "-- Inflation." The Company's tariffs and charges for inbound calls
originated by a wireline subscriber are not similarly linked to the U.S. dollar,
but rather are determined with reference to the inflation adjusted consumer
price index of Ecuador (Unidades de Valor Constante, or "UVC") under the terms
of the Company's interconnection agreement with the Ecuadorian Wireline System.
Under the terms of such interconnection agreement, the UVC is fixed for the
subsequent six-month period each January 1 and July 1 of each year during the
term of the agreement. The effective devaluation of the sucre on March 25, 1998
will have a negative impact on the Company's earnings until UVC is reset on July
1, 1998. A further change to the U.S. dollar/sucre exchange rate may materially
affect the Company. Such exposure could materially and adversely affect the
financial condition of the Company in the event of a material and adverse change
to the applicable UVC. See "Business -- Operating Agreements -- Interconnection
Agreements" and "-- Factors Relating to the Company -- Terms of Interconnection
Agreements."
Regulatory and Concession Matters
The continued existence and terms of the Company's concessions are subject
to ongoing review by regulatory authorities in Ecuador and to interpretation,
modification or termination by such authorities. The term of the Company's
concession relating to its cellular operations is 15 years from August 1993. The
term of the Company's concession relating to its data transmission services is
15 years from December 1994 and the term of the Company's concession relating to
Internet services is ten years from August 1997. There can be no assurance that
the Company's concessions authorizing it to provide telecommunications services
will be renewed upon their respective expiration dates or that any such renewal
will be on acceptable terms.
The construction, ownership and operation of the Company's Network, the
maintenance and renewal of its cellular, data transmission and Internet
concessions and the pricing of the Company's services and related matters are
subject to substantial regulation by the National Council of Telecommunications
(Consejo Nacional de Telecomunicaciones), the National Secretary of
Telecommunications (Secretaria Nacional de Telecomunicaciones) and the
Superintendency of Telecommunications (Superintendencia de Telecomunicaciones).
Changes in the regulation of the Company's activities, including the regulation
of rates charged by operators for their services, could have a material adverse
effect on the Company. In addition, the regulatory standards to which the
Company may generally be subject, and the oversight and enforcement functions of
certain of the Company's regulators, may be different than those applicable to
telecommunications operators in countries with more highly-developed regulatory
regimes. The Company's Cellular Concession requires that the Company maintain
certain minimum quality and service criteria. If the Company fails to meet such
minimum criteria, the Company's regulators provide a warning to the Company with
a subsequent period of 30 days for remedy. If the Company does not comply within
the specified 30-day period, the Company's regulators may initiate a proceeding
to terminate the Cellular Concession. The terms of the Company's cellular, data
transmission and Internet concessions generally do not condition defaults by the
Company thereunder with concepts of materiality. Consequently, the Government of
Ecuador may seek to unilaterally terminate the concessions, as applicable, upon
any breach by the Company of the terms thereof, however insignificant. See
"Regulatory Framework." In addition, the Company's regulators have significant
powers to regulate the market for telecommunications services in the "public
interest." Though the Company has experienced a good relationship with its
principal regulators to date and there are no significant current disputes with
such regulators, this relationship was developed over a period in which
competition with the state-owned wireline system was limited and there can be no
assurance that as the telecommunications market in Ecuador develops that
competitive pressures and other factors will not adversely affect the Company's
relationship with its regulators and its financial condition and prospects.
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Risks Due to Ecuador's Share Registration System
Under applicable Ecuadorian law, ownership of shares is evidenced by
transferable share certificates. However, transfers of shares must be registered
on the Company's share register to be valid against the Company and third
parties. Registration on the Company's share register is evidenced by
non-transferable extracts from the share register or other written evidence of
registration. Share registration is carried out by a share registrar, currently
Carlos Mosquera P., the Chairman of the Board of the Company, who is appointed
by the Company. Although the share registrar is required by law to act in strict
conformity with the instructions furnished to it by the Company, there exists
the possibility that transactions in the Company's shares could be improperly or
inaccurately recorded or share registration could be lost through fraud,
negligence or mere oversight.
Effects of El Nino on Ecuadorian Economy
The Company's results of operations may be affected by the global climatic
phenomenon known as "El Nino." This phenomenon has been identified by scientists
as causing droughts, hurricanes, tidal waves and temperature variations and
other meteorological conditions. It is not possible to predict the effect that
El Nino has had or may in the future have on the economy of Ecuador and,
consequently, on the Company's results of operations.
Enforceability of Certain Civil Liabilities
The Company is a corporation (sociedad anonima) organized and existing
under the laws of the Republic of Ecuador. All of the directors and officers of
the Company and certain of the experts named in this Prospectus reside outside
of the United States, and all or a substantial portion of the assets of such
persons and the Company are located outside the United States. As a result, it
may not be possible for investors to effect service of process within the United
States upon such persons, including with respect to matters arising under the
Securities Act, or to enforce against the Company or any of them judgments of
courts of the United States predicated upon the civil liability provisions of
the federal securities laws of the United States. The Company has been advised
by Estudio Juridico Pareja, Abogados, its legal counsel in Ecuador, that there
is doubt as to the enforceability, in original actions in Ecuadorian courts, of
liabilities predicated solely on the United States federal securities laws and
predicated upon the civil liability provisions of the United States federal
securities laws.
Effects of Developments in Other Markets
The market for the securities of an Ecuadorian company is, to varying
degrees, influenced by economic and market conditions in other emerging market
countries. Although economic conditions are different in each country, investor
reaction to developments in one country can have significant effects on the
securities of companies from other countries, including the Company. In December
1994, the Mexican currency was sharply devalued, triggering an economic crisis
in Mexico which adversely affected the securities markets in many emerging
markets. The ensuing increased market volatility in these securities markets has
also been attributed, at least in part, to the effects of the Mexican currency
devaluation. Beginning in the summer of 1997, the currencies of a number of
Southeast Asian countries, including Thailand, Indonesia, Malaysia, the
Philippines and South Korea have come under pressure, have been allowed to float
against the U.S. dollar and have been significantly devalued. The Asian markets
have continued to experience significant volatility, affecting both the U.S. and
Latin American capital markets. There can be no assurance that the market for
the securities of Ecuadorian companies, such as the Company, will not be
materially adversely affected by events elsewhere, especially in other emerging
market countries.
In addition, the Company is, to varying degrees, influenced by economic and
market conditions in more industrialized countries, such as the United States.
Among other events, increases in interest rates in the United States and, more
generally, events that increase the opportunity cost of investing outside the
United States, may tend to decrease the attractiveness of the securities of the
Company. Likewise, increased volatility in the U.S. capital markets may lead to
increased volatility of other securities markets.
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FACTORS RELATING TO THE COMPANY
High Leverage and Ability to Service Debt
The Company is highly leveraged and following the Offering will continue to
be highly leveraged. As of December 31, 1997, the Company had outstanding $125.0
million aggregate principal amount of the Conecel Notes, $9.8 million under a
vendor credit facility, unsecured promissory notes in the amount of $5.8 million
and, under "push-down" accounting rules, $121.0 million aggregate principal
amount of the Conecel Holdings Notes, representing approximately 110% of its
total capitalization. On an as adjusted basis after giving effect to the
Offering and the use of a substantial portion of the net proceeds (approximately
$87.5 million based on the estimated net proceeds) from the Offering to redeem
most of the Conecel Holdings Notes, the total indebtedness of the Company at
December 31, 1997, would have been $175.2 million or approximately 68.2% of its
total capitalization. See "Capitalization."
Since inception, the Company's earnings have been inadequate to cover its
fixed charges. Fixed charges, which effectively was interest expense, for the
years ended December 31, 1994, 1995, 1996 and 1997 were approximately $2.7
million, $5.0 million, $3.0 million and $21.0 million, respectively, while net
losses for the same periods were $3.5 million, $4.1 million, $1.5 million and
$9.7 million, respectively. For the year ended December 31, 1997, on an as
adjusted basis after giving effect to the Offering, the Company's assumption of
the Conecel Holdings Notes and the use of a substantial portion of the net
proceeds of the Offering to redeem a portion (approximately $86.5 million) of
the Conecel Holdings Notes, earnings would have been adequate to cover fixed
charges. In addition, there can be no assurance that future cash flows of the
Company will be sufficient to meet its obligations and commitments. If the
Company is unable to generate sufficient cash flows from operations to satisfy
its debt service requirements, or to pay its debts as they mature and meet its
other commitments, the Company could be required to pursue one or more
alternatives, such as attempting to arrange a refinancing or restructuring of
its indebtedness, selling material assets or operations or seeking to obtain
additional debt or equity financing. There can be no assurance that any of these
actions could be effected on satisfactory terms, that they would enable the
Company to continue to satisfy its capital requirements or that they would be
permitted by the terms of the Company's applicable debt agreements. In addition,
if the Company were to encounter difficulty in covering its fixed charges, it
would have to consider reductions in its operations and deferrals of planned
capital expenditures, which could have a material adverse effect on the
Company's financial condition and results of operations.
The Company's high degree of leverage has numerous adverse consequences to
the Company, including (i) the ability of the Company to obtain additional
financing in the future for working capital, capital expenditures, acquisitions
or other purposes, may be impaired, (ii) a substantial portion of the Company's
cash flow from operations will be required to be dedicated to meet its debt
service obligations, which will reduce the funds available to the Company for
its operations, future business opportunities and to pay dividends on its
capital stock, including the Class B Common Stock underlying the ADSs, (iii) the
Company's high degree of leverage may make it more vulnerable to a downturn in
its business and may limit its ability to respond to price competition or
changes in the economy generally, (iv) the Company may not have sufficient funds
to repay or refinance its existing indebtedness at maturity and (v) the
Company's ability to invest in or develop new technologies or take advantage of
new opportunities may be restricted.
Risks Related to Payments from the Ecuadorian Wireline System
In February 1997, the Government of Ecuador implemented a "calling party
pays" interconnection system pursuant to which the originator of the call pays
for the entire cellular charge of the call. The "calling party pays" system
requires that the wireline operator commence charging wireline subscribers for
calls to cellular subscribers originated by them. Cellular operators, in turn,
charge the wireline operator any applicable fees for calls placed to cellular
subscribers, net of any applicable interconnection charges required to be paid
by the cellular operators to the wireline operators. Emetel, S.A. ("Emetel"),
the predecessor to the two regional entities comprising the Ecuadorian Wireline
System, encountered some difficulties in administering and implementing the new
tariff policy and delayed charging its customers under the "calling party pays"
system until May 26, 1997. Consequently, Emetel failed to remit to the Company
amounts owed to it under the "calling party pays" system from February 1, 1997
to May 26, 1997, owing the Company a total of
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approximately $12.4 million for such period. In November 1997, pursuant to a
settlement agreement between the parties, Emetel agreed to pay the Company in
full satisfaction of the amounts owed, approximately $6.5 million, consisting of
an immediate payment of $1.6 million in cash and the delivery of a promissory
note in the principal amount of approximately $4.9 million providing for monthly
installments of approximately $223,000, including annual interest at 10%, for 24
consecutive months, commencing December 15, 1997. In addition, the Company
offset approximately $2.4 million attributable to interconnection fees that were
payable by the Company to Emetel. Accordingly, the Company recorded a one-time
settlement expense of approximately $3.6 million in connection with this
agreement.
On November 19, 1997, two regional operating entities, Andinatel, S.A. in
the mountain region (including Quito) and Pacifictel, S.A. in the coastal region
(including Guayaquil), were formed in anticipation of the pending privatization
of Emetel, the state-owned wireline service provider. Emetel continues to exist
as a legal entity for the sole purpose of winding up its affairs. All of the
assets of Emetel were divided and transferred to the two regional entities. In
addition, all of the liabilities of Emetel, except liabilities under the
November settlement agreement with the Company for periods prior to November 19,
1997 and interconnection fees payable to the Company under the "calling party
pays" system for such periods, were divided and transferred to the regional
entities. As a result, Emetel made payments to the Company for Andinatel, S.A.
and Pacifictel, S.A. which were due for September and October 1997. The Company
anticipates that each of the regional entities will be liable for the
interconnection fees for the period beginning November 19 through the end of the
month and for all monthly interconnection fees and settlement payments
attributable to them thereafter.
As of March 10, 1998, each of the regional entities is current with respect
to its payments to the Company. However, the payments by Emetel on behalf of
Pacifictel, S.A. that were due for September and October 1997 were not made in a
timely manner and were past due when made. The Company was advised that the
delay in payment was attributable to administrative difficulties encountered by
Pacifictel, S.A. as a result of its recent formation and adoption of inadequate
billing systems from Emetel. Under the interconnection agreement with Emetel,
payments for "calling party pays" are due approximately 105 days after the
relevant monthly billing period and therefore payments for November 1997 will
not be due until March 1998. Neither of the regional entities has made or is
currently obligated to make any payments to the Company and there can be no
assurance that either entity will pay, or pay in a timely manner, current or
future amounts. As a result of the "calling party pays" interconnection system,
the Ecuadorian Wireline System has become, and is expected to remain, the
Company's largest debtor and source of revenues, accounting for approximately
50% of the Company's revenues for the year ended December 31, 1997.
The Ecuadorian Wireline System is one of the Company's primary competitors
in all aspects of its business and the entities comprising such system may
determine for strategic purposes to refuse to or delay in remitting amounts owed
to the Company under the "calling party pays" system. The failure by the Company
to receive payments in a timely manner under the "calling party pays" system
will have a material adverse effect on the Company's financial position and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
Terms of Interconnection Agreements
The Company and the Ecuadorian Wireline System (as successors to Emetel)
entered into an interconnection agreement in April 1994 that has an original
term of five years expiring in April 1999. The interconnection agreement is
automatically renewable for an additional five-year term unless either party
delivers written notice to the other of its intention not to renew the
agreement. The Ecuadorian Wireline System is required, under applicable
Ecuadorian law (including applicable regulations relating to interconnection
among telecommunications networks), to maintain an interconnection agreement
with each of the cellular operators in Ecuador, including the Company. Under the
terms of the existing interconnection agreement with respect to digital
centrals, the Ecuadorian Wireline System is compensated at a rate of $0.05 per
minute of usage for all calls originated in their respective wireline networks
to a cellular subscriber and receive a collection fee of 2% of all amounts
collected by them from their subscribers for such calls. The rates charged by
the wireline operators to their wireline subscribers for calls to cellular
subscribers are established by the Company subject to the
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approval of CONATEL, the primary telecommunications regulatory body in Ecuador.
Upon the expiration of the original term of the interconnection agreement
between the Ecuadorian Wireline System and the Company, it is possible that the
wireline operators may seek to renegotiate certain terms of the interconnection
agreement, including the amounts payable to the Company and rates of
compensation payable to the Ecuadorian Wireline System under such agreement. The
terms of the interconnection agreements must be approved by Ecuador's
Superintendency of Telecommunications. See "Business -- Cellular Operations." In
addition, under the interconnection agreements, with respect to outbound calls,
wireline telephone companies charge cellular operators a fee per minute varying
between $.03 to $.15 per minute, depending upon the destination of the call and
when a cellular subscriber places a call to a wireline subscriber. See
"Business -- Operating Agreements -- Interconnection Agreements."
In addition, under the interconnection agreement, the Company and the
Ecuadorian Wireline System exchange on a monthly basis statements detailing the
interconnection fees payable to and from each other, and a reconciliation of
fees is conducted within 90 days after each statement date. A payment of 90% of
the fees owed by the Ecuadorian Wireline System to the Company is due within 15
days after the reconciliation date and the remaining 10% is due within 180 days
after the 90% payment, in each case without interest. This payment structure has
resulted in the creation of a significant trade receivable ($20.6 million as of
December 31, 1997) on the Company's financial statements and, prior to the
commencement of the wireline operators' payment cycle, impacted the Company's
short-term cash flow. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
Limited Operating History; Net Losses
The Company has a limited operating history, having only begun providing
cellular telephone services in March 1994. Through December 31, 1997, the
Company experienced net losses in each year of operation. There can be no
assurance that the Company will have net income in the future.
Risks Associated with New Industry and Growth
While the cellular telephone industry is well established throughout the
world, the cellular telephone industry in Ecuador is still relatively new and
therefore subject to the inherent risks associated with a new industry, such as
the uncertainties of consumer demand, costs and pricing structures, regulatory
issues, and the ability to operate profitably. The success of the Company's
business strategy is subject to certain factors that are beyond the control of
the Company. The Company is unable to predict how consumer demand for cellular
and other telecommunications services may develop over time, the size of the
Ecuadorian market for cellular, data transmission and other telecommunications
services, the rates of penetration of the market and the sensitivity of
potential subscribers to changes in prices.
Ability to Manage Growth
The Company's continued rapid growth will require the expansion of its
Network, the training of new personnel, the expansion of its management
information systems, the maintenance of effective quality controls with respect
to the Company's business operations and services provided and effective control
of expenses related to operations and systems construction and over the quality
of new subscribers and churn rate. The Company's failure to satisfy these
requirements, manage growth effectively, attain high quality standards of
service, and generate sufficient revenues could have a material adverse effect
on the Company's financial condition and results of operations. In addition,
such growth has placed a significant strain on the Company's financial systems
and controls. Any failure to maintain and improve its financial systems and
controls at a pace consistent with the Company's business growth could have a
material adverse effect on the Company's financial condition and results of
operations.
Dependence on Key Personnel
The Company's management and operations are substantially dependent upon
the contributions of J. Fernando Colunga, the Company's Chief Executive Officer,
and other senior management and technical
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<PAGE> 21
personnel. The loss of the services of any of these individuals could have a
material adverse effect on the Company's financial condition and results of
operations. The Company is not the beneficiary of "key-person" life insurance on
any of its executive officers. See "Management."
Competition
The telecommunications industry is highly competitive and industry
participants are typically very large and have significant financial, marketing
and other resources. The Company faces competition in Ecuador for the provision
of cellular services from Otecel, the only other Ecuadorian cellular operator.
In addition, the Company also competes with both Otecel and the Ecuadorian
Wireline System for the provision of telephone services in general. BellSouth
Corporation ("BellSouth"), through an affiliate, acquired a controlling interest
in Otecel in early 1997. BellSouth also has interests in other cellular
telephone operators throughout Latin America. Consequently, Otecel may have
greater financial and other resources than the Company and may be in a better
position to fund operating deficits or unexpected capital costs, and purchase
cellular telephone equipment at more favorable prices than are available to the
Company. Competition in the Ecuadorian telecommunications industry is based on
price, services offered, quality of service and coverage area. During the fourth
quarter of 1995 and throughout 1996, there was significant price competition
between the Company and Otecel and Otecel significantly increased its market
share, primarily as a result of aggressive pricing strategies implemented by
Otecel during such periods. There can be no assurance that additional periods of
intense price competition will not continue and will not result in a material
adverse effect on the Company's financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company competes with traditional wireline telephone service operators.
Wireline density in Ecuador, as of December 31, 1996, is estimated at
approximately 6.4%, which is low relative to other Latin American countries. If
substantial capital were to be invested in the wireline telephone industry,
resulting in increased wireline density and improved service, certain of the
Company's existing and potential subscribers may shift to wireline service
providers due to a number of factors, some of which are price related. In
addition, increased wireline densities could lead to reduced cellular usage. The
entrance of new wireline operators would result in additional competition for
the Company. The Government of Ecuador is currently implementing measures
designed to improve wireline service and density within the country, including
the possible privatization of the Ecuadorian Wireline System which is currently
scheduled to take place in April 1998. Several of the Company's service plans,
including Porta Family, compete directly with traditional wireline services.
Following such privatizations, the wireline operators may seek to increase the
competitive pressures on the Company and its products through more aggressive
pricing, better service, increased advertising or regulatory challenges to
certain services provided by the Company, including the Porta Family service.
The Company also faces competition from other existing wireless services, such
as mobile radio and beeper services, and may face competition from emerging
technologies and services that might be introduced in the future, including
enhanced specialized mobile radio and personal communications services ("PCS").
Each of the regional entities comprising the Ecuadorian Wireline System is
qualified to bid for PCS licenses in its respective region when offered by the
Government of Ecuador in the future. In the event such entities are successful
in obtaining PCS licenses, they will engage in direct competition with the
Company within their respective regions for wireless telecommunications
services.
Rapid Technological Change
The telecommunications industry is subject to rapid and significant changes
in technology. There can be no assurance that the current technologies employed
by the Company will not become obsolete or subject to competition from new
technologies in the future or that the Company will be able to anticipate and
acquire on reasonable terms new technologies necessary to compete in a new
environment. In addition, the Government of Ecuador may grant concessions for
such new technologies to third parties that may compete with the Company. There
can be no assurance that the Company will be able to compete successfully
against existing competitors or new market entrants.
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Churn Rate Risks
The Company commenced cellular operations in March 1994 and its subscriber
base has grown rapidly since inception. The Company expanded the number of its
subscribers by 197.5% from December 31, 1996 to December 31, 1997. Consequently,
many of the Company's current subscribers have no long-term relationship with
the Company and the Company's churn rate (the rate at which subscribers leave
the system, calculated as a percentage of average reported subscribers for the
applicable period) is relatively unseasoned and may be less than future
subscriber turnover rates. The Company's average monthly churn rate for the
years ended December 31, 1996 and 1997 were approximately 3.96% and 2.13%,
respectively. During the months of March through June 1996, in order to upgrade
the credit quality of its customer base, the Company disconnected approximately
8,000 reported subscribers with non-performing accounts, many of whom subscribed
to the Company's service during promotions offered in the early part of 1995. As
the cellular telephone industry is a new industry to Ecuador, national cellular
telephone usage and expected churn rates are relatively unknown and may not be
comparable to more developed countries such as the United States. The results of
operations of the Company can be significantly affected by subscriber
cancellations. Sales and marketing costs associated with attracting new
subscribers are substantial relative to the costs of providing service to
existing customers. Because the cellular telephone industry is characterized by
high fixed costs, disconnections directly and adversely affect incremental
operating cash flow. The Company's failure to maintain churn rates at a low
level could have a material adverse effect on its financial condition and
results of operations. See "Business -- Subscriber Management -- Management of
Churn and Credit Policy."
Dependence Upon Certain Equipment Suppliers
The construction and operation of the Company's Network depends upon
obtaining adequate supplies of highly-sophisticated switching and other network
equipment and telephone handsets on a timely basis. The Company experienced
shortages in obtaining network equipment and telephone handsets from Northern
Telecom and Ericsson Group, its principal suppliers, in early 1997. These
disruptions resulted in delays in the buildout of the Network. In the event the
Company is unable to obtain sufficient supplies of equipment, the Network could
experience operational problems and delays in its buildout, which could have a
material adverse effect on the Company's financial position and results of
operations.
Equipment Failure; Natural Disaster
Although the Company carries "business interruption" insurance, a major
equipment failure or a natural disaster affecting any one of the Company's
central switching offices or certain of its cell sites could have a significant
adverse effect on the Company's operations. See "-- Factors Relating to
Ecuador -- Effects of El Nino on Ecuadorian Economy."
Future Capital Needs
The Company expects to incur substantial capital expenditures and other
costs as it continues to pursue its strategy of upgrading and expanding its
Network, increasing its existing customer base and expanding its operations to
provide a wider array of services. The Company currently expects to fund its
anticipated capital expenditures for 1998 primarily with internally-generated
cash flow, vendor financing and a portion of the net proceeds of the Offering,
although there can be no assurance that such funds will be sufficient. The
telecommunications industry is characterized by rapidly changing technologies
that can require significant capital expenditures to remain competitive. If the
Company were required to invest in competing technologies, such as PCS or other
wireless services, significant additional capital would be required. If the
Company is unable to fund such expenditures, or if the Company's cash flow from
operations does not increase from its present level, the Company's ability to
complete its network construction could be jeopardized, which could have a
material adverse effect on the Company's financial condition and results of
operations. If the Company were unable to fund capital expenditures or other
costs in the future, it may, depending upon the circumstances which then exist,
seek additional equity and/or debt financing. The indenture governing the
Conecel Notes contains covenants restricting the incurrence of indebtedness,
other than subordinated indebtedness to the extent certain financial ratios and
covenants would continue to be met, and up to $30.0
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million in vendor financing. As of December 31, 1997, the Company had
approximately $15.6 million of outstanding vendor financing and is permitted to
incur up to $14.4 million of additional vendor financing. The Company does not
currently meet such financial ratios and covenants so as to permit it to incur
additional indebtedness. There can be no assurance that the Company could raise
sufficient funds to fund capital expenditures or other costs. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "The Conecel Indebtedness."
In addition, in order to meet increased competition and to continue to
expand its markets, the Company established its Comodato financing plan in
November 1997. Comodato is a 24 month lease of the cellular handset, with an
option to buy, that is incorporated into certain of the Company's service plans.
Through the Comodato plan, the Company recovers the cost of the handset within
12 to 24 months through recurring revenues, but until such time, essentially
finances a portion of the handsets. The Company expects that this financing plan
will continue to have an impact on the Company's short-term capital needs.
Additionally, under Ecuadorian law, the Company is required to set aside and
distribute at the end of each year to its qualified full-time employees an
amount equal to 15% of its net income as compensatory bonuses. Such
distributions, if any, will reduce the level of net income otherwise available
for future capital needs.
Related Party Transactions and Potential Conflicts of Interest
The Parra Family is also the majority stockholder of Banco Amazonas, S.A.,
one of Ecuador's leading financial institutions, and engages in entrepreneurial
activities in a number of other industries in the country. In the past, related
entities have conducted business activities with the Company. Although it is
anticipated that all future related party transactions and agreements will be on
terms no less favorable to the Company than the Company could obtain in
comparable arm's-length contracts with independent third parties, conflicts of
interest may arise between the Company and the Parra Family in certain
circumstances. See "Certain Relationships and Related Transactions."
Alleged Health Risks Associated with Wireless Telephones
Lawsuits have been filed against suppliers and sellers of wireless
telephones alleging possible health risks, including brain cancer, associated
with electromagnetic fields emitted by portable hand-held wireless telephones.
To date, there has been only limited research in this area, and such research
has not been conclusive as to what effects, if any, exposure to electromagnetic
fields emitted by portable wireless telephones has on human cells. However, the
perception that health risks may exist could adversely affect the Company's
ability to market portable wireless telephone products. Since most of the
Company's revenues are derived from its cellular operations, future studies
confirming alleged health risks associated with the use of such products could
have a material adverse effect on the wireless communications industry and the
Company. As a distributor of wireless telephones, the Company may be subject to
product liability and other lawsuits alleging health risks. The costs associated
with the defense of such lawsuits or a successful claim against the Company
could have a material adverse effect on the Company's results of operations and
financial condition.
FACTORS RELATING TO THE ADSS AND COMMON STOCK
No Prior Public Market; Possible Price Volatility
Prior to the Offering, there has been no public market for the ADSs, the
Class B Common Stock or any other equity securities of the Company in Ecuador,
the United States or elsewhere. Although the ADSs have been approved for
quotation on Nasdaq, there can be no assurance that an active market will
develop after the completion of the Offering or, if developed, that it will be
sustained. The initial public offering price of the ADSs has been established by
negotiations among the Company, the representatives of the Selling Shareholders
and the Underwriters and may bear no relationship to the price at which the ADSs
will trade after the Offering. See "Underwriting." In addition, the trading
price of the ADSs could be subject to significant fluctuations in response to
variations in the Company's operating results, general conditions in the
cellular telephone industry or in Ecuador and other factors. In addition,
Ecuador is generally considered by international investors to be an "emerging
market." Political, economic, social and other developments in
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Ecuador, as well as in other "emerging markets" in Latin America and elsewhere,
may have an adverse effect on the market value and liquidity of the ADSs. See
"-- Factors Relating to Ecuador -- Recent Political and Economic Developments."
Future Preemptive Rights May Be Unavailable to ADR Holders in Certain
Circumstances
Ecuador's Ley de Companias (Law of Corporations) requires the Company,
whenever it issues new shares for cash, to grant preemptive rights to all of its
shareholders (including holders of ADRs), giving them the right to purchase a
sufficient number of shares to maintain their existing ownership percentage.
However, the Company may not be able to offer preemptive rights to United States
holders of ADRs unless a registration statement under the Securities Act is
effective with respect to such rights and underlying shares, or an exemption
from the registration requirements of the Securities Act is available. The
Company intends to evaluate at the time of any rights offering the costs and
potential liabilities associated with any such registration statement as well as
the indirect benefits to it of enabling United States holders of ADRs to
exercise preemptive rights and any other factors that the Company considers
appropriate at the time, and then make a decision as to whether to file such a
registration statement. No assurance can be given that any registration
statement would be filed or that such registration statement would be declared
effective if filed or that an exemption from registration would be available. To
the extent holders of ADRs are unable to exercise such rights because a
registration statement has not been filed and declared effective, the Depositary
will attempt to sell such holders' preemptive rights and distribute the net
proceeds of the sale, net of the Depositary's fees and expenses, to the holders
of the ADRs, provided that a secondary market for such rights exists and a
premium can be recognized over the cost of any such sale. Although it is not
currently contemplated that the ADSs, the Class B Common Stock or any other
equity securities of the Company will trade on any exchange or market other than
in the United States, a secondary market for the sale of preemptive rights can
be expected to develop if the subscription price of the shares upon exercise of
the rights is below the prevailing market price of the shares. Under the
Company's Bylaws, the Company may not issue additional shares of its equity
capital at a price below 90% of its prevailing market price, unless the holders
of Class A and Class B Common Stock, voting together, approve such issuance. As
a result, there can be no assurance both that a secondary market in preemptive
rights will develop in connection with any future issuance of shares or, if such
market does develop, a premium will be recognized on such sale. If such rights
cannot be sold they will expire and holders of ADRs will not realize any value
from the grant of such preemptive rights. In either case, the equity interests
of the holders of ADRs would be diluted proportionately. See "Description of
Capital Stock -- Class A Common Stock and Class B Common Stock -- Preemptive
Rights" and "Description of American Depositary Receipts -- Dividends, Other
Distributions and Rights."
Shares Eligible for Future Sale
Sales of a substantial number of shares of Common Stock or ADSs in the
public market following the Offering could adversely affect the market price of
the ADSs. Upon completion of the Offering, the Company will have 107,185,856
shares of Common Stock outstanding, consisting of 60,747,286 of Class A Common
Stock and 46,438,570 shares of Class B Common Stock. All of the shares of Class
B Common Stock represented by the ADSs offered hereby, will be available for
immediate sale in the public market following the date of this Prospectus,
except for ADSs held or purchased by an affiliate of the Company (an
"Affiliate"), as that term is defined in Rule 144 under the Securities Act. Any
ADSs purchased in the Offering by an Affiliate may not be resold except pursuant
to an effective registration statement filed by the Company or an applicable
exemption from registration under the Securities Act, including an exemption
under Rule 144. In addition, an aggregate of 750,000 shares of Class B Common
Stock will be reserved for issuance to executive officers, key employees and
independent contractors of the Company under the Company's 1998 Stock Option
Plan. All of the shares of Class A Common Stock, upon conversion to shares of
Class B Common Stock, will be available for sale in the public market following
the expiration of 180-day lock-up agreements between the shareholders of the
Company and the Underwriters, subject to compliance with the volume and other
limitations of Rule 144 promulgated under the Securities Act. Any future sale of
a substantial number of shares of Class B Common Stock or ADSs in the open
market or the perception that such sales may occur may
20
<PAGE> 25
materially adversely affect the market price of the ADSs offered hereby. See
"Shares Eligible for Future Sale" and "Underwriting."
Dilution
Investors purchasing the ADSs in the Offering will incur immediate and
substantial dilution in net tangible book value of $3.53 per share of Class B
Common Stock (at an assumed initial public offering price of $14.50 per ADS or
$3.625 per share of Class B Common Stock). See "Dilution."
Control by the Parra Family
Through controlling interests in both Conecel Holdings and Cempresa, the
Parra Family currently controls the voting power of the Common Stock of the
Company. As a result of the limited voting rights of holders of Class B Common
Stock, upon completion of the Offering, the Parra Family will continue to
control the election of directors, the business policies of the Company and
significant business transactions, such as mergers, acquisitions and
divestitures by the Company. Holders of Class B Common Stock and ADRs will not
be entitled to vote on most matters, including matters concerning the management
of the Company and proposed modifications to the Company's charter documents
that do not affect their relative rights. The voting rights of holders of Class
B Common Stock and ADRs will be limited to proposed modifications to the
Company's charter documents that would affect their relative rights and as to
the initiation of bankruptcy proceedings by, or any proposed liquidation of, the
Company. In addition, the Parra Family may retain control of the Company with a
small percentage of the total outstanding shares of the Company, as shares of
Class A Common Stock are convertible into Class B Common Stock at any time at
the option of the holders thereof and the Bylaws (Estatutos) of the Company
require that the Class A Common Stock only comprise 33.33% of the total share
capital of the Company. See "Principal and Selling Shareholders" and
"Description of Capital Stock."
Corporate Disclosure
A principal objective of the securities laws of the United States, Ecuador
and other countries is to promote full and fair disclosure of all material
information of companies issuing securities. However, there may be less
publicly-available information about the Company than is regularly published by
or about listed companies in certain countries with highly-developed capital
markets, such as the United States.
21
<PAGE> 26
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the ADSs
offered hereby are estimated to be approximately $109.3 million (assuming an
initial public offering price of $14.50 per ADS) (approximately $128.2 million
if the Underwriters' overallotment option is exercised in full).
The Company will use at least 80% of the net proceeds from the Offering to
redeem a substantial portion of the Conecel Holdings Notes (though not less than
$80.0 million). Based on the estimated net proceeds set forth above, the Company
will use approximately $87.5 million of the net proceeds of the Offering,
together with a portion of the prefunded interest payments held by the trustee
of the Conecel Holdings Notes and interest accrued thereon in an amount equal to
a percentage of the Notes redeemed, to redeem approximately $86.4 million
aggregate principal amount of the Conecel Holdings Notes at a redemption price
equal to 107% of the outstanding principal amount thereof, plus unpaid accrued
interest to the redemption date, shortly following the consummation of the
Offering. The Conecel Holdings Notes bear interest at a rate of 14% per annum,
payable semiannually in arrears on September 30 and March 31 of each year,
commencing on March 31, 1998. The proceeds from the sale of the Conecel Holdings
Notes were used predominantly to finance Conecel Holdings' acquisition of
approximately 85% of the capital stock of the Company in September 1997 from
shareholders of the Company. See "Certain Relationships and Related
Transactions -- Conecel Holdings Transactions."
The Company will use the remaining net proceeds (expected to be
approximately $21.8 million) of the Offering for capital expenditures. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Pending such uses, the net
proceeds of the Offering will be invested in interest-bearing bank accounts or
in short-term, interest bearing investments, including government obligations
and other money market investments.
The Company will not receive any proceeds from the sale of ADSs offered by
the Selling Shareholders.
DIVIDEND POLICY
The Company's Board of Directors will determine the Company's future
dividend policy based on its results of operations, financial condition, capital
requirements and other circumstances. Pursuant to the terms of a Dividend and
Contribution Agreement, dated September 30, 1997, between the Company and
Conecel Holdings, and in connection with the indentures governing each of the
Conecel Notes and Conecel Holdings Notes, the Company is currently obligated, so
long as the Conecel Holdings Notes remain outstanding and are not assumed by the
Company, to declare and pay to its shareholders dividends within 90 days after
the end of each fiscal year in an amount equal to all Free Cash Flow (which is
defined as EBITDA less, as calculated on a consolidated basis in accordance with
U.S. GAAP, consolidated interest expense, capital expenditures and corporate
income taxes for the four most recent consecutive fiscal quarters ending on or
prior to the date of determination). No such payments have been, or are expected
to be, made. The obligation to pay dividends will terminate upon the repayment
of all of the Conecel Holdings Notes by the Company. Under Ecuadorian law, the
Company is required to retain on an annual basis not less than 10% of its net
income to fund a legal reserve up to an amount equal to 50% of the Company's
subscribed and paid for capital, and the Company may only pay dividends once
such reserve is fully funded.
In addition, the terms of the Conecel Note Indenture contain restrictions
on the declaration and payment of dividends and other distributions to
shareholders of the Company. See "The Conecel Indebtedness -- The Conecel
Notes."
Following the consummation of the Offering, the redemption of a significant
portion of the Conecel Holdings Notes and any future assumption or repayment of
the remaining Conecel Holdings Notes, if any, it is not anticipated that any
cash dividends will be paid on the Company's shares in the foreseeable future.
The Company has never paid a dividend on its Common Stock.
22
<PAGE> 27
CAPITALIZATION
The following table sets forth the cash and cash equivalents, short-term
debt and capitalization of the Company as of December 31, 1997 on (a) an actual
basis, (b) a pro forma basis to give effect to (i) the creation of two separate
classes of shares, the Class B Common Stock offered hereby and the Class A
Common Stock (which all of the then existing shareholders received in exchange
for shares of Common Stock), and (ii) the conversion by Conecel Holdings of
3,039,750 shares of Class A Common Stock into an equal number of shares of Class
B Common Stock in respect of the Warrants and the UBS Warrants and an additional
750,000 shares of Class B Common Stock issued in connection with the MasTec
Agreement (c) an as adjusted basis to give effect to the sale of the 8,046,464
ADSs offered by the Company hereby (at an assumed initial public offering price
of $14.50 per ADS) and the application of the estimated net proceeds therefrom
as set forth under "Use of Proceeds." The information presented under the
"Actual" column below is based on the Company's audited financial statements as
of December 31, 1997. The table should be read in conjunction with the Financial
Statements and the related notes thereto appearing elsewhere in this Prospectus.
See also "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................. $ 22,000(1) $ 22,000 $ 34,689
======== ======== ========
Short-term debt(2)........................................ 15,616 15,616 15,616
-------- -------- --------
Long-term debt:
Conecel Notes........................................... 125,000 125,000 125,000
Conecel Holdings Notes(3)............................... 121,000 121,000 34,632
-------- -------- --------
Total long-term debt............................ 246,000 246,000 159,632
-------- -------- --------
Shareholders' equity (deficit):
Common Stock, par value 1,000 sucres per share; 150
million shares authorized, 75 million shares
outstanding;......................................... 28,670
Class A Common Stock, par value 1,000 sucres per share;
150,000,000 shares authorized, no shares outstanding
actual; 63,710,250 shares outstanding pro forma and
60,747,286 as adjusted(3)............................ 24,341 23,197(6)
Class B Common Stock, par value 1,000 sucres per share;
100,000,000 shares authorized, no shares outstanding
actual; 11,289,750 shares outstanding pro forma and
46,438,570 shares outstanding as adjusted(4)......... 4,329 12,876
Additional paid-in capital.............................. 5,000 106,935
Effect of push-down accounting.......................... (40,906) (38,187)(7) (38,187)(7)
Accumulated deficit..................................... (10,675) (15,675)(8) (23,432)(8)
-------- -------- --------
Total shareholders' equity (deficit)(5)......... $(22,911) $(20,192) $ 81,389
======== ======== ========
Total capitalization...................................... $238,705 $241,424 $256,637
======== ======== ========
</TABLE>
- ---------------
(1) Approximately $17.3 million in cash is restricted. See Note A of the Notes
to Financial Statements.
(2) Includes (a) the following short-term promissory notes at December 31, 1997
to (i) Banco del Pichincha C.A. in the aggregate principal amount of $4.0
million (interest at 10% per annum, maturing January 27, 1998 (renewed to
July 27, 1998)) and (ii) Banco Aserval in the aggregate principal amount of
$1.8 million (interest ranging from 11.5% to 15% per annum, maturing between
February 2 and June 2, 1998), and (b) amounts outstanding under the Nortel
secured credit facility in the aggregate principal amount of $9.8 million
(interest at LIBOR plus 7% (currently 13% per annum)), payable quarterly
through
23
<PAGE> 28
October 30, 1999. See Note H of the Notes to Financial Statements. The
Company has remained current with respect to the payment of all such
indebtedness.
(3) See Note 6 of Selected Financial and Operating Data.
(4) Translations of sucres into U.S. dollars have been made at the rate of 4,430
sucres = $1.00, the exchange rate in effect on December 31, 1997, as
determined by the Central Bank of Ecuador. See Note A of Notes to Financial
Statements.
(5) Does not include an aggregate of 750,000 shares of Class B Common Stock
reserved for issuance to executive officers, key employees and independent
contractors of the Company under the 1998 Stock Option Plan.
(6) Takes into consideration 2,962,964 shares of Class A Common Stock to be sold
by Conecel Holdings.
(7) Reflects the effect of the issuance of 750,000 shares of Class B Common
Stock, at $3.625 per share, in connection with the MasTec Agreement.
(8) The pro forma column includes $5,000 in costs associated with the exercise
of the Warrants. The as adjusted column contains the additional interest (7%
premium) to be incurred upon the prepayment of the Conecel Holding Notes in
the amount of $4,546 (net of $1,500 previously assumed) and the write-off of
debt offering costs in the amount of $3,211.
24
<PAGE> 29
DILUTION
(Dollars in thousands, except share and per share data)
At December 31, 1997, the Company had a net tangible book value of
$(99,070), or $(1.32) per share of Common Stock. Net tangible book value per
share of Common Stock is determined by dividing the net tangible book value
(tangible assets less liabilities) of the Company at December 31, 1997, by the
number of shares of Common Stock outstanding at that date. After giving effect
to the issuance and sale of the 8,046,464 ADSs offered by the Company hereby (at
the assumed initial public offering price of $14.50 per ADS) after deducting the
underwriting discount and estimated expenses of the Offering and the application
of the net proceeds therefrom as set forth under "Use of Proceeds," the net
tangible book value of the Company at December 31, 1997, would have been $10,268
or $0.10 per share of Common Stock. This represents an immediate increase in net
tangible book value of $1.42 per share of Common Stock to the existing
shareholders and an immediate dilution of $3.53 per share to new investors. The
following table illustrates this per share dilution:
(Expressed in shares of Class B Common Stock)
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $ 3.63
Net tangible book value per share as of December 31, 1997... $(1.32)
Increase in net tangible book value attributable to new
investors................................................. $ 1.42
Net tangible book value after the Offering................ $ 0.10
------
Dilution per share to new investors....................... $ 3.53
======
</TABLE>
The following table summarizes as of December 31, 1997, the difference
between the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price per share of Common Stock and ADS
paid by the existing shareholders and by new investors in the Offering.
<TABLE>
<CAPTION>
AVERAGE PRICE
SHARES PURCHASED TOTAL CONSIDERATION PER SHARE OF
---------------------- ------------------- ---------------
COMMON
NUMBER PERCENT AMOUNT PERCENT STOCK ADS
----------- ------- -------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Existing shareholders(1)........ 75,000,000 70.0% $ 28,670 20.0% $0.38 $ --
New investors(1)................ 32,185,856 30.0 116,674 80.0 3.625 14.50
----------- ----- -------- -----
Total................. 107,185,856 100.0% $145,344 100.0%
=========== ===== ======== =====
</TABLE>
- ---------------
(1) Sales by the Selling Shareholders in the Offering will reduce the number of
shares held by existing shareholders to 70,403,536 shares and the number of
shares purchased by new investors will increase to 36,782,320, or 34%, of
the total number of shares of Common Stock which will be outstanding after
the Offering. See "Principal and Selling Shareholders."
25
<PAGE> 30
SELECTED FINANCIAL AND OPERATING DATA
(Dollars in thousands, except per share and operating data)
The summary financial information for each of the fiscal years in the
four-year period ended December 31, 1997 are derived from the financial
statements included elsewhere herein that have been prepared in accordance with
U.S. GAAP and audited by BDO Binder, independent auditors. BDO Binder is one of
the world's largest accounting and consulting organizations. This information
should be read in conjunction with, and is qualified in its entirety by
reference to, the financial statements and the related notes thereto presented
elsewhere in this Prospectus. Calculations of revenue per subscriber and airtime
usage per subscriber are made on the basis of "reported subscribers."
The unaudited pro forma data for the year ended December 31, 1997 gives
effect to (i) the issuance by Conecel Holdings of 1,406,250 Warrants issued in
connection with certain corporate financial advisory services rendered to the
Company and its affiliates, and (ii) the issuance by Conecel Holdings of
1,633,500 Warrants in connection with the issuance of the Conecel Holdings
Notes. The unaudited pro forma financial data is based on the historical
financial statements of the Company and the assumptions and adjustments
described in the accompanying notes. The Company believes that the assumptions
on which the unaudited pro forma data are based are reasonable. The unaudited
pro forma data is provided for informational purposes and does not purport to
represent what the Company's financial position or results of operations
actually will be for any period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996 1997(1)
------- -------- -------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service Revenues:
Activation revenues....................................... $ 4,059 $ 2,066 $ 1,069 $ 972
Recurring charges(2)...................................... 7,571 24,664 27,223 65,487
Sales of equipment........................................ 1,083 3,090 1,532 8,557
------- -------- -------- --------
Total............................................... 12,713 29,820 29,824 75,016
------- -------- -------- --------
Cost of Revenues:
Cost of services(3)....................................... (1,348) (6,155) (7,997) (12,262)
Cost of equipment sold.................................... (957) (4,150) (2,336) (14,763)
------- -------- -------- --------
Total............................................... (2,305) (10,305) (10,333) (27,025)
------- -------- -------- --------
Gross profit................................................ 10,408 19,515 19,491 47,991
------- -------- -------- --------
Operating Expenses:
Selling expenses.......................................... (2,070) (3,567) (2,180) (7,920)
Marketing expenses........................................ (2,229) (6,333) (4,353) (3,936)
General and administrative expenses....................... (3,266) (5,813) (7,388) (12,205)
Depreciation and amortization(1).......................... (2,205) (2,536) (4,189) (6,290)
Settlement related to calling party pays(4)............... -- -- -- (3,560)
Provision for bad debt.................................... (5) (1,946) -- (277)
------- -------- -------- --------
Total............................................... (9,775) (20,195) (18,110) (34,188)
------- -------- -------- --------
Operating income (loss)..................................... 633 (680) 1,381 13,803
------- -------- -------- --------
Other Income:
Interest income........................................... 366 426 556 2,873
Other income.............................................. 75 266 1,602 888
------- -------- -------- --------
Total............................................... 441 692 2,158 3,761
------- -------- -------- --------
Other Expenses:
Interest expense(1)....................................... $(2,654) $ (5,016) $ (3,034) $(20,985)
Remeasurement (loss) gain................................. (1,927) 899 (2,037) (6,293)
------- -------- -------- --------
Total............................................... (4,581) (4,117) (5,071) (27,278)
------- -------- -------- --------
Net income (loss)........................................... $(3,507) $ (4,105) $ (1,532) $ (9,714)
======= ======== ======== ========
Net income (loss) per share................................. $ (.31) $ (.11) $ (.02) $ (.13)
------- -------- -------- --------
Weighted average number of shares outstanding............... 11,484 38,288 75,000 75,000
======= ======== ======== ========
</TABLE>
26
<PAGE> 31
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
PROFORMA DATA:
Pro forma net loss(5)..................................... $(14,714)
========
Pro forma net loss per share(5)........................... $ (.20)
--------
Pro forma average number of shares outstanding............ 75,000
========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------
1994 1995 1996 1997
------- ------- ------- --------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets............................................ $ 6,353 $21,909 $11,000 $ 66,453
Property and equipment, net............................... 15,747 31,315 32,156 74,520
Licenses and systems...................................... 1,949 1,845 1,698 52,015
Total assets.............................................. 24,106 55,951 44,931 271,606
Current liabilities....................................... 20,556 22,854 15,126 48,517
Long-term debt(6)......................................... 1,667 12,812 11,052 246,000
Stockholders' equity (deficit)............................ 1,883 20,285 18,753 (22,911)(1)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1994 1995 1996 1997
------- -------- -------- ---------
<S> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(7)................................................. $ 2,838 $ 1,856 $ 5,570 $ 23,248
Net cash provided (used) by:
Operating activities...................................... (2,558) 5,188 3,925 (10,256)
Investing activities...................................... (5,356) (20,154) (4,883) (105,600)
Financing activities...................................... 8,079 26,283 (10,360) 119,722
Capital expenditures...................................... 5,387 17,928 4,830 47,931
OPERATING DATA:
Average airtime usage (minutes per month)(8).............. 207 165 190 295
Average number of reported subscribers.................... 7,199 23,429 28,382 65,251
Average monthly revenue per reported subscriber........... $134.63 $ 95.07 $ 83.07 $ 84.88(9)
Percent of Ecuadorian population covered(10).............. 30% 60% 80% 85%
Ending reported subscribers............................... 15,012 28,558 34,970 104,061
Ending market penetration................................. .13% .25% .29% .87%
Average of average monthly churn.......................... .79% .86% 3.96%(11) 2.13%
</TABLE>
- ---------------
(1) Under accounting rules relating to "push-down" accounting, the Company is
required to reflect certain assets and liabilities of Conecel Holdings on
the Company's balance sheet. Due to "push-down" accounting, the Company had
a stockholders' deficit as of December 31, 1997. Without giving effect to
such accounting treatment, the Company's stockholders' equity would have
been $15.3 million. Upon repayment in full or in part of the Conecel
Holdings Notes, as a result of "push-down" accounting, the Company will
continue to carry approximately $66.8 million of goodwill on its balance
sheet which will be amortized over 30 years. The effect of such accounting
treatment will be to decrease net income or increase net loss, as
applicable, in the amount of approximately $2.2 million annually for future
periods. Results of operations for 1997 include approximately $0.6 million
of depreciation and amortization and approximately $6.2 million of interest
expense associated with "push-down" accounting.
(2) Includes monthly fees, airtime charges, roaming charges, national and
international long distance revenues and public phone service revenues.
(3) In May 1997, the Company prepaid the annual license fees that were payable
to the Government of Ecuador pursuant to its Cellular Concession.
Commencing June 1997, the Company was no longer required to make the annual
cost payment to the Government of Ecuador and the full amount of the
prepayment ($53.6 million) will be amortized as a pre-paid expense over the
remainder of the term of such license and will continue to be reflected in
cost of services.
(4) Represents settlement of amounts due from Andinatel, S.A. and Pacifictel,
S.A. (the successors to Emetel, S.A.) regarding calling party pays. See
Note B to Notes to Financial Statements.
(5) The pro forma adjustments for the year ended December 31, 1997 are as
follows:
<TABLE>
<S> <C>
Historical net loss......................................... $ (9,714)
Pro forma adjustments:
For warrants issued in connection with corporate finance
advisory services....................................... (2,039)
For warrants issued in connection with the Conecel
Holdings Notes.......................................... (2,961)
--------
Pro forma net loss.......................................... (14,714)
========
</TABLE>
The pro forma adjustments have been determined with an assumed public
offering price of $3.625 per share of Class B Common Stock, however, the
actual price may be higher or lower depending on the market conditions at
the time of the Offering. The pro forma net loss is presented to reflect an
estimate of the expenses the Company will record in 1998 when the value of
the Class B Common Stock is determined for 1,633,500 warrants issued in
connection with the issuance of the Conecel Holdings Notes and
27
<PAGE> 32
1,406,250 warrants issued in connection with corporate finance advisory
services. As of December 31, 1997, "Long-term debt" included $125.0 million
aggregate principal amount of the Conecel Notes and, as a result of
"push-down" accounting, $121.0 million aggregate principal amount of the
Conecel Holdings Notes issued on September 30, 1997.
(6) As of December 31, 1997, "Long-term debt" included $125.0 million aggregate
principal amount of the Conecel Notes and, as a result of "push-down"
accounting, $121.0 million aggregate principal amount of the Conecel
Holdings Notes issued on September 30, 1997.
(7) EBITDA represents earnings (net income (loss)) before interest, taxes,
depreciation and amortization, remeasurement gain (loss) and other income.
The Company has included information concerning EBITDA (which is not a
measure of financial performance under U.S. GAAP), because it understands
that it is used by certain investors as one measure of an issuer's ability
to meet obligations for interest, income tax and amortization of debt
before new capital expenditures for property and equipment. EBITDA should
not be construed as an alternative to net income (as determined in
accordance with U.S. GAAP) as an indicator of operating performance. EBITDA
is calculated using financial statement information included herein. The
Company's EBITDA may not be comparable to computations presented by other
companies since all companies and analysts do not calculate EBITDA in the
same fashion. In addition, EBITDA takes into account the annual license
payments that were made by the Company to the Government of Ecuador
pursuant to the Cellular Concession prior to the prepayment of the annual
license fees in May 1997. As the license has been prepaid, the annual
license cost, recorded at $400,000 in 1994, $1.6 million in 1995, $3.4
million in 1996 and $3.9 million in 1997, will be recorded as cost of
services in the future in order to maintain continuity with historical
data. The Company will amortize the prepayment amount over the remaining
term of the Cellular Concession resulting in annual amortization of
approximately $4.9 million. Excluding the minimum annual license cost, the
Company would have reported an EBITDA of $3.2 million in 1994, $3.5 million
in 1995 and $9.0 million in 1996. In 1997, EBITDA of $23.2 million excludes
the amortization of the Cellular Concession in the amount of $3.2 million,
which is included in cost of services.
(8) Average airtime usage figures include airtime usage related to the
Company's public cellular telephone operations and free minutes.
(9) ARPU for 1997 includes recurring revenues received by the Company resulting
from the sale of telephone equipment (e.g., handsets) under the Comodato
programs. The Company does not believe that ARPU is significantly affected
as a result of this treatment.
(10) Based on publicly-available information compiled by the Central Bank of
Ecuador, the population of Ecuador was approximately 11,173,500,
11,460,000, 11,689,000 and 11,700,000 people at the end of 1994, 1995, 1996
and 1997, respectively.
(11) During 1996, the Company disconnected approximately 8,000 reported
subscribers with non-performing accounts in order to upgrade the credit
quality of its subscriber base. See "Business -- Subscriber
Management -- Management of Churn and Credit Policy."
28
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was awarded its cellular telephone concession in August 1993
(the "Cellular Concession"), and began providing cellular telephone services in
March 1994. However, the Company sold telephone handsets and other equipment
during 1993 and the first quarter of 1994 in anticipation of its commencement of
operations. Therefore, the balance sheet and income statement as of and for the
year ended December 31, 1994 reflect that the Company was in a preoperative
stage during 1993 and the first three months of 1994. Accordingly, the financial
results for 1994 are not directly comparable with the other periods presented in
this discussion.
The following is a discussion of the financial condition and results of
operations of the Company as of and for each of the fiscal years in the
four-year period ended December 31, 1997. The discussion should be read in
conjunction with the financial statements and the related notes thereto of the
Company included elsewhere in this Prospectus. The financial statements have
been prepared in accordance with U.S. GAAP.
Functional Currency. The Ecuadorian sucre is the currency of the Company's
primary economic environment. The Company considers that Ecuador is a highly
inflationary economy as a result of the country's historical inflation rates. As
required by Statement of Financial Accounting Standards No. 52, Foreign Currency
Translation, the Company uses the U.S. dollar as its functional currency. As a
result, the Company remeasures its financial statements from sucres to U.S.
dollars. Non-monetary assets, liabilities, revenues and expenses are remeasured
at the historical exchange rate. Monetary assets, liabilities, revenues and
expenses are remeasured at the exchange rate in effect at the date a transaction
occurs. Gains and losses related to the remeasurement of monetary assets and
liabilities are included in the Company's statement of operations.
Subscribers. The term "reported subscribers" means subscribers as reported
by the Company to the Secretary and is the Company's measure of subscribers.
Consistent with the Company's interpretation of the Secretary's reporting
guidelines and common practice of cellular operators in Ecuador and other Andean
region countries that have adopted a "calling party pays" interconnection
system, the Company currently includes in such term subscribers who have been
temporarily "deactivated," in that their outbound calling privileges have been
suspended, in accordance with the Company's credit policies. Such temporarily
"deactivated" subscribers are under evaluation by the Company for reconnection
or permanent disconnection and continue to generate revenues from inbound calls
for the Company under the "calling party pays" system in Ecuador. See
"-- Calling Party Pays and Interconnection Payments." Based on the Company's
recent experience, the Company expects that a significant portion of
"deactivated" subscribers will continue to pay all past due sums and be
reinstated with their full calling privileges. Calculations of revenue per
subscriber, monthly fees per subscriber and airtime usage per subscriber are
made on the basis of reported subscribers.
Prepayment of License Fees. In August 1993, the Company paid a one-time
fee of $2.0 million to the Superintendency for its Cellular Concession. In
addition to this fee, the terms of the Cellular Concession provided for (i) an
annual license fee ("Annual License Fee"), payable in monthly installments,
which is calculated each year at the greater of a certain minimum guaranteed sum
or a stated percentage of the Company's revenues from cellular operations during
the year and (ii) monthly payments for the use of cellular frequencies
(collectively, "Frequency Fees"). See "Regulatory Framework -- Terms of Cellular
Concession" for a more detailed discussion of the Annual License Fee and
Frequency Fees.
In May 1995, the Government of Ecuador commenced negotiations with the
Company and Otecel, the Company's primary competitor and holder of a cellular
concession with terms identical to the Cellular Concession, for the prepayment
of the full amount of the Annual License Fees thereafter payable by each of the
cellular operators. In October 1996, the Bucaram administration finalized these
negotiations and agreed with the cellular operators on the terms pursuant to
which the Annual License Fees payable by each of them would be prepaid in a
lump-sum of approximately $51.5 million. The prepayment amount was determined by
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<PAGE> 34
discounting the minimum annual guaranteed payments under the terms of the
Cellular Concession at the rate of 21.75% to arrive at a net present value
figure as of September 1996.
In March 1997, the Company made a partial payment to the Secretary in the
aggregate amount of approximately $1.9 million to evidence its good faith
intention to prepay the Annual License Fees thereafter payable. After giving
effect to such partial payment, the remaining balance of the full prepayment
amount, including interest accrued from December 19, 1996, was approximately
$53.6 million. In May 1997, the Company paid the remaining balance of the Annual
License Fees to the Government of Ecuador from a portion of the proceeds of the
issuance of the Conecel Notes. From inception until the May 1997 payment, the
Company had paid to the Government of Ecuador, including the March 1997 payment,
the aggregate amount of approximately $9.3 million pursuant to the terms of the
Cellular Concession which included (i) a one-time fee of $2.0 million, (ii) the
Annual License Fee of approximately $0.4 million paid by the Company for 1994,
(iii) the Annual License Fee of approximately $1.6 million paid by the Company
during 1995 and (iv) the Annual License Fee of approximately of $3.4 million
paid by the Company during 1996. The Annual License Fee and the Frequency Fees
paid and accrued by the Company are reflected in the cost of services in the
Company's financial statements.
Push-Down Accounting. As a result of the acquisition by Conecel Holdings
of 85% of the capital stock of the Company in September 1997, the Company was
required, under an accounting practice prescribed by the Securities and Exchange
Commission generally referred to as "push-down" accounting, to revalue the
Company's assets at the time of acquisition. The Company's financial statements
reflect the push-down accounting of Conecel Holdings' cost of acquiring the
stock of the Company. This accounting treatment requires the push-down of
goodwill and adjustments totaling $89.3 million and long-term debt of $121.0
million aggregate principal amount of the Conecel Holdings Notes. In relation to
the acquisition of the Company's shares from Cempresa, a deemed dividend has
been pushed-down based on the gain associated with the sale of the Parra
Family's investment in the amount of approximately $12.8 million. This amount is
included under "Effect of push-down accounting" on the Company's balance sheet.
In addition, the push-down treatment also resulted in the recapitalization of
stockholders' equity. These changes will affect the future comparability of
operating data principally with respect to the amortization of the intangible
assets and the interest expense associated with the push-down accounting.
Calling Party Pays and Interconnection Payments. In October 1996, the
Government of Ecuador mandated a "calling party pays" system, where the
originator of the call pays for the entire cost of the call, effective February
1, 1997. Under the "calling party pays" system, all incoming calls to the
Company's cellular subscribers are charged to the originating party by its
respective wireline or wireless network operator which, in turn, pays to the
Company any applicable interconnection charges (as of December 31, 1997, $.27
per minute after deduction of the interconnection charge and any applicable
collection fees) for calls routed through the Company's network to its cellular
subscribers. The collection responsibility for all such calls remains with the
applicable wireline or wireless operator and interconnection fees are due and
payable to the Company without regard to whether the wireline or wireless
operator successfully collects the fees due from the originating caller. The
Company and each of the wireline and wireless operators exchange on a monthly
basis statements detailing the interconnection fees payable to and from each of
them, and a reconciliation of fees is conducted within 90 days after each
statement date. A payment of 90% of the fees owed by the applicable party is due
within 15 days after the reconciliation date and the remaining 10% is due within
180 days after the 90% payment, in each case without interest. This payment
structure has resulted in the creation of a significant trade receivable ($20.6
million as of December 31, 1997) on the Company's financial statements and,
prior to the commencement of the Ecuadorian Wireline System's payment cycle,
impacted the Company's short-term cash flow. See "Risk Factors -- Factors
Relating to the Company -- Terms of Interconnection Agreements."
Although the "calling party pays" system went into effect in Ecuador as of
February 1, 1997, Emetel, the previous wireline operator in Ecuador and
predecessor of the two regional entities comprising the Ecuadorian Wireline
System, encountered difficulties in administering and implementing the new
tariff policy for the period from February 1, 1997 through May 26, 1997. The
"calling party pays" system requires that the wireline operators charge wireline
subscribers for calls to cellular subscribers originated by them. Cellular
operators, in turn, charge the wireline operators any applicable fees for calls
placed to cellular subscribers, net of any
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<PAGE> 35
applicable interconnection charges required to be paid by the cellular operators
to the wireline operators. As a result primarily of the abrupt change in the
presidency that occurred in Ecuador in early February 1997, and the political
uncertainties that resulted therefrom, Emetel delayed the implementation of the
"calling party pays" system. Consequently, Emetel failed to remit to the Company
amounts owed it under the "calling party pays" system from February 1, 1997 to
May 26, 1997, owing the Company approximately $12.4 million for such period. In
November 1997, pursuant to a settlement agreement between the parties, Emetel
agreed to pay the Company, in full satisfaction of the amounts owed,
approximately $6.5 million, consisting of an immediate payment of $1.6 million
in cash and a promissory note in the principal amount of approximately $4.9
million providing for monthly principal installments of approximately $223,000,
which includes annual interest at 10%, for 24 consecutive months, commencing
December 15, 1997. In addition, the Company offset approximately $2.4 million
attributable to interconnection fees that were payable by the Company to Emetel.
Accordingly, the Company recorded settlement expenses of approximately $3.6
million in connection with this agreement.
On November 19, 1997, two regional operating entities, Andinatel, S.A. in
the mountain region (including Quito) and Pacifictel, S.A. in the coastal region
(including Guayaquil), were formed in anticipation of the pending privatization
of Emetel, the state-owned wireline service provider. Emetel continues to exist
as a legal entity for the sole purpose of winding up its affairs. All of the
assets of Emetel were divided and transferred to the two regional entities. In
addition, all of the liabilities of Emetel, except liabilities under the
November settlement agreement with the Company for periods prior to November 19,
1997 and interconnection fees payable to the Company under the "calling party
pays" system for such periods, were divided and transferred to the regional
entities. As a result, Emetel made payments to the Company for Andinatel, S.A.
and Pacifictel, S.A. which were due for September and October 1997. The Company
anticipates that each of the regional entities will be liable for the
interconnection fees for the period beginning November 19 through the end of the
month and for all monthly interconnection fees and settlement payments
attributable to them thereafter.
As of March 10, 1998, each of the regional entities is current with respect
to its payments to the Company. However, the payments by Emetel on behalf of
Pacifictel, S.A. that were due for September and October 1997 were not made in a
timely manner and were past due when made. The Company was advised that the
delay in payment was attributable to administrative difficulties encountered by
Pacifictel, S.A. as a result of its recent formation and adoption of inadequate
billing systems from Emetel. Under the interconnection agreement with Emetel,
payments for "calling party pays" are due approximately 105 days after the
relevant monthly billing period and therefore payments for November 1997 will
not be due until March 1998. Neither of the regional entities has made or is
currently obligated to make any payments to the Company. As a result of the
"calling party pays" interconnection system, the Ecuadorian Wireline System has
become, and is expected to remain, the Company's largest debtor and source of
revenues, accounting for approximately 50% of the Company's revenues for the
year ended December 31, 1997. See "Risk Factors -- Risks Related to Payments
from the Ecuadorian Wireline System."
Prior to February 1997, the Company would generate revenues from its
cellular subscribers who were billed for both incoming and outgoing calls. By
implementing a "calling party pays" system into certain of its products prior to
February 1997, for the period between November 1996 through January 1997, the
Company did not receive either revenues directly from its subscribers or
interconnection fees from the wireline or wireless operators. Therefore, the
Company, in effect, subsidized the early implementation of the "calling party
pays" system during this three-month period. The Company believes the
significant growth in its total cellular subscribers since November 1996 is
attributable in large part to the implementation of "calling party pays" as a
result of which subscribers no longer pay for incoming calls. This has enabled
the Company to raise fees and airtime charges on some plans and introduce new
product lines that have resulted in a significant increase in airtime usage. See
"Business -- Cellular Operations -- Digitalization and Calling Party Pays."
Increase in Prepay Subscriber Base. In April 1996, the Company introduced
its Porta Control prepay program in response to economic and market conditions
in Ecuador. Porta Control has been extremely popular, and prepay customers have
increased from an insignificant percentage of the Company's subscriber base in
April 1996 to 40.54% of its subscriber base as of December 31, 1997. The Company
expects that the
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<PAGE> 36
percentage of its customers who subscribe to cellular service on a prepay basis
may continue to increase. See "Business -- Cellular Products and Services."
The Company believes that prepay programs represented an effective means of
attracting and retaining subscribers during a difficult economic and competitive
environment in 1996 and 1997. However, the Company also believes that prepay
plans are attractive to a wider range of cellular consumers than just those
experiencing financial difficulties. In addition to helping customers control
costs, Porta Control has no monthly bill and allows customers to prepay for
cellular services in cash. The Company is marketing these features to new
classes of potential customers and, as a result, expects prepay plans to
continue to help the Company increase cellular market penetration, grow its
customer base and generate positive cash flow. Prepay programs are particularly
attractive under a "calling party pays" system such as Ecuador's, where the
cellular subscriber does not pay for the cost of inbound calls, because a large
portion of the Company's subscribers under such programs consist of cost
conscious customers that may not have subscribed for cellular service under a
different system. Compared to the average contract plan, prepay plans involve
higher per minute airtime charges, a lower cost to acquire new subscribers
(principally because the Company does not finance the hand-set and sales
commissions are lower than contract plans), and no billing expenses or credit or
collection risk. Prepay customers are also potential customers for the Company's
other services and products, and the Company intends to focus marketing efforts
on "migrating" qualified prepay customers to higher revenue contract plans. In
addition, the Company is considering new methods to increase minutes of use by
its prepay customers, particularly outbound traffic, by expanding the
distribution network of prepaid self-activating cards.
Prepay customers, on average, have substantially lower minutes of usage
than contract customers (148 as compared to 372 for contract customers) and do
not pay monthly fees. Consequently, they generate substantially lower average
monthly revenues per customer. Prepay cards expire after 45 days regardless of
any balance, and the customer loses his or her assigned telephone number after
90 days if no additional amounts are credited to his or her account. Since most
customers have distributed their assigned phone number widely and do not pay for
inbound calls, the Company believes that these non-contractual subscribers have
a significant incentive to remain with the Company. This is reflected in the
monthly average 1997 churn for prepay customers which was 2.28%, slightly higher
than the overall monthly average churn rate of 2.13% for all of the Company's
subscribers during 1997.
CAPITAL EXPENDITURE REQUIREMENTS
Cellular operators typically experience losses and negative cash flow in
their initial years of operation due to the large capital investments required
for construction of their networks and the significant advertising and other
expenses needed to start the business. Until technological limitations on total
capacity are reached, additional cellular capacity can normally be added in
increments that closely match demand and at less than the proportionate cost of
the initial capital investments. Once revenues exceed fixed costs, incremental
revenues are expected to yield a high incremental operating profit, giving
cellular operators an incentive to stimulate and satisfy demand for service in
the market. Digital technology, which offers increased capacity, provides cost
savings on capital expenditures and reduces fixed costs on a per subscriber
basis. The Company has experienced positive cash flow from operations during
1995, 1996 and 1997.
The Company does not expect the cost of converting its computer systems to
"Year 2000" compliant software to be material to its financial condition or
results of operations, nor does it anticipate any material disruption in its
operations with respect thereto.
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<PAGE> 37
RESULTS OF OPERATIONS
The following table sets forth the results of operations of the Company for
each of the fiscal years in the four-year period ended December 31, 1997, and
expresses each amount as a percentage of total operating revenues and a
percentage of change from the prior year:
RESULTS OF OPERATIONS FOR EACH OF THE THREE YEARS ENDED DECEMBER 31, 1997
INCLUDING PERCENTAGES
OF TOTAL OPERATING REVENUES AND PERCENTAGE CHANGE FROM PRIOR YEAR
(Dollars in millions)
<TABLE>
<CAPTION>
PERCENTAGE
YEAR ENDED DECEMBER 31, CHANGE
% OF % OF % OF -----------------
TOTAL TOTAL TOTAL 1996 VS 1997 VS
1995 REVENUE 1996 REVENUE 1997 REVENUE 1995 1996
---- ------- ---- ------- ---- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service revenues:
Recurring charges............... 24.7 82.6% 27.2 91.3% 65.5 87.2% 10% 141%
Activation revenue.............. 2.1 7.0 1.1 3.7 1.0 1.3 -48 -9
Sales of equipment.............. 3.1 10.4 1.5 5.0 8.6 11.5 -52 473
---- ---- ----
Total.................... 29.9 100.0% 29.8 100.0% 75.1 100.0% * 152%
---- ---- ----
Costs of revenue:
Cost of services................ 6.2 20.7% 8.0 26.8% 12.3 16.4% 29% 54%
Cost of equipment sold.......... 4.2 14.0 2.3 7.7 14.8 19.7 45 543
---- ---- ----
Total.................... 10.4 34.8% 10.3 34.6% 27.1 36.1% -1% 163%
---- ---- ----
Gross profit...................... 19.5 65.2 19.5 65.4 48.0 63.9 * 146
---- ---- ----
Operating expenses:
Selling expenses................ 3.6 12.0% 2.2 7.4% 7.9 10.5% 39% 259%
Marketing expenses.............. 6.3 21.1 4.4 14.8 3.9 5.2 30 -11
General and admin............... 5.8 19.4 7.4 24.8 12.2 16.2 28 65
Depreciation and amortization... 2.5 8.4 4.2 14.1 6.2 8.2 68 48
Settlement related to calling
party pays.................... -- -- -- -- 3.6 4.8 * *
Provision for bad debts......... 1.9 6.4 -- -- 0.3 0.4 * *
---- ---- ----
Total.................... 20.1 67.2% 18.2 61.1% 34.1 45.5% -9% 87%
---- ---- ----
Operating income (loss)........... (0.6) -2.0 1.3 4.4 13.9 18.5 317 969
---- ---- ----
Other income:
Interest income................. 0.4 1.3% 0.6 2.0% 2.9 3.9% 50% 383%
Other income.................... 0.3 1.0 1.6 5.4 0.9 1.2 433 -44
---- ---- ----
Total.................... 0.7 2.3% 2.2 7.4% 3.8 5.1% 214% 73%
---- ---- ----
Other expenses:
Interest expense................ 5.0 16.7% 3.0 10.1% 21.0 28.0% -40% 600%
Remeasurement loss (gain)....... (0.9) 3.0 2.0 6.7 6.3 8.4 322 215
---- ---- ----
Total.................... 4.1 -13.7% 5.0 16.8% 27.3 36.4% 22% 446%
---- ---- ----
Net income (loss)................. (4.0) -13.4% (1.5) -5.0% (9.6) -12.8% -63% 540%
==== ==== ====
</TABLE>
- ---------------
*Percentage change not meaningful.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Revenues. The Company's total revenues were $75.0 million for the year
ended December 31, 1997 as compared to $29.8 million for the year ended December
31, 1996. The increase in revenues was primarily due to an increase in the total
minutes of usage of reported subscribers on the Company's Network, as a result
of an increase in the average number of reported subscribers and an increase in
average usage per subscriber which was partially offset by a decline in average
tariffs.
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<PAGE> 38
The Company had 104,061 reported subscribers as of December 31, 1997, as
compared to 34,970 reported subscribers as of December 31, 1996, an increase of
197.5% from 1996. The Company had an average number of reported subscribers of
65,251 during the year ended December 31, 1997 compared to 28,382 average
reported subscribers during the year ended December 31, 1996, an increase of
129.9%. The increase in subscribers was due primarily to an aggressive marketing
campaign promoting the Company as the only cellular provider offering digital
services. Digital service is attractive to cellular subscribers because it
offers a number of advantages over analog service including caller and message
identification, enhanced privacy, extended battery life, messaging and digital
voice mail. The Company also believes that the introduction of "calling party
pays" contributed to the increase in its subscribers because the originator of
the call pays for the total cost of the call rather than having the cellular
subscriber pay for both incoming and outgoing calls.
The Company reported 295 average monthly minutes of usage per reported
subscriber for the year ended December 31, 1997, as compared to 190 average
monthly minutes of usage per subscriber for the year ended December 31, 1996, an
increase of 55.3%. This increase in average monthly minutes of usage per
reported subscriber was primarily due to an increase in network utilization
resulting from the introduction of "calling party pays." See "Business-Cellular
Operations -- Digitalization and Calling Party Pays."
The decline in average tariffs during the year ended December 31, 1997 was
due primarily to changes resulting from the introduction and implementation of
the "calling party pays" system. During the year ended December 31, 1996 (prior
to the introduction of the "calling party pays" system), the Company's average
revenues per minute were $0.29, and approximately 60% of the total minutes were
represented by outbound calls and 40% by inbound calls. During the year ended
December 31, 1997 (following the introduction of the "calling party pays"
system), the Company's average revenues per minute, net of interconnection fees,
were $0.27, and approximately 40% of the total minutes were represented by
outbound calls, and 60% by inbound calls which resulted in the average price per
minute being approximately $0.02 less during the year ended December 31, 1997.
This decline in average tariffs also resulted from the Company's decision to
temporarily lower its tariffs in June, July and August 1997 to $0.18, $0.24 and
$0.27, respectively, in order to facilitate the introduction of the "calling
party pays" system by Emetel. This decrease was partially offset by an average
increase in the tariffs for outbound calls. The decline in average tariffs was
also affected by the Company's decision to offer plans that were priced to
include a fixed number of minutes per month to new subscribers during January
through June 1997. The Company estimates that the total number of minutes
included in such plans approximated 15% of total billable minutes during the
period. The Company changed its policy in July 1997, and is including less
minutes on new service plans. As a result of this change, in December 1997, the
average tariff increased to $0.29.
Service Revenues. Recurring charges, which include monthly fees, airtime
charges (which includes revenues derived from the "calling party pays" system),
international and national long distance, public cellular telephone and
value-added services, increased from $27.2 million for the year ended December
31, 1996 to $65.5 million for the year ended December 31, 1997, an increase of
140.8%. The increase was primarily due to an increase in the total minutes of
usage of reported subscribers on the Network, resulting from an increase in the
average number of reported subscribers and an increase in average usage per
reported subscriber, and partially offset by a decline in average tariffs.
Monthly fees and airtime charges constitute more than 84% of revenues from
recurring charges.
Of total revenues for the year ended December 31, 1997, revenues from
activations of $1.0 million represented 1.3% of revenues in such period compared
to $1.1 million for the year ended December 31, 1996, representing 3.6% of
revenues in such period. The decrease in revenues from activations was
principally due to competitive pressures requiring the Company to offer
promotional packages waiving the activation fee.
Revenues from sales of equipment, consisting primarily of handsets and
accessories, were approximately $8.6 million or 11.4% of revenues for the year
ended December 31, 1997 as compared to $1.5 million or 5.1% of revenues for the
year ended December 31, 1996, an increase of 473.3%. This increase in sales of
equipment was attributable primarily to a shift in the Company's 1996 strategy
of maintaining low inventory costs by having handsets sold primarily through
independent distributors to a strategy of purchasing and selling digital
cellular telephones directly to customers. This new strategy was effected in
order to secure a ready supply of
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<PAGE> 39
digital handsets in an international environment of strong demand. To a lesser
degree, this increase was also due to the Company's shift to sales of digital
handsets that have a higher per unit price than analog handsets. As a result of
competitive pressures, in July 1997, the Company introduced new service plans
designed to attract new subscribers by reducing the initial costs of obtaining
digital handsets while committing such subscribers to a 24-month contract with
the Company. The Company expects that these contracts will generate, over a
12-month period, sufficient revenue to cover the initial cost, through higher
monthly fees, of digital handsets.
Cost of Revenues. Cost of revenues, which includes cost of services and
cost of equipment sold, was $27.0 million, or 36.0% of sales, for the year ended
December 31, 1997 as compared to $10.3 million, or 34.6% of sales, for the year
ended December 31, 1996, an increase of 162.1%.
Cost of services was $12.3 million, or 18.7% of recurring charges for the
year ended December 31, 1997 as compared to $8.0 million, or 29.3% of recurring
charges, for the year ended December 31, 1996, a decrease of 36.1% as a
percentage of recurring charges. The decrease in cost of services as a
percentage of recurring charges was primarily due to the reduction in Frequency
Fees payable to the Government of Ecuador as a result of a determination by the
applicable regulatory body that such fee should be based on the number of cell
sites rather than on the number of subscribers. This decrease was also due to
the amortization of the minimum annual guaranteed payment being less than the
specified minimum annual payment that would have been payable for such period.
In addition, the Company's investment in its Network infrastructure resulted in
reduced interconnection fees payable to Emetel.
Cost of equipment sold was $14.8 million, or 19.6% of revenues, for the
year ended December 31, 1997 as compared to $2.3 million, or 7.8% of revenues,
for the year ended December 31, 1996. This increase in cost of equipment sold
primarily reflects the Company's current strategy of purchasing and selling
digital cellular phones directly to customers, and to a lesser degree, to an
increase in the unit price of digital handsets as compared with analog handsets.
This increase also reflects the Company's strategy of attracting new subscribers
by reducing the initial costs of obtaining digital handsets while committing new
subscribers to a 24-month contract with the Company. The Company expects that
these contracts will generate, over a 12-month period, sufficient revenue to
cover the initial cost, through higher monthly fees, of digital handsets. This
strategy has resulted in lower revenues from the sales of telephone equipment
and a corresponding increase in monthly recurring charges for the year ended
December 31, 1997.
Operating Expenses. Operating expenses consist of selling expenses,
marketing expenses, and general and administrative expenses. Total operating
expenses were approximately $34.2 million for the year ended December 31, 1997
compared to $18.1 million for the year ended December 31, 1996, an increase of
89.0%. Total operating expenses increased primarily as a result of the
substantial increase in selling expenses and as a result of the settlement
related to the "calling party pays" system. Total operating expenses per average
subscriber decreased approximately 17.9% from $638 during the year ended
December 31, 1996 to $524 during the year ended December 31, 1997, due to
economies of scale.
Selling expenses, which includes sales commissions to the Company's sales
force and independent distributors and credit card charges, were $7.9 million
for the year ended December 31, 1997 as compared to $2.2 million for the year
ended December 31, 1996, an increase of 259.1%. The increase in selling expenses
is due to the significant increase in subscribers and an increase in the amount
of the average commission paid for greater sales volume to its sales force and
distributors. As a result of the significant increase in new activations in
1997, selling expenses in relation to new activations decreased to $97 per new
activation in 1997 from $130 per new activation in 1996, a decrease of 25.3%.
Marketing expenses were $3.9 million for the year ended December 31, 1997
as compared to $4.4 million for the year ended December 31, 1996, a decrease of
11.3%, as a result primarily of the Company refocusing its marketing efforts to
more limited and specific consumer groups.
General and administrative expenses were $12.2 million for the year ended
December 31, 1997 as compared to $7.4 million for the year ended December 31,
1996, an increase of 64.8%. The increase was
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<PAGE> 40
primarily due to a number of increases in individual items, including legal and
professional fees including auditors fees, training costs, travelling expenses,
and security services.
Depreciation and amortization was $6.3 million for the year ended December
31, 1997 as compared to $4.2 million for the year ended December 31, 1996, an
increase of 53.7%. This increase reflects the increased amortization resulting
from the significant capital expenditures incurred in building-out the Network
and amortization of goodwill associated with "push-down" accounting ($0.6
million).
Provision for bad debts was $0.3 million for the year ended December 31,
1997 as compared to none for the year ended December 31, 1996.
Operating Income. Operating income was approximately $13.8 million for the
year ended December 31, 1997 as compared to $1.4 million for the year ended
December 31, 1996. This improvement was largely due to increased sales and the
containment of operating expenses which did not increase in proportion to sales.
Other Income, including Interest Income. Other income was approximately
$3.8 million for the year ended December 31, 1997 as compared to $2.2 million
for the year ended December 31, 1996. The increase was primarily due to an
increase in interest income to $2.9 million from $0.6 million due to the receipt
and investment of the proceeds from the sale of the $125.0 million aggregate
principal amount of Conecel Notes in May 1997.
Other Expenses, including Interest Expense. Other expenses, including
interest expense were approximately $27.3 million for the year ended December
31, 1997 as compared to $5.1 million for the year ended December 31, 1996. The
increase was primarily due to increased interest expense attributable to the
$125.0 million aggregate principal amount of the Conecel Notes issued in May
1997 ($11.7 million) and the $121.0 million aggregate principal amount of the
Conecel Holdings Notes issued in September 1997 ($4.2 million).
Net Income (Loss). As a result of the foregoing, the Company had a net
loss for the year ended December 31, 1997 of $9.7 million as compared to a net
loss of $1.5 million for the year ended December 31, 1996.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Revenues. The Company's total revenues were $29.8 million in 1996 as
compared to $29.8 million in 1995. The Company's revenues in 1996 were
negatively affected by certain factors including: (i) the Company engaged in
significant price competition with Otecel during 1996 by offering free minutes
of airtime usage, waiving activation fees and providing cellular phones at below
market prices as part of certain promotional and marketing campaigns, (ii) the
Company disconnected approximately 8,000 non-performing subscribers during 1996
in order to upgrade the credit quality of its customer base and (iii) the
Company introduced certain products that incorporated the "calling party pays"
system in November 1996 which eliminated certain of the Company's revenues
previously generated by incoming calls to its cellular subscribers which
resulted in the Company effectively subsidizing the early introduction of
certain "calling party pays" products through February 1, 1997, the effective
date of Ecuador's new "calling party pays" legislation.
The Company had 34,970 reported subscribers as of December 31, 1996, as
compared to 28,558 reported subscribers as of December 31, 1995, an increase of
22.5% from 1995 (notwithstanding the disconnection of approximately 8,000
subscribers). During 1995, the Company's prior management launched aggressive
marketing and promotional campaigns to increase its subscriber base and did not
strictly enforce its policies for managing customer credit checks, late payments
and collections. As a result, the Company experienced growth in total
subscribers during 1995, but a lower average credit quality among its subscriber
base. The Company records recurring revenues on its financial statements as of
the billing date for the applicable charges. As a result, the Company's revenues
during 1995 included revenues attributable to a significant number of non-
performing subscribers that were subsequently disconnected during 1996.
Accordingly, during 1995, a provision for bad debts of $1.9 million was recorded
by the Company for these non-performing subscribers. During 1996, the Company's
new management implemented new credit policies and procedures that are designed
to reduce the amount of revenues attributable to non-performing subscribers that
are included in recurring revenues. Such new credit policies and procedures
include a greater emphasis on credit checks and
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prepaid plans, as well as billing procedures which stop the generation of
additional billings immediately upon the "deactivation" of a subscriber for
nonpayment. Subscribers are "deactivated" 10 days after a billing date in the
event of non-payment. See "Business -- Subscriber Management -- Management of
Churn and Credit Policy."
Service Revenues. Of total revenues for 1996, revenues from activations of
$1.1 million represented 3.6% of revenue in 1996 as compared to $2.1 million
representing 7.0% of revenue in 1995. During the same period recurring charges
of $27.2 million represented 91.3% of total revenue in 1996 as compared to $24.7
million, or 82.9% of total revenue, in 1995. The decrease in activation revenue
during 1996 was due primarily to the elimination of activation fees during
certain periods in 1996 as a result of competition between the Company and
Otecel and certain marketing and promotional campaigns that the Company
implemented throughout the year. The increase in recurring revenues was
primarily due to an increase in the number of subscribers and in the average
minutes per subscriber in 1996 from 165 in 1995 to 190 in 1996, a 15% increase.
The increase in recurring revenues was partially offset by the significant price
competition between the Company and Otecel which took the form of providing
subscribers with free minutes of airtime usage.
Sales of equipment, consisting primarily of handsets and accessories, were
approximately $1.5 million, or 5.1% of total revenues, during 1996 as compared
to $3.1 million, or 10.4% of total revenues during 1995, a decrease of 51.6%
from 1995. This reduction in sales of equipment was attributable primarily to
the subsidizing by the Company of telephone handset and equipment sales as part
of several marketing campaigns aimed at increasing its subscriber base and
generating additional revenues by promoting increased subscriber usage and, to a
lesser degree, by an overall decline in prices for cellular equipment. In
addition, during 1996, the Company sold only 40% of the telephone handsets to
its new subscribers as compared to 70% during 1995. This decrease in the
Company's sale of telephone handsets resulted primarily from the expansion by
the Company of its distribution network which includes independent distributors
that are authorized to sell handsets directly to subscribers. The management of
the Company is currently seeking to lower inventory costs and minimize inventory
risks by selling more handsets through independent distributors, which is likely
to further decrease the Company's revenues from sales of such equipment.
Cost of Revenues. Cost of revenues, which includes cost of services and
cost of equipment sold, were approximately $10.3 million for the year ended
December 31, 1996 as compared to approximately $10.3 million for the year ended
December 31, 1995. Cost of services was $8.0 million during 1996, as compared to
$6.2 million during 1995, an increase of 29.0% from 1995 and consisted primarily
of costs associated with an increase in the Annual License Fee payable to the
government of Ecuador. During 1996, the Company paid the Annual License Fee in
the amount of approximately $3.4 million as compared to approximately $1.6
million in 1995. After the prepayment of the Annual License Fee by the Company
from the proceeds of the sale of the Conecel Notes, the Company was no longer
required to make the annual cash payments to the Government of Ecuador and the
full amount of the prepayment (currently $49.7 million) is being amortized as a
pre-paid expense over the remainder of the term of the Cellular Concession.
Cost of equipment sold was $2.3 million for the year ended December 31,
1996 as compared to $4.2 million for the year ended December 31, 1995, a
decrease of approximately 45.2% from 1995, reflecting primarily the Company's
increased emphasis on selling equipment through its independent distributors
and, to a lesser degree, the overall decline in prices for cellular equipment
that occurred during 1996.
Certain of the Frequency Fees payable by the Company pursuant to the
Cellular Concession are calculated in part with reference to the number of
"stations" operated by the Company. The proper interpretation of the term
"station" in the Cellular Concession was previously disputed between the Company
and the Government of Ecuador. The Government of Ecuador interpreted "station"
as referring to each cellular subscriber while the Company interprets "station"
as meaning each cell site. In October 1996, new regulations were issued in
Ecuador that clarified that the term "station" referred to actual cell stations
as argued by the Company, and not total subscribers. Based on the new
regulations, the Frequency Fees that would otherwise have been payable by the
Company throughout the remainder of the term of the Cellular Concession will be
significantly reduced. See "Regulatory Framework -- Terms of Cellular
Concession." With respect to Frequency Fees paid in the past, the Company has
commenced an administrative proceeding to
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recover payments made to the Government of Ecuador based on its interpretation.
There can be no assurance that the Company will be successful in its efforts. In
addition, the Company took into income certain reserves made by the Company to
pay the Frequency Fees at the higher rate required by the government's
interpretation. See "-- Other Income."
Operating Expenses. Total operating expenses were approximately $18.1
million for the year ended December 31, 1996 as compared to approximately $20.1
million for the year ended December 31, 1995, a decrease of approximately 10.0%
from 1995. Operating expenses consists of selling expenses, marketing expenses
and general and administrative expense. During 1996, there was a decrease in the
total operating expenses per average subscriber of approximately 26.0%, from
$862 during 1995 to approximately $638 during 1996. This reduction is primarily
attributable to a decrease in selling and marketing expenses and provisions for
bad debts, which were partially offset by increases in general and
administrative expenses and depreciation and amortization.
Selling expenses, which includes sales commissions, were $2.2 million, or
7.7% of total costs and operating expenses in 1996 as compared to $3.6 million,
or 11.8% of total costs and operating expenses, a decrease of approximately 39%
from 1995. This reduction was caused primarily by the restructuring of the
Company's distribution network and an overall reduction in commissions paid to
its sales force. The Company reduced its internal sales force, which currently
targets primarily corporate accounts, government accounts and other high volume
customers, and expanded its external distribution network. Concurrently, the
Company reduced commissions paid to its sales force, including its independent
distributors, from a standard range of $30 to $100 per activated line during
1995 to $5 to $30 per activated line during 1996, depending upon the service
plan selected by the subscriber.
Marketing expenses during the period ended December 31, 1996 were $4.4
million, or 15.5% of total costs and operating expenses, as compared to $6.3
million, or 20.7% of total costs and operating expenses, in 1995, a decrease of
30.2% from 1995. This decrease reflected a marketing expense per new subscriber
of $267 during the period ending December 31, 1996, as compared to $390 in 1995,
a reduction of 31.5%. The reduction in marketing costs was due primarily to the
new management's decision to reduce the Company's advertising budget and the
expansion and emphasis by the Company on its distribution network as a primary
means of reaching the market. See "Business -- Sales and Marketing."
General and administrative expenses were $7.4 million, or 26% of total
costs and operating expenses during 1996, as compared to $5.8 million, or 19.0%
of total costs and operating expenses during 1995, an increase of 27.6% from
1995. The $1.6 million increase reflected primarily the increase in personnel
costs associated with the management of an expanded cellular network, the
Company's emphasis on customer service, and, during the third and fourth
quarters of 1996, the introduction of the "calling party pays" system.
Operational personnel increased from 190 full-time employees as of December 31,
1995, to 292 full-time employees as of December 31, 1996.
Depreciation and amortization were $4.2 million in 1996 as compared to $2.5
million in 1995, an increase of 68.0% from 1995. This increase reflects the
Company's addition of 13 new depreciable radio base cell sites to its cellular
infrastructure during 1996.
There was no provision for bad debts as of the year ended December 31, 1996
as compared to $1.95 million as of the year ended December 31, 1995. This
reduction was due primarily to the Company's restructuring of its credit
policies and its launch of prepaid products which effectively minimized
subscriber credit risk and the Company's determination that the provisions made
during 1995 were adequate to cover any potential bad debts in 1996.
Operating Income (Loss). Operating income was approximately $1.4 million
for the year ended December 31, 1996 as compared to an operating loss of
approximately $680,000 for the year ended December 31, 1995. This improvement
resulted primarily from the decrease in selling and marketing expenses that
occurred during 1996.
Other Income. Other income was approximately $2.2 million for the year
ended December 31, 1996 as compared to approximately $692,000 for the year ended
December 31, 1995, an increase of approximately
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217.9% from 1995. This increase was due to an increase in interest income and
other income during the period. Interest income was approximately $556,000 for
the year ended December 31, 1996, as compared to approximately $426,000 for the
year ended December 31, 1995, an increase of 30.5% from 1995. This increase was
attributable primarily to an increase in excess cash balances during 1996 which
was partially offset by a decline in interest rates. Other income was $1.6
million, or 5.3% of revenues during 1996, as compared to $266,000, or 0.9% of
revenues, during 1995, an increase of 501.5% from 1995. This increase was
primarily due to (i) deactivation penalties and reactivation fees attributable
to the non-performing subscribers that were disconnected during the year that
were collected by the Company during 1996, (ii) interest on past-due accounts
and past-due collections, (iii) payments received by the Company in connection
with its *911 Emergency Service and (iv) the reversal of provisions for
Frequency Fees in the amount of approximately $389,000.
Other Expenses. Other expenses were approximately $5.1 million for the
fiscal year ended December 31, 1996 as compared to approximately $4.1 million
for the fiscal year ended December 31, 1995, an increase of 24.4% from 1995. For
the year ended December 31, 1996, the Company showed a remeasurement loss of
$2.0 million as compared to a remeasurement gain of $899,000 in 1995 which
resulted from the continuing devaluation of the sucre relative to the U.S.
dollar during 1996. Remeasurement gains (losses) occur as a result of the impact
of the exchange rate on assets and liabilities, income statement accounts and
stockholders' equity, reflecting adjustments to balance sheet accounts. In 1995,
a net remeasurement gain occurred primarily as a result of the funding of the
CAF Loan (as defined below) which was denominated in U.S. dollars. Interest
expense was $3.0 million in 1996 as compared to $5.0 million in 1995, a decrease
of 40.0% from 1995, that is attributable primarily to the Company's successful
refinancing of a substantial portion of its high interest bank indebtedness and
other short-term liabilities with the proceeds obtained from the CAF Loan which
provides for a two-year grace period before payments of principal and interest
become due and payable and, to a lesser degree, by a decline in interest rates.
Net Income (Loss). As a result of the foregoing, the Company had a net
loss of $1.5 million in 1996 as compared to a net loss of $4.1 million in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The Company actively manages its liquidity position to ensure
that it has sufficient funds to meet the Company's needs. Historically, the
Company has met its liquidity requirements through cash flow from operations,
long and short-term borrowings (including vendor financing) and private equity
financings (including capital contributions by its shareholders). Net cash
(used) provided by operating activities was $(10.3) million, $3.9 million and
$5.2 million for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company's financing activities in 1997 also provided a significant
source of liquidity. Net cash provided by (used in) financing activities was
$119.7 million, $(10.4) million and $26.3 million for the years ended December
31, 1997, 1996 and 1995, respectively.
During 1997, the Company's financing activities consisted substantially of
the issuance of $125.0 million aggregate principal amount of the Conecel Notes.
The Conecel Notes were issued on May 2, 1997, pursuant to an Indenture between
the Company and The Bank of New York, as trustee (the "Trustee"). The Conecel
Notes mature in May 2002 and will be payable at par. The Conecel Notes bear
interest from May 2, 1997 at the rate of 14% per annum, payable semiannually in
arrears on May 2 and November 2 of each year commencing November 2, 1997, to the
holders of record at the close of business on April 15 or October 15 (whether or
not a business day), as the case may be, preceding such interest payment date,
except for the final payment of principal and interest which is made against
presentation of the related Conecel Notes. Commencing October 30, 1997, the
interest rate on the Conecel Notes increased 0.5% per annum under the terms of a
registration rights agreement relating to such notes as a result of the
Company's delay in consummating an exchange offer in respect of the Conecel
Notes pursuant to a registration statement filed with the Commission (an
"Exchange Offer"). The Conecel Notes accrued interest from October 30, 1997 at
the increased rate of
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14.50% until the Exchange Offer was consummated on January 6, 1998, at which
time the interest rate was reduced to 14%. See "The Conecel Indebtedness."
The Company used the net proceeds of approximately $118.9 million from the
sale of the Conecel Notes to prepay the annual license fees payable to the
Government of Ecuador (approximately $53.7 million), for capital expenditures in
1997 (approximately $42.2 million) related to the expansion and development of
the Company's Network, to repay indebtedness of the Company (approximately $22.0
million) and for working capital (approximately $4.5 million). The sale of the
Conecel Notes improved the liquidity of the Company as a significant amount of
the net proceeds from such sale were used to prepay the full amount of the
license fees, otherwise payable on a monthly basis, pursuant to the Company's
Cellular Concession.
The Company expects that it will continue to meet its cash requirements in
1998 and thereafter, including its debt service requirements and other working
capital requirements, with a portion of the net proceeds of the Offering, as
well as cash flow from its operations and permitted vendor financing. The
Company's ability to incur additional debt is restricted by the terms of the
Conecel Indenture. See "The Conecel Indebtedness." The ability of the Company to
meet its debt service obligations will depend on the future operating
performance and financial results of the Company. If the Company is unable to
generate sufficient cash flow from operations in the future to service its debt,
it might not be able to obtain additional alternate financing on satisfactory
terms, in which event it may not be able to meet its debt service obligations,
including its obligations under the Conecel Notes and the Conecel Holdings
Notes. See "Risk Factors -- Factors Relating to the Company -- High Leverage and
Ability to Service Debt."
Under "push-down" accounting, the Company's financial statements also
reflect $121.0 million aggregate principal amount of the Conecel Holdings Notes.
The Conecel Holdings Notes bear interest at a rate of 14% per annum, payable
semiannually in arrears on September 30 and March 31 of each year, commencing on
March 31, 1998. The proceeds from the sale of the Conecel Holdings Notes were
used to finance Conecel Holdings' acquisition of 85% of the capital stock of the
Company from former shareholders of the Company. See "Certain Relationships and
Related Transactions -- Conecel Holdings Transactions." The Company will use a
substantial portion of the net proceeds of the Offering, together with a portion
of the prefunded payments of principal and interest, to redeem a significant
portion (but not less than $80 million) of the Conecel Holdings Notes at a
redemption price equal to 107% of the outstanding principal amount thereof, plus
unpaid accrued interest to the redemption date. See "Use of Proceeds."
As of December 31, 1997 and after giving effect to "push-down" accounting,
the Company had approximately $66.5 million of current assets and $48.5 million
of current liabilities, of which approximately $30.0 million represents letters
of credit and bank guarantees in connection with equipment purchases. Although
the Company experienced net losses through December 31, 1997, the Company
generated positive operating cash flow of $5.2 million in 1995 and $3.9 million
in 1996.
In recent years, the sucre has generally experienced a significant
depreciation relative to the U.S. dollar and was effectively devalued on March
25, 1998. As of December 31, 1997, substantially all of the Company's
indebtedness (including the Conecel Notes, short-term unsecured promissory notes
and vendor financing) was denominated in U.S. dollars and the Company has
incurred and expects to continue to incur a significant portion of its
borrowings in U.S. dollars. Tariffs and charges for the Company's services,
except charges for inbound calls originated by a wireline subscriber (which are
a significant portion of the Company's revenues), are linked to the U.S. dollar
and are billed in sucres at the sucre/U.S. dollar exchange rate in effect on the
billing date. Consequently, the Company is exposed to currency exchange rate
risks and, therefore, a substantial devaluation of the sucre relative to the
U.S. dollar will adversely affect the Company's liquidity position.
The Company's short-term liquidity has been adversely impacted by delays in
the Company's receipt of interconnection fees from the Ecuadorian Wireline
System which the Company believes have been caused primarily by administrative
difficulties encountered by Pacifictel, S.A. as a result of its recent formation
and adoption of inadequate billing systems from Emetel. The Company's short-term
liquidity has also been adversely affected by delays in the collection of
charges for services from the Ecuadorian Wireline System that have resulted from
the initial implementation of the "calling party pays" system. The payment terms
under the Company's interconnection agreement with the Ecuadorian Wireline
System provide for an initial window of
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approximately 105 days before sums are due for the first billing cycle
subsequent to May 1997. The introduction of certain financing plans by the
Company, such as Comodato, that provide for handset financing has also adversely
impacted the Company's short-term liquidity position. To a lesser degree, the
Company's Porta Control and other prepay programs have improved the Company's
liquidity. See "Risk Factors -- Factors Relating to the Company -- Terms of
Interconnection Agreements" and "-- Future Capital Needs."
Capital Resources. For the year ended December 31, 1995, the Company's use
of cash for investing activities amounted to $20.2 million, primarily for
ongoing construction and expansion of the Company's Network, its complementary
microwave transmission system and the commencement of the Company's satellite
data transmission and national and international long distance operations. The
Company financed its cash requirements during 1995 through stockholder
contributions in the amount of $22.5 million, cash provided by operating
activities in the amount of $5.2 million and a net increase in short and
long-term debt in the amount of $3.8 million.
During the third quarter of 1995, the shareholders of the Company approved
an increase in the Company's share capital which provided for an aggregate
capital infusion of approximately $22.8 million pursuant to which 13,516,000
shares ($5.6 million) of the Company's Common Stock were issued in December 1995
and 50 million shares ($17.2 million) were issued in February 1996. The issuance
of these additional shares brought cumulative historical shareholder
contributions to approximately $28.7 million.
In September 1995, the Company entered into an agreement with CAF for a
loan of $11.5 million for the restructuring of its liabilities (the "CAF Loan").
The CAF Loan was payable over a seven-year term with a two-year grace period
before payments of principal and interest were due and payable. The funds from
the CAF Loan were received by the Company in September 1995. As a result of the
foregoing, the Company had, as of December 31, 1995, cash and cash equivalents
in the amount of approximately $12.2 million and short-term debt in the amount
of $16.9 million and long-term debt in the amount of $12.8 million, which
included the CAF Loan in the amount of $11.5 million. The CAF Loan was repaid in
May 1997 with a portion of the proceeds of the Conecel Notes.
During the last quarter of 1995 and the first half of 1996, the Company
refinanced its short-term liabilities with the proceeds of the CAF Loan.
Excluding a vendor financing facility with Northern Telecom, short-term debt as
of December 31, 1996 decreased from approximately $10.5 million to $363,000.
Long-term debt also decreased to $11.1 million, as a result of the retirement of
certain other loans that matured during 1996. Equipment financing increased
slightly to $7.7 million as a result of the continued expansion of the Company's
Network.
During the year ended December 31, 1996, the Company applied cash in the
amount of approximately $4.8 million toward the expansion of the Company's
Network and the development of its teleport and satellite infrastructure. The
Company's cash requirements during the year were met with cash generated by
operating activities which amounted to approximately $3.9 million. As a result,
the Company's cash and cash equivalents at the end of 1996 decreased to $835,000
as compared to approximately $12.2 million at the end of 1995.
During the last quarter of 1996, the Company amended its vendor financing
facility in the aggregate principal amount of $7.7 million, by extending its
maturity from December 31, 1996 to June 30, 1997. The terms of the amendment
included a $1.0 million payment in January 1997, which was financed with a
short-term bank loan from Banco Aserval (Ecuador), an unaffiliated lender. The
vendor financing facility and such short-term bank loan were both repaid in
their entirety in May 1997 from the proceeds of the sale of the Conecel Notes.
In November 1997, the Company entered into a $10.0 million vendor financing
facility with Northern Telecom, its primary equipment supplier of cell sites.
Outstanding amounts under such facility are secured by the equipment purchased
with the proceeds thereof and rank senior to all other indebtedness with respect
to such equipment. As of December 31, 1997, approximately $9.8 million was
outstanding under the facility, which bears interest at a rate equal to LIBOR
plus 7%. The vendor financing facility expires on October 30, 1999; provided
that no advance will be made by Northern Telecom after October 31, 1998. As a
result of the recent amendment of the Conecel Note Indenture, an additional
$20.0 million of vendor financing is
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permitted under the Conecel Note Indenture for a total of $30.0 million. See
"The Conecel Indebtedness -- The Conecel Notes." As of December 31, 1997, the
Company had approximately $15.6 million of outstanding vendor financing and is
permitted to incur up to $14.4 million of additional vendor financing. Pursuant
to the vendor financing facility, as amended in March 1998, Northern Telecom has
made available to the Company the vendor financing facility up to an aggregate
of $20.0 million; provided, however, that Northern Telecom is not required to
make any advances in excess of $10.0 million unless the Company (i) completes an
initial public offering in an amount of not less than $100.0 million in gross
proceeds, (ii) maintains a minimum level of subscribers and (iii) complies with
certain financial covenants. The interest rate on amounts outstanding and on
future advances up to an aggregate of $10.0 million will be reduced to LIBOR
plus 4% upon the completion of an initial public offering in an amount not less
than $100.0 million, the proceeds of which are used to redeem a portion of the
Conecel Holdings Notes, and upon compliance by the Company with certain
financial covenants. All amounts outstanding under the vendor financing facility
in excess of $10.0 million will accrue interest at LIBOR plus 7%.
In February 1998, pursuant to a Supplemental Indenture, (i) the holders of
the Conecel Notes waived compliance by the Company with the Limitation on
Indebtedness, Restricted Payments and Limitation on Transactions with Affiliates
covenants in the Conecel Note Indenture and (ii) the holders of the Conecel
Holdings Notes and the Warrants waived compliance by Conecel Holdings with
certain covenants contained in the Conecel Holdings Indenture, including
covenants relating to Limitations and Indebtedness, Restricted Payments,
Limitations on Transactions with Affiliates and certain restrictions relating to
the early redemption of the Conecel Holdings Notes in the Conecel Holdings
Indenture in order to enable the Company to assume and immediately thereafter
redeem, using a significant portion of the net proceeds (though not less than
80% of the net proceeds) of the Offering, all or a portion of the Conecel
Holdings Notes in accordance with the terms of the Conecel Indenture and the
Conecel Holdings Indenture. In addition, pursuant to the Supplemental Indenture
relating to the Conecel Notes, the maximum amount of vendor financing permitted
to be incurred by the Company was increased from $10.0 million to $30.0 million.
Capital expenditures during each of the years ended December 31, 1995, 1996
and 1997 were $17.9 million, $4.8 million and $47.9 million, respectively. The
Company financed its capital expenditure requirements in 1994 through short-term
bank lines of credit, vendor financing facilities, long-term debt and the
issuance of Common Stock. In 1995, the Company issued shares of its Common Stock
and borrowed long-term debt to finance its capital expenditure requirements. In
1996, the Company financed most of its capital expenditure requirements with
cash generated by operating activities. In 1997, the Company financed most of
its capital expenditure requirements from the proceeds of the sale of the
Conecel Notes.
The Conecel Note Indenture contains negative covenants restricting the
incurrence of indebtedness in the event the Company, if it were to incur such
indebtedness, would not be able to meet certain cash flow and other financial
tests. The Company does not currently meet these financial tests and,
accordingly, the Company is subject to restrictions on the incurrence of
additional indebtedness. Until it can meet these tests, the Company will be
required to satisfy its working capital requirements from cash flow from
operations and future equity financings, neither of which are assured. See "The
Conecel Indebtedness -- The Conecel Notes."
The Company's capital requirements are predominantly for capital
expenditures related to the expansion of its Network. The Company anticipates
that its capital expenditure requirements for 1998 will be approximately $36.4
million, which will be partially offset by a $5.5 million credit for future
equipment purchases recently granted to the Company by Northern Telecom for
certain volume discounts made available to the Company. The Company expects to
meet its anticipated capital expenditures in 1998 with internally-generated cash
flow, vendor financing and a portion of the net proceeds of the Offering. In the
future, the Company expects to meet its debt service requirements, additional
capital expenditures and other working capital requirements with cash flow from
operations, equity financings, possible assignment of its accounts receivable
and, to the extent permitted by the Conecel Note Indenture, additional vendor
financing.
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BUSINESS
GENERAL
The Company is the leading provider of integrated wireless
telecommunications services in Ecuador, offering cellular, international and
national long distance, data transmission and cellular public telephone
services, and is the only company in Ecuador licensed to provide all of these
services. The Company is the largest cellular provider in Ecuador, having
104,061 cellular subscribers as of December 31, 1997 and a cellular network that
covers in excess of 85% of the country's population. In addition, the Company is
the largest cellular public telephone operator in Ecuador with 1,440 cellular
public telephones in operation as of December 31, 1997. The Company's
recently-commenced data transmission operations are also currently providing
data, voice and image connectivity over its Network to a number of major
Ecuadorian companies, and beginning in the second quarter of 1998, the Company
anticipates offering Internet gateway services to its customers. The Company's
products and services are marketed through its internal sales force and through
more than 280 independent distributors utilizing the Company's "Porta"
trademarks, one of the best known brand names in Ecuador.
The Company has experienced substantial growth, with total revenues and
operating income having grown to approximately $75.0 million and $13.8 million,
respectively, for the year ended December 31, 1997 from approximately $29.8
million and $1.4 million, respectively, for the year ended December 31, 1996. In
addition, average minutes of usage per reported subscriber has increased to 295
minutes per month in 1997 from 190 minutes per month in 1996, a 55.3% increase.
As a result, total minutes of usage per month of the Company's reported
subscribers has increased to 31.2 million minutes for December 1997 from 7.7
million minutes for December 1996.
THE ECUADOR TELECOMMUNICATIONS MARKET
The Ecuadorian Wireline System, which is presently comprised of two
regional entities -- Pacifictel, S.A. and Andinatel, S.A., is the exclusive
provider of local wireline telephone services in Ecuador, with the exception of
the city of Cuenca which is serviced by the Municipal Telephone, Potable Water
and Sewage Company of Ecuador ("ETAPA"). Because the Government of Ecuador has
historically operated the state-owned telephone service providers with limited
capital and resources, Ecuador currently remains significantly underserved by
existing wireline operators and demand for phone services throughout Ecuador far
outweighs supply of wireline phone services. In addition, the waiting time for
wireline services, which generally varies by city, may range from a few weeks or
months in the most developed areas (including Quito and Guayaquil) to two years
or longer in other areas. As of December 31, 1996, as reported by The Strategis
Group, Ecuador had only 6.4 telephone lines per 100 persons. In rural areas
throughout Ecuador, telephone penetration rates remain below 1 line per 100
persons. Ecuador's wireline penetration is low relative to other Latin American
countries, as is shown in the table below:
NUMBER OF TRADITIONAL LINES PER 100 PERSONS
(NUMBER OF TRADITIONAL LINES PER 100 PERSON CHART)
- ---------------
Source: Latin American Cellular/PCS Markets 1997 and The Strategis Group
43
<PAGE> 48
National and international long distance wireline service is operated by
the Ecuadorian Wireline System, which until recently has had a monopoly on both
international calls and telex services. Currently, cellular operators in
Ecuador, such as the Company, pursuant to their concessions, are permitted to
route national and international long distance calls through their own networks
or through those of the other cellular companies. The Company believes that the
additional competition in the long distance market that is expected to result
from these concessions to the cellular operators will, as it has in other
countries, lower tariffs to consumers and, as a result, stimulate telephone
usage, including the usage of cellular telephones.
Growth of Ecuadorian Cellular Telephone Industry
Since 1994, the Ecuadorian cellular telephone industry has experienced
significant growth. As of December 31, 1994, total reported subscribers in
Ecuador were approximately 20,000. By December 31, 1997, the total number of
reported subscribers had grown to approximately 160,000, representing a
penetration rate for the total Ecuadorian population of 1.3%. Under its Cellular
Concession, the Company controls and operates a non-wireline cellular network
that currently operates in a geographic area that covers approximately 85% of
the country's population. As of December 31, 1997, the geographic area covered
by the Company's Network had an estimated aggregate population of 10 million
people, including the main metropolitan areas of Quito, the capital city with
approximately 1.5 million people, Guayaquil, the main commercial center with
approximately 2 million people, and Cuenca with approximately 500,000 people.
The following table shows subscriber trends in terms of the number of reported
subscribers and market share as reported to the Secretary of Telecommunications
of Ecuador by the Company for the periods indicated below:
REPORTED NUMBER OF SUBSCRIBERS AND MARKET SHARE PERCENTAGE
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996 1997
---------------- ---------------- ---------------- -----------------
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
------ ------- ------ ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Conecel(1)................................... 15,012 75% 28,558 63% 34,970 52% 104,061 65%
Otecel(2).................................... 4,988 25 17,000 37 32,400 48 55,939 35
------ --- ------ --- ------ --- ------- ---
Total Reported Subscribers........... 20,000 100% 45,558 100% 67,370 100% 160,000 100%
====== === ====== === ====== === ======= ===
</TABLE>
- ---------------
(1) Figures are based on the total number of "reported subscribers" which
includes subscribers that have been temporarily "deactivated" and are under
evaluation for reactivation or permanent disconnection. See "-- Subscriber
Information" for more information regarding the Company's "deactivated"
subscribers.
(2) Otecel figures are based on estimates believed by the Company to be
generally accurate.
The Company believes that the growth in this industry is primarily a result
of the unfilled demand for traditional wireline telephone services, as well as
the convenience, relatively short implementation time and reliability of
cellular telephones, and more recently as a result of the introduction of the
"calling party pays" interconnection system in Ecuador, in which the originator
of the call pays the entire cellular charge of the call. Ecuador is one of the
last countries in Latin America to initiate cellular telephone service.
Calling Party Pays
In February 1997, the Government of Ecuador enacted regulations mandating a
"calling party pays" interconnection system for cellular service charges. The
Company believes that the recent introduction of the "calling party pays" system
in Ecuador has had, and will continue to have, a favorable impact on growth in
the cellular telephone industry. The "calling party pays" system provides that
the originator of the call pays for the entire cellular charge of the call, as
opposed to the standard United States practice where the cellular subscriber
pays for both incoming and outgoing calls. One of the effects of the "calling
party pays" system is that cellular operators substantially increase their
revenue base to include each caller who originates a call to a cellular
subscriber. This shift in costs to the originating caller and corresponding
decrease in the total cost of cellular service to the subscriber has enabled
cellular operators to develop additional product lines targeted at a more
budget-conscious segment of their markets. The experience in other countries, in
which the shift to a "calling party pays" system has occurred, such as Argentina
and Peru, has been that such a system increases cellular
44
<PAGE> 49
penetration levels and airtime usage per subscriber. The Company has experienced
these increases in cellular penetration levels and airtime usage per subscriber
in Ecuador, even though it has not yet launched mass market "calling party pays"
products, but rather has concentrated on the introduction of digital services.
See "-- Cellular Operations -- Calling Party Pays and Digitalization" for a more
detailed discussion of the "calling party pays" system.
BUSINESS STRATEGY
The Company's current business strategy is to (i) take advantage of the
strong demand for telecommunications services in Ecuador by aggressively
marketing its cellular services to a broader potential subscriber base with an
emphasis on maximizing shareholder return through a full range of
competitively-priced service plans and by increasing the capacity of its Network
to support additional subscribers, (ii) exploit the competitive advantages
associated with its digital TDMA service (including a complete line of
value-added telecommunications services) and high-quality international and
national long distance services, (iii) leverage the local strengths associated
with the Company's extensive distribution channels and continue to expand such
channels by adding more independent distributors, (iv) differentiate its
services by providing high-quality, reliable customer service and (v) capitalize
on its strong brand name recognition throughout the country. The Company's
long-term strategy is to expand the range of telecommunications products and
services which it offers through its Network to satisfy all of a customer's
telecommunications needs, from national and international cellular telephone
services to data transmission connectivity for Internet access,
videoconferencing, e-mail and fax to consistently be the first company to
introduce innovative telecommunications and multimedia technologies in Ecuador
under its "Porta" brand name as such technologies become available in other
areas of the world. As part of this strategy, beginning in the second quarter of
1998, the Company anticipates offering Internet gateway services to provide
network access to local Internet service providers, as well as to the Company's
existing customer base.
Broaden Subscriber Base and Expand Cellular Network. The Company seeks to
aggressively market its cellular services to reach a broader potential
subscriber base in Ecuador with an emphasis on maximizing shareholder return. As
of December 31, 1997, the Company estimates that there were only 160,000
cellular telephone subscribers in Ecuador (representing approximately 1.3% of
the total population), of whom approximately 65% were subscribers to the
Company's "Porta" system. The Company believes that the Ecuadorian cellular
telephone industry has the potential to continue to grow rapidly because of the
poor quality of the existing wireline service, the unfilled demand for basic
telephone service and the increasing demand from users wanting the convenience
and relatively short activation time of cellular telephones. The Company
believes that its growth will come, not only from covering a larger area of
Ecuador (the Network already reaches 85% of the population), but from additional
segments of the population which until recently had not been offered
competitively-priced service plans. The Company's strategy is to remain the
leader in adding new subscribers. To support the significant growth in its
subscriber base, the Company has invested approximately $80.0 million to date to
construct its Network.
Exploit Competitive Advantages of Digital Services. The Company's Network,
in part based on a system using digital IS-136 TDMA technology and equipment
supplied by Northern Telecom, offers increased capacity and better voice quality
than existing analog systems and enables transmissions to be made in encrypted
form so that conversations cannot easily be intercepted and prevents cellular
telephone "hackers" from intercepting a cellular number and programming it into
a new telephone (known as "cloning"). In addition, digital technology permits
the sending and receiving of nonvoice data over the telephone, including
alphanumeric pages, e-mail, faxes, news and quotes, and Internet access. The
Company believes that its Network is more advanced technologically than the only
other Ecuadorian provider of cellular telephone service and expects that it will
continue to experience strong demand for its advanced network system as the
demand for digital technology and digital-specific value-added services is
expected to surpass analog cellular technology in the future. As of December 31,
1997, the Company had upgraded approximately 50% of the Network with digital
technology. The Company anticipates that 90% of the Network will be digitalized
before the end of 1998. Currently, approximately 90% of new subscribers to the
Company's "Porta" system are selecting digital handsets.
45
<PAGE> 50
Leverage Existing Distribution Channels. The Company markets its
telecommunications services through its own internal sales force, who primarily
target significant corporate accounts, government accounts and other high-volume
customers, and its sales centers and exclusive network of independent
distributors, both of which target small businesses and residential customers.
The Company's independent distributors operate approximately 280 distribution
sales offices that operate under the "Porta" name and primarily serve regional
areas, suburban areas and smaller towns throughout Ecuador, with more than 850
Company-trained representatives. This approach has permitted the Company to
expand its name recognition and reach a broader customer base without the high
cost of a large direct sales force. The Company believes that this distribution
network allows it to capitalize on the distributors' knowledge of local markets,
reduce selling expenses and limit inventory risk.
Continue to Provide High-Quality, Reliable Customer Service. The Company
believes that, in the market for its services, providing high-quality, reliable
customer service is an important differentiating factor and has accordingly
developed a business strategy that is customer service-oriented. The Company
seeks to provide a high level of customer service by setting exacting
service-related performance objectives, by employing a skilled and qualified
workforce and by providing intensive customer service training for its employees
and distributors. The Company has established eight customer service centers in
Quito and Guayaquil in an effort to make the personalized customer service
process more available to its subscribers. The Company also provides toll-free,
24 hours a day, seven days a week assistance to its subscribers. The Company
seeks to motivate its sales force to provide a high level of customer service
through a variety of techniques, including tying sales commissions to subscriber
retention and requiring regular subscriber contact.
Capitalize on Strong Brand Name Recognition. As the first and largest
company to provide cellular service in Ecuador, the Company's brand name "Porta"
has widespread name recognition. According to a 1997 survey conducted by the
Ecuadorian Advertisers Association, the "Porta" brand is one of the four best
known brand names in Ecuador. All of the Company's distributors market the
Company's products and services as "Porta," thereby increasing the Company's
market presence. The Company regularly conducts multimedia marketing campaigns
to support its "Porta" brand name, stimulate demand for its services and
increase its customer base. In addition, the Company believes that its strong
brand name recognition is due in part to its senior management team which has
extensive experience in brand name marketing of consumer products, especially
telecommunications products and services.
The Company's long-term strategy is to expand the range of
telecommunications products and services which it offers through its network to
satisfy all of a customer's telecommunications needs, from national and
international cellular telephone services to data transmission connectivity for
Internet access, videoconferencing, e-mail and fax, and to consistently be the
first company to introduce innovative telecommunications and multimedia
technologies in Ecuador under its "Porta" brand name as such technologies become
available in other parts of the world. As part of this strategy, beginning in
the second quarter of 1998, the Company anticipates offering Internet gateway
services to provide network access to local Internet service providers, as well
as to the Company's existing customer base.
CELLULAR OPERATIONS
Digitalization and Calling Party Pays
Since commencing operations, the Company has taken measures to increase its
cellular subscriber base and to distinguish itself from its competitors by,
among other ways, offering a broader range of digital products and services and
by employing more technologically advanced and digital versatile systems. In
addition, the Company has made efforts to capitalize on the recent change in
applicable Ecuadorian legislation which currently mandates a "calling party
pays" system and the increased demand for digital specific value-added services
that employ the more versatile digital TDMA cellular technology which the
Company's systems presently have the capacity to support.
Although the Company was not required to switch to the "calling party pays"
interconnection system until February 1997, the Company created and commenced
offering certain products that incorporated the "calling party pays" concept in
November 1996 in an effort to increase its number of subscribers and to
46
<PAGE> 51
increase airtime usage. The Company believes that the significant growth in its
cellular subscriber base since November 1996 is due in part to the incorporation
of the "calling party pays" system into certain of its products.
Prior to the implementation of the "calling party pays" system, a cellular
subscriber was charged by the Company for both incoming and outbound calls
consistent with standard United States practice. However, as a result of the
implementation of the "calling party pays" system, all incoming calls are
currently charged to the originating party by its respective local wireline or
wireless operator which, in turn, pays the Company any applicable
interconnection charges (as of December 31, 1997, $.27 per minute after
deduction of the interconnection charge and any applicable collection fees) for
calls routed through the Company's network to its cellular subscribers. The
collection responsibility for all such calls remains with the applicable
wireline or wireless operator and interconnection fees are payable to the
Company without regard to whether the wireline or wireless operator successfully
collects the fees due from the originating caller. The Company and each of the
wireline and wireless operators exchange on a monthly basis statements detailing
the interconnection fees payable to and from each of them, and a reconciliation
of fees is conducted within 90 days after each statement date. A payment of 90%
of the fees owed by the applicable party is due within 15 days after the
reconciliation date and the remaining 10% is due within 180 days after the 90%
payment, in each case without interest. This payment structure resulted in the
creation of a significant trade receivable on the Company's financial statements
and, prior to the commencement of the Ecuadorian Wireline System's payment
cycle, impacted the Company's short-term cash flow. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation -- Overview" and
"-- Operating Agreements -- Interconnection Agreements."
On November 19, 1997, two regional operating entities, Andinatel, S.A. in
the mountain region (including Quito) and Pacifictel, S.A. in the coastal region
(including Guayaquil), were formed in anticipation of the pending privatization
of Emetel, the state-owned wireline service provider. Emetel continues to exist
as a legal entity for the sole purpose of winding up its affairs. All of the
assets of Emetel were divided and transferred to the two regional entities. In
addition, all of the liabilities of Emetel, except liabilities under the
November settlement agreement with the Company for periods prior to November 19,
1997 and interconnection fees payable to the Company under the "calling party
pays" system for such periods, were divided and transferred to the regional
entities. As a result, Emetel made payments to the Company for Andinatel, S.A.
and Pacifictel, S.A. which were due for September and October 1997. The Company
anticipates that each of the regional entities will be liable for the
interconnection fees for the period beginning November 19 through the end of the
month and for all monthly interconnection fees and settlement payments
attributable to them thereafter.
As of March 10, 1998, each of the regional entities is current with respect
to its payments to the Company. However, the payments by Emetel on behalf of
Pacifictel, S.A. that were due for September and October 1997 were not made in a
timely manner and were past due when made. The Company was advised that the
delay in payment was attributable to administrative difficulties encountered by
Pacifictel, S.A. as a result of its recent formation and adoption of inadequate
billing systems from Emetel. Under the interconnection agreement with Emetel,
payments for "calling party pays" are due approximately 105 days after the
relevant monthly billing period and therefore payments for November 1997 will
not be due until March 1998. Neither of the regional entities has made or is
currently obligated to make any payments to the Company. As a result of the
"calling party pays" interconnection system, the Ecuadorian Wireline System has
become, and is expected to remain, the Company's largest debtor and source of
revenues, accounting for approximately 50% of the Company's revenues for the
year ended December 31, 1997. See "Risk Factors -- Risks Related to Payments
from the Ecuadorian Wireline System."
The "calling party pays" system has enabled the Company to implement more
gradual restrictions on subscribers with past due accounts by "blocking" their
outbound calling capability, while such subscribers continue to generate
revenues for the Company from inbound calls that are paid by the party
originating the call. Prior to the implementation of the "calling party pays"
system, the Company would disconnect subscribers entirely within 30 days after
the due date of any invoice. The Company believes that the "calling party pays"
system enables it to handle its current past due accounts and credit issues in a
manner that maximizes revenues to the Company and minimizes the Company's churn
rate. See "-- Subscriber Manage-
47
<PAGE> 52
ment -- Management of Churn and Credit Policy" for a more detailed discussion of
the Company's credit policies and procedures.
In constructing its Network, the Company selected cellular technology using
TDMA technology and, as a result, had the capacity to offer digital cellular
service from its commencement of operations. In Ecuador, cellular subscribers
have expressed significant interest in purchasing digital handsets and the
Company believes that demand for digital capacity and technology will soon
surpass that of other cellular technology as a result of the superior quality
signal, the availability of digital specific value-added services, such as
caller identification and digital voice mail, the longer battery life of digital
equipment and the increased level of security and confidentiality that digital
technology provides. Digital technology is also the Company's preferred cellular
technology as a result of the increased network capacity that it provides. By
employing digital technology, rather than traditional analog technology, the
Company believes it can increase its Network capacity by up to 66%. The digital
technology incorporated into the Company's Network can accommodate up to three
users per communication channel as compared to one user per channel under an
analog system. In addition, the Company expects to be able to upgrade its system
to accommodate up to six users per channel as its subscriber growth may require.
The Company has sought to increase the digitalization of its subscriber
base because of the benefits of digitalization, including additional revenue
through the sale of digital specific value-added cellular services, reduced
operating expenses and greater network capacity. In January 1997, the Company
introduced certain digital specific value-added services, including caller
identification and digital voice mail, and believes that its significant recent
growth in total cellular subscribers is due in part to the Company's
introduction of such services to the cellular telephone market in Ecuador. The
Company expects to increase its aggregate cellular subscriber base as it
increases digital penetration and believes it possesses a competitive advantage
as it is the only cellular operator in Ecuador that presently has the capacity
to offer digital specific value-added services or that employs the digital TDMA
technology in connection with its cellular operations. As of December 31, 1997,
approximately 50% of the voice channels in the Network were programmed to be
digital (up from approximately 7% at December 31, 1996).
CELLULAR PRODUCTS AND SERVICES
The Company currently generates revenues primarily from cellular
telecommunications services and the sale of cellular handsets and accessories.
Revenues from cellular telecommunications services include (i) activation fees
("Activation Revenues"), (ii) monthly fees, airtime charges and, to a lesser
extent, roaming charges, national and international long distance and public
telephone revenues ("Recurring Revenues") and (iii) revenues generated from the
sale of handsets and accessories ("Equipment Sales"). As the Company's national
and international long distance service continues to develop, the Company
expects to generate additional revenues from cellular subscribers who make
international calls. The Company expects that revenues from Equipment Sales will
decline as the price of cellular handsets declines and as a result of
competitive pressures forcing steeper discounts. Through December 31, 1996, the
Company sought to lower its inventory costs by selling more handsets through
independent distributors. However, as a result of the implementation of TDMA in
January 1997, the Company expects that it will continue to purchase and sell
digital cellular telephones directly to consumers in order to (i) secure a
supply of digital handsets in an international environment of strong demand and
(ii) ensure that the same digital standard, "IS-136," is delivered in the
digital handset as is employed by the Company's Network and thus avoid consumer
confusion, as there are other digital standards that will not fully benefit from
the value-added digital services that the Company offers.
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<PAGE> 53
The following table shows the sources of the Company's revenues for the
following periods (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1994 1995 1996 1997
----------------- ----------------- ----------------- -----------------
SOURCE OF REVENUES AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ------------------ ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Activation Revenues.......................... $ 4,059 31.9% $ 2,066 6.9% $ 1,069 3.6% $ 972 1.3%
Recurring Revenues(1)........................ 7,571 59.6 24,664 82.7 27,223 91.2 65,487 87.3
Equipment Sales(2)........................... 1,083 8.5 3,090 10.4 1,532 5.2 8,557 11.4
------- ----- ------- ----- ------- ----- ------- -----
Total................................ $12,713 100.0% $29,820 100.0% $29,824 100.0% $75,016 100.0%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- ---------------
(1) National and international long distance service is currently not a
significant component of the Company's total revenues.
(2) Includes revenues from the sale of handsets and accessories.
Cellular Service Plans
Through December 31, 1997, the Company's cellular service consisted of a
variety of service plans to satisfy customers with varying budget needs,
including Porta Control, Porta Family, Porta Savings, Porta Savings Plus, Porta
Productivity, Porta Productivity Plus, Porta VIP and Porta Free. In an effort to
capitalize on the introduction of the "calling party pays" system, the Company
introduced new service plans whose objectives are to stimulate the sale of
digital handsets, increase income from outbound calls, increase subscribers and
avoid market degradation through price competition with Otecel. The main segment
targeted in these service plans are executives of small and medium-sized
businesses with moderate usage (35 Especial), executives with a need to
communicate in peak-time hours and nights (Magnifico), and corporations with a
plan designed to reward the number of lines contracted through volume discounts
and with special benefits to employees and employers alike (Empresarial). The
basic features available to all plans include cellular service, national
coverage, 24-hour customer service and automatic connection with wireline
services giving its customers access to all Ecuadorian wireline subscribers. In
addition, the Company offers international roaming and, upon request,
international direct-dial services. The Company modifies its service plans from
time to time in accordance with its targeted marketing strategy and market
conditions. The Company's main cellular service plans, representing
approximately 55% of the Company's subscribers, of which Porta Control itself
accounts for approximately 38% of all subscribers, are described below:
Porta Control is a value-priced primary service offered by the Company
that has become more marketable and more valuable to the Company by the
introduction of the "calling party pays" system in Ecuador. Under the Porta
Control plan, the subscriber is not required to pay any monthly service
fees, but is obliged to prepay anticipated usage. Once the subscriber
reaches prepaid levels, the system automatically rejects further outbound
calling, but permits receiving inbound calls (effective February 1997)
since the originating party is charged for the call. This service is
designed to appeal, in particular, to budget-conscious customers with a
need for cellular services but a desire to control costs, and customers
with safety and security concerns or who otherwise expect to use their
cellular telephones on a very limited basis, such as strictly for
emergencies. This service is offered to all applicants, since there is no
credit approval requirement.
Porta Family is a value-priced basic service offered by the Company
that consists of a portable cellular telephone that resembles a traditional
wireline telephone. The portable cellular telephone, a large telephone with
a heavy base, is designed to appeal particularly to customers in areas with
waiting lists for wireline services or who are otherwise dissatisfied with
wireline services and who do not need the mobility of a traditional
cellular phone. This service offers the same cellular technology as
traditional mobile cellular phones.
35 Especial is a new service plan designed for executives of small and
medium-sized businesses and self-employed business people who utilize their
cellular telephones only moderately. This plan is offered in conjunction
with Comodato, described below, and seeks to lower the barriers to entry
and maximize the
49
<PAGE> 54
Company's internal rate of return by offering relatively few packaged
minutes with above average airtime tariffs.
Empresarial is also a new service plan designed to reward the number
of lines contracted through volume discounts and special benefits to
employers and employees. The plan offers employers a moderate monthly basic
fee with average airtime tariffs and offers employees free minutes for
personal use during nights and weekends.
Comodato
Comodato is a 24-month lease of the cellular handset, with an option
to buy, that is incorporated into certain of the Company's service plans.
Through Comodato, the Company recovers the cost of the handset within 12 to
24 months from recurring revenues and retains title to the handset, which
is offered at book value to the customer at the end of the 24-month lease.
Book value is determined by calculating the handset's cost minus
depreciation, which is accounted for on a straight-line basis over a
five-year period. As of December 31, 1997, there were 4,068 Comodato
subscribers.
Pricing Structure
As of December 31, 1997, the Company's subscribers pay a monthly service
fee which ranges from $20.00 for Porta Family and $35.00 for Porta Savings, to
as much as $150.00 for Porta VIP with 500 free minutes of cellular service per
month. The following service plans developed during 1997 target specific market
segments and aim to increase outbound revenue by raising tariffs in a "calling
party pays" environment and reducing free minutes. Airtime charges for outgoing
calls range from $.20 per minute for Porta Family to $.55 per minute for Porta
Control, depending upon the tariff plan selected and whether calls are placed
during peak or non-peak hours. The more popular tariff plans offered by the
Company are described below:
<TABLE>
<CAPTION>
TARIFF PLAN MONTHLY FEE DESCRIPTION
- ----------- ----------- -----------
<S> <C> <C>
Porta Control.................. $ 0.00 No free minutes per month. $.55 per minute.
Porta Family................... 20.00 No free minutes per month. $.20 per minute.
35 Especial.................... 31.00 35 free minutes per month cumulative; $0.45 per
minute.
Empresarial.................... 36.00 90 free minutes per month. Nights and weekends
free. $0.32 per minute.
Porta Savings.................. 35.00 50 free minutes per month. $.40 per minute
Mon.-Fri., 8 a.m.-7:59 p.m. and $.28 per minute
Mon.-Fri., 8 p.m.-7:59 a.m.; Sat., Sun. and
holidays all day.
Porta Free..................... 39.95 Free service Mon.-Fri. 8 p.m.-7:59 a.m.; Sat.,
Sun. and holidays all day. $.50 per minute,
Mon.-Fri. 8 a.m.-7:59 p.m.
Porta Productivity............. 48.00 100 minutes per month to be used any time of
day, with a price per minute of $0.26.
Porta VIP...................... 150.00 500 minutes per month to be used any time of
day, with a price per minute of $0.25.
Magnifico...................... 48.00 60 free minutes per month cumulative; $0.45 per
minute.
</TABLE>
In February 1997, as a result of the introduction of the "calling party
pays" interconnection system, all incoming calls are charged to the originating
party by its respective local wireline or wireless operator which, in turn, pays
the Company any applicable interconnection fee (as of December 31, 1997, $.27
per minute after deduction of the interconnection charges and collection
charges) for calls routed through the Company's Network to its cellular
subscribers. The collection responsibility for all such calls remains with the
operators and interconnection fees are payable to the Company regardless of
whether the operators successfully collect fees due from the originating
callers. Pursuant to the Company's Cellular Concession, all fees and charges are
computed in U.S. dollars and billed in sucres (except for inbound calls
originated by a wireline subscriber) which are adjusted for inflation and set in
sucres, using billing date exchange rates. The fees charged by the Company for
cellular services are subject to regulation by the Government of Ecuador.
50
<PAGE> 55
The Company modifies its prices from time to time to correspond with
marketing campaigns and to respond to competitive pressures. During the last
quarter of 1995 and throughout 1996, there was significant price competition
between the Company and Otecel which resulted in significant reductions in
cellular rates charged by the Company. During 1997, with the acquisition of
Otecel by BellSouth, the form of competition appeared to have changed from one
based solely on price to one based on reducing barriers to entry by financing
the cost of cellular telephones and by network coverage, value-added services
and customer service. The Company expects that it will continue to implement
promotional campaigns which may involve temporary price reductions from time to
time in order to encourage new subscriber activations and stimulate airtime
usage.
Value-Added Services
In addition to traditional premium cellular services such as call transfer,
call waiting and three-way conference calling which the Company offers its
subscribers for additional charges, the Company currently offers the following
supplemental services:
Porta Voz. Porta Voz is a digital voice mail service which receives and
stores messages for subscribers when incoming calls are not answered. Porta Voz
can be obtained as a supplemental service to any of the Company's basic
services.
*911 Emergency Service. Centralized emergency services such as the *911
emergency service in the United States are not available in Ecuador; persons are
required to call the respective emergency service directly. The Company offers
to its subscribers its *911 emergency service, in which a subscriber can call
the Company at any time by dialing *911 and then be transferred by one of the
Company's operators to the appropriate emergency service, including the fire
department, police, medical emergency services and vehicle-towing services.
Detailed Billing Services. The Company provides, for a fee, a wide array
of detailed billing services to its subscribers. This information includes a
list of all calls made (including free calls), the date and time of calls, and
the duration and cost of calls. By contrast, local wireline companies typically
provide such information only for national and international long-distance
calls.
International Roaming. As a convenience to its Porta customers who are
traveling, the Company offers roaming services in other countries, including
Canada, Chile, Colombia, Peru, the United States and Venezuela. International
roaming agreements with cellular operators in Mexico are currently being
negotiated by the Company, although no assurances can be given that such
agreements will be concluded. This service allows the Company's customers to
place calls to or from participating countries. In some cases, the Company
collects from the subscriber and forwards to such operators the charges for such
calls. In other cases, the Company's subscribers pay for such calls directly.
The Company recently entered into a roaming agreement with Iridium SudAmerica
Corporation that is expected to enable the Company's subscribers to utilize
cellular telephones throughout the rest of the world once the Iridium network is
functioning, which is expected to be in September 1998.
Caller and Message Identification. This service is offered as a result of
the digital capabilities of TDMA and makes use of the hand-set screen to display
information such as the calling party's identification, a brief message or
information from a central database.
Extended Battery Life. This service is offered as a result of the digital
capabilities of TDMA and a switch-based software upgrade identified as "Dynamic
Power Control" ("DPC"). DPC administers the Network's and the digital
subscriber's signaling system with increased efficiency, allowing for up to a
250% increase in the battery life of digital subscribers.
Cellular Products and Equipment Supply
The mobile equipment used by the Company consists of handsets and
accessories which are available for purchase from multiple sources. The Company
currently purchases its mobile equipment from various distributors such as
Motorola Inc., Nokia Corp. and Ericsson Group under short-term arrangements.
Although
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the Company experienced shortages in obtaining network equipment and telephone
handsets from its primary suppliers in 1997, the Company anticipates that such
equipment and telephone handsets will be available for purchase by the Company
from many sources in the foreseeable future. Although the Company generally
sells handsets at its cost, it has offered subsidies for purchasing such
handsets during specific promotional periods and will continue to facilitate
their purchase in the future by offering financing to certain reported
subscribers. Through 1996, the Company sought to lower its inventory costs by
selling more handsets through independent distributors. However, with the
introduction of TDMA in January 1997, the Company decided to purchase and sell
digital cellular telephones directly to consumers in order to secure a supply of
digital handsets in an international environment of strong demand and ensure
that the same digital standard, "IS-136," is delivered in the digital handsets
as is employed by the Company's Network and thus avoid customer confusion, as
there are other digital standards that will not fully benefit from the
value-added digital services that the Company offers.
SUBSCRIBER MANAGEMENT
Management of Churn and Credit Policy
The Company recognizes that managing customer churn is an important factor
in maximizing revenues and cash flow. The Company's average monthly churn rate
for the years ended December 31, 1996 and 1997 were, on average, approximately
3.96% and 2.13%, respectively. The churn rate was approximately 2.64% per month
for most of the year ended December 31, 1996, except between March and June when
such rate was approximately 5.74%, and as high as 9.21% in June 1996. This
temporary increase in churn resulted from new management at the Company
initiating approximately 8,000 disconnections of reported subscribers with non-
performing accounts in order to upgrade the quality of the Company's customer
base. In order to minimize churn caused by customers voluntarily terminating
service, the Company aims to ensure that its services remain competitive and has
one-year customer contracts that contain penalties for early termination. In
addition, in June 1996, the Company established a credit committee to oversee
the implementation of policies which require thorough credit checks for new
subscribers, including a review of the subscriber's credit and employment
history, encourage direct debit and credit card payment plans and impose gradual
restrictions on service once payment dates have been missed. The reduction of
churn levels in 1997 is attributable to the continuous implementation of
stringent credit policies, including collection clock procedures and the
development of a customer retention program, as well as an increase in customer
care and satisfaction initiatives. The reduction of churn occurred during a
period when the Company increased its subscriber level by approximately 197.6%,
from 34,970 subscribers as of December 31, 1996 to 104,061 subscribers as of
December 31, 1997.
Generally, a subscriber's ability to place outgoing calls is suspended in
the event payment is not received within ten days after the final due date of
any bill. While a subscriber's outgoing calls are blocked, incoming calls may be
permitted and may continue to generate revenues for the Company under the
"calling party pays" system. See "-- Calling Party Pays and Digitalization."
Under the Company's credit policies, this temporary status of "blocked calling"
may last a maximum of ten days, at which time the applicable subscriber is
"deactivated" in that both inbound and outbound calling capabilities are blocked
for an additional period of 45 days. During the months of April and May 1997,
the Company varied its procedure of deactivation by extending the inbound
privileges for 30 days to past due subscribers in an effort to capitalize on the
"calling party pays" system. The Company measured the results against a control
group that remained in the original "10 days" status and concluded that average
monthly collections in the control group were higher than in the experimental
group and, as a result, the Company determined to revert to the original ten-day
period. During this 55-day period, the subscriber may be reactivated with full
calling privileges upon the Company's receipt of all past-due amounts and
without the imposition of any additional fees or penalties. At the end of this
55-day period, the subscriber is fully disconnected and removed from the
Company's reported subscriber list. Reactivation after the 55-day period will
require, in addition to the payment of all past-due amounts, a new activation
fee and the issuance of a new telephone number. The Company believes that these
policies reduce the likelihood that customers will incur excessive debts, thus
enhancing the likelihood of settlement and reconnection. In addition, prior to a
complete disconnection of service, a representative of the Company will
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attempt to contact the delinquent subscriber in order to settle and agree on
payment terms and to suggest alternate prepaid cellular services such as Porta
Control that will enable the subscriber to maintain his cellular service
connection.
As of December 31, 1997, the Company reported approximately 4,000
subscribers that are subject to "blocked calling" and that have been temporarily
"deactivated" for non-payment. Based on the Company's experience, the Company
expects that a significant portion of "deactivated" subscribers will pay all
past-due amounts and be reinstated with full calling privileges. Only a small
portion of such "deactivated" subscribers are expected to be disconnected. There
can be no assurance, however, that such "deactivated" subscribers will become
current or that a substantial portion will not be disconnected. Prior to
February 1997, when the "calling party pays" system went into effect,
"deactivated" subscribers were unable to receive inbound calls at the calling
party's expense and thus did not generate any revenues for the Company.
Consequently, prior to February 1997, the Company fully disconnected past-due
subscribers upon the expiration of the initial ten-day period described above.
The Company believes that the current system of gradually imposing restrictions
prior to complete disconnection will result in increased subscriber retention.
Billing and Administration
The Company uses a billing and customer management system called "CBILL,"
developed by Cellular Services, Inc., a Los Angeles, California-based firm whose
systems are utilized by numerous international cellular service providers
worldwide. The accuracy and flexibility of the Company's billing and customer
management system are critical to efficiently servicing the Company's
subscribers and to generate subscriber information vital to the Company's
management. This system currently permits the Company to bill its customers
monthly with a detailed billing statement including itemized local and
long-distance calls. In contrast, local Ecuadorian wireline companies typically
give equivalent details only with respect to long-distance calls. The Company
also uses information from the system to analyze the effects of price changes
and promotional and advertising campaigns, as well as subscriber use patterns to
prevent fraud. Due to the growth experienced by the Company during 1997 and
expected through 1998, and the Company's determination to integrate its MIS
operations to provide higher efficiency and capabilities, the Company has been
evaluating and is currently in the process of selecting more advanced billing,
subscriber management and management information systems in an integrated
platform. The determination to change to a more advanced MIS platform is based
on the need to (i) support a growing subscriber base and more complex
transactions with greater flexibility for the development of service plans, (ii)
support the convergence of multiple services in the same account, (iii) support
the management of volume discounts for multiple services and (iv) provide the
Company with better data for managing its operations.
Fraud Detection and Prevention
The Company currently uses a proprietary fraud detection system that
analyzes call data records to identify abnormal calling patterns and cloned
cellular phones and that enables the Company to take corrective actions
promptly. In addition, the Company's billing system generates daily reports on
customers that have exceeded their preassigned credit limits. Based on these
reports, customers are contacted by the credit control staff of the Company or
deactivated, depending on the individual circumstances.
To reduce the incidence of fraud in its operations, the Company has
developed a fraud prevention program that includes (i) fraud awareness and
prevention training, (ii) background checks of its employees and (iii)
restrictions on international calls to certain high-risk destinations and
restrictions on three-way calling by customers with international direct dial
access. The third restriction prevents a caller from calling a cloned telephone
with three-way calling and international access and thereby make an unbillable
international call.
In addition to its fraud detection and prevention methods, the Company
conducts credit checks of each new subscriber to reduce the incidence of
fraudulent applications. The Company and Otecel share information on bad
accounts and cooperate in developing and implementing fraud detection systems.
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SALES AND MARKETING
In order to implement its business strategy, the Company has focused its
marketing efforts on (i) establishing brand name recognition of its primary
"Porta" service and related product and service offerings, (ii) expanding its
sales and distribution network, (iii) targeting high-quality, high-use customer
groups that have specific identifiable needs through the use of a well-trained
sales network and (iv) differentiating the Company on the basis of a superior
quality and scope of service, rather than price.
Marketing Programs
The Company uses both mass media campaigns and direct marketing through its
internal sales force and independent distributors to reach potential customers.
Mass media campaigns have been used by the Company to create awareness and
promote the benefits of cellular services and to position its "Porta" brand name
and commercial slogan. The Company employs, among other media, billboards,
television, radio and direct-mail. Direct marketing efforts have been used by
the Company to reach priority segments of its target market, such as financial
institutions and other corporate and commercial subscribers, professionals,
small business executives who travel or work on location and
convenience-oriented consumers. Over time, the Company has identified additional
factors that promote the use of cellular services, such as convenience and
personal safety, and has tailored its marketing efforts accordingly.
Sales Network
The Company offers its cellular and other services to potential subscribers
principally through (i) direct marketing activities by its internal sales
representatives, who primarily target corporate accounts, government accounts
and other high-volume customers and (ii) its sales centers and network of
independent distributors, both of which target residential customers and small
businesses. Currently, there are three categories of distributors -- national,
regional and retail. The Company believes that this mixed distribution approach
allows the Company to reach a broader customer base while avoiding the cost of a
large direct sales force. It also allows the Company to capitalize on its
distributors' knowledge of local markets and reduce selling expenses and
inventory risks. As of December 31, 1997, approximately 70% of new subscriber
activations were effected through the Company's distributor network and
approximately 30% through its internal sales force.
As of December 31, 1997, the Company's sales and distribution network
consisted of approximately 50 internal sales representatives, as well as more
than 850 Company-trained representatives in approximately 280 distribution sales
offices, primarily serving regional areas, suburban areas and smaller towns
located throughout Ecuador. The Company's distribution network has grown
substantially from 250 internal sales representatives and independent
distributors to the current level of approximately 900 combined internal sales
representatives and independent distributors. The Company operates primary sales
centers that are centrally located in the cities of Quito, Guayaquil, Cuenca,
Ambato, Santo Domingo, Machala, Esmeraldas and Manta, and provide both sales and
various customer support services, including repairs and billing matters. The
Company's primary independent distributors, as of December 31, 1997, are as
follows:
PRIMARY INDEPENDENT DISTRIBUTORS
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF TRAINED
NAME OF DISTRIBUTOR LINE OF BUSINESS SALES CENTERS REPRESENTATIVES
- ------------------- ---------------- ------------- ---------------
<S> <C> <C> <C>
Artefacta.......... largest electronic retailer in Ecuador 50 200
Comandato.......... largest supermarket chain in Ecuador 45 100
Mi Comisariato..... supermarket chain in Ecuador 12 50
</TABLE>
The breadth and diversity of the Company's sales and distribution network
provide its customers with the benefits of convenient locations, extended
service hours, comprehensive telephone and accessory selection and
highly-trained sales and service staffs. The independent distributors are paid
commissions for the activation of cellular lines according to a schedule that
increases their applicable percentage commissions as the number of lines sold by
such distributor increases. Commissions may be reduced if the subscriber does
not maintain a cellular line for a minimum period of time. The Company does not
pay its distributors any commissions on
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revenues earned from air time usage or from monthly cellular service access
fees. The Company believes that these arrangements encourage its distributors to
attract and retain long-term customers. In addition, distributor contracts
generally provide for certain sales, service and retention standards that must
be maintained and that are reviewed by the Company on a regular basis.
Subdistributors have contracts with the independent distributors. The
subdistributors are paid a commission based on their sales directly by the
independent distributors that also may be reduced if the subscriber does not
maintain the cellular line for a minimum period of time.
Customer Service and Expanded Services
The Company's commitment to providing excellent customer service is an
important element of its operating strategy. The Company believes that in the
market for its services, the provision of high quality customer service is an
important differentiating factor and has accordingly developed a strategy that
is customer service-oriented. The Company seeks to provide a high level of
customer service by setting exacting service-related performance objectives, by
employing a skilled and qualified workforce that is trained in-house to rapidly
resolve problems, by providing customer service training for all staff and by
investing in the technology, products and processes required to achieve high
performance levels.
The Company's specialized customer service team of approximately 60
employees (as of December 31, 1997) provides toll-free, 24 hours a day, seven
days a week response to telephone queries from three regional centers, answering
more than 1,100 calls per day through the *611 service, more than 600 letters
per month and handling more than 500 in-person customer inquiries per week in
sales and service locations throughout Ecuador. As of December 31, 1997, the
Company had established and presently operates eight "immediate service centers"
in Quito and one in Guayaquil, and expects to open at least four more similar
centers in 1998. In addition, the Company has a VIP customer service group in
charge of responding to corporate accounts or personal accounts with a high
usage or optimum payment record. The Company currently employs three VIP
customer service account consultants in Quito and four in Guayaquil. The Company
believes that achieving a high level of customer service will contribute to its
ability to attract new customers, increase usage of cellular services, and
maintain low subscriber churn rates.
Service-related performance targets relate to (i) the time required for the
Company to respond to customer inquiries and requests, (ii) the quality of such
responses and (iii) the performance of the Network. These targets are monitored
internally and externally through independent surveys of the Company's customer
base that are periodically submitted to the Superintendency of
Telecommunications as required by the terms of the Company's concession
agreements. The latest such survey, which was completed in November 1996,
reflected that 80.7% of the customer service-related calls were answered by a
Company representative within the first 30 seconds, 92.2% of the respondents
said they are satisfied or very satisfied with the *611 service, 88.8% were
satisfied with actual Network coverage and 73.7% said they never experienced
coverage problems.
To aid its customer service team, the Company has invested in an advanced
Automatic Call Distribution system (ACD Meridian from Northern Telecom) for
managing customer calls, and a state-of-the-art Network Management Center that
is staffed 24 hours a day to enable rapid identification and resolution of
Network problems. An electronic network links the Company's main sites providing
access to e-mail and to the main databases to provide rapid access to
information required to solve customer problems. Customer hand-set level 1
repairs are carried out by trained staff at the sales and service locations in
Quito and Guayaquil, with the more complex problems being sent to the official
manufacturers' distributors for resolution. Customers are typically activated
within one hour of credit approval, and time for the credit approval takes
between one hour and 48 hours depending upon the complexity of the case and the
amount of supplementary information required. In addition, the Network has been
designed and is maintained for optimum reliability. During the year ended
December 31, 1997, according to switching data, the Company connected more than
97% of attempted calls (including calls routed to service features such as
digital voice mail, three-way calling and call forwarding) and dropped only 3%
of total calls made. This "dropped call" rate compares favorably with
international averages.
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The Company's customer service team members have, on average, attended
approximately 120 hours of training through 1997, providing them with the
standards and formal skills necessary to support the Company's commitment to
achieving the highest customer service standards. Employees are also trained and
actively encouraged to take the initiative in resolving customer problems.
CELLULAR NETWORK
Cellular Telecommunications Technology. Cellular telecommunications
systems are capable of providing high-quality, high-capacity voice and data
communications to and from mobile and portable telephones, and handling
thousands of calls at any one time and providing service to thousands of
subscribers in any particular area. Cellular telecommunications technology is
based on the division of a given geographical area into a number of regions or
"cells" which are generally contiguous. Each cell contains a low-power
transmitter-receiver, known as a "base station" or "cell site," that
communicates by radio signal with cellular telephones located in that cell. Each
cell is connected by wirelines or microwave to a central switching point, or
MTSO, that controls the routing of calls and which, in turn, is connected to the
PSTN under an interconnect agreement with the wireline operator. The MTSO
controls the assignment of frequencies within the cell area and allows cellular
telephone users to move freely from one cell to another across the service area
while continuing their calls. The Company's Network is also linked to its
national microwave network and its international teleport that allows the
Company to provide national and international long-distance services utilizing
its Network. See "-- International and National Long Distance Service."
Cellular telecommunications systems, such as the Company's Network,
generally offer subscribers the features offered by the most technologically
advanced wireline telephone services. The value-added services available to the
Company's subscribers are currently available only on a limited basis to
wireline telephone users throughout Ecuador. Since cellular telecommunications
systems are interconnected with the PSTN, subscribers can receive and originate
local, long distance and international calls from their cellular telephones.
One significant difference between cellular systems in Ecuador and in the
United States is the early introduction of digital technology in Ecuador.
Cellular operators in many markets, such as the United States, face the need to
implement digital cellular technology, often at significant cost. The Company
has constructed its Network using Northern Telecom analog (AMPS) technology with
a dual capacity to migrate to digital TDMA technology, the most widely-used
cellular digital standard in North America. Approximately 50% of the Company's
Network currently uses TDMA technology and all further increases in capacity
will be in the TDMA standard, which the Company expects will be employed by 90%
of its Network by the end of 1998.
Each cellular telecommunications network is planned and constructed to meet
a certain level of subscriber density and traffic demand. Once this level is
exceeded, a cellular operator must take steps to increase network capacity in
order to maintain service standards. Such capacity increases can be accomplished
by increasing digital penetration and by using techniques such as sectorization
and cell splitting. Other techniques have been developed by operators and
infrastructure manufacturers to ensure service quality at minimal cost,
including microcells. Cellular telecommunications networks are typically
characterized by high fixed costs and low variable costs. Until technological
limitations on network capacity are reached, additional capacity can usually be
added in increments that closely match demand and at marginal additional cost.
Network Construction and Design. The Company has invested substantially in
constructing a high quality network that has both dual analog and digital
capacity and can support substantial continued growth in subscribers, as well as
technologically advanced new services. The Company constructed its Network with
the manufacturing and construction expertise of certain of its former
shareholders, including Grupo Iusacell, S.A. de C.V. ("Iusacell"), the Mexican
telecommunications affiliate of Bell Atlantic, Bell Canada and the Company's
main equipment supplier, Northern Telecom. The Company believes that it has been
able to provide better cellular service quality and a broader range of products
and services as a result of the Company's advanced digital capacity network.
In developing its Network design, the Company incorporated service quality
and coverage objectives based on the best practices in the United States. In
addition, the Company's Network was designed to take advantage of its microwave
transmission system along with multiple interconnect points with the wireline
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telephone company in order to ensure that the Company has the ability to carry a
significant portion of its traffic on its Network and, correspondingly, to
reduce the Company's reliance on other networks over which the Company has no
control. In addition, the Company's design objectives require that the network
be sufficiently versatile to support a variety of desired value-added cellular
services such as call forwarding, call waiting, three-way conference calling,
digital voice mail, caller identification, data transmission and support for
fixed cellular operations, as well as handle all national and international
long-distance services and data, voice and image transmission services.
Network Expansion and Capacity. The Company develops its cellular service
areas by building new base stations and adding cells to existing base stations.
Such development is done for the purpose of increasing capacity and improving
coverage in direct response to projected subscriber demand. The Company
initially focused on providing service to the principal metropolitan areas of
Quito and Guayaquil. The Company continues to expand its network to cover as
broad a geographical area as is economically feasible, as geographic coverage is
a key variable in the consumer purchasing decision. Expansion of the Network
enhances the Company's ability to provide service in previously underserved
areas where the demand for cellular services continues to increase. In September
1997, the Company signed a non-binding letter of intent with Iusacell to
purchase switching, cell site and transmission equipment to equip or upgrade at
least 140 new or existing base stations. Iusacell is in the process of changing
its network from an AMPS/TDMA platform identical to the one used by the Company
to a CDMA network. Iusacell was acquired by an affiliate of Bell Atlantic in
November 1996 and, for compatibility purposes, Iusacell is moving to the same
platform used by Bell Atlantic. The Company has been informed that this process
began in December 1997. Subject to the negotiation of a final agreement and an
updated inspection of the operating condition of the Northern Telecom equipment,
the Company intends to buy the equipment which would allow the Company to expand
Network capacity at a discount from the cost for new equipment.
The Company's microwave network is currently operating with ample capacity
with the Company's present operations during peak periods occupying
approximately 90% of total capacity.
Equipment. In building its Network, the Company has purchased cellular
equipment manufactured by Northern Telecom, which allows the Company to provide
subscribers cellular service of comparable quality with cellular operators
employing the most advanced commercially available technology in the United
States. The principal switching center, located in Guayaquil, employs a Super
Node NT DMS-MTX to provide switching services for the Coastal Region in Ecuador.
The second switching center, located in Quito, also employs a Super Node NT
DMS-MTX to provide switching services for the Sierra and Amazon Regions. As of
December 31, 1997, the Company's Network consisted of 63 cell sites and 17 cell
repeaters. In 1997, Northern Telecom opened a technical support center in
Guayaquil, which provides extensive backup support of the Company's operations.
The Network is connected primarily by its own microwave transmission system
provided by California Microwave, Inc. consisting of 57 microwave links as of
December 31, 1997. Interconnection with local PSTNs occurs at three locations.
Through December 31, 1997, the Company had invested approximately $80.0 million
in Network construction.
Performance. The Company continuously monitors the performance of its
Network to ensure that cellular telecommunications service quality meets United
States standards. Despite the demands for Network services resulting from the
Company's substantial subscriber growth, as of December 31, 1997, the Company
had been able to limit average dropped calls (the inability of the system to
sustain a call in progress) to approximately 3.3% and achieved an average call
"blockage" rate (the percentage of subscriber calls that are unable to access
the Network during peak usage periods) of approximately 1.8%. As a result of
recent strong increases in reported subscribers and average usage per reported
subscriber, the Company believes that average dropped calls and average call
"blockage" rates have increased slightly. The Company has adopted measures to
address these increases.
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INTERNATIONAL AND NATIONAL LONG DISTANCE SERVICE
The Company offers its subscribers long-distance connections to all
international destinations through the Company's satellite teleport located in
Guayaquil, Ecuador. The Company believes that it possesses significant
competitive advantages over the national PSTN international long distance
service provider, the Ecuadorian Wireline System, in the areas of both pricing
and quality. The Company's cost structure with respect to its international long
distance operations currently enables it to set its rates by up to 40% below the
Ecuadorian Wireline System's rates for similar telephone service. In addition,
the international long distance telephone call completion rate for the
Ecuadorian Wireline System is currently 46.7% according to public information
distributed by the Ecuadorian Wireline System, as compared to approximately 95%
for the Company according the Company's switching data.
The Company's teleport has also provided the Company with the capacity to
route international and national long distance traffic to and from its cellular
subscribers through its own Network, and without any interconnections through
the wireline providers. The terms of the Company's cellular and data
transmission concessions permit the Company to route national and international
long distance traffic using its Network if it has the capacity to do so. Routing
international traffic through the Company's Network will generate additional
revenues for the Company while at the same time avoiding interconnection fees
previously payable to the wireline operators. The Company believes that it has a
significant competitive advantage in the areas of international and national
long distance service as Otecel, the Company's primary competitor, does not
presently have the ability to route long distance calls through its own network.
During 1997, the Company routed approximately 150,000 minutes of outbound
international long distance traffic per month through its teleport, and expects
to increase this volume significantly during 1998, primarily as a result of the
poor quality international and national long distance service currently provided
by Emetel. The completion rate for long distance calls originated through Emetel
is approximately 46.7%, according to publicly-available information, as compared
to the Company's completion rate of approximately 95% using the Company's
Network, according to switching data. The Company believes that its reported
subscribers will provide it with a captive subscriber base for developing its
data transmission and other operations, particularly international and national
long distance services. The Company intends to launch specific marketing and
promotional campaigns that target predominately corporate and business
subscribers to increase international long distance traffic in 1998, including
the introduction of pre-paid calling cards to be distributed in Ecuador and in
major metropolitan areas in the United States with a high concentration of
Ecuadorian residents, such as New York, Miami and Los Angeles.
The Company's microwave network currently has substantial excess capacity
which will enable the Company to support substantial growth in its international
and national long distance business without incurring any substantial capital
expenditures beyond what is required for the expansion of the Company's Network.
DATA TRANSMISSION SERVICES
The Company holds a 15-year data transmission concession (the "Data
Transmission Concession") from December 1994, that permits it to install,
operate and maintain a satellite system serving all of Ecuador and to provide
various national and international telecommunications services, including the
transmission of data, voice and image signals. The Company was awarded its data
transmission concession in a competitive bidding process based upon several
factors including price offered by the Company, technical capabilities and
operational capacity, experience of its affiliates and its financial and
planning capabilities. Similar licenses were granted to IMSATEL (Ecuador), S.A.
and AMERICATEL, S.A., the two other operators of satellite systems in Ecuador.
Pursuant to the Data Transmission Concession, the Company has installed an
international satellite teleport (Class 3 Earth Station) located at Guayaquil,
Ecuador, which commenced operations in June 1996. The Company's teleport
transmits and receives signals to and from a PAS-1 PANAMSAT satellite which, in
turn, transmits and receives signals from PANAMSAT's earth station located in
Florida. Satellite signals received by the Company's teleport are distributed
throughout Ecuador by employing a combination of the
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Company's cellular infrastructure including its nationwide microwave network
that serves as the link between the Company's cellular switches and the final
destination (or originating point) of the satellite signal. Because the Company
uses its cellular infrastructure in connection with its satellite operations,
the Company is capable of providing satellite services, such as data, voice and
image transmission services, to a geographic area in Ecuador that covers
approximately 85% of the country's population. In addition, as a result of the
substantial excess capacity that presently exists in the Company's microwave
network, the Company believes that it will be able to accommodate substantial
growth in its satellite service subscriber base without incurring any capital
expenditures in addition to the capital expenditures incurred by the Company in
connection with the expansion of its Network. See "-- Cellular
Network -- Network Expansion and Capacity."
Data transmission services is one of the fastest-growing sectors of the
Ecuadorian telecommunications market, primarily due to the demand from companies
in the financial, manufacturing, healthcare and travel industries, requiring
instantaneous access to information around the world. The Company has entered
into ten data transmission service agreements since March 1997, including
agreements with a number of major Ecuadorian companies such as Banco del
Pichincha C.A., one of the country's largest banks, Ecuatorosas, a flower
exporter, and Skytel S.A., the country's leading paging firm. Since the original
agreements were entered into, the Company's customers have generally expanded
their business by adding additional datalinks. The Company is currently
negotiating to enter into additional data transmission service agreements,
however no assurance can be given that any agreements in negotiation will be
concluded.
The Company's satellite system is currently being used for the transmission
of all internal Company data and for videoconferencing between the Company's
offices located in Quito and Guayaquil. Although the Company expects that it
will aggressively market and promote its expanded services that utilize the
Company's satellite system, the Company's sales efforts with respect to such
services to date have been limited to private presentations by Company
representatives to prospective subscribers. The Company's satellite network is
monitored and managed from the Company's principal offices, located in Quito,
and receives technical and switching support from its offices in Guayaquil.
Charges for long distance and other satellite services are administered through
the Company's cellular operations division in the same manner as charges for the
Company's cellular services.
INTERNET GATEWAY SERVICES
The Company was awarded a 10-year Internet service license (the "Internet
Concession") in August 1997. The Internet Concession permits the Company to
install, operate and maintain Internet gateway and access service throughout
Ecuador and to provide various national and international Internet based
value-added services, included basic Internet access to the World Wide Web,
private networks, remote services and network browsers, electronic mail,
database access and electronic data interchange (EDI). The Company was awarded
its concession based on a licensing process that resulted in the granting of
additional concessions to nine other companies. See "Regulatory
Framework -- Terms of Internet Concession."
Pursuant to the Internet Concession, the Company is in the process of
installing the necessary computer hardware and anticipates offering this service
in the second quarter of 1998. The Company will utilize its Guayaquil earth
station and its National Microwave Network as the basic backbone to provide
Internet gateway services in Ecuador. In addition, the Company is authorized to
use its cellular network as well as the Ecuadorian Wireline System's lines and
dedicated circuits whenever it is necessary to complete connectivity to its
intended customers. The basic connection equipment consists of a satellite
modem, connected to a multiplexer with access to an Ethernet 10BaseT TCP/IP
Network, that is fed by communications and news servers, all located in the
Company's offices in Guayaquil. Because the Company uses its cellular
infrastructure, including its microwave backbone in connection with its Internet
operations, the Company is capable of providing Internet services to a
geographic area that covers approximately 85% of Ecuador's population. In
addition, as a result of the substantial excess capacity that presently exists
in the Company's microwave network, the Company believes that it will be able to
accommodate substantial growth without incurring any incremental capital
expenditures over the capital expenditures incurred by the Company in connection
with the planned expansion of its Network. See "-- Cellular Network -- Network
Expansion and Capacity."
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The Company's Internet system connects in the United States with SysNet
Corp. SysNet is located in the Washington, D.C. area, one of the most important
Internet hubs worldwide, and provides the Company with three fully redundant
trunk lines to MCI (T1), Cable and Wireless (T3) and UUNET (T3). In Ecuador, the
Company is establishing two primary Internet access hubs in Quito and Guayaquil,
each with 100 modems, which gives the Company initial capacity of 2,000 dial-up
subscribers without connectivity or transmission time delays. Additionally, the
Company's microwave network provides the backbone to interconnect private
networks, corporations, universities, government agencies and other high volume
users without capacity considerations.
PORTABLE CELLULAR AND PUBLIC CELLULAR TELEPHONE SERVICES
The Company offers a portable cellular service that allows it to capitalize
on the unfilled demand of consumers with the service currently available through
Ecuador's wireline operators. Portable cellular uses the same wireless
transmission technology as mobile cellular; however, the portable telephone unit
is physically installed in the user's office or home. This service has been made
available primarily to corporate and business users as an alternative or
supplement to traditional wireline telephone services.
Under the terms of the Company's Cellular Concession, the Company is
required to install public pay telephones in rural and suburban areas located
within the coverage area of its Network. The concession was recently amended to
authorize the Company to also install public cellular telephones in urban areas
throughout Ecuador. The Company has already installed 1,265 more public cellular
telephones than required under the terms of its Cellular Concession for the end
of 1997 and believes that significant growth can be sustained with respect to
its public telephone operations as a result of the shortage of telephones in
many urban, rural and suburban areas in Ecuador. The terms of the Company's
Cellular Concession require the Company to install each year a number of
telephones equal to 0.5% of the Company's total number of cellular subscribers
as of December 31 of the immediately preceding year, which as of December 31,
1996, would equal 175 public telephones required for installation. As of
December 31, 1997, the Company had 1,440 public cellular telephones in
operation, which generated average monthly revenues of approximately $110 per
telephone and had an average payback period of 18 months. The Company's public
cellular telephones operate using prepaid phone cards, thereby minimizing the
risks of fraud, vandalism and noncollection. The Company's ability to expand its
public pay telephone operations in accordance with its business plan will depend
primarily upon various external factors that are beyond its control. See "Risk
Factors -- Factors Relating to Ecuador."
OPERATING AGREEMENTS
Interconnection Agreements. The Company has executed interconnection
agreements with Andinatel, S.A., Pacifictel, S.A. and Telefonos, Agua Potable y
Alcantarillado, the three wireline telephone companies serving Ecuador. The
terms of the interconnection agreements include provisions for the number of
connection points, the method by which signals must be received and transmitted,
fraud control, billing, damage liability and the assumption of responsibility
for the costs of interconnection. Under such interconnection agreements,
wireline telephone companies charge cellular operators a fee per minute, ranging
between $.03 to $.15 per minute, depending upon the destination of the call and
when a cellular subscriber places a call to a wireline subscriber. This
interconnection fee is charged directly to the cellular subscriber through the
subscriber's monthly bill. Such agreements also contain the terms pursuant to
which wireline operators will be charged a fee (currently $.27 per minute net of
interconnection and collection fees) by cellular operators for calls to cellular
subscribers that are originated by wireline subscribers. See "-- Cellular
Products and Services -- Pricing Structure." The interconnection agreements have
a term of five years from April and June 1994, respectively. The Company
believes the terms of its interconnection agreements are similar in substance to
the interconnection agreements executed by Otecel. See "Risk Factors -- Risks
Related to Payments From the Ecuadorian Wireline System."
Roaming Agreements. As a convenience to its traveling Porta customers, the
Company offers roaming services within other countries, currently including
Canada, Chile, Colombia, Peru, the United States and Venezuela, through
agreements with major cellular telephone companies in such countries. The
Company
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recently entered into a roaming agreement with Iridium SudAmerica Corporation
that is expected to enable the Company's subscribers to utilize cellular
telephones throughout the rest of the world once the Iridium network is
functioning, which is expected to be in September 1998. International roaming
agreements with cellular operators in Mexico are currently being negotiated,
although no assurance can be given that such agreements will be concluded. See
"-- Cellular Products and Services -- International Roaming."
Other Agreements. The Company has entered into agreements with TeleData
World Services, Inc. and SysNet Corp. for the delivery and routing of
international telephone traffic, data services and Internet access. These
agreements provide for advanced and competitive switching facilities on a
least-cost-routing basis and the ability to deliver value-added services, such
as international pre-paid services and 1-800 direct access lines.
COMPETITION
The cellular telecommunications business in Ecuador is currently a
regulated duopoly. Each of the two operators awarded cellular concessions in
Ecuador has the non-exclusive use of a defined frequency band within the region.
The terms of the Cellular Agreement provide that the Superintendency is
authorized to license other cellular operators in the same geographic
territories. In addition, the Superintendency is authorized to reassign
frequency Bands A and B for the purpose of authorizing the entry of new
operators in the cellular license network without affecting the number of
channels originally assigned to the Company or to Otecel. Competition is
principally based on network coverage and technical quality, value-added
cellular services, quality and responsiveness of customer service and price. The
Company's primary competitor in the area of cellular service in Ecuador is
Otecel, the holder of the other cellular service concession. The Company
believes that it presently enjoys significant competitive advantages over Otecel
primarily as a result of the Company's more technologically advanced systems,
which have both digital and analog capacity, and ability to route international
and national long distance calls through its own teleport and microwave network,
which Otecel presently does not have. The Company expects that Otecel may in the
future seek to upgrade its systems in order to enable it to offer additional
digital products and services, such as caller identification, to its subscribers
in order to more effectively compete with the Company. As of December 31, 1997,
the Company's subscriber base comprised approximately 65% of Ecuador's cellular
market, with the remaining 35% being served by Otecel. See "-- The Ecuador
Telecommunications Market -- Growth of Ecuadorian Cellular Industry" for
additional market share information. During 1997, an affiliate of BellSouth
acquired a controlling interest in Otecel. This may improve Otecel's access to
financial resources and technical expertise and thereby improve its competitive
position.
The Company also competes with traditional wireline telephone service
operators. Wireline density in Ecuador as of December 31, 1996 was estimated at
approximately 6.4%, which is low relative to other Latin American countries. If
substantial capital were to be invested in the wireline telephone industry,
resulting in increased wireline density and improved service, certain of the
Company's existing and potential subscribers may shift to wireline service
providers due to a number of factors, some of which are price related. In
addition, increased wireline densities could lead to reduced cellular usage as
subscribers will have available to them additional competitively-priced options
for telephone service. The entrance of new wireline operators would result in
additional competition for the Company. See "-- The Ecuador Telecommunications
Market."
Certain competing wireless communications services, such as mobile radio,
paging or beeper services are widely used in Ecuador as a substitute for
wireline services in order to improve productivity and to address security
concerns. These services suffer certain disadvantages compared to cellular
services due to factors such as lack of coverage, handset non-portability, lack
of privacy, lower transmission quality, network overloading and lack of customer
service. These competing wireless communications services are nevertheless
considerably less expensive than cellular service.
Technological advances in the telecommunications field, such as the
possible introduction of PCS, continue to occur and make it difficult to predict
the extent of additional future competition for cellular systems. For example,
several mobile satellite systems are planning to initiate service by the year
2000. While such services may offer worldwide coverage, significant
technological, legal and other hurdles need to be overcome before such services
may be offered in Ecuador. Each of the two regional entities comprising the
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Ecuadorian Wireline System, Andinatel, S.A. and Pacifictel, S.A., has been
qualified to bid for PCS licenses in its respective region when offered by the
Government of Ecuador in the future. In the event such entities are successful
in obtaining PCS licenses, they will engage in direct competition with the
Company within their respective regions for wireless telecommunications
services.
The Company also faces competition in its data transmission business from
the Ecuadorian Wireline System, which offers data transmission and
point-to-point communication network services, and from IMSATEL (Ecuador), S.A.
and AMERICATEL, S.A., the two other operators of satellite systems in Ecuador.
The Company expects to encounter competition in its data transmission operations
from certain local and national cable television operators that may offer
similar services in Ecuador.
As of February 10, 1998, there were 20 companies offering Internet service
in Ecuador, of which only ten were authorized pursuant to a concession to
operate in Ecuador. None of the present Internet service providers has the
network and facilities that the Company possesses, including the Company's own
teleport and microwave network, which gives the Company a coverage advantage
over its competition. At present, there are two types of Internet service
providers in Ecuador. The first group consists of companies whose primary
business is Internet service. In this group, there are companies such as
"HoyNet," based in Quito, that possess a dial-up subscriber base of
approximately 600 individual and approximately 12 corporate customers. HoyNet
has a satellite connection with the U.S. with a bandwidth of 64 Kbps and 32
modems for commuted access. There are similar companies with a bandwidth of 252
Kbps, but with the same number of modems. This configuration offers
disadvantages such as connectivity problems due to an insufficient number of
modems and slow transmission time resulting from insufficient bandwidth. The
second group consists of companies that offer Internet services as a by-product
of their primary business, but their bandwidth is partially utilized by their
own transmission requirements. These potential competitors include IBM, "El
Banco del Pacifico" (SATNET), and "El Comercio" (ACCESS). The Company believes
that it will have significant competitive advantages due to a system
configuration that addresses these problems. See "-- Internet Gateway Services."
INTELLECTUAL PROPERTY
The Company uses the "Conecel" and "Porta" names and logos as trademarks
and service marks in connection with the sales and marketing of its products and
services. According to a 1997 survey conducted by the Ecuadorian Advertisers
Association, the "Porta" name is one of the four best known brand names in
Ecuador. The "Conecel" and "Porta" names and logos are protected from
infringement under the intellectual property laws of Ecuador.
LEGAL PROCEEDINGS
The Company is from time to time involved in various legal proceedings
occuring in the ordinary course of business. The Company does not believe that
adverse decisions in any pending or threatened proceedings or any amounts which
it may be required to pay by reason thereof would have a material adverse effect
on the financial condition or results of operations of the Company.
EMPLOYEES
As of December 31, 1997, the Company had 395 full-time employees. None of
the Company's employees are unionized or represented by a collective bargaining
unit. The Company currently does not provide any of its employees with any
pension, retirement or other similar benefits. Under Ecuadorian law, the Company
is required to set aside and distribute directly to its qualified full-time
employees an amount equal to 15% of its net income. To date, as a result of the
Company's net losses, the Company has not been required to make any such
distributions. The Company believes that its employee relations are good.
PROPERTIES
The Company currently leases a total of approximately 3,269 square meters
(one square meter equals approximately 10.89 square feet) of office space
located in various Ecuadorian cities, including Quito (1,900 square meters),
where the Company's principal executive offices are located, Guayaquil (550
square meters),
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Cuenca (350 square meters), Ambato (70 square meters), Esmeraldas (35 square
meters), Santo Domingo (70 square meters), Machala (84 square meters), Quevedo
(90 square meters) and Manta (120 square meters).
The Company also owns or leases the sites where its cellular network
equipment is installed. As of December 31, 1997, the Company had 63 cell sites
and 17 cell repeaters, of which ten cell sites were owned and the remaining
sites were leased. Most of these leases do not expire prior to the year 2000 and
the Company expects that it will be able to renew its network licenses on
substantially the same terms as currently in effect, if it so elects, upon their
expiration. In addition, the Company leases the sites where its cellular
repeaters (including its microwave repeater) stations are located in Ecuador.
The Company expects that it will be able to renew its network site leases on
substantially the same terms as are currently in effect, if it so elects, upon
their expiration. Although the Company believes its current network sites are
adequate for its present operations and anticipated levels of growth, the
Company expects to continue purchasing or leasing additional sites as it
continues to expand its Network coverage in Ecuador. All of the Company's
network sites are capable of supporting the digital technology utilized by the
Company. The Company believes that it currently maintains adequate insurance
coverage for all of its current network equipment and other properties.
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REGULATORY FRAMEWORK
REGULATORY AUTHORITIES AND LEGISLATION
Prior to 1992, the state-owned national telecommunications service
provider, the Ecuadorian Telecommunications Institute ("IETEL"), was responsible
for the regulation and oversight of the telecommunications sector in Ecuador. In
August 1992, the Special Telecommunications Law (Legislative Decree No. 184)
(the "Special Law") was passed to, among other things, separate the operating
and regulatory functions of IETEL in an effort to address certain inefficiencies
that resulted from the performance of both functions by one entity. The Special
Law thus provided for the creation and establishment of the Superintendency of
Telecommunications (Superintendencia de Telecomunicaciones), the new
government-controlled regulatory body (the "Superintendency"), and the Empresa
Estatal de Telecomunicaciones, the state-owned provider of telecommunications
services. Prior to the enactment of the Special Law, IETEL performed both the
regulatory and operational functions within the telecommunications sector in
Ecuador. The Special Law also authorized the grant by the government of Ecuador
of concessions to privately-owned providers of all non-basic telecommunications
services, including cellular telephony, satellite data, voice and image
transmission, mobile radio, trunking services and paging services.
In August 1993, pursuant to Resolution No. ST-93-0054, the Superintendency
awarded cellular telecommunications licenses to the Company and Otecel. As
Ecuador has adopted the AMPS standard, the Company was awarded the A Band and
Otecel was awarded the B Band. Both licenses have rights over an aggregate of 22
MHz of bandwidth within the 800-900-MHz range covering the entire country of
Ecuador. Upon receiving its cellular concession (the "Cellular Concession"),
Conecel became one of two operators authorized to offer cellular
telecommunications services in Ecuador for a period of 15 years from August
1993. The Company's rights and obligations with respect to its license are set
forth in an Authorization Agreement for Mobile Cellular Telephone Services
(Contrato de Autorizacion Para La Prestacion del Servicio de Telefonia Movil
Celular), dated August 26, 1993, as amended (the "Cellular Agreement"), entered
into by the Superintendency and the Company. The terms of the Cellular Agreement
were identical to the terms of the cellular concession agreement entered into
between the Superintendency and Otecel.
In August 1995, the Reformatory Law to the Special Telecommunications Law
(Legislative Decree No. 94) (the "Reformatory Law") was passed in an effort to
facilitate the privatization of the Empresa Estatal de Telecomunicaciones and to
create a regulatory framework that would be capable of overseeing the
anticipated growth and technological development of the telecommunications
sector in Ecuador. The Reformatory Law provided for the reorganization of the
Empresa Estatal de Telecomunicaciones as a private corporation (sociedad
anonima) which is currently the Ecuadorian Wireline System comprised of two
regional entities, Andinatel, S.A. and Pacifictel, S.A., the successors to
Emetel, S.A. Among the services the Ecuadorian Wireline System currently
provides are local, national and international telephone services and portable
telephone services, including the provision of wireless and wireline circuits.
With the exception of the City of Cuenca, which is serviced by the Municipal
Telephone, Potable Water and Sewage Company (ETAPA), the Ecuadorian Wireline
System is currently the exclusive provider of basic national and international
wireline telecommunications services throughout Ecuador.
Regulatory Authorities
The Reformatory Law also created the National Council of Telecommunications
(Consejo Nacional de Telecomunicaciones) ("CONATEL") and the Secretary of
Telecommunications of Ecuador (the "Secretary"), and redefined the duties and
responsibilities of the Superintendency. CONATEL, the Secretary and the
Superintendency are the governmental entities that are currently responsible for
the regulation and oversight of the telecommunications sector, including
cellular and data transmission operations, in Ecuador.
CONATEL is the primary administrative regulatory agency and is comprised of
seven members representing the Secretary, the Superintendency, the Executive
Office of Ecuador, the Armed Forces, the Secretary General of the National
Development Counsel (CONADE), the Chamber of Production and the EMETEL Central
Worker's Committee. CONATEL is the law and policy making body that is charged
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primarily with the responsibility of establishing guidelines for the development
of the telecommunications sector within Ecuador. The guidelines established by
CONATEL relate to, among others, the minimum qualifications and quality
standards applicable to providers of telecommunications services and the general
terms of the various concessions to be granted to service providers within the
telecommunications industry, frequency and use allocation and tariffs to be
charged by providers for telecommunications services.
The Secretary is charged primarily with implementing the mandates and
resolutions of CONATEL, including entering into agreements and granting
concessions to operators in accordance with the processes and guidelines
established by CONATEL from time to time. In addition, the Secretary furnishes
all of the requisite authorizations with respect to the equipment and
construction of facilities for use by service providers in connection with
telecommunications related operations.
The Superintendency is currently responsible for policing and supervising
the compliance by telecommunications service providers with the laws and
regulations promulgated by CONATEL and with the written agreements containing
the terms of the concessions granted by the Secretary from time to time.
Legislation
In addition to the Reformatory Law, the following legislation involving the
telecommunications sector, and more specifically the cellular services industry,
has been promulgated in Ecuador: (1) the General Regulation Relating to the
Special Telecommunications Law and the Reformation of the Special
Telecommunications Law, published in the official registry no. 832 on November
29, 1995 (the "General Regulation"); (2) the Regulation Relating to Mobile
Telephone Cellular Services, published in the official registry no. 44 on
October 11, 1996 (the "Cellular Services Regulation"); (3) the Regulation for
the Provision of Portable Services, published in the official registry no. 1,008
on August 10, 1996 (the "Portable Services Regulation"); and (4) the Regulation
Relating to Interconnections and Connections between Nets and Systems of
Communications, published in the official registry no. 1,008 on August 10, 1996
(the "Internet Regulation").
The General Regulation was enacted soon after the passage of the
Reformatory Law and sets forth a regulatory framework applicable to the
telecommunications industry generally. Among other things, the General
Regulation establishes procedures for the establishment of private nets, defines
and establishes procedures for the granting of concessions in connection with
the provision of resale services, and underscores the prohibition against the
provision of call back services, except for national concessionaires authorized
to provide national telephone services. Furthermore, the General Regulation (i)
defines and establishes procedures for the granting of permits for the provision
of value-added services and for authorization relating to the use of
frequencies; (ii) incorporates and makes mandatory the "calling party pays"
arrangement for interconnections between nets and systems of telecommunications,
(iii) establishes that contracts authorizing frequencies shall have the same
duration as the concession for the provision of telecommunications services and
(iv) establishes maximum tariffs for different telecommunications services.
The Cellular Services Regulation, among other things, clarifies the proper
construction and interpretation of the term "station" (estaciones del sistema de
telefonia movil celular) as it relates to the calculation of certain fees
payable by cellular operators for the use of frequencies. See "-- Terms of
Cellular Concession." The regulation clarifies that the term "station" is to be
interpreted to mean the number of cell stations under which the cellular system
is based and not the number of cellular subscribers to cellular services. The
Cellular Services Regulation was prompted in part by claims from cellular
operators, including the Company, that the government was overcharging for the
use of certain frequencies because of its incorrect interpretation of the term
"station." The Company has instituted formal administrative proceedings against
the Secretary and the Superintendency to recover approximately $677,000 in
overcharged frequency fees that were paid by the Company during 1995.
The Cellular Services Regulation also mandates the institution by Ecuador's
cellular operators of a "calling party pays" system with regard to charges for
cellular services. Contrary to North American practice, where a cellular user
generally pays for both outgoing and incoming calls, the "calling party pays"
system requires the originator of the call to pay for the total cost of the
call. This system reduces the cost of cellular services to cellular users. The
Company believes that the system of "calling party pays" stimulates additional
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usage by effectively spreading the cost of cellular service among cellular phone
subscribers and wireline phone subscribers.
In addition, the Cellular Services Regulation framework (i) authorized the
prepayment of cellular license fees by cellular operators, including the
Company, as a discounted present value payment calculated at approximately $51.5
million, and the execution by the Secretary of written amendments to the license
agreements of the cellular service providers that contains the terms of such
prepayments, (ii) transfers certain functions and responsibilities relating to
the collection of cellular license fees from the Superintendency to the
Secretary and (iii) authorizes private operators to provide international long
distance services to their customers through interconnections with other
authorized operators or through their own networks.
The Portable Services Regulation sets forth, among other things, the
conditions pursuant to which the Ecuadorian Wireline System may provide portable
services and establishes norms for exploiting portable services and the process
for granting concessions to companies interested in providing portable services
once the period of exclusivity of the Ecuadorian Wireline System lapses.
The Internet Regulation establishes the general technical, administrative
and economic parameters, including tariffs, with respect to the interconnection
between public nets of communication and the telecommunication systems of
operators of resale services, value-added services or private nets. The Internet
Regulation also set forth the procedure for the approval of concession contracts
and establishes a "calling party pays" arrangement pursuant to which each
operator becomes responsible for collecting charges originated by its customers
within other interconnected operators.
TERMS OF CELLULAR CONCESSION
The Company was awarded its Cellular Concession in August 1993. The
Cellular Concession authorizes the Company to establish and develop a cellular
telecommunications business in Ecuador. The consideration paid by the Company
for the Cellular Concession consists of (i) a one-time concession fee of $2.0
million which was paid by the Company in August 1993, (ii) an annual license
fee, payable in monthly installments, calculated each year as the greater of a
certain minimum guaranteed sum or a stated percentage of the Company's revenues
from cellular operations during the prior year (the "Annual License Fee"), and
(iii) monthly payments for the use of cellular frequencies ("Frequency Fees").
The terms of the Company's Cellular Concession are set forth in an Agreement for
the Authorization of Mobile Cellular Telephone Services (Contrato de
Autorizacion del Servicio de Telefonia Movil Celular), dated August 26, 1993, as
amended (the "Cellular Agreement"), between the Superintendency and the Company.
The Company was awarded the Cellular Concession in a competitive bidding process
on the basis of the price offered by the Company, its technical capabilities and
operational capacity, the mobile cellular experience of its affiliates, and its
financial and planning capabilities. Otecel was also awarded a cellular
telephone concession with terms identical to the terms set forth in the Cellular
Agreement. The Company's Cellular Concession is for a term of 15 years, expiring
in August 2008, and may be renewed by the Secretary, in its sole discretion, for
additional periods.
The Annual License Fee was payable in U.S. dollars and escalated
significantly to as high as 70% of gross revenues during the last year of the
term of the Cellular Concession. After entering into its agreements with the
Company and Otecel, the Government of Ecuador recognized the adverse impact that
the current structure of the Annual License Fee could have on the cellular
operators' incentives to expand their respective cellular operations and to
maximize revenues. As a result, in May 1995, the Superintendency, under mandate
from the Duran-Ballen administration, commenced negotiations with the Company
and Otecel for the prepayment of the full amount of the Annual License Fees
payable under their respective cellular concession agreements. The Bucaram
administration, motivated primarily by the government's need for capital to
finance promised social programs, continued such negotiations and agreed in
October 1996 to accept a prepayment by each of the Company and Otecel in the
amount of approximately $51.5 million in lieu of the annual license fees that
were payable to the Government pursuant to their respective cellular concession
agreements. The prepayment amount represented the net present value of the
minimum guaranteed annual license fee payments previously agreed to by the
Company and Otecel, discounted at the annualized rate of 21.75%.
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In December 1996, Otecel prepaid the full amount of its minimum guaranteed
annual license fee payments with a payment to the Secretary of approximately
$51.5 million, and entered into a written agreement with the Secretary that
modified Otecel's cellular concession agreement and contains the terms and
conditions of such prepayment (the "Otecel Amendment"). The terms of the
Cellular Agreement include certain pari passu provisions that prohibit
discrimination among the cellular operators in Ecuador. Such pari passu
provisions provide that in the event any regulatory authority or other
governmental body in Ecuador modifies any of the terms of any operator's
cellular concession agreement, all other cellular operators shall be entitled to
request a similar modification that affords them substantially similar rights
and benefits. In March 1997, the Company made a partial payment to the Secretary
in the aggregate amount of approximately $1.9 million to evidence its good faith
intention to prepay the Annual License Fees. After giving effect to such partial
payment, the remaining balance of the full prepayment amount, including interest
accrued since December 1996, was approximately $53.6 million. In May 1997, the
Company entered into an agreement substantially similar to the Otecel Amendment
which provided for identical rights, benefits and privileges to the Company, and
pursuant to which the Company paid the remaining balance of the Annual License
Fees, or approximately $53.6 million, to the Government of Ecuador from the
proceeds of the sale of the Conecel Notes. The Company believed the prepayment
of the Annual License Fee presented it with an exceptional opportunity to reduce
its aggregate future liabilities and to properly incentivize the Company to
maximize revenues, a substantial portion of which would have been payable to the
Government of Ecuador under the previous arrangement.
The negotiations for the prepayment of the Annual License Fee also
presented the Company with an opportunity to clarify and modify certain other
terms of the Cellular Agreement. In addition to the terms relating to the
prepayments, the Cellular Agreement, as amended, provides for the acknowledgment
by the Secretary of the enactment of certain legislation in Ecuador,
specifically the Cellular Services Regulation, that provides for (i) a "calling
party pays" tariff where the originating party will pay for the call and which
the Company believes will have a favorable impact on cellular telephone usage,
and (ii) the clarification of certain ambiguities with respect to the
calculation of frequency fees that are based in part on the number of "stations"
utilized by the cellular operators. The Cellular Agreement, as amended, also
authorized the Company to place international calls using its own network, and
not through the services of a long distance carrier as previously required.
As the Annual License Fee has been prepaid in full, the Company is only
required to pay Frequency Fees for the use of frequencies in accordance with the
government regulations on rates and tariffs applicable from time to time.
Currently, there are three separate Frequency Fees payable by the Company to the
Superintendency, each of which is calculated as follows:
<TABLE>
<S> <C>
Frequency Fee A........................... 2 X minimum habitual salary (95,000(1) sucres) X
number of channels. As of December 31, 1996, the
Company used 916 channels. Therefore, Frequency
Fee A for the month of December 1996 equaled
87,020,000 sucres, or approximately $24,038.67
(5 X 95,000 X 916).
Frequency Fee B........................... 5 X minimum habitual salary (95,000(1) sucres) 5
number of connections. As of December 31, 1996,
the Company used 32 connections. Therefore,
Frequency Fee B for the month of December 1996
equaled 3,040,000 sucres, or approximately
$839.78 (5 X 95,000 X 32).
Frequency Fee C........................... 1 X minimum habitual salary (95,000(1) sucres) X
number of stations. As of December 31, 1996, the
Company used 42 stations. Therefore, Frequency C
for the month of December 1996 equaled 3,990,000
sucres, or approximately $1,102.21 (1 X 95,000 X
42).
</TABLE>
- ---------------
(1) The minimum habitual salary was adjusted in 1997 to 100,000 sucres.
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The calculation of Frequency Fee C furnished the basis of a pending dispute
between the Company and the Superintendency with respect to the proper
interpretation of what constitutes a "station" for purposes of this formula. The
Superintendency has previously taken the position that each cellular line
subscriber constituted a "station" for purposes of calculating this fee. The
Company has contested this interpretation and has argued that a "station" refers
to actual cell stations and not total subscribers. This issue has since been
resolved by the enactment of the Cellular Services Regulation which clarifies
that the correct interpretation of the term "station" is actual "cell stations"
and not "subscribers." The Company has initiated proceedings against the
Secretary and the Superintendency to recover approximately $677,000 that the
Company believes has been overpaid by the Company as a result of the
government's incorrect interpretation of applicable regulations and the Cellular
Agreement. Additional Frequency Fees will be assessed by the Secretary from time
to time as the Company acquires rights to use additional channels.
Competition. The Cellular Concession grants the Company a non-exclusive
license to establish and develop a cellular telecommunications business in
Ecuador. The Secretary has the right to grant additional concessions for
wireless telecommunications services to third parties that may engage in
competition with the Company.
Roaming Interconnection. The ability to provide national roaming (among
licensed cellular telecommunications networks) is required by the Company's
Cellular Concession. Cellular companies are also required to enter into
interconnection agreements with wireline telephone companies.
Restrictions on Assignment of Concession. The terms of the Company's
Cellular Concession prohibit the Company from assigning any rights or
obligations arising thereunder to any third party without the prior written
consent of the Secretary.
Network Expansion Plan. The terms of the Company's Cellular Concession
required the Company to submit to the Secretary a detailed timetable of its
expansion plan, identifying the key cities, highways and other areas to be
covered by its network throughout Ecuador. The Company fully complied in all
respects with its build-out requirements.
Non-Traditional Cellular Services. The Company's Cellular Concession
allows the Company to provide certain services not typically permitted to be
offered by cellular operators in North America. Unlike the North American model,
the Company is currently routing international calls using its own network
without routing such calls through a long distance carrier. In addition, the
Company's Cellular Concession authorizes the Company to provide cellular service
to subscribers using portable cellular equipment that is installed in the user's
home or office, rather than mobile handsets.
Service Standards. Upon the request of the Secretary, the Company is
required to furnish to the Secretary information regarding the number of
cellular service subscribers, the quality of its service, the results of a
quality survey completed from time to time by cellular service subscribers and
any other more detailed information regarding the quality of the services of the
Company that the Secretary may request from time to time.
Public Cellular Telephones. The Company's Cellular Concession requires the
Company to install, at its cost, public cellular telephones in rural and
suburban areas within the geographic coverage of its cellular telecommunication
system. The Company is required to install each year an amount of public
telephones equal to not less than 0.5% of the Company's total number of cellular
subscribers as of December 31 of the immediately preceding year. The Company and
the Secretary will from time to time jointly determine the actual locations of
public telephones to be installed by the Company in Ecuador. To date, the
Company has complied with such build-out requirements.
Regulation of Rates and Fees. The rates and fees the Company may charge
its subscribers may not exceed the maximum limits established by CONATEL from
time to time. Any modifications to the rates and/or fees charged by the Company
to subscribers must be approved by the Superintendency prior to effectiveness.
As of February 15, 1998, the maximum tariff that may be charged by the
Company for outbound calls originated by a cellular subscriber is $0.50 per
minute of airtime usage (net of any interconnection fees and any
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applicable taxes and other expenses unrelated to airtime usage that may be
charged by the Company to its cellular subscribers). The maximum tariff that may
be charged by the Company for inbound calls to the Company's cellular
subscribers that are originated by a wireline subscriber is a variable rate that
is based upon the consumer price index of Ecuador (Unidades de Valor Constante,
or "UVC"). As of February 15, 1998, the maximum tariff that may be charged by
the Company for such inbound calls is $0.32 per minute of airtime usage and is
subject to adjustment in the event of a variation in the UVC index of Ecuador.
Fines. The Superintendency may fine the Company for its failure to comply
with the following quality standards: (i) the reutilization of frequencies with
a coverage design based on rate relations or interference greater than or equal
to 17%, (ii) a rate of service of the access channel less than or equal to 1%
when linking conditions with other nets permit; (iii) a rate of service of the
voice channel less than or equal to 2%; (iv) a rate of service from the trunk
lines to the public telephone net less than or equal to 1%; and (v) the blocking
of transferred calls (hands off) less than or equal to 2%.
Termination. The Cellular Concession may be terminated for any of the
following reasons: (i) upon the expiration of the initial term; (ii) by mutual
consent of the parties; or (iii) upon the occurrence of one or more of the
following events: (1) negligence or grave fault of the Company in the
fulfillment of its contractual obligations; (2) dissolution or liquidation of
the Company; (3) assignment of assets by the Company for the benefit of its
creditors; (4) unjustifiable suspension of cellular services by the Company for
a period of more than 30 days; (5) the Company's repeated failure to comply with
the specified minimum quality standards; (6) the Company's failure to pay any
Frequency Fees within 60 days after their due date; and (7) the Company's
repeated failure to comply with the terms of the Cellular Agreement. Upon the
occurrence of any of the events described in (iii) above, the Secretary is
required to notify the Company in writing of its intention to terminate the
Company's Cellular Concession 30 days prior to the effective date thereof. In
the event the Company fails to cure such breach or other event giving rise to
the right of termination during such 30-day period, the Secretary will be
entitled to initiate a legal proceeding to terminate the Cellular Agreement.
Reversion of Assets. In the event the Cellular Agreement is terminated,
all of the Company's assets used in connection with its cellular operations (the
"Cellular Assets") will be sold to the Government of Ecuador. The Secretary will
be required to purchase all of the Cellular Assets at a purchase price equal to
the discounted value, without amortization, of the Cellular Assets determined
according to the Company's books and calculated by an independent expert chosen
by mutual consent of the parties. In the event of such purchase, the total
purchase price shall be payable to the Company by the government of Ecuador
within one year of the date of termination of the Cellular Agreement.
Modification of Cellular Concession. The Cellular Agreement provides that
the regulatory authorities will not discriminate among the operators of cellular
license systems. In the event the regulatory authorities or other governmental
body modify the terms of any cellular operator's concession agreement, all other
cellular operators are entitled to request a similar modification within thirty
(30) days of such modification that affords them substantially similar rights
and benefits.
Arbitration. The Cellular Agreement provides that any controversy of a
technical nature which cannot be resolved amicably between the parties will be
submitted to binding arbitration in Ecuador. All other disputes will be resolved
in a judicial proceeding in a court or other tribunal located in Quito, Ecuador.
The party seeking arbitration shall send written notice to the other party
designating one arbitrator. The other party shall designate a second arbitrator;
and the two arbitrators shall mutually agree on a third arbitrator, who must be
a member of an international telecommunications entity and shall preside over
the deliberations. A decision shall be reached by simple majority of the
arbitrators, which decision shall not be subject to appeal in respect of the
interpretation and resolution of any technical matter submitted to arbitration.
Each party shall be responsible for paying the costs, fees and expenses
associated with its designated arbitrator and shall share equally the costs,
fees and expenses of the third arbitrator.
TERMS OF DATA TRANSMISSION CONCESSION
The Company was awarded its data transmission service concession (the "Data
Transmission Concession") in December 1994. The Data Transmission Concession
authorizes the Company to install, operate and
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maintain a satellite system that provides various national and international
telecommunications service to the entire country of Ecuador. The consideration
paid by the Company for the Data Transmission Concession consisted of (i) a
one-time concession fee of $150,000, plus (ii) a monthly royalty fee equal to
12% of gross monthly receipts collected by the Company from its subscribers in
connection with its data transmission services. The Company is also responsible
for the payment of any applicable fees assessed for the use of radioelectrical
frequencies in connection with its data transmission operations. The terms of
the Company's Data Transmission Concession are set forth in an International
Gateway License Agreement entered into between the Company and the
Superintendency (the "Data Transmission Agreement"). The Company was awarded the
Data Transmission Concession in a competitive bidding process on the basis of
several factors including price offered by the Company, technical capabilities
and operational capacity, experience of its affiliates, and its financial and
planning capabilities. The term of the Company's Data Transmission Concession is
15 years, expiring in December 2009, and may be renewed by the Secretary, in its
sole discretion, for additional periods provided the Company furnishes notice of
its intent to renew at least one year prior to the expiration of the original
term thereof.
The Company's authorization to install and operate a satellite system
pursuant to the Data Transmission Agreement permits the Company to establish
earth stations for the transmission and/or reception of signals from satellites.
The Data Transmission Concession does not include other authorizations the
Company will be required to obtain in connection with its actual use of
satellites or applicable signals or programs. The Company is solely responsible
for acquiring and maintaining all other authorizations necessary to operate its
satellite system, which include, among others, authorizations from the
Superintendency for the use of radioelectrical frequencies, the establishment of
tangible access networks, the interconnection of the satellite system with other
telecommunications networks, the expansion of the satellite system and the
installation and operation of the VSAT stations.
In accordance with the terms of the Data Transmission Agreement, the
Company installed an international satellite teleport (Class 3 Earth Station)
located at Guayaquil, Ecuador.
Non-exclusivity; Competition. The Data Transmission Concession is
non-exclusive and the Secretary is permitted to grant other similar
international gateway licenses to other third party operators for the operation
of satellite networks that may ultimately engage in direct competition with the
Company. In addition, several third parties, particularly larger corporations
that have a need for personal networks and advanced telecommunications services,
currently hold international gateway licenses for internal uses.
Bank Guaranty. The terms of the Data Transmission Agreement have required
that the Company obtain a bank guaranty (the "Bank Guaranty") in order to
guarantee the performance of the Company's obligations arising thereunder. The
Company is required to maintain the effectiveness of the Bank Guaranty during
the term of the Data Transmission Agreement.
Network Expansion. The Company is required to obtain additional
authorizations from the Secretary prior to installing additional VSAT satellite
stations in Ecuador. The Company is also required to obtain prior approval from
the Secretary of the technical features and characteristics of any satellite
station equipment it proposes to install from time to time. In addition, as each
station becomes operational, the Company is required to take any corrective
measures necessary to avoid any interference with existing satellite stations or
other telecommunications networks already in place.
Restrictions on Ownership. The Data Transmission Agreement prohibits the
Company from exercising a monopoly over the exploitation of satellite systems in
Ecuador and contains specific limitations with respect to the Company's control
of any other venture or entity that has also received a concession to operate a
satellite system within the country. For purposes of these restrictions, control
is deemed to exist where one of the stockholders of the Company also holds,
whether directly or indirectly, more than 10% of another concessionaire. In the
event the Secretary determines that a prohibited ownership structure exists, the
applicable parties will be afforded a reasonable period of time to resolve the
problem. Upon the expiration of the applicable period, the Secretary will be
entitled to unilaterally terminate the Data Transmission Agreement and the Data
Transmission Concession granted to the Company thereunder.
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Equipment. The Company is entirely responsible for acquiring all
equipment, goods and services required to operate the satellite systems, and has
total responsibility in all regards with respect to the purchase, importation,
nationalization and transportation thereof. The Company is required to furnish
to the Secretary the specifications of all telecommunications equipment prior to
installation or operation thereof.
Social Sector Participation. The Company is required under the terms of
the Data Transmission Agreement to install and operate certain satellite system
terminals at its cost for marginal sectors or for social purposes as indicated
by the Superintendency. The required number of terminals to be installed and
operated by the Company for marginal sectors and social purposes may not exceed
5% of the total number of satellite system terminals installed and operated by
the Company throughout the country.
Periodic Reporting. During the period of operation of the satellite
system, the Company is required to provide the Superintendency various periodic
reports including (i) a report every six months as to the number of subscribers
connected to the satellite system, broken down by locality and type of
subscription, (ii) a report every six months relating to the quality of the
satellite services provided by the Company, (iii) a report every six months of
the cross-traffic for each teleport, a profile of the medium daily traffic for
each teleport and a description of the capacity of the circuits and the service
and the types of circuits used (digital or analog); (iv) a report every six
months of major errors, even if such errors have not affected the service, and a
description of remedies undertaken; (v) a monthly report of gross receipts
provided by the monthly fees paid by users for the use of the data transmission
services furnished by the Company; (vi) a monthly report of complaints received
from users, including the amount of time given to such complaints; (vii) a
report every six months containing a diagram of the configuration of the system
and indicating the geographic location of the stations, including monthly
modifications thereto; and (viii) any other information that may be solicited by
the Superintendency in accordance with applicable regulations.
Regulation of Rates and Fees. The rates and fees the Company may charge
its subscribers are subject to regulation by CONATEL. Any modifications to the
rates and/or fees charged by the Company to subscribers must be approved by the
Superintendency prior to effectiveness.
Fines. The Superintendency may fine the Company for its failure to comply
with certain terms of the Data Transmission Agreement. Breaches that may subject
the Company to fines include non-performance or delay in the performance of the
timetable established for the installation and commencement of operations of the
satellite system and the Company's failure to pay applicable fees when due.
Termination. The Superintendency may unilaterally terminate the Data
Transmission Concession in the event that the Company unjustifiably suspends
data transmission services for more than 30 days. The Data Transmission
Agreement may also be terminated unilaterally by the Superintendency upon the
occurrence of certain events, including if the Company: (i) is negligent or is
at "grave fault" (as defined in the Civil Code of Ecuador) in its fulfillment of
its contractual obligations; (ii) is declared insolvent, bankrupt, dissolved or
commences a bankruptcy or liquidation proceeding or assigns its assets for the
benefit of its creditors; (iii) is dissolved or liquidated; (iv) repeatedly
fails to cure a breach under the Data Transmission Agreement; (v) fails to pay
the licensing or other applicable fees within 90 days after the due date
thereof; or (vi) assigns its rights under the Data Transmission Agreement to a
third party. The terms of the Data Transmission Agreement generally do not
condition a default by the Company on materiality; therefore, the Secretary may
unilaterally terminate the Data Transmission Agreement upon the occurrence of
any breach by the Company, however insignificant. Upon the occurrence of any
event that entitles the Secretary to unilaterally terminate the Data
Transmission Agreement, the Secretary is required to notify the Company in
writing of its intention to terminate the Company's Data Transmission Concession
30 days prior to the effective date thereof. In the event the Company fails to
cure such breach or other event giving rise to the right of termination during
such 30-day period, the Secretary shall be entitled to initiate a legal
proceeding to terminate the Data Transmission Agreement. Upon a termination of
the Satellite Agreement upon a default by the Company in the performance of its
obligations thereunder, the Secretary will also be entitled to payment of the
Bank Guaranty and to pursue all other remedies at law for any additional damages
suffered.
Reversion of Assets. In the event the Company abandons the Data
Transmission Agreement or the Secretary unilaterally terminates the Data
Transmission Agreement because the Company unjustifiably
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suspends satellite services for more than 30 days; the Company is declared
insolvent, bankrupt, dissolved or commences a bankruptcy or liquidation
proceeding or assigns its assets for the benefit of its creditors; the Company
is dissolved or liquidated; or the Company fails to pay the licensing or other
applicable fees within 90 days after the due date thereof, all of the Company's
assets used in connection with its data transmission operations will revert to
the government of Ecuador without compensation to the Company. In the event the
Data Transmission Agreement is terminated for any other reason including
non-renewal, mutual consent of the parties, unilateral decision of the Secretary
to terminate the Data Transmission Agreement (other than for the reasons
described above) or the dissolution of the Company as a legal entity, the
Government will be required to purchase all of the Company's assets used in
connection with its data transmission operations at a purchase price equal to
their aggregate discounted value, without amortization, determined according to
the Company's books and calculated by an independent expert chosen by mutual
consent of the parties. The total purchase price for such assets is payable to
the Company by the Government of Ecuador within one year of the termination of
the Data Transmission Agreement.
Arbitration. The Data Transmission Agreement provides that any controversy
of a technical nature which cannot be resolved amicably between the parties will
be submitted to binding arbitration in Ecuador. The party seeking arbitration
shall send written notice to the other party designating one arbitrator. The
other party shall designate a second arbitrator; and the two arbitrators shall
mutually agree on a third arbitrator, who must be a member of an international
telecommunications entity and shall preside over the deliberations. A decision
shall be reached by simple majority of the arbitrators, which decision shall not
be subject to appeal in respect of the interpretation and resolution of any
technical matter submitted to arbitration. Each party shall be responsible for
paying the costs, fees and expenses associated with its designated arbitrator
and shall share equally the costs, fees and expenses of the third arbitrator.
TERMS OF INTERNET CONCESSION
The Company was awarded its Internet Concession in August 1997. The
Internet Concession authorizes the Company to furnish various Internet related
services, including basic Internet access to the World Wide Web, private
networks, remote services and network browsers, electronic mail, database access
and electronic data interchange (EDI) services. The consideration paid by the
Company for the Internet Concession consisted of (i) a one-time concession fee
of approximately $675 and (ii) an annual fee payable throughout the term of the
Internet Concession of (x) the number of internet service subscribers of the
Company as of December 31 of each year multiplied by (y) the product of 0.01 and
a variable index that is linked to the consumer price index of Ecuador (Unidades
de Valor Constante, or "UVC"). As of December 31, 1997, the UVC was
approximately $6.75.
The terms of the Company's Internet Concession are set forth in Resolution
No. 256-11 issued by CONATEL on August 26, 1997. The Company submitted an
application for the Internet Concession in November 1996 and was awarded the
concession on the basis of several factors, including the Company's technical
capabilities and operational capacity. The term of the Company's Internet
Concession is ten years, expiring on August 26, 2007, and may be renewed by the
Company or the Secretary for subsequent ten-year periods by delivering prior
written notice of its election to renew.
The Company will utilize its international satellite teleport (Class 3
Earth Station) located in Guayaquil, Ecuador and its national microwave network
in providing Internet services to its subscribers. In addition, the Company is
authorized to utilize its existing cellular network and the Ecuadorian Wireline
System and dedicated circuits if necessary in order to expand the areas in which
it may provide Internet services.
The Internet Concession is non-exclusive and identical concessions were
granted to nine other entities, including Emetel, Impsatel del Ecuador, S.A.,
Prodata, S.A. and Cyberweb, S.A., that may compete with the Company. In
addition, the Secretary is authorized to issue additional concessions with terms
identical to the Internet Concession to third parties that may compete with the
Company. See "Business -- Competition."
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MANAGEMENT
BOARD OF DIRECTORS
The Company's Board of Directors is composed of five members, each with one
vote. The members of the Board of Directors are elected for two-year terms and
may be removed by the principal stockholders at a general assembly. Any member
may be reelected indefinitely. Action by the Board of Directors of the Company
requires the approval of a majority of the directors in office.
At the current time, the number of directors each holder of Class A Common
Stock is entitled to appoint is determined by each stockholder's relative
percentage ownership of the Company's capital stock divided by 20, the
percentage of total ownership of the Company's capital stock needed to elect one
director (which is equal to 100 divided by 5). Utilizing this formula, Conecel
Holdings has a quotient equal to 4.2500 (i.e., 85% divided by 20%) and Cempresa
has a quotient equal to 0.7500 (i.e., 15% divided by 20%) (individually, each a
"Director Quotient" and collectively, the "Director Quotients"). Given the
ownership structure of the Company, each Director Quotient is comprised of a
fraction or a whole number and a fractional remainder up to four decimal places.
Each whole number comprising each Director Quotient entitles the respective
stockholder to elect that number of directors. Using this formula, Conecel
Holdings is entitled to appoint four directors and Cempresa is entitled to
appoint one director. Following the completion of the Offering, Conecel Holdings
will beneficially own 100% of the outstanding shares of Class A Common Stock and
be entitled to appoint all of the Company's directors.
The Company's Board of Directors currently expects to form an audit
committee comprised of a majority of independent members following the
consummation of the Offering. The members of the Company's Board of Directors,
as of February 28, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE DIRECTOR SINCE
- ---- --- --------------
<S> <C> <C>
Carlos Mosquera P. (Chairman)............................... 58 1995
Jaime Aguilera Blanco....................................... 58 1995
Pedro Zambrano Lapentti..................................... 28 1995
Rafael Ferreti Parra........................................ 38 1995
Luis Nasr................................................... 48 1997
</TABLE>
The following is certain biographical information regarding the directors
of the Company:
Carlos Mosquera P., the Company's Chairman of the Board and President,
has been a director of the Company since 1995. Previously, he was the
General Manager of Banco del Pichincha and Banco Amazonas, S.A., as well as
a member of the Board of Directors of Banco Amazonas, S.A.
Jaime Aguilera Blanco, has been a director of the Company since 1995.
From 1994 to 1995, he served as Executive President of National Enterprise
of Telecommunications of Colombia (TELECOM), as Executive Director of the
Association of Telecommunications Enterprises (ASETA) and as Chairman of
the Board and Chief Executive Officer of BIARCA, LTD. from 1991 to 1994.
Mr. Aguilera holds Doctorate degrees in Law and Business from the National
University of Colombia, a Doctorate degree in Law and Economics from Paris
University, and an L.L.M. from Yale University in the United States.
Pedro Zambrano Lapentti has been a director of the Company since 1995.
Previously, he has been the President and Director of Diano Ediasa S.A.,
one of the major newspapers in the city of Portoviejo, Ecuador. Mr.
Zambrano holds a Bachelor's degree in Business Administration from
Universidad San Francisco de Quito in Ecuador.
Rafael Ferreti Parra has been a director of the Company since 1995. He
is currently the Executive President of Rogliz S.A., a company involved in
the shrimp industry. From 1990 to 1996, he served as a director of Factor
Amazonas. Mr. Ferreti holds a Master's degree in Business and Construction
from Catholic University in Guayaquil, Ecuador, and a Bachelor's degree in
Industrial Engineering from the University of Tennessee at Knoxville. Mr.
Ferreti Parra is a member of the Parra Family which controls the Company.
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Luis Nasr has been a director of the Company since 1997. Mr. Nasr is a
prominent businessman in Ecuador currently serving as Executive Vice
President of Mercantil Garzoal in Ecuador, a major advertising firm. From
1984 to July 1992, Mr. Nasr served as Account Director in charge of Colgate
Palmolive and Pepsi Cola accounts for Poole Cane and Belding/Leboney
Advertising in New York, New York. Mr. Nasr holds a Masters degree in
Business and Political Communications from Fairchild University in
Connecticut and a Bachelor's degree in Business Administration from the
Ecola Superior de Administracao de Negocios, The Loyola Foundation, Sao
Paolo, Brazil.
EXECUTIVE OFFICERS
The executive officers of the Company are appointed by the Board of
Directors to serve one-year terms. Any executive officer may be reelected
indefinitely and may be removed by the Board at any time. The executive officers
of the Company, as of February 28, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD SINCE
- ---- --- -------- ----------
<S> <C> <C> <C>
Carlos Mosquera P.............. 58 Chairman of the Board and President 1996
J. Fernando Colunga............ 47 Chief Executive Officer 1997
Paul Siska Goytre.............. 39 Vice President -- Strategic Planning and 1996
Corporate Development
Guido Paez Puga................ 36 Vice President -- Finance 1996
Santiago Cordovez.............. 39 Vice President -- Marketing and Sales 1997
Renato Paccagnella Estrada..... 35 Vice President -- Network Operations 1997
Luis Hinostroza................ 32 Vice President -- Systems 1994
Jose Luis Magallanes........... 40 Vice President -- Customer Service 1997
Fabian Berru................... 31 Vice President -- Public Telephone 1996
Jorge Lanas.................... 36 Vice President -- Data Transmission and 1997
Value-Added Services
Martin Sanchez................. 34 Vice President -- Human Resources 1996
Gonzalo Valarezo............... 30 Vice President -- Legal 1995
</TABLE>
The following is certain biographical information regarding the executive
officers of the Company (information for Carlos Mosquera P. is included under
"Board of Directors" above):
J. Fernando Colunga, the Company's Chief Executive Officer since 1997,
is responsible for the Company's day-to-day operations. From 1995 to 1997,
he served as the Company's Chief Operating Officer. From 1991 to 1995, he
held various senior management positions at Grupo Iusacell, including
Marketing and Sales Director. Mr. Colunga holds a Master's degree in
Business Administration from the IPADE, Mexico, a post-graduate degree in
Philosophy, Pedagogy and Communications and a degree in Public Accounting
from the Instituto Politecnico Nacional in Mexico.
Paul Siska Goytre, the Company's Vice President -- Strategic Planning
and Corporate Development since 1996, is responsible for streamlining
operations and developing business opportunities for the Company. He has
been involved in numerous international telecommunications operations since
1989, including the procurement of telecommunications concessions in
various Latin American countries, including Chile, Bolivia, Peru,
Venezuela, Panama, El Salvador and Honduras. Mr. Siska also performs
services for Conecel Holdings from time to time. Prior to joining the
Company, Mr. Siska most recently served as the International Sales Manager
of GST Telecommunications Inc., an international long-distance and local
wireless telephone provider in Florida, from June 1993 to December 1995.
Mr. Siska holds a Master's degree in International Business Administration
from Nova Southeastern University, a graduate certificate in Latin American
and Caribbean Studies and a Bachelor of Science degree in Economics.
Guido Paez Puga, the Company's Vice President -- Finance since 1996,
is responsible for the Company's financial and administrative divisions.
Previously, he was a consultant to the World Bank, having provided
technical assistance on financial and administrative matters in Cambodia,
Armenia and Haiti. He was also involved in the design of a $120 million
investment fund in Ecuador financed by the World Bank, the Inter American
Development Bank, USAID and the Andean Development Corporation.
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Mr. Paez holds a Bachelor's degree in Business Administration with a
specialization in Economics from Winthrop University in South Carolina.
Santiago Cordovez, the Company's Vice President -- Marketing and Sales
since 1997, is responsible for all marketing and sales with respect to
Company's operations nationwide. Mr. Cordovez joined the Company in 1996 as
its Vice President -- Operations -- Sierra Region. Between 1994 and 1996,
Mr. Cordovez served as Sales Manager for Otecel, S.A., the Company's
primary competitor. Previously, he served as Marketing Manager of Quaker
Oats, Perugina, Gatorade, the largest industrial group in Ecuador, and
served as Advertising and Promotional Manager of a Coca-Cola bottler in
Guayaquil, Ecuador. Mr. Cordovez has also served as an Account Executive
for McCann Erickson, one of the largest advertising companies in the world,
in charge of international accounts such as Coca-Cola, Beatrice Foods,
Nabisco and Eastern.
Renato Paccagnella Estrada, the Company's Vice President -- Network
Operations since 1997, is responsible for all network planning,
construction and as well as the network's quality maintenance with respect
to the Company's operations nationwide. Mr. Paccagnella joined the Company
in 1995 as its Vice President -- Operations -- Coastal Region. Previously,
between 1992 and 1995, he was a regional manager for TELCEL CELULAR, a
leading Venezuelan cellular company operated by BellSouth International.
Luis Hinostroza, the Company's Vice President -- Systems since 1994,
is responsible for the Company's information system, including the
Company's cellular and pager operations and its public and international
telephony. Previously, Mr. Hinostroza served as an international
telecommunication systems consultant to companies based in the United
States and Puerto Rico, as well as throughout Ecuador. Mr. Hinostroza holds
a Systems Engineering degree from the National Polytechnic School, and
received extensive training in Venezuela and the United States in Oracle
database architecture, CASE tool designs and software development.
Jose Luis Magallanes, the Company's Vice President -- Customer Service
since November 1997, is responsible for coordinating the Company's
relations with its customers. Mr. Magallanes previously served as a
business manager of the northern division of United Parcel Service in
Mexico from February 1993 to October 1997. Mr. Magallanes holds a
Bachelor's degree in Business Administration from the Universidad
Regiomontana in Mexico and a Master's degree in Business Administration
from Eastern College in Pennsylvania.
Fabian Berru, the Company's Vice President -- Public Telephony since
1996, is responsible for managing the Company's public telephone business.
From 1990 to 1996, he worked as a business management executive with
Carvajal S.A., a Colombian multinational private group with a strong
presence in Ecuador, where he managed its office furniture business and the
Carvajal Foundation in Ecuador. Mr. Berru holds a Bachelor's degree in
Business Administration from Pontificia Universidad Catolica in Ecuador.
Jorge Lanas, the Company's Vice President -- Data Transmission and
Value-Added Services since 1997, is responsible for managing the Company's
Data Transmission and Value-Added Services businesses. Mr. Lanas
collaborated in the design and implementation of Internet Service Providers
in Ecuador, Morocco and Saudi Arabia. Mr. Lanas holds a Master's degree in
Engineering and Engineering Management and a Bachelor's degree in
Electrical Engineering from Catholic University in Washington, D.C.
Martin Sanchez, the Company's Vice President -- Human Resources since
1996, is responsible for the selection, hiring and training of all
employees nationwide. Mr. Sanchez has worked previously at Autobuses de
Oriente ADO, Videovisa Group (Mexico), Aeromexico, Iusacell and Promotora
Celular. He holds a Bachelor's degree in Psychology and a post-graduate
degree in Philosophy and Pedagogy from the Pan-American University in
Mexico.
Gonzalo Valarezo, the Company's Vice President -- Legal since 1995,
handles the Company's public relations with Ecuador's governing
telecommunications institutions and oversees the Company's legal and
contractual matters. From 1993 to 1995, he worked as the Company's General
Secretary, where he
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was responsible for overseeing the Company's compliance with the cellular
licenses issued by the Superintendency and all of the Company's other
administrative and legal matters. Dr. Valarezo received his law degree from
the Ecuadorian Catholic University in Quito.
COMPENSATION OF DIRECTORS
Currently, the directors of the Company do not receive any compensation for
serving on the Board of Directors, other than reimbursement of all reasonable
expenses for attendance at Board meetings.
COMPENSATION OF EXECUTIVE OFFICERS
For the year ended December 31, 1997, the aggregate amount of compensation
paid by the Company to all directors and executive officers as a group was
approximately $1.7 million (at the sucre/U.S. dollar exchange rate in effect on
December 31, 1997). The Company believes that its directors and executive
officers are compensated at a level commensurate with industry standards within
the telecommunications sector in Ecuador.
The Company entered into substantially similar employment agreements with
each of its executive officers. Each agreement establishes an annual base salary
and a package of benefits, including a cash bonus based on meeting and exceeding
targeted performance objectives of the Company as well as the employee's
specific responsibility areas, and in some cases, the use of an automobile at
the Company's expense. Each employment agreement expires annually, subject to
renewal. The employment agreements also contain certain non-competition and
confidentiality provisions. It is expected that, prior to the consummation of
the Offering (but contingent on such consummation), certain of the Company's
executive officers will enter into amended employment agreements with the
Company to reflect, among other changes, awards of stock options to purchase
shares of Class B Common Stock under the Company's Stock Option Plan, as
described below.
STOCK OPTION PLAN
At a meeting held in March 1998, the Company's directors approved the
general terms of a 1998 Stock Option Plan (the "Stock Option Plan") for
executive officers, key employees and independent contractors of the Company
pursuant to which they may, through the grant of options to purchase Class B
Common Stock of the Company, participate in the increase in value of the
Company's shares. The Stock Option Plan will be administered by the Board of
Directors, or a committee designated by the Board, which has authority to
determine, in its sole discretion, to whom incentive awards may be granted and
the valuation of each award. An aggregate of 750,000 shares of Class B Common
Stock have been reserved for issuance under the Stock Option Plan.
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<PAGE> 81
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth (a) as of February 28, 1998, after giving
effect to the exercise of the Warrants and (b) after giving effect to (i) the
MasTec Transaction and (ii) the sale of 9,195,580 ADSs in the Offering, certain
information regarding the beneficial ownership of the Company. Unless otherwise
noted, none of the directors or officers of the Company beneficially owns any
shares of Common Stock.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON
BENEFICIALLY OWNED PRIOR STOCK BENEFICIALLY
TO OFFERING NUMBER OF OWNED AFTER OFFERING
CLASS OF ------------------------- SHARES TO --------------------
NAME AND ADDRESS COMMON NUMBER OF BE SOLD NUMBER OF
OF BENEFICIAL OWNER STOCK SHARES PERCENT IN OFFERING SHARES PERCENT
- ------------------- -------- ------------ --------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Conecel Holdings Limited(1)(2)... A 60,710,250 80.9% 2,962,964 60,747,286 56.7%
P.O. Box 146
Road Town, Tortola B 1,406,250(3) 1.9% 1,406,250(3) 1.3%
British Virgin Islands
Centro Empresarial, Cempresa
C.A.(1)(2)..................... A 11,250,000 15.0% -- -- --
Cordova 1005 and 9 de Octubre
Guayaquil, Ecuador
MasTec, Inc.(2).................. B -- -- -- 7,500,000 7.0%
3155 NW 77th Avenue
Miami, Florida 33122
Selling Warrantholders(4)........ B 1,633,500(5) 2.2% 1,633,500(5) -- --
</TABLE>
- ---------------
(1) Both Conecel Holdings and Cempresa are controlled by the Parra Family
through its 100% and 60% equity interests, respectively, in such companies.
The Parra Family is comprised of Simon Parra-Gil, the former Chief Executive
Officer of the Company, and certain of his family members including his
children. Mr. Parra-Gil currently serves as the Chairman and Chief Executive
Officer of Banco Amazonas, S.A., one of Ecuador's leading financial
institutions. The Parra Family also holds interests in Ecuador's
construction, real estate and agricultural industries. Rafael Ferreti Parra,
a director of the Company, is the nephew of Mr. Parra-Gil and is a member of
the Parra Family. See "Certain Relationships and Related Transactions."
(2) In September 1997, an entity wholly owned by the Parra Family preliminarily
agreed to purchase from MasTec the 40% interest in Cempresa which the Parra
Family does not control, in exchange for $20.0 million in cash and 7,500,000
shares of the Company's Class B Common Stock owned by Cempresa (which it
will convert from an equal number of shares of Class A Common Stock).
Pursuant to a definitive stock purchase agreement in December 1997, the cash
portion of the MasTec Transaction was paid, with the share transfer to occur
concurrently with the consummation of the Offering. Of the remaining shares
of Class A Common Stock held by Cempresa, 3,000,000 shares will be
transferred to Conecel Holdings and 750,000 shares (representing less than
1% of such outstanding shares after the Offering) will be converted into
Class B Common Stock and transferred to an unaffiliated entity before or
concurrently with the consummation of the Offering for services rendered in
connection with the MasTec Transaction.
(3) Of the shares of Class B Common Stock held by Conecel Holdings, 1,406,250
shares are subject to a warrant held by UBS Securities LLC issued in
consideration for corporate finance advisory services rendered to the
Company, Conecel Holdings and its affiliates since May 1995. See
"Underwriting."
(4) Of the shares of Class B Common Stock held by Conecel Holdings, 1,633,500
shares are subject to the Warrants, and the holders of the Warrants that
have agreed to sell shares hereunder are expected to exercise their
respective Warrants for shares of Class B Common Stock on or prior to the
consummation of the Offering and sell such shares as part of the Offering.
(5) This table assumes that all of the Warrants are exercised and sold as part
of the Offering. See "Certain Relationships and Related Transactions." The
Company is currently establishing, subject to applicable securities law, the
level of participation from the holders of the Warrants.
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<PAGE> 82
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONECEL HOLDINGS TRANSACTIONS
Conecel Stock Acquisition. In September 1997, Conecel Holdings completed
the acquisition (the "Conecel Acquisition") of an aggregate of 63,750,000 shares
of common stock of the Company, representing 85% of such outstanding shares.
Pursuant to a Stock Purchase Agreement, dated as of September 12, 1997, Conecel
Holdings purchased, for an aggregate purchase price of $51.0 million, (i)
20,467,410 shares of common stock from Grupo Iusacell, S.A. de C.V., (ii)
11,345,116 shares of common stock from Adminstracion y Control de Industrias,
S.A. de C.V. and (iii) 3,713,648 shares of common stock from Telecel, S.A.,
representing in each case all of their respective interests. Conecel Holdings
also entered into a Stock Purchase Agreement, dated September 30, 1997, to
purchase for a purchase price of $27.5 million, 28,223,826 shares of common
stock from Cempresa. Cempresa retained, and currently owns, 11,250,000 shares of
common stock, representing 15% of such outstanding shares.
The Parra Family, through its 100% equity interest in Conecel Holdings and
its 60% equity interest in Cempresa, currently controls the Company. The other
shareholder of Cempresa is MasTec. See "-- The MasTec Transaction."
Conecel Holdings Financing. Conecel Holdings financed the Conecel
Acquisition (the "Conecel Financing") by issuing, in a private transaction to
qualified institutional buyers, $121.0 million aggregate principal amount of
Conecel Holdings Notes and transferable warrants to purchase an aggregate of
1,633,500 shares of Class B Common Stock from Conecel Holdings (the "Warrants").
As collateral for its obligations under the indenture governing the Conecel
Holdings Notes, Conecel Holdings pledged substantially all of its shares of
Class A Common Stock of the Company to Bankers Trust Company ("Bankers Trust"),
on behalf of the holders of the Conecel Holdings Notes. In addition, Cempresa,
upon the occurrence of certain events, may be required to furnish to Bankers
Trust additional shares of Class A Common Stock as collateral for the Conecel
Holdings Notes. If all the Conecel Holdings Notes are redeemed, shortly
following the consummation of the Offering, Conecel Holdings' pledge of its
Class A Common Stock will be released by Bankers Trust Company, the trustee of
the Conecel Holdings Notes. In the event the Conecel Holdings Notes are redeemed
in part with the proceeds of the Offering, a portion of Conecel Holdings' pledge
of its Class A Common Stock will be released in accordance with the terms of the
Conecel Holdings Indenture.
Each of the holders of $1,000 principal amount of the Conecel Holdings
Notes received Warrants from Conecel Holdings exercisable into 13.5 shares of
Class B Common Stock of the Company held by Conecel Holdings at an exercise
price of $0.01 per share, or $16,335 in the aggregate. The Warrants were issued
pursuant to a Warrant Agreement, dated as of September 30, 1997, among Conecel
Holdings, the Company and Bankers Trust, as warrant agent. The Warrant Agreement
provides for demand and "piggyback" registration rights to the holders of the
Warrants. The Company has agreed to include the shares of Class B Common Stock
issuable upon exercise of the Warrants (the "Warrant Shares") (other than any
Warrant Shares issued to UBS Securities LLC in consideration for corporate
finance advisory services) in the Offering. The Company has agreed to pay all
expenses in connection with this registration except for underwriting discounts
and commissions. See "Underwriting." Under the terms of the Warrant Agreement,
Holders of the Warrants are entitled to receive additional Warrants in a number
equal to 1% of the total share equity of the Company as of September 30, 1997 as
a result of the Company's failure to complete a public offering prior to March
31, 1998. A majority of Holders of the Warrants waived such rights to receive
additional Warrants.
Dividend and Contribution Agreement. To enable Conecel Holdings to meet
its payment obligations under the Conecel Holdings Notes, the Company entered
into a Dividend and Contribution Agreement pursuant to which the Company has
agreed to declare and pay to its shareholders, within 90 days after the end of
each fiscal year, all Free Cash Flow (defined as, for the four most recent
consecutive fiscal quarters, EBITDA less consolidated interest expense, capital
expenditures and corporate income taxes, each as calculated on a consolidated
basis in accordance with U.S. GAAP). The obligation to pay dividends will
terminate upon the repayment of all of the Conecel Holdings Notes by the
Company.
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<PAGE> 83
THE MASTEC TRANSACTION
In September 1997, Devono Company Limited, a Parra Family-owned entity
("Devono"), entered into a preliminary agreement, which was superseded by a
definitive Stock Purchase Agreement in December 1997, with MasTec, Inc., a
Miami-based telecommunications engineering and construction company ("MasTec"),
to acquire the 40% equity interest in Cempresa owned by MasTec (the "MasTec
Interest"). Pursuant to such definitive agreement, in consideration for the
transfer of the MasTec Interest to Devono, Devono (i) caused Conecel Holdings to
pay to MasTec the sum of $20.0 million (paid in December 1997) in immediately
available funds and (ii) cause Cempresa to transfer to MasTec 7,500,000 shares
of Class B Common Stock of the Company owned by Cempresa. Cempresa further
agreed to transfer to Conecel Holdings the remaining 3,750,000 shares of Class A
Common Stock, of which Conecel Holdings has directed 750,000 such shares (upon
conversion to Class B Common Stock) to be transferred to an unaffiliated entity
for services rendered in connection with the MasTec Transaction. It is
anticipated that the MasTec Transaction and related transfers will be completed
concurrently with the consummation of the Offering.
CORPTILOR, S.A. AGREEMENTS
Corptilor, S.A., an Ecuadorian corporation and affiliate of the Company
("Corptilor"), has a non-exclusive license to provide paging services in
Ecuador. Although Corptilor operates as a separate and distinct business,
Corptilor shares certain office space and administrative and marketing expenses
with the Company pursuant to written agreements. In addition, Corptilor has the
non-exclusive right to use the Company's "Porta" logo and service mark in
connection with the promotion and marketing of the services it offers.
Management of the Company believes that the terms of its agreements with
Corptilor are at least as favorable to the Company as could have been obtained
from independent third parties.
LEASES WITH BANCO AMAZONAS
The Company leases certain vehicles and computer and technical equipment
from Banco Amazonas, S.A., an Ecuadorian bank that is controlled by the Parra
Family. The leases to which the Company and Banco Amazonas, S.A. are a party
provide for payments in the aggregate of approximately $74,000 over a 36-month
period. Each of the Company's leases with Banco Amazonas, S.A. expires in August
1998, with the exception of two vehicle leases which expire in December 1998.
Management of the Company believes that the terms of such leases are at least as
favorable to the Company as could have been obtained from independent third
parties.
PAYMENTS TO CONECEL HOLDINGS AND OTHERS
Upon the consummation of the Offering, the Company will pay to Conecel
Holdings and to certain unaffiliated service providers an aggregate of
approximately $1.0 million for certain financial and other services furnished to
the Company and other expenses incurred in connection with the Offering.
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THE CONECEL INDEBTEDNESS
THE CONECEL NOTES
The Conecel Notes were issued on May 2, 1997 pursuant to an Indenture (the
"Conecel Note Indenture") between the Company and The Bank of New York, as
trustee (the "Trustee"). The Conecel Notes mature on May 1, 2002 and are payable
at par. The Conecel Notes bear interest at the rate of 14% per annum, payable
semiannually in arrears on May 2 and November 2 of each year, to the holders of
record at the close of business on April 15 or October 15 (whether or not a
business day), as the case may be, preceding such interest payment date, except
for the final payment of principal and interest which will be made against
presentation of the related Conecel Notes. The Conecel Notes constitute general,
direct, unsecured and unconditional obligations of the Company, and rank pari
passu with all other unsecured and unsubordinated indebtedness of the Company,
except to the extent otherwise provided by mandatory provisions of Ecuadorian
law.
The Company filed with the Commission a Registration Statement on Form F-4,
which became effective in November 1997, in connection with the offer by the
Company to exchange the Conecel Notes (the "Exchange Offer") for the Company's
Series B 14% Notes due 2002 (the "Exchange Notes"), which contain substantially
identical terms as the Conecel Notes, except with respect to restrictions on
transferability. As used in this Prospectus, the term "Conecel Notes" includes
both the original and the Exchange Notes. Commencing October 30, 1997, the
interest rate on the Conecel Notes temporarily increased by 0.5% per annum under
the terms of a registration rights agreement relating to such notes as a result
of the Company's delay in consummating the Exchange Offer within 180 days after
the initial issuance of the Conecel Notes. The Conecel Notes accrued interest at
the increased rate of 14.50% until the Exchange Offer was consummated on January
6, 1998, at which time the interest rate was reduced to and fixed at 14%.
Redemption
The Company is required to redeem all or a portion of the Conecel Notes
upon the occurrence of certain events, including upon the closing of certain
asset sales and a Change of Control of the Company. Completion of the Offering
would not result in a Change of Control of the Company. In addition, the Company
may, at its option, redeem up to 35% of the aggregate principal amount of the
Notes outstanding at the time of the redemption offer, with the proceeds of (i)
a public sale of Qualified Capital Stock (as defined in the Indenture), which
includes the sale of the ADSs pursuant to the Offering, or (ii) a subscription
for Qualified Capital Stock by existing shareholders or a capital call by the
Company in exchange for Qualified Capital Stock, at a redemption price equal to
114% of the principal amount of the Conecel Notes redeemed, plus accrued
interest to the redemption date, provided that such redemption must occur within
60 days after the closing date of such public sale or subscription for Qualified
Capital Stock.
Certain Covenants
The Indenture contains, among others, the following covenants:
(a) Statement as to Compliance. The Company is required to deliver to the
Trustee, within 90 days after the end of each fiscal year, a written statement
signed by the President or Vice President and by the Chief Executive Officer,
the Treasurer, an Assistant Treasurer, the Controller or an Assistant Controller
of the Company, stating, as to each signatory thereto that (i) a review of the
activities of the Company during such year and of performance under the
Indenture has been made under his supervision, and (ii) to the best of his
knowledge, based on such review the Company has fulfilled all of its obligations
under the Indenture throughout such year, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known to him
and the nature and status thereof.
(b) Financial Statements. The Company is required to keep true and
complete books of record and account, in accordance with U.S. GAAP, and to
periodically furnish to the Trustee financial information, including copies, in
comparative form with the preceding fiscal year, of the consolidated balance
sheet of the Company and its subsidiaries as at the end of such fiscal year, and
of the consolidated statements of income, cash flows and retained earnings of
the Company and its subsidiaries for such fiscal year, all in reasonable
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<PAGE> 85
detail, in accordance with U.S. GAAP, and accompanied by a report and opinion of
independent public accountants of recognized standing selected by the Company,
as the Trustee may desire.
(c) Limitation on Liens. So long as any Conecel Notes remain outstanding,
the Company is not permitted to at any time create, incur or assume any Lien
with respect to any properties or assets of the Company or its subsidiaries (as
the case may be) now owned or hereafter acquired to secure any Indebtedness,
unless the Company or such subsidiary causes such Lien to secure equally and
ratably the obligations of the Company under the Conecel Notes; provided,
however, that Liens may be incurred in respect of (i) Permitted Vendor Equipment
Financing not to exceed $30.0 million in the aggregate at any time and (ii)
certain other Liens.
(d) Limitation on Indebtedness. So long as any of the Conecel Notes remain
outstanding, the Company is not permitted to create, incur or assume (or agree
to create, incur or assume), issue, directly or indirectly, guarantee or in any
manner become, directly or indirectly, liable for or with respect to, or suffer
to exist, any Indebtedness. Notwithstanding the foregoing limitation, the
Company may incur the following so long as no Event of Default shall have
occurred and be continuing and the Company is in compliance with the other
covenants contained herein: (i) Permitted Vendor Equipment Financing not to
exceed $30.0 million in the aggregate at any time; (ii) Junior Indebtedness so
long as (A) the ratio of Indebtedness to Capitalization of the Company and its
subsidiaries determined on a consolidated basis in accordance with U.S. GAAP,
after giving pro forma effect to the incurrence of such Junior Indebtedness and
any other Indebtedness since the most recent fiscal quarter and the receipt and
application of the proceeds thereof is not greater than 90% from May 1997 to May
1998, 85% from May 1998 to May 1999, and 75% from May 1999 and thereafter; (B)
the Debt Service Coverage Ratio of the Company and its subsidiaries at the time
the ratio is calculated is at least equal to 150% in 1998, 200% in 1999 and 250%
thereafter; and (C) the ratio of Indebtedness to EBITDA of the Company and its
subsidiaries determined on a consolidated basis in accordance with U.S. GAAP,
after giving pro forma effect to the incurrence of such Junior Indebtedness and
any other Indebtedness since the most recent fiscal quarter and the receipt and
application of the proceeds thereof is not greater than 6.00 to 1.00 through May
2000, and 5.00 to 1.00 from May 2000 and thereafter; (iii) Pari Passu
Indebtedness so long as (A) the ratio of Indebtedness to Capitalization of the
Company and its subsidiaries determined on a consolidated basis in accordance
with U.S. GAAP, after giving pro forma effect to the incurrence of any other
Indebtedness (including Junior Indebtedness) since the most recent fiscal
quarter and the receipt and application of the proceeds thereof is not greater
than 60%; (B) the Debt Service Coverage Ratio of the Company and its
subsidiaries at the time the ratio is calculated after giving pro forma effect
to the incurrence of any other Indebtedness (including Junior Indebtedness)
since the most recent fiscal quarter and the receipt and application of the
proceeds thereof, is at least equal to 250%; and (C) the ratio of Indebtedness
to EBITDA of the Company and its subsidiaries determined on a consolidated basis
in accordance with U.S. GAAP, after giving pro forma effect to the incurrence of
any other Indebtedness (including Junior Indebtedness) since the most recent
fiscal quarter and the receipt and application of the proceeds thereof is not
greater than 4.00 to 1.00; (iv) Indebtedness arising or incurred pursuant to the
Indenture; (v) Indebtedness existing as of May 2, 1997; and (vi) any refinancing
of any such Indebtedness permitted under the Indenture (including the Conecel
Notes), provided that the amount of any Indebtedness incurred to refinance such
Indebtedness does not exceed the amount of such refinanced Indebtedness and is
on substantially similar terms.
(e) Restricted Payments. So long as any of the Conecel Notes remain
outstanding, the Company is not permitted to, directly or indirectly, make any
Restricted Payment from Free Cash Flow or otherwise, if at the time of such
Restricted Payment or after giving effect thereto, (i) an Event of Default shall
have occurred and be continuing; (ii) as of the date of the shareholder
distribution or stock repurchase being made the Company was not in compliance
with the other covenants contained in the Indenture after taking into account
the shareholder distribution or stock repurchase being made; or (iii)
Stockholders' Equity of the Company is (after taking into account the
shareholder distribution or stock repurchase being made) less than Stockholders'
Equity at December 31, 1996; provided, that the Company and its Subsidiaries may
declare or pay shareholder distributions to the extent required by law, and so
long as no Event of Default has occurred and is continuing and the Company is in
compliance with the other covenants contained herein and, provided, further,
that
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Restricted Payments may only be from Free Cash Flow. In addition, the Company is
not permitted to make any loans or advances to, or investments in, any Person,
except (i) loans and advances to, and investments in, the Company or any
subsidiary; and (ii) investments in direct obligations of the United States of
America, prime commercial paper and certificates of deposit issued by commercial
banks of the United States of America.
(f) Transactions with Affiliates. The Company is not permitted to,
directly or indirectly, enter into any transaction or series of related
transactions (including without limitation, the sale, purchase, exchange or
lease of assets, property or services) with any Affiliate of the Company, except
in certain specified circumstances.
(g) Limitation on Business Activities. The Company will not engage in any
business other than the Cellular Business, public telephony and non-wireline
telecommunication services, data transmission, beepers and related businesses.
(h) Additional Covenants. The Indenture also contains covenants with
respect to, among other things, the following matters: (i) payment of principal,
premium and interest; (ii) maintenance of corporate existence; (iii) payment of
taxes and other claims; (iv) maintenance of properties; and (v) maintenance of
insurance; (vi) listing on the Luxembourg Stock Exchange; (vii) registration
rights; (viii) status/ranking; (ix) redemption of the Conecel Notes upon the
occurrence of certain events, including upon the closing of certain assets sales
and a Change of Control of the Company; and (x) no mergers or consolidations by
the Company.
Events of Default
An Event of Default is defined in the Conecel Note Indenture to include:
(a) failure by the Company to pay interest on any Conecel Note when due and
payable, if such failure continues for a period of 5 days; (b) failure by the
Company to pay the principal on any Conecel Note when due and payable at
maturity or upon redemption, acceleration or otherwise; (c) failure by the
Company to comply with any other agreement or covenant contained in the
Indenture if such failure continues for a period of 30 days after the Company
becomes aware of such failure or notice to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in principal amount of
the Conecel Notes then outstanding; (d) an event of default occurs and is
continuing under any present or future indenture, loan or credit agreement or
other instrument or obligation evidencing or under which the Company or a
subsidiary has outstanding Indebtedness in an aggregate principal amount
exceeding $5,000,000 (or its equivalent in other currencies); (e) as a result of
action by or under the authority of any government or the Company, any of the
issued stock of the Company or any of its subsidiaries, or the whole or any part
of the revenues or assets of the Company or any of its subsidiaries, is seized,
nationalized, expropriated or compulsorily acquired, or the authority of the
Company or any of its subsidiaries in the conduct of its business is wholly or
partially curtailed, and such action could reasonably be expected to have a
material adverse effect on the Company and its subsidiaries taken as a whole;
(f) the occurrence of certain events of bankruptcy or insolvency of the Company
or a Significant Subsidiary (as defined in the Conecel Note Indenture); (g) the
termination of the Cellular Concession; (h) the existence of one or more
judgments against the Company or any of its Subsidiaries in excess of
$5,000,000, either individually or in the aggregate, which remain undischarged
60 days after all rights to directly review such judgment, whether by appeal or
writ, have been exhausted or have expired as of the quarter end preceding the
end of such 60-day period; and (i) the occurrence of a Change of Control Event,
as noted below. If an Event of Default occurs and is continuing, the Trustee or
the Holders of not less than 25% in principal amount of the Conecel Notes then
outstanding may declare all the Notes to be immediately due and payable by
notice to the Company (and to the Trustee if given by the Holders). Under
certain circumstances, the Holders of a majority in principal amount of the
Notes then outstanding may rescind such a declaration.
Change of Control
A Change of Control Event is defined in the Conecel Note Indenture to
include an event or series of events by which (i) any third party, other than
the existing control group or entities controlled by them or certain
telecommunications providers, becomes the beneficial owner of more than 50% of
the total voting power of the Company, (ii) another corporation merges into the
Company or the Company consolidates with
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or merges into any other corporation, (iii) the Company conveys, transfers or
leases all or substantially all its assets to a third party, other than to a
subsidiary of the Company, with the effect that a third party, other than the
existing control group or certain telecommunications providers, is or becomes
the beneficial owner of more than 50% of the total voting power of the surviving
or transferee corporation, or (iv) the shareholders of the Company approve any
plan or proposal for the liquidation or dissolution of the Company. A Change of
Control Event would constitute an Event of Default and accelerate the obligation
of the Company to repay the entire outstanding amounts under the Conecel Notes.
Supplemental Indenture
In February 1998, pursuant to a Supplemental Indenture, the holders of the
Conecel Notes waived compliance by the Company with the Limitation on
Indebtedness, Restricted Payments and Limitation on Transactions with Affiliates
covenants in the Conecel Note Indenture in order to enable the Company to assume
and immediately thereafter redeem, using a significant portion of the net
proceeds (though not less than 80% of the net proceeds) of the Offering, all or
a portion of the Conecel Holdings Notes at a redemption price equal to 107% of
the principal amount thereof in accordance with the terms of the Conecel
Indenture and the Conecel Holdings Indenture. In addition, pursuant to the
Supplemental Indenture relating to the Conecel Notes, the maximum amount of
vendor financing permitted to be incurred by the Company was increased from $10
million to $30 million.
Trading
The Conecel Notes are listed and traded on the Luxembourg Stock Exchange.
THE CONECEL HOLDINGS NOTES
On September 30, 1997, Conecel Holdings, the Company's approximately 85%
stockholder, completed a private placement of $121,000,000 in aggregate
principal amount of Conecel Holdings' 14% Series A Secured Notes (the "Conecel
Holdings Notes") and warrants to acquire an aggregate of 1,633,500 shares of the
Company's Class B Common Stock (the "Warrants") pursuant to an Indenture and
Security Agreement, dated as of September 30, 1997, between Conecel Holdings and
Bankers Trust Company ("Bankers Trust"), as trustee (the "Conecel Holdings
Indenture"). The Conecel Holdings Notes mature on October 1, 2000 and are
payable at par. The Conecel Holdings Notes bear interest at the rate of 14% per
annum, payable semi-annually in arrears on September 30 and March 31 of each
year, commencing March 31, 1998, to the holders of record on March 15 or
September 15 (whether or not a business day), as the case may be, preceding such
interest payment date, except for the final payment of principal and interest
which will be made against presentation of related Conecel Holdings Notes. The
rate of interest on the Conecel Holdings Notes increased by 1% per annum on
March 31, 1998 because a Complying Initial Public Offering was not consummated
by March 31, 1998. The Conecel Holdings Notes constitute direct unconditional
senior and secured obligations of Conecel Holdings, and will rank pari passu
with all other existing and future secured obligations of Conecel Holdings,
except to the extent otherwise provided by mandatory provisions of Ecuadorian
law.
Collateral
As collateral for its obligations under the Conecel Holdings Indenture
governing the Conecel Holdings Notes, Conecel Holdings pledged (i) certain of
its shares of common stock of the Company, representing approximately 80.95% of
the capital stock of the Company; and (ii) US$16,940,000 consisting of the sum
of two interest payments on all the Conecel Holdings Notes initially issued
under the Conecel Holdings Indenture, to Bankers Trust, on behalf of holders of
the Conecel Holdings Notes. In addition, Cempresa, upon the occurrence of
certain events, is required to furnish to Bankers Trust additional shares of
common stock as collateral for the Conecel Holdings Notes. If all Conecel
Holdings Notes are redeemed with the proceeds of the Offering, shortly following
the consummation of the Offering, Conecel Holdings' pledge of common stock will
be released by Bankers Trust. In the event the Conecel Holdings Notes are
redeemed in part with the
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proceeds of the Offering, a portion of Conecel Holdings' pledge of its Class A
Common Stock will be released in accordance with the terms of the Conecel
Holdings Indenture.
Redemption
Conecel Holdings is required to redeem all of the Conecel Holdings Notes
upon the occurrence of certain events, including upon the receipt by Conecel
Holdings of (i) proceeds in an amount equal to 35% of the Conecel Notes
outstanding from a Complying Initial Public Offering (and 90% of the net
proceeds received by Conecel Holdings from any Subsequent Public Offering or
private sale of stock of the Company following a Complying Initial Public
Offering); and (ii) 100% of all dividends and the proceeds of all subordinated
Indebtedness incurred by Conecel Holdings.
Certain Covenants
The Conecel Holdings Indenture contains, among others, the following
covenants:
(a) Statement as to Compliance. Conecel Holdings is required to deliver to
Bankers Trust, within 90 days after the end of each fiscal year, a written
statement signed by the President or Vice President and by the Chief Executive
Officer, the Treasurer, an Assistant Treasurer, the Controller or an Assistant
Controller of Conecel Holdings, stating, as to each signatory thereto that (i) a
review of the activities of Conecel Holdings during such year and of performance
under the Conecel Holdings Indenture has been made under his supervision, and
(ii) to the best of his knowledge, based on such review Conecel Holdings has
fulfilled all of its obligations under the Conecel Holdings Indenture throughout
such year, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default known to him and the nature and status
thereof.
(b) Financial Statements. Conecel Holdings is required to keep true and
complete books of record and account, in accordance with U.S. GAAP, and to
periodically furnish to Bankers Trust financial information, including copies,
in comparative form with the preceding fiscal year, of the consolidated balance
sheet of Conecel Holdings and its subsidiaries as at the end of such fiscal
year, and of the consolidated statements of income, cash flows and retained
earnings of Conecel Holdings and its subsidiaries for such fiscal year, all in
reasonable detail, in accordance with U.S. GAAP, and accompanied by a report and
opinion of independent public accountants of recognized standing selected by
Conecel Holdings, as Bankers Trust may desire.
(c) Limitation on Liens. So long as any Conecel Holdings Notes remain
outstanding, Conecel Holdings is not permitted to at any time create, incur or
assume any Lien with respect to any properties or assets of Conecel Holdings now
owned or hereafter acquired to secure any Indebtedness, with the exception of
Liens incurred in respect of (i) current taxes, assessments or other
governmental charges which are not delinquent or remain payable without any
penalty; and (ii) certain other Liens. In addition, so long as the Conecel Notes
remain outstanding, Conecel Holdings shall not permit any of its Subsidiaries
now owned or hereinafter acquired, to at any time create, incur or assume any
Lien with respect to any properties or assets of such Subsidiary now owned or
hereinafter acquired to secure any Indebtedness, unless such Subsidiary causes
such Lien to secure equally and ratably the obligations of Conecel Holdings
under the Conecel Holdings Notes; provided, however, that Liens may be incurred
by the Company to the extend permitted by the Conecel Note Indenture. If the
Conecel Note Indenture is at any time amended to permit the creation, incurrence
or assumption of any additional Lien, the Company may create, incur or assume
any Lien permitted under the Conecel Note Indenture as so amended so long as:
(i) the ratio of Indebtedness to Capitalization of the Company and its
Subsidiaries determined on a consolidated basis in accordance with U.S. GAAP,
after giving pro forma effect to the incurrence of any other Indebtedness since
the most recent fiscal quarter, as well as the Indebtedness represented by such
Lien, and the application of the proceeds thereof in each case, is not greater
than 60%; (ii) the Debt Service Coverage Ratio of Conecel Holdings and its
Subsidiaries at the time the ratio is calculated after giving pro forma effect
to the incurrence of any Indebtedness since the end of the most recent fiscal
quarter, as well as the Indebtedness represented by such Lien, and the
application of the proceeds thereof in each case, is at least equal to 250%; and
(iii) the ratio of Indebtedness to EBITDA of Conecel Holdings and its
subsidiaries determined on a consolidated basis in accordance with U.S. GAAP,
after giving pro forma effect to the incurrence of any other Indebtedness since
the most recent fiscal quarter, as well as the Indebtedness
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represented by such Lien, and the receipt and application of the proceeds
thereof in each case, is not greater than 4:00 to 1:00.
(d) Limitation on Indebtedness. The Company is not permitted to create,
incur or assume (or agree to create, incur or assume), issue, directly or
indirectly, guarantee or in any manner become, directly or indirectly, liable
for or with respect to, or suffer to exist, any Indebtedness, except for (i)
Indebtedness arising or incurred under the Conecel Holdings Indenture and (ii)
Indebtedness that is expressly subordinate and junior in right of payment and
principal, premium and interest to the Conecel Holdings Notes if (A) the
proceeds of such Indebtedness are used to redeem Conecel Holdings Notes pursuant
to the Conecel Holdings Indenture; and (B) the terms of such Indebtedness do not
permit the payment of interest in cash until after all Indebtedness under the
Conecel Holdings Indenture has been satisfied and (C) the principal amount of
such Indebtedness does not exceed the amount of the Conecel Holdings Notes
repaid with the proceeds thereof. Conecel Holdings is also precluded from
permitting any Subsidiary to create, incur or assume, issue, directly or
indirectly, guarantee or in any manner become, directly or indirectly, liable
for or with respect to, or suffer to exist, or otherwise become liable in
respect of any Indebtedness except for Indebtedness permitted to be incurred by
the Company pursuant to the Conecel Note Indenture.
(e) Restricted Payments. Unless the Company has assumed the obligations of
Conecel Holdings under the Conecel Holdings Indenture and the Conecel Holdings
Notes, Conecel Holdings may not make any Restricted Payment (other than, among
other things, the distribution by Conecel Holdings to its shareholders of up to
US$5,000,000 in proceeds of a Complying Initial Public Offering, if such
Complying Initial Public Offering is made in compliance with the Conecel
Holdings Indenture). In addition, Conecel Holdings may not permit any subsidiary
to, directly or indirectly, make any Restricted Payment from Free Cash Flow or
otherwise, if at the time of such Restricted Payment or after giving effect
thereto, (i) an Event of Default shall have occurred and be continuing under the
Conecel Note Indenture or the Conecel Holdings Indenture; (ii) as of the date of
the shareholder distribution or stock repurchase being made Conecel Holdings was
not in compliance with the other covenants contained in the Conecel Holdings
Indenture after taking into account the shareholder distribution or stock
repurchase being made; or (iii) Stockholders' Equity of Conecel Holdings is
(after taking into account the shareholder distribution or stock repurchase
being made) less than Stockholders' Equity at June 30, 1997; provided, that
Conecel Holdings and its Subsidiaries may declare or pay shareholder
distributions to the extent required by law, and so long as no Event of Default
has occurred and is continuing and Conecel Holdings is in compliance with the
other covenants contained herein and all such dividends received by Conecel
Holdings are used to redeem the Conecel Holdings Notes pursuant to the Conecel
Holdings Indenture, provided, further, that Restricted Payments may only be from
Free Cash Flow. In addition, Conecel Holdings is not permitted to make any loans
or advances to, or investments in, any Person, except (i) loans and advances to,
and investments in, Conecel Holdings or any Subsidiary; and (ii) investments in
direct obligations of the United States of America, prime commercial paper and
certificates of deposit issued by commercial banks of the United States of
America.
(f) Transactions with Affiliates. Conecel Holdings is not permitted to,
directly or indirectly, enter into any transaction or series of related
transactions (including without limitation, the sale, purchase, exchange or
lease of assets, property or services) with any Affiliate of Conecel Holdings,
except in certain specified circumstances.
(g) Limitation on Business Activities. The business activities of Conecel
Holdings are restricted exclusively to (i) owning Capital Stock of the Company;
(ii) issuing the Conecel Holdings Notes and Warrants, (iii) applying the
proceeds from the Offering of the Conecel Holdings Notes and Warrants pursuant
to the Conecel Holdings Indenture, (iv) granting the security interests pursuant
to the Conecel Holdings Indenture, (v) raising equity financing, (vi) raising
subordinate debt financing in accordance with the Conecel Holdings Indenture,
(vii) any activity necessary, suitable or convenient to accomplish the foregoing
or incidental thereto. In addition, so long as the Conecel Holdings Notes and
Warrants remain outstanding, Conecel Holdings may not (A) incur any indebtedness
of any other entity, other than Indebtedness pursuant to the Conecel Holdings
Indenture, (B) consolidate or merge into any other entity or convey or transfer
its properties and assets substantially as an entirety to any entity; and (C)
without the affirmative vote of 75% of Conecel Holdings' shareholders, institute
proceedings to be adjudicated bankrupt or insolvent, or consent to the
institution of
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bankruptcy or insolvency proceedings against it, or consent to, or file a
petition seeking reorganization or relief under any applicable federal or state
law relating to bankruptcy, or consent to the appointment of a receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of
Conecel Holdings or a substantial part of its property, or make any assignment
for the benefit of creditors, or admit in writing its inability to pay its debts
generally as they become due, or take corporate action in furtherance of any
such action. So long as the Conecel Holdings Notes and Warrants remain
Outstanding, Conecel Holdings also may not (i) lend or advance any moneys to, or
make an investment in, any person or (ii) engage in any other activity that
bears on whether the separate legal identity of Conecel Holdings will be
respected, including, without limitation (A) holding itself out as being liable
for the debts of another party; (B) forming, or causing to be formed, any
subsidiaries; or (C) acting other than in its corporate name.
(h) Additional Covenants. The Conecel Holdings Indenture also contains
covenants with respect to, among other things, the following matters: (i)
liquidity maintenance, requiring Conecel Holdings to maintain Liquid Assets
selected by Conecel Holdings on deposit with Bankers Trust with a value equal to
at least 100% of the required interest payments due on the Conecel Holdings
Notes on the first two semi-annual dates on which interest on the Conecel
Holdings Notes becomes due and payable; (ii) registration rights; and (iii)
certain limitations on the business activities of Conecel Holdings.
Events of Default
An Event of Default is defined in the Conecel Holdings Indenture to
include: (a) failure by Conecel Holdings to pay interest on any Conecel Holdings
Note when due and payable, if such failure continues for a period of 5 days; (b)
failure by Conecel Holdings to pay the principal on any Conecel Holdings Note
when due and payable at maturity or upon redemption, acceleration or otherwise;
(c) failure by Conecel Holdings to comply with any other agreement or covenant
contained in the Conecel Holdings Indenture, Conecel Holdings Notes the Warrant
or Warrant Agreement if such failure continues for a period of 30 days after
Conecel Holdings becomes aware of such failure or notice to Conecel Holdings by
Bankers Trust or to Conecel Holdings and Bankers Trust by the Holders of at
least 25% in principal amount of the Conecel Holdings Notes then outstanding;
(d) an event of default occurs and is continuing under any present or future
indenture, loan or credit agreement or other instrument or obligation (including
the Conecel Note Indenture) evidencing or under which Conecel Holdings or a
Subsidiary has outstanding Indebtedness in an aggregate principal amount
exceeding $5,000,000 (or its equivalent in other currencies); (e) as a result of
action by or under the authority of any government or Conecel Holdings, any of
the issued stock of Conecel Holdings or any of its Subsidiaries, or the whole or
any part of the revenues or assets of Conecel Holdings or any of its
subsidiaries, is seized, nationalized, expropriated or compulsorily acquired, or
the authority of Conecel Holdings or any of its subsidiaries in the conduct of
its business is wholly or partially curtailed, and such action could reasonably
be expected to have a material adverse effect on Conecel Holdings and its
subsidiaries taken as a whole; (f) the occurrence of certain events of
bankruptcy or insolvency of Conecel Holdings or a Subsidiary; (g) the existence
of one or more judgments against the Company or any of its Subsidiaries in
excess of $5,000,000, either individually or in the aggregate, which remain
undischarged 60 days after all rights to directly review such judgment, whether
by appeal or writ, have been exhausted or have expired as of the quarter
preceding the end of such 60-day period; (h) the occurrence of a Change of
Control Event, as noted below; and (i) if it becomes unlawful for Conecel
Holdings or the Company to perform any of its respective obligations under the
Conecel Holdings Indenture, the Conecel Holdings Notes, the Warrants or the
Warrant Agreement, or their respective obligations thereunder cease to be valid,
binding or enforceable. If an Event of Default occurs and is continuing, Bankers
Trust or the Holders of not less than 25% in principal amount of the Conecel
Holdings Notes then outstanding may declare all the Conecel Holdings Notes to be
immediately due and payable by notice to Conecel Holdings (and to Bankers Trust
if given by the Holders). Under certain circumstances, the Holders of a majority
in principal amount of the Conecel Holdings Notes then outstanding may rescind
such a declaration.
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Change of Control
A Change of Control Event is defined in the Conecel Holdings Indenture to
include an event or series of events by which (i) any third party, other than
the existing control group or entities controlled by them or certain
telecommunications providers, becomes the beneficial owner of more than 50% of
the total voting power of Conecel Holdings, (ii) another corporation merges into
Conecel Holdings or Conecel Holdings consolidates with or merges into any other
corporation, (iii) Conecel Holdings conveys, transfers or leases all or
substantially all its assets to a third party, other than to a subsidiary of
Conecel Holdings, with the effect that a third party, other than the existing
control group or certain telecommunications providers, is or becomes the
beneficial owner of more than 50% of the total voting power of the surviving or
transferee corporation, or (iv) the shareholders of Conecel Holdings approve any
plan or proposal for the liquidation or dissolution of Conecel Holdings. A
Change of Control Event would constitute an Event of Default and accelerate the
obligation of Conecel Holdings to repay the entire outstanding amounts under the
Conecel Holdings Notes.
Supplemental Indenture
In February 1998, pursuant to a Supplemental Indenture, the holders of the
Conecel Holdings Notes and the Warrants waived compliance by Conecel Holdings
with certain covenants contained in the Conecel Holdings Indenture, including
covenants relating to Limitations on Indebtedness, Restricted Payments,
Limitations on Transactions with Affiliates and certain restrictions relating to
the early redemption of the Conecel Holdings Notes in order to enable the
Company to assume and immediately thereafter redeem, using a significant portion
of the net proceeds (though not less than 80% of the net proceeds) of the
Offering, all or a portion of the Conecel Holdings Notes at a redemption price
equal to 107% of the principal amount thereof in accordance with the terms of
the Conecel Indenture and the Conecel Holdings Indenture.
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DESCRIPTION OF CAPITAL STOCK
The following includes certain information concerning the Company's equity
share capital and a summary of all material provisions of the Company's Bylaws
(Estatutos) and certain provisions of the Ecuadorian Law of Corporations (Ley de
Companias). This description does not purport to be complete and is qualified in
its entirety by reference to the Company's Bylaws and provisions of Ecuadorian
law referred to in such summary. The Bylaws have been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
GENERAL
The authorized capital stock of the Company consists of 150,000,000 shares
of common stock divided into two classes, designated as Class A Common Stock,
par value 1,000 sucres per share, and Class B Common Stock, par value 1,000
sucres per share. As of December 31, 1997, there were 75,000,000 shares of Class
A Common Stock and no shares of Class B Common Stock outstanding. See "Principal
and Selling Shareholders." A majority of the holders of Class A Common Stock may
from time to time increase or decrease the authorized number of shares of Class
A Common Stock or Class B Common Stock. The Board of Directors of the Company
may from time to time authorize the issuance of additional shares of Class A
Common Stock or Class B Common Stock, subject to the statutory preemptive rights
granted to the holders of such shares in the Bylaws and under applicable
Ecuadorian law. The Bylaws of the Company provide that the Class A Common Stock
will at no time be less than 33.33% of the total equity share capital of the
Company.
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
The shares of Class A Common Stock and Class B Common Stock are
substantially the same, except that holders of Class A Common Stock will be
entitled to certain conversion rights and holders of Class B Common Stock will
be entitled to vote in only limited circumstances, as more fully described
below.
Shareholders' Meetings. Pursuant to the Law of Corporations of Ecuador,
and the Bylaws of the Company, the shareholders' meetings may be either Ordinary
Shareholder Meetings or Extraordinary Shareholder Meetings. Ordinary Shareholder
Meetings are convened annually at the principal office of the Company within
ninety days following the end of the Company's fiscal year. Extraordinary
Shareholder Meetings are held at the principal office of the Company, except
under certain circumstances as provided under the Law of Corporations of
Ecuador.
Shareholders' Meetings may be called by the Company's Chairman of the Board
of Directors, Executive President, or by two principal members of the Board of
Directors, by publication of a notice in a newspaper of general circulation, at
least eight days prior to the shareholders' meeting. Shareholders' meetings must
be limited to the issues identified in such notice. In addition, (i) holders
owning at least 25% of the Class A Common Stock of the Company may call a
meeting of all shareholders to discuss any matter related to the Company, and
(ii) holders owning at least 25% of the Class B Common Stock of the Company may
call a meeting to discuss only those matters to which such shareholders are
entitled to vote, such as proposed changes to the terms or relative rights of
the Class B Common Stock. The Company's management may also call a shareholders'
meetings pursuant to, and in accordance with, the provisions of the Law of
Corporations of Ecuador.
Quorum Requirements. Shareholders' Meetings are subject to a first, second
and third quorum call, a subsequent call to occur upon the failure to achieve a
quorum in connection with the previous call. A quorum for the first call of a
shareholder meeting where only the holders of Class A Common Stock are entitled
to vote requires the presence of at least a majority of all shares of Class A
Common Stock outstanding. A quorum for the first call of a shareholder meeting
where holders of both Class A Common Stock and Class B Common Stock may vote
requires the presence of at least a majority of all shares of Class A Common
Stock outstanding and at least a majority of all shares of Class B Common Stock
outstanding. For the second call of a shareholder meeting where only holders of
Class A Common Stock may vote, the presence of at least 33.33% of the total
shares of Class A Common Stock outstanding is required. For the second call of a
shareholder meeting where holders of both Class A Common Stock and Class B
Common Stock may vote, the presence of at least 33.33%
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of all shares of Class A Common Stock outstanding, and at least 33.33% of all
shares of Class B Common Stock outstanding, is required. Upon the failure of
both the first and second call, a third or subsequent meeting may be held by,
and action may be taken by a majority vote of, the holders of Class A Common
Stock or Class B Common Stock then in attendance.
Holders of the Company's Class B Common Stock are not entitled to vote at,
and may only attend, general shareholder meetings held for the purpose of
resolving matters with respect to which only the owners of shares of Class A
Common Stock are entitled to vote.
Voting Rights. Holders of Class A Common Stock are entitled to vote in
proportion to their respective relative percentage ownership of the subscribed
and paid for share capital of the Company on each matter submitted to a vote of
the Company's shareholders. The holders of the Class B Common Stock will have no
voting rights, except with respect to any proposed change to the terms or
relative rights of the Class B Common Stock, including any proposed change to
the holders' rights to receive dividends, liquidation rights and statutory
preemptive rights. Holders of Class B Common Stock will be entitled to attend
any meeting of the shareholders of the Company, without regard to their ability
to vote on any matter presented.
The Bylaws of the Company expressly provide that holders of the Class A
Common Stock will be entitled to vote exclusively on certain matters, including
(i) the election of directors of the Company, (ii) the appointment of the
Company's independent auditors, (iii) any modification of the Company's charter
documents, except with respect to any proposed modification that will affect the
terms or relative rights of the Class B Common Stock, (iv) any increase in the
Company's outstanding share capital, subject to the approval of holders of Class
B Common Stock where the price proposed by the Board of Directors of the Company
for any future issuance provides for a discount of greater than 10% of the then
fair market value of the shares and (v) the interpretation of any provision of
the Company's Bylaws as may be in effect from time to time in the event of any
conflict or otherwise, except where any such interpretation may affect the terms
or relative rights of the holders of Class B Common Stock. Holders of the
Company's Class B Common Stock will not be entitled to vote on certain matters
specified in the Company's Bylaws, including the matters described above.
Holders of the Class A Common Stock and the Class B Common Stock will vote
together on (i) any proposed dissolution or liquidation of the Company,
including the appointment of a liquidator or receiver for the Company in the
event it institutes bankruptcy or dissolution proceedings, (ii) any increase in
the Company's outstanding share capital where the price proposed by the Board of
Directors of the Company for any future issuance provides for a discount of
greater than 10% of the then fair market value of the shares, and (iii) any
proposed modification to the terms or the relative rights of the Class B Common
Stock. Any such proposed shareholder action will require the approval of a
majority of holders of shares of Class A Common Stock and the approval of a
majority of the holders of the Class B Common Stock in attendance at the meeting
of shareholders held for the purpose of approving the proposed action.
Dividends. Holders of Class A Common Stock and Class B Common Stock are
entitled to receive cash dividends at the same rate in proportion to their
relative ownership if and when declared by the Board of Directors out of funds
legally available therefor. If a dividend or distribution payable in Class A
Common Stock is made on the Class A Common Stock, the Company must also make a
pro rata and simultaneous dividend or distribution on the Class B Common Stock
payable in shares of Class B Common Stock. Conversely, if a dividend or
distribution payable in Class B Common Stock is made on the Class B Common
Stock, the Company must also make a pro rata and simultaneous dividend or
distribution on the Class A Common Stock payable solely in shares of Class A
Common Stock.
Conversion. Class B Common Stock has no conversion rights. Class A Common
Stock is convertible into Class B Common Stock, in whole or in part, at any time
and from time to time at the option of the holder on the basis of one share of
Class B Common Stock for each share of Class A Common Stock. The Bylaws of the
Company provide that Class A Common Stock must at all times comprise at least
33.33% of the total share capital of the Company. Upon completion of the
Offering, the Class A Common Stock will comprise approximately 57.1% of the
Company's total share capital, all of which will be indirectly controlled by the
Parra Family.
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Liquidation. In the event of a liquidation of the Company, after payment
of the debts and other liabilities of the Company, the remaining assets of the
Company will be distributable ratably among the holders of the Class A Common
Stock and Class B Common Stock, treated as a single class.
Preemptive Rights. Ecuador's Ley de Companias (Law of Corporations)
requires the Company, whenever it issues new shares for cash, to grant
preemptive rights to all of its shareholders (including holders of ADRs), giving
them the right to purchase a sufficient number of shares to maintain their
existing ownership percentage. However, the Company may not be able to offer
preemptive rights to United States holders of ADRs unless a registration
statement under the Securities Act is effective with respect to such rights and
the underlying shares, or an exemption from the registration requirements of the
Securities Act is available. The Company intends to evaluate at the time of any
rights offering the costs and potential liabilities associated with any such
registration statement as well as the indirect benefits to it of enabling United
States holders of ADRs to exercise preemptive rights and any other factors that
the Company considers appropriate at the time, and then make a decision as to
whether to file such a registration statement. No assurance can be given that
any registration statement would be filed or that such registration statement
would be declared effective or that an exemption would be available. To the
extent holders of ADRs are unable to exercise such rights because a registration
statement has not been filed and declared effective, the Depositary will attempt
to sell such holders' preemptive rights and distribute the net proceeds of the
sale, net of the Depositary's fees and expenses, to the holders of the ADRs,
provided that a secondary market for such rights exists and a premium can be
recognized over the cost of any such sale. Although it is not currently
contemplated that the ADSs, the Class B Common Stock or any other equity
securities of the Company will trade on any exchange or market other than in the
United States, a secondary market for the sale of preemptive rights can be
expected to develop if the subscription price of the shares upon exercise of the
rights is below the prevailing market price of the shares. Under the Company's
Bylaws, the Company may not issue additional shares of its equity capital at a
price below 90% of its prevailing market price, unless the holders of Class A
and Class B Common Stock, voting together, approve such issuance. As a result,
there can be no assurance both that a secondary market in preemptive rights will
develop in connection with any future issuance of shares or, if such market does
develop, a premium will be recognized on such sale. If such rights cannot be
sold they will expire and holders of ADRs will not realize any value from the
grant of such preemptive rights. In either case, the equity interests of the
holders of ADRs would be diluted proportionately.
Transferability. The transfer of the shares of the Company's Class A
Common Stock and Class B Common Stock is subject to compliance with all
requirements and conditions set forth by applicable securities and similar laws
of any country in which such transfer could have legal effects, including the
Securities Act. Furthermore, no transfer or other transaction affecting the
shares is effective without notice to, and recording in the stock registry of,
the Company.
Other Provisions. Neither the Class A Common Stock nor the Class B Common
Stock may be subdivided or combined in any manner unless the other class is
subdivided or combined in the same proportion.
WARRANTS
Conecel Warrants
On September 30, 1997, Conecel Holdings sold in a private transaction to
qualified institutional buyers, $121.0 million aggregate principal amount of
Conecel Holdings Notes and transferable Warrants to purchase 1,633,500 shares of
Class B Common Stock. Each holder of Conecel Holdings Notes received for every
$1,000 of principal, Warrants exercisable into 13.5 shares of Class B Common
Stock at an exercise price of $.01 per share. The Warrants expire on September
30, 2000. See "Certain Relationships and Related Transactions -- Conecel
Holdings Transactions."
UBS Warrants
In consideration for rendering corporate finance advisory services to the
Company, Conecel Holdings and its affiliates, UBS Securities LLC received
warrants to purchase 1,406,250 shares of Common Stock of the
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Company from Conecel Holdings at an exercise price of $.01 per share and was
granted certain demand and "piggyback" registration rights with respect to such
warrants. The warrants are not exercisable prior to six months after the
consummation of the Offering and expire on September 30, 2000. See
"Underwriting."
FOREIGN INVESTMENT LEGISLATION
No Ecuadorian government approval is necessary to purchase the Company's
ADSs or the Class B Common Stock. There are no restrictions in the Company's
Bylaws limiting the rights of nonresidents or non-Ecuadorians to hold or to vote
the Company's ADSs or the Class B Common Stock.
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DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS
The following is a summary of all material provisions of the Deposit
Agreement (the "Deposit Agreement") to be entered into by the Company, Bankers
Trust Company, as depositary (the "Depositary"), and all Holders and Beneficial
Owners from time to time of American Depositary Shares evidenced by American
Depositary Receipts ("ADRs") issued thereunder. The Deposit Agreement will be
governed by the laws of the State of New York. As used herein, the terms
"Holders" and "Beneficial Owners" shall have the meanings provided in the
Deposit Agreement.
This summary does not purport to be complete and is subject to and
qualified in its entirety by reference to the Deposit Agreement, including the
form of ADRs attached thereto. Terms used herein and not otherwise defined will
have the meanings set forth in the Deposit Agreement. Copies of the Deposit
Agreement and the Bylaws (Estatutos) of the Company are available for inspection
at the principal office of the Depositary currently located at Four Albany
Street, New York, New York 10006 and at the principal Guayaquil office of Banco
La Previsora S.A. (the "Custodian").
AMERICAN DEPOSITARY RECEIPTS
ADRs evidencing ADSs are issuable by the Depositary pursuant to the Deposit
Agreement. Each ADS will represent four shares of Class B Common Stock of the
Company or evidence of the right to receive four shares of Class B Common Stock
(the Class B Common Stock at any time deposited or deemed deposited under the
Deposit Agreement and any and all other securities, cash and property received
by the Depositary or the Custodian in respect thereof and at such time held
under the Deposit Agreement, "Deposited Securities"). Only persons in whose
names ADRs are registered on the books of the Depositary will be treated by the
Depositary and the Company as Holders.
DEPOSIT, TRANSFER AND WITHDRAWAL
The Depositary has agreed, subject to the terms and conditions of the
Deposit Agreement, that upon delivery to the Custodian of Class B Common Stock,
of appropriate instruments of transfer or endorsement in a form satisfactory to
the Custodian and any other document required by the Custodian or the Depositary
under the terms of the Deposit Agreement, the Depositary will, upon payment of
the fees, charges and taxes (including, without limitation, amounts in respect
of any applicable transfer tax) provided in the Deposit Agreement, execute and
deliver at its Corporate Trust Office to, or upon the written order of, the
person or persons named in the notice of the Custodian delivered to the
Depositary, an ADR or ADRs, registered in the name or names of such person or
persons, and evidencing the authorized number of ADSs requested by such person
or persons.
The Depositary has no obligation to accept Class B Common Stock for deposit
from any person or entity identified by the Company as holding Restricted
Securities (as defined below). The term "Restricted Securities" means Class B
Common Stock, ADSs or ADRs representing such shares of Class B Common Stock,
which are "restricted securities" as such term is defined in Rule 144(a)(3) of
the Securities Act, or which would require registration under the Securities Act
in connection with the offer and sale thereof in the United States, or which are
held by an officer, director (or persons performing similar functions) or other
affiliate of the Company or which are subject to other restrictions on sale or
deposit under the laws of the United States or the Republic of Ecuador, or under
a shareholder agreement or the Bylaws of the Company.
Upon surrender at the Corporate Trust Office of the Depositary of an ADR
for the purpose of withdrawal of the Deposited Securities represented by the
ADSs evidenced by such ADR, and upon payment of the fee of the Depositary for
the surrender of ADRs and payment of all governmental charges and taxes
(including, without limitation, amounts in respect of any applicable transfer
tax) as provided in the Deposit Agreement, and subject to the terms and
conditions of the Deposit Agreement, the Holder of such ADR will be entitled to
delivery, to him or upon his order, of the amount of the Deposited Securities at
the time represented by the ADS or ADSs evidenced by such ADR. The forwarding of
share certificates, other securities, property, cash and other documents of
title for such delivery will be at the risk and expense of the Holder.
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Subject to the terms and conditions of the Deposit Agreement and any
limitations established by the Depositary, the Depositary may deliver ADRs prior
to the receipt of Class B Common Stock (a "Pre-Release") and deliver Class B
Common Stock upon the receipt and cancellation of ADRs which have been
Pre-Released, whether or not such cancellation is prior to the termination of
such Pre-Release or the Depositary knows that such ADR has been Pre-Released.
The Depositary may receive ADRs in lieu of Class B Common Stock in satisfaction
of a Pre-Release. Each Pre-Release must be (i) preceded or accompanied by a
written representation from the person to whom the ADRs or shares of Class B
Common Stock are to be delivered that such person, or its customer, owns the
Class B Common Stock or ADRs to be remitted, as the case may be, (ii) at all
times fully collateralized with cash or such other collateral as the Depositary
deems appropriate, (iii) terminable by the Depositary on not more than five
business days notice, and (iv) subject to such further indemnities and credit
regulations as the Depositary deems appropriate.
DIVIDENDS, OTHER DISTRIBUTIONS AND RIGHTS
Subject to any restrictions imposed by Ecuadorian law, regulations or
applicable permits, the Depositary is required to convert or cause to be
converted into United States dollars as promptly as practicable, to the extent
that in its reasonable judgment it can do so on a reasonable basis and can
transfer the resulting dollars to the United States, all cash dividends and
other cash distributions denominated in a currency other than dollars ("Foreign
Currency"), that it receives in respect of the Deposited Securities, and to
distribute, as promptly as practicable the resulting dollar amount (net of fees
and expenses and any taxes or other governmental charges incurred by the
Depositary in converting such Foreign Currency) to the Holders entitled thereto,
in proportion to the number of ADSs representing such Deposited Securities
evidenced by ADRs held by them, respectively. Such distribution may be made upon
an averaged or other practicable basis without regard to any distinctions among
Holders on account of exchange restrictions or the date of delivery of any ADR
or ADRs or otherwise. The amount distributed to the Holders of ADRs will be
reduced by any amount on account of taxes to be withheld by the Company or the
Depositary. See "Liability of Holder for Taxes." If such conversion or
distribution can be effected only with the approval or license of any government
or agency thereof, the Depositary will file such application for approval or
license, if any, as it deems desirable and practicable.
If the Depositary determines that in its reasonable judgment any Foreign
Currency received by the Depositary or the Custodian cannot be converted on a
reasonable basis into dollars transferable to the United States, any approval or
license of any government or agency thereof that is required for such conversion
is denied or in the opinion of the Depositary is not readily obtainable or if
any such approval or license is not obtained within a reasonable period as
determined by the Depositary, the Depositary may distribute the Foreign Currency
received by the Depositary or the Custodian to, or in its discretion may hold
such Foreign Currency uninvested and without liability for interest thereon for
the respective accounts of, the Holders entitled to receive the same. If any
such conversion of Foreign Currency, in whole or in part, cannot be effected for
distribution to some of the Holders entitled thereto, the Depositary may in its
discretion, but subject to applicable laws and regulations, make such conversion
and distribution in dollars to the extent permissible to the Holders entitled
thereto, and may distribute the balance of the Foreign Currency received by the
Depositary to, or hold such balance uninvested and without liability for
interest thereon for, the respective accounts of the Holders entitled thereto.
If the Company declares a dividend in, or free distribution of, Class B
Common Stock, the Depositary may, and will if the Company so requests, promptly
distribute to the Holders of outstanding ADSs entitled thereto, in proportion to
the number of ADSs evidenced by the ADRs held by them, respectively, additional
ADRs evidencing an aggregate number of ADSs that represents the number of shares
of Class B Common Stock received as such dividend or free distribution, subject
to the terms and conditions of the Deposit Agreement with respect to the deposit
of Class B Common Stock and the issuance of ADSs evidenced by ADRs, including
the withholding of any tax or other governmental charge and the payment of fees
and expenses of the Depositary. The Depositary may withhold any such
distribution of ADRs if it has not received satisfactory assurances (as
contemplated in the Deposit Agreement) from the Company that such distribution
does not require registration or is exempt from registration under the
Securities Act. In lieu of delivering ADRs for fractional ADSs in the event of
any such dividend or free distribution, the Depositary will sell the amount
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of Class B Common Stock represented by the aggregate of such fractions and
distribute the net proceeds in accordance with the Deposit Agreement. If
additional ADRs are not so distributed, each ADS will thenceforth also represent
the additional shares of Class B Common Stock distributed upon the Deposited
Securities represented thereby.
If the Company offers or causes to be offered to the holders of any
Deposited Securities any rights to subscribe for additional shares of Class B
Common Stock or any rights of any other nature, the Depositary, upon receipt of
timely notice and after consultation with the Company, will have discretion as
discussed below as to the procedure to be followed in making such rights
available to any Holders of ADRs or in disposing of such rights for the benefit
of any Holders and making the net proceeds available to such Holders or, if by
the terms of such rights offering or from any other reason, the Depositary may
not either make such rights available to any Holders or dispose of such rights
and make the net proceeds available to such Holders, then the Depositary shall
allow the rights to lapse. If at the time of the Offering of any rights the
Depositary determines in its discretion that it is lawful and practicable to
make such rights available to all or certain Holders but not to other Holders,
the Depositary may distribute to any Holder to whom it determines the
distribution to be lawful and practicable, in proportion to the number of ADSs
held by such Holder, warrants or other instruments therefor in such form as it
deems appropriate. If the Depositary determines in its discretion that it is not
lawful and practicable to make such rights available to all or certain Holders,
it may sell the rights, warrants or other instruments in proportion to the
number of ADSs held by the Holders to whom it has determined it may not lawfully
or feasibly make such rights available, and allocate the proceeds of such sales
(net of fees and expenses of the Depositary as provided in the Deposit
Agreement) for the account of such Holders otherwise entitled to such rights,
warrants or other instruments, upon an averaged or other equitable basis without
regard to any distinctions among such Holders because of exchange restrictions
or the date of delivery of any ADR or ADRs, or otherwise.
In circumstances in which rights would not be distributed, if a Holder of
ADSs requests the distribution of warrants or other instruments in order to
exercise the rights allocable to the Shares evidenced by the ADSs of such
Holder, the Depositary will make such rights available to such Holder upon
written notice from the Company to the Depositary that the Company has elected
in its sole discretion to permit such rights to be exercised. Upon instruction
pursuant to such warrants or other instruments to the Depositary from such
Holder to exercise such rights, upon payment by such Holder to the Depositary
for the account of such Holder of any amount equal to the purchase price of the
shares of Class B Common Stock to be received upon exercise of the rights and
upon payment of the fees and expenses of the Depositary and any other charges as
set forth in such warrants or other instruments, the Depositary will, on behalf
of such Holder, exercise the rights and purchase the shares of Class B Common
Stock, and the Company shall cause the shares of Class B Common Stock so
purchased to be delivered to the Depositary on behalf of such Holder. As agent
for such Holder, the Depositary will cause the shares of Class B Common Stock so
purchased to be deposited, and will execute and deliver ADSs to such Holder,
pursuant to the Deposit Agreement.
The Depositary will not distribute rights to Holders unless both the rights
and the securities to which such rights relate are either exempt from
registration under the Securities Act with respect to a distribution to all
Holders or are registered under the provisions of such Act; provided, that
nothing in the Deposit Agreement will create, or be construed to create, any
obligation on the part of the Company or the Depositary to file a registration
statement with respect to such rights or underlying securities or to endeavor to
have such a registration statement declared effective. If a Holder of ADRs
requests the distribution of warrants or other instruments, notwithstanding that
there has been no such registration under the Securities Act, the Depositary
will not effect such distribution unless it has received an opinion acceptable
to it from recognized counsel in the United States for the Company upon which
the Depositary may rely that such distribution to such Holder is exempt from
such registration. The Depositary will not be responsible for any good faith
failure to determine that it may be lawful or feasible to make such rights
available to Holders in general or any Holder in particular.
Whenever the Depositary receives any distribution other than cash, shares
of Class B Common Stock or rights in respect of the Deposited Securities, the
Depositary will cause the securities or property received by it to be
distributed as promptly as practicable to the Holders entitled thereto, after
deduction or upon payment of any fees and expenses of the Depositary or any
taxes or other governmental charges, in proportion to their
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ADS holdings in any manner that the Depositary may deem equitable and
practicable for accomplishing such distribution; provided, however, that if in
the opinion of the Depositary such distribution cannot be made proportionately
among the Holders entitled thereto, or if for any other reason (including, but
not limited to, any requirement that the Company or the Depositary withhold an
amount on account of taxes or other governmental charges or that such securities
must be registered under the Securities Act in order to be distributed to
Holders or Beneficial Owners) the Depositary deems such distribution not to be
feasible, the Depositary may adopt such method as it may deem equitable and
practicable for the purpose of effecting such distribution, including, but not
limited to, the public or private sale of the securities or property thus
received, or any part thereof, and the proceeds of any such sale (net of the
fees and expenses of the Depositary) will be distributed by the Depositary to
the Holders entitled thereto as in the case and manner of a distribution
received in cash.
If the Depositary determines that any distribution in property is subject
to any tax or other governmental charge which the Depositary is obligated to
withhold, the Depositary may, by public or private sale, dispose of all or a
portion of such property (including shares of Class B Common Stock and rights to
subscribe therefor) in such amounts and in such manner as the Depositary deems
necessary and practicable to pay such taxes or charges and the Depositary will
distribute as in the case of distributions received in cash the net proceeds of
any such sale (after deduction of such taxes or charges and of the fees and
expenses of the Depositary, as provided in the Deposit Agreement) to the Holders
entitled thereto in proportion to the number of ADSs held by them, respectively.
Upon any change in nominal or par value, split-up, consolidation or any
other reclassification of Deposited Securities, or upon any recapitalization,
reorganization, merger or consolidation or sale of assets affecting the Company
or to which it is a party, any securities which shall be received by the
Depositary or Custodian in exchange for, in conversion of, or in respect of
Deposited Securities will, to the extent permitted by law, be treated as new
Deposited Securities under the Deposit Agreement, and the ADSs will, to the
extent permitted by law, thenceforth represent, in addition to the existing
Deposited Securities, the right to receive the new Deposited Securities so
received in exchange or conversion unless additional ADRs are delivered pursuant
to the following sentence. In any such case, the Depositary may (upon receipt of
a satisfactory opinion of counsel of the Company) execute and deliver additional
ADRs as in the case of a dividend in shares of Class B Common Stock, or call for
the surrender of outstanding ADRs to be exchanged for new ADRs specifically
describing such new Deposited Securities.
RECORD DATES
Whenever any cash dividend or other cash distribution becomes payable or
any distribution other than cash shall be made, whenever rights shall be issued
with respect to the Deposited Securities, or whenever for any reason the
Depositary causes a change in the number of shares of Class B Common Stock that
are represented by each ADS, or whenever the Depositary receives notice of any
meeting of holders or right of holders to consent or to grant a proxy of shares
of Class B Common Stock or other Deposited Securities or whenever the Depositary
finds it necessary or convenient, the Depositary will fix a record date (the
"ADS Record Date") as close as practicable to the record date fixed by the
Company with respect to the shares of Class B Common Stock (i) for the
determination of the Holders who will be (a) entitled to receive such dividend,
distribution or rights, or the net proceeds of the sale thereof or (b) entitled
to give instructions for the exercise of voting rights at any such meeting, or
(c) entitled to act in respect of any other matter or (ii) on or after which
each ADS will represent the changed number of shares of Class B Common Stock,
all subject to the provisions of the Deposit Agreement.
VOTING OF DEPOSITED SECURITIES
Upon receipt of notice of any meeting of holders or solicitation of
consents or proxies of holders of shares of Class B Common Stock or other
Deposited Securities, and if requested in writing by the Company, the Depositary
will, as soon as practicable thereafter, mail to all Holders a notice in English
(the form of which notice shall be in the sole discretion of the Depositary)
containing (i) the information included in such notice of meeting received by
the Depositary from the Company, (ii) a statement that the Holders as of the
close of
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business on a specified record date as close as practicable to the record date
fixed by the Company with respect to the shares of Class B Common Stock will be
entitled, subject to any applicable provision of Ecuadorian law, the Deposit
Agreement and of the Bylaws of the Company, to instruct the Depositary as to the
exercise of the voting rights, or right to consent or to grant a proxy, if any,
pertaining to the amount of shares of Class B Common Stock or other Deposited
Securities represented by their respective ADSs and (iii) a statement as to the
manner in which such instructions may be given. Upon the written request of an
Holder on such record date, received on or before the date established by the
Depositary for such purpose, the Depositary will endeavor, insofar as
practicable, to vote or cause to be voted the amount of shares of Class B Common
Stock or other Deposited Securities represented by the ADSs evidenced by such
ADRs in accordance with the instructions set forth in such request. Neither the
Depositary nor the Custodian shall, under any circumstances, exercise any
discretion as to voting or vote in a manner that is inconsistent with applicable
law. Notwithstanding anything to the contrary in the Deposit Agreement, if the
Depositary is notified by the Company that applicable law prohibits the
Depositary, the Custodian, or the nominee(s) of either of them (if any), as the
holder of the Deposited Securities, from voting less than all of the Shares
registered in its name in the same manner, (a) the Depositary shall provide
notice thereof to all Holders as of the ADS Record Date in the statement
identified in (iii) above, and (b) Holders of ADSs shall be deemed, and the
Depositary shall deem such Holders, to have instructed the Depositary to vote
all of the Deposited Securities in accordance with the voting instructions
received in respect of the majority of ADSs for which voting instructions have
been received from the Holders of ADSs. Voting instructions in respect of any
ADS shall be deemed to have been received only if received in accordance with
the terms of the Deposit Agreement. The Company agrees to provide timely notice
to the Depositary enabling the timely notification of Holders in the statement
identified in (iii) above as to limitations on the ability of the Depositary to
vote Deposited Securities in accordance with instructions from Holders.
DISCLOSURE OF INTERESTS
Each Holder and Beneficial Owner of an ADR agrees (a) to provide such
information as the Company may request pursuant to Ecuadorian law, U.S. law or
the Bylaws of the Company or any resolutions of the Company's Board of Directors
adopted pursuant to such Bylaws, or the rules of any market or exchange upon
which ADSs are traded or listed and (b) to be bound by and subject to applicable
provisions of the Ecuadorian laws, the Bylaws of the Company and the
requirements of any markets or exchanges upon which the ADSs, ADRs or shares of
Class B Common Stock are listed or traded, or pursuant to any requirements of
any electronic book-entry system by which the ADSs, ADRs or shares of Class B
Common Stock may be transferred, to the same extent as if such Holder and
Beneficial Owner held shares directly. Failure of a Holder or Beneficial Owner
to provide in a timely fashion the information so requested may result in the
imposition of sanctions against the holder of the shares of Class B Common Stock
represented by ADSs in respect of which the noncomplying person is or was, or
appears to be or have been interested as provided in Ecuadorian law and the
Bylaws of the Company, which currently include, without limitation, the
imposition of restrictions on the rights to receive dividends on and to transfer
such shares of Class B Common Stock.
REPORTS AND OTHER COMMUNICATIONS
The Depositary will make available for inspection by Holders at its
Corporate Trust Office any reports and communications, including any proxy
solicitation material, received from the Company, which are both (i) received by
the Depositary as the holder of the Deposited Securities and (ii) made generally
available to the holders of such Deposited Securities by the Company (including,
without limitation, annual reports prepared in accordance with applicable
requirements of the Securities and Exchange Commission). The Depositary will
also send to the Holders copies of such reports and communications when
furnished by the Company pursuant to the Deposit Agreement.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of ADRs and any provisions of the Deposit Agreement may at any
time and from time to time be amended by agreement between the Company and the
Depositary in any respect which they may deem
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necessary or desirable without the consent of the Holders or Beneficial Owners;
provided, however, that any amendment that imposes or increases any fees or
charges (other than taxes and other governmental charges, registration fees,
cables, telex or facsimile transmission costs, delivery costs or other such
expenses), or that otherwise prejudices any substantial existing right of
Holders, will not take effect as to outstanding ADRs until the expiration of 30
days after notice of any amendment has been given to the Holders of outstanding
ADRs. The parties hereto agree that any amendments or supplements which (i) are
reasonably necessary (as agreed by the Company and the Depositary) in order for
(a) the ADSs to be registered on Form F-6 under the Securities Act or (b) the
ADSs or shares of Class B Common Stock to be traded solely in electronic
book-entry form and (ii) do not in either such case impose or increase any fees
or charges to be borne by Holders, shall be deemed not to materially prejudice
any substantial rights of Holders or Beneficial Owners. Every Holder, at the
time any amendment becomes effective, will be deemed, by continuing to hold such
ADR, to consent and agree to such amendment and to be bound by the Deposit
Agreement as amended thereby. In no event will any amendment impair the right of
the Holder or Beneficial Owner to surrender such ADR and receive therefor the
Deposited Securities represented thereby, except in order to comply with
mandatory provisions of applicable law. If any governmental body should adopt
new laws, rules or regulations which would require an amendment or supplement of
the Deposit Agreement and the ADRs to ensure compliance therewith, the Company
and the Depositary may amend or supplement the Deposit Agreement and the ADRs at
any time in accordance with such changed laws, rules or regulations. Such
amendment or supplement to the Deposit Agreement and the ADRS in such
circumstances may become effective before a notice of such amendment or
supplement is given to Holders or within any other period of time as required
for compliance with such laws, rules or regulations.
The Depositary shall at any time at the direction of the Company terminate
the Deposit Agreement by mailing notice of such termination to the Holders of
the ADRs then outstanding at least 30 days prior to the date fixed in such
notice for such termination. The Depositary may likewise terminate the Deposit
Agreement by mailing notice of such termination to the Company and the Holders
of all ADRs then outstanding if, any time after 90 days shall have expired after
the Depositary has delivered to the Company a written notice of its election to
resign and a successor depositary has not been appointed and accepted its
appointment in accordance with the terms of the Deposit Agreement. On and after
the date of termination, the Holder of an ADR will, upon (i) surrender of such
ADR at the Corporate Trust Office, (ii) payment of the fee of the Depositary for
the surrender of ADRs referred to in the Deposit Agreement, and (iii) payment of
any applicable taxes or governmental charges, be entitled to delivery to such
Holder, or upon such Holder's order, of the amount of Deposited Securities
represented by the ADSs evidenced by such ADRs. If any ADRs remain outstanding
after the date of termination of the Deposit Agreement, the Depositary
thereafter will discontinue the registration of transfers of ADRs, will suspend
the distribution of dividends to the Holders thereof and will not give any
further notices or perform any further acts under the Deposit Agreement, except
the collection of dividends and other distributions pertaining to the Deposited
Securities, the sale of rights and other property and the delivery of underlying
shares of Class B Common Stock, together with any dividends or other
distributions received with respect thereto and the net proceeds of the sale of
any rights or other property, in exchange for surrendered ADRs (after deducting
in each case, the fee of the Depositary for the surrender of ADRs, other
expenses set forth in the Deposit Agreement and any applicable taxes or
governmental charges). At any time after the expiration of one year from the
date of termination, the Depositary may sell the Deposited Securities then held
under the Deposit Agreement and hold uninvested the net proceeds of such sale,
together with any other cash held by it pursuant to the Deposit Agreement,
unsegregated and without liability for interest, for the pro rata benefit of the
Holders that have not surrendered their ADRs, such Holders thereupon becoming
general creditors of the Depositary with respect to such net proceeds. After
making such sale, the Depositary will be discharged from all obligations under
the Deposit Agreement, except to account for net proceeds and other cash (after
deducting, in each case, the fee of the Depositary for the surrender of ADRs,
other expenses set forth in the Deposit Agreement and any applicable taxes or
governmental charges).
CHARGES OF DEPOSITARY
The following charges shall be incurred by the Holders and Beneficial
Owners, by any party depositing or withdrawing shares of Class B Common Stock or
by any party surrendering ADRs or to whom ADRs are
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issued (including, without limitation, issuance pursuant to a stock dividend or
stock split declared by the Company or an exchange of stock regarding the ADRs
or Deposited Securities or a distribution of ADRs pursuant to the Deposit
Agreement), whichever is applicable: (1) taxes (including, without limitation,
any amounts in respect of any applicable transfer tax and other governmental
charges), (2) such transfer or registration fees as may from time to time be in
effect for the registration of transfers of Shares generally on the register of
the Company or Foreign Registrar and applicable to transfers of Shares to the
name of the Depositary or its nominee or the Custodian or its nominee on the
making of deposits or withdrawals under the terms of the Deposit Agreement, (3)
such cable, telex and facsimile transmission expenses as are expressly provided
in the Deposit Agreement, (4) such expenses as are incurred by the Depositary in
the conversion of foreign currency pursuant to the Deposit Agreement, (5) a fee
of $5.00 or less per 100 ADSs (or portion thereof) for the execution and
delivery of ADRs pursuant to the Deposit Agreement and the surrender of ADRs
pursuant to the Deposit Agreement, (6) a fee of $.02 or less per ADS (or portion
thereof) for any cash distribution made pursuant to the Deposit Agreement, and
(7) a fee for the distribution of securities pursuant to the Deposit Agreement,
such fee being in an amount equal to the fee for the execution and delivery of
ADSs referred to above which would have been charged as a result of the deposit
of such securities (for purposes of this clause (7) treating all such securities
as if they were shares of Class B Common Stock) but which securities are instead
distributed by the Depositary to Holders. The right of the Depositary to receive
payment and/or reimbursement under the terms of the Deposit Agreement shall
survive the termination of the Deposit Agreement.
LIABILITY OF HOLDERS AND BENEFICIAL OWNERS FOR TAXES
If any tax (including, without limitation, any transfer tax) or other
governmental charge becomes payable with respect to any ADR or any Deposited
Securities represented by any ADR, such tax or other governmental charge will be
payable by the Holder or Beneficial Owner of such ADR to the Depositary. The
Depositary may refuse to effect any transfer (or combination or split-up) of
such ADR or any withdrawal of Deposited Securities underlying such ADR until
such payment is made, and may withhold any dividends or other distributions, or
may sell for the account of the Holder or Beneficial Owner thereof any part or
all of the Deposited Securities underlying such ADR and may apply such
dividends, other distributions or the proceeds of any such sale to pay any such
tax or other governmental charge and the Holder or Beneficial Owner of such ADR
will remain liable for any deficiency.
OTHER PROVISIONS
The Custodian and the Depositary and any of their Affiliates may own and
deal in any class of securities of the Company and its Affiliates and in ADRs.
Neither the Depositary nor the Company nor any of their respective directors,
employees, agents or Affiliates will be liable to any Holder or Beneficial Owner
of ADRs, if by reason of any provision of any present or future law or
regulation of the United States or any state thereof, the Republic of Ecuador,
including, without limitation, any provisions of the Ecuadorian Civil Code or of
the Ecuadorian Commercial Code or any other country, or of any other
governmental or regulatory authority, stock exchange or automated quotation
system, or by reason of any provision, present or future, of the Bylaws of the
Company, or by reason of any provision of any securities issued or distributed
by the Company, or any offering or distribution thereof, or by reason of any act
of God or war or other circumstances beyond its control, the Depositary or the
Company shall be prevented, delayed or forbidden from, or be subject to any
civil or criminal penalty on account of, doing or performing any act or thing
which by the terms of the Deposit Agreement or the Deposited Securities it is
provided will be done or performed; nor will the Depositary or the Company or
any of their respective directors, employees, agents or Affiliates incur any
liability to any Holder or Beneficial Owner of any ADR by reason of any
nonperformance or delay, caused as aforesaid, in the performance of any act or
thing which by the terms of the Deposit Agreement it is provided will or may be
done or performed, or by reason of any exercise of, or failure to exercise, any
discretion provided for under the Deposit Agreement. Neither the Depositary nor
the Company shall incur any liability in the case that any or all holders of
Deposited Securities benefit from any distribution, offering, right or other
benefit which is not, under the terms of the Deposit Agreement, made available
to any or all Holder(s) or
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Beneficial Owners of ADSs issued thereunder. Where, by the terms of the Deposit
Agreement, or for any other reason, a distribution or offering may not be made
available to Holders, and the Depositary may not dispose of such distribution or
offering on behalf of such Holders and make the net proceeds available to such
Holders, then the Depositary shall not make such distribution or offering, and
shall allow any rights, if applicable, to lapse.
The Company and the Depositary assume no obligation nor will they be
subject to any liability under the Deposit Agreement to Holders or Beneficial
Owners of ADRs, except that they severally agree to perform their respective
obligations specifically set forth in the Deposit Agreement without negligence
or bad faith.
The ADRs are transferable on the books of the Depositary. As a condition
precedent to the execution and delivery, registration of transfer, split-up,
combination or surrender or any ADR or withdrawal or any Deposited Securities,
the Depositary, the Custodian or the Registrar may require payment from the
person presenting the ADR or the depositor of the shares of Class B Common Stock
of a sum sufficient to reimburse it for any tax (including, without limitation,
amounts in respect of any applicable transfer tax) or other governmental charge
and any stock transfer or registration fee with respect thereto (including any
such tax or charge and fee with respect to shares of Class B Common Stock being
deposited or withdrawn), payment of any applicable fees as provided in the
Deposit Agreement, production of proof satisfactory to it as to the identity and
genuineness of any signature, production of proof of compliance with any
applicable notice, consent or other requirements relating to the acquisition of
securities of Ecuadorian companies, and may also require compliance with any
regulations the Depositary may establish consistent with the provisions of this
Deposit Agreement and applicable law. The Depositary may refuse to deliver ADRs,
to register the transfer of any ADR or to make any distribution on, or related
to, shares of Class B Common Stock until it has received such proof of
citizenship or residence, exchange control approval or other information as it
may deem necessary or proper. The delivery, transfer, registration of transfer
of outstanding ADRs and surrender of ADRs generally may be suspended or refused
during any period when the transfer books of the Depositary are closed, or if
any such action is deemed necessary or advisable by the Depositary or the
Company in their reasonable discretion, at any time or from time to time.
Notwithstanding anything to the contrary in the Deposit Agreement, the surrender
of outstanding ADRs and the withdrawal of Deposited Securities may not be
suspended, subject only to (i) temporary delays caused by closing the transfer
books of the Depositary or the Company or the deposit of shares of Class B
Common Stock in connection with voting at a shareholders' meeting or the payment
of dividends, (ii) the payment of fees, taxes and similar charges and (iii)
compliance with any United States or other laws or governmental regulations
relating to the ADRs or to the withdrawal of the Deposited Securities.
The Depositary will keep books, at its Corporate Trust Office, for the
registration and transfer of ADRs, which at all reasonable times will be open
for inspection by the Holders, provided that such inspection is not for the
purpose of communicating with Holders in the interest of a business or object
other than the business of the Company or a matter not related to the Deposit
Agreement or the ADRs.
The Depositary may, after consultation with the Company, appoint one or
more co-transfer agents for the purpose of effecting transfers, combinations and
split-ups of ADRs at designated transfer offices on behalf of the Depositary. In
carrying out its functions, a co-transfer agent may require evidence of
authority and compliance with applicable laws and other requirements by Holders
or persons entitled to ADRs and will be entitled to protection and indemnity to
the same extent as the Depositary. Such co-transfer agents may be removed and
substitutes appointed by the Depositary.
GOVERNING LAW
The Deposit Agreement will be governed by the laws of the State of New
York.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 107,185,856 shares
of Common Stock outstanding, consisting of 60,747,286 shares of Class A Common
Stock and 46,438,570 shares of Class B Common Stock. All of the shares of Class
B Common Stock, represented by the ADSs offered hereby, will be available for
immediate sale in the public market following the date of this Prospectus,
except for any shares (or ADSs) held or purchased by an Affiliate. Any ADSs
purchased in the Offering (or shares of Class B Common Stock acquired upon the
surrender of the ADR representing the ADSs) by an Affiliate may not be resold
except pursuant to an effective registration statement filed by the Company or
an applicable exemption from registration, including an exemption under Rule
144. In addition, up to an aggregate of 750,000 shares of Class B Common Stock
will be reserved for issuance to executive officers, key employees and
independent contractors of the Company under its 1998 Stock Option Plan. All of
the shares of Class A Common Stock (upon conversion into shares of Class B
Common Stock) will be available in the public market following the expiration of
180-day lockup agreements between the existing shareholders and the
Representatives of the Underwriters, subject to compliance with the volume and
other limitations of Rule 144 promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated for purposes of such rule) including an Affiliate
who has beneficially owned "restricted securities" (as that term is defined in
Rule 144) for at least one year is entitled to sell within any three-month
period commencing 180 days after the date of this Prospectus a number of shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
Common Stock (approximately 1,071,859 shares immediately after the Offering) or
(ii) the average weekly trading volume during the four calendar weeks preceding
such sale. A person (or persons whose shares are aggregated) who is not deemed
to have been an Affiliate at any time during the 90 days immediately preceding
the sale and who has beneficially owned his or her shares for at least two years
is entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations described above.
After the expiration of the 180-day lock-up agreements described below,
holders of shares of Common Stock available for sale under Rule 144, including
the Selling Shareholders, may sell some or all of such shares. The number of
shares of Common Stock that will be sold under Rule 144 will depend on the
market price of the Common Stock or the ADSs, the personal circumstances of each
of the holders and other factors. Prior to the Offering, there has been no
public market for the Common Stock or the ADSs, and there can be no assurance
that a significant public market for the Common Stock or the ADSs will develop
or be sustained after the Offering.
The Company and Conecel Holdings have agreed not to sell, offer to sell,
grant any option or warrant for the sale of or otherwise dispose of any shares
of Common Stock or securities convertible into or exercisable or exchangeable
for shares of Common Stock (except for the shares offered hereby) for a period
of 180 days after the date of this Prospectus without the prior written consent
of the representatives of the Underwriters (which consent may be granted at any
time without notice). See "Underwriting."
UBS Securities LLC holds warrants to purchase 1,406,250 shares of Class B
Common Stock, which are not exercisable prior to six months after the
consummation of the Offering. After the expiration of such six month period, UBS
Securities LLC can require the Company to register the shares of Class B Common
Stock, which are issuable upon the exercise of the warrants. In addition, UBS
Securities LLC was granted "piggyback" registration rights with respect to such
warrants.
No precise predictions can be made about the effect, if any, that market
sales of ADSs or shares of Common Stock or the availability of shares of Common
Stock for sale will have on the public market price prevailing from time to
time. Nevertheless, sales of substantial numbers of ADSs or shares of Common
Stock in the public market may have an adverse effect on the market price
thereof.
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TAXATION
The following is a general summary of the principal U.S. federal income tax
consequences and Ecuadorian tax consequences of the purchase, ownership and
disposition of ADSs or Class B Common Stock. It is based on the advice of
Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A. with respect to U.S.
federal income tax and on the advice of Estudio Juridico Pareja, Abogados,
Guayaquil, Ecuador with respect to Ecuadorian tax. This summary does not purport
to be a comprehensive description of all of the tax considerations that may be
relevant to a decision to purchase ADSs or Class B Common Stock. This summary
does not describe any tax consequences under the laws of any state, locality or
taxing jurisdiction other than the United States and Ecuador.
This summary is based on the tax laws, regulations, administrative
pronouncements and court decisions of the United States and Ecuador as in effect
on the date of this Prospectus. All of the foregoing are subject to change, and
any change could apply retroactively or otherwise affect the continued validity
of this summary.
This summary does not constitute, and should not be considered as, legal or
tax advice to a holder of ADSs or Class B Common Stock. Each prospective
purchaser of ADSs or Class B Common Stock should consult his own tax adviser
regarding the United States, Ecuadorian or other tax consequences of the
purchase, ownership and disposition of ADSs or Class B Common Stock, including,
in particular, the application to his particular situation of the tax
considerations discussed below, as well as the application of state, local,
foreign and other tax laws.
There is no income tax treaty in force between the United States and
Ecuador.
ECUADORIAN TAXATION
The following summary describes the principal Ecuadorian tax consequences
of the acquisition, ownership and disposition of an ADS or of Class B Common
Stock by a Non-Ecuadorian Holder. For purposes of this discussion, a
Non-Ecuadorian Holder is a person or entity that is not domiciled in Ecuador and
includes a holder other than (i) (a) an individual who (I) is an Ecuadorian
citizen resident in Ecuador or (II) is not an Ecuadorian citizen but has lived
in Ecuador for at least two years or has lived in Ecuador for at least six
months and has elected to be treated as domiciled in Ecuador for Ecuadorian tax
purposes, or (b) a business entity created under the laws of Ecuador, or (ii) a
branch, agency or permanent establishment of a business entity formed under the
laws of a country other than Ecuador or of an individual not described in clause
(i). Each holder of an ADS or of Class B Common Stock described in clause (i) is
subject to Ecuadorian taxes on its worldwide income, and a holder described in
clause (ii) is subject to Ecuadorian tax only on its Ecuadorian source income.
The determination of whether an individual is resident in Ecuador is made on the
first day of each year and is effective thereafter until the individual becomes
domiciled in another country.
Taxation of Dividends
A dividend in cash or in any other form, paid with respect to a share of
Class B Common Stock, whether held directly or represented by an ADS, will be
subject to an Ecuadorian withholding tax imposed at the rate of 25% on the gross
amount of the dividend.
Taxation of Capital Gains and Losses
Deposits and withdrawals of Class B Common Stock in exchange for ADSs will
not give rise to Ecuadorian tax or transfer duties.
A Non-Ecuadorian Holder will not be subject to Ecuadorian tax on the sale
or other disposition of an ADS. A Non-Ecuadorian Holder will not be subject to
Ecuadorian tax on the sale or other disposition of Class B Common Stock if the
sale occurs outside Ecuador but will be subject to Ecuadorian tax if the sale
occurs in Ecuador and is not effected on an Ecuadorian stock exchange.
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Other Ecuadorian Taxes
There are no Ecuadorian inheritance, gift or succession taxes applicable to
the ownership, transfer or disposition of an ADS or of Class B Common Stock.
There are no Ecuadorian stamp, issue, transfer, registration or similar taxes or
duties payable by a holder of an ADS or of Class B Common Stock. Commissions
paid to a U.S. broker by a Non-Ecuadorian Holder are not subject to Ecuadorian
value added tax.
UNITED STATES TAXATION
The following discussion of U.S. federal income tax considerations is
limited to a beneficial owner of an ADS or a share of Class B Common Stock who
holds the ADS or share of Class B Common Stock as a capital asset within the
meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the
"Code"), and whose functional currency within the meaning of Section 985 of the
Code is the U.S. dollar. Certain holders (including, but not limited to
financial institutions, insurance companies, dealers in securities or
currencies, tax-exempt organizations, persons liable for alternative minimum
tax, broker-dealers, persons who hold an ADS or share of Class B Common Stock in
a hedging transaction or as part of a "straddle" or "conversion transaction" and
persons that own or are treated as owning actually or constructively ten percent
or more of the voting shares of the Company) may be subject to special rules not
discussed below.
As used below, a "U.S. Holder" is a holder of an ADS or a share of Class B
Common Stock that is, for U.S. federal income tax purposes, a U.S. citizen or
resident, a corporation created or organized in the United States or under the
laws of the United States or of any State or the District of Columbia, or an
estate or trust whose income is subject to U.S. federal income taxation
regardless of its source. A Non-U.S. Holder is a holder of an ADS or a share of
Class B Common Stock that, for U.S. federal income tax purposes, is an
individual who is not a citizen or resident of the United States or is a
corporation organized under the law of a country other than the United States.
In general, for U.S. federal income tax purposes, a holder of an ADS
evidencing Class B Common Stock will be treated as the beneficial owner of the
Class B Common Stock represented by the ADS.
Taxation of Dividends
In general, a distribution of cash made with respect to Class B Common
Stock will constitute a dividend for U.S. Federal income tax purposes to the
extent it is paid from the current or accumulated earnings and profits of the
Company. To the extent a distribution of cash on Class B Common Stock exceeds
the Company's current and accumulated earnings and profits, the distribution
will be treated on a share by share basis as a nontaxable reduction of the
adjusted tax basis of the share to the extent thereof and thereafter as capital
gain. As used below, the term "dividend" means a distribution that constitutes a
dividend for U.S. federal income tax purposes.
The gross amount of any cash dividend with respect to Class B Common Stock
(which will include the amount of Ecuadorian tax withheld) will be includable in
gross income by a U.S. Holder as ordinary income when the dividend is received
by the U.S. Holder or the Depositary, as the case may be, and will not be
eligible for the dividends received deduction allowed to certain corporations
under the Code. A dividend paid in Ecuadorian currency will be includable in the
income of a U.S. Holder in a U.S. dollar amount calculated by reference to the
prevailing spot market exchange rate in effect on the day it is received by the
U.S. Holder or the Depositary, as the case may be, whether or not the dividend
is converted into U.S. dollars. Any gain or loss realized on conversion or other
disposition of the Ecuadorian currency will be treated as U.S. source ordinary
income or loss.
Subject to generally applicable limitations under U.S. federal income tax
law, the Ecuadorian withholding tax will be treated as a foreign income tax
eligible for credit against a U.S. Holder's federal income tax liability. A
dividend with respect to Class B Common Stock will constitute income from
sources without the United States for foreign tax credit purposes. For purposes
of the computation of the foreign tax credit limitation separately for specific
categories of income, the dividend generally will constitute "passive income"
or, in the
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case of certain holders, "financial services income." Alternatively, a U.S.
Holder may elect not to claim a credit for any of its foreign taxes and deduct
all of those taxes in computing taxable income.
A dividend received on an ADS or on a share of Class B Common Stock by a
Non-U.S. Holder, subject to the discussion of backup withholding below,
generally will not be subject to U.S. federal income tax unless the Non-U.S.
Holder is (i) a corporation that is an insurance company carrying on a U.S.
insurance business to which the dividend is attributable within the meaning of
the Code or (ii) an individual or corporation that has an office or other fixed
place of business in the United States to which the dividend is attributable,
the dividend is derived in the active conduct of a banking, financing or similar
business within the United States or is received by a corporation the principal
business of which is trading in stock or securities for its own account, and
certain other conditions exist.
A U.S. Holder's ability to deduct charges of the Depositary (see
"Description of American Depositary Receipts -- Charges of Depositary") may be
subject to limitations generally applicable to the deductibility of
miscellaneous itemized deductions.
Taxation of Capital Gains and Losses
A Deposit or withdrawal of Class B Common Stock by a U.S. Holder in
exchange for ADSs will not result in the realization of gain or loss for U.S.
federal income tax purposes.
Gain or loss recognized by a U.S. Holder on a sale or other disposition of
an ADS or a share of Class B Common Stock will be subject to U.S. federal income
taxation as capital gain or loss in an amount equal to the difference between
the U.S. Holder's adjusted basis in the ADS or share of Class B Common Stock,
determined in U.S. dollars, and the U.S. dollar value of the amount realized on
the sale or other disposition. Capital gain recognized by certain noncorporate
U.S. Holders is taxed at preferential rates that will vary depending on whether
the ADS or share of Class B Common Stock has been held for more than one year or
more than 18 months on the date of the sale or other disposition. Capital gain
recognized by a U.S. Holder on a sale or other disposition of an ADS or a share
of Class B Common Stock generally will be treated as U.S. source income for U.S.
foreign tax credit purposes, unless the U.S. Holder maintains an office or other
fixed place of business outside the United States, the gain is attributable to
that office or other fixed place of business and an income tax equal to at least
ten percent (10%) of the gain actually is paid to a foreign country.
Consequently, in the case of U.S. source gain recognized on a disposition of
Class B Common Stock that is subject to Ecuadorian tax, the U.S. Holder may not
be able to use the foreign tax credit for that Ecuadorian tax unless it can
credit that tax against U.S. tax payable on other foreign source income in the
appropriate income category. Alternatively, a U.S. Holder may take a deduction
for the Ecuadorian tax if it elects not to claim a credit for any of its foreign
taxes and to deduct all of those taxes in computing taxable income. Any loss may
be treated as a foreign source loss by reference to the source of income
received from the ADS or share of Class B Common Stock.
Subject to the discussion of backup withholding below, any gain or loss
recognized on a sale or other disposition of an ADS or share of Class B Common
Stock by a Non-U.S. Holder is exempt from U.S. federal income tax unless (i)
that gain is effectively connected with the conduct by the Non-U.S. Holder of a
U.S. trade or business, or (ii) in the case of a Non-U.S. Holder who is an
individual, the holder is present in the United States for 183 days or more
during the taxable year in which the gain is realized and certain other
conditions are met.
If the Company were to issue new shares for cash, requiring the Company to
grant preemptive rights to its shareholders to purchase additional shares of
Company stock, that grant likely would be treated for U.S. federal income tax
purposes as a distribution of rights to acquire Company stock within the meaning
of Section 305 of the Code. That distribution would not be taxable to a holder
of an ADS or a share of Class B Common Stock. If the rights are exercised or
sold, the holder's basis in the Class B Common Stock, whether that stock
underlies an ADS or is held directly, would be allocated between the Class B
Common Stock and the rights in proportion to their relative fair market values
on the date of the distribution, unless the fair market value of the rights
distributed on a share of Class B Common Stock is less than 15% of the fair
market value of that Class B Common Stock on the date of the distribution and
the holder does not elect to allocate basis in
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his Class B Common Stock to the rights. If a holder exercises his rights, any
basis allocated to those rights will be added to the amount paid for the
additional shares of Class B Common Stock in computing the holder's basis in
that Class B Common Stock. If the rights are sold, the holder will recognize
capital gain or loss equal to the difference between the sales price and the
amount of basis, if any, in those rights. The holding period of the rights will
include the period for which the Class B Common Stock on which the rights were
distributed was held.
Foreign Personal Holding Company Rules
The Company or any non-U.S. subsidiary of the Company generally may be
classified as a "foreign personal holding company" ("FPHC") if in any taxable
year (i) five or fewer individuals who are U.S. citizens or residents for U.S.
federal income tax purposes own (directly, indirectly or constructively) more
than 50% (by vote or value) of the stock of the Company or of the non-U.S.
subsidiary (a "U.S. group") and (ii) at least 60% (reduced to 50% in certain
years after the first year of FPHC status) of the gross income of the Company or
non-U.S. subsidiary consists of "foreign personal holding company income" as
defined for purposes of FPHC rules ("FPHCI"). In general, FPHCI consists of
dividends, interest, royalties, annuities, net gains from sales or exchanges of
stocks or securities or (in certain circumstances) commodities, rents (in
certain circumstances) and certain income from trusts or estates, from personal
service contracts and from the use of corporate property by a 25% or greater
shareholder. In general, dividends and interest from subsidiaries are FPHCI
unless received from a corporation that is a related person (generally, a
corporation related through more than 50% common ownership, as defined in
Section 954(d) of the Code), that is incorporated in the same foreign country as
the recipient of the dividend or interest, that has a substantial part of its
assets used in its trade or business located in that same foreign country and
that is not a FPHC, provided the dividend or interest is not attributable to
FPHCI of the related payor corporation.
If one or more members of the Parra family were to become U.S. citizens or
residents of the United States for U.S. federal income tax purposes, it is
possible that the constructive ownership rules for FPHCs would cause a U.S.
group to exist and thereby cause the Company or any non-U.S. subsidiary of the
Company to satisfy the stock ownership test for a FPHC described in clause (i)
in the preceding paragraph. In that event, the Company or non-U.S. subsidiary of
the Company would be a FPHC if it also satisfied the income test for a FPHC
described in clause (ii) in the preceding paragraph. At the present time, the
Company, which conducts all of its business directly and not through
subsidiaries, believes that less than 60% of its income is FPHCI and therefore
that the Company does not constitute a FPHC.
If the Company or any non-U.S. subsidiary of the Company is or becomes a
FPHC, each U.S. Holder of an ADS or share of Class B Common Stock who holds the
ADS or share on the last day of the taxable year of the Company or non-U.S.
subsidiary or, if earlier, the last day of the taxable year of the Company or
non-U.S. subsidiary on which a U.S. group exists with respect to, respectively,
the Company or non-U.S. subsidiary, would be required to include in gross income
as a deemed dividend the U.S. Holder's pro rata portion of the undistributed net
income of the Company or non-U.S. subsidiary (as specially calculated or
purposes of the FPHC rules) up to and including the last day on which the U.S.
group existed, even if no cash dividend actually were paid. In that case, if the
Company were the FPHC, a U.S. Holder would be entitled to increase its tax basis
in the ADS or share of Class B Common Stock by the amount of the deemed dividend
from the Company. If a non-U.S. subsidiary of the Company were the FPHC, it is
not clear that a U.S. Holder would be afforded similar relief. If the Company is
or becomes a FPHC, a person who acquires an ADS or share of Class B Common Stock
from a decedent would be denied the step-up of tax basis of that ADS or share to
fair market value upon the decedent's death that otherwise would have been
available but instead would have a tax basis equal to the lower of fair market
value and the decedent's basis.
Passive Foreign Investment Company Rules
The Company believes, based on the nature of its income and assets, that
ADSs and Class B Common Stock should not be treated as stock of a passive
foreign investment company ("PFIC") for U.S. federal income tax purposes, but
this conclusion is a factual determination made annually and thus may be subject
to change.
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If the Company is treated as a PFIC, contrary to the discussion above in
"United States Taxation -- Taxation of Dividends" and "United States
Taxation -- Taxation of Capital Gains and Losses," a U.S. Holder would be
subject to special rules with respect to (i) any gain realized on the sale or
other disposition of an ADS or a share of Class B Common Stock, and (ii) any
"excess distribution" by the Company to the U.S. Holder (generally, any
distribution to the U.S. Holder on an ADS or on a share of Class B Common Stock
in any taxable year in which total distributions to the U.S. Holder exceed 125
percent of the average annual taxable distributions the U. S. Holder received on
the ADS or share of Class B Common Stock during the preceding three taxable
years or, if shorter, the U.S. Holder's holding period for the ADS or share of
Class B Common Stock). Under those rules, (i) the gain or excess distribution
would be allocated ratably over the U.S. Holder's holding period for the ADS or
share of Class B Common Stock, (ii) the amount allocated to the taxable year in
which the gain or excess distribution is realized would be taxable as ordinary
income, (iii) the amount allocated to each prior year, with certain exceptions,
would be subject to tax at the highest rate in effect for that year and (iv) the
interest charge generally applicable to underpayments of tax would be imposed in
respect of the tax attributable to each such prior year. A U.S. Holder who owns
an ADS or a share of Class B Common Stock during any year the Company is a PFIC
must file IRS Form 8621. The Taxpayer Relief Act of 1997 enacted an elective
mark-to-market regime for stock in a PFIC. The new rules, effective for taxable
years of U. S. Holders beginning after December 31, 1997, would apply to the
exclusion of the rules described immediately above, except generally to the
extent that the Company is a PFIC at any time while the U.S. Holder has owned an
ADS or a share of Class B Common Stock and the U.S. Holder has not made either
the mark-to-market election or an election under current law to treat the
Company as a qualified electing fund. Under the mark-to-market rules, a U.S.
Holder may elect mark-to-market treatment for his ADSs or share of Class B
Common Stock, provided the ADSs or share of Class B Common Stock, for purposes
of those rules, constitutes "marketable stock" pursuant to Treasury regulations
that have yet to be promulgated. An electing U.S. Holder generally would include
as ordinary income in each taxable year an amount equal to the increase, if any,
in the value of his ADSs or share of Class B Common Stock for that year
(measured at the close of the U.S. Holder's taxable year) and would treat any
gain recognized on an actual sale of an ADS or share of Class B Common Stock as
ordinary income. An electing U.S. Holder generally would be allowed an ordinary
deduction for any decrease in the value of his ADSs or share of Class B Common
Stock in any taxable year and for any loss recognized on an actual sale, but
only to the extent, in each case, of previously included mark-to-market income
not offset by previously deducted decreases in value. A U.S. Holder's basis in
an ADS or share of Class B Common Stock would increase or decrease by gain or
loss taken into account under the mark-to-market regime. A mark-to-market
election generally is irrevocable.
Controlled Foreign Corporation Rules
If a foreign corporation is a controlled foreign corporation ("CFC") for an
uninterrupted period of at least 30 days during its taxable year, a U.S. person
(as defined in Section 957(c) of the Code) who, on the last day in that taxable
year, owns (directly, indirectly or constructively) 10% or more of the total
combined voting power of all classes of stock entitled to vote of that foreign
corporation (a "U.S. Shareholder") must include in gross income certain earnings
and profits of the CFC even though those earnings and profits have not been
distributed. A foreign corporation is a CFC if more than 50% (by vote or value)
of the stock of the foreign corporation is owned by U.S. Shareholders. Even if
the Company or a non-U.S. subsidiary of the Company were a CFC, because the
holder of ADSs or shares of Class B Common Stock will hold stock of the Company
that is not entitled to vote for the election of directors of the Company, a
U.S. Holder that owns solely ADSs or shares of Class B Common Stock cannot be a
U.S. Shareholder and therefore will not be subject to the rules applicable to
CFCs.
Information Reporting and Backup Withholding
A U.S. Holder of an ADS or share of Class B Common Stock generally will be
subject to information reporting to the U.S. Internal Revenue Service (the
"IRS") and to "backup-withholding" of U.S. federal income tax at the rate of 31
percent with respect to dividends paid on and the proceeds of sale of an ADS or
share of Class B Common Stock paid within the United States, unless the holder
(i) is a corporation or comes within any of certain other exempt categories and
demonstrates that fact when so required, or (ii) provides a
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correct taxpayer identification number, certifies that it is not subject to
backup withholding and otherwise complies with applicable requirements of the
backup withholding rules. Any amount withheld under these rules will be
creditable against the U.S. Holder's U.S. federal income tax liability, and a
U.S. Holder may obtain a refund of any excess amounts withheld by filing the
appropriate claim for refund with the IRS. Although non-U.S. Holders generally
are exempt from backup withholding and information reporting on payments made
within the United States, a Non-U.S. Holder may be required to comply with
applicable certification procedures to establish that it is not a U.S. person in
order to avoid the application of those rules.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement (the "Underwriting Agreement") among the Company, the Selling
Shareholders and each of the Underwriters named below (the "Underwriters"), each
of the Underwriters has severally agreed to purchase, the respective number of
ADSs set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER ADSS
- ----------- ---------
<S> <C>
UBS Securities LLC..........................................
SBC Warburg Dillon Read Inc.................................
Donaldson Lufkin & Jenrette Securities Corporation..........
Lehman Brothers Inc.........................................
---------
Total............................................. 9,195,580
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the ADSs offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are committed to take and pay for all of the
ADSs offered hereby (other than those covered by the over-allotment option
described below) if any are taken.
The Underwriters propose to offer the ADSs offered hereby directly to the
public at the public offering price set forth on the cover page hereof and to
certain dealers at a price that represents a concession not in excess of $
per ADS. Any Underwriter may allow, and such dealers may reallow, a concession
not in excess of $ per ADS to certain other dealers. After the ADSs offered
hereby are released for sale to the public, the offering price and other selling
terms may from time to time be varied by the Underwriters.
Pursuant to the Underwriting Agreement, the Company and the Selling
Shareholders granted to the Underwriters an option, exercisable within 30 days
after the date of this Prospectus, to purchase up to an aggregate of 1,379,337
additional ADSs on the same terms as set forth on the cover page hereof. The
Underwriters may exercise such option to purchase solely for the purpose of
covering over-allotments, if any, made in connection with the Offering. To the
extent such option is exercised, each Underwriter will become obligated, subject
to certain conditions, to purchase approximately the same percentage of such
additional ADSs as the number set forth next to such Underwriters' name in the
preceding table bears to the total number of ADSs offered by the Underwriters
hereby.
The Company and Conecel Holdings have agreed not to, directly or
indirectly, offer, sell, contract to offer or sell or otherwise dispose of any
Class A Common Stock, Class B Common Stock, ADSs or any securities which are
convertible into or exercisable or exchangeable for Class B Common Stock, or
ADSs (other than the ADSs offered hereby), or enter into any swap or other
agreement that transfers, in whole or in part, any of the economic consequences
of ownership of Class A Common Stock, Class B Common Stock or ADSs for a period
of 180 days after the date of this Prospectus, without the prior written consent
of UBS Securities LLC, on behalf of the Underwriters.
In the Underwriting Agreement, the Company and, to a limited extent, the
Selling Shareholders have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the U.S. federal securities laws, or to
contribute to payments which the Underwriters may be required to make in respect
thereof.
In order to facilitate the Offering, certain persons participating in the
Offering may engage in transactions that stabilize, maintain or otherwise affect
the price of the ADSs during or after the Offering. Specifically, the
Underwriters may over-allot or otherwise create a short position in the ADSs for
their own account by selling more ADSs than have been sold to them by the
Company and the Selling Shareholders. The Underwriters may elect to cover any
such short position by purchasing ADSs in the open market or by exercising the
over-allotment option granted to the Underwriters. In addition, such persons may
stabilize or maintain the price of the ADSs by bidding for or purchasing ADSs in
the open market and may impose penalty bids, under which selling concessions
allowed to syndicate members or other broker-dealers participating in this
Offering are
107
<PAGE> 112
reclaimed if ADSs previously distributed in the Offering are repurchased in
connection with stabilization transactions or otherwise. The effect of these
transactions may be to stabilize or maintain the market price of the ADSs at a
level above that which might otherwise prevail in the open market. The
imposition of a penalty bid may also affect the price of the ADSs to the extent
that it discourages resales thereof. No representation is made as to the
magnitude or effect of any such stabilization or other transactions. Such
transactions if commenced may be discontinued at any time.
The Underwriters have advised the Company that they do not intend to
confirm sales of ADSs to any account over which they exercise discretionary
authority.
Prior to the Offering, there has been no public market for the ADSs, Class
B Common Stock or any other equity securities of the Company in Ecuador, the
United States or elsewhere. Consequently, the initial public offering price will
be determined by negotiations between the Company and the Underwriters. The
factors to be considered in such negotiations are prevailing market conditions,
the results of operations of the Company in recent periods, the market
capitalizations and stages of development of other companies which the Company
and the Underwriters believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development, general economic conditions and prospects in Latin America
generally and in Ecuador, and other factors deemed relevant by the Underwriters.
UBS Securities LLC has provided from time to time, and expects to provide
in the future, investment banking services to the Company, Conecel Holdings and
its affiliates, for which UBS Securities LLC received and expects to receive
customary fees and commissions. In consideration for rendering corporate finance
advisory services to the Company, Conecel Holdings and its affiliates since May
1995, UBS Securities LLC received warrants to purchase 1,406,250 shares of Class
B Common Stock of the Company from Conecel Holdings at an exercise price of $.01
per share and was granted certain demand and "piggyback" registration rights
with respect to such warrants. The warrants issued to UBS Securities LLC are not
exercisable prior to six months after the consummation of the Offering. See
"Certain Relationships and Related Transactions." UBS Securities LLC currently
makes a market in the Conecel Notes and Conecel Holdings Notes, both of which
are listed and traded on the Luxembourg Stock Exchange.
Purchasers of the ADSs may be required to pay transfer taxes and other
charges in accordance with the laws and practices of the country of purchase in
addition to the offering price set forth on the cover page hereof.
LEGAL OPINIONS
The validity of the ADSs, certain matters as to the tax laws of the United
States and certain other matters relating to the Offering will be passed upon
for the Company by Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.,
Miami, Florida and New York, New York. Certain other matters relating to the
Offering will be passed upon for the Underwriters by Proskauer Rose LLP. The
validity of the Class B Common Stock underlying the ADSs and certain matters as
to the tax laws of Ecuador will be passed upon by Estudio Juridico Pareja,
Abogados, Ecuadorian counsel to the Company.
Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A. and Proskauer Rose
LLP may rely, without independent investigation, upon Estudio Juridico Pareja,
Abogados, and Perez, Bustamante y Perez, Estudio Juridico Amado, Abogados,
respectively, with respect to matters governed by Ecuadorian law. Estudio
Juridico Pareja, Abogados, and Perez, Bustamante y Perez, Abogados, may rely
upon Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A. and Proskauer Rose
LLP, respectively, with respect to matters governed by United States and New
York law.
108
<PAGE> 113
EXPERTS
The financial statements of the Company included in this Prospectus for the
years ended December 31, 1995, 1996 and 1997 have been audited by BDO Binder,
independent certified public accountants, to the extent and for the periods set
forth in their report appearing elsewhere herein and are included in reliance
upon such report given upon the authority of said firm as experts in accounting
and auditing.
CHANGE IN ACCOUNTANTS
On August 5, 1996, Deloitte & Touche Ecuador Cia. Ltda. ("D&T") resigned as
the independent auditors of the Company as a result of a disagreement between
D&T and the Company with respect to the audit scope D&T considered necessary to
provide a basis for an opinion on the Company's financial statements for the
fiscal year ended December 31, 1995. The disagreement between the Company and
D&T with respect to the scope of D&T's audit related to the manner in which D&T
proposed to resolve the discrepancy that existed between the general ledger
control account of trade accounts receivable and the balance reflected in the
Company's subsidiary records. The stockholders of the Company accepted the
resignation of D&T as the independent auditors of the Company at a stockholders'
general meeting held on September 10, 1996.
The Company's audit report for the fiscal year ended December 31, 1994 and
the six months ended June 30, 1995 were qualified and noted a disagreement
between the Company and D&T regarding the proper treatment of certain monetary
corrections under Ecuadorian generally accepted accounting principles
("Ecuadorian GAAP"). At such time, the Company's financial statements were
prepared in accordance with Ecuadorian GAAP. In accordance with then current
legal requirements, it was the Company's policy to record the results of
monetary corrections, including the net unrealized exchange difference arising
from foreign currency assets and liabilities, in stockholders' equity. D&T
believed that any such gains or losses should have been recorded in the
Company's statement of operations as would have been required under Ecuadorian
GAAP. The audit report on the Company's financial statements for the six months
ended June 30, 1995 was further qualified because of audit scope issues that
prevented D&T from (i) reconciling discrepancies between the Company's general
ledger and subsidiary records with respect to the Company's accounts receivable,
(ii) determining the proper accounting treatment of certain free airtime usage
granted to new subscribers during sales promotions undertaken by the Company in
May and June 1995 and (iii) determining whether the Company made adequate
provisions for payments that would be due to the government of Ecuador under the
Company's cellular license during such period. For both periods, the audit
reports disclosed, but were not qualified for, a going concern uncertainty.
On July 30, 1996, the Company engaged BDO Binder to replace D&T as the
Company's independent auditors. BDO Binder has audited the Company's financial
statements for the fiscal years ended December 31, 1994, 1995, 1996 and 1997 in
accordance with U.S. GAAP and United States generally accepted auditing
standards, for inclusion and presentation in this Prospectus. In connection with
its audit, BDO Binder addressed and resolved to its satisfaction the issues
previously raised by D&T as follows: (i) the discrepancies that existed between
the accounts receivable balances reflected in the Company's general ledger
control account and the Company's subsidiary records were resolved by recording
appropriate adjustments to the Company's statement of operations and balance
sheet in order to reflect the lower amounts set forth in the Company's
subsidiary records; (ii) free airtime usage granted during sales promotions has
been accounted for as costs and is being expensed as incurred in accordance with
industry practice; (iii) as disclosed in the 1995 and 1996 financial statements
of the Company, the Company has made adequate provisions for payments under the
Company's cellular license agreement; and (iv) with regard to the proper
treatment of monetary correction under Ecuadorian GAAP, this issue is no longer
relevant since the financial statements of the Company are no longer prepared in
accordance with such principles. The Company authorized D&T to respond fully to
the inquiries of BDO Binder concerning the subject matter of each of the
foregoing issues.
109
<PAGE> 114
AVAILABLE INFORMATION
The Company has filed with the U.S. Securities and Exchange Commission (the
"Commission") a Registration Statement on Form F-1 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement") under the Securities Act with respect to the ADSs offered hereby.
This Prospectus, which forms a part of the Registration Statement, does not
contain all the information set forth in the Registration Statement, certain
parts of which have been omitted in accordance with the rules and regulations of
the Commission. For further information with respect to the Company, the Class B
Common Stock and the ADSs offered hereby, reference is made to the Registration
Statement. Statements contained in this Prospectus as to the contents of certain
documents filed as exhibits to the Registration Statement are not necessarily
complete, although described in all material respects, and, in each instance,
reference is made to the copy of the document so filed. Each such statement is
qualified in its entirety by such reference.
The Company is registering the ADSs under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The Company is subject to certain
informational requirements of the Exchange Act applicable to foreign private
issuers and, in accordance therewith, is required to file reports, including
annual reports on Form 20-F and other information with the Commission, subject
to certain exceptions described below. The Registration Statement and such other
materials and information can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549; and at the Commission's regional offices at Suite 1400,
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois
60661-2511, and at the 13th Floor, 7 World Trade Center, New York, New York
10048. Copies of such materials can also be obtained from the Commission at
prescribed rates through its Public Reference Section at 450 Fifth Street, N.W.
Washington, D.C. 20549. The Commission also maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, including the Company. The ADSs have
been approved for quotation on Nasdaq. Reports and other information regarding
the Company will be available for inspection at the Nasdaq Stock Market, Inc.,
1735 K Street, N.W., Washington D.C. 20006.
As a foreign private issuer, the Company will be exempt from the rules
under the Exchange Act prescribing the furnishing and content of proxy
statements and its officers, directors and principal shareholders are exempt
from the reporting and short-swing profit recovery provisions contained in
Section 16 of the Exchange Act. Under the Exchange Act, the Company will not be
required to publish financial statements as frequently or as promptly as U.S.
companies.
The Company will enter into the Deposit Agreement with Bankers Trust
Company, as Depositary, regarding the issuance of and rights pertaining to the
ADSs. The Company will furnish the Depositary with annual reports, which will
include a description of the business of the Company and annual audited
financial statements, and quarterly interim earnings reports beginning with the
first quarter of 1998, which will include unaudited interim financial
information. Such financial statements and financial information will be
prepared in conformity with U.S. GAAP. The Company will also furnish the
Depositary with semiannual reports in English, which will include unaudited
semiannual condensed financial information prepared in accordance with U.S.
GAAP. The Depositary has agreed that, upon receipt thereof, it will promptly
mail such reports to all record holders of ADRs representing ADSs. The Company
will furnish to the Depositary all notices of shareholders' meetings and other
reports and communications that are made generally available to shareholders of
the Company. The Depositary has agreed that it will, to the extent permitted by
law, make such notices, reports and communications available to record holders
of ADRs and will mail to all record holders of ADRs a notice containing a
summary of the information contained in any notice of a shareholders' meeting
received by the Depositary. See "Description of American Depositary Receipts."
110
<PAGE> 115
CONSORCIO ECUADORIANO DE TELECOMUNICACIONES S.A. CONECEL
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets as of December 31, 1997 and 1996............. F-3
Statements of Operations for the Years ended December 31,
1997, 1996 and 1995....................................... F-4
Statements of Stockholders' Equity for the Years ended
December 31, 1997, 1996 and 1995.......................... F-6
Statements of Cash Flows for the Years ended December 31,
1997, 1996 and 1995....................................... F-7
Notes to Financial Statements -- Years ended December 31,
1997, 1996 and 1995....................................... F-9
</TABLE>
F-1
<PAGE> 116
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Consorcio Ecuatoriano de Telecomunicaciones S.A. CONECEL
Quito, Ecuador
We have audited the accompanying balance sheet of Consorcio Ecuatoriano de
Telecomunicaciones S.A. CONECEL, as of December 31, 1997 and 1996 and the
related statements of operations, stockholders' equity and of cash flows for
each of the years ended December 31, 1997, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Consorcio Ecuatoriano de
Telecomunicaciones S.A. CONECEL as of December 31, 1997 and 1996 and the results
of its operations and its cash flows for each of the years ended December 31,
1997, 1996 and 1995, in conformity with United States generally accepted
accounting principles.
January 26, 1998
Quito, Ecuador BDO Binder
F-2
<PAGE> 117
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
BALANCE SHEETS
(EXPRESSED IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1997 1996
-------- -------
<S> <C> <C>
ASSETS:
Current:
Cash and cash equivalents................................. $ 4,701 $ 835
Restricted cash ($16,940 held in escrow for interest and
$359 held for working capital) (Note A)................ 17,299 502
Certificates of deposit................................... -- 1,663
Trade receivables, net (Note B)........................... 27,308 4,831
Other accounts receivables (Note C)....................... 7,360 2,076
Inventories (Note D)...................................... 7,356 739
Prepaid expenses and other (Note L (1))................... 2,429 354
-------- -------
Total current assets.............................. 66,453 11,000
Trade receivables, long term (Note B)....................... 2,339 --
Property and equipment (Note E)............................. 74,520 32,156
Telecommunication and satellite systems licenses (Note F)... 52,015 1,698
Deferred charges (Note G)................................... 9,894 --
Goodwill (Notes A and O).................................... 66,265 --
Other assets................................................ 120 77
-------- -------
$271,606 $44,931
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and credit facility (Note H)................ $ 15,616 $ 8,094
Accounts payable (Note I)................................. 23,991 3,734
Accrued expenses and other................................ 8,910 1,550
Current maturities of long-term bank loans (Note K)....... -- 1,748
-------- -------
Total current liabilities......................... 48,517 15,126
Long-term debt and banks loans (Note K)..................... 246,000 11,052
-------- -------
Total liabilities................................. 294,517 26,178
Commitments and contingencies (Note L) Stockholders' Equity
Common stock (Notes M and N).............................. 28,670 28,670
Accumulated deficit (Note A).............................. (10,675) (9,917)
Effect of push-down accounting (Note A)................... (40,906) --
-------- -------
Total stockholders' equity (deficit).............. (22,911) 18,753
-------- -------
$271,606 $44,931
======== =======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 118
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
STATEMENTS OF OPERATIONS
(EXPRESSED IN THOUSANDS OF US DOLLARS OR SHARES)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Service Revenues:
Recurring charges (Note B)................................ $ 65,487 $ 27,223 $ 24,664
Activation................................................ 972 1,069 2,066
Sales of telephones equipment and accessories............. 8,557 1,532 3,090
-------- -------- --------
Total............................................. 75,016 29,824 29,820
COST OF REVENUES:
Cost of services (includes amortization of $3,155 in
1997).................................................. (12,262) (7,997) (6,155)
Cost of equipment sold.................................... (14,763) (2,336) (4,150)
-------- -------- --------
Total............................................. (27,025) (10,333) (10,305)
-------- -------- --------
Gross Profit................................................ 47,991 19,491 19,515
Operating expenses:
Selling expenses.......................................... (7,920) (2,180) (3,567)
Marketing expenses........................................ (3,936) (4,353) (6,333)
General and administrative expenses....................... (12,205) (7,388) (5,813)
Depreciation and amortization............................. (6,290) (4,189) (2,536)
Settlement related to calling party pays (Note B)......... (3,560) -- --
Provision for bad debt (Note B)........................... (277) -- (1,946)
-------- -------- --------
Total............................................. (34,188) (18,110) (20,195)
-------- -------- --------
Operating income (loss)..................................... 13,803 1,381 (680)
-------- -------- --------
Other income:
Interest income........................................... 2,873 556 426
Other income (Note L (2))................................. 888 1,602 266
-------- -------- --------
Total............................................. 3,761 2,158 692
-------- -------- --------
Other expenses:
Interest expense.......................................... (20,985) (3,034) (5,016)
Remeasurement (loss) gain................................. (6,293) (2,037) 899
-------- -------- --------
Total............................................. (27,278) (5,071) (4,117)
-------- -------- --------
Net loss.................................................... $ (9,714) $ (1,532) $ (4,105)
-------- -------- --------
Net loss per common share................................... $ (0.13) $ (0.02) $ (0.11)
-------- -------- --------
Weighted average number of common shares outstanding........ 75,000 75,000 38,288
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 119
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
STATEMENTS OF OPERATIONS
(EXPRESSED IN THOUSANDS OF US DOLLARS OR SHARES)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Pro forma
Historical net loss....................................... $ (9,714)
Pro forma adjustments
For warrants issued in connection with advisory services
(Note N)(1)............................................ (2,039)
For warrants issued in connection with the Conecel
Holdings Notes (Note A)(1)............................. (2,961)
--------
Pro forma net loss.......................................... $(14,714)
--------
Pro forma net loss per common share......................... $ (.20)
--------
Pro forma average number of common shares outstanding....... 75,000
========
</TABLE>
- ---------------
(1) Assumes an estimated initial public offering price of $3.625 per share,
however, the actual price may be higher or lower depending on the market
conditions at the time of the initial public offering.
See accompanying notes to financial statements.
F-5
<PAGE> 120
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
STATEMENTS OF STOCKHOLDERS' EQUITY
(EXPRESSED IN THOUSANDS OF US DOLLARS)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
EFFECT OF
COMMON STOCK ADDITIONAL PUSH-
-------------------- PAID ACCUMULATED DOWN
SHARES AMOUNT IN CAPITAL DEFICIT ACCOUNTING TOTAL
---------- ------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, AT DECEMBER 31, 1994.... 11,484,000 $ 5,828 $ 335 $ (4,280) -- $ 1,883
Net loss......................... -- -- -- (4,105) -- (4,105)
Cash contributions............... -- -- 22,507 -- -- 22,507
Issuance of common stock......... 13,516,000 5,600 (5,600) -- -- --
---------- ------- -------- -------- -------- --------
BALANCE, AT DECEMBER 31, 1995.... 25,000,000 $11,428 $ 17,242 $ (8,385) -- $ 20,285
Net loss......................... -- -- -- (1,532) -- (1,532)
Issuance of common stock......... 50,000,000 17,242 (17,242) -- -- --
---------- ------- -------- -------- -------- --------
BALANCE, AT DECEMBER 31, 1996.... 75,000,000 28,670 -- (9,917) -- 18,753
Net loss......................... -- -- -- (9,714) -- (9,714)
Effect of push-down accounting
(Note A)....................... -- -- -- 8,956 $(40,640) (31,684)
Deemed dividend (Note A)......... -- -- -- -- (266) (266)
---------- ------- -------- -------- -------- --------
BALANCE, AT DECEMBER 31, 1997.... 75,000,000 $28,670 $ -- $(10,675) $(40,906) $(22,911)
========== ======= ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 121
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
STATEMENTS OF CASH FLOWS
(EXPRESSED IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (9,714) $(1,532) $ (4,105)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization............................. 9,445 4,189 2,536
Amortization of deferred charges.......................... 1,188 -- --
Provision for uncollectibles.............................. 277 -- 1,946
Settlement related to calling party pays.................. 3,560 -- --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(Increase) in trade and other receivables, net............ (33,937) (484) (3,218)
(Increase) decrease in inventories and prepaid expenses... (8,692) 911 (1,638)
Increase in accounts payable, accrued expenses and
other.................................................. 27,617 841 9,667
--------- ------- --------
Net cash (used) provided in operating activities............ $ (10,256) $ 3,925 $ 5,188
--------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash........................................... 502 284 (786)
Additions to deferred charges............................. (6,148) -- --
Additions to telecommunication and satellite system
licenses............................................... (53,643) -- --
Sale (purchase) of certificates of deposit................ 1,663 (334) (1,329)
Additions to property and equipment....................... (47,931) (4,830) (17,928)
Additions to other assets................................. (43) (3) (111)
--------- ------- --------
Net cash used in investing activities....................... (105,600) (4,883) (20,154)
--------- ------- --------
Subtotal.................................................... $(115,856) $ (958) $(14,966)
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 122
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
STATEMENTS OF CASH FLOWS
(EXPRESSED IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Subtotal.................................................... $(115,856) $ (958) $(14,966)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term loans.............................. 26,065 3,589 62,622
Payments of short-term loans.............................. (18,543) (10,889) (69,704)
Payment of long-term debt and bank loans.................. (12,800) (3,060) (642)
Increase in long-term debt and bank loans................. 125,000 -- 11,500
Cash contributions........................................ -- -- 22,507
--------- -------- --------
Net cash provided (used) by financing activities............ 119,722 (10,360) 26,283
--------- -------- --------
Net increase (decrease) by cash and cash equivalents........ 3,866 (11,318) 11,317
--------- -------- --------
Cash and cash equivalents at beginning of the year.......... 835 12,153 836
--------- -------- --------
Cash and cash equivalents at end of the year................ $ 4,701 $ 835 $ 12,153
========= ======== ========
SUPPLEMENTAL CASH DISCLOSURE:
Cash paid for interest.................................... $ 1,307 $ 1,676 $ 3,947
SUPPLEMENTAL NON CASH DISCLOSURE:
For effect of push-down accounting (see Note A)
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE> 123
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF US DOLLARS OR SHARES)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business description
Consorcio Ecuatoriano de Telecomunicaciones S.A. Conecel. This Company was
established in Quito, Ecuador on June 24, 1993. Its main purpose is the
operation of a mobile cellular telephone system, authorized by the
Superintendency of Telecommunications in Ecuador. The Company was awarded the
cellular service concession and began offering cellular communications service
in March 1994, and started the sale of telephone equipment during December 1993.
As of December 31, 1997 and 1996, the Company did not have any subsidiaries.
Accounting principles
The Company maintains its accounting records in Sucres (S/.). The
accompanying financial statements are remeasured using the U.S. Dollar as the
functional currency, in accordance with generally accepted accounting principles
in the United States of America ("USA-GAAP").
The Internal Tax Regime Law, issued by the Government of Ecuador,
established the requirement as of the tax year 1991 to present financial
statements adjusted by inflation.
The above effects were applied to the local financial statements to comply
with new Ecuadorian fiscal requirements, and were reversed in the financial
statements with the purpose of presenting them at their cost of purchase, in
conformity with USA-GAAP.
Push-down accounting
On September 30, 1997, the Company became a subsidiary of Conecel Holdings
when Conecel Holdings acquired 85% of the Company. The remaining 15% of the
Company is owned by Centro Empresarial, Cempresa C.A. ("Cempresa"), an
Ecuadorian corporation that is controlled by the Parra family through its 60%
interest. In connection with the acquisition, Conecel Holdings issued units
consisting of an aggregate of $121 million of its Series A 14% Secured Notes
(the "Conecel Holding Notes") due September 30, 2000 and Warrants (the
"Warrants") to acquire an aggregate of 1,633,500 shares of the Company (the
"Acquisition").
In September 1997, an entity controlled by the Parra family agreed to
purchase from MasTec, Inc. ("MasTec") the 40% interest in Cempresa not
controlled by the Parra family, in exchange for $20.0 million in cash and
7,500,000 shares of the Company's Class B Stock. Pursuant to a definitive stock
purchase agreement in December 1997, the Company signed a purchase agreement
with MasTec requiring Conecel Holdings to distribute $20 million of the proceeds
from the Conecel Holding Notes to MasTec and cause 7,500,000 shares of the
Company's Class B Stock owned by Cempresa (Class B Stock will be converted from
shares of Class A common stock) to be transferred to MasTec in exchange for the
Company's shares. Additionally, the remaining 3,000,000 shares of Class A Stock
held by Cempresa, will be transferred to Conecel Holdings. The effect of these
transactions, upon completion, is to raise Conecel Holdings ownership in the
Company to effectively 89%. In connection, with this transaction, an additional
750,000 shares of Class B Common Stock (at an assumed share price of $3.625)
will be transferred to an unrelated third party causing goodwill to increase by
an additional $2,719 and a reduction to the effect of push-down accounting by
the same amount.
Accounting practice prescribed by the Securities and Exchange Commission
("SEC") requires "push-down" accounting to revalue the Company's assets at the
time of the acquisitions.
The financial statements presented reflect the push-down accounting of
Conecel Holding's cost of acquiring the Company through the two transactions
described above. This accounting includes the push-down of goodwill and
adjustments totaling $89.3 million and related debt in the amount of $121
million. For the portion of the acquisition from an entity under common control,
a deemed dividend has been pushed-
F-9
<PAGE> 124
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN THOUSANDS OF US DOLLARS OR SHARES)
down based on the gain associated with the sale of the related party's
investment in the amount of $12.8 million. This amount is included under the
effect of push-down accounting.
The push-down treatment also resulted in the recapitalization of
stockholders' equity. As of September 30, 1997, the accumulated deficit in the
amount of $8,956 was recapitalized into the effect of push down accounting, and
therefore the accumulated deficit as of December 31, 1997, reflects the results
of operations from October 1, 1997 to December 31, 1997.
The push-down treatment resulted in restricted cash of $16,940 held in
escrow for interest and $625 for working capital purposes of Conecel Holdings.
Any relief of the working capital will be accounted for as a deemed dividend to
Conecel Holdings.
During 1997, Conecel Holdings used $266 of the funds reserved for working
capital. This was accounted for as a deemed dividend.
These changes will affect the future comparability of operating data
principally with respect to the amortization of the intangible assets and the
interest expense associated with the push-down accounting (see Note P).
The Company will account for the issuance of the warrants exercisable into
Class B Stock, as of the date the Class B Stock is created and its value is
determinable, as interest expense and as additional equity to the extent of the
fair market value of the warrants. Included in the pro forma net loss in the
statement of operations is $2,961 of additional interest expense that will be
recognized by the Company at the time that the Class B Stock is created and its
value is determinable, and the Conecel Holding's notes are repaid. The interest
expense is based on the creation of the Class B Stock and assuming that the
Class B Stock will be valued at $3.625 per share in the initial public offering.
Cash equivalents
For purposes of the cash flow statement, the Company considers as cash
equivalents all the cash amounts on term deposits, with original due dates of
three months or less.
Fair value of financial instruments
The company's financial instruments consist principally of cash,
certificates of deposits, trade receivables, accounts payable, accrued expenses,
notes payable and long-term bank loans. The carrying amounts of such financial
instruments as reflected in the balance sheet approximate their estimated fair
value as of December 31, 1997 and 1996. The estimated fair value is not
necessarily indicative of the amounts the Company could realize in a current
market exchange or of future earnings or cash flows.
Inventories
Inventories are stated at the lower of cost or market; cost is determined
by the average-cost-method.
Property and equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expenses as incurred, whereas improvements are
capitalized. Depreciation is computed on the straight-line method over the
estimated useful lives of the related assets: 10 years for cellular telephone
equipment, infrastructure, installations, equipment, furniture and office
equipment; 5 years for vehicles, computer equipment, and cellular telephone
accessories.
F-10
<PAGE> 125
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN THOUSANDS OF US DOLLARS OR SHARES)
Telecommunication and satellite system licenses
The telecommunication licenses and systems are stated at cost. The
operating license granted by the Superintendency of Telecommunications is for
the rights of the Company to provide mobile cellular telephone services in
Ecuador; the systems license is for the rights to provide services of a teleport
in the city of Guayaquil, Ecuador, and are amortized on a straight-line basis
during a period of 15 years.
Revenue recognition
Recurring charges are recognized on a monthly basis according to the terms
of the customer agreements. Recurring charges resulting from airtime in excess
of the customer agreements is recognized at the time of usage.
Activation fees are one time charges, which are recognized as revenue at
the time payment is received.
Revenue from sale of telephone equipment and accessories is recognized at
the time of sale and subsequent delivery of such equipment.
Remeasurement of foreign currency and exchange rates
The Ecuadorian Sucres is the currency of the primary economic environment.
Ecuador is considered a highly inflationary economy. As required by Statement of
Financial Accounting Standards ("SFAS") No. 52, Foreign Currency Translation,
the Company uses the U.S. dollar as its functional currency. As a result, the
Company remeasures the financial statements from Ecuadorian Sucres to the U.S.
dollar. Nonmonetary assets, liabilities, revenues and expenses are remeasured at
the historical exchange rate. Monetary assets, liabilities, revenues and
expenses are remeasured at the exchange rate in effect at the date a transaction
occurs. Gains and losses related to the remeasurement of monetary assets and
liabilities are included in the statement of operations. The Monetary Board of
Ecuador established that the official exchange market resulted from the average
of U.S. Dollars sales at the interbank market; in this way the official and free
market exchange rates have stayed relatively the same. The financial statements
were remeasured to U.S. dollars using the free market exchange rate. At December
31, 1997 and 1996, the free market exchange rates were S/4,430 and S/3,631 to
$1.00, respectively.
Income taxes
The Company accounts for income taxes pursuant to the provisions of SFAS
No. 109, "Accounting for Income Taxes", which requires, among other things, an
asset and liability approach to calculating deferred income taxes. The asset and
liability approach requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences between
the carrying amounts and the tax bases of assets and liabilities.
Net loss per share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128 "Earnings Per Share." SFAS No. 128 simplifies the standards for
computing earnings per share ("EPS") previously found in APB No. 15 "Earnings
per Share." It replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the diluted
EPS computation. The Company adopted SFAS No. 128 in 1997 and its implementation
did not have a material effect on the financial statements. EPS has been
restated for all prior periods presented.
F-11
<PAGE> 126
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN THOUSANDS OF US DOLLARS OR SHARES)
Net loss per common share is based on the loss for the period divided by
the weighted average number of common shares outstanding during each year.
In accordance with Ecuadorian law, common shares are sometimes issued
several months after the capital for such shares is received. However, for
purposes of calculating the weighted average number of common shares
outstanding, common shares are considered outstanding from the date the capital
contribution was made.
Management estimates
The preparation of financial statements 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.
Stock based compensation
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation." SFAS No. 123 establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. The
Company did not adopt the fair value based method but instead will disclose the
pro forma effects of the calculation required by the statement.
Recent accounting pronouncements
In March 1994, FASB issued SFAS No. 121 "Accounting for Impairment of
Long-Lived Assets and for long-lived Assets to be Disposed of." SFAS No. 121
requires, among other things, impairment loss of assets to be held and gains or
losses from assets that are expected to be disposed of to be included as a
component of income from continuing operations before taxes on income. The
Company adopted SFAS No. 121 as of January 1, 1996 and its implementation did
not have a material effect on the financial statements.
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise," establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statement issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate the resources and in assessing performance.
Both SFAS No. 130 and 131, issued in June 1997, are effective for financial
statements for periods beginning after December 15, 1995 and require comparative
information for earlier years to be restated. Due to the recent issuance of
these standards, management has been unable to fully evaluate the impact, if
any, they may have on future financial statement disclosures.
F-12
<PAGE> 127
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN THOUSANDS OF US DOLLARS OR SHARES)
B. TRADE RECEIVABLES, NET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
------- ------
<S> <C> <C>
EMETEL access (includes IVA Tax)(1)......................... $20,648 $ --
Recurring charges receivables............................... 3,147 5,739
Telephone sales receivables(2).............................. 7,392 660
------- ------
31,187 6,399
Less allowance for doubtful accounts........................ 1,540 1,568
------- ------
29,647 4,831
Less long-term portion...................................... 2,339 --
------- ------
$27,308 $4,831
======= ======
</TABLE>
The allowance for doubtful accounts is established through a charge to the
statement of operations. The Company reviews the accounts receivable aging
balances on a monthly basis and reserves those balances deemed to be
uncollectible.
During 1995, the Company wrote off certain receivables and determined the
appropriate allowance for its doubtful accounts for such year. Subsequently, the
Company initiated its prepayment plans for its customers that posed a high
credit risk, which reduced the Company's exposure to uncollectible accounts.
During 1996, the Company again conducted a detailed accounts receivable analysis
and determined that the allowance for doubtful accounts recorded in 1995 was
adequate to cover any expected write off from uncollected accounts in 1996.
(1) On August 10, 1996 in the Official Registry Number 1008, the
Regulation on interconnection and connection between telecommunications
networks and systems was issued, which establishes the tariffs denominated
"access charges," which enable cellular telephone systems companies to bill
EMETEL, S.A. ("EMETEL"), the wire telephone service provider owned by the
Ecuadorian Government, for the calls made to a subscriber of the cellular
network.
On November 14, 1997, the Company and EMETEL signed a Transactional
Agreement concerning the settlement of an action commenced by the Company
to collect certain accounts receivables from EMETEL in the amount of
$12,431. The Company and EMETEL agreed to settle the above accounts
receivables amounting to $6,470. The terms of the settlement are as
follows: EMETEL has agreed to make a cash payment in the amount of $1,617
and execute a promissory note to the Company in the amount of $4,853. The
note carries an interest rate of 10% per annum and is payable over a 24
month period. Additionally, EMETEL has agreed to offset amounts owed by the
Company for interconnection charges in the amount of $2,401 which are
included in accounts payable. As a result of the Transactional Agreement,
the Company has reflected as of December 1997 a write-off of the receivable
accounts in the amount of $3,560 as a charge to operations, included in the
settlement related to calling party pays.
(2) Relates to service plans which are recovered through normal
billings.
F-13
<PAGE> 128
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN THOUSANDS OF US DOLLARS OR SHARES)
C. OTHER ACCOUNTS RECEIVABLES
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Due from related parties:
Corptilor S.A. (includes interest)........................ $ 887 $ 614
Tax receivables............................................. 3,015 478
Advances to third parties................................... 2,567 137
Checks returned by the bank................................. 146 103
Others...................................................... 745 744
------- -------
$ 7,360 $ 2,076
======= =======
</TABLE>
D. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Cellular telephones......................................... $ 3,693 $ 539
Cellular accessories........................................ 141 118
Magnetic cards.............................................. 44 52
Teleport cards.............................................. 23 30
Inventories in transit...................................... 3,455 --
------- -------
$ 7,356 $ 739
======= =======
</TABLE>
E. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Land and building........................................... $ 464 $ 456
Cellular telephone system................................... 77,529 34,718
Infrastructure, installation and equipment.................. 8,310 4,960
Furniture, equipment and vehicles........................... 3,374 1,612
------- -------
89,677 41,746
Less accumulated depreciation............................... 15,157 9,590
------- -------
$74,520 $32,156
======= =======
</TABLE>
F. TELECOMMUNICATIONS AND SATELLITE SYSTEM LICENSES
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Cellular telephone licenses................................. $ 2,095 $ 2,095
Satellite system............................................ 151 151
Minimum annual guaranteed pre-payment....................... 53,643 --
------- -------
55,889 2,246
Less accumulated amortization............................... 3,874 548
------- -------
$52,015 $ 1,698
======= =======
</TABLE>
F-14
<PAGE> 129
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN THOUSANDS OF US DOLLARS OR SHARES)
On September 20, 1996, the Consejo Nacional de Telecomunicaciones CONATEL,
authorized the National Telecommunications Secretariat (SNT) to change the
payment conditions of the telecommunication licensing rights, accepting a single
payment at present value, instead of the installments established in the initial
concession contract. Accordingly, the SNT authorized the amount of $51,540 as an
advance at present value for the concession rights.
On January 30, 1997, the Company paid $1,782 to National Telecommunications
Secretariat (SNT) as a portion of the full prepayment amount to be paid by the
Company and as interest accrued since October 1996 on such amount. This sum was
deducted from the total sum of the prepayment.
On April 30, 1997, the National Telecommunications Secretariat (SNT) and
the Company signed a payment agreement for the concession rights prepayment of
$53,643, and on May 2, 1997, payment was made. This prepayment will be amortized
over the remaining 11 year period using the straight-line method.
In case of a contract termination, all real estate and equipment, owned by
the operator for the provision of mobile cellular telephone service, will become
property of the Ecuadorian State through the Superintendency of
Telecommunications, which will pay the operator the book value of such assets.
The Company has accrued the greater of the minimum annual guaranteed or the
percentage of gross revenues for each of the years ended December 31, 1997, 1996
and 1995, in order to match the costs with the associated revenues. The Company
has recorded in cost of revenues $710 in 1997, $2,326 in 1996, and $1,595 in
1995, in connection with this agreement.
G. DEFERRED CHARGES
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Long-term issuance costs in relation to the Conecel Notes... $ 6,148 $ --
Long-term secured notes issuance cost attributed to
push-down accounting (Notes A and K)...................... 4,934 --
------- -------
11,082 --
Less accumulated amortization............................... 1,188 --
------- -------
$ 9,894 $ --
======= =======
</TABLE>
Corresponds to legal, commission and other expenses incurred in connection
with the bond issuance and secured notes, which are amortized, using the
interest method, over the five year life of the bond and the three year life of
the secured notes.
F-15
<PAGE> 130
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN THOUSANDS OF US DOLLARS OR SHARES)
H. NOTES PAYABLE AND CREDIT FACILITY
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Banco Pichincha C.A.
Promissory notes for $4,000 at an annual interest rate of
10% maturing in July 27, 1998............................. $ 4,000 $ --
Loan for S/.1.319.200 at a 40% annual interest rate with 179
days period, maturing on March 28, 1997................... -- 363
Banco Aserval
Promissory notes for $1,800 interest ranging from 11.50% to
15%, maturing between February 2, 1998 and June 2, 1998... 1,800 --
Northern Telecom International Finance B.V.
Direct financing for the purchase of cellular equipment, to
180 days term, at the 180-days LIBOR rate plus 8%, per
year due December 30, 1996 (refinanced at the LIBOR rate
plus 12% in January 1997)................................. -- 7,731
Credit facility for the direct financing of cellular
equipment, payable quarterly, at an annual interest rate
of LIBOR plus 7% (currently 13%), maturing October 30,
1999 and limited to advances through October 30, 1998,
collateralized by equipment. Upon completion of an initial
public offering and meeting certain other conditions, the
interest rate will change to LIBOR plus 4% on amounts
outstanding up to $10 million and LIBOR plus 7% on the
remaining outstanding balance. This credit facility has
been increased up to an aggregate of $20 million, subject
to the satisfaction of certain conditions................. 9,816 --
------- -------
$15,616 $ 8,094
======= =======
</TABLE>
The weighted average interest rate on notes payable for the years ended
December 31, 1997, 1996 and 1995 was 11%, 14.8% and 9.9%, respectively.
I. ACCOUNTS PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Bank Overdraft.............................................. $ 746 $ 20
Suppliers and letters of credit............................. 17,817 2,714
Commissions................................................. 1,311 --
Taxes and utilities......................................... 2,735 1,000
Other....................................................... 1,382 --
------- -------
$23,991 $ 3,734
======= =======
</TABLE>
J. INCOME TAXES
At December 31, 1997 and 1996, the Company had an accumulated deficit of
$9,425 and $9,917 for financial reporting purposes.
The Company has net deferred tax assets as of December 31, 1997 and 1996,
which consists mainly of the net operating loss carryforwards. Such operating
loss carryforwards would result in the recognition of deferred tax assets of
$1,885 and $2,479 at December 31, 1997 and 1996. A valuation allowance has been
established for the full amount of such deferred tax assets since it is not
considered more likely than not that they will be realized.
F-16
<PAGE> 131
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN THOUSANDS OF US DOLLARS OR SHARES)
The current Internal Tax Law of Ecuador permits carryforwards of the net
losses against future taxable income during the succeeding five years, not
exceeding 25% for 1997 and 1996 of the earnings generated in each of those
years.
K. LONG-TERM DEBT AND BANK LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- -------
<S> <C> <C>
Bonds, Conecel Notes
Annual interest at 14% payable semiannually due May 2,
2002(1)................................................ $125,000 $ --
Conecel Holdings Notes
Annual interest at 14% due September 30, 2000 (Note
A)(2).................................................. 121,000 --
Corporacion Andina de Fomento (C.A.F.)
U.S. Dollar loan payments are due in June and December of
each year with a 2 year grace period................... -- 11,500
Banco del Pichincha C.A.
Annual interest at 15.75% plus a 1% commission, with
monthly payments, and matures on December 3, 1998...... -- 1,300
-------- -------
246,000 12,800
Less the current maturities of the long-term bank loans..... -- 1,748
-------- -------
$246,000 $11,052
======== =======
</TABLE>
- ---------------
(1) Pursuant to the Conecel Note registration rights agreement as of November 1,
1997 the effective interest rate increased to 14.5% due to the Company's
failure to consummate a registered exchange offer by October 31, 1997. On
January 6, 1998, the Company consummated a registered exchange offer for the
Conecel Notes and the interest rate reverted to 14%.
The Company's operations and financial performance are subject to covenants
contained in the Conecel Note indenture that, among other things, limit the
Company's ability to incur liens, incur additional indebtedness, dispose of
assets, engage in mergers or engage in certain other transactions.
(2) Conecel Holdings Notes are redeemable by the Company at a redemption price
equal to 105% of the outstanding principal amount if paid within two years
of the closing date, however, if paid within two years of the closing date
using proceeds from a public offering, then the redemption price should
equal 107% of the outstanding principal amount.
In connection with this premium, the Company has recognized $1.5 million in
additional interest expense during 1997.
Currently, the Company does not meet certain financial ratios and covenants,
and thus is subject to restrictions on the incurrance of additional
indebtedness. The holders of the Conecel Holdings Notes and the Warrants
waived compliance by Conecel Holdings with certain covenants contained in
the Conecel Holdings Indenture, including covenants relating to limitations
and indebtedness, restricted payments, limitations on transactions with
affiliates and certain restrictions relating to the early redemption of the
Conecel Holdings Notes. In addition, pursuant to a supplemental indenture
relating to the Conecel Notes, the maximum amount of vendor financing
permitted to be incurred by the Company was increased from $10 million to
$30 million.
F-17
<PAGE> 132
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN THOUSANDS OF US DOLLARS OR SHARES)
The scheduled maturities for these bank loans are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1998.................................................... $ --
1999.................................................... --
2000.................................................... 121,000
2001.................................................... --
2002.................................................... 125,000
--------
$246,000
========
</TABLE>
L. COMMITMENTS AND CONTINGENCIES
(1) LEASES
The Company maintains operating leases on buildings, computer equipment,
vehicles, installations, furniture and furnishings, rent expense for the year
ended December 31, 1997 and 1996 amounted to $535 and $1,126, respectively.
The schedule of future minimum lease payments is as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998........................................................ $202
1999........................................................ 148
2000........................................................ 74
----
$424
====
</TABLE>
The Company leases certain vehicles, computer and technical equipment from
an Ecuadorian Bank that is controlled by a majority stockholder of the Company.
The Company has entered into an agreement in the amount of $4,105 to occupy
real estate property. In connection with this agreement, the Company has made a
deposit of $1,750 which is included in prepaid expenses and other. The Company
was required to make a $2,355 payment on November 11, 1997, or incur a 12%
annual interest rate on any unpaid portions. The payment has not been made and
the Company is currently negotiating the terms of the agreement.
(2) CLAIMS
On September 16, 1996 the Company presented an administrative claim to the
National Telecommunications Secretariat based on new legislation that
retroactively clarifies the term "station." The National Telecommunications
Secretariat previously referred to "station" as subscribers not cell stations.
Based on the earlier definition of "station," the Company paid the partial "C"
tariff on the monthly use of frequencies, which originated an excess payment of
$677 corresponding to the period December 1993 to August 1996. However, the
Company has not provided for the recovery of the $677 excess payment mentioned
above. When these values are recovered they will be recorded as "other
revenues."
Due to the calculation mechanisms applied by the Superintendency of
Communications, in the years 1993 to 1995, Conecel constituted provisions in the
amount of $389. During the year ended December 31, 1996, the Company constituted
an additional provision in the amount of $931. As a result of the retroactive
change by the Superintendency of Communication's interpretation of the
calculation mechanisms, the total provision of $1,320 was reversed in 1996.
F-18
<PAGE> 133
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN THOUSANDS OF US DOLLARS OR SHARES)
The Company reversed the 1996 provision through cost of revenues in the
amount of $931. The previous years provisions in the amount of $389 are included
in other revenues.
(3) TAX REVIEWS
In 1997, the Company was reviewed for its 1995 tax year, with a resulting
assessment to the Company of $91 for income tax and $308 for Value Added Tax.
Such assessments are being disputed by the Company, and management and its legal
advisors believe they will prevail.
(4) LEGAL PROCEEDINGS
The Company is from time to time involved in various legal proceedings
occuring in the ordinary course of business. The Company does not believe that
adverse decisions in any pending or threatened proceedings or any amounts which
it may be required to pay by reason thereof would have a material adverse effect
on the financial condition or results of operations of the Company.
M. COMMON STOCK
The authorized capital for the Company on December 31, 1997 and 1996 was
150 million and 100 million of shares of common stock with a par value of
S/.1.000 each. As of December 31, 1997, 75 million shares of the common stock of
the Company were issued and outstanding.
On December 18, 1996, the Company's Board of Directors decided to increase
the authorized capital to S/.150,000 million, effective January 17, 1997
(equivalent to US $40,972 at an exchange rate of S/.3.661 per U.S. Dollar on
January 17, 1997). There is no deadline to increase paid-in capital up to the
new authorized capital.
Subsequent to December 31, 1997, the Company converted the existing 75,000
shares of common stock into 63,710 shares of Class A common stock, and 11,290
shares of Class B common stock. The shares of Class B common stock consist of
8,250 shares to be transferred in connection with the MasTec agreement and
approximately 3,040 shares issued in connection with the conversion of warrants
for advisory services and for issuance costs associated with the Conecel Holding
Notes.
Additionally, the Company is in the process of completing an initial public
offering where an additional 32,186 shares of Class B common stock will be
issued at a price ranging from $3.375 to $3.875 per share.
N. INDENTURE WITH CONECEL HOLDINGS LIMITED
Pursuant to the Indenture dated September 30, 1997, between Conecel
Holdings Limited (85% stockholder of the Company) and Bankers Trust Company, as
trustee (the "Conecel Holdings Indenture"), the Company agreed to among other
things, amend its charter documents. Following such amendment, the Company's
authorized capital stock will consist of shares of Class A common stock and
Class B common stock, which will be substantially similar in all respects except
that the Class B stock will only be entitled to vote in extremely limited
circumstances and the Class A common stock will be convertible into Class B
common stock. As security for its obligations under the Conecel Holdings
Indenture, Conecel Holdings Limited has pledged substantially all of its shares
of the Company's common stock, or approximately 81% of the total outstanding
shares of the Company. The Company also entered into a Dividend and Contribution
Agreement with Conecel Holdings Limited pursuant to which the Company has agreed
to declare and pay to its stockholders, within 90 days after the end of each
fiscal year, all free cash flow (as defined in the agreement); provided,
however, that such dividend payment shall at all times be made only to the
extent the Company is permitted to so under its terms of the Indenture, date May
2, 1997 between the Company and the Bank of
F-19
<PAGE> 134
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN THOUSANDS OF US DOLLARS OR SHARES)
New York, as trustee. In consideration for the Company's agreement to declare
and pay dividends, the Company received 31 shares (3%) of the capital stock of
Conecel Holdings Limited.
Each of the holders of the Conecel Holdings Limited notes received, from
Conecel Holdings Limited, for every $1,000 of principal, Warrants exercisable
into 13.5 shares of Class B stock of the Company at an exercise price of $0.01
per share. The Company's charter documents were amended on January 23, 1998, to
provide for the creation of the Class B stock.
Additionally, 1,406,250 warrants convertible into an equal number of the
Company's shares, were issued to the underwriters in connection with advisory
services.
The Company will account for the issuance of the warrants exercisable into
Class B stock, as of the date the Class B stock is created and its value is
determinable, as advisory services and as additional equity to the extent of the
fair market value of the warrants. Included in the pro forma net loss in the
statement of operations is $2,039 of additional expense that will be recognized
by the Company upon the creation of the Class B Stock and assuming the Class B
Stock will be valued at $3.625 per share in the initial public offering.
O. GOODWILL
The balance of the Goodwill attributed to the effect of push-down
accounting:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Goodwill................................................. $66,817 $ --
Less accumulated amortization............................ 552 --
------- -------
$66,265 $ --
======= =======
</TABLE>
Goodwill is being amortized over 30 years.
P. PRO FORMA RESULTS
The following unaudited pro forma summary presents the results of
operations of the Company as if the acquisition and push-down adjustments had
occurred on January 1, 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues............................................... $ 75,016 $ 29,824
Net loss............................................... (24,305) (22,321)
Net loss per share..................................... (0.32) (0.30)
</TABLE>
The unaudited pro forma assumes the amortization of goodwill amounting to
$66,817 over 30 years. The interest on the Conecel Holdings Notes in the amount
of $121,000, and the amortization of the debt issuance costs amounting to $4,934
over 3 years.
Q. STOCK OPTION PLAN
The Company's directors approved the general terms of a 1998 Stock Option
Plan (the "Stock Option Plan") for executive officers, key employees and
independent contractors of the Company by which they may, through the grant of
options, purchase up to 750,000 shares of Class B Common Stock of the Company,
participate in the increase in value of the Company's shares.
F-20
<PAGE> 135
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN THOUSANDS OF US DOLLARS OR SHARES)
R. SUPPLEMENTAL INFORMATION
Assuming the Company was effective with its initial public offering on
September 30, 1997 and the net proceeds were used to pay $86,368 of the Conecel
Holdings Notes, the pro-forma net loss would be calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Historical net loss......................................... $ (9,714)
Reduction of interest expense............................... 4,235
Reduction of debt offering cost............................. 292
Reduction of 7% premium amortization........................ 1,500
Write-off of debt offerings cost............................ (3,503)
7% premium on prepayment of the Conecel Holdings Notes...... (6,046)
Cost associated with the issuance of $1.4 million warrants
issued to the underwriters (assuming Class B Stock has an
initial public offering price of $3.625 per share)........ (2,039)
Cost associated with the issuance of 1.63 million warrants
attached to the Conecel Holdings Notes (assuming Class B
Stock has an initial public offering price of $3.625 per
share).................................................... (2,961)
--------
Pro forma net loss.......................................... $(18,236)
--------
Pro forma net loss per share................................ (.22)
--------
Weighted average number of shares........................... 83,046
========
</TABLE>
F-21
<PAGE> 136
ANNEX A
THE REPUBLIC OF ECUADOR
The following information has been derived from public sources and has not
been prepared or independently verified by the Company or the Underwriters or
any of their respective affiliates or advisers.
The Company is including the following for general information only. Such
information is not, nor is its inclusion herein meant to suggest that it is, all
the information concerning Ecuador that is or may be material to an investor.
The following information should be read in conjunction with the information set
forth under "Risk Factors -- Risks Related to Ecuador." Investors who wish to
know more about Ecuador are urged to consult the wide variety of information
available from public sources.
GENERAL
Territory and Population. Located on the north-west coast of South
America, the Republic of Ecuador ("Ecuador") covers an area of approximately
270,670 square kilometers. Ecuador borders Peru to the south and the east,
Colombia to the north and the Pacific Ocean to the west. Geographically, Ecuador
is divided into three distinct regions: the tropical lowlands of the Pacific
Coast, the mountains and valleys of the Andean Sierra and the Amazon rain forest
of the Oriente, and the Galapagos Islands.
Ecuador has a population of approximately 12 million inhabitants of which
60% is urban. In 1997, Ecuador's population grew at an estimated annual rate of
2.1%. Guayaquil, located on the coast, is the largest city, with a population of
about 2 million. Quito, located in the mountainous interior, is the capital and
second largest city in Ecuador, with 1.5 million inhabitants.
Spanish is the official language, but other languages, primarily Quechua,
are also spoken.
Government and Political Parties. In 1802, Ecuador declared its
independence from Spain after almost 300 years of colonial rule. In 1979, after
a long succession of civilian and military rule, the armed forces of Ecuador
became the first in Latin America to hand power to a democratically elected
government.
Ecuador's constitution provides for three branches of government: (1) the
executive branch is headed by the nation's President, who is elected to a
non-renewable four-year term, and appoints and leads the Council of Ministers;
(2) the legislative branch which consists of a one-chamber National Congress
composed of both national and provincial members; and (3) the judiciary branch
which is headed by the Supreme Court and includes various special-purpose courts
and lower courts.
Ecuador's political scene is fragmented, with nearly a dozen different
parties represented in Congress. The reform-minded parties include the
center-right Partido Social Cristiano (PSC), the Partido Liberal (PL) and
interim President Fabian Alarcon's frente Radical Alfarista. The major left wing
parties are the Izquierda Democratica (ID), the Partido Roldosisha Ecuatoriano
of former President Abdala Bucaram and the Pachakutik party. Other important
parties include the centrist party Democracia Popular (DP) and Nuevo Pais.
Membership in International and Regional Organizations. Ecuador is a
member of the United Nations, the Organization of American States, the
International Monetary Fund, the International Bank for Reconstruction and
Development (World Bank), the Inter-American Development Bank, the Andean Group,
the Andean Development Corporation and the Latin American Integration
Association. In November 1992, Ecuador resigned from the Organization of
Petroleum Exporting Countries. Ecuador expects to become a member of The World
Trade Organization, which is the successor to the General Agreement on Tariffs
and Trade.
POLITICAL ENVIRONMENT
Ecuador is a Republic, and under the amended 1979 constitution has a
unicameral system of presidential government. Presidents are directly elected by
absolute majority for four-year terms. Congress has the right to impeach
ministers, and has frequently used this power in the past as a way of stalling
government initiatives.
A-1
<PAGE> 137
The Constitution also confers considerable veto powers on the President, and
establishes that crucial economic measures can be passed through emergency laws.
The Duran-Ballen administration weathered several crises during its term,
including the refusal of Congress to pass several laws which were considered
extremely urgent and necessary for its economic reform plans. Among some of
those setbacks were Congress' partial vetoes of the State Modernization Law (Ley
de Modernizacion del Estado, see "Privatization" above), which was aimed at
quickly privatizing certain sectors of the economy. In January 1995, a border
conflict with Peru erupted in a disputed land area in the southeastern part of
the country. Following the conflict and beginning in August 1995, the country
was shaken by a serious deficit in energy production caused by a lack of water
in the country's largest hydroelectric facility (Paute). In addition to these
two devastating events, 1995 also witnessed a political scandal involving the
prior Vice President, Alberto Dahik, who allegedly used public funds for
personal benefit. The use of these funds, which were reserved funds designated
for "internal and external state security" (Fondos Reservados), through a
private bank, caused the President of the Supreme Court to order Mr. Dahik's
detention. However, Mr. Dahik fled to Costa Rica to avoid a possible prison term
in Ecuador.
In August 1996, Abdala Bucaram Ortiz, from the "Roldosista Party," won the
Presidency in a run-off against the center-right Socialist Democratic party
candidate, Jaime Nebot Saadi. President Bucaram was elected on a populist
platform which included, among other things, higher wages, spending 30% of the
budget on education and building thousands of kilometers of roads. However, in
the wake of his victory, President Bucaram announced plans to implement economic
reforms, including fixing Ecuador's exchange rate with the dollar, promoting
large scale privatizations (including telecommunications, electricity and oil)
and tighter controls over fiscal spending and tax collection, and instituting up
to a 300% price increases in phone service, cooking gas and electricity. Such
erratic changes in economic policy were heavily criticized by Congress, which
was controlled by the opposition, and the electorate, whose support for Bucaram
plummeted from 67% in August 1996 to 11% in February 1997.
In February 1997, the Congress voted to remove Bucaram from the Presidency
of Ecuador on the grounds that he was "mentally incompetent." Bucaram initially
refused to recognize his removal and, immediately thereafter, a brief power
struggle ensued among him, Vice President Rosalia Arteaga and Fabian Alarcon
Rivera. After episodes of civil unrest, disturbances and demonstrations
throughout the country, and a brief two-day assumption of the Presidency by then
Vice President Arteaga, Fabian Alarcon Rivera was appointed Interim President by
the Congress of Ecuador in February 1997 for the duration of Bucaram's term. A
general election will be held in May 1998 to choose a full-term President of
Ecuador.
ECONOMY
As the following table demonstrates, Ecuador has enjoyed steady Gross
Domestic Product ("GDP") growth rates since the beginning of the 1990s. The
economy expanded 3.3% in 1997. However, GDP growth will slow in 1998 as
production in the agricultural sector stagnates due to the climatic phenomenon
of El Nino, and adverse commodity prices.
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Real GDP % change from prior year................... 5.0% 3.6% 2.0% 4.3% 2.3% 2.0% 3.3%
GDP (in millions of $)(1)........................... 11,189.7 12,237.9 14,320.5 16,613.0 17,943.3 18,649.5 19,920
</TABLE>
- ---------------
(1) GDP in nominal sucres converted at the average commercial exchange rate
(buy) for each year.
Source: Ecuadorian Central Bank
A-2
<PAGE> 138
The major areas that contribute to Ecuador's GDP are: agriculture and
fishing, mining and petroleum, manufacturing and commerce. The following tables
set forth the relative contribution by each one of the aforementioned sectors,
as well as other sectors of the economy:
REAL GDP BY SECTOR(3)
<TABLE>
<CAPTION>
1997
---------------
% OF
AMOUNT TOTAL
------- -----
<S> <C> <C>
Agriculture livestock, fishing and forestry................. 39,531 17.4%
Mining and petroleum........................................ 32,182 14.2
Manufacturing............................................... 34,955 15.4
Electricity, gas and water.................................. 3,109 1.4
Construction................................................ 5,461 2.4
Commerce, hotels and restaurants............................ 34,157 15.1
Transportation and communication............................ 20,543 9.1
Financial, corporate and real estate services(1)............ 16,992 7.5
Government, social and domestic services.................... 28,770 12.7
Other Elements Of GDP(2).................................... 10,951 4.8
------- -----
Gross domestic product...................................... 22,665 100.0%
======= =====
</TABLE>
- ---------------
(1) Includes banking services.
(2) "Other elements of GDP" include value-added taxes.
(3) Provisional figures in millions of 1975 sucres and as a percentage of GDP.
Source: Ecuadorian Central Bank.
Trade. Ecuador is highly dependent on foreign trade, with exports
accounting for about 27% of GDP. Fishing and agricultural commodities, such as
shrimp, bananas and coffee, provide half of all export proceeds. Petroleum and
derivatives follow, representing 33% of total shipments while non-traditional
exports, such as chemicals and timber, remain low. In 1997, capital goods and
raw materials made up 31% and 41% of imports, respectively, while 21% of
Equador's foreign purchases were consumer goods. Fuel and lubricants accounted
for the rest of imports.
BALANCE OF TRADE
<TABLE>
<CAPTION>
JANUARY TO
OCTOBER
1992 1993 1994 1995 1996 1997(1)
------ ------ ------ ------ ------ ----------
(MILLIONS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
TRADE
Exports (FOB).......................... 3,101 3,066 3,844 4,411 4,900 3,877
Petroleum............................ 1,345 1,257 1,305 1,560 1,776 1,169
Non-petroleum........................ 1,756 1,809 2,539 2,851 3,124 2,708
Imports (FOB).......................... (2,083) (2,474) (3,282) (4,057) (3,680) (3,331)
------ ------ ------ ------ ------ ------
Trade Balance.......................... 1,018 592 562 354 1,220 543
====== ====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Figures for 1997 are provisional.
Source: Ecuadorian Central Bank
A-3
<PAGE> 139
EXPORTS (FOB)
<TABLE>
<CAPTION>
JANUARY TO
OCTOBER
1991 1992 1993 1994 1995 1996 1997(1)
------- ------- ------- ------- ------- ------- ----------
(MILLIONS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
Crude Oil......................... 1,059.0 1,259.6 1,152.1 1,185.0 1,395 1,520.8 1,183.1
Petroleum derivatives(2).......... 93.0 85.7 104.5 119.8 164.9 255.2 121.5
Bananas and plantains(3).......... 719.6 683.4 567.6 708.4 856.6 973.0 1,105.2
Coffee and coffee products........ 110.0 82.1 117.1 413.8 243.9 159.1 86.0
Shrimp............................ 491.4 542.4 470.6 550.9 673.5 631.4 694.2
Cocoa and Cocoa Products.......... 112.8 74.9 83.3 101.8 133.0 163.6 116.2
Tuna and other Fish............... 47.0 55.6 54.8 72.9 89.0 89.8 79.5
Other Products(4)................. 218.5 317.8 515.6 690.0 854.8 1,112.2 903.3
------- ------- ------- ------- ------- ------- -------
Total................... 2,851.3 3,101.5 3,065.6 3,842.7 4,411.2 4,900.1 4,289.0
======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Figures for 1997 are provisional.
(2) 1996 figures include exports by the private sector.
(3) From 1995 onward, figures include those from the Programa Nacional del
Banano and the Ecuadorian Central Bank.
(4) "Other products" consist of non-traditional primary and manufactured
products, including canned seafoods, flowers, vehicles, manufactured metals
and chemicals.
Source: Ecuadorian Central Bank
Balance of Payments. Ecuador has traditionally posted trade surpluses due
to the large petroleum revenues as shown in the following table. However, the
continued real appreciation of the sucre, low banana and oil prices have, in
recent years, resulted in a more rapid rise in imports than exports (with the
exception of 1996 when imports fell due to a sluggish economy and a war with
Peru). For the first time this decade, Ecuador is expected to post a trade
deficit in 1998 as oil revenues decline due to weak demand and agricultural
exports decline due to the effects of El Nino.
In spite of the traditional trade surpluses, Ecuador's current account
often registers large deficits due to significant interest payments. The
shortfall, amounted to 2.5% of GDP last year and is expected to widen to 4.7% of
GDP in 1998. The country's current account deficits have largely been financed
by oil-related foreign direct investment, foreign capital attracted by high
interest rates on government debt and multi-lateral official creditors such as
the World Bank. As a consequence, Ecuador foreign exchange reserves have
increased steadily this decade.
A-4
<PAGE> 140
Inflation. The fight against inflation is one of the monetary authorities'
main goals. For this purpose, the central bank traditionally adopts a tight
monetary policy. As a consequence, Ecuador has avoided periods of hyperinflation
similar to those in Argentina, Peru or Brazil. Nevertheless, the tight monetary
policies and austerity measures launched regularly by various governments, e.g.,
restriction of credit to the public sector and to private business, have been
offset by loose fiscal policies and several devaluations. As a result, annual
inflation remains well above 20% as shown in the following table.
<TABLE>
<CAPTION>
ANNUAL
INFLATION
---------
<S> <C>
1989........................................................ 54.2%
1990........................................................ 49.5
1991........................................................ 49.0
1992........................................................ 60.2
1993........................................................ 31.0
1994........................................................ 25.4
1995........................................................ 22.8
1996........................................................ 25.5
1997........................................................ 30.7
</TABLE>
- ---------------
Source: Ecuadorian Central Bank
Monetary Policy. In 1992, the Ecuadorian Central Bank eliminated all
restrictions on interest rate controls. Additionally, the Ecuadorian Central
Bank reduced reserve requirements to 32% and instituted a new system by which it
conducts open market operations through state bonds (Bonos de Estabilizacion
Monetaria) ("BEMs"). Pursuant to such open market operations, the Ecuadorian
Central Bank has managed the money and exchange markets through the issuance of
its own bonds, secondary market initiative and the setting of overnight interest
rates. Although no explicit monetary targets were set for the period 1992-1994,
the overriding policy was the reduction of the budget deficit through efficient
controls on public spending and increased revenues for the state. This policy,
coupled with the repatriation of funds that occurred primarily as a result of
increased confidence in the government, led to an increase in monetary
aggregates without significant inflationary pressures.
During the Bucaram administration, a policy favoring the constant reduction
of interest rates was adopted, and the monetary authorities have supported this
policy through intervention by the Ecuadorian Central Bank in order to provide
liquidity to the financial system. At the end of 1996, interest rates had
dropped substantially to 44% for credit operations and 33.5% for time deposits,
as compared to 62.8% and 51%, respectively, at the beginning of the year. In
January 1998, the active interest rate was 34% and the passive interest rate was
41%.
Exchange Rates. In September 1992, the Government of Ecuador devalued the
sucre by 35% and established the official sucre/dollar exchange rate in a band
of 1,700-2,000 sucres to the U.S. dollar. The new official sucre/dollar exchange
rate was approximately 8% higher than the free market rate, which reduced demand
for the foreign exchange holdings of the Ecuadorian Central Bank (Banco Central
de Ecuador) (the "Central Bank"). This reduction, together with increased demand
for sucres caused by the return of flight capital, allowed the Central Bank to
accumulate international reserves. In November 1992, the Monetary Board of
Ecuador eliminated the requirement that all export receipts be sold to the
Central Bank and, since that time, exporters have been permitted to sell such
receipts on the free market. The 1,700-2,000 band was eliminated in September
1993, and an official exchange rate was established. Such official exchange rate
was adjusted weekly in accordance with the inter-bank sell rate established the
previous week. This official rate applied only to the public and petroleum
sectors, while private sector operations continued to use the free market rate.
In connection with the adoption of its 1994 financing plan, the Ministry of
Finance and Public Credit announced its commitment to maintain a unified free
market exchange rate for private sector transactions, to abide by the principles
of full currency convertibility and to provide equal access to the exchange rate
market for all private agents.
A-5
<PAGE> 141
Ecuador adopted a crawling corridor system in December 1994. Since then,
the US dollar has traded within a band set by the central bank in accordance
with an annual inflation target. In mid-February 1995, the Central Bank took
steps to ease pressure on the sucre during the border conflict with Peru.
Downward pressure placed on the sucre by public sector strikes and uncertainty
over the 1996 elections forced the sucre to the limit of the permitted band in
June 1995. The Central Bank followed a round of dollar selling by raising
interest rates which had gradually declined since the border conflict. Ecuador's
sustained level of high foreign reserves gave the Central Bank considerable
leeway in defending the sucre.
In 1996, the Bucaram Administration proposed a convertibility plan that
would obligate the Ecuadorian Central Bank to exchange sucres into foreign
currency at a fixed rate of 400 sucres per U.S. dollar. The administration
believed that one of the immediate effects of this convertibility plan would be
to increase foreign reserves as Ecuador's monetary base is strengthened.
However, President Alarcon's economic policies did not support such a
convertibility plan and the crawling peg system was maintained in 1997. On March
25, 1998, the Central Bank of Ecuador and Ecuadorian Monetary Board adjusted the
"crawling corridor" by shifting the corridor approximately 7.5%, in effect
devaluing the Ecuadorian sucre. The government indicated that this adjustment
was intended to address high food prices brought on by the effects of El Nino.
The following table sets forth certain information concerning the exchange
rates for transactions in the commercial market involving purchase of dollars as
reported by the Ecuadorian Central Bank for the years indicated:
EXCHANGE RATES(1)
<TABLE>
<CAPTION>
PERIOD END AVERAGE FOR THE PERIOD
--------------------- -----------------------
YEAR BUY SELL BUY SELL
- ---- --------- --------- ---------- ----------
(SUCRES PER U.S. DOLLAR)
<S> <C> <C> <C> <C>
1991........................................ 1,280.50 1,301.50 1,099.46 1,100.85
1992........................................ 1,843.50 1,846.94 1,586.35 1,587.72
1993........................................ 2,040.84 2,043.78 1,916.91 1,919.41
1994........................................ 2,277.17 2,279.69 2,195.77 2,197.78
1995........................................ 2,924.50 2,926.05 2,563.94 2,566.00
1996........................................ 3,631.68 3,633.77 3,189.45 3,191.26
</TABLE>
- ---------------
(1) Exchange rates for transactions in the commercial market involving purchase
of dollars as reported by the Ecuadorian Central Bank.
Source: Ecuadorian Central Bank
The information in the table above is based on the free market exchange
rates published by the Ecuadorian Central Bank, which is the average rate for
the entire system on the relevant dates. The free market exchange rate at
December 31, 1997 was 4,382 sucres per dollar. No representations are made that
sucre amounts have been, could have been or could be converted into U.S. dollars
at the foregoing rates on any of the dates indicated.
A-6
<PAGE> 142
Fiscal Policy. Budget surpluses were generated in the second half of the
1980s due to well-conceived fiscal policies. However, fiscal revenues fell
sharply in 1991 because of a decline in oil prices and severe losses of several
state-owned companies. In addition, a steep rise in external interest payments
induced by escalating US interest rates in 1994, the resurgence of the border
conflict with Peru in 1995, public-sector wage increases and an easing of policy
before the May 1996 elections resulted in a deterioration of the fiscal account
from a surplus of 0.2% in 1994 to a deficit of 3% in 1996. The fiscal shortfall
remained large in 1997 as reforms were curbed by political uncertainty. The
following table shows actual revenues and expenditures for the consolidated
non-financial public sector for the period from 1992 through 1996:
SUMMARY OF CONSOLIDATED NON-FINANCIAL PUBLIC SECTOR REVENUES AND EXPENDITURES(1)
<TABLE>
<CAPTION>
% OF % OF % OF % OF % OF
1992 GDP 1993 GDP 1994 GDP 1995 GDP 1996 GDP
------- ---- ------- ---- ------- ---- -------- ----- --------- ----
(BILLIONS OF SUCRES AND PERCENTAGE OF GDP)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Petroleum revenues.......... 1,867.6 9.6% 2,376.4 8.7% 2,618.9 7.2% 3,391.8 7.4% 5,001.3 8.4%
Non-petroleum revenues...... 2,542.5 13.1 3,734.2 13.6 5,105.3 14.0 6,934.1 15.1 8,274.6 12.9
Public enterprises operating
result.................... 5,696.4 3.1 734.1 2.7 1,160.2 3.2 1,410.9 3.1 1,476.6 2.5
------- ---- ------- ---- ------- ---- -------- ----- --------- ----
Total.............. 5,006.5 25.7 6,844.7 24.9 8,884.4 24.4 11,736.8 25.5 14,752.5 24.8
EXPENDITURES
Current..................... 3,809.5 19.6 5,006.9 18.2 6,303.6 17.3 9,227.3 209.1 11,760.5 19.8
Capital..................... 1,420.9 7.3 1,866.7 6.8 2,362.2 6.5 3,031.6 6.6 4,771.9 8.0
------- ---- ------- ---- ------- ---- -------- ----- --------- ----
5,230.3 26.9 6,873.6 25.0 8,665.7 23.8 12,258.9 26.6 16,632.4 27.8
======= ==== ======= ==== ======= ==== ======== ===== ========= ====
(Deficit)/Surplus........... (223.8) (1.2) (29.0) (0.1) 218.7 0.6 (522.1) (1.1) (1,779.9) (3.0)
(Deficit)/Surplus with
reduction of
personnel(2).............. (223.8) (1.2) (29.0) (0.1) 218.7 0.6 (522.1) (1.1) (1,779.9) (3.0)
(Deficit)/Surplus with
reduction of personnel and
transfer from/(to) Banco
Central................... (340.4) (1.8) 5.5 0.0 146.5 0.4 (614.9) (1.3) (1,780.9) (3.0)
Primary
(deficit)/surplus(3)...... 714.5 3.7 1,224.4 4.5 1,678.5 4.6 1,483.1 3.2(1) 895.5 1.5
</TABLE>
- ---------------
(1) Figures for each year include payments and receipts made in that year but
incurred in prior years.
(2) Reductions of personnel affect the (deficit)/surplus beginning in 1994.
(3) Primary (deficit)/surplus is the consolidated non-financial public sector
(deficit)/surplus without taking into account interest payments or interest
income.
Source: Ministry of Finance.
The following table indicates that Ecuador's monetary reserves have
steadily increased every year, with the exception of 1995:
<TABLE>
<CAPTION>
NET INTERNATIONAL
YEAR MONETARY RESERVES(1)
- ---- --------------------------
(MILLIONS OF U.S. DOLLARS)
<S> <C>
1991........................................................ 760
1992........................................................ 782
1993........................................................ 1,254
1994........................................................ 1,712
1995........................................................ 1,557
1996........................................................ 1,831
1997........................................................ 2,090
</TABLE>
- ---------------
(1) Figures are for end-of-period.
Source: Ecuadorian Central Bank
A-7
<PAGE> 143
PRIVATIZATION
The government's privatization efforts are run by the National Council for
the Modernization of the State (Consejo Nacional de Modernizacion del Estado)
("CONAM"). In late 1993, Congress passed the State Modernization Law (Ley de
Modernizacion del Estado) which was aimed at reducing the size of Ecuador's
government primarily through the sale to private individuals or entities of
state-owned enterprises or licensing agreements to operate certain services in
an effort to generate revenues and reduce the government's level of public
spending. This law was passed with significant amendments including the
exclusion of sale of certain "strategic" industries such as electricity and
telephones. However, on November 19, 1997, the Government of Ecuador formed two
regional operating entities, Andinatel, S.A. and Pacifictel, S.A., in
anticipation of the expected privatization of the state-owned wireline system
(formerly known as Emetel, S.A.). The possible privatization of Andinatel, S.A.
and Pacifictel, S.A. is scheduled to take place in April 1998. In addition, the
government extended several licenses (concesiones) to private individuals or
entities in areas previously reserved only to the state such as highways and
verifications in ports of entry.
In addition, the government began the sale of its participation in the
country's largest cement plant, La Cemento Nacional (LCN) in 1993. This process
was concluded in 1994, together with the sale of a sugar mill and another cement
company in which the government had an interest. In 1995, the successful sale of
the government-owned airline, Ecuatoriana, was also concluded.
A-8
<PAGE> 144
ANNEX B
GLOSSARY OF CERTAIN TELECOMMUNICATIONS TERMS
The following terms are used throughout this Prospectus:
AMPS: Advanced Mobile Phone System, is the standard
developed for and used in North America and is used
widely throughout the world.
ANALOG: A transmission method employing a continuous
electrical signal that varies in amplitude or
frequency in response to changes in sound, light,
position, etc., impressed on transducer in the
sending device.
BAND: A range of frequencies between two defined limits.
BANDWIDTH: The relative range of frequencies that can be
passed through a transmission medium without
distortion. The greater the bandwidth, the greater
the information carrying capacity. Bandwidth is
measured in hertz.
BASE STATION: In mobile telecommunications, the central radio
transmitter/receiver that maintains communications
with the cellular telephone sets within a given
cell. Each cell or microcell has its own base
station; each base station in turn is
interconnected with other cells base stations and
with the public switched telephone network.
CDMA: Code Division Multiple access, a standard of
digital cellular technology which allows for
multiple conversations to be transported on a
single radio carrier using digital "tags." Systems
using this standard have not been placed into
widespread commercial use.
CELL SITE: The location of a transmitting/receiving station
serving a given geographic area in a cellular
communications system.
CHANNEL: A pathway for the transmission of information
between a sending point and a receiving point.
CHURN: Monthly disconnections expressed as a percentage of
reported subscribers at the beginning of the month.
DEACTIVATED SUBSCRIBERS
(DEACTIVATIONS): Subscribers who have been temporarily deactivated
for non-payment and who are subscribers under
evaluation by the Company for reactivation or
permanent disconnection. Consistent with the
company's interpretation of the Secretary of
Telecommunications' reporting guidelines and with
what the Company believes to be the common
interpretation of cellular operators in Ecuador,
the Company currently includes these subscribers in
the total of reported subscribers.
DIGITAL: A method of storing, processing and transmitting
information through the use of distinct electronic
or optical pulses that represent the binary digits
0 and 1. Digital transmission and switching
technologies employ a sequence of discrete,
distinct pulses to represent information, as
opposed to the continuous analog signal.
DISCONNECTED SUBSCRIBERS
(DISCONNECTIONS): Subscribers whose access to the network has been
permanently disconnected, who subscribers are
excluded from the billing system and who have been
referred to the collections department or legal
counsel for account settlement. These subscribers
are not included in the total number of reported
subscribers.
HERTZ: The unit measuring the frequency with which an
alternating electromagnetic signal cycles between
its lowest and highest states. One hertz
(abbreviated Hz) equals one cycle per second, kHz
(kilohertz) stands for
B-1
<PAGE> 145
thousands of hertz; MHz (megahertz) stands for
millions of hertz and GHz (gigahertz) stands for
billions of hertz).
MICROWAVE: The radio band transmission between 300 MHz 32 hz.
MICROWAVE HOP: The basic microwave transmission path (link),
constituted by a couple of transmitters/receivers.
The microwave frequency bank requires "line of
sight" between the two sides of the hop. Depending
on the distance and topographical conditions, more
than one "hop" could be necessary to establish a
complete microwave transmission link.
MTSO: Mobile Telephone Switching Office; the
computer-controlled MTSO selects the appropriate
path for the transmission of a cellular call and
monitors the hand-off process. The MTSO allows
cellular telephone users to move freely from one
cell to another across the service area while
continuing their calls.
PENETRATION: A cellular operator's subscribers within a defined
area divided by total pops within that area.
Ecuadorian figures are based on reported, not
current, subscribers. Penetration rates for
countries other than Ecuador are based on publicly
available figures, which may calculate subscribers
differently than in Ecuador.
PSTN: Public Switched Telephone Network.
REPORTED SUBSCRIBERS: The subscribers as reported by the Company to the
Superintendency of Telecommunications of Ecuador.
Consistent with the Company's interpretation of the
Ministry's reporting guidelines and with what the
Company believes to be the common interpretation of
cellular operators in Ecuador, the Company
currently includes in such term subscribers who
have been temporarily disconnected and are under
evaluation by the Company for reconnection or
permanent deactivation.
REPEATER: A device which automatically retransmits received
signals on an outbound circuit, generally in an
amplified form.
ROAMING: A service offered by mobile communications
providers which allows a subscriber to use his or
her cellular telephone while in the service area of
another carrier.
SITE OR CELL SPLITTING OR
SECTORIZATION: The process of dividing sites or cells into smaller
coverage areas by reducing their power output and
the antenna height of the station transmitter. Site
or cell splitting (or sectoring) allows for the
further reuse of frequencies by a mobile
communications system.
SWITCH: A device that opens or closes circuits or selects
the paths or circuits to be used for transmission
of information. Switching is the process of
interconnecting circuits to form a transmission
path between users.
TDMA: Time Division Multiple Access, like AMPS, divides
the radio spectrum into 30 kHz channels. The
distinguishing feature of TDMA is it employs
digital techniques at the base station and in the
cellular ratio to subdivide each channel into time
slots which can be assigned to different users.
Voice, data and access information are converted to
digital information that is sent and received in
bursts over the time slots. These bursts can be
encoded, transmitted and decoded in a fraction of
time required to produce sound. The result is that
only a fraction of the air time is used, and other
subscribers can use the remaining time on a radio
channel.
B-2
<PAGE> 146
======================================================
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations in connection with the offering made
hereby other than those contained in this Prospectus. If given or made, such
information or representations must not be relied upon as having been authorized
by the Company, the Selling Shareholders, the Underwriters or any other person.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, any securities other than the securities to which it relates, nor
does it constitute an offer to sell, or a solicitation of an offer to buy any
securities in any jurisdiction where, or to any person to whom, it is unlawful
to make such offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create an implication
that there has not been a change in the facts set forth in this Prospectus or in
the affairs of the Company since the date hereof.
---------------------------
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................... 1
Risk Factors............................... 10
Use of Proceeds............................ 22
Dividend Policy............................ 22
Capitalization............................. 23
Dilution................................... 25
Selected Financial and Operating Data...... 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 29
Business................................... 43
Regulatory Framework....................... 64
Management................................. 73
Principal and Selling Shareholders......... 77
Certain Relationships and Related
Transactions............................. 78
The Conecel Indebtedness................... 80
Description of Capital Stock............... 88
Description of American Depositary
Receipts................................. 92
Shares Eligible for Future Sale............ 100
Taxation................................... 101
Underwriting............................... 107
Legal Opinions............................. 108
Experts.................................... 109
Available Information...................... 110
Index to Financial Statements.............. F-1
Annex A -- The Republic of Ecuador......... A-1
Annex B -- Glossary of Certain
Telecommunications Terms................. B-1
</TABLE>
Until , 1998 (25 days after the date of this Prospectus), all
dealers effecting transactions in the ADSs, whether or not participating in this
distribution, may be required to deliver a Prospectus. This requirement is in
addition to the obligation of dealers to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
======================================================
======================================================
CONECEL LOGO
CONSORCIO
ECUATORIANO DE
TELECOMUNICACIONES
S.A. CONECEL
---------------------------
9,195,580 AMERICAN
DEPOSITARY SHARES
EACH REPRESENTING
FOUR SHARES OF CLASS B
COMMON STOCK
-----------------------------
PROSPECTUS
, 1998
----------------------------
UBS SECURITIES
SBC WARBURG DILLON READ INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEHMAN BROTHERS
======================================================
<PAGE> 147
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the securities being registered, other than
underwriting discounts and commissions. These expenses will be paid by the
Company.
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Securities and Exchange Commission filing fee............... $ 48,354
NASD Fee.................................................... 16,891
Nasdaq listing fee.......................................... 30,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 125,000
Costs of printing and engraving............................. 106,000
Depositary fees and expenses................................ 20,000
Miscellaneous expenses...................................... 272,755
--------
Total............................................. $919,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Directors and officers are severally liable to the Company, the
shareholders and third parties for any damages they cause as a result of their
negligence or fraud in the execution of their duties. There is a presumption of
negligence in cases where they breach their duties or violate the law or by-laws
of the Company. Directors and officers also have criminal liability where they
mislead the authorities, provide false information or permit, tolerate, order or
cover up misinterpretations in the financial statements of the Company.
Under Ecuadorian law, the Company can not indemnify its directors and
officers. The Company's Bylaws (Estatutos) do not provide for indemnification of
directors or officers, and the Company presently does not have any director and
officer insurance in effect.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, the Company has issued the following
unregistered securities:
1. 14% Notes due 2002 pursuant to an Indenture, dated May 2, 1997,
between the Company and The Bank of New York, as trustee.
2. March 1, 1996 -- Issuance of 50,000,000 shares of common stock to
then existing shareholders.
3. May 10, 1995 -- Issuance of 7,113,741 shares of common stock to
Univempro, S.A., an Ecuadorian corporation.
II-1
<PAGE> 148
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits. The following exhibits are filed as part of this
Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.
3.1 -- By laws (Estatutos) of Consorcio Ecuatoriano de
Telecomunicaciones S.A. CONECEL (the "Company"), as amended.
4.1 -- Form of Deposit Agreement (including form of ADR).
4.2 -- Indenture, dated as of May 2, 1997, between the Company and
The Bank of New York, as Trustee.(1)
4.3 -- Dividend and Contribution Agreement, dated as of September
30, 1997, between the Company and Conecel Holdings
Limited.(1)
4.4 -- Form of Specimen Class B Common Stock Certificate.
5.1 -- Opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel,
P.A., counsel for the Company, as to the legality of the
securities being registered.
5.2 -- Opinion of Estudio Juridico Pareja, Abogados, as to the
legality of the securities being registered.
8.1 -- Opinion and Consent of Greenberg Traurig Hoffman Lipoff
Rosen & Quentel, P.A. as to certain United States tax
matters relating to the ADSs and ADRs.
10.1 -- Note Purchase Agreement, dated April 29, 1997, between the
Company and UBS Securities LLC.(1)
10.2 -- Cellular Concession Agreement, dated August 26, 1993,
between the Company and the Superintendency of
Telecommunications of the Republic of Ecuador, as amended
(English translation).(1)
10.3 -- International Gateway License Agreement, dated December 9,
1994, between the Company and the Superintendency of
Telecommunications of the Republic of Ecuador (English
translation).(1)
10.4 -- Internet Concession, dated August 26, 1997.
10.5 -- Agreement, dated January 15, 1997, between the Company and
Corptilor, S.A. (English translation).(1)
10.6 -- Interconnection Agreement, dated April 14, 1994, between the
Company and Emetel, S.A., as amended (English
translation).(1)
10.7 -- Interconnection Agreement, dated August 1994, with
Telefonos, Agua Potable y Alcantarillado (ETAPA), as amended
(English translation).(1)
10.8 -- International Roaming Agreement, dated June 30, 1995,
between the Company and B&B Group, Inc. (English
translation).(1)
10.9 -- International Roaming Agreement, dated October 1, 1996,
between the Company and BellSouth Comunicaciones S.A.
(English translation).(1)
10.10 -- Reciprocal Service Agreement, dated May 18, 1995, between
the Company and Cocelco S.A. (English translation).(1)
10.11 -- Reciprocal Service Agreement, dated June 15, 1995, between
the Company and Conecel S.A. (English translation).(1)
10.12 -- Commercial Lease, dated September 26, 1994, between the
Company and Conecel S.A. (English translation).(1)
10.13 -- Commercial Lease, dated October 24, 1994, between the
Company and Leasing Amazonas S.A. (English translation).(1)
10.14 -- Commercial Lease, dated October 26, 1994, between the
Company and Leasing Amazonas S.A. (English translation).(1)
</TABLE>
II-2
<PAGE> 149
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.15 -- Commercial Lease, dated November 26, 1994, between the
Company and Leasing Amazonas S.A. (English translation).(1)
10.16 -- Commercial Lease, dated September 18, 1995, between the
Company and Leasing Amazonas S.A. (English translation).(1)
10.17 -- Commercial Lease, dated December 11, 1995, between the
Company and Leasing Amazonas S.A. (English translation).(1)
10.18 -- Amendment to Commercial Lease, dated January 18, 1996,
between the Company and Leasing Amazonas S.A. (English
translation).(1)
10.19 -- Agreement, dated March 11, 1997, between the Company and
TeleData World Services, Inc. (English translation).(1)
10.20 -- Agreement, dated March 11, 1997, between the Company and
Industrias Ales, S.A. (English translation).(1)
10.21 -- Warrant Agreement, dated September 30, 1997, among Conecel
Holdings, the Company and Bankers Trust Company, as Warrant
Agent.(1)
10.22 -- Indenture and Security Agreement, dated as of September 30,
1997, between Conecel Holdings and Bankers Trust Company, as
Trustee.(1)
10.23 -- 1998 Stock Option Plan.
12.1 -- Statement re: computation of ratios.
16.1 -- Letter re Change in Certifying Accountant.(1)
22.1 -- List of Subsidiaries.
23.1 -- Consent of Greenberg Traurig Hoffman Lipoff Rosen & Quentel,
P.A. (included in its opinion filed as Exhibit 5.1 and in
its opinion filed as Exhibit 8.1).
23.2 -- Consent of Juridico Pareja, Abogados (contained in Exhibit
5.2).
23.3 -- Consent of BDO Binder.
27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference to the Registration Statement on Form F-4 (No.
333-7380), effective November 25, 1997.
(b) Financial Statement Schedules.
<TABLE>
<CAPTION>
SCHEDULE
NUMBER DESCRIPTION
- -------- -----------
<C> <C> <S>
1.1 -- Schedule of Valuation and Qualifying Accounts.
</TABLE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(b) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
II-3
<PAGE> 150
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(3) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant, will unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(4) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement
certificates in such denominations and registered in such names as required
by the underwriter to permit prompt delivery to each purchaser.
II-4
<PAGE> 151
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Quito, Republic of Ecuador, on March 9, 1998.
CONSORCIO ECUATORIANO DE
TELECOMUNICACIONES S.A.
CONECEL
By: /s/ J. FERNANDO COLUNGA
------------------------------------
J. Fernando Colunga
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ CARLOS MOSQUERA P. Chairman of the Board March 9, 1998
- ------------------------------------------
Carlos Mosquera P.
/s/ J. FERNANDO COLUNGA President and Chief Executive Officer March 9, 1998
- ------------------------------------------ (principal executive officer)
J. Fernando Colunga
/s/ GUIDO PAEZ PUGA Vice President -- Finance (principal March 9, 1998
- ------------------------------------------ financial
Guido Paez Puga and accounting officer)
/s/ JAIME AGUILERA BLANCO Director March 9, 1998
- ------------------------------------------
Jaime Aguilera Blanco
/s/ PEDRO ZAMBRANO LAPENTI Director March 9, 1998
- ------------------------------------------
Pedro Zambrano Lapenti
/s/ RAFAEL FERRETI PARRA Director March 9, 1998
- ------------------------------------------
Rafael Ferreti Parra
/s/ LUIS NASR Director March 9, 1998
- ------------------------------------------
Luis Nasr
</TABLE>
II-5
<PAGE> 152
SIGNATURE OF AUTHORIZED UNITED STATES REPRESENTATIVE
Pursuant to the Securities Act of 1933, as amended, the undersigned
certifies that he is the duly authorized United States representative of
Consorcio Ecuatoriano de Telecomunicaciones S.A. CONECEL and has signed this
Registration Statement or amendment thereto in New York, New York, on March 9,
1998.
By: /s/ Paul Siska Goytre
------------------------------------
Paul Siska Goytre
(Authorized U.S. Representative)
II-6
<PAGE> 153
SCHEDULE 1.1
INDEPENDENT AUDITORS' REPORT
ON SCHEDULE
To the Board of Directors
Consorcio Ecuatoriano de Telecomunicaciones S.A. Conecel
The audits referred to in our report to Consorcio Ecuatoriano de
Telecomunicaciones S.A. Conecel, dated January 26, 1998, which is contained in
the Prospectus constituting part of this Registration Statement, included the
audit of the schedule listed under Part II of this Registration Statement for
each of the years ended December 31, 1997, 1996, and 1995. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based upon our audits.
In our opinion, such schedule presents fairly, in all material respects,
the information set forth therein.
January 26, 1998
Quito, Ecuador BDO Binder
S-1
<PAGE> 154
SCHEDULE 1.1
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(EXPRESSED IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS OF YEAR ADDITIONS EXPENSES CHARGE-OFFS YEAR
------------------------------- ---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997............... $1,568 $ 277 $305 $ 1,540
Year ended December 31, 1996............... $1,951 $ -- $383 $ 1,568
Year ended December 31, 1995............... $ 5 $1,946 $ -- $ 1,951
GOODWILL
Year ended December 31, 1997............... $ -- $66,817 $ 552 $ -- $66,265
</TABLE>
S-2
<PAGE> 155
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.
4.4 -- Form of Specimen Class B Common Stock Certificate.
5.2 -- Opinion of Estudio Juridico Pareja, Abogados, as to the
legality of the securities being registered.
8.1 -- Opinion and Consent of Greenberg Traurig Hoffman Lipoff
Rosen & Quentel, P.A., counsel for the Company, as to the
legality of the securities being registered.
10.4 -- Internet Concession, dated August 26, 1997.
10.23 -- 1998 Stock Option Plan.
23.2 -- Consent of Estudio Juridico Pareja, Abogados (contained in
Exhibit 5.2).
</TABLE>
<PAGE> 1
Exhibit 1
CONSORCIO ECUATORIANO DE
TELECOMUNICACIONES S.A. CONECEL
9,195,580 American Depositary Shares
Each Representing Four Shares of
CLASS B COMMON STOCK, PAR VALUE 1,000 SUCRES PER SHARE
UNDERWRITING AGREEMENT
April __, 1998
UBS Securities LLC
SBC Warburg Dillon Read Inc.
Donaldson, Lufkin & Jenrette
Securities Corporation
Lehman Brothers Inc.
As Representatives of the several Underwriters
named in Schedule I hereto
c/o UBS Securities LLC
299 Park Avenue
New York, New York 10171
Ladies and Gentlemen:
Consorcio Ecuatoriano de Telecomunicaciones S. A. CONECEL (the
"Company"), a corporation (sociedad anonima) formed under the laws of the
Republic of Ecuador ("Ecuador"), proposes to cause the issuance of, and sell to
the Underwriters named in Schedule I hereto (the "Underwriters"), for whom you
are acting as representative (the "Representatives"), an aggregate of 8,046,464
American Depositary Shares, each representing four shares of Class B Common
Stock, par value 1,000 sucres per share of the Company (the "Class B Shares"),
and the shareholders of the Company named in Schedule II hereto (collectively,
the "Selling Shareholders") propose to sell to the Underwriters an aggregate of
1,149,116 American Depositary Shares, subject to the terms and conditions stated
herein. The aggregate of 9,195,580American Depositary Shares, representing
36,782,320 Class B Shares to be sold by the Company and the Selling Shareholders
are hereinafter referred to as the "Firm ADSs." The Company also proposes to
cause the issuance of, and sell, solely to cover over-allotments, if any, to the
Underwriters up to an additional 1,379,337 American Depositary Shares
representing 5,517,348 Class B Shares (the "Optional ADSs"). The Firm ADSs and
the Optional ADSs that the Underwriters elect to purchase pursuant to Section 2
hereof are hereinafter referred to as the "ADSs." The Class B Shares represented
by the Firm ADSs are hereinafter referred to as the "Firm Shares" and the Class
B Shares represented by the Optional ADSs are hereinafter referred
<PAGE> 2
to as the "Optional Shares" and the Firm Shares and the Optional Shares are
hereinafter referred to as the "Shares."
The ADSs will be evidenced by American Depositary Receipts (the
"ADRs"), issued against deposit of the Class B Shares by or on behalf of the
Company and the Selling Shareholders pursuant to a deposit agreement dated as of
March __, 1998 (the "Deposit Agreement") among the Company, Bankers Trust
Company, as depositary (the "Depositary"), and the Holders and Beneficial Owners
(as defined in the Deposit Agreement) from time to time of the ADRs issued
thereunder.
1. Representations and Warranties of the Company and the Selling
Shareholders.
(a) The Company hereby represents and warrants to, and agrees with,
each of the Underwriters that:
(i) A registration statement on Form F-1 (File No. 333-47723)
(the "Initial Registration Statement") in respect of the ADSs has been filed
with the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in the
form heretofore delivered to you, and, excluding exhibits thereto, to you for
each of the other Underwriters, have been declared effective by the Commission
in such form; other than a registration statement, if any, increasing the size
of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended (the "Act"), which became
effective upon filing, no other document with respect to the Initial
Registration Statement has heretofore been filed with the Commission; and no
stop order suspending the effectiveness of the Initial Registration Statement,
any post-effective amendment thereto or the Rule 462(b) Registration Statement,
if any, has been issued and no proceeding for that purpose has been initiated or
threatened by the Commission (any preliminary prospectus included in the Initial
Registration Statement or filed with the Commission pursuant to Rule 424(a) of
the rules and regulations of the Commission under the Act (the "Rules and
Regulations") is hereinafter called a "Preliminary Prospectus"; the various
parts of the Initial Registration Statement and the Rule 462(b) Registration
Statement, if any, including all exhibits thereto and including the information
contained in the form of final prospectus filed with the Commission pursuant to
Rule 424(b) under the Act in accordance with Section 5(a)(i) hereof and deemed
by virtue of Rule 430A under the Act to be part of the Initial Registration
Statement at the time it was declared effective or such part of the Rule 462(b)
Registration Statement, if any, became or hereafter becomes effective, each as
amended at the time such part of the registration statement became effective,
are hereinafter collectively called the "Registration Statement," such final
prospectus, in the form first filed pursuant to Rule 424(b) under the Act, or,
if no final prospectus is required to be filed pursuant to Rule 424(b) under the
Act, in the form contained in the Registration Statement at the time it became
effective is hereinafter called the "Prospectus");
(ii) No order, nor notice of any order, preventing or
suspending the use of any Preliminary Prospectus has been issued by the
Commission, and each Preliminary Prospectus, at the time of filing thereof,
conformed in all material respects to the requirements of
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<PAGE> 3
the Act and the Rules and Regulations, and did not contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that this
representation and warranty does not apply to statements or omissions in the
Registration Statement or the Prospectus or any Preliminary Prospectus made or
omitted to be made in reliance upon information furnished to the Company in
writing by you expressly for use therein. You agree that the statements included
in the last paragraph of the cover of the Prospectus and in the second, third,
seventh and eight paragraphs under the caption "Underwriting" in the Prospectus
have been made in reliance upon the information furnished to the Company in
writing by you expressly for use therein;
(iii) The Registration Statement conforms, and the Prospectus
and any further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the Act
and the Rules and Regulations and do not and will not, as of the applicable
effective date as to the Registration Statement and any amendment thereto and as
of the applicable filing date as to the Prospectus and any amendment or
supplement thereto, contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, except that this representation and warranty
does not apply to statements or omissions in the Registration Statement or the
Prospectus or any Preliminary Prospectus made or omitted to be made in reliance
upon information furnished to the Company in writing by you expressly for use
therein. You agree that the statements included in the last paragraph of the
cover of the Prospectus and in the second, third, seventh and eight paragraphs
under the caption "Underwriting" in the Prospectus have been made in reliance
upon the information furnished to the Company in writing by you expressly for
use therein;
(iv) A registration statement on Form F-6 (File No. 333-8450)
in respect of the ADSs has been filed with the Commission; such registration
statement in the form heretofore delivered to you and, excluding exhibits, to
you for each of the other Underwriters, has been declared effective by the
Commission in such form; no other document with respect to such registration
statement has heretofore been filed with the Commission; no stop order
suspending the effectiveness of such registration statement has been issued and
no proceeding for that purpose has been initiated or threatened by the
Commission (the various parts of such registration statement, including all
exhibits thereto, each as amended at the time such part of the registration
statement became effective, being hereinafter called the "ADS Registration
Statement"); and the ADS Registration Statement when it became effective
conformed, and any further amendments thereto will conform, in all material
respects to the requirements of the Act and the Rules and Regulations, and did
not, as of the applicable effective date, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading;
(v) The Company has been duly incorporated and is validly
existing as a corporation (sociedad anonima) in good standing under the laws of
Ecuador, with full corporate power and authority to own, lease and operate its
properties and conduct its business as described in the Prospectus. The Company
is duly qualified or licensed by each jurisdiction in which it
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<PAGE> 4
conducts business and in which the failure, individually or in the aggregate, to
be so qualified or licensed could have a material adverse effect on its assets,
operations, business, condition (financial or otherwise), or prospects. The
Company is duly qualified to do business as a foreign corporation in good
standing in each jurisdiction in which it owns or leases real property or
maintains an office, except where the failure to be so qualified and in good
standing would not have a material adverse effect on its assets, operations,
business, condition, or prospects. The Company has no direct or indirect
subsidiaries (as defined in the Rules and Regulations). The Company does not
own, directly or indirectly, any shares of stock or any equity or long-term debt
securities of any corporation or have any equity interest in any firm,
partnership, joint venture, association or other entity, except a 3% equity
interest in Conecel Holdings Limited;
(vi) The Company has full corporate power and authority to
enter into this Agreement and the Deposit Agreement and to perform the
transactions contemplated hereby and thereby. This Agreement and the Deposit
Agreement each has been duly authorized, executed and delivered by the Company
and is a legal, valid and binding agreement on the part of the Company, and each
of this Agreement and the Deposit Agreement is enforceable against the Company
in accordance with its terms, except as enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, or other similar
laws affecting creditors' rights generally or by general equitable principles.
Upon issuance by the Depositary of ADRs evidencing ADSs and the deposit of
Shares in respect thereof in accordance with the provisions of the Deposit
Agreement, such ADRs will be duly and validly issued and the persons in whose
names the ADRs are registered will be entitled to the rights specified therein
and in the Deposit Agreement; and the Deposit Agreement, the ADRs and the ADSs
conform in all material respects to the descriptions thereof contained in the
Prospectus;
(vii) No consent, approval (including exchange control
approval), authorization, order, license, filing, registration, clearance or
qualification of or with any court or governmental agency or regulatory body
(hereinafter referred to as a "Governmental Agency") having jurisdiction over
the Company or any of its properties or assets (hereinafter referred to as
"Governmental Authorizations") is required for (A) the issuance of the Shares,
(B) the deposit of the Shares by the Company and the Selling Shareholders being
deposited with Banco La Previsora S.A. (the "Custodian") on behalf of the
Depositary, against issuance of ADRs evidencing ADSs to be delivered hereunder,
(C) the issuance and sale of the ADSs in respect of the deposited Shares, (D)
the execution and delivery by the Company of this Agreement and the Deposit
Agreement to be duly and validly authorized, and (E) the consummation and
performance by the Company of the transactions contemplated by this Agreement
and the Deposit Agreement, except (1) the registration under the Act and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), of the ADSs
and the Shares, (2) such Governmental Authorizations as have been duly obtained
and are in full force and effect and copies of which have been furnished to you
and (3) such Governmental Authorizations as may be required under United States
state securities or Blue Sky laws, or the rules and regulations of the National
Association of Securities Dealers, Inc. ("NASD"), in connection with the
purchase and distribution of the ADSs by or for the account of the Underwriters;
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<PAGE> 5
(viii) The issuance and sale of the Shares to be sold by the
Company hereunder, the deposit of the Shares being deposited by the Company with
the Custodian, on behalf of the Depositary, against issuance of ADRs evidencing
ADSs, the performance and compliance by the Company with the respective
obligations of this Agreement and the Deposit Agreement and the consummation of
the transactions herein and therein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under (nor constitute any event which with the giving of
notice, the passage of time, or both would constitute a breach or violation of,
or default under) (A) except as specifically disclosed in the Prospectus any
provision of any indenture (including the Conecel Indenture and the Conecel
Holdings Indenture (each as defined in the Prospectus and as amended)),
mortgage, deed of trust, loan or credit agreement or other agreement or
instrument to which the Company is a party or by which the Company is bound or
to which any of its properties or assets may be affected or subject, which in
any event could have a material adverse effect on the assets , operations,
business, condition (financial or otherwise) or prospects of the Company (B) any
provision of the Memorandum of Association (or similar organizational document)
or bylaws (Estatutos) of the Company, or (C) any provision of any statute or any
law, order, rule, regulation or decree of any Governmental Agency having
jurisdiction over the Company or any of its properties;
(ix) There is not pending or, to the Company's knowledge,
threatened, any action, suit, claim, proceeding or investigation against the
Company, any of its officers, its controlling persons, or any of its properties
or assets, at law or in equity, or before any Governmental Agency or otherwise
which reasonably could individually or in the aggregate, be expected to have a
material adverse effect on the assets, operations, business, properties,
condition (financial or otherwise) or prospects of the Company or might
adversely affect the ability of the Company to consummate the transactions
contemplated hereby or by the Deposit Agreement. There are no statutes, rules,
regulations, agreements, contracts, leases or documents that are required to be
described in the Prospectus, or to be filed as exhibits to the Registration
Statement by the Act or by the Rules and Regulations that have not been
accurately, completely and fairly described in the Prospectus or filed as
exhibits to the Registration Statement;
(x) The Company has an authorized capitalization as set forth
in the Prospectus and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and
nonassessable and conform in all material respects to, and entitle the holders
thereof to the rights set forth in, the description thereof contained in the
Prospectus (and such description correctly states the substance of the
provisions of the instruments defining the capital stock of the Company); all of
the issued shares of capital stock of the Company have been issued in compliance
with all applicable U.S. federal and state securities laws and Ecuadorian laws;
the holders of outstanding shares of capital stock of the Company are not
entitled to preemptive, resale, rights of first refusal or other rights to
acquire the Shares or the ADSs which have not been complied with or waived;
except for the warrants described in the Prospectus and preemptive rights under
Ecuadorian law described in the Prospectus (which have been waived in connection
with this transaction), there are no outstanding securities convertible into or
exchangeable for, or warrants, rights (including, without limitation, preemptive
rights) or options to purchase from the Company, or obligations
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<PAGE> 6
of the Company to issue, the Class B Shares or any other class of capital stock
of the Company or any contract, commitment, agreement, understanding or
arrangement of any kind relating to the issuance of any capital stock of the
Company, any such convertible or exchangeable securities or any such warrants,
rights or options; the Shares may be freely deposited by the Company and the
Selling Shareholders with the Custodian on behalf of the Depositary against
issuance of ADRs evidencing ADSs to the extent set forth under "Description of
American Depositary Receipts" in the Prospectus; the ADSs to be purchased
hereunder are freely transferable by the Company and the Selling Shareholders to
or for the account of the several Underwriters and (to the extent described in
the Prospectus) the initial purchasers thereof; and there are no restrictions on
subsequent transfers of the Shares or ADSs under the laws of Ecuador and of the
United States except as described in the Prospectus under "Description of
Capital Stock" and "Description of American Depositary Receipts";
(xi) The Shares to be deposited by the Company with the
Custodian in accordance with the Deposit Agreement have been duly and validly
authorized and, when issued and delivered against payment as provided in the
Deposit Agreement, such Shares will be duly and validly issued, fully paid and
nonassessable, free and clear of any pledge, lien, encumbrance, security
interest, preemptive right or other claim, and will conform in all material
respects to the description of the Class B Shares contained in the Prospectus.
The Shares to be deposited by the Selling Shareholders with the Custodian in
accordance with the Deposit Agreement against issuance of ADRs representing such
Shares are duly and validly authorized, issued, fully paid, and nonassessable;
(xii) The ADSs to be issued and sold by the Company and the
Selling Shareholders are authorized for quotation on the Nasdaq National Market
("NASDAQ"), subject to official notice of issuance;
(xiii) All dividends and other distributions declared and
payable on the capital stock of the Company under the current laws and
regulations of Ecuador to be paid in Ecuadorian Sucres (including any such
dividends or distributions to be paid to the Depositary) may be converted into
foreign currency that may be freely transferred out of Ecuador, and except as
described in the Prospectus under the heading "Taxation - Ecuadorian Taxation,"
such dividends or other distributions will not be subject to withholding or
other taxes under the laws and regulations of Ecuador and are otherwise free and
clear of any other tax, duty, withholding or deduction in Ecuador and without
the necessity of obtaining any Governmental Authorization in Ecuador;
(xiv) BDO Binder (the "Accountants") who have certified the
financial statements and delivered their report with respect to the audited
financial statements, together with the related schedules and notes, of the
Company filed with the Commission as a part of the Registration Statement, which
are included in the Prospectus, are independent public accountants with respect
to the Company within the meaning of the Act and the Rules and Regulations. The
audited financial statements of the Company, together with the related schedules
and notes, forming part of the Registration Statement and the Prospectus, have
been prepared in accordance with generally accepted accounting principles as in
effect in the United States ("U.S. GAAP")
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<PAGE> 7
applied on a consistent basis throughout the periods involved and present fairly
the financial position of the Company as at the dates indicated, and the results
of operations, cash flows and changes in financial position of the Company for
the periods specified. The selected and summary financial and statistical data
included in the Prospectus present fairly the information shown therein and have
been compiled on a basis consistent with the financial statements presented
therein. No other financial statements or schedules are required by the Act or
the Rules and Regulations to be included in the Registration Statement;
(xv) The statements set forth in the Prospectus under the
heading "Description of American Depositary Receipts" insofar as such statements
purport to summarize certain terms of the ADSs and the Deposit Agreement, under
the heading "Description of Capital Stock" insofar as such statements purport to
summarize certain terms of the Company's capital stock, under the caption
"Taxation-United States Taxation" insofar as they purport to constitute a
summary of the material United States Federal income tax consequences of the
offering, under the caption "Taxation-Ecuadorian Taxation" insofar as they
purport to constitute a summary of the material Ecuadorian income tax
consequences of the offering, fairly and accurately summarize such terms, United
States Federal income tax consequences and Ecuadorian tax consequences,
respectively;
(xvi) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, there has
not been (A) any material adverse change, or any development which could
reasonably be expected to result in a prospective material adverse change, in or
affecting the business, properties or assets of the Company described or
referred to in the Prospectus or the general affairs, management, results of
operations, condition, financial position, stockholders' equity or prospects of
the Company, (B) any loss or interference with the Company's business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree, except for
any loss or interference which does not and would not be reasonably likely to
have a material adverse effect on the Company, (C) the issuance or grant of any
securities or rights to acquire any securities of the Company, (D) any
obligation or liability, direct or contingent, of the Company, except
obligations or liabilities incurred in the ordinary course of business, (E) any
change in the capital stock or outstanding indebtedness of the Company, (F) any
dividend or distribution of any kind declared, paid or made on any class of the
capital stock of the Company or (G) any transaction or acquisition by the
Company, except transactions in the ordinary course of business or (H) any
change or prospective change affecting the Company's licenses. The Company does
not have any material contingent obligation which is not disclosed in the
Registration Statement;
(xvii) The Company has good and marketable title in fee simple
to all of its real property and good and marketable title to all of its personal
property owned by it, in each case free and clear of all liens, security
interests, encumbrances, claims, defects, equitable interests or restrictions
except as are described in the Prospectus or such as do not, or would not be
reasonably likely in the aggregate to have, a material adverse effect on the
Company or materially affect the value of such property and do not interfere
with the use made or proposed to be made of such property by the Company; and
for the real and personal property of the
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<PAGE> 8
Company held under lease, the Company has valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere with the
use made or proposed to be made of such property by the Company and such leases
conform in all material respects to the description thereof, if any, set forth
in the Prospectus;
(xviii) The Company has all necessary licenses (including
cellular licenses), concessions, franchises, permits, authorizations, consents
and approvals and has made all necessary filings required under any law,
regulation or rule required in order to own or lease its properties and to
conduct its business as now conducted and as proposed to be conducted as
described in the Prospectus, except to the extent that any failure to have any
such licenses, concessions, franchises, permits, authorizations, consents or
approvals or to make any such filings, would not, individually or in the
aggregate, have a material adverse effect on the assets, operations, business,
condition (financial or otherwise), or prospects of the Company or the
transactions contemplated hereby or by the Deposit Agreement; all of which are
valid and in full force and effect (and there is no proceeding pending or, to
the knowledge of the Company, threatened which may cause any such license,
concession, permit, authorization, approval or consent to be withdrawn,
canceled, suspended or not renewed). The Company is not in violation of, or in
default under and no event has occurred which, with the giving of notice or the
passage of time or both, would cause the Company to be in violation of, or
default under, any such license, concession, franchise, permit, authorization,
consent or approval or any law, regulation or rule or any decree, order or
judgment applicable to the Company which in any such event could have a material
adverse effect on the assets, operations, business, condition (financial or
otherwise) or prospects of the Company;
(xix) The Company has all licenses, franchises, permits,
authorizations, approvals and orders of and from all Governmental Agencies that
are necessary to own or lease its properties and conduct its business as now
conducted and as proposed to be conducted as described in the Prospectus,
including (A) the 15-year cellular license granted to the Company by the
government of Ecuador pursuant to the Contrato de Autorizacion del Servicio de
Telefonia Movil Celular, dated August 26, 1993, as amended (the "Cellular
Concession"), (B) the 15-year license to install, operate and maintain a
satellite system that provides various domestic and international
telecommunications services, including the transmission of data, voice and image
signals granted to the Company by the government of Ecuador, dated December 9,
1994, as amended (the "Data Transmission Concession") and (C) the 10-year
interest service license granted by the government of Ecuador, dated August 22,
1997 (the "Internet Concession"). Each of the Cellular Concession, the Data
Transmission Concession and Internet Concession is in full force and effect. The
Company is not in violation of, or in default under, or with the giving of
notice or the passage of time or both, would be in violation of, or in default
under the Cellular Concession, the Data Transmission Concession or Internet
Concession;
(xx) The Company is not in breach of, or in default (nor has
any event occurred which with the giving of notice or the passage of time or
both, would constitute a breach of, or default under) (A) under its Memorandum
of Association (or similar organizational document) or bylaws (Estatutos) or (B)
except as specifically disclosed in the Prospectus in the performance or
observance of any obligation, agreement, covenant or condition contained in any
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<PAGE> 9
indenture (including the Conecel Holdings Indenture and the Conecel Indenture),
mortgage, deed of trust, loan or credit agreement or other agreement or
instrument to which the Company is a party or by which the Company is bound or
to which any of its properties or assets may be affected or subject and the
waivers/supplemental indentures relating to the Conecel Holdings Indenture and
Conecel Indenture are in full force and effect, except in the case of clause
(B), for such breaches or defaults which would not have a material adverse
effect on the assets, operations, business or condition (financial or otherwise)
of the Company;
(xxi) The Company has filed on a timely basis all necessary
federal, state, local and foreign income, franchise and other tax returns and
has paid all taxes shown thereon as due, and the Company has no knowledge of any
tax deficiency which has been or might be asserted against the Company which
might have a material adverse effect on the current or future condition
(financial or otherwise), results of operations, business or prospects of the
Company;
(xxii) No stock exchange, stamp or other issuance or transfer
taxes or duties and no capital gains, income, withholding or other taxes are
payable by or on behalf of the Underwriters to Ecuador or any political
subdivision or taxing authority thereof or therein in connection with (A) the
issuance of the Shares to be sold by the Company, (B) the deposit with the
Custodian, on behalf of the Depositary, of Shares by the Company and the Selling
Shareholders against the issuance of ADRs evidencing ADSs, (C) the
authorization, issuance, sale and delivery by the Company and the Selling
Shareholders of the Shares and ADSs to or for the respective accounts of the
Underwriters or (D) the sale and delivery outside Ecuador by the Underwriters of
the ADSs to the initial purchases thereof;
(xxiii) The Company owns or possesses adequate licenses or
other rights to use all patents, patent applications, trademarks, trademark
applications, service marks, service mark applications, trade names, copyrights,
formulae, trade secrets, know-how, franchises, and other intangible property and
assets (collectively, "Intellectual Property") necessary to the conduct of its
business as conducted and as proposed to be conducted as described in the
Prospectus. The Company has no knowledge that it lacks or will be unable to
obtain any rights or licenses to use any of the Intellectual Property necessary
to conduct the business now conducted or proposed to be conducted by it as
described in the Prospectus, except as described in the Prospectus. The
Prospectus fairly and accurately describes rights with respect to the
Intellectual Property. The Company has not received any notice of infringement
of or conflict with (and knows of no such infringement of or conflict with)
rights or claims of others with respect to any Intellectual Property. The
Company is not aware of any patents of others which are infringed upon by
potential products or processes referred to in the Prospectus;
(xxiv) The Company is in compliance with all applicable laws,
rules and regulations, orders, decrees and judgements, including those relating
to transactions with affiliates;
(xxv) The Company carries or is covered by, insurance in such
amounts and covering such risks as is adequate for the conduct of its business
and the value of its properties as is customary for companies engaged in similar
businesses in similar industries;
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(xxvi) No labor disturbances by the employees of the Company
exist or, to the knowledge of the Company, are threatened which might be
expected to have a material adverse effect on the financial condition, results
of operations, business or prospects of the Company;
(xxvii) The Company is not, and after giving effect to the
offering and sale of the ADSs, will not be an "investment company," or an entity
"controlled" by an "investment company," as such terms are defined in the
Investment Company Act of 1940, as amended;
(xxviii) The Company has not incurred any liability for a fee,
commission, or other compensation on account of the employment of a broker or
finder in connection with the transactions contemplated by this Agreement other
than the underwriting discounts and commissions contemplated hereby;
(xxix) The ADS are registered pursuant to Section 12(g) of the
Exchange Act. The Company has taken no action designed to, or likely to have the
effect of, terminating the registration of the ADSs under the Exchange Act or
delisting the ADSs from the NASDAQ, nor has the Company received any
notification that the Commission or NASDAQ is contemplating terminating such
registration or listing;
(xxx) Neither the Company, nor any of its respective officers,
directors or affiliates has taken or will take, directly or indirectly, any
action which was designed to or which has constituted, or might reasonably be
expected to constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the ADSs and each of
the Company and its affiliates are otherwise in compliance with Regulation M
under the Exchange Act;
(xxxi) The Company has timely and properly filed with the
Commission all reports and other documents required to have been filed by it
with the Commission pursuant to the Act and the Rules and Regulations. True and
complete copies of all such reports and other documents have been delivered to
you;
(xxxii) Neither the Company nor any of its properties or
assets has any immunity from the jurisdiction of any court or from any legal
process (whether through service or notice, attachment prior to judgment,
attachment in aid of execution, executing or otherwise) under Ecuadorian law;
(xxxiii) Except as described in or contemplated by the
Prospectus, the Company has not entered into any material transaction outside of
the ordinary course of business or with any affiliate except on an arm's length
basis;
(xxxiv) There are no liens, pledges or encumbrances on the
assets of the Company or capital stock of the Company, except as set forth in
the Prospectus;
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(xxxv) There is no legal or beneficial owner of any securities
of the Company who has any rights, not effectively satisfied or waived, to
require registration of any securities of the Company in connection with the
filing of the Registration Statement;
(xxxvi) The Company is not and upon consummation of the
offering of the Shares, will not be treated for U.S. tax purposes as a Passive
Foreign Investment Company within the meaning of Section 1296 of the United
States Internal Revenue Code of 1986, as amended;
(xxxvii) This Agreement, the Deposit Agreement and the Shares
and ADSs are in proper legal form under the laws of Ecuador for the enforcement
thereof against the Company under the laws of Ecuador; and to ensure the
legality, validity, enforceability or admissibility into evidence in Ecuador of
this Agreement, the Deposit Agreement and the Shares and ADSs, it is not
necessary that this Agreement, the Deposit Agreement, any Share or ADS or any
other document be filed or recorded with any court or other authority in Ecuador
or that any Ecuadorian stamp or similar tax be paid on or in respect of this
Agreement, the Deposit Agreement, any Share or ADS or any other document to be
furnished hereunder or thereunder; and
(xxxviii) Neither the Company, the Selling Shareholders nor to
their knowledge, their respective affiliates does business with the government
of Cuba or with any person or affiliate located in Cuba within the meaning of
Section 517.075, Florida Statutes.
(b) Each of the Selling Shareholders severally represents and warrants
to, and agrees with, each of the Underwriters and the Company that:
(i) The Selling Shareholder has been duly incorporated and is
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, with full power and authority (corporate and
otherwise) to own, lease and operate its properties and to conduct its business
as currently conducted; [MAY NEED MODIFICATION DEPENDING UPON THE TYPES OF
ENTITIES.]
(ii) This Agreement has been duly authorized, executed and
delivered by such Selling Shareholder and is a legal, valid and binding
agreement on the part of such Selling Shareholder, in accordance with its terms.
All Governmental Authorizations required for (A) the deposit by such Selling
Shareholder of the Shares being deposited with the Custodian on behalf of the
Depositary against issuance of ADRs evidencing ADSs to be delivered hereunder,
(B) the execution and delivery by such Selling Shareholder of this Agreement,
the Power of Attorney (the "Power of Attorney") and the Custody Agreement (the
"Custody Agreement") hereinafter referred to to be duly and validly authorized,
(C) for the sale and delivery of the Shares and the ADS to be sold by such
Selling Shareholder hereunder and (D) the consummation and performance by such
Selling Shareholder of the transactions contemplated by this Agreement, the
Power of Attorney and Custody Agreement, have been obtained; and such Selling
Shareholder has full right, power and authority (corporate and otherwise) to
enter into this Agreement, the Power of Attorney and the Custody Agreement to
perform the transactions contemplated hereby
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<PAGE> 12
and thereby and to sell, assign, transfer and deliver the Shares to be sold by
such Selling Shareholder hereunder;
(iii) The sale of the Shares to be sold by such Selling
Shareholder hereunder, the deposit of the Shares being deposited by such Selling
Shareholder with the Custodian, on behalf of the Depositary, against issuance of
ADRs evidencing ADSs, the performance and compliance by such Selling Shareholder
with the respective obligations of this Agreement, the Power of Attorney and the
Custody Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or violation of any of
the terms or provisions of, or constitute a default under (nor constitute any
event which with the giving of notice, the passage of time, or both would
constitute a breach or violation of, or default under) (A) any provision of any
indenture, mortgage, deed of trust, loan or credit agreement or other agreement
or instrument to which such Selling Shareholder is a party or by which such
Selling Shareholder is bound or to which any of the property or assets of such
Selling Shareholder may be affected or subject, (B) any provision of the
Certificate of Incorporation or By-laws of such Selling Shareholder if such
Selling Shareholder is a corporation, the Articles of Partnership or any similar
or related instrument of such Selling Shareholder if such Selling Shareholder is
a partnership, the Deed of Trust, Trust Agreement or any similar or related
instrument if such Selling Shareholder is a trust, or (C) any provision of any
statute or any law, order, rule, regulation or decree of any Governmental Agency
having jurisdiction over such Selling Shareholder or the property of such
Selling Shareholder;
(iv) Such Selling Shareholder has, and immediately prior to
each Time of Delivery (as defined in Section 4 hereof) such Selling Shareholder
will have, good and valid title to the Shares to be sold by such Selling
Shareholder hereunder free and clear of all liens, encumbrances, equities or
claims; and, upon delivery of such Shares to the Custodian in accordance with
the Deposit Agreement against issuance of ADSs to be sold hereunder and upon and
payment therefor pursuant to this Agreement, good and valid title to such
Shares, free and clear of all liens, encumbrances, equities or claims, will pass
to the Depositary, subject only to the Deposit Agreement;
(v) There is not pending or, to such Selling Shareholder's
knowledge, threatened, any action, suit, claim, proceeding or investigation
against such Selling Shareholder, any of its officers or any of its properties
or assets, at law or in equity, or before any Governmental Agency or otherwise
which reasonably could individually or in the aggregate, be expected to have a
material adverse effect on the assets, operations, business, properties,
condition (financial or otherwise) or prospects of such Selling Shareholder or
might adversely affect the ability of such Selling Shareholder to consummate the
transactions contemplated hereby or by the Power of Attorney or the Custody
Agreement;
(vi) The Selling Shareholder has effectively and validly
waived its preemptive rights in respect of the Shares and the ADSs to be issued
and sold by the Company pursuant hereto;
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(vii) To the extent that any statements or omissions made in
the Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto are made in reliance upon and in conformity with
written information furnished to the Company by such Selling Shareholder
expressly for use therein, such Preliminary Prospectus and the Registration
Statement did, and the Prospectus and any further amendments or supplements to
the Registration Statement and the Prospectus will, when they become effective
or are filed with the Commission, as the case may be, conform in all material
respects to the requirements of the Act and the Rules and Regulations and not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading.
Each of the Selling Shareholders represents and warrants that
certificates in negotiable form representing all of the Shares to be sold by
such Selling Shareholder hereunder have been placed in custody under a Custody
Agreement, in the form heretofore furnished to you, duly executed and delivered
by such Selling Shareholder to Banco La Previsora S.A., as share custodian (the
"Share Custodian"), and that such Selling Shareholder has duly executed and
delivered a Power of Attorney, in the form heretofore furnished to you,
appointing Paul Siska Goytre and Guido Paez Puga, or either of them acting
singly, as such Selling Shareholder's attorney-in-fact (the "Attorney-in-Fact"),
each with full power to act without the other and with authority to execute and
deliver this Agreement on behalf of such Selling Shareholder, to determine the
purchase price to be paid by the Underwriters to the Selling Shareholders as
provided in Section 2 hereof, to authorize the delivery of the Shares to be sold
by such Selling Shareholder hereunder and otherwise to act on behalf of such
Selling Shareholder in connection with the transactions contemplated by this
Agreement and the Custody Agreement.
2. On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, (a) the Company and each of the
Selling Shareholders agree, severally and not jointly, to sell to each of the
Underwriters, and each of the Underwriters agrees, severally and not jointly, to
purchase from the Company and each of the Selling Shareholders at a purchase
price per ADS of $___ the number of Firm ADSs (to be adjusted by you so as to
eliminate fractional shares) determined by multiplying the aggregate number of
Firm ADSs to be sold by the Company and each of the Selling Shareholders as set
forth opposite their respective names in Schedule II hereto by a fraction, the
numerator of which is the aggregate number of Firm ADSs to be purchased by such
Underwriter as set forth opposite the name of such Underwriter in Schedule I
hereto and the denominator of which is the aggregate number of Firm ADSs to be
purchased by all the Underwriters from the Company and all the Selling
Shareholders hereunder and (b) in the event and to the extent that the
Underwriters shall exercise the election to purchase Optional ADSs as provided
below, the Company agrees to sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company at
the purchase price per ADS set forth in clause (a) of this Section 2, that
portion of the number of Optional ADSs as to which such election shall have been
exercised (to be adjusted by you so as to eliminate fractional ADSs) determined
by multiplying such number of Optional ADSs by a fraction, the numerator of
which is the maximum number of Optional ADSs which such Underwriter is entitled
to purchase as set forth opposite the name of such Underwriter in
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<PAGE> 14
Schedule I hereto and the denominator of which is the maximum number of Optional
ADSs that all of the Underwriters are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 1,379,337 Optional ADSs, at the purchase price per ADS set
forth in the paragraph above, for the sole purpose of covering over-allotments
in the sale of the Firm ADSs. Any such election to purchase Optional ADSs may be
exercised only by written notice from you to the Company, given within a period
of 30 calendar days after the date of this Agreement and setting forth the
aggregate number of Optional ADSs to be purchased and the date on which such
Optional ADSs are to be delivered, as determined by you but in no event earlier
than the First Time of Delivery (as defined in Section 4 hereof) or, unless you
and the Company otherwise agree in writing, earlier than two or later than ten
business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm ADSs, the
several Underwriters propose to offer the ADSs for sale upon the terms and
conditions set forth in the Prospectus.
4. (a) The ADSs to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as UBS Securities LLC may request upon at least 48 hours' notice to the
Company and the Selling Shareholders prior to a Time of Delivery (as defined
below)(the "Notification Time"), shall be delivered by or on behalf of the
Company and the Selling Shareholders to or upon the order of UBS Securities LLC,
for the account of such Underwriter, against payment by or on behalf of such
Underwriter of the purchase price therefor by certified or official bank check
or checks or by wire transfer or other same day funds, payable to the order of
the Company and to the Share Custodian for the account of the Selling
Shareholders. The Company and the Selling Shareholders will cause the
certificates representing the ADSs to be made available for checking and
packaging at least 24 hours prior to the Time of Delivery (as defined below)
with respect thereto at the office of UBS Securities LLC, 299 Park Avenue, New
York, New York 10171 (the "Designated Office"). The time and date of such
delivery and payment shall be, with respect to the Firm ADSs, 9:30 a.m., New
York City time, on ________, 1998 or such other time and date as UBS Securities
LLC, the Company and the Share Custodian may agree upon in writing, and, with
respect to the Optional ADSs, 9:30 a.m., New York City time, on the date
specified by UBS Securities LLC in the written notice given by UBS Securities
LLC of the Underwriters' election to purchase such Optional ADSs, or such other
time and date as UBS Securities LLC and the Company may agree upon in writing.
Such time and date for delivery of the Firm ADSs is herein called the "First
Time of Delivery" such time and date for delivery of the Optional ADSs, if not
the First Time of Delivery, is herein called the "Second Time of Delivery," and
each such time and date for delivery is herein called a "Time of Delivery."
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the
cross-receipt for the ADSs and any additional documents requested by the
Underwriters pursuant to Section 7(m) hereof, will be delivered at the offices
of Proskauer Rose LLP, 1585 Broadway, New York, New York 10036-8299 (the
"Closing Location"), and the ADSs will be delivered as specified in Section 4(a)
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<PAGE> 15
above, all at such Time of Delivery. A meeting will be held at the Closing
Location at 1:00 p.m., New York City time, on the New York Business Day
immediately preceding such Time of Delivery, at which meeting the final drafts
of the documents to be delivered pursuant to the preceding sentence will be
available for review by the parties hereto. For the purposes of this Agreement,
"New York Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in New York are
generally authorized or obligated by law or executive order to close.
5. (a) The Company agrees with each of the Underwriters:
(i) To prepare the Prospectus in a form approved by you and,
if required by Rule 424(b) under the Act, to file such Prospectus under the Act
not later than the Commission's close of business on the second business day
following the execution and delivery of this Agreement, or, if applicable, such
earlier time as may be required by Rule 430A(a)(3) under the Act; to make no
further amendment or any supplement to the Registration Statement or Prospectus
which shall not have been reasonably approved by you promptly after reasonable
notice thereof; to advise you, promptly after it receives notice thereof, of the
time when any amendment to the Registration Statement has been filed or becomes
effective or any supplement to the Prospectus or any amended Prospectus has been
filed and to furnish you copies thereof; to file promptly all reports required
to be filed by the Company with the Commission pursuant to Section 13(a), 13(c)
or 15(d) of the Exchange Act subsequent to the date of the Prospectus and for so
long as the delivery of a prospectus is required in connection with the offering
or sale of the ADSs; to advise you, promptly after it receives notice thereof,
of the issuance by the Commission of any stop order or of any order preventing
or suspending the use of any Preliminary Prospectus or Prospectus, of the
suspension of the qualification of the ADSs for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or supplementing
of the Registration Statement or Prospectus or for additional information; and,
in the event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or Prospectus or suspending any
such qualification, promptly to use its best efforts to obtain the withdrawal of
such order;
(ii) Promptly from time to time to take such action as you may
reasonably request to qualify the ADSs for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with such
laws so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution of
the ADSs, provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction;
(iii) Prior to 10:00 a.m., New York City time, on the New York
Business Day immediately succeeding the date of this Agreement and from time to
time, to furnish the Underwriters with copies of the Prospectus in New York City
in such quantities as you may reasonably request, and, if the delivery of a
prospectus is required at any time prior to the expiration of nine months after
the time of issue of the Prospectus in connection with the offering or sale of
the ADSs and if at such time any events shall have occurred as a result of which
the
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<PAGE> 16
Prospectus, as then amended or supplemented, would include an untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made when such Prospectus is delivered, not misleading, or, if for any other
reason it shall be necessary during such period to amend or supplement the
Prospectus in order to comply with the Act, to notify you and upon your request
to prepare and furnish without charge to each Underwriter and to any dealer in
securities as many copies as you may reasonably request of an amended Prospectus
or a supplement to the Prospectus which will correct such statement or omission
or effect such compliance, and in case any Underwriter is required to deliver a
prospectus in connection with sales of any of the ADSs at any time nine months
or more after the time of issue of the Prospectus satisfying the requirements of
Section 10(a)(3) of the Act, upon your request but at the expense of such
Underwriter, to prepare and deliver to such Underwriter as many copies as you
may request of an amended or supplemented Prospectus complying with Section
10(a)(3) of the Act;
(iv) To make generally available to its securityholders as
soon as practicable, but in any event not later than 18 months after the
effective date of the Registration Statement (as defined in Rule 158(c) under
the Act), an earnings statement of the Company (which need not be audited)
complying with Section 11(a) of the Act and the Rules and Regulations
(including, at the option of the Company, Rule 158);
(v) (A) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the Prospectus,
(i) not to offer, sell, pledge, contract to sell, sell any option, grant any
option for the sale of or otherwise dispose of, any Class B Shares, shares of
Class A common stock, par value 1,000 sucres per share of the Company ("Class A
Shares"), ADSs, including but not limited to any securities that are convertible
into or exercisable for, or that represent the right to receive Class B Shares
or Class A Shares or any substantially similar securities (other than pursuant
to employee share option plans described in the Prospectus or existing on, or
upon the conversion or exchange of convertible or exchangeable securities
outstanding as of, the date of this Agreement and disclosed in the Prospectus)
or (ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic consequence
of ownership of the Class A Shares or Class B Shares, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of the Class A Shares or Class B Shares or securities convertible into or
exchangeable for Class A Shares or Class B Shares, in cash or otherwise without
your prior written consent; and (B) to cause Centro Empresarial, Cempresa C.A.,
an Ecuadorian company ("Cempresa"), and Conecel Holdings Limited, a British
Virgin Islands company ("Conecel Holdings") to deliver an agreement to you,
pursuant to which Cempresa and Conecel Holdings shall have agreed, during the
period beginning from the date hereof and continuing to and including the date
180 days after the date of the Prospectus, not to (i) offer, sell, pledge,
contract to sell, sell any option, grant any option for the sale of or otherwise
dispose of, any shares of Class B Shares, Class A Shares, ADSs, including but
not limited to any securities that are
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<PAGE> 17
convertible into or exercisable for, or that represent the right to receive
Class B Shares or Class A Shares or any substantially similar securities or (ii)
enter into any swap or any other agreement or any transaction that transfers, in
whole or in part, directly or indirectly, the economic consequence of ownership
of the Class A Shares or Class B Shares, whether any such swap or transaction
described in clause (i) or (ii) above is to be settled by delivery of the Class
A Shares or Class B Shares or securities convertible into or exchangeable for
Class A Shares or Class B Shares, in cash or otherwise without your prior
written consent.
(vi) To furnish to its shareholders in accordance with U.S.
and Ecuadorian law and regulations, or the rules and regulations of the NASDAQ,
after the end of each fiscal year an annual report (in English) (including a
balance sheet and statements of income, shareholders' equity and cash flows of
the Company certified by independent public accountants and prepared in
conformity with U.S. GAAP and, as soon as practicable after the end of each of
the first three quarters of each fiscal year (beginning with the fiscal quarter
ending after the effective date of the Registration Statement), consolidated
summary financial information of the Company for such quarter (in English) in
reasonable detail prepared in accordance with U.S. GAAP;
(vii) During a period of five years from the effective date of
the Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to shareholders, and to deliver to
you (i) as soon as practicable after they are available, copies of any reports
and financial statements furnished to or filed with the Commission or any
securities exchange on which any class of securities of the Company is listed or
any automated quotation system on which any class of securities of the Company
is quoted; and (ii) such additional information concerning the business and
financial condition of the Company as you may from time to time reasonably
request;
(viii) To use the net proceeds received by it from the sale of
the ADSs pursuant to this Agreement in the manner specified in the Prospectus
under the caption "Use of Proceeds;"
(ix) Prior to each Time of Delivery to deposit the Shares to
be sold by the Company with the Depositary (or an agent of the Depositary
appointed for such purpose) in accordance with the provisions of the Deposit
Agreement and otherwise to comply with the Deposit Agreement so that ADRs
evidencing ADSs will be executed (and, if applicable, countersigned) and issued
by the Depositary against receipt of such Shares and delivered to the
Underwriters at such Time of Delivery;
(x) Not to take, directly or indirectly, any action which is
designed to or which constitutes or which might reasonably be expected to cause
or result in stablization or manipulation of the price of any security of the
Company or facilitate the sale or resale of the Shares and the ADSs;
(xi) To use its best efforts to list, subject to notice of
issuance, the ADSs on NASDAQ; and
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(xii) If the Company elected to rely upon Rule 462(b), the
Company shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of
this Agreement, and the Company shall at the time of filing either pay to the
Commission the filing fee for the Rule 462(b) Registration Statement or give
irrevocable instructions for the payment of such fee pursuant to Rule 111(b)
under the Act.
(b) Each of the Selling Shareholders severally agrees with each of the
Underwriters:
(i) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the Prospectus,
not to offer, sell, contract to sell or otherwise dispose of, except as provided
hereunder, Class B Shares, Class A Common or ADSs or any securities of the
Company that are substantially similar to Class B Shares, Class A Common or
ADSs, including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Class B Shares, Class
A Common or any such substantially similar securities, without your prior
written consent;
(ii) Prior to the applicable Time of Delivery to cause the
Share Custodian to deposit the Shares with the Depositary in accordance with the
provisions of the Deposit Agreement and otherwise to comply with the Deposit
Agreement so that ADRs evidencing ADSs will be executed (and, if applicable,
countersigned) and issued by the Depositary against receipt of such Shares and
delivered to the Underwriters at such Time of Delivery;
(iii) Not to take, directly or indirectly, any action which is
designed to or which constitutes or which might reasonably be expected to cause
or result in stabilization or manipulation of the price of any security of the
Company or facilitate the sale or resale of the Shares or the ADSs; and
(iv) In order to document the Underwriters' compliance with
the reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein contemplated,
prior to or at the each Time of Delivery, to deliver to you a properly completed
and executed United States Treasury Department Form W-9 (or other applicable
form or statement specified by Treasury Department regulations in lieu thereof)
and any other form required by the instructions thereto.
6. The Company and each of the Selling Shareholders covenant and agree
with one another and with the several Underwriters that (a) the Company will pay
or cause to be paid the following: (i) the fees, disbursements and expenses of
the Company's counsel and accountants in connection with the registration of the
ADSs under the Act and all other expenses in connection with the preparation,
printing and filing of the Registration Statement, the ADS Registration
Statement, any Preliminary Prospectus and the Prospectus and amendments and
supplements thereto and the mailing and delivering of copies thereof to the
Underwriters and dealers; (ii) all expenses in connection with the qualification
of the ADSs for offering and sale under United States state securities laws as
provided in Section 5(a)(ii) hereof, including the fees and disbursements of
counsel for the Underwriters in connection with such qualification and in
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<PAGE> 19
connection with the Blue Sky surveys; (iii) all fees and expenses in connection
with the quotation of the ADSs on NASDAQ; (iv) the filing fees incident to, and
the fees and disbursements of counsel for the Underwriters in connection with,
securing any required review by the NASD of the terms of the sale of the ADSs;
(v) all expenses and taxes arising as a result of the deposit by the Company and
the Selling Shareholders of the Shares with the Depositary and the issuance and
delivery of the ADRs evidencing ADSs in exchange therefor by the Depositary to
the Company and the Selling Shareholders, of the sale and delivery outside
Ecuador of the ADSs by the Underwriters to each other, and of the initial
purchasers thereof in the manner contemplated under this Agreement including, in
any such case, any Ecuadorian income, capital gains, withholding, transfer or
other tax asserted against an Underwriter by reason of the purchase and sale of
an ADS pursuant to this Agreement; (vi) the fees and expenses (including fees
and disbursements of counsel), if any, of the Depositary or and any custodian
appointed under the Deposit Agreement, other than the fees and expenses to be
paid by holders of ADRs (other than the Underwriters in connection with the
initial purchase of ADSs); (vii) the fees and expenses of the Authorized Agent
(as defined in Section 14 hereof); (viii) the cost of preparing ADRs; (ix) the
cost and charges of a transfer agent or registrar, if any; and (x) all other
costs and expenses incident to the performance of its obligations hereunder
which are not otherwise specifically provided for in this Section and (b) such
Selling Shareholder will pay or cause to be paid all costs and expenses incident
to the performance of such Selling Shareholder's obligations hereunder which are
not otherwise specifically provided for in this Section, including; (i) any fees
and expenses of counsel for such Selling Shareholder; (ii) such Selling
Shareholder's pro rata share of the fees and expenses of the Attorney-in-Fact
and the Share Custodian; and (iii) all expenses and U.S. and Ecuadorian taxes
incident to the sale and delivery of the Shares and ADSs to be sold by such
Selling Shareholder to the Underwriters hereunder. It is understood, however,
that the Company shall bear, and the Selling Shareholders shall not be required
to pay or to reimburse the Company for, the cost of any other matters not
directly relating to the sale and purchase of the ADSs pursuant to this
Agreement.
7. The obligations of the Underwriters hereunder, as to the ADSs to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and the Selling Shareholders herein or in certificates are, at and
as of such Time of Delivery, true and correct, the condition that the Company
and the Selling Shareholders shall have performed all of its and their
obligations hereunder theretofore to be performed, and the following additional
conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) (if required pursuant to Rule 424(b)) within the applicable time
period prescribed for such filing by the Rules and Regulations and in accordance
with Section 5(a)(i) hereof; no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and no
proceeding for that purpose shall have been initiated or threatened by the
Commission; and all requests for additional information on the part of the
Commission shall have been complied with to your reasonable satisfaction; if the
Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration
Statement shall have become effective by 10:00 p.m., Washington, D.C. time, on
the date of this Agreement;
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<PAGE> 20
(b) Proskauer Rose LLP, U.S. counsel for the Underwriters, shall have
furnished to you such opinion or opinions (a draft of such opinion is attached
as Annex II(a) hereto), dated such Time of Delivery, with respect to the matters
covered in paragraphs (i), (ii), (iii), and (xii) of subsection (d) below, as
well as such other related matters as you may reasonably request, and such
counsel shall have received such papers and information as they may reasonably
request to enable them to pass upon such matters;
(c) Perez Bustamante & Perez, Ecuadorian counsel for the Underwriters,
shall have furnished to you such opinion or opinions (a draft of such opinion is
attached as Annex II(b) hereto), dated such Time of Delivery, with respect to
the matters covered in paragraphs (i), (iii), (vi), (vii), (ix), (xi), (xii),
(xiii), (xiv), (xvii) and (xviii) of subsection (e) below, as well as such other
related matters as you may reasonably request, and such counsel shall have
received such papers and information as they may reasonably request to enable
them to pass upon such matters;
(d) Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A., U.S.
counsel for the Company, shall have furnished to you their written opinion (a
draft of such opinion is attached as Annex II(c)), dated such Time of Delivery,
in form and substance satisfactory to you, to the effect that:
(i) Assuming due authorization, execution and delivery of this
Agreement under Ecuadorian law, this Agreement has been duly executed and
delivered by the Company;
(ii) Assuming due authorization, execution and delivery of the
Deposit Agreement under Ecuadorian law and due authorization, execution and
delivery of the Deposit Agreement by the Depositary and that the Depositary has
full power, authority and legal right to enter into and perform its obligations
thereunder, the Deposit Agreement has been duly executed and delivered by the
Company and constitutes a legal, valid and binding agreement on the part of the
Company, enforceable against the Company in accordance with its terms, except as
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting creditors' rights generally or by general
equitable principles;
(iii) Upon due issuance by the Depositary of the Master ADR
(the "Master ADR") evidencing ADSs being delivered at such Time of Delivery
against deposit of Shares to be deposited by the Company and the Selling
Shareholders in respect thereof in accordance with the provisions of the Deposit
Agreement, such Master ADR with respect to such Shares will be duly and validly
issued and the person in whose name the Master ADR is registered will be
entitled to the rights specified therein and in the Deposit Agreement;
(iv) Under the laws of the State of New York relating to
submission to jurisdiction, the Company has pursuant to Section 14 of this
Agreement, validly and irrevocably submitted to the personal jurisdiction of any
state or federal court located in the Borough of Manhattan, The City of New
York, New York (each a "New York Court") in any action arising out of or
relating to this Agreement or the transactions contemplated hereby, has validly
and irrevocably waived any objection to the venue of a proceeding in any such
New York Court, and has validly and irrevocably appointed the Authorized Agent
(as defined herein) as its authorized
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<PAGE> 21
agent for the purpose described in Section 14 hereof; and service of process
effected on such agent in the manner set forth in Section 14 hereof will be
effective to confer valid personal jurisdiction over the Company;
(v) There is not pending, or to such counsel's knowledge,
threatened any action, suit, claim, proceeding or investigation against the
Company, any of its officers or any of its property or assets, at law or in
equity, or before any Governmental Agency or otherwise which reasonably could
individually or in the aggregate, be expected to have a material adverse effect
on the assets, operations, business, properties, condition (financial or
otherwise) or prospects of the Company or might adversely affect the ability of
the Company to consummate the transactions contemplated hereby or by the Deposit
Agreement;
(vi) The issuance and sale of the ADSs to be sold by the
Company hereunder, the deposit of the Shares being deposited by the Company with
the Custodian, on behalf of the Depositary, against issuance of the Master ADR
evidencing ADSs to be delivered at each Time of Delivery, the performance and
compliance by the Company with the respective obligations of this Agreement and
the Deposit Agreement and the consummation of the transactions herein and
therein contemplated does not conflict with or result in a breach or violation
of any of the terms or provisions of, or constitute a default under (nor
constitute any event which with the giving of notice, the passage of time, or
both would constitute a breach or violation of, or default under) (A) any
provision of any indenture (including the Conecel Holdings Indenture and the
Conecel Indenture), mortgage, deed of trust, loan or credit agreement or other
agreement or instrument to which the Company is a party or by which the Company
is bound or to which any of its properties or assets may be affected or subject;
(B) any provision of any United States or New York statute or regulation or any
law, order, rule, regulation, or decree known to such counsel of any
Governmental Agency having jurisdiction over the Company or any of its
properties which in any event could have a material adverse effect on the
assets, operations, business, condition (financial or otherwise) or prospects of
the Company;
(vii) The Company is not in breach of, or in default (nor has
any event occurred which with the giving of notice or the passage of time or
both, would constitute a breach of, or default under) except as specifically
disclosed in the Prospectus, in the performance or observance of any obligation,
agreement, covenant or condition contained in any indenture (including the
Conecel Holdings Indenture and the Conecel Indenture), mortgage, deed of trust,
loan or credit agreement or other agreement or instrument known to it to which
the Company is a party or by which the Company is bound or to which any of its
properties or assets may be affected or subject, except in the case of clause
(B), for such breaches or defaults which would not have a material adverse
effect on the assets, operations, business or condition (financial or otherwise)
of the Company;
(viii) To our knowledge, the Company is in compliance in all
material respects with all applicable laws, rules and regulations, orders,
decrees and judgements, including those relating to transactions with
affiliates, to the extent applicable;
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(ix) No Governmental Authorization or filing with any
Governmental Agency that is required in the United States federal or the State
of New York for the issuance of the Shares, the deposit by the Company of the
Shares being deposited with the Custodian, on behalf of the Depositary against
the issuance of ADRs evidencing the ADSs to be delivered at each Time of
Delivery, the issuance and sale of the ADSs in respect of the deposited Shares,
the execution and delivery by the Company of this Agreement and the Deposit
Agreement to be duly and validly authorized and the consummation and performance
by the Company of the transactions contemplated by this Agreement and the
Deposit Agreement, except the registration under the Act of the ADSs and the
Shares and the registration under the Exchange Act of the Shares, such
Governmental Authorizations as have been obtained and are in full force and
effect and such Governmental Authorizations as may be required under state
securities or Blue Sky laws, or the rules and regulations of the NASD, in
connection with the purchase and distribution of the ADSs by or for the account
of the Underwriters;
(x) The statements set forth in the Prospectus under the
heading "Description of American Depositary Receipts" insofar as such statements
purport to summarize certain terms of the ADRs and the Deposit Agreement and
under the caption "Taxation-United States Taxation" insofar as they purport to
constitute a summary of certain United States Federal income tax consequences,
fairly and accurately summarize in all material respects such terms and United
States Federal income tax consequences, respectively;
(xi) The Company is not, and after giving effect to the
offering and sale of the Shares and ADSs, will not be an "investment company"
within the meaning of the Investment Company Act of 1940, as amended; and
(xii) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior to such
Time of Delivery (other than the financial statements and related schedules
therein, pro forma financial data and other financial and operating data
included therein as to which such counsel need not express any opinion) comply
as to form in all material respects with the requirements of the Act and the
Rules and Regulations; although they are not passing upon and do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus, except for those
referred to in the opinion in subsection (x) of this Section 7(d), they have no
reason to believe that, as of its effective date, the Registration Statement or
any further amendment thereto made by the Company prior to such Time of Delivery
(other than the financial statements and related schedules therein, as to which
such counsel need not express any opinion) contained an untrue statement of a
material fact or omitted to state a material fact required to be state therein
or necessary to make the statements therein not misleading or that, as of its
date and as of the Time of Delivery, the Prospectus or any further amendment or
supplement thereto made by the Company prior to such Time of Delivery (other
than the financial statements and related schedules therein, as to which such
counsel need not express any opinion) contained an untrue statement of a
material fact or omitted to state a material fact required to be state therein
or necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading; and they do not know
of any amendment to the Registration Statement required to be filed or of any
contracts or other
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<PAGE> 23
documents of a character required to be filed as an exhibit to the Registration
Statement or required to be described in the Registration Statement or the
Prospectus which are not filed or described as required.
In rendering such opinion, such counsel may state that they express no
opinion as to the laws of any jurisdiction outside of the United States;
(e) Estudio Juridico Pareja, Abogados, Ecuadorian counsel for the
Company and the Selling Shareholders, shall have furnished to you their written
opinion (a draft of such opinion is attached as Annex II(d) hereto), dated such
Time of Delivery, in form and substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a sociedad anonima in good standing under the laws of Ecuador, with
full power and authority (corporate and otherwise) to own its properties and to
conduct its business, and to execute, deliver and perform this Agreement and the
Deposit Agreement;
(ii) The Company is duly qualified or licensed by each
jurisdiction in which it conducts business and in which the failure,
individually or in the aggregate, to be so qualified or licensed could have a
material adverse effect on its assets, operations, business or condition
(financial or otherwise) and the Company is duly qualified, and is in good
standing, in each jurisdiction in which it owns or leases real property or
maintains an office, except where the failure to be so qualified and in good
standing would not have a material adverse effect on its assets, operations,
business, condition (financial or otherwise) or prospects;
(iii) This Agreement and the Deposit Agreement each has been
duly authorized, executed and delivered by the Company and assuming due
authorization, execution and delivery by the Depositary and that the Depositary
has full power, authority and legal right to enter into and perform its
obligations thereunder, the Deposit Agreement constitutes a valid and legally
binding agreement of the Company, enforceable in accordance with its terms,
subject, as to enforcement, to bankruptcy, insolvency, reorganization and
similar laws of general applicability affecting creditors' rights and to general
equity principles;
(iv) The issuance and sale of the ADSs to be sold by the
Company hereunder, the deposit of Shares being deposited by the Company with the
Custodian, on behalf of the Depositary against issuance of the Master ADR
evidencing ADSs to be delivered at each Time of Delivery, the performance and
compliance by the Company with the respective obligations of this Agreement and
the Deposit Agreement, and the consummation of the transactions herein and
therein contemplated will not conflict with or result in a breach or violation
of any of the terms or provisions of, or constitute a default under (nor
constitute any event which or with the giving of notice, the passage of time, or
both would constitute a breach or violation of, or default under) (A) any
provision of any indenture (including the Conecel Indenture or the Conecel
Holdings Indenture), mortgage, deed of trust, loan or credit agreement or other
agreement or instrument to which the Company is a party or by which the Company
is bound or to which any of its property or assets may be affected or subject,
(B) any provision of
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<PAGE> 24
the Memorandum of Association (or similar organizational document or bylaws
(Estatutos) of the Company or (C) any provision of any statute or regulation or
any order, rule, regulation or decree known to such counsel of any Governmental
Agency having jurisdiction over the Company or any of its properties;
(v) No Governmental Authorization of or filing with any
Governmental Agency is required in Ecuador for the issuance and sale of the
Shares or ADSs by the Company, the sale of the Shares or ADSs by the Selling
Shareholder, the deposit of the Shares being deposited by the Company and the
Selling Shareholder with the Custodian on behalf of the Depositary against
issuance of the Master ADR evidencing ADSs to be delivered at each Time of
Delivery by the Company and the Selling Shareholder, the execution and delivery
by the Company of this Agreement and the Deposit Agreement to be duly and
validly authorized or the consummation by the Company of the transactions
contemplated by this Agreement and the Deposit Agreement, except [NAME OF ANY
APPROVAL, AUTHORIZATION OR ORDER] which [HAS][HAVE] been duly obtained and are
in full force and effect;
(vi) The Company is not in breach of, or in default (nor has
any event occurred which with the giving of notice or the passage of time or
both, would constitute a breach of, or default under), (A) under its Memorandum
of Association (or similar organizational document) or Estatutos or (B) in the
performance or observance of any obligation, agreement, covenant or condition
contained in any indenture (including the Conecel Indenture or Conecel Holdings
Indenture), mortgage, deed of trust, loan or credit agreement or other agreement
or instrument to which the Company is a party or by which it is bound or to
which any of its properties or assets may be subject, except in the case of
clause (B), for such breaches or defaults which would not have a material
adverse effect on the assets, operations, business or condition (financial or
otherwise) of the Company;
(vii) The Company has an authorized capitalization as set
forth in the Prospectus and all of the issued share capital of the Company
(including the Shares being delivered at such Time of Delivery) have been duly
and validly authorized and issued, are fully paid and nonassessable; all of the
issued shares of capital stock of the Company have been issued in compliance
with all applicable Ecuadorian laws; the holders of outstanding shares of
capital stock of the Company are not entitled to preemptive, resale, rights of
first refusal or other rights to acquire the ADSs or the Shares which have not
been complied with or waived; except for the Warrants (as defined in the
Prospectus), there are no outstanding securities convertible into or
exchangeable for, or warrants, rights (including, without limitation, preemptive
rights) or options to purchase from the Company, or obligations of the Company
to issue, the Class B Shares or any other class of capital stock of the Company
or any contract, commitment, agreement, understanding or arrangement of any kind
relating to the issuance of any capital stock of the Company, any such
convertible or exchangeable securities or any such warrants, rights or options;
the Shares may be freely deposited by the Company and the Selling Shareholders
with the Custodian, on behalf of the Depositary against issuance of the Master
ADR evidencing ADSs; the ADSs to be purchased hereunder are freely transferable
by the Company and the Selling Shareholders to or for the account of the several
Underwriters and the initial purchasers thereof; there are no restrictions on
subsequent transfers of the Shares or ADSs under the laws of
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<PAGE> 25
Ecuador and the United States, in each such case, except as described in the
Prospectus; and the Shares conform to the description of the Class B Shares
contained in the Prospectus;
(viii) There is not pending or, to such counsel's knowledge,
threatened any action, suit, claim, proceeding or investigation against the
Company, any of its officers or any of its property or assets, at law or in
equity, or before or by any Governmental Agency or otherwise which reasonably
could individually or in the aggregate, be expected to have a material adverse
effect on the assets, operations, business, properties, condition (financial or
otherwise) or prospects of the Company or might adversely affect the ability of
the Company to perform its obligations hereunder or in the Deposit Agreement;
(ix) The statements in the Prospectus and under the captions
"Description of Capital Stock," "Risk Factors," "Dividend Policy,"
"Business--Operating Agreements," "Regulatory Framework," "Management,"
"Taxation" and "Annex A--The Republic of Ecuador" to the extent such statements
relate to matters of Ecuadorian law or regulation or to the provisions of
documents therein described, and the statements set forth in the Prospectus
under the caption "Description of Capital Stock," insofar as they purport to
constitute a summary of the terms of the Shares, are true and accurate in all
material respects and nothing has been omitted from such statements which would
make the same misleading in any material respect;
(x) The Company has good and marketable title in fee simple to
all real property and good and marketable title to all personal property owned
by it, in each case free and clear of all liens, security interests,
encumbrances, claims and defects, equitable interests or restrictions except
such as are described in the Prospectus or such as do not or would not be
reasonably likely in the aggregate to have, a material adverse effect on the
Company or materially affect the value of such property and do not interfere
with the use made and proposed to be made of such property by the Company; and
any real property held under lease by the Company are held by it under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere in any material respect with the use made and proposed to be
made of such property by the Company;
(xi) The opinions of such counsel set forth in the Prospectus
under the caption "Enforcement of Civil Liabilities" are confirmed as of such
Time of Delivery;
(xii) No stock exchange, stamp or other issuance or transfer
taxes or duties and no capital gains, income, withholding or other taxes are
payable to Ecuador or to any political subdivision or taxing authority thereof
or therein in connection with (A) the issuance of the Shares to be sold by the
Company, (B) the deposit with the Custodian, on behalf of the Depositary, of
Shares by the Company and the Selling Shareholder against the issuance of ADRs
evidencing ADSs, (C) the authorization, issuance, sale and delivery by the
Company and the Selling Shareholders of the ADSs and the Shares to or for the
respective accounts of the Underwriters or (D) the sale and delivery outside
Ecuador by the Underwriters of the ADSs to the initial purchasers thereof in the
manner contemplated herein;
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<PAGE> 26
(xiii) Insofar as matters of Ecuadorian law are concerned, the
Registration Statement and the ADS Registration Statement and the filing of the
Registration Statement and the ADS Registration Statement with the Commission
have been duly authorized by and on behalf of the Company; and each of the
Registration Statement and the ADS Registration Statement has been duly executed
pursuant to such authorization by and on behalf of the Company;
(xiv) The Company's agreement to the choice of law provisions
set forth in Section 14 hereof and in the Deposit Agreement will be recognized
by the Ecuadorian courts; the Company can sue and be sued in its own name; under
the laws of Ecuador, the irrevocable submission of the Company to the exclusive
jurisdiction of a New York Court, the waiver by the Company of any objection to
the venue of a proceeding in a New York Court and the agreement of the Company
that this Agreement shall be governed by and construed in accordance with the
laws of New York are legal, valid and binding; service of process effected in
the manner set forth in Section 14 hereof, assuming its validity under New York
law, will be effective, insofar as Ecuadorian law is concerned, to confer valid
personal jurisdiction over the Company; and any judgment obtained in a New York
Court arising out of or in relation to the obligations of the Company under this
Agreement or would be enforceable against the Company in the courts of Ecuador;
(xv) Under the laws of Ecuador, the choice of New York law to
govern this Agreement and Deposit Agreement is a valid, effective and
irrevocable choice of law;
(xvi) Under the laws of Ecuador, neither the Company nor any
of its respective properties or assets have any indemnity from the jurisdiction
of any court or from any legal process (whether through service or notice,
attachment prior to judgment, attachment in aid of execution, execution or
otherwise);
(xvii) The indemnification and contribution provisions set
forth in Section 8 hereof and the Deposit Agreement do not contravene the public
policy or laws of Ecuador;
(xviii) All dividends and other distributions declared and
payable on the capital stock of the Company under the current laws and
regulations of Ecuador to be paid in Ecuadorian Sucres (including any such
dividends or distributions to be paid to the Depositary) may be converted into
foreign currency that may be freely transferred out of Ecuador, and except as
described in the Prospectus under the heading "Taxation - Ecuadorian Taxation,"
no such dividends and other distributions will be subject to withholding or
other taxes under the laws and regulations of Ecuador and are otherwise free and
clear of any other tax, withholding or deduction in Ecuador and without the
necessity of obtaining any Governmental Authorization in Ecuador;
(xix) The Company is in compliance in all material respects
with all applicable laws, rules, regulations, orders, decrees and judgments
under the laws of Ecuador, including those relating to transactions and
affiliates; and
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<PAGE> 27
(xx) Although they do not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, except for those referred to in the
opinion in subsection (ix) of this Section 7(e), they have no reason to believe
that, as of its effective date, the Registration Statement or any further
amendment thereto made by the Company prior to such Time of Delivery (other than
the financial statements and related schedules therein, as to which such counsel
need not express any opinion) contained an untrue statement of a material fact
or omitted to state a material fact required to be state therein or necessary to
make the statements therein not misleading or that, as of its date and as of the
Time of Delivery, the Prospectus or any further amendment or supplement thereto
made by the Company prior to such Time of Delivery (other than the financial
statements and related schedules therein, as to which such counsel need not
express any opinion) contained an untrue statement of a material fact or omitted
to state a material fact required to be state therein or necessary to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading; and they do not know of any amendment to the
Registration Statement required to be filed or of any contracts or other
documents of a character required to be filed as an exhibit to the Registration
Statement or required to be described in the Registration Statement or the
Prospectus which are not filed or described as required.
In giving such opinion, such counsel may state that with respect to all
matters of United States federal and New York law they have relied upon the
opinions of United States counsel for the Company delivered pursuant to
paragraph (d) of this Section 7;
(f) The respective counsel for each of the Selling Shareholders, as
indicated in Schedule II hereto, each shall have furnished you their written
opinion with respect to each of the Selling Shareholders for whom they are
acting as counsel, dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) The Selling Shareholder has been duly incorporated and
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, with full power (corporate or otherwise) to own
or lease its property and conduct its business [MUST CHANGE DEPENDING UPON
ENTITY];
(ii) A Power of Attorney and a Custody Agreement have been
duly executed and delivered by such Selling Shareholder and constitute valid and
binding agreements of such Selling Shareholder in accordance with their terms;
(iii) This Agreement has been duly executed and delivered by
or on behalf of such Selling Shareholder and constitutes the valid and binding
agreement of such Selling Shareholder in accordance with its terms; and the sale
of the Shares and ADS to be sold by such Selling Shareholder hereunder and the
compliance by such Selling Shareholder with all of the provisions of this
Agreement, the Power of Attorney and the Custody Agreement and the consummation
of the transactions herein and therein contemplated will not conflict with or
result in a breach or violation of any terms or provisions of, or constitute a
default under, any statute, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument known
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<PAGE> 28
to such counsel to which such Selling Shareholder is a party or by which such
Selling Shareholder is bound or to which any of the property or assets of such
Selling Shareholder is subject, nor will such action result in any violation of
the provisions of the Certificate of Incorporation or By-laws of such Selling
Shareholder if such Selling Shareholder is a corporation, the Articles of
Partnership or any similar or related instrument of such Selling Shareholder if
such Selling Shareholder is a partnership or the Deed of Trust, Trust Agreement
or any similar or related instrument if such Selling Shareholder is a trust, or
any order, rule or regulation known to such counsel of any Governmental Agency
having jurisdiction over such Selling Shareholder or the property of such
Selling Shareholder;
(iv) No Governmental Authorization is required for the deposit
by the Selling Shareholder of the Shares being deposited with the Custodian, on
behalf of the Depositary, the execution and delivery by the Selling Shareholder
of this Agreement, the Power of Attorney or the Custody Agreement to be duly and
validly authorized and the consummation of the transactions contemplated by this
Agreement in connection with the ADSs to be sold by such Selling Shareholder
hereunder, except such as have been obtained under the Act and the Exchange Act
and such as may be required under state securities or Blue Sky laws or the rules
and regulations of the NASD in connection with the purchase and distribution of
such ADSs by the Underwriters;
(v) Immediately prior to such Time of Delivery such Selling
Shareholder had good and valid title to the Shares to be sold at such Time of
Delivery by such Selling Shareholder under this Agreement, free and clear of all
liens, encumbrances, equities or claims, and full right, power and authority to
sell, assign, transfer and deliver the Shares or ADSs to be sold by such Selling
Shareholder hereunder and thereunder; and
(vi) Good and valid title to such ADSs, free and clear of all
liens, encumbrances, equities or claims, has been transferred to each of the
several Underwriters (assuming the Underwriters acquired the ADSs without notice
of any adverse claim (as such term is used in Section 8-302 of the Uniform
Commercial Code as in effect in the State of New York)).
In rendering such opinion, such counsel may state that, to the extent
that they express any opinion as to the laws of any jurisdiction other than New
York, they are relying upon certificates of such Selling Shareholder in respect
of matters of fact as to ownership of and liens, encumbrances, equities or
claims on the Shares sold by such Selling Shareholder and upon opinions of other
counsel for such Selling Shareholder, provided that such counsel shall state
that they believe that both you and they are justified in relying upon such
certificates and opinions;
(g) Greenburg Traurig Hoffman Lipoff Rosen & Quentel, counsel for the
Depositary, shall have furnished to you their written opinion, dated such Time
of Delivery, in form and substance satisfactory to you, to the effect that:
(i) The Registration Statement on Form F-6 under the Act File
No. 333- 8450 as amended appears on its face to comply as to form in all
material respects with the
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<PAGE> 29
requirements of the Act and the Rules and Regulations. No other document with
respect to such registration statement has been filed the Commission; such
registration statement has been declared effective and, to the best of such
counsel's knowledge, no stop order suspending the effectiveness of such
registration statement or any part thereof has been issued and no proceedings
for that purpose have been instituted or, to the best knowledge of such counsel
are pending or contemplated under the Act;
(ii) The Deposit Agreement has been duly authorized, executed
and delivered by the Depositary and constitutes a valid and legally binding
obligation of the Depositary, enforceable against the Depositary in accordance
with its terms, subject as to enforcement to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws relating to or affecting
creditors' rights generally and to general equity principles; and
(iii) Upon due issuance by the Depositary of ADRs against
delivery of the Shares in accordance with the provisions of the Deposit
Agreement, the ADSs evidenced by the ADRs being sold pursuant to this Agreement
will entitle the registered holders thereof to the rights specified therein and
in the Deposit Agreement.
In rendering these opinions, such counsel has made the following
assumptions: (a) the Deposit Agreement has been duly authorized, executed and
delivered by the Company and constitutes a legal, valid and binding agreement of
the Company, enforceable against the Company in accordance with its terms, (b)
such Class B Shares have been duly issued by the Company and duly deposited with
Banco La Previsora S.A. as Custodian, in each case under and in accordance with
all applicable laws and regulations and (c) all signatures on documents examined
by such counsel have been validly authorized by appropriate corporate
authorization procedure;
(h) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 a.m., New York City time, on the effective date of any
post-effective amendment to the Registration Statement filed subsequent to the
date of this Agreement and also at each Time of Delivery, BDO Binder shall have
furnished to you a letter or letters, dated the respective dates of delivery
thereof, in form and substance satisfactory to you, to the effect set forth in
Annex I hereto (the executed copy of the letter delivered prior to the execution
of this Agreement is attached as Annex I(a) hereto and a draft of the form of
letter to be delivered on the effective date of any post-effective amendment to
the Registration Statement and as of each Time of Delivery is attached as Annex
I(b) hereto);
(i) The Company shall not have sustained since the date of the latest
audited financial statements included in the Prospectus any material loss or
interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any material labor dispute or court
or governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus, and (ii) since the respective dates as of which
information is given in the Registration Statement and the Prospectus there
shall not have been any change in the authorized share capital or outstanding
share capital, or long-term debt of the
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<PAGE> 30
Company or any material adverse change, or any development involving a
prospective material adverse change, in or affecting the general affairs,
management, financial position, shareholders' equity or results of operations of
the Company, otherwise than as set forth or contemplated in the Prospectus, the
effect of which, in any such case described in clause (i) or (ii), is in the
judgment of the Representatives so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or the delivery
of the ADSs being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(j) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange, the American Stock Exchange or NASDAQ;
(ii) a suspension or material limitation in trading in the Company's securities
on NASDAQ; (iii) a general moratorium on commercial banking activities in New
York, London or Ecuador declared by the relevant authorities; (iv) a change or
development involving a prospective change in affecting the Company, the Shares
or the ADSs or the transfer thereof or the imposition of exchange controls by
the United States or Ecuador; or (v) the outbreak or escalation of hostilities
involving the United States or Ecuador or the declaration by the United States
or Ecuador of a national emergency or war, if the effect of any such event
specified in this clause (v) in the judgment of the Representatives makes it
impracticable or inadvisable to proceed with the public offering or the delivery
of the ADSs being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus; or (vi) if any foreign, federal or state
statute, regulation, rule or order of any court or other governmental authority
shall have been enacted, published, decreed or otherwise promulgated which, in
the judgement of the Representatives, would materially and adversely affect or
will materially and adversely affect the business or operations of the Company;
or (vii) the occurrence of any material adverse change in the existing
financial, political or economic conditions in the United States or Ecuador or
elsewhere which, in the judgment of the Representatives, would materially and
adversely affect the financial markets or the market for the ADSs and other
equity securities;
(k) The ADSs to be sold by the Company and the Selling Shareholders at
such Time of Delivery shall have been duly accepted for quotation on, subject to
notice of issuance, on the NASDAQ;
(l) The Depositary shall have furnished or caused to be furnished to
you, upon receipt from the Company and Selling Shareholders at such Time of
Delivery certificates satisfactory to you evidencing the deposit with it of the
Shares being so deposited against issuance of ADRs evidencing the ADSs to be
delivered by the Company and the Selling Shareholders at such Time of Delivery,
and the execution, countersignature (if applicable), issuance and delivery of
ADRs evidencing such ADSs pursuant to the Deposit Agreement;
(m) The Company and the Selling Shareholders shall have furnished or
caused to be furnished to you (or your counsel) at such Time of Delivery
certificates of officers of the Company and the Selling Shareholders,
repectively, satisfactory to you as to the accuracy of the representations and
warranties of the Company and the Selling Shareholders, respectively, herein at
and as of such Time of Delivery, as to the performance by the Company and the
Selling
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<PAGE> 31
Shareholders of all of their respective obligations hereunder to be performed at
or prior to such Time of Delivery, and as to such other matters as you may
reasonably request, and the Company shall have furnished or caused to be
furnished certificates as to the matters set forth in subsections (a) and (i) of
this Section 7, and as to such other matters as you may reasonably request; and
(n) The Company shall have complied with the provisions of Section
5(a)(iii) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act, the Exchange Act, or the
common law or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact contained in Section
1(a) of this Agreement or in any Preliminary Prospectus, the Registration
Statement, the ADS Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such action or
claim as such expenses are incurred; PROVIDED, HOWEVER, that the Company shall
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement, the ADS Registration Statement or the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through UBS Securities LLC, expressly for use therein.
(b) Each of the Selling Shareholders, severally in proportion to the
number of ADSs to be sold by such Selling Shareholder hereunder, will indemnify
and hold harmless each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in
Section 1(b) of this Agreement or in any Preliminary Prospectus, the
Registration Statement, or the Prospectus or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such action or claim as such
expenses are incurred; PROVIDED, HOWEVER, that the Selling Shareholders shall
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement, or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through UBS Securities LLC,
31
<PAGE> 32
expressly for use therein. Notwithstanding the foregoing provisions of this
subsection (b), in no event shall any Selling Shareholder be liable for an
amount in excess of the total proceeds received by such Selling Shareholder from
the sale by them of the ADSs (before deducting expenses).
(c) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement, the ADS
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary Prospectus, the Registration
Statement, the ADS Registration Statement or the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through UBS Securities
LLC expressly for use therein; and will reimburse the Company for any legal or
other expenses reasonably incurred by the Company in connection with
investigating or defending any such action or claim as such expenses are
incurred.
(d) Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against an
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (which shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
32
<PAGE> 33
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Selling Shareholders on the
one hand and the Underwriters on the other from the offering of the ADSs. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Selling Shareholders on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof) as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Shareholders on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total proceeds from the offering of the ADSs purchased under this
Agreement (before deducting expenses) received by the Company and the Selling
Shareholders bear to the total underwriting discounts and commissions received
by the Underwriters with respect to the ADSs purchased under this Agreement, in
each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or the Selling Shareholders on the one hand or the Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company, each
of the Selling Shareholders and the Underwriters agree that it would not be just
and equitable if contributions pursuant to this subsection (e) were determined
by PRO RATA allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable consideration referred to above in this subsection (e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (e), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the ADSs underwritten by
it and distributed to the public were offered to the public exceeds the amount
of any damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (e) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(f) The obligation of the Company and the Selling Shareholders under
this Section 8 shall be in addition to any liability which the Company and the
respective Selling Shareholders may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any,
33
<PAGE> 34
who controls any Underwriter within the meaning of the Act; and the obligations
of the Underwriters under this Section 8 shall be in addition to any liability
which the respective Underwriters may otherwise have and shall extend, upon the
same terms and conditions, to each officer and director of the Company and to
each person, if any, who controls any Selling Shareholder or the Company within
the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the ADSs which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such ADSs on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such ADSs, then the Company and the Selling Shareholders shall be entitled to a
further period of thirty-six hours within which to procure another party or
other parties satisfactory to you to purchase such ADSs on such terms. In the
event that, within the respective prescribed periods, you notify the Company and
the Selling Shareholders that you have so arranged for the purchase of such ADSs
or the Company and the Selling Shareholders notify you that they have so
arranged for the purchase of such ADSs, you or the Company and the Selling
Shareholders shall have the right to postpone such Time of Delivery for a period
of not more than seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your opinion
may thereby be made necessary. The term "Underwriter" as used in this Agreement
shall include any person substituted under this Section with like effect as if
such person had originally been a party to this Agreement with respect to such
ADSs.
(b) If, after giving effect to any arrangements for the purchase of the
ADSs of a defaulting Underwriter or Underwriters by you and the Company and the
Selling Shareholders as provided in subsection (a) above, the aggregate number
of such ADSs which remains unpurchased exceeds one-eleventh of the aggregate
number of all of the Shares to be purchased at such Time of Delivery, then this
Agreement (or, with respect to the Second Time of Delivery, the obligations of
the Underwriters to purchase and of the Company to sell the Optional ADSs) shall
thereupon terminate, without liability on the part of any non-defaulting
Underwriter or the Company or the Selling Shareholders, except for the expenses
to be borne by the Company and the Selling Shareholders and the Underwriters as
provided in Section 6 and the indemnity and contribution agreements in Section 8
hereof; but nothing herein shall relieve a defaulting Underwriter from liability
for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company, the Selling Shareholders and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person of any
Underwriter, the Company, or any of the Selling Shareholders, or any officer or
director or controlling person of the Company or any Selling Shareholder, or any
controlling person, and shall survive delivery of and payment of the ADSs.
34
<PAGE> 35
11. If this Agreement shall be terminated pursuant to Section 9 hereof
or if for any reason any ADSs are not delivered by or on behalf of the Company
or the Selling Shareholders neither the Company nor any Selling Shareholders
shall be liable to any Underwriter except as provided in Sections 6 and 8
hereof; but, if for any other reason any ADSs are not delivered by or on behalf
of the Company and the Selling Shareholders as provided herein, the Company and
each Selling Shareholder (based on the number of ADSs to be sold by the Company
and such Selling Shareholder hereunder) will reimburse the Underwriters through
you for all out-of-pocket expenses approved in writing by you, including fees
and disbursements of counsel, reasonably incurred by the Underwriters in making
preparations for the purchase, sale and delivery of the ADSs not so delivered,
but the Company and the Selling Shareholders shall then be under no further
liability to any Underwriter in respect of the ADSs not so delivered except as
provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by UBS Securities LLC on behalf of you as the
Representatives; and in all dealings with any Selling Shareholder hereunder you
and the Company shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of such Selling Shareholder made or given by the
Attorney-in-Fact for such Selling Shareholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of UBS Securities
LLC, 299 Park Avenue, New York, New York 10171, Attention: Registration
Department; if to the Company shall be delivered or sent by certified mail,
telex or facsimile transmission (together with a confirmation of receipt of
transmission), to the address of the Company set forth in the Registration
Statement, Attention: President and Chief Executive Officer; and if to any
Selling Shareholder shall be delivered or sent by mail, telex or facsimile
transmission to counsel for such Selling Shareholder at its address set forth in
Schedule II hereto; provided, however, that any notice to an Underwriter
pursuant to Section 8(c) hereof shall be delivered or sent by mail, telex or
facsimile transmission to such Underwriter at its address set forth in its
Underwriters' Questionnaire or telex constituting such Questionnaire, which
address will be supplied to the Company or the Selling Shareholder by you upon
request. Any such statements, requests, notices or agreements shall take effect
upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and the Selling Shareholders and, to
the extent provided in Sections 8 and 10 hereof, the officers and directors of
the Company and each person who controls the Company, any Selling Shareholder or
any Underwriter, and their respective heirs, executors, administrators,
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. No purchaser of any of the ADSs from any
Underwriter shall be deemed a successor or assign by reason merely of such
purchase.
14. Each of the parties hereto irrevocably (i) agrees that any legal
suit, action or proceeding arising out of or based upon this Agreement or the
transactions contemplated hereby
35
<PAGE> 36
may be instituted in any New York Court, (ii) waives, to the fullest extent it
may effectively do so, any objection which it may now or hereafter have to the
laying of venue of any such proceeding and (iii) submits to the exclusive
jurisdiction of such New York Court in any such suit, action or proceeding. The
Company irrevocably waives any immunity to jurisdiction to which it may
otherwise be entitled or become entitled in any legal suit, action or proceeding
against it arising out of or based on this Agreement or the transactions
contemplated hereby which is instituted in any New York Court or in any
competent court in Ecuador. The Company has appointed CT Corporation, New York,
New York, as its authorized agent (the "Authorized Agent") upon whom process may
be served in any such action arising out of or based on this Agreement or the
transactions contemplated hereby which may be instituted in any New York Court
by any Underwriter or by any person who controls any Underwriter, expressly
consents to the jurisdiction of any such court but only in respect of any such
action, and waives any other requirements of or objections to personal
jurisdiction with respect thereto. Such appointment shall be irrevocable, unless
and until a successor authorized agent in the County and State of New York shall
have been appointed by the Company, such successor shall have accepted such
appointment and written notice thereto shall have been given to the
Underwriters. The Company hereby covenants to appoint a successor authorized
agent if the Authorized Agent is unable or unwilling to serve his appointment.
The Company represents and warrants that the Authorized Agent has agreed to act
as such agent for service of process in any such action and agrees to take any
and all action, including the filing of any and all documents and instruments,
that may be necessary to continue such appointment or substitute appointment in
full force and effect as aforesaid. With respect to any action in any New York
Court, service of process upon the Authorized Agent or successor and written
notice of such service to the Company (delivered pursuant to Section 12 hereof)
shall be deemed, in every respect, effective service of process upon the Company
in any such action. [MAY NEED IF THE SELLING SHAREHOLDERS ARE FOREIGNERS WITHOUT
PLACE OF BUSINESS IN U.S.]
15. In respect of any judgment or order given or made for any amount
due hereunder that is expressed and paid in a currency (the "judgment currency")
other than United States dollars, the Company [AND THE SELLING SHAREHOLDERS AS
THE CASE MAY BE,] will indemnify each Underwriter against any loss incurred by
such Underwriter as a result of any variation as between (i) the rate of
exchange at which the United States dollar amount is converted into the judgment
currency for the purpose of such judgment or order and (ii) the rate of exchange
at which an Underwriter is able to purchase United States dollars with the
amount of the judgment currency actually received by such Underwriter. The
foregoing indemnity shall constitute a separate and independent obligation of
the Company [AND THE SELLING SHAREHOLDERS] and shall continue in full force and
effect notwithstanding any such judgment or order as aforesaid. The term "rate
of exchange" shall include any premiums and costs of exchange payable in
connection with the purchase of or conversion into United States dollars.
[DEPENDS UPON WHO THE SELLING SHAREHOLDERS ARE.]
16. Time shall be of the essence for this Agreement. As used herein,
unless otherwise specified, the term "business day" shall mean any day when the
Commission's office in Washington, D.C. is open for business.
36
<PAGE> 37
17. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York, without giving effect to rules governing
the conflict of laws.
18. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us, one for the Company, the Attorney-in-Fact and for each of the
Representatives plus one for each counsel, counterparts hereof, and upon the
acceptance hereof shall constitute a binding agreement among each of the
Underwriters and the Company and the Selling Shareholders. It is understood that
your acceptance of this letter on behalf of each of the Underwriters is pursuant
to the authority set forth in a form of Agreement among Underwriters (U.S.
Version), the form of which shall be submitted to the Company and the Selling
Shareholders for examination upon request, but without warranty on your part as
to the authority of the signers thereof.
37
<PAGE> 38
Any person executing and delivering this Agreement as Attorney-in-Fact
for a Selling Shareholder represents by so doing that he has been duly appointed
as Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing
and binding Power of Attorney which authorizes such Attorney-in-Fact to take
such action.
Very truly yours,
Consorcio Ecuatoriano de Telecomunicaciones
S.A. CONECEL
By:
---------------------------------------
Name:
Title:
Accepted as of the Date Hereof
At New York, New York: Selling Shareholders Named in
Schedule II to this Agreement
UBS Securities LLC
SBC Warburg Dillon Read Inc.
Donaldson, Lufkin & Jenrette
Securities Corporation
Lehman Brothers Inc.
By:
---------------------------------------
By: Name:
----------------------------
(UBS Securities LLC)
As Attorney-in-Fact acting on
behalf of each of the Selling shareholders
named in Schedule II to this Agreement.
38
<PAGE> 1
Exhibit 4.4
[CONECEL LOGO]
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A.
CONECEL
Capital Social, SA 75.000'000.000
TITULO No. _________________ VALOR DEL TITULO _______________________
Accion(es) No(s) _______________________________________________________________
valor de cada accion 1.000,00
Conste por el presente titulo que ______________________________________________
es propietaria de ______________________________________________________________
accion(es) Clase B ordinaria(s) nominativa(s) de UN MIL sucres (1.000,00) cada
una que se emite(n) a su favor y que corresponde(n) al capital de la compania
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL con domicilo principal
en QUITO Republica del Ecuador que tiene un capital social de SETENTA Y CINCO
MIL MILLONES de sucres dividido en SETENTA Y CINCO MILLONES de acciones
ordinarias y nominativas de UN MIL sucres cada una. El contrato de constitucion
de la compania fue celebrado mediante Escritura Publica otergada ante el Notario
Primero del Canton Quito el dia 24 de Junio de 1993 aprobada por la
Superintendencia de Companias e inscrita en el Registro Mercantil del Canton
Quito el 30 de Junio de 1993 y anotada bajo el No. 14498 del Repertorio. Al
accionista propetario de este Titulo de Accion(es) e corresponden todos los
derechos y obligaciones a de la ley y los Estatutos Sociales determinan.
Fecha: ___________________________________ de 19____
PRESIDENTE PRESIDENTE EJECUTIVO
<PAGE> 2
TRANSFERENCIAS
Cede y tranfiero la(s) accion(es) correspondiente(s) a este Titulo a
de de 19
Cedente Cesionario
Se tomo nota de esta cesion en el Registro respectivo
de de 19
Cede y tranfiero la(s) accion(es) correspondiente(s) a este Titulo a
de de 19
Cedente Cesionario
Se tomo nota de esta cesion en el Registro respectivo
de de 19
Cede y tranfiero la(s) accion(es) correspondiente(s) a este Titulo a
de de 19
Cedente Cesionario
Se tomo nota de esta cesion en el Registro respectivo
de de 19
<PAGE> 1
Exhibit 5.2
ESTUDIO JURIDICO PAREJA, ABOGADOS
CHILE 303, EDIFICIO TORRE AZUL
NOVENO PISO
GUAYAQUIL, ECUADOR
April 1, 1998
Consorcio Ecuatoriano de
Telecomunicaciones S.A. CONECEL
Amazonas 6017 and Rio Coca
Quito, Ecuador
Re: Consummation of Public Offering of Consorcio Ecuatoriano de
Telecomunicaciones S.A. CONECEL
Ladies and Gentlemen:
We have acted as counsel to Consorcio Ecuatoriano de Telecomunicaciones
S.A. CONECEL, a corporation organized and existing under the laws of the
Republic of Ecuador (the "Company"), in connection with (i) the Registration
Statement on Form F-1, filed on March 10, 1998 (the "Registration Statement"),
under the Securities Act of 1933, as amended (the "Act"), covering 42,299,668
shares of Class B Common Stock of the Company to be evidenced by American
Depositary Receipts, including 5,517,348 shares of Class B Common Stock subject
to an over-allotment option (collectively, the "Shares") and (ii) the
Underwriting Agreement among the Company and UBS Securities LLC and SBC Warburg
Dillon Read Inc., as global coordinators of the several Underwriters (the
"Underwriting Agreement").
We have examined the originals, or certified, conformed or reproduction
copies, of all such records, agreements, instruments and documents as we have
deemed relevant or necessary as the basis for the opinion hereinafter expressed.
In all such examinations, we have assumed the genuineness of all signatures on
original or certified copies and the conformity to original or certified copies
of all copies submitted to us as conformed or reproduction copies. As to various
questions of fact relevant to such opinion, we have relied upon, and assumed the
accuracy of, certificates and oral or written statements and other information
of or from public officials, officers or representatives of the Company, and
others.
Based solely upon the foregoing, we are of the opinion that the Shares,
when issued and delivered in accordance with the terms of the Underwriting
Agreement, will be validly issued, fully paid and non-assessable, and that the
discussion of the Ecuadorian federal income tax consequences set forth in the
Registration Statement under "TAXATION--Ecuadorian Taxation" is correct and is
complete in all material respects.
The foregoing opinion relates only to matters of Ecuadorian law and
does not purport to express any opinion on the laws of any other jurisdiction.
<PAGE> 2
Consorcio Ecuatoriano de
Telecomunicaciones S.A. CONECEL
April 1, 1998
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our name under the captions
"Taxation" and "Legal Opinions" in the prospectus comprising a part of the
Registration Statement. In giving such consent, we do not thereby admit that we
are included within the category of persons whose consents is required under
Section 7 of the Act or the rules and regulations promulgated thereunder.
Very truly yours,
ESTUDIO JURIDICO PAREJA, ABOGADOS
/s/ Dr. Carlos Pareja Cordero
-------------------------------------
Dr. Carlos Pareja Cordero
<PAGE> 1
EXHIBIT 8.1
GREENBERG
A T T O R N E Y S A T L A W
TRAURIG
April 1, 1998
Consorcio Ecuatoriano de
Telecomunicaciones S.A. CONECEL
Amazonas 6017 e Rio Coca
Quito, Ecuador
Re: Consummation of Public Offering of
Consorcio Ecuatoriano de Telecomunicaciones S.A. CONECEL
Ladies and Gentlemen:
We have acted as special counsel to Consorcio Ecuatoriano de
Telecomunicaciones S.A. CONECEL, a corporation organized and existing under the
laws of the Republic of Ecuador (the "Company"), in connection with the
Registration Statement on Form F-1, filed on March 10, 1998, as amended, by
Amendment No. 1, dated as of April 1, 1998 (collectively, the "Registration
Statement"), under the Securities Act of 1933, as amended (the "Act"), covering
42,299,668 shares of Class B Common Stock of the Company (the "Shares"),
including 5,517,348 shares subject to an over-allotment option.
We have examined the originals, or certified, conformed or reproduction
copies, of all such records, agreements, instruments and documents as we have
deemed relevant or necessary as
GREENBERG TRAURIG HOFFMAN LIPOFF ROSEN & QUENTEL, P.A.
1221 BRICKELL AVENUE, MIAMI, FLORIDA 33131 305-579-0500 FAX 305-579-0717
MIAMI NEW YORK WASHINGTON, D.C.
FORT LAUDERDALE WEST PALM BEACH TALLAHASSEE ORLANDO
<PAGE> 2
Consorcio Ecuatoriano de
Telecomunicaciones S.A. CONECEL
April 1, 1998
Page 2
the basis for the opinion hereinafter expressed. In all such examinations, we
have assumed the genuineness of all signatures on original or certified copies
and the conformity to original or certified copies of all copies submitted to us
as conformed or reproduction copies. As to various questions of fact relevant to
such opinion, we have relied upon, and assumed the accuracy of, certificates and
oral or written statements and other information of or from public officials,
officers or representatives of the Company, and others.
Based solely upon the foregoing, we are of the opinion that the
discussion of the United States federal income tax consequences set forth in the
Registration Statement under "TAXATION--United States Taxation" is correct and
is complete in all material respects.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our name under the captions
"Taxation" and "Legal Opinions" in the prospectus comprising a part of the
Registration Statement. In giving such consent, we do not thereby admit that we
are included within the category of persons whose consents is required under
Section 7 of the Act or the rules and regulations promulgated thereunder.
Very truly yours,
/s/ Greenberg Traurig Hoffman
Lipoff Rosen & Quentel, P.A.
--------------------------------
GREENBERG TRAURIG HOFFMAN LIPOFF
ROSEN & QUENTEL, P.A.
GREENBERG TRAURIG
<PAGE> 1
EXHIBIT 10.4
RESOLUTION No. 256-11 CONATEL-97
TRANSLATION
- -----------
NATIONAL TELECOMMUNICATIONS COUNCIL
CONATEL
CONSIDERING
That the Regulation for the rendering of value-added services was published in
the supplement-Official Registry No. 960 of June 5, 1996;
That, by means of Official Letter No. SNT-SP-0888 of June 27, 1997, the National
Department of Telecommunications has requested authorization from CONATEL to
grant CONECEL S.A., represented by Mr. Carlos Mosquera, licenses for the
rendering of value-added services through the INTERNET, based on technical,
financial and legal reports;
In exercise of the faculty vested upon him by Article 10, numeral 3, literal f)
of the Law Amending the Special Telecommunications Law,
BE IT RESOLVED:
ART. 1.- To approve that the National Department of Telecommunications grant the
licenses for the rendering of value-added services through the INTERNET,
requested by CONECEL S.A., which technical and economic characteristics are as
follows:
- - TECHNICAL DESCRIPTION OF THE PRINCIPAL SYSTEMS, EQUIPMENT AND RESOURCES
The teleport installed in Guayaquil, the trunk net owned by CONECEL S.A.
and the net of EMETEL S.A.; a router for access to INTERNET.
Satellite Modem; multiplexor with access to an ETHERNET 10 Base T net.
News, communications provider.
- - TRANSMISSION INFRASTRUCTURE
- - NATIONAL
Circuits leased to EMETEL S.A. and the trunk network owned by CONECEL S.A.
-1-
<PAGE> 2
RESOLUTION No. 256-11 CONATEL-97
- - INTERNATIONAL
Its own international link from Guayaquil to Homestead, Florida.
- - ACCESS TO SUBSCRIBERS
Through the telephonic network of EMETEL S.A. and by means of CONECEL
S.A.'s cellular system.
- - POINTS OF CONNECTION AND INTERCONNECTION WITH EXISTENT NETS
Through dedicated links of EMETEL S.A. or the trunk network of CONECEL S.A.
TECHNICAL DESCRIPTION OF THE SERVICES (Attached technical description of
the authorized services).
Electronic mail.
INTERNET DIAL-UP ISP service.
Service to corporate clients and owners of LAN networks.
- - SERVICE AREA
Cities of Quito and Guayaquil.
ECONOMIC CHARACTERISTICS
- - CONCESSION RIGHTS
Pursuant to Article 34 of the Regulation on value-added services, in order
to operate a Value-Added Service, CONECEL S.A. must have previously paid to
the National Department of Telecommunications an amount equivalent to 100
UVC ("Unidades de Valor Constante") for the concession rights, applying the
UVC in force on the first day of the month in which the application was
filed.
Each year it must pay, for the same concept, the value equivalent to a 0,01
UVC for each user registered as of December 31 of said year.
The Superintendence of Telecommunications will be in charge of the
verification of the number of users.
-2-
<PAGE> 3
RESOLUTION No. 256-11 CONATEL-97
- - TAXES
The assignees are obligated to pay their income tax, including the IVA, in
accordance with the provisions of the Internal Law on Taxation.
ART. 2. - LIMITATIONS OF THE LICENSES
The licenses are independent from other concessions, for which CONECEL
S.A. must keep an account of costs by product.
It is established that the rates that are auto-charged for the use of the
networks and systems of other concessions, will be the same to be used for
other value-added concessionaires as a way of reselling the services.
When working as providers of access to the INTERNET, will have only one
rate system for any provider of INTERNET services, including itself or its
subsidiaries.
The transmission services of commuted data or of voice signals in actual
time are not authorized.
ART 3. - RESERVATION OF RIGHTS
CONATEL reserves the right to review, at any moment, the licenses granted
to CONECEL S.A. for the rendering of value-added services through the
INTERNET net.
Issued in Quito on August 26, 1997.
(Signature)
Eng. Mario Burbano de Lara
PRESIDENT OF CONATEL
(Signature)
Dr. Julio Martinez A.
SECRETARY OF CONATEL
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RESOLUTION No. 256-11 CONATEL-97
TECHNICAL DESCRIPTION OF THE SERVICES AUTHORIZED TO EMETEL S.A., IMPSATEL DEL
ECUADOR S.A., RAMTELECOM S.A., SITA, ECUANET, SATNET S.A., CONECEL S.A.,
PARADYNE S.A., PRODATA S.A., AND CYBERWEB S.A.
The Value-Added Service license is granted for ACCESS TO INTERNET, with
the following technical characteristics:
The communication protocol TCP/IP, of the Internet network.
It will have available direct links at transmission speed equal or higher
than 64 Kbps, for the transportation network.
It will use as access network, the networks of the final telecommunication
service operators.
They will not be able to use the transmission infrastructure itself,
without the concession granted for that purpose.
The Service for Access to Internet shall include the following basic
services:
* File transfers
* Access to Data Base
* Electronic Mail (X.400.X.500, etc.)
* Electronic data exchange (EDI)
* Access to remote servers
* Access to discussion groups
* Access to search directories
* Simple group applications (GROUPWARE)
* The services that are developed in the future are included in this
license, as part of the service for Internet access, that do not
modify the spirit of the license and do not contravene the legal
provisions in force as of this date in this country.
NP/CJR/CJA (Initialed)
(Signature)
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Exhibit 10.23
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CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL
1998 STOCK OPTION PLAN
---------------------------------------
1. PURPOSE. The purpose of this Plan is to advance the interests of
CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL, an Ecuadorian
corporation (the "Company"), and its Affiliates by providing an additional
incentive to attract and retain qualified and competent persons who provide
services to the Company and its Affiliates, and upon whose efforts and judgment
the success of the Company and its Affiliates is largely dependent, through the
encouragement of stock ownership in the Company by such persons.
2. DEFINITIONS. As used herein, the following terms shall have the meaning
indicated:
(a) "Affiliates" shall mean any entity directly or indirectly
controlling or controlled by, or under direct or indirect common control with,
the Company and any legal or beneficial owner, directly or indirectly, of 20% or
more of the voting stock of the Company.
(b) "ADR" shall mean an American Depositary Receipt evidencing the
Common Stock.
(c) "Committee" shall mean the committee appointed by the Board
pursuant to Section 12(a) hereof.
(d) "Common Stock" shall mean the Company's Class B Common Stock, par
value 1,000 sucres per share.
(e) "Director" shall mean a member of the Board.
(f) "Fair Market Value" of a Share on any date of reference shall be
as determined in good faith by the Committee or the Board in a fair and uniform
manner.
(g) "Officer" shall mean the Company's Chairman of the Board,
President, Chief Executive Officer, principal financial officer, principal
accounting officer, any vice-president of the Company in charge of a principal
business unit, division or function (such as sales, administration or finance),
any other officer who performs a policy-making function, or any other person who
performs similar policy-making functions for the Company. Officers of Affiliates
shall be deemed Officers of the Company if they perform such policy-making
functions for the Company. As used in this paragraph, the phrase "policy-making
function" does not include policy-making functions that are not significant.
<PAGE> 2
(h) "Option" (when capitalized) shall mean any option granted under
this Plan.
(i) "Optionee" shall mean a person to whom a stock option is granted
under this Plan or any person who succeeds to the rights of such person under
this Plan by reason of the death of such person.
(j) "Plan" shall mean this 1998 Stock Option Plan for the Company.
(k) "Securities Exchange Act" shall mean the United States Securities
Exchange Act of 1934, as amended from time to time.
(l) "Share" shall mean a share of Common Stock.
3. SHARES AVAILABLE FOR OPTION GRANTS. The Committee or the Board may grant
to Optionees from time to time Options to purchase an aggregate of up to Seven
Hundred Fifty Thousand (750,000) Shares from the Company's authorized and
unissued Shares. The Board shall determine in its sole discretion at the time of
the grant of an Option under the Plan whether the Option granted will be
exercisable into ADRs evidencing the Shares. If any Option granted under the
Plan shall terminate, expire, or be cancelled or surrendered as to any Shares,
new Options may thereafter be granted covering such Shares.
4. CONDITIONS FOR GRANT OF OPTIONS.
(a) Each Option shall be evidenced by an option agreement that may
contain any term deemed necessary or desirable by the Committee or the Board,
provided such terms are not inconsistent with this Plan or any applicable law.
Optionees shall be (i) those persons selected by the Committee or the Board from
the class of all regular employees of, or persons who provide consulting or
other services as independent contractors to, the Company or its Affiliates,
including Directors and Officers who are regular employees, and (ii) Directors
who are not employees of the Company or of any Affiliates. Any person who files
with the Committee or the Board, in a form satisfactory to the Committee or the
Board, a written waiver of eligibility to receive any Option under this Plan
shall not be eligible to receive any Option under this Plan for the duration of
such waiver.
(b) In granting Options, the Committee or the Board shall take into
consideration the contribution the person has made to the success of the Company
and such other factors as the Committee or the Board shall determine. The
Committee or the Board shall also have the authority to consult with and receive
recommendations from officers and other personnel of the Company and its
Affiliates with regard to these matters. The Committee or the Board may from
time to time in granting Options under the Plan prescribe such other terms and
conditions concerning such Options as it deems appropriate, including, without
limitation, (i) prescribing the date or dates on which the Option becomes
exercisable, (ii) providing that the Option rights accrue or become exercisable
in installments over a period of years, or upon the
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<PAGE> 3
attainment of stated goals or both, or (iii) relating an Option to the continued
employment of the Optionee for a specified period of time, provided that such
terms and conditions are not more favorable to an Optionee than those expressly
permitted herein.
(c) The Options granted to employees under this Plan shall be in
addition to regular salaries, pension, life insurance or other benefits related
to their employment with the Company or its Affiliates. Neither the Plan nor any
Option granted under the Plan shall confer upon any person any right to
employment or continuance of employment by the Company or its Affiliates.
5. OPTION PRICE. The option price per Share of any Option shall be any
price determined by the Committee or the Board but shall not be less than the
par value per Share.
6. EXERCISE OF OPTIONS. An Option shall be deemed exercised when (i) the
Company has received written notice of such exercise in accordance with the
terms of the Option, (ii) full payment of the aggregate option price of the
Shares as to which the Option is exercised has been made, and (iii) arrangements
that are satisfactory to the Committee or the Board in its sole discretion have
been made for the Optionee's payment to the Company of the amount that is
necessary for the Company or Subsidiary employing the Optionee to withhold in
accordance with applicable tax withholding requirements. Unless further limited
by the Committee or the Board in any Option, and subject to such guidelines as
the Committee or the Board may establish, the option price of any Shares
purchased shall be paid (1) in cash, (2) by certified or official bank check,
(3) by money order, (4) with Shares, (5) by the withholding of Shares issuable
upon exercise of the Option or by any other form of cashless exercise procedure
approved by the Committee or the Board , or (6) in such other consideration as
the Committee or the Board deems appropriate, or by a combination of the above.
The Committee or the Board in its sole discretion may accept a personal check in
full or partial payment of any Shares. If the exercise price is paid in whole or
in part with Shares that have been held for at least 6 months, or through the
withholding of Shares issuable upon exercise of the Option, the value of the
Shares surrendered or withheld shall be their Fair Market Value on the date the
Option is exercised. The Company in its sole discretion may, on an individual
basis or pursuant to a general program established in connection with this Plan,
lend money to an Optionee, guarantee a loan to an Optionee, or otherwise assist
an Optionee to obtain the cash necessary to exercise all or a portion of an
Option granted hereunder or to pay any tax liability of the Optionee
attributable to such exercise. If the exercise price is paid in whole or part
with Optionee's promissory note, such note shall (i) provide for full recourse
to the maker, (ii) be collateralized by the pledge of the Shares that the
Optionee purchases upon exercise of such Option, (iii) bear interest at the
prime rate of the Company's principal lender, and (iv) contain such other terms
as the Committee or the Board in its sole discretion shall reasonably require.
No Optionee shall be deemed to be a holder of any Shares subject to an Option
unless and until a stock certificate or certificates for such Shares are issued
to such person(s) under the terms of this Plan. No adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
the date such stock certificate is issued, except as expressly provided in
Section 9 hereof.
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<PAGE> 4
7. EXERCISABILITY OF OPTIONS. Any Option shall become exercisable in such
amounts, at such intervals and upon such terms as the Committee or the Board
shall provide in such Option.
8. TERMINATION OF OPTION PERIOD. The unexercised portion of any Option
shall automatically and without notice terminate and become null and void at the
time of the earliest to occur of the following:
(a) (i) three months after the date on which the Optionee's employment
is terminated for any reason other than by reason of (A) Cause, which, solely
for purposes of this Plan, shall mean the termination of the Optionee's
employment by reason of the Optionee's willful misconduct, negligence or
insubordination, (B) a mental or physical disability as determined by a medical
doctor satisfactory to the Committee, or (C) death;
(ii) immediately upon the termination of the Optionee's employment
for Cause;
(iii) twelve months after the date on which the Optionee's
employment is terminated by reason of a mental or physical disability as
determined by a medical doctor satisfactory to the Committee or the Board;
(iv) (A) twelve months after the date of termination of the
Optionee's employment by reason of death of the Optionee, or, if later, (B)
three months after the date on which the Optionee shall die if such death shall
occur during the one year period specified in Subsection 8(a)(iii) hereof.
All references herein to the termination of the Optionee's employment shall, in
the case of a Optionee who is not an employee of the Company or a Subsidiary,
refer to the termination of the Optionee's service with the Company.
(b) To the extent not previously exercised, (i) each Option shall
terminate immediately in the event of (1) the liquidation or dissolution of the
Company, or (2) any reorganization, merger, consolidation or other form of
corporate transaction in which the Company does not survive, unless the
successor corporation, or a parent or subsidiary of such successor corporation,
assumes the Option or substitutes an equivalent option or right pursuant to
Section 9(c) hereof, and (ii) the Committee or the Board in its sole discretion
may by written notice ("cancellation notice") cancel, effective upon the
consummation of any corporate transaction in which the Company does survive, any
Option that remains unexercised on such date. The Committee or the Board shall
give written notice of any proposed transaction referred to in this Section 8(b)
a reasonable period of time prior to the closing date for such transaction
(which notice may be given either before or after approval of such transaction),
in order that Optionees may have a reasonable period of time prior to the
closing date of such transaction within which to exercise any Options that then
are exercisable (including any Options that may
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<PAGE> 5
become exercisable upon the closing date of such transaction). An Optionee may
condition his exercise of any Option upon the consummation of a transaction
referred to in this Section 8(b).
9. ADJUSTMENT OF SHARES.
(a) If at any time while the Plan is in effect or unexercised Options
are outstanding, there shall be any increase or decrease in the number of issued
and outstanding Shares through the declaration of a stock dividend or through
any recapitalization resulting in a stock split-up, combination or exchange of
Shares, then and in such event:
(i) appropriate adjustment shall be made in the maximum number of
Shares available for grant under the Plan, or available for grant to any person
under the Plan, so that the same percentage of the Company's issued and
outstanding Shares shall continue to be subject to being so optioned; and
(ii) appropriate adjustment shall be made in the number of Shares
and the exercise price per Share thereof then subject to any outstanding Option,
so that the same percentage of the Company's issued and outstanding Shares shall
remain subject to purchase at the same aggregate exercise price.
(b) Unless otherwise provided in any Option, the Committee or the
Board may change the terms of Options outstanding under this Plan, with respect
to the option price or the number of Shares subject to the Options, or both,
when, in the Committee's or Board's sole discretion, such adjustments become
appropriate so as to preserve but not increase benefits under the Plan.
(c) In the event of a proposed sale of all or substantially all of the
Company's assets or any reorganization, merger, consolidation or other form of
corporate transaction in which the Company does not survive, where the
securities of the successor corporation, or its parent company, are issued to
the Company's shareholders, then the successor corporation or a parent of the
successor corporation may, with the consent of the Committee or the Board,
assume each outstanding Option or substitute an equivalent option or right. If
the successor corporation, or its parent, does not cause such an assumption or
substitution to occur, or the Committee or the Board does not consent to such an
assumption or substitution, then each Option shall terminate pursuant to Section
8(b) hereof upon the consummation of sale, merger, consolidation or other
corporate transaction.
(d) Except as otherwise expressly provided herein, the issuance by the
Company of shares of its capital stock of any class, or securities convertible
into shares of capital stock of any class, either in connection with a direct
sale or upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made to, the number of or exercise price for Shares then subject to
outstanding Options granted under the Plan.
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<PAGE> 6
(e) Without limiting the generality of the foregoing, the existence of
outstanding Options granted under the Plan shall not affect in any manner the
right or power of the Company to make, authorize or consummate (i) any or all
adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business; (ii) any merger or consolidation of
the Company; (iii) any issue by the Company of debt securities, or preferred or
preference stock that would rank above the Shares subject to outstanding
Options; (iv) the dissolution or liquidation of the Company; (v) any sale,
transfer or assignment of all or any part of the assets or business of the
Company; or (vi) any other corporate act or proceeding, whether of a similar
character or otherwise.
10. TRANSFERABILITY OF OPTIONS AND SHARES.
(a) No Stock Option shall be subject to alienation, assignment,
pledge, charge or other transfer other than by the Optionee by will or the laws
of descent and distribution, and any attempt to make any such prohibited
transfer shall be void. Each Option shall be exercisable during the Optionee's
lifetime only by the Optionee by a permitted assignee.
(b) Unless the prior written consent of the Committee or the Board is
obtained and the transaction does not violate any applicable laws, no Shares
acquired by an Officer or Director pursuant to the exercise of an Option may be
sold, assigned, pledged or otherwise transferred prior to the expiration of the
six-month period following the date on which the Option was granted.
11. ISSUANCE OF SHARES.
(a) Notwithstanding any other provision of this Plan, the Company
shall not be obligated to issue any Shares unless it is advised by counsel of
its selection that it may do so without violation of all applicable laws
pertaining to the issuance of securities, and may require any stock so issued to
bear a legend and may take such other steps as in its judgment are reasonably
required to prevent any such violation.
(b) As a condition to any sale or issuance of Shares upon exercise of
any Option, the Committee or the Board may require such agreements or
undertakings as the Committee or the Board may deem necessary or advisable to
facilitate compliance with any applicable law or regulation including, but not
limited to, the following:
(i) a representation and warranty by the Optionee to the Company,
at the time any Option is exercised, that he is acquiring the Shares to be
issued to him for investment and not with a view to, or for sale in connection
with, the distribution of any such Shares; and
(ii) a representation, warranty and/or agreement to be bound by
any legends endorsed upon the certificate(s) for such Shares that are, in the
opinion of the Committee or the Board, necessary or appropriate to facilitate
compliance with the provisions of any
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<PAGE> 7
securities laws deemed by the Committee or the Board to be applicable to the
issuance and transfer of such Shares.
12. ADMINISTRATION OF THE PLAN.
(a) The Plan shall be administered by the Board or by a committee
appointed by the Board (the "Committee") which shall be composed of two or more
Directors. The membership of the Committee shall be constituted so as to comply
at all times with the applicable legal requirements. The Committee shall serve
at the pleasure of the Board and shall have the powers designated herein and
such other powers as the Board may from time to time confer upon it.
(b) The Board may grant Options pursuant to this Plan to Directors who
are not employees of the Company or any Affiliate and/or other persons to whom
Options may be granted under Section 4(a) hereof.
(c) The Committee or the Board, from time to time, may adopt rules and
regulations for carrying out the purposes of the Plan. The determinations by the
Committee or the Board, and the interpretation and construction of any provision
of the Plan or any Option by the Committee or the Board, shall be final and
conclusive.
(d) Any and all decisions or determinations of the Committee shall be
made either (i) by a majority vote of the members of the Committee at a meeting
or (ii) without a meeting by the unanimous written approval of the members of
the Committee.
13. WITHHOLDING OR DEDUCTION FOR TAXES. If at any time specified herein for
the making of any issuance or delivery of any Option or Common Stock to any
Optionee or beneficiary, any law or regulation of any governmental authority
having jurisdiction in the premises shall require the Company to withhold, or to
make any deduction for, any taxes or take any other action in connection with
the issuance or delivery then to be made, such issuance or delivery shall be
deferred until such withholding or deduction shall have been provided for by the
Optionee or beneficiary, or other appropriate action shall have been taken.
14. INTERPRETATION; GOVERNING LAW.
(a) This Plan shall be governed by the laws of the Republic of
Ecuador.
(b) Headings contained in this Plan are for convenience only and shall
in no manner be construed as part of this Plan.
(c) Any reference to the masculine, feminine, or neuter gender shall
be a reference to such other gender as is appropriate.
15. AMENDMENT AND DISCONTINUATION OF THE PLAN. The Committee or the Board
may from time to time amend, suspend or terminate the Plan or any Option;
provided, however, that,
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any amendment to the Plan shall be subject to the approval of the Company's
shareholders if such shareholder approval is required by any federal or state
law or regulation or the rules of any Stock exchange or automated quotation
system on which the Common Stock may then be listed or granted. Except to the
extent provided in Sections 8 and 9 hereof, no amendment, suspension or
termination of the Plan or any Option issued hereunder shall substantially
impair the rights or benefits of any Optionee pursuant to any Option previously
granted without the consent of the Optionee.
16. EFFECTIVE DATE AND TERMINATION DATE. The effective date of the Plan is
February 28, 1998, the date on which the Board adopts this Plan, and the Plan
shall terminate on February 28, 2003. The Plan shall be submitted to the
shareholders of the Company for their approval and adoption and Options
hereunder may be granted prior to such approval and adoption but contingent upon
such approval and adoption.
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